The challenges of freight rates for manufacturing
“Transporting goods via different modes of transportation incurs costs that can significantly impact a manufacturing company's supply chain, logistics expenses, and service levels,” says Alex Selwitz, Director of SEO at Red Stag Fulfillment. “These costs are known as freight rates and are influenced by various factors such as carrier capacity, fuel prices, and market demand and supply. If not properly managed, any changes in these rates can greatly affect a company's profitability.”
Here Selwitz discusses the top five ways fluctuating freight rates affect manufacturing businesses and provide effective strategies for managing these challenges.
Challenges that fluctuating freight rates bring for manufacturing businesses
Freight rates in 2023 are currently on a correction: for instance, Asia to the United States freight rates have dropped 40% since the end of February and are now at par with 2019. However, the last two years have seen a lot of surges and availability issues.
“On the other hand, shipping lines face multiple issues regarding port congestion, empty sailing, high fuel prices, and inflation,” says Selwitz.
Such variability of freight rates poses several challenges for manufacturing businesses if not managed properly:
Increased transportation costs and decreased profit margins
“Fluctuating freight rates can significantly impact logistics and supply chain costs. In 2023, general rate increases will be close to 10% over last year. External factors affect freight rates — for example, high fuel prices and reduced carrier capacity increase costs. High demand and limited supply can also increase the rates and impact profit margins.”
Limited capacity and reduced availability of carriers
“When freight rates are low, carriers may reduce capacity as sailing profits are low as well. Conversely, when freight rates are high, carriers may prioritise more profitable routes, reducing the availability of carriers for businesses.”
Reduced control on pricing power and profit margins
“Due to the increased costs, fluctuating freight rates affect pricing strategy and pressure profit margins. In 2021, when higher freight costs increased the cost of imports by 11%, consumer prices raised by 1.5%. This can make the company less competitive, put pressure on the margins, and customers may opt for cheaper alternatives.”
Difficulty managing inventory, warehousing, and deliveries
“While saving money by taking shipping slots may appear as a cost-saving measure, it impacts inventory management and warehousing. Manufacturing businesses must maintain adequate inventory levels to ensure timely customer delivery. However, as a trade-off to higher prices, when companies choose future slots to reduce the impact of higher spot pricing, it leads to longer delivery times. This can lead to disturbed inventory management, higher last-mile costs, or missed order timelines.”
Negative impact on customer satisfaction and relationships
“Measures taken to curb the impact of freight cost fluctuations influence inventory levels, late deliveries to customers, and increased last-mile costs. All of this can affect customer satisfaction and relationships. On the other hand, if the increased cost is passed on to the customer, that becomes an immediate sales problem. Customers may choose to switch to competitors who offer more reliable and cost-effective services.”
Alex Selwitz, Director of SEO for Red Stag Fulfillment
Strategies for overcoming the challenges of fluctuating freight rates
“As discussed above, fluctuating freight rates pose significant challenges for manufacturing businesses,” said Selwitz. “However, there are strategies to cope with these challenges. The core strategy is to reduce your dependency on the logistics that will help you gain more bargaining power and save money.”
Negotiating favorable long-term contracts with carriers
“There are two freight rates: contract and spot rates. Contract rates are a much more efficient way to mitigate price fluctuations — companies can negotiate more favorable terms, bringing in a reasonable amount of predictability in logistics costs.
“Some actionable tips for negotiating favorable terms include:
- “Building long-term relationships with carriers: To build trust with logistics partners, businesses can provide them with long-term visibility, create mutually beneficial partnerships, and offer incentives for performance. Such initiatives help get better rates and terms from the logistics partner, helping improve overall business margins.
- “Offering volume commitments or guarantees: If a business can commit to a particular volume of shipments, it can negotiate more favorable rates and terms. For example, a company might offer to ship a certain amount of goods with a carrier each month in exchange for a discounted rate.”
Managing inventory more effectively
“Effective inventory management helps businesses cope with fluctuations in freight rates. Some actionable tips for managing inventory more effectively include:
- “Reducing lead times: To reduce the impact of fluctuating freight rates, businesses can effectively minimise their inventory by implementing practices like JIT, digital planning systems, optimising supply chain networks, and working closely with suppliers to reduce lead times.
- “Implementing inventory forecasting: Businesses use inventory forecasting tools to predict demand and ensure they have the right amount of inventory. By accurately forecasting demand, businesses can avoid priority shipments and reduce the impact of fluctuations in freight rates.”
Implementing route optimisation and mode shifting
“To implement route optimisation and mode-shifting strategies effectively, companies collaborate with logistics providers, monitor rate trends, and adjust modes accordingly. There are many route optimisation software that can automate the entire process.”
Investing in technology and automation to improve efficiency
“Adopting technology and automation reduces freight rate fluctuations. Real-time rates can help find great freight shipping deals when supply is higher than demand. Shipping companies reduce the rates to avoid an empty haul. In such cases, the spot rates can also be better than contract rates. Real-time data and analytics enable businesses to make more accurate and timely decisions to mitigate the impact of unexpected changes in the freight market.”
Diversifying modes and carriers
“Relying on a single mode of transportation or carrier leaves businesses vulnerable to disruptions in the supply chain. Diversifying transportation modes and carriers mitigates these risks and ensures business continuity. Similarly, businesses can diversify the service provider base and request bids from multiple carriers to ensure they get the best rates, service terms, and reliability.”
Reducing product weight and size
“Manufacturing businesses can reduce transportation costs and mitigate the impact of fluctuating freight rates by reducing the weight and size of their products with compact design, lighter-weight materials, and smaller packaging. For instance, Walmart changed the shipping cases for 200 products. The redesign of the packaging case removed 727 shipping containers used to transport the products from Asia to North America each year. This translates to annual savings of over US$2.5mn.”
Manufacturing must address the changes related to these fluctuations
Selwitz believes that manufacturing businesses must stay proactive and agile in response to fluctuating freight rates.
“To address the challenges associated with these fluctuations, businesses should assess their current supply chain and logistics strategies, identify areas for improvement, and take action to implement these strategies.”
By adopting practical solutions such as long-term carrier contracts, rethinking packaging, and investing in supply chain technology, Selwitz believes that businesses can enhance their performance and gain a competitive advantage.
“It is important to emphasise that agility is key to staying competitive in a rapidly evolving market. By being flexible and adapting quickly to changes, businesses respond to evolving customer needs and maintain a sustainable competitive edge.”
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