The Challenge when Managing Global Freight
Whether you are an existing importer/exporter or planning to implement new international supply chains; the role of your freight forwarding partners will be critical to your business. The changing international environment, (e.g. impacts post Brexit in Europe), could impact many companies, (including perhaps, those who currently just trade domestically or in the EU single market) and who may now feel they need to develop better capabilities in managing & creating new global supply chains.
Irrespective of whether they wish to develop new markets abroad, or extend their overseas sources; this will inevitably mean these companies, needing to engage more closely with external expertise and seek the capabilities offered by the freight forwarding industry.
For those un-initiated into the freight forwarding world and the volatility associated with the global freight market; this can be a daunting prospect.
Common Issues When Procuring Global Freight
The freight forwarding market exists in a challenging environment, with both the complexity of the supply chains themselves and the many handlers or carriers that can be involved in the completion of a single cargo journey. Overlaying that with the numerous incoterms and many cross-border requirements and regulations, thus leaving shippers facing a major challenge to ensure they are getting the right level of service and reliability at competitive cost.
Procuring airfreight and ocean freight services is not like buying some simpler logistics services, which might be outsourced. e.g. pallet storage/handling or domestic road transport. There are multiple parties involved, some with contradictory incentives, working with different charging structures; all working in a dynamic market driven by fluctuations in demand & supply. Your global supply chain will have to exist in this complex environment and needs effective management by your selected freight forwarder. Hence, making sure you make appropriate choices and use the right selection criteria for this key role is essential.
Some of the numerous pitfalls include:
- Not adequately specifying the freight lanes, volumes or service requirements in the original tender.
- Overlooking the potential ‘additional services’ that may be required, or contingencies, if there are service failures.
- Failing to make the forwarder accountable for shipment performance and demanding of them adequate reporting to identify shortcomings, and specifying corrective action.
- Lacking contractual clarity over the services required, the rates agreed, and the timescale or circumstances under which rates can be adjusted.
The hard work of an RFQ process can be quickly undermined in these circumstances.
In reality, the volume and value of the shippers existing or potential business to the forwarder, is a key lever in ensuring adequate commitment from the supplier. It is often customers with less commercial leverage, who can end up with their shipments left on the dockside, whenever demand temporarily outstrips supply
At Bisham we have extensive experience of providing independent outsourcing advice, and have handled many projects assisting both importers and exporters in the sourcing of freight forwarding partners
From recent experiences, we still see that there are continuing issues in the industry, which impact negatively on the shipping companies and create real dangers when sourcing new forwarders. In the procurement process, when responding to invitations to tender, many freight forwarders operate a fragmented and manual quotation system. This results in excessive delays in submitting quotations, which are often difficult to interpret and often omit some key component charges. Furthermore, the lack of an IT enabled approach means that there is often an inability to cost a shipment dataset quickly and most importantly, without error. To us it is also apparent there is often a reluctance to take time to really understand the potential customer’s business, instead a standard template response is made in the interests of ‘bidding efficiency’. ‘Voice of the Customer’, should be paramount
Good Procurement Practise and Top Tips
However, let’s not forget; the freight-forwarders have a challenging job, building a responsive, reliable & visible supply chain, resilient to the volatility of the global freight market. Hence, shippers need to make it as easy for them as possible, in order to mitigate the risks. This is done by taking a careful and well-planned approach to procuring these services and establishing an open, honest and collaborative environment with potential freight-forwarding partners.
Our main tips for achieving this are as follows;
1. Clearly defining your Requirements
Think about your requirements and document these to the potential bidders
- What are the value-adds that you might want?
- Where do you stand on service against cost trade-offs?
- Do your size and capability restrictions mean you will need a high degree of account management & is this more important than lowest cost?
2. Collect your Logistics Data
Prepare a logistics dataset, which reflects the supply chain as accurately as possible – the more information you can share the easier it will be for bidders to quote competitively.
3. Value-Added Services
Look for the value-add services that could help your business.
- Warehousing, including bonded
- Full end to end services, as appropriate to INCO terms
- Special handling requirements (e.g. Temperature control)
- Customs clearance & export/import filing
- Out-of-gauge or oversize shipments
- Cargo consolidation & break bulk
- Packaging & labelling or product re-configuration
- Drop shipping & associated administration
- Technology – order management, on-line booking, configurable reporting
4. Take a Total Logistics Cost Approach
Calculate total logistics costs, including all accessorials, (which can constitute a majority of the cost), when comparing quoted tariffs and do this against your prepared dataset.
- This establishes an unequivocal financial basis for any sourcing or sourcing change.
- Generates logistics budgets and a basis for future spend projections
5. Establish a Suitable Commercial Framework
The commercial design of the tender document will set the scene for the future commercial framework, so take time to get it right first time and ensure you can track the movement in commercial offers through the process. Issues for consideration include:
- Simplified aggregated charging mechanisms
- Origin and destination lane rates
- Visibility of cost components
- Price stability periods
- Price review mechanisms e.g. fuel or currency
- Insurance level
- Bonus/malus mechanisms
6. Account Management
Reflect on non-customer focussed behaviours in the procurement process, they could be replicated or even deteriorate when the business becomes operational. Talk to some of their other clients of similar size to you with similar supply chains.
- Do they really want you as a customer?
- Have they listened to what you asked for?
Furthermore, it is recommended that experienced in-house resources are deployed to manage the relationship. This should include periodic reviews with your primary freight forwarding suppliers and co-ordinated and documented feedback to them.
In summary, effective freight management is fundamental to successful exporting and the management of inbound supply from overseas suppliers. The selection of an effective and committed service partner is therefore essential and following the above general principles will set you on the right path. However, if you need more detailed independent advice or input, Bisham Consulting can assist.