In the dynamic world of the Singapore logistics industry, various factors can significantly influence the profitability of freight forwarders. One key factor is the impact of volatile freight rates. If you are a freight forwarder, you can consider the adoption of a freight rate management software to help you manage rate volatility and maximize your profit growth.
In this article, our logistics software experts will delve into the impact of declining freight rates on the profitability of freight forwarders. We will explore recent challenges faced by the industry, the direct effect on revenues, and discuss actionable strategies that forwarders can implement to mitigate risks including the adoption of digital solutions.
Recent Challenges with Freight Rates in 2023:
The freight industry experienced unprecedented challenges in recent times, primarily due to the COVID-19 pandemic. The tight supply conditions caused by lockdown disruptions and port congestions led to substantial rate surges.
For example, during the peak of the pandemic, air freight rates surged due to reduced passenger flights, which were typically utilized for cargo transport (passenger planes can carry up to 50% of global cargo capacity). The abrupt and unfortunate Ukraine war in 2022 also added to global supply constraints particularly in Europe. Consequently, shippers faced exorbitant prices to transport their goods.
However, as countries gradually re-open post pandemic and supply conditions normalize, freight rates are now correcting themselves. The market is experiencing a very sharp decline in rates this year as the availability of shipping capacity increases.
While this correction is beneficial for shippers, it presents challenges for freight forwarders and logistics companies.
Lower Freight Rates Hurt Freight Forwarders Profitability:
Lower freight rates have a direct impact on the revenues of forwarders. Consider the two typical pricing methods that freight forwarders use:
1. Percentage of Freight Rate
For example, a freight forwarder charges a 15% fee based on the freight rate, if the freight rate declines by 50%, the forwarder’s revenue from that shipment will decrease linearly by 50% as well.
While the forwarder can maintain its gross margins, the absolute profit level will be under pressure.
2. Unit pricing method based on weight / volume shipped
For this method, the forwarder may be able to charge a unit price for the service rendered.
This means that during periods of rate decline, the gross profit margins may increase as absolute dollar of gross profit is resilient despite declining revenue with lower freight rates.
This effect can be seen from a long-term study on rate volatility by McKinsey, whereby forwarders’ gross margins tend to move in the opposite direction of freight rates:
However, the cost of freight forwarding services as a percentage of the total shipping cost increases for shippers when freight rates decline sharply.
This will potentially reduce the negotiating power of forwarders, especially when dealing with large shippers who may demand lower rates or else they can contract directly with the carriers.
Furthermore, recent inflation concerns have also weighed on demand for goods and inventory de-stocking is adding pressure to freight volumes.
Coupled with the lower freight rates, forwarders are expected to face significant profit headwinds in 2023.
What Actions can Forwarders Take to Mitigate the Freight Rate Challenge?
a) Maintaining a Lean and Variable Cost Structure:
To soften the impact of rate volatility on business performance, forwarders can adopt a lean and variable cost structure.
One potential option involves tying personnel salaries to actual profits, allowing for better cost control during periods of declining rates.
For instance, forwarders can implement performance-based incentive programs, where bonuses are tied to profit achievement. This ensures that the largest cost item is aligned with gross profit, minimizing the profit pressure when rates are declining.
b) Expanding the Base of Carriers:
Forwarders can mitigate risk by diversifying their carrier network. Relying on a few carriers can leave them vulnerable to fluctuations in rates and service quality.
Forwarders can take into consideration factors such as volumes, schedules, and special requirements (e.g., transport of hazardous materials) to negotiate better rates and secure more reliable services.
They can strategically choose carriers based on their strengths and capabilities.
c) Targeting Smaller Shippers:
Forwarders can focus on smaller shippers who lack bargaining power and may prioritize service quality and on-time delivery over price.
While large shippers may have the bargaining power to demand lower rates, smaller shippers lack the volumes to contract directly with carriers at favourable rates and often value personalized attention and reliability.
By offering tailored solutions, reliable communication, and responsive customer service, forwarders can differentiate themselves in the market and potentially command higher rates.
d) Leveraging Technology Solutions:
Adopting technology is crucial in managing the complexity and volume of rate information.
Forwarders can leverage advanced software solutions, such as a comprehensive freight rate management software integrated with rate management capabilities.
Such systems enable efficient rate searching and comparison, provide visibility into surcharges and schedule data, and help forwarders stay on top of rate impact on their business.
For instance, One Logis’s rate management module can support businesses in the following ways:
- Manage and compare all your buy rates in one place via uploads or integration with carriers
- Generate quotes instantly based on buy rate + margin
- Implement role-based access controls that restrict access to certain users only
Unlock the Potential with Freight Management Software!
As the freight forwarding industry navigates through the challenges posed by declining freight rates, it is essential for companies to adopt proactive strategies to maintain profitability.
By implementing measures like maintaining a lean and variable cost structure, expanding carrier networks, targeting smaller shippers, and adopting technology solutions, forwarders can mitigate risks and optimize their operations.
In this context, One Logis has helped multiple freight forwarding companies in Singapore manage rate volatility with an innovative freight rate management solution that is seamlessly integrated with a comprehensive freight management system.
The solution empowers forwarders to search, compare, and manage rates efficiently, providing a competitive edge in the industry. With features such as surcharge and schedule data visibility, the system offers a comprehensive solution for managing every aspect of a modern freight forwarding business, protecting profitability in a challenging market environment.