April 25, 2023 | Supply Chain Strategy
Ocean freight rates have cooled substantially in 2023. Retailer stockpiling, which outpaced sales growth last year, resulted in reduced demand for new merchandise from overseas suppliers. Ocean carriers are now faced with excess capacity and are scrambling to sell space to big shippers, particularly out of Asia.
For the first time since October 2020, transportation costs have fallen below their long-term average and retailers, especially those with large Asian supply bases, are well-positioned to save on shipping.
Furthermore, bottlenecks due to port congestion have been resolved. This presents a welcome respite for an industry that, in recent years, has been battered by extreme supply chain cost increases.
Retailers should take advantage of falling rates and negotiate. They should:
Firms should target reductions in both base rates and inland haulage. They should index prices to maximize further benefits as transportation costs continue to cool.
Return to pre-pandemic detention and demurrage terms. This is also a good time to pursue improvements to net payment terms to increase working capital.
China has reopened. In fact, demand from procurement managers in both India and China is rising rapidly, according to GEP’s Global Supply Chain Volatility Index. Retailers that can shift which geographies they import from should move supply bases towards China, India and Vietnam. This will allow the companies to source cheaper merchandise and benefit from additional reductions to ocean network spend because of Asia’s relatively more rapid decline in transportation costs.
Because of lockdowns, empty shelves in stores and headlines about input shortages, retailers overstocked massively last year. Avoid repeating past mistakes. Real inventory levels need to stay top-of-mind and accurately forecasting sales is critical. Contracting container Minimum Quantity Commitments (MQCs) with ocean carriers needs to be a sales-driven exercise. As transit times continue to improve, retailers must avoid stockpiling by keeping imports at pace with sales while maintaining lower storage levels.
Despite tighter monetary policies, consumer demand in the U.S., E.U., and Asia is improving. In the short term, retailers could experience bigger margins as shipping costs come down and sales sustain.
In the medium term, whether there’s a ‘soft’ or ‘hard’ landing downturn, retailers can expect further reduction in ocean rates and should aggressively target lower prices through renegotiation or the spot market.
Author: Siddharth Panandiker, senior associate, GEP