Rate Optimization in a Falling Market

Posted on: March 18, 2023

Discussions surrounding the applicability of Rate Management Software still continue to circulate in the marketplace, and some individuals argue that it’s less relevant during falling markets or periods of turmoil. However, this perspective is fundamentally flawed. A declining or volatile market is precisely when Rate Management technology is most useful.

Discussions surrounding the applicability of Rate Management Software still continue to circulate in the marketplace, and some individuals argue that it’s less relevant during falling markets or periods of turmoil. However, this perspective is fundamentally flawed. A declining or volatile market is precisely when Rate Management technology is most useful. We call our rate management function the Optimizer because it does exactly that; it presents a comprehensive overview of options and contracts and their respective rates in effect at any given moment, sorting the rates from lowest to highest, optimizing the search process.

Skilled Trade Lane Managers at forwarding companies are constantly in the process of negotiating rates with carriers for various origins and destinations within specific trade lanes. They consider all possible travel routes for groups of goods and/or specific account cargo/bullet rates.

Large Forwarders typically have between seven to ten carrier contracts in each trade lane, resulting in a vast number of rates to consider. Each contract contains around 50,000 to 100,000 rates, which are rarely well organized, especially when it comes to bullet rates. Let’s do some calculations: at the lower end, that would be seven multiplied by 50,000 rates, resulting in 350,000 rates. At the higher end of the scale, seven multiplied by 100,000 rates for a total of 1,000,000. Accessorial charges also need to be taken into account for each rate, and calculations have to be performed for 20’, 40’, 45’ and HQ container sizes, increasing the number of potential rates into the millions. Moreover, the freight markets worldwide are similar to the stock market, with many hundreds of new price points emerging daily.

It’s hard to estimate how much time the average salesperson would need to manually research and calculate all the applicable rates within the contracts at any given moment. In any case, the market situation changes so rapidly that manual searches are inefficient at keeping up within a reasonable time frame, so it is no surprise that Forwarders relying on manual searches tend to submit bids much higher compared to those that utilize technology.

In contrast, Rate Management Software can provide comprehensive results within seconds, with all relevant accessorials factored into the total. Would anyone be willing to bet $100 per search that a salesperson could beat the speed of any Rate Management system on the market? How about having some fun and making it double or nothing for accuracy?

That’s exactly what I did when I served as the Director of the Transpacific Trade at Fritz Companies in 1996 during the initial launch of our rate management tool. During my visits to various locations in the USA and Asia, I presented this same challenge to each sales and customer service team that was resistant to using the technology. Within six months, all had begun using the tool because they couldn’t match its capabilities. They realized it was a bet they couldn’t win.

Our team simply had a superior understanding of the market compared to our competitors. Our method of communications was more effective; that is, we didn’t rely on personal communication. Instead, we found what we needed in the system whenever it was necessary.

Are Rate Management Software systems only useful for the sales team? No, Operations should also utilize the tool to ensure seamless coordination with Trade Management and Sales. Trade Management engages in ongoing negotiations with carriers as they strive to secure more business for their vessels. As a result, in a falling market, the carrier cost initially used to generate the initial quotation rapidly becomes less favorable compared to other rates as the market continues to decline. Operations should be responsible for maximizing margins based on the current best cost basis rather than the cost basis that initially secured the cargo.

We gave clear instructions to our Operations team, emphasizing the importance of using the Rate Management tool for every new booking. This ensured that they could identify the most optimal and efficient way to handle that particular business. By deliberately not distributing hard copies of contracts to our field staff, we compelled the Operations team to rely on the system to determine the best cost. To assist them in locating rates within contracts, we included additional information into the system displays, such as the Amendment number and the Bullet Number. These served as guideposts to facilitate the identifications of rates that even the carriers themselves often struggled to locate in their own manual versions of the contracts!

In fact, by now there should be no more questions about the usefulness of Rate Management Software. It is an essential tool for navigating the dynamic marketplace. Its applicability extends well beyond the sales team to operations and trade management, allowing them to benefit from real-time insights to make decisions more efficiently and accurately than would ever be possible using manual methods. By using Rate Management Software to leverage technology and optimize communication, Forwarders can stay competitive and maximize their profitability even during challenging market conditions.

Global Supply Chain | Trade Tech

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