Will I Leave Money on the Table with 12-month Fixed Rates?
Jan 25, 2018
This is part 2 of the Xeneta 11-part FAQ series focusing on key questions related to freight rate benchmarking and procurement. The series provides answers to the most frequently asked questions revolving around the complex world of ocean freight rate benchmarking and procurement. It provides you some tips and tricks to make the process a little less painful.
"Leaving money on the table" is an idiom which signifies someone not getting or saving money that they could be. This idiom is thought to have originated from poker wherein if you don’t play intelligently, you may be leaving your money on the poker table.
This expression is quite widely used in negotiations. But does it apply to ocean freight rate negotiations?
Ocean freight rate negotiation is an art and if not done correctly, you could be leaving money on the table.
If you consider a 12-month fixed ocean freight rate, is it possible that you may be leaving money on the table? Probably yes, probably no.
Let’s play around with a couple of scenarios. Assume a competitive environment for a shipper/BCO, which is the case for most.
BCO #1 ties in their rates for 12 months at the beginning of the year. BCO #2 negotiates a 12-month contract with quarterly reviews/adjustments based on market movements. In this scenario the market, during the 12 month period, moves significantly upwards. The first BCO ‘wins’ in this case.
Assume the same BCOs with the contract types as above. Now, however, the market moves both up and down – but mostly down – BCO #2 “wins” as rates are adjusted downwards and they have the flexibility in their contact to do reviews and adjust.
If you are thinking “Ah, I have big volumes, I will score if I negotiate rates on a longer-term basis”, think again.
Based on the volatility of freight rates, it has been shown that volume no longer necessarily translates to savings and in many cases, big volume shippers are paying far above the average Asia-Europe or Asia-US TEU rates.
You can gauge this using freight benchmarking services which will tell you what the performance on the trade lane has been and what is anticipated.
Freight benchmarking provides you with actionable data to study the various markets, trade lanes, your peers and after analyzing same, you can decide on whether to fix your rates for a 12-month period, 6m, quarterly, short term or a combination.