Online technology platforms where shipping lines and their customers can negotiate forward contracts could help improve vessel utilisation levels and reduce freight rate volatility, a joint study by Drewry and CyberLogitec showed.
While the shipping industry has changed dramatically in recent years, the market for ocean freight services “remains exposed to the inherently dynamic nature of demand and fixed nature of supply which results in oscillating vessel load factors and freight rate volatility.”
This fundamental supply and demand mismatch causes significant structural inefficiency which adversely impacts all market participants, according to Drewry.
The study assessed the ability of technology platforms to help reduce the fundamental mismatch between supply and demand in global liner shipping spot markets.
“Our study concluded that many of the market’s pain points could be addressed through a capability to flexibly buy or sell ocean freight services in advance, using a neutral, global platform,” said Philippe Salles, Head of e-Business, Transport and Supply Chain at Drewry Supply Chain Advisors.
“Volume commitments and capacity guarantees would provide an early visualisation of demand to the market, thereby reducing the supply-demand mismatch and rate volatility, to the benefit of all market participants.”
For shipping lines, forward selling of vessel slots, underpinned by volume commitments, would put them in a stronger position to forecast their revenues and reduce their cost of capital, according to the study. The early visualisation of demand could also be linked to collaborative, dynamic capacity management and increase vessel load factors. The reduced freight rate volatility would assist in stabilising vessel P&L’s and improve invoice accuracy, while the ability to ‘sell forward’ will provide an effective hedge against freight rate decreases.
Additionally, the study showed that, for shippers and forwarders, the reduction in freight rate volatility and the ability to ‘buy forward’ would protect their product margins and provide an effective hedge against freight rate increases. Together with space guarantees, enforced through a deposit scheme and vendor reliability scores, this would result in more stable and elevated service levels of their ocean providers that enable reduction of safety stock levels. Forward buying ocean freight provides procurement teams with an additional ocean freight procurement tool with flexible timings, thereby improving the agility of their logistics management teams, Drewry said.
Furthermore, the study also identified benefits resulting from technical platforms enabling the market for IT providers. A platform which provides these forward negotiation capabilities would be the ideal starting point to also provide the ensuing requirements involving electronic booking, documentation, freight settlement and cargo visibility. These items combined would provide “a unique position in today’s market place offering unparalleled scope and exciting opportunities to optimise their customer’s ocean freight experiences by eliminating other pain points.”