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As a shipper, your ultimate goal is to secure the best possible freight rate and terms. An effective way to achieve this goal is to execute a well-structured freight negotiation process.
Given that freight costs account for a significant portion of your total operating expenses, negotiating the right rate at the right time can have a big impact on your bottom line. A freight negotiation process should be implemented with every potential carrier to ensure you get the greatest value for your money.
We'll go over what a freight contract is and give you tips to help you negotiate better freight rates.
What is a Freight Contract?
A freight contract is a legally binding agreement between a shipper and a carrier that outlines the terms and conditions under which goods will be transported.
This contract governs the transportation of goods from one location to another, including the price, payment terms, delivery dates, and liability for loss, damage, or delay during transit. Freight contracts are essential to businesses that rely on the transportation of goods to operate and can be customized to meet the unique needs of both parties.
10 Tips for Negotiating Freight Rates
#1 Understand Your Operating Costs
Freight rates are only one aspect of the shipping process. To successfully negotiate better freight rates that are right for your business, you need to have a comprehensive understanding of your other operating costs.
This includes taking into account the various side costs associated with merchant haulage. Demurrage fees, free time, detention fees, and the location of both pick up and return of empty containers are some of factors that can add up and ultimately outweigh any potential savings gained from lower freight rates.
Start by understanding what you’re spending on freight and other associated costs. This will give you a better understanding of where you can save money while still ensuring quality service.
#2 Do Your Homework
Before even entering new contracts and freight rate negotiations, do your research. Gather market rates, benchmark quotes, and understand the current supply-demand dynamics of your shipping lane.
By understanding the full picture of freight market trends and the cost structure of your shipment, you'll be armed with valuable information to help you negotiate a lower rate.
#3 Identify Your Freight Needs
Knowing precisely what you need will make discussions with your carrier or freight forwarder more productive. You can use data to determine the specific modes, routes, and delivery times that best fit your requirements.
By understanding the specific details of your freight needs, you can communicate them to carriers and negotiate terms tailored to your requirements.
#4 Consider Shipment Consolidation
Shipment consolidation is a useful strategy for saving on transportation costs. Combining multiple shipments into one reduces the number of loads that need to be shipped, which can help you negotiate lower rates.
Look into less-than-containerload (LCL) options to combine several small loads into one larger shipment.
By consolidating your shipments, you can decrease the number of carriers needed and negotiate rates more effectively.
#5 Negotiate with Multiple Carriers
Don't limit yourself to one carrier when negotiating freight rates. Talk to several carriers and get quotes from each of them. This will give you more leverage in the negotiation process and allow you to compare rates easily.
It's also important to note that the more leverage you have in terms of negotiating, the better rate you’ll be able to secure.
#6 Build Relationships
Respect and communication are key elements of any successful business partnership. Working with a carrier or freight forwarder should never be a purely transactional experience.
To successfully negotiate freight rates, you should build strong relationships with your carriers. This is especially important if you plan to ship regularly or in high volume.
By developing trust and understanding with your carrier, you can work together to find the best shipping solutions for both parties.
#7 Compare Contract and Spot Rates
Contract and spot rates represent two different types of freight pricing. Spot rates are the current market rate for a given lane, while contracts are negotiated ahead of time and locked in for a period of time.
Average spot rates can sometimes be cheaper than contract rates because they’re based on the most recent market conditions. However, the latter can offer greater cost savings in the long run because they’re locked in for a set period of time. Spot rates can be extremely volatile, as seen in the example of trade routes from Shanghai below:
It's important to consider both when negotiating freight rates. This will give you more options to choose from and help you get the best possible freight rates.
#8 Don't Overlook the Details
Negotiate all aspects of the rate agreement, including surcharges, accessorials, insurance, and service level requirements. Elevate it onto a contract to assist in adhering to the details over time.
All of these details can affect the total cost of your freight, so consider them when negotiating with carriers.
#9 Read the Fine Print
Make sure to read the entire agreement, including the fine print. Understanding all the terms and conditions before signing a contract is essential.
Pay close attention to any exclusions, limitations, or hidden fees that may be included in the agreement, as these could affect your overall operating costs.
#10 Don't Forget to Re-Evaluate
Re-evaluate your contracts regularly to ensure you're still getting the best rate for your freight. It's also important to monitor market data, as they can affect the cost of shipping goods.
Paying attention to these details can help you stay current on the latest trends and determine if you need to renegotiate your contracts.
Negotiate Freight Rates and Lower Operating Costs
Negotiating the best freight rates is a critical part of running any successful business, and with the right approach you can save your company significant amounts in shipping costs.
With these tips in mind, you should be well-equipped to negotiate more favorable terms for shipping services and lower your operating costs overall.
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