The Simple Strategy To Control Detention and Demurrage: Know Your Free Time

It looks like shippers and forwarders finally have had enough. It’s not a surprise to us, the topic of detention and demurrage at US ports is something we’ve discussed frequently.

Our post: How to Use Free Time to Reduce Detention and Demurrage

And, our whitepaper: Use Free Time to Reduce Detention and Demurrage Costs

There are multiple reasons these unnecessary charge have become so common, but of course your feelings may depend on your perspective. Shippers argue it’s about revenue protection for terminals and ocean cargo companies in a struggling industry where everyone is trying to scrape by. The counter argument is that it is infrastructure limitations and regulations that are the reason these cost are necessary.

The JOC.com recently published an article about: US shipper, trucker petition could trigger detention and demurrage relief

The article discusses a petition gathered by a group of US-based shippers and service providers to create a rule preventing ports and carriers from charging detention and demurrage when “uncontrollable” circumstances make it impossible to pick up or return a chassis according to their contracted free time.

From the article, “Shippers, consignees and drayage providers do not create and cannot avoid these events,” the coalition said. “They cannot control the weather. They do not choose the terminals that carriers use. They are not parties to port labor collective bargaining agreements.”

“Shippers have grumbled for years that demurrage and detention fees are being used to generate revenue, rather than to clear out containers to improve terminal fluidity or to incentivize prompt return of equipment. Although a lack of financing from coalition members for the legal push has prevented shippers from filing a formal regulatory request — until now.”

With time, this will play out. But shippers and forwarders are probably better served in the short term to focus on what they can control now that influences detention and demurrage – free time.

Our perspective is that this problem is primarily an issue of rate and cost visibility. The reason is all shipments have a contracted free time in the rate or contract. Yet, few forwarders or shippers take the time to consider this constraint when they are routing a shipment.

Considering free time allows the number of days the companies has to pick up and return the chassis to be included in the routing decision – just like the freight rate and transit time.

The reason this happens is free time is a line item buried in most contracts. It is different based on the port and carrier, and other shipment details. Most companies do not have an efficient way to find their free time on an individual shipment basis. Lacking this, they’ll use an average or estimated amount of free time when planning and quoting a shipment.

Knowing and using contracted free time allows freight forwarders to not only quote shipments more accurately, but develop routings that ensure charges at the ports don’t pile up.

Hopefully, the challenges at the ports for all parties will lessen with time. Until then, taking the necessary steps to include free time in each routing decision is the best thing forwarders and shippers can do to reduce the additional costs from detention and demurrage.

Shipping and Autonomous Vehicles: The Future of Logistics Technology

There is no question that the logistics industry will be changed drastically by autonomous vehicles. Research into self-driving machines of all types for use in the supply chain is exploding – from automated ocean cargo vessels to warehouse forklifts.  The push to use more automation in the logistics industry is, of course, largely based on the goal of lowering costs but comes with many environmental benefits as well.  

Cargo Ships

The automation of container ships is part of a larger effort in the industry to automate the way goods get from place to place.  Personnel (about 20 per vessel who need to be paid, housed, and fed), account for nearly half the cost of operating cargo vessels so the ability to cut that part of the budget will have a dramatic impact on this struggling industry.

Automating a large vessel carrying hundreds of shipping containers is a complex project.  Rolls Royce, the makers of luxury cars, is at the forefront of researching and implementing this technology for large ocean carriers. This is a major priority for the company, with the philosophy that automated ships will redefine the shipping industry. There are many technical and regulatory and policy issues that need to be solved before this endeavor can become a reality, but when it does, expect massive changes to the global supply chain as we know it. 

Trucks

With over 3.5 million truck drivers in the U.S., replacing human driven trucks with automated ones will create a big change to the trucking industry. Labor-saving vehicles are likely to be adapted faster than self-driving cars, as companies look to cut costs.  

Individual self-driving trucks are not the only way businesses are looking to decrease transportation costs. Tests with convoys have also been conducted, using Wi-Fi, sensors, GPS, and cameras to connect the trucks. The leading vehicle determines the speed and direction with the rest of the convoy to automatically steer and change speed.

While there is a lot of skepticism about replacing humans behind the wheel of large, load-bearing trucks, there are others that are confident the technology will be developed to safely be able to do this. And the potential savings, of an estimated $168 billion yearly, is worth the technology investment by automotive manufacturers. The economic impact of job loss is also delaying the process somewhat, as trucking accounts for the largest job in 29 states. 

Forklifts

Automation is also taking place in larger numbers with forklifts in warehouses across the U.S. If a larger amount of product can be picked up and put away faster, the more productive and cost efficient a warehouse will be. 

Giant Eagle, a Pittsburgh-based retailer has been using automated forklifts and robots to unpack pallet trucks and stock its distribution centers. The company claims an increase of 10-30 percent in productivity with the use of automated warehouse vehicles. 

Each vehicle has sensors that gather data, such as size of load picked, how long it takes to deliver it, and location of the vehicle.  This allows the company to find out quickly if the vehicle has a problem and adjust as necessary. These sensors also help to prevent accidents within the warehouse. 

Logistics and the global supply chain are often discussed as being the most ripe for new technology and “disruption”. This means investment in automation for different types of transportation vehicles will only increase as more companies look for ways to cut costs and operate more efficiently.

What’s Behind the Continued Low Ocean Freight Rates?

It’s well publicized that global ocean container rates are at near historic lows. And despite speculation about things improving for carriers, every attempt by the industry to change this has failed to gain traction – at least yet.

Of course, there is no single reason why ocean shipping rates are so low or why the industry is hurting. Like any other, global shipping is a highly cyclical industry which is very much dependent on market forces and the economic principles of supply and demand. It’s commonly accepted that, at the moment, there is an over-supply of ships and tonnage capacity whereas the demand for trade has dwindled. But of course, there’s more to the story.

The Shanghai Container Freight Index shows the extent of the drop in cargo freight rates over the past 2 years.

China_Containerized_Index

The initial catalyst for what the industry is experiencing stems from the “Great Recession” going back to 2007. Leading up to this period was a lot of global economic growth, as well as optimism for the future. Ocean lines invested aggressively in bigger and better ships.

This was encouraged by infrastructure changes as well, like the ability of many large ports to accommodate bigger ships and the now complete Panama Canal enlargement project. Both enabled carriers to build bigger ships and have added significant capacity to the industry.

Today, this has continued despite many container lines coming to a realization that these large ships haven’t offered the economies of scale that they had expected. Industry experts are predicting that the global economy is not, and will not, grow fast enough to absorb the increase in the global container fleet. The story is not looking to improve either. By virtue of pending new ship orders, capacity is expected to grow by 4 to 5 percent per year through 2018.

To counter this oversupply and attempt to lift dismal freight rates, some ship owners are resorting to scrapping and recycling. This is happening with ships as young as 15 years old. The average age for scrapping a ship is normally around 30 years.

Container lines are getting desperate in other ways, such as increasing the frequency and types of surcharges being added to invoices. This is much to the frustration of freight forwarders and shippers. Some are even offering $0 rates with the simple goal of covering a portion of their costs via these same surcharges.

Oversupply, competition, and dwindling trade are forcing the container lines to fight for bigger market share of a pie that is now much smaller. And, here we are with freight rates at historic lows.

For now, it’s a good time to be a shipper. But the market is cyclical and things will come around to the benefit of carriers eventually. They have to. Smart freight forwarders and shippers realize this and are taking a long term approach with their procurement strategy for the upcoming bid season.

Why Surcharges Are the Biggest Risk to the Ocean Shipping Industry, Not Low Rates

During the first half of 2016, the two most talked about topics in the ocean freight industry have been historically low container rates and the new SOLAS regulations. Both are serious challenges to the industry for a variety of reasons and have deserved much of the attention they’ve received from both freight forwarders and shippers.

Thankfully, for the moment at least, both issues appear to be slowly sorting themselves out as markets normally do. Rates in many important trade lanes are beginning to stabilize and so far there have been no reports of major problems with SOLAS. But a bigger challenge still remains for the industry – the persistent issue cause by constantly changing ocean contracts, carrier surcharge updates, and GRI’s.

In many ways it appears the problem with how ocean carriers update surcharges and fees is something the industry has gotten used to, or maybe has just given up trying to fix. In any event, the result is where the industry is at today – a place where freight forwarders and shippers have little ability to understand or track these updates. With that comes less confidence in their ability to create accurate shipping quotes or audit ocean freight invoices thanks to the lack of information on surcharges and the complexity of their own ocean contracts.

While the solution is complex, the cause is simple. There are many reasons why surcharge management is so difficult.

1,300+ ocean carrier fees and surcharges, dozens of which change weekly

Average of 9 surcharges applied per shipment

Tracking and applying updates is challenging:

  • There is no standard process for learning about new updates. Most are not well publicized, sent as emails, or buried somewhere on carrier’s websites
  • Many updates require in-depth interpretation based on a forwarder or shipper’s own contract with that carrier
  • Companies often lack a platform to manage and apply the updates to their own contracts and calculate their rates accurately

It’s the nature of global logistics that every shipment is different. The costs involved are always unique, being impacted by the volume and class of goods, trade lanes, ports used, and the ocean carriers themselves. The problem of surcharges is unique in that such fees that can make up 40% or more of the total cost of a shipment – with many of the costs appearing to be at the discretion of the carrier.
Why-Ocean-Surcharges-Are-the-Biggest-Risk-to-Freight-Forwarders-And-Shippers

This puts all the companies who ultimately quote, book, and pay for the freight in a difficult position. Forwarders and NVOCC’s need to provide quotes to shippers to win the business upfront – often months or more in advance of when the shipment actually takes place.

It’s in that time that the surcharges can change, leaving unprepared forwarders exposed with pricing that may be too low to cover the cost of the move. And, lacking a process to track the surcharge updates, both forwarders and shippers are unable to audit the carrier’s invoices correctly after the fact either. This leaves many service providers and shippers to trust the invoices they are paying are accurate. This is a big problem considering Catapult’s own analysis shows that 30% or more of freight invoices are incorrect.

All this together means the problem of managing ocean surcharge updates has becomes a very high cost of doing business.

Because it is ultimately the forwarder and shipper who end up paying these costs, it’s up to them to deal with the problem. Short of a major change to the way carriers operate, the solution has to involve creating detailed internal processes that ensure every contract update is accounted for. Here are 4 specific steps companies can take to get carrier surcharges under control.

  • Develop a process for tracking carrier updates that includes researching and understanding how each of your carriers makes surcharge update announcements.
  • Hire, or partner with, analysts having the industry experience to interpret what each update means based on your company’s contracts.
  • Build, or implement, a platform to manage your contracts and tariffs centrally to ensure the updates are applied correctly across your office locations. In other words, create a process for managing your ocean contracts centrally so accurate rates are up to date for everyone.
  • Set up a process to audit invoices. Armed with accurate rates, your company can now audit ocean freight invoices and ‘take back’ what you’ve been overpaying in billing errors.

While the current low levels of ocean rates and nervousness of what SOLAS will mean in the long term are important – both are in many ways a distraction to the bigger issue of surcharges and fees that’s been facing the ocean shipping industry for many years.

Smart forwarders and shippers have realized this is where their greatest exposure and challenge to their business really lies. It’s our view that these issues with constantly changing surcharges, fees, and GRI’s will outlast the short term issues of low rates and SOLAS. This means taking steps to create a proper rate and contract management process is the most important change you can make within your operation.

Can You Benefit From Logistics Business Process Outsourcing?

The idea of outsourcing in the logistics industry is not new. In fact, in many ways freight forwarders and customs brokers are in themselves a form of Business Process Outsourcing (BPO).

BPO is a common method companies turn to for cutting costs, helping their operations run more efficiently, and freeing up time to focus on their core competencies.

After all, is it really the best use of an employee’s time at any company to perform labor intensive back office logistics functions – many of which can be automated with technology or at least managed more efficiently by a team set up and dedicated to the specific task?

At a high level, smart BPO develops ways to take arduous tasks and make them run better. Many functions that are manual and repetitive can be completed more efficiently when they are done at scale and with trained people. Another way to look at it is that BPO is about spending your resources on higher value activities like reducing freight rates and expenses, or finding new ways to better serve your customers.

It’s the purpose of logistics and the supply chain to worry about the tasks and goals that are core to making businesses run better. BPO helps to enable this focus, but doing it successfully takes an outsourcing partner who brings resources and deep industry experience – and most importantly a sound process.

A common way to deconstruct a BPO project is in four parts, each integral to how a final solution is implemented:

  • Current State – a look at what is happening now
  • Gap Analysis – finding areas that can be improved
  • Design – documenting and planning for the solution
  • Measure – a process for managing and determining level of success

The process of managing logistics for any large company involves a complex network of data, technology, suppliers, as well as countless other details. A big part of it is also inertia – the ever present idea that things are done a certain way because “that’s always how we’ve done it”. BPO is a great way to break through that inertia.

With so much of logistics, in particular international shipping, being data and documentation intensive there are many areas BPO can provide added value.

Here’s a list of common logistics processes that can be improved with BPO.

  • Rating (pre-rating, pre-audit)
  • Booking
  • Import Security Filings (pre-alert processing, CA-CS file creation)
  • Track and Trace (issue resolution)
  • Load Planning (container utilization)
  • Shipping Instructions
  • BOL Data
  • Manifestation
  • Export Invoices, Payables, Import Invoices (exception handling)
  • Import Arrival Notices
  • Import Renewables (on-carriage, import deliverables)
  • Long Standing, Unclaimed Cargo
  • Customer Service (issue resolution, complaint handling, data entry)

Many of the tasks and functions on this list are things your logistics operations must do. Thinking of each, do you see any gaps in your process for getting the work done? Do you see where a technology, or team trained to focus on a specific task could make it easier?

One way to describe the concept of logistics is to say it is controlling complexity through efficiency. As a logistics professional, you know there’s a problem that needs fixed when your processes, technology, and data are not optimal.

If you see inefficiencies within your own operation, then the answer to the original question is yes – you can benefit from BPO.