What is a diversified rate strategy and why do you need one now?Aug 05, 2022
For the first time since April 2020, spot rates have fallen below long term rates on the China to the US West Coast trade lane. There has been a downward trend in spot rates on most other routes and long term rates are also under pressure as growth has slowed in July, indicating that rates may have hit their peak.
Global inflation, falling levels of consumer demand and inventory overstocking has contributed to this drop.
The supply chain market is continuously battling against disruptions and the freight rate market remains unpredictable. Now is the time for businesses to rethink their freight rate strategy and minimise risk across their supply chain.
- What are the rate products that are available?
- How do you diversify your rate strategy?
- How can Zencargo help?
What are the rate products that are available?
A good starting point to understanding your rate strategy is to recognise the types of rates that are available on the market.
Long term rates
Long term rates are fixed at a price over a certain period of time. Committed volumes are agreed which offers shippers guaranteed space on vessels. This option provides rate stability and reliable capacity, and businesses are able to factor this into their budgeting and forecasting.
However, this option is harder to secure for smaller shippers and if volumes are not fulfilled on the shipper side, then their space will be lost.
Spot rates are constantly changing and are determined by market conditions within a 2-4 week period. This option requires no contractual obligations and shippers can benefit from short term market inefficiencies as spot rates can drop.
On the other hand, there are risks in price volatility and there is no preferential space allocation. This option also requires continuous tracking and monitoring as spot rates can change within a short time period. Businesses will find this hard to include in their budgeting and forecasting as it is difficult to anticipate these rates.
Index linked rates
This option is a variable rate and it is tracked against established freight market indexes such as Xeneta or SCFI (Shanghai Shipping Index). Index linked rates are usually competitive and based on mid-market lows. Shippers will be paying for that one market average rather than shopping around.
Index linked rates are an alternative concept that requires more operational effort in terms of monitoring as rates need to be tracked constantly and they are sensitive to peak season swings.
Each rate option comes with pros and cons meaning that businesses shouldn’t put all of their eggs in one basket. Instead, shippers need to diversify their rate strategy in order to create a competitive advantage. By doing so, businesses can mitigate risks by securing the right amount of space for their volumes whilst also keeping their costs at a minimum, and within control.
How do you diversify your rate strategy?
The key to diversifying your rate strategy is to understand the key characteristics of your supply chain.
Here are some of the questions you should be asking yourselves:
- What is our current rate strategy?
- What trade lanes do we focus on?
- What is my yearly volume profile and split over each quarter?
- Is our volume affected by peak seasonality?
- What is our appetite for risk?
The answers to these questions will help you build out a supply chain profile to help you understand how you tailor a bespoke rate strategy that fits best with your business.
To give an example, let’s say your business ships around 500-1500 TEU a year and your volumes are evenly distributed throughout each quarter in the year and are not impacted by peak seasonality.
The strategic blend to this rate strategy may be 80% long-term rates and 20% spot rates. Here are some of the reasons why:
- This shipper can guarantee a stable amount of volume to forwarders which leads to successful long term agreements
- Long term rates would avoid peak season spikes in costs
- Spot rates are an added line of defence in the event of market swings
- Spot rates can also give the shipper alternative carrier options
How can Zencargo help?
Zencargo is a digital freight forwarder and trusted partner that aims to help businesses beat the market and achieve the best rates and space for their volumes.
We understand that it is difficult to approach the current freight market so we are offering 1:1 consultation rate strategy sessions to help you focus on what’s best for your business.
This consultative session is run by our co-Founder and Chief Commercial Officer, Richard Fattal, as he will be offering advice on rates, strategy and ‘quick wins’ suited to your supply chain.
Book a session with him today here.
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