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Time for a more sophisticated approach to freight procurement?
[ January 12, 2017 // Chris ]With the traditional January freight procurement season in full swing in Europe, now could be the time to consider your strategy, argues Dominic at EnVista.
McGough, who is managing partner for the EMEA and APAC regions and associate at the European arm of freight IT firm, say that freight procurement requires a different approach than, say, office supplies. Effective freight procurement needs good, ‘cleansed’ historical data for the specific trade lane if it is to give the client an accurate picture of what comparable competitors are paying. It also needs to be adjusted to take into account factors such as the volume of freight being procured or the date of shipment.
“Without good, cleansed data, going to market can be labour intensive,” assets McGough. “However, the only parameter that many shippers have is what they are spending today.”
Even today, there are many large shippers who do not properly benchmark against their peers, he says. Rate information is no longer made publicly available, as it could be under some national jurisdictions in the conference era, but freight audit companies such as EnVista have access to data that they can anonymise and average, allowing them to provide an “apples with apples” comparison, says McGough.
Freight procurement is also complicated because it isn’t just a matter of finding the lowest price. Factors such as quality of service, whether or not rates will be maintained during the course of the year or two years or even the financial stablity of the shipping line can all come into play. The procurement process must also take into account applicable Incoterms.
The shipping industry is also possibly unique in that different service providers can offer space on the same ship, but with widely different pricing structures. Also, with the recent spate of line mergers and the ever-changing shipping line alliance landscape, keeping track of which lines are offering which service on which ships is a fearsomely complicated task. Last year’s Hanjin bankuptcy brought home forcefully to many shippers that the line they had book space with was not necessarily the one whose ships were carrying their cargo.
The picture is further clouded by the existence of NVOCCs, freight forwarders or freight management companies, all of whom can offer an alternative way of buying freight capacity – and which may or may not be more cost effective for some or all of the shipper’s volume, depending on circumstances. It might be better to give all your volume to a shipping line direct and enjoy a volume discount; on the other hand, it could be better to take advantage of a freight forwarder’s own buying power. Another possible strategy is to mix and match – get a contract for a portion of the business and use the forwarder and/or spot market for the rest.
“There really isn’t a one size fits all solution, and if you haven’t got the right data to put into your procurement tool, you will have problems,” says McGough.
“The problem with standard procurement tools is that they’re just not designed for freight services,” adds EnVista associate Alastair Cairns. “Remember, in shipping you get what you negotiate, not what you deserve.”
McGough adds that procurement should not be carried out on the basis solely of an automated procurement tool. Rather, such tools should be used to whittle down the number of prospective freight suppliers before concluding on the basis of, probably, face to face negotiations.
The freight element of total landed cost in the UK is not insignificant, he further points out, taking into account that VAT and duty are calculated as a percentage of the total cost. Moreover, the price of many goods has been dropping more rapidly than typical freight rates, so the freight element has become relatively larger.
EnVista can also provide a similar data service for airfreight, which has the added complexity of different levels of service depending on whether it is an expressed or a deferred shipment, and also for express ‘integrators’ – whose pricing can be just as variable as the ‘traditional’ freight industry’s.
January is the time when most shippers traditonally do their freight procurement – it falls conveniently after Christmas in Europe and before the Chinese New Year rush, though there is no fundamental reason why the exercise could not carried out at other times of the year. In the case of former Hanjin shippers, the process had to be hurriedly carried out again following that operator’s bankruptcy at the end of August last year.
Tags: enVista