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Moore on Pricing: An ocean window of opportunity?

If you’ve been keeping one eye on ocean fuel (“bunkers”) pricing as I have, you know that the slowdown in the economy has had a pleasing effect on fuel prices.
By Peter Moore, Adjunct Professor of Supply Chain
July 01, 2012

If you’ve been keeping one eye on ocean fuel (“bunkers”) pricing as I have, you know that the slowdown in the economy has had a pleasing effect on fuel prices.

Since the peak this March, we have seen a 16 percent drop according to the Bunker World Index (BWI) and ocean shippers should be seeing some relief this month. In addition to fuel, we’re still seeing the effects of a determined effort by carriers to capture freight to fill new capacity coming on-line in the form of larger ships. 

Contract negotiation leverage has reached equilibrium and some might argue that it’s tipping to the shipper. Reports by Logistics Management out of the EU suggest flat to low growth this year, while we’ve all read of China’s increasing domestic consumption.

So, if you’re moving freight internationally there’s a window of opportunity opening that will help you save. To get there, let’s review some key elements of intermodal freight costs in an effort to ensure that we don’t overlook opportunities in the current volatile market.

Since last year there have been a number of announced deals for capacity sharing among ocean carriers. Capacity sharing has allowed carriers to increase sailings on their schedules and has improved utilization of vessels in some key lanes such as Asia-Europe. We note that there are non-participants, both large and small, whose independent actions should keep the market competitive for negotiations.

Keep in mind that insurance costs continue to be significant in international movements. Incoterms can be negotiated so that this cost is born by either the buyer or seller (CF vs. CIF terms).

Thus, the parties should be aware of the risks and charges in regards to transfer of ownership of the goods so as to minimize this expense. In a recent review with a manufacturer, we found that the company itself was insured for cargo in transit while it also bought insurance from the carrier for domestic moves and cargo insurance for ocean moves. So, be careful that you are not double or excessively insured. 

Just as our military has been exploring alternatives to transit through Pakistan, each shipper needs to develop alternate plans for their major shipping lanes by weighing price and reliability in addition to schedules and capacity.

In North America we have choices as to ports, railroads, and truck operators; so, shippers need to do their homework to develop options in order to increase leverage to ensure lower costs and sustainability.

Keep in mind that slow sailing by ocean carriers can add up to an extra week to East-West transit time. Many would argue that this practice is designed primarily as a way to increase vessel load factors, but as fuel prices dip and fleet expansions slow, it will be up to shippers to seek relief for improved cost and service. 

Lastly, shippers do not need to negotiate alone. Shipper associations have been very effective in leveraging volume and sharing alternatives, and those with modest volumes often can benefit from “teaming” with others.

These are just a few of the factors in international shipping. And as all of these factors are volatile, it’s critical that buyers monitor invoices closely to make sure cost items on invoices accurately reflect rates. My experience is that carriers are quick to pass through increases and are a bit slow on the decreases. However, pre- and post-auditors with deep knowledge of contracts, tariffs, and markets are a great resource for shippers. 

Volatility can raise anxiety and complexity, but it also opens a window of opportunity for savvy buyers to optimize freight in the global market.

About the Author

Peter Moore
Adjunct Professor of Supply Chain

Peter Moore is Adjunct Professor of Supply Chain at the University of Denver Daniels School of Business, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at .(JavaScript must be enabled to view this email address).

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