Maneuvering Tight Corners

Helping Brokers & Forwarders Navigate Beyond Containergeddon

Victor Ofstein | MELIO

SHIFTING PRICES AND volatile demand for consumer goods are a sign of the times. They’re also forcing the freight industry to adopt new technology, especially in the field of payments.

The impact of COVID-19 on the freight and logistics industry was massive. But it also had a spiraling effect on every industry that relies on physical goods, raw materials and supplies.

As people spent more time at home due to health restrictions, the economy became dependent on e-commerce and doorstep deliveries. A shortage of basic consumer goods also led to widespread panic-buying and sent demand through the roof.

That’s when things got complicated.

Welcome to Containergeddon

COVID caught global trade by surprise and led to the crisis, referred to as Containergeddon, which drove shipping prices to new highs.

According to Freightos, the price of moving goods from the Far East to Amazon’s U.S. distribution centers more than tripled, from $8,875 per a 40-foot container in January 2021 to $27,423 in August.1

One indication that this spike isn’t temporary is the tender rejection rate—the number of contracted loads rejected by carriers. These were around 5% before the pandemic and have since risen to about 20%, according to FreightWaves.2 And there’s no sign of a drop any time soon.

While COVID was the catalyst, other factors contributed to the current supply chain challenges.

Outdated Infrastructure

Once pandemic-infused demand became the new normal, it became apparent that international ports have not evolved fast enough.

Many docks aren’t deep enough to fit new, massive ships capable of carrying up to 20,000 containers. The standard crane is also not high enough to accommodate these vessels. And there’s also a global shortage of transport ships.

But the problem doesn’t begin and end with the ports. This became evident, for example, when the Ever Given got stuck in the Suez Canal in March this year. With 15% of global trade going through the canal, the six days it took to move the vessel crippled the industry. This incident alone is expected to curb annual trade growth by 0.2%-0.4%, according to German insurance company Allianz.

COVID Side Effects

Even before COVID, the freight industry suffered from a shortage of truck drivers, forcing freight professionals to compete for truckers.

Then came the pandemic. It brought mass illness, lockdowns, and quarantines and reduced the availability of port and warehouse workers, drivers and fleet operation professionals.

With less staff, shipments got stuck, creating backlogs and leaving retailers short on inventory. This led to bidding wars for shipments and containers, where larger businesses pay more to get their products, while smaller operations struggle to maintain functional inventory levels.

Global Container Shortage

As Asian markets began to emerge from the crisis, they encountered an unexpected blocker. There weren’t enough ships and containers to move Chinese exports, which surged 21% year-over-year, according to Reuters.3

While estimates put the number of shipping containers in use at 180 million, many seem to be in the wrong place. Ships delivering goods to Europe and the Americas in early 2020 dropped off their cargo but were unable to return to Asia. So, containers were piling up on one side of the world, and products manufactured on the other side had no way of reaching their markets.

The shortage is so dire that ports are now getting paid to forgo exports and send empty containers back, further distorting trade flows and increasing prices.

Why Don’t We Just Fix It?

The changes required to fix these issues cannot happen overnight. Each project requires billions of dollars and years to accomplish.

While these renovations could improve the situation in the long run, they cannot avert this current crisis.

Forwarders Are Caught in the Middle

Like any contractor, brokers and forwarders act as intermediaries between the shipper and the various professionals who physically move the freight through all stations to the final destination.

In this new reality, brokers find themselves maneuvering several tight corners, affecting their income and cash flow.

maneuvering tight corners

Fewer Clients Mean Less Cash

Unable to pay the abnormally high prices, shippers and retailers, especially small- and medium-sized ones, are left with no inventory and no income. Many of them are in danger of going under.

Those that manage to get by need better credit terms from their forwarders in order to delay payments until they can generate revenue by selling their long-awaited goods.

No Cash, No Service

Payments are a major moving force in the world of freight. A trucker or a warehouse, for example, might not release goods until payment is confirmed.

To keep the goods flowing, brokers and forwarders must secure enough cash to pay for every step along the way. This doesn’t come easy when they have to offer appealing credit terms to struggling retailers.

The Catch-22 of Cash Flow

Brokers and forwarders are only as good as their relationships with the professionals who move the goods. These relationships depend heavily on timely payments that can be made on the spot, while goods are loaded on ships or boxed in warehouses.

The problem is that brokers are often paid 30 days after the goods arrive at the destination, while their service providers demand payment as soon as their role is done.

With fewer customers who can withstand shipping price hikes, brokers must offer more flexibility in payment terms. At the same time, they need to keep carriers, lumpers, and other contracted professionals happy, as they cannot afford delays.

This leaves them with a difficult choice—they can hamper their cash flow or harm their business relationships.

The good news is that there is a third path. Technology, once only available to large enterprises, is making advanced payment solutions accessible to all businesses, adding flexibility and resilience.

Fintech to the Rescue

The world of digital payments is constantly evolving, and new technologies can help brokers and forwarders maintain a healthy cash flow while keeping their service providers happy.

Here are some of the features they should look out for:

Fast pay: For a small fee, fast pay services allow freight professionals to cash in on future payments and gain some breathing room, without affecting the payment terms their clients enjoy.

Credit card payments: Innovative online payment services allow credit card payments even when the recipients don’t accept cards. This means carriers get paid instantly, while brokers maintain the funds until their next billing cycle. It also comes with lower fees than standard rates for third-party lending sources.

Instant payments: When moving goods cross country, there are often unexpected expenses that need to be handled on the spot, such as shipment fees or maintenance charges. Instant payments through push-to-card technologies will soon be available to all businesses and could prove invaluable in such scenarios.

Instant payment confirmation: Even if service providers are willing to wait for the cash, they still need to know it’s coming. Digital tools provide instant confirmation directly to their inbox, allowing them to monitor the transaction until it’s complete.

Scheduling: Ensuring that payments go out on time, not too soon or too late, is an art that is better mastered when everything is scheduled in advance.

Better visibility: Cash flow issues are often caused by the inability to monitor finances. A digital payment tool offers visibility, so brokers know where they stand and can plan accordingly.

The Future of Freight Payments

The freight industry has made significant technological leaps in the past few years, but there is room for broader adoption. That’s especially true for payments, as the industry still relies on traditionally slow and expensive methods.

High prices are here to stay, and the success of brokers and forwarders depends on their ability to harness technology to help customers weather this storm, and the ones to come.

Victor Ofstein is the logistics specialist for B2B digital payments company Melio. For more information, contact Victor via email: victor@melio.com.

References

1 The Freightos FBA Freight Pricing Index. Accessed Sept. 14, 2021. https://www.freightos.com/freight-resources/the-freightos-fba-freight-index/

2 Viewpoint: Will the world’s largest container ship actually provide trade solutions? Sept. 14, 2021. FreightWaves.comhttps://www.freightwaves.com/news/evergreen-ever-ace-worlds-largest-container-ship-trade-solutions-viewpoint-loriann-larocco.

3 Boxed out: China’s exports pinched by global run on shipping containers. Reuters. Dec. 10, 2020. https://www.reuters.com/article/us-global-shipping-container-idUSKBN28K0UA.

Images credits: ADLAC/SHUTTERSTOCK.COM; HERMIN/SHUTTERSTOCK.COM