How to Take Advantage of Falling Freight Rates

The severe congestion caused by the COVID pandemic is clearing, and freight rates are starting to plummet. But with no clarity as to when or where freight rates might bottom out, how do you, as a shipping customer, take advantage of current trends to lower your shipping costs?

Freight rates will continue trending down

The New York Fed's Global Supply Chain Pressure Index (GSCPI) shows global supply chain pressures are falling back toward historical levels.

Source: New York Fed

But in recent earnings calls, shipping executives have assured investors that rates are “adjusting slowly.” This is not just happy talk for Wall Street because logistics solution providers have reasons to be cautiously optimistic. For example: In 2019, Maersk had only 46% of its long-haul business on long-term contracts. Today, it has 71% on contract for one or more years. This will help them to offset spot freight rate declines and any long-term contracts being renegotiated or cancelled by shippers.

On the other hand, after the most profitable two years in shipping history (2021-22), logistics solution providers have ordered a record number of new container ships. This could mean a glut of too many ships chasing too few goods as soon as 2023.

Source: FreightWaves

However, logistics solution providers are also looking to offload “as many older, more polluting ships from the market as quickly as they can.” If that happens, spot-buy freight rates may not fall as much as some have predicted.

And do not forget: Spot-buy freight rates are still subject to sudden spikes caused by unexpected strikes (especially involving ports and rail), wars (Ukraine and the associated sanctions on Russia), and weather (hurricanes or typhoons at sea, continued droughts that impact river traffic, etc.) in any part of the world. These non-pandemic supply chain disruptions we have seen recently could easily continue for the foreseeable future.

10 tips to help you negotiate lower freight rates

Uncertainties aside, shippers are now back in the driver's seat. By taking the following actions, you can negotiate lower freight rates for even more cost savings:

Invest in the right technology

Digitizing your supply chain will make it much easier to quickly take advantage of sudden freight rate changes. For example: With a cloud-based Transportation Management Software (TMS) like Cargobase that delivers visibility into the entire supply chain, you will get more, better, and faster quotes with standardized quoting features.

Modify or renegotiate long-term contracts

It makes no sense to remain locked into long-term contracts negotiated during the height of the pandemic-induced congestion. Make it clear to your logistics solution providers that your long-term contract rates need to become more aligned with current spot-buy freight rate realities. And that you are shopping around.

Timing is everything

Unless you have a great quote (or flexible terms) from a trusted provider for business-critical shipping needs, new long-term contracts make little sense right now. Your focus should be on obtaining lower spot-buy freight rates and negotiating shorter-term contracts with better rates.

Don’t get greedy by trying to time the freight rate bottom

As with market timing the stock market, trying to time the freight rate bottom may leave you in the cold. Focus on getting better freight rates now while maintaining room to negotiate lower spot or long-term freight rates in the future should they continue to fall.

Don’t be afraid to shop around

Suppose your logistics solution provider's reliability is not above average, or their performance has not been worth their quoted rates. Now would be the time to shop around and see what deals their competitors might offer. Even if you are happy with your current providers, leverage your conversations with other providers for better deals from your current provider(s). Remember: If they do not believe you will switch, they will not give you the best rates.

Spread some of your shipping business around

Even if you are satisfied with your primary logistics solution providers, you should always allocate a small amount of business (e.g. 30%) with the other carriers. You never know when a shipping company will change its rates, add a new surcharge, or have reliability suddenly deteriorate. In that way, you have the flexibility to quickly shift or adjust some of your shipping mix.

Target a savings amount, not a specific discount

Shipping companies are doing their own analytics and analysis in the background. They could have hundreds of levers to pull that can improve their bottom line, but hurt yours. And they know when you are giving up something to get something. So don’t fixate on lowering one charge that you may hate. Focus on the big picture and seek to improve your overall bottom line rather than win a specific discount or concession.

Consider different freight rate pricing structures

Do you hate freight surcharges, or does your business get hit hard by them? Be aware that in earnings calls, shipping executives love talking about how surcharges help them to meet their financial projections. However, UPS will be offering all customers a consolidated rate based on package weight and geographic delivery zones. This may or may not make sense for your business. But you should still run any financial calculations and analysis to see if different pricing structures might lower your shipping costs. Remember: In a buyer’s market, everything is negotiable.

Don’t forget about rising fuel prices and surcharges

Rising energy prices and shortages remain a wild card for everyone - including shipping companies and their customers. However, the biggest shipper complaint is usually over fuel surcharges, as they are often levied in a manner out of line with the normal price movement of the commodity.

You need to keep track of fuel rates centrally to quickly react to any sudden or expected disruptions or price changes that may lead to fuel surcharges. And if your logistics solution provider levies surcharges that are out of line, it’s time to renegotiate or find a new provider.

Listen to logistics solution provider's earnings calls

It's not just rates or fuel surcharges that shipping executives like to tout in their earnings calls with Wall Street. By listening to what they tell investors, you might learn more about how they view your business or industry than you would ever learn from talking to their sales reps. At the very least, you will increase your knowledge and ability to negotiate better rates with your provider reps.

Some final thoughts

Lowering your overall shipping costs is about more than just getting the lowest freight rates. You must ensure that you and your providers have the right processes and tools to efficiently manage your shipping needs.

If you have not already digitized your supply chain, now would be the time to start. By adopting the right technology tools, you can keep abreast of fast-moving trends and rate changes in the market. You will also gain leverage in your negotiations with your providers.

At the very least, you will make things easier for everyone involved in getting your ship done. And you will be well-positioned to take advantage of lower freight rates.