What does it take to be profitable in Freight Forwarding

This is a very pertinent question to many Freight Forwarders around the world currently..

Achieving and maintaining profitability has been one of the serious problems faced by many freight forwarders and more so, in these trying times..

As we have discussed, a Freight Forwarder is a multi-function agent/operator who undertakes to handle the movement of goods from point to point on behalf of the cargo owner..

The essence of freight forwarding is to ensure that the cargo is collected from the seller and delivered to the buyer at the required place, at the right price and in the same condition that it is picked up from origin using the most suitable and optimal resources and routing possible..

Reducing costs, keep the costs low or maintaining the costs over a period of time is key to achieving profitability in freight forwarding..

But it is easier said than done because just like other businesses, the business of freight forwarding also has variable, fixed, statutory and incidental costs..

1. Variable costs may be defined as a constant amount per unit of output which changes in proportion to the volume of the output.. Examples would be costs such as freight rates, road/rail haulage, fuel costs because these costs fluctuate based on market demand ;
2. Fixed costs are costs that remain the same over a period even if the volume of the output varies.. Examples would be costs such as staff costs, rent, operating systems ;
3. Statutory costs may be costs such as Customs Duties, taxes and other costs related to or enforced by Governments.. These costs normally cannot be negotiated or discounted unless in certain special cases relating to specific cargoes ;
4. Incidental costs may be costs such as Storage, Demurrage, Detention or other costs that are not budgeted for by the seller or buyer or other entities in the chain ;
5. Then there is also the cost of doing business which involves gathering market intelligence, negotiations, enforcing contracts and transactions..

 

Cost reduction can be achieved in a variety of ways

Smart procurement

A freight forwarder uses the services of many service providers such as Carriers, Truckers, Warehouses, Clearing Agents, Depots, Pack Houses and many more..

It is essential for a freight forwarder to have a dedicated procurement person or team handling the procurement of the various services because finding the perfect service to cost ratio can be tricky and could render your quotes uncompetitive..

Having a proper procurement process allows the forwarder to benchmark and find the right mix of service coverage, cost, and reputation required to handle your customer’s business effectively..

 

Process optimisation

Freight forwarding is a sensitive, labour and process-intensive business as it has to cover activities by sea, road, rail either individually or in combination..

Any processes that are not followed correctly or not done in time can lead to additional costs which will eat into the company’s profits.. In the case of specialised businesses like project cargo or perishable cargoes, such additional costs have the potential to wipe out the profits of the company as a whole..

Therefore, it is essential that operational processes covering the various types of shipments handled and the various modalities used are mapped and recorded properly..

In the recent past, digitalisation has played an important role in helping freight forwarders optimