Freight management: Essential tool for the market economy

• Dollar savings should be driven from top down

Working in the market economy is a challenging proposition for manufacturers and traders. The market economy is of course a valuable tool to compete globally and to organise productive activity to service a market driven global consumer society.

In the above context, both buyers and the sellers of the international market would constantly have to look at an efficient supply chain to manage both raw material and finished goods to be competitive. In order to make the best of quality and price in logistics, companies must carefully focus on freight management which is a key element of the supply chain.

Today, transportation has diversified into various segments. Logistics is divided among various transport segments known as multimodal operators, which includes ocean, air, rail and road transport companies moving goods across the world to reach the consumers. They become the intermediaries between buyers and sellers.

Just as the transport complexity has expanded, the cost of transportation too has got complicated due to the various stakeholders’ involvement. This includes shipping lines, airlines, freight forwarders, consolidators and third party logistics companies. Given this development in the modern supply chain, if companies do not manage the freight market with proper understanding, either the exporter or the importer would be paying enormous amount of additional dollars as freighting costs which is commonly known as the freight rate.

A decade back shippers enjoyed market driven all inclusive freight rates. Today this has changed as most shippers find that on top of the freight rate additional surcharges are being added to the freight cost. In most cases these charges are not justified and are seen added on an ad hoc basis by various service providers in the supply chain.

Global transportation over the last three decades has been expanding with more and more containerisation of consumer products being shipped through the ocean highways. At the same time ships are becoming larger and provide better economies of scales for container transportation. Therefore, as a natural tendency the freight rate should become more competitive. But this benefit has been eroded due to non market driven surcharges being constantly added into the transportation which has in fact in many cases increased the logistics cost.

To avoid this situation the buyers and the sellers first of all have to have a good understanding of the globally accepted trading terms and make sure that third party service providers should not be given the opportunity to unethically and artificially increase the freight costs at the expense of the manufacturers and the consumers.

In most recent years, many companies have made a big mistake by allowing the middle and the junior managers or merchandisers to negotiate vital freight and trade contracts. The inefficiency of getting the best freight rate could be identified in two ways. The first one would be the level of education and understanding of executives of the global freight market and its tools along with negotiating skills. The second is, the high level of corruption in the negotiating of freight rates which leads to many artificial costs being included and the rates being blown out of proportion.  

The above factors have led many companies to lose millions of dollars to third parties. The fault lies in most cases with the top management of the companies, who neglects the transportation division and does not get involved in understanding and negotiating of freight contracts due to the lack of focus on this critical area of the supply chain.

While this is a global position the suppliers’ side has been hit harder. Many manufacturing companies using modern container transportation as the means of delivery of goods have ignored the proper use of trading terms guided by the International Chamber of Commerce (ICC) known as the International Commercial Terms (INCOTERMS). If these terms are not properly incorporated in the sales contract, both the buyer and the seller will be paying additional costs, irrespective of who negotiates the transport contract with the shipping company end of the day.

Therefore, to have the best freight costs companies should work on three management aspects, first of all to give the best commercial exposure for staff and train them in the best practices of global commerce and secondly to get the top and senior management involved in freight negotiations and to keep a constant update on the cost of transportation which is fluctuating on a weekly basis in today’s international transportation market. Thirdly the relationship and understanding between the seller and the buyer should be strengthened to eliminate doubt of cost division and liability transfer in international transactions. If these areas could be given proper focus, international traders could get the best transportation and logistics costs to compete in the international market place.



(The writer, CEO of the Shippers’ Academy Colombo, is a double major BSc in Economics and Business Management from Connecticut State University USA and is certified in Supply Chain Management from Cranfield University, UK. He was a former Chairman of the Sri Lanka Shippers’ Council, and the immediate past Secretary General of the Asian Shippers’ Council. He is also currently a Senior Consultant to the President’s Office – Strategic Enterprise Management Agency (SEMA) for ports and aviation.)