Is Freight Letting Your New E-Commerce Business Down?
Updated on March 16, 2020
Hey everyone, Greg here.
If you’ve been following us for the last few months, you’ve probably noticed we’ve been getting A LOT of e-commerce businesses lately on our marketplace. We’ve been growing this audience for some time, but a lot of you out there who want to get into the e-commerce space might have a few questions you need answered before you hop into the industry.
One of the most crucial pieces of running an e-commerce business is how you go about evaluating and improving the international freight arrangements. That is why today I want to introduce John Edmonds with Freightos.
eFreightos knows a lot about international freight and freight forwarders. Think of them as the Expedia for freight — a marketplace where importers and exporters can instantly receive, compare, and book freight quotes from leading freight forwarders, and also get help managing shipments.
Whether you’re new to international freight or want to level up your freight knowledge, this is the right post for you.
All right, all that being said, I’ll let John take it away from here!
If you’ve just bought an e-commerce business, you’re probably looking for opportunities to cut costs.
If you are looking to source overseas it’s almost a no-brainer — check out Empire Flippers Ultimate Guide To Sourcing From China on how to do it.
If you are already sourcing overseas, you will want to cut international freight costs. Recent Freightos research found that almost half of companies importing four-to-10 shipments a year spend over $10,000 per month on international freight. That’s too high, and yet most importers struggle when they try to reduce their costs.
International freight is an “opaque” industry, meaning importers can’t easily tell whether they are getting good service or a good price. Most forwarders jealously guard their rates, making it difficult to compare prices. And as for value, even seasoned importers often can’t tell whether their forwarder is giving them good service.
But don’t be disheartened. You don’t need to develop a great understanding of freight to save money. Read on for all the insider knowledge you need to get better service at a lower cost.
Are the Shipping Arrangements Letting You Down?
We’re all familiar with express freight — international couriers like FedEx manage the entire shipment for small, light shipments, including pickup, international transit, delivery, customs processing, and anything else that needs to be organized.
Easy!
But once that shipment exceeds courier size and weight limits, it’s a different story. Each of the aforementioned responsibilities is picked up by a different company. Respectively, that’s a foreign trucking company, an airline or container ship carrier, a local trucking company, a customs broker, and at least one freight forwarder (if the supplier and you split responsibilities for the shipment, you will almost certainly use different forwarders).
Select the Right Mode
One of the most common ways small businesses waste money is by over-relying on air freight. A point to keep in mind when choosing between ocean freight or air freight is that going by sea clearly takes much longer and is less reliable on schedule. However, there are fewer cargo restrictions on ships than planes.
Another thing to note is that ocean freight is usually cheaper, too, although that’s not always the case for smaller shipments. To work out the most cost-effective option, input your shipment’s measurements, weight, and the origin and destination into this freight rate estimator.
Select the Right Freight Term
We’re talking incoterms here — this is going to get a bit dry. An incoterm defines a point in a shipment, between between pickup and delivery. Before that point, the seller of the goods (supplier) is responsible for making and paying for the freight arrangements (through their forwarder) and is liable to follow up (with the forwarder or with legal proceedings) if something goes wrong.
The buyer (importer) takes over beyond that point. The seller and buyer of the goods determine the point where they split responsibilities (including the options of either party assuming all responsibility) when they agree to one of 11 standard freight terms (incoterms) as part of their sales agreement.
Huh?
Well, most of us have heard of Free on Board (FOB). That’s an incoterm. Its transfer point is delivery to the international carrier. The supplier arranges pickup, pays any export customs, etc., and the importer makes all the international transit and destination arrangements.
Many importers know very little about incoterms, and so inadvertently agree to an incoterm which may end up being costly for them.
Here’s a common pitfall. The supplier’s forwarder often works out cheaper for origin charges (pickup, loading, and customs) than the importer’s forwarder. So far, so good. But problems creep in when the supplier’s forwarder arranges the shipment up to the port of entry. The supplier’s forwarder hits the importer with unfactored (and usually inflated) charges and can hold the shipment as hostage. This scenario is only possible with incoterms starting with the letter C, like Cost, Insurance, Freight (CIF).
There are plenty more incoterm pitfalls that forwarders are aware of, but that may not be helpful if the supplier and importer have already signed on an incoterm. You can protect yourself with a little more incoterms research; otherwise, play it safe by only agreeing to EXW (Ex Works), FOB (Free On Board), or FCA (Free To Carrier).
Getting incoterms right can save on the sales agreement, too. It’s quite common in supplier negotiations for the supplier to agree to a lower price, but switch the incoterm to EXW in exchange. The lower buy price might look tempting, but that incoterm means that you will now be paying all the freight costs.
Use the freight rate estimator to instantly find out if this is still a good deal. Work out the door-to-door freight rate (for EXW) and the port-to-door freight rate (for FOB), and then calculate landed costs.
A final note on incoterms. Don’t be alarmed if, after changing the agreement’s incoterms to EXW, the supplier later relays bad reports of your forwarder’s local agent. That probably means someone at the factory is trying to overturn the change of forwarder and rescue their kickback.
Select The Right Cargo Insurance
About 0.01% of containers are lost at sea each year, something that happens a lot less than urban myths would have it. But shipments do regularly suffer damage or go missing.
If your shipment gets lost, stolen or damaged, the cap on carrier terms and conditions is a measly $2/kg (2.2 pounds), which inevitably works out much less than shipment value. Cargo insurance is so cheap that it’s a no-brainer to spend a little to avoid larger unforeseen costs. It’s largely standardized too, so no need to shop around. But make sure your forwarder gives you comprehensive cargo insurance, which is the top level of cover. Unfortunately, it still won’t recompense for lost sales.
