Finance execs: Do you realize this happens within your supply chain?
By Erik Mate
finance | Tue, May 28, 2019 | 6 Minute Read
I joined NYSHEX about two years ago and this is my first experience within the shipping industry. Accurate forecasting, precise financial planning and keeping costs low are all incredibly critical aspects of my role and what keep all finance and accounting executives up at night. I've been completely shocked by the opacity inherent and unique to shipping freight procurement. This post is intended to share some of the key learnings I’ve obtained since joining the industry and how such learnings could be utilized by the accounting or finance decision-maker of a company shipping containerized ocean freight.
Freight Costs Vary Depending on When Cargo is Shipped
To begin, one of the most striking oddities that I quickly discovered is that most companies shipping container ocean freight may not actually know the cost of transportation until the cargo loads the ship. Generally speaking, most shippers purchase space on an ocean carrier’s vessel in one of two ways: via a service contract or via the spot market. (I’ll save my thoughts about the inefficient practices surrounding service contracts for a blog post at a later date.)
For shippers who need to meet a need outside of their direct service contracts and thus have to utilize the spot market, the actual cost of the containers may not be known until the day the containers are loaded onto the vessel! The quote obtained from the carrier can be effectively treated as an estimated cost which is frequently subject to a higher or lower rate than originally agreed upon/quoted. The time between receipt of the quote from the ocean carrier versus the actual date of loading onto the vessel may range from several weeks to several months. While the variability between the quoted cost and the effective cost at the time of vessel loading may only swing between $10-$100 per container, the total cost in any given year as a result of this volatility between the quoted rate and the effective rate can range from as little as several thousand dollars to as great as several million dollars making it nearly impossible to forecast and maximize the return on cash by the finance and accounting team.
Sadly, having an annual service contract doesn't make you immune. The majority of importers from Asia lack visibility to what "Peak Season Surcharge" they will pay in Q3, what next quarter's "Bunker Adjustment Factor" will be, and even Eugene Fama couldn't tell us what this IMO 2020 regulation will mean in terms of January freight increases. I can't think of many finance execs who are comfortable writing these blank checks.
Invoice Errors Are Not Just Tolerated; They're Expected
Next, invoicing practices in the industry are incredibly antiquated and subject to an unacceptable number of mistakes and errors. About 30% of invoices issued by ocean carriers are either disputed or inaccurate. Aside from inaccuracies in pricing due to the manual and complex nature of billing, many disputes arise from hidden charges added by the carrier not previously agreed upon or known by the shippers. There are many causes for such invoicing inaccuracies and disputes, I will certainly not attempt to diagnose the root causes. However, it’s clear that managing invoicing inaccuracies by the ocean carriers can cost the other side of the transaction (the shipper) an outrageous amount of time, money and resources.
There are third party providers (i.e. freight audit companies) who’ve built multi-million-dollar businesses managing the invoicing process for shippers by auditing each and every line item on freight invoices against the prices listed in a service contract or spot market quote. As I’m sure you can imagine, the cost of a freight audit payment firm is NOT cheap. For those shippers who do not outsource to freight audit payment firms, the cost of processing and reviewing freight invoices can be a major inefficiency in time utilization for a full-time staff member, a full-time job, or even entire departments dedicated to this cause. Something that most finance and accounting professionals can agree upon is that reducing overhead costs and maximizing the value of all staff is always a critical component to managing a company’s finances.
There is a Better Way!
In sum, the normal occurrences and traditional practices in the industry should be considered unacceptable by any finance or accounting professional accustomed to operating in almost any other service and industry. Here at NYSHEX, we pride ourselves on tackling the issues of i) price variability and uncertainty between the original quote from ocean carrier and the cost of ocean freight on the day of vessel loading, and ii) invoicing inaccuracies and disputes. With a NYSHEX Forward Contract, the price agreed to with the ocean carrier at the time of entering into the contract is a fixed price not subject to any price fluctuations or changes. Additionally, the NYSHEX Forward Contract is an “all-inclusive rate” at the time of entering into the contract so there are no hidden fees which may lead to invoicing disputes or inaccuracies. Effectively, the price you see on the screen for a contract is the price you’ll pay. Furthermore, if that weren't enough value for your freight spend, the ocean carriers guarantee the containers and the vessel space for all NYSHEX contracts because there are liquidated damages associated with breaching the contract.
If your organization is not taking advantage of guaranteed, NYSHEX Forward Contracts this represents a true and tangible loss of opportunity cost. We’ve seen that the finance team of shippers contracting a significant portion of their container ocean freight volume on NYSHEX Forward Contracts can forecast costs significantly more accurately and also reduce the exorbitant overhead costs associated with disputing and managing the invoicing process. Many of our largest shipper members have run analyses to pinpoint P&L upsides to utilizing NYSHEX amounting to the hundreds of thousands in cost benefits. I admire and love working with these innovators who are rejecting this completely unacceptable status quo and are leveraging the tools available to them to drive change.