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Moore on Pricing: Checking your ocean rate numbers

By Peter Moore, Adjunct Professor of Supply Chain
July 01, 2013

In last month’s column I focused on the volatility of domestic intermodal rail. I cautioned that shippers should expect pressure in major routes associated with import and export because ocean rates are in turmoil as world markets adjust to new capacity and an uneven economic recovery. 

Ocean and rail are two different modes with different market characteristics. At least in rail you can expect 98 percent plus accuracy in invoicing once you make a deal with a carrier. But even with today’s technological advances, ocean carriers continue to make errors on 10 percent or more of invoices according to Steve Ferreira, CEO of Ocean Audit, a leading ocean freight auditor. 

I recently caught up with the globetrotting Ferreira and asked him what he sees happening right now in the intermodal portion of the ocean market: “While it seems likely that carriers will get some increases, the forecast that we’re predicting is that carrier revenue gains will again be inconsistent.

It seems that there’s no authoritative consensus on how strong the market demand may be. That said, it’s a guessing game on capacity holdbacks.”
Ferreira’s comments are consistent with what we’ve been reporting in Logistics Management and right on with what shipper contacts are telling me. The impact will continue to ripple through all modes in international moves as shippers look at total landed cost (TLC).

The consequence of selective rate hikes and changing capacity is that shippers need to be on their game in monitoring all the players in their major and minor shipping lanes. If you’re a small volume shipper this can be really tough; so, heading advice from fellow shippers in shipper associations and third parties can be very helpful.

On the invoice front, I recently worked with a mid-size shipper who, like many manufacturers, had a logistics and purchasing function negotiating freight and a separate finance function in another physical location processing payment. We quickly learned that complex ocean invoices were being paid with only a review of the math and with little oversight on accessorials and surcharges. 

Ferreira recommends that shippers look to invoice accuracy first to capture freight savings. “One aspect to combat potential rate increases for beneficial cargo owners should be a focus on the accuracy of new invoicing associated with rate increases taken in new contracts,” he says. “One major ocean carrier recently disclosed their invoice accuracy rate at 88 percent; and in most cases, the business team negotiating ocean freight pricing are not the same associates paying the invoices.”

He advises that if you’re taking increases on your ocean freight pricing, it’s best to mitigate them as best possible by ensuring your teams are using enhanced auditing rather than rubber-stamping invoices for payment.

The progress on including multi-component ocean, rail, and truck rates in transportation management systems has been slow. Many ERP-based systems are simply looking for one total landed cost to enter into a single price field. Accounts payable may be simply checking for a value within a range. 

Shippers have historically relied upon third parties to review, adjust, or approve complex invoices. But it’s important that you incorporate an integrated, team approach consisting of those with knowledge of the intent of the contract working along side of those with technical expertise and know the market well. 

In this case, I’ll quote a certain presidential candidate: “It takes a village.” Shippers need to have resources that can negotiate a fair rate, monitor service levels, and, most importantly, pay only the correct charges.

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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