Incidentally, the most common reason why shipments go missing is insufficient labeling. Smaller shipments often get lost at consolidation centers, where air freight and most sea freight are packed in with other shipments before being loaded onto the vessel, and similarly unpacked after unloading. Check that your shipment is carefully labeled with at a minimum — carton count, country of origin, and FBA shipment tracking label.
Can You Cut Costs By Cutting the Middleman?
A time-worn method of cutting costs is to cut the middleman, and the freight forwarder is the middleman of international shipping. In theory, you could go it alone, although you’d probably need to use a customs broker. But, here’s why taking that path would be false economy.
Processes like customs clearance and preparing shipments for loading and unloading onto a vessel are far more complicated than with international couriering. Freight forwarders save you time by taking care of just about everything. It’s easy to underestimate just how much organizing and communicating is involved. Having a forwarder means that you don’t have to understand all the ins and outs of freight forwarding, except for the few tasks which, for legal reasons, you must do — like checking or completing the key freight documents.
Also, ship happens. Many things can, and do, go wrong with international shipments. Forwarders have the experience and know-how to troubleshoot and how to avoid the many pitfalls along the way.
Here’s a common example of how all of these potential problems come together to create an expensive nightmare. Rookie importers often think they can cut destination costs by using a domestic trucking company. But they don’t realize that there are other destination costs that need to be factored in.
Furthermore, truckers typically don’t have the troubleshooting experience to deal with the many things that often go wrong at port pickup. Many a rookie importer taking this path ends up seriously out-of-pocket because of unfactored destination costs and unnecessary additional port charges.
In short, although freight forwarders add cost to the process, they are vital to keeping your operation running smoothly, helping you avoid unnecessary costs. Nevertheless, there are still several ways you can save money on freight forwarder costs without cutting them out entirely.
Is Your Current Forwarder Letting You Down?
If your forwarder doesn’t measure up to the following criteria, it’s time to look elsewhere.
Are They Accessible?
Because forwarders are vital to smooth operations, they should be easy to contact. If you are with a large forwarder, they are likely to be balancing their time spent you and with larger customers. That generally works out better for the larger customer, and for the forwarder, because larger customers bring more business. You might find that arrangement to be not working well for you when something has gone wrong with your shipment, and your primary point of contact is a 1-800 number.
Are They Communicative?
A good forwarder will provide status updates, quickly alert you of any problem, and just as quickly work to resolve them. Make sure they are good with documentation, too.
Transparent communication is also important to keep in mind. Their quotes should be easy to understand, and their fee structure should make sense.
Is Your Forwarder a Good Fit For Your Business?
Few forwarders deal with all commodities, especially hazardous cargo or forward oversized shipments. If your new business deals with specialized cargo, you probably need a specialist forwarder who really understands and knows how to care about your product and shipping requirements.
Smaller freight forwarding companies often have a limited network of forwarding companies in other countries. Unless you are importing from a popular country like China, you should check whether your forwarder’s network is a good fit for your business.
Can You Trust Their Service?
Your shipment is worth more than the shipment value; it’s needed to grow your business, so you want someone you can trust to handle your valued goods.
Shipments do occasionally get lost, stolen, damaged, and delayed, but if there have been several instances of this problem happening in the past, you should look around for a more reliable forwarder.
Are You Getting a Competitive Price?
Importers want to know what value for money they are getting, but that often doesn’t happen in an opaque industry like freight forwarding. In fact, sometimes importers pay top dollar and get substandard service.
Being pragmatic and going with the cheapest price isn’t necessarily a good strategy. That will cut out smaller forwarders, who have to pay higher carrier prices, but often provide excellent the best customer service.
Can You Find Both a Better Price and Better Service?
International freight is behind the times. Trying to get a great freight quote has been hit and miss, with forwarders often taking more than a week to provide a quote, if at all. For instance, small business prospects should expect less than half of the top forwarders to respond to their quote requests.
But going through the process of requesting quotes is useful for getting some indication of the quality of service you can expect from each forwarder — useful as there hasn’t been a Yelp for forwarders. Some of the things to look out for are confusing quote request forms, quotes that don’t match your request, and confusing small print.
Selecting quotes based on price isn’t necessarily straightforward. Less scrupulous forwarders hide charges, making it harder for good forwarders to compete on price. Some forwarders, too, deliberately discount the first shipment to win the sale, and recoup their margins on subsequent shipments.
There have always been plenty of forwarders, of course, who provide great service and competitive quotes. Trouble is, their customers may not realize this until after they’ve left.
This is frustrating for most importers, who expect their freight experience to match their e-commerce experiences. Fortunately, the freight business is starting to move online. You can now instantly compare prices and forwarder service ratings on the Freightos Marketplace before selecting the best quote for you.
A Recap on the Key Tips for Saving Freight Costs
In an opaque industry, it’s been hard to work out whether you are getting competitive quotes and good service from your forwarder. Luckily, that’s changing. For now, though, we’ve covered the key ways to improve your freight costs.
- With a little understanding of freight shipments, especially how to make the right choice of mode, incoterm, and cargo insurance, you can reduce costs.
- Cutting the middleman is a false economy because there are too many pitfalls that even experienced importers can fall into trying to go it alone, but you should check whether you’re getting good service.
- If your forwarder doesn’t stack up, there is now a quick and simple way of finding both a good forwarder and a good price.
Clearly, there’s a lot more to international shipments and freight forwarding than this article covers. The International Freight Crash Course goes to the next level and it isn’t a long read. For now, you’ve got a solid start on ways that you can streamline service and work with your forwarder to grow your new business.
Good luck, and smooth shipping.
Photo Credit: anekoho
