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Industry Pulse: Ocean Freight

“Supply always comes on the heels of demand.” – Robert Collier

Ocean Freight Industry Snapshot

  • Rates and Availability – Ocean freight spot rates have improved while sailing schedule availability and reliability are poised to be an issue for organizations into 2023 and are expected to get worse through the second half of the year
  • Reliability – Ship availability and reliability introduce delivery uncertainty and risk of increased freight costs, and tied up working capital
  • Approach – Establish or deepen partnerships with selected shippers or 3PLs to selectively move from spot to contracted buys to lock in lower prices and mitigate availability risk and improve reliability  
  • Operations – Optimize supply chain visibility with real time software dashboards that enable proactive pinpointing of developing issues e.g., China 2023 COVID spread impact, to make agile adjustments to maintain lower costs and improve customer deliveries

Industry Landscape

Prices Dropped to Pre-pandemic Level

  • Average global container rates declined back to 2020 levels at $1,560 in January 2023, after rising from $1,525 in March of 2020 to $4,872 in March of 2021 and $8,152 in March of 2022
  • Global industry professionals believe ongoing US and EU interest rate hikes will continue until inflation reaches desired 2%- result will be 2023 recession that lowers shipping demand and maintains container rates to 2020 levels.
  • Looking forward, rates are expected to stabilize with carriers being described as “pessimistic” in 2023-24 container rate contract negotiations as worldwide container supply is expected to outweigh and outpace demand in 2023 and 2024.

Calmer Seas Could Mask Storm Forming on Horizon

  • Average on time arrival for ocean container shipments improved to 46% in September 2022, after bottoming out at 30% in January 2022, however, on time arrivals are still off pre-pandemic levels of 68% which continues to insert uncertainty and risk into business planning
  • The average number of days lost to shipping delays decreased from 7.9 days in January 2022 to 6 days in August 2022 while the end-to-end transit time of ocean shipments from China to the US decreased from record highs of 107 days in March 2022, to 69 days in December 2022 matching the fastest time since January 2021
  • Shipment schedule uncertainty has further drove up total value chain costs by burgeoning inventory, built up from 2022’s excess buffer shipments intended to insulate against delays, filling additional warehouse space capacity tapped to accommodate increased inventory, and canceling manufacturing orders due to excess inventory and softening of sales forecasts

Industry Outlook

Lock In Lower Prices and Stabilize Supply

  • Unbundle freight costs from material purchases and contract directly for freight services to avoid multiple levels of margin built into shipping costs
  • Negotiate fixed-forward pricing contracts for freight rates; the combination of lower rates, shipping companies’ aggressive negotiating stance and preferences given to long-term customers will make the second half of 2023 a bad time to be in the ocean container spot market
  • Focus on securing fixed sailing schedules; it’s not possible to control or even influence all aspects of ocean transit time, but departure date can be managed
  • Rework inventory and production plans based on realistic shipping time projections to maintain smooth operations and reduce excess inventory

Strategic Approach

  • Assess ocean shipping needs, logistics management capabilities, total volume, and volume concentration to determine the correct level of ocean freight relationship – direct relationships with shippers or strategic 3PL partnerships
  • Establish strategic supplier relationships with guaranteed shipping volumes in exchange for preferred rates and fixed sailing schedules – trade flexibility for price and schedule certainty
  • To achieve strategic relationship benefits, focus on supplier alignment with your ocean freight partners and keep in mind that a strategic supplier relationship is a two-way selection process
  • Optimize warehouse operations to reduce space required to accommodate existing inventory and reduce the number of times any inventory needs to be handled
  • Align end-end-end supply chain operations with lowered production and sales forecasts to minimize any disruptions and maximize the time available to plan for any delays

SBG Logistics Consulting brings teams of experts with deep category and industry knowledge to work shoulder to shoulder with our clients and capitalize on their most pressing opportunities.  We have highly experienced freight management professionals who can diagnose, tailor, and implement our strategic approach to improve freight performance.

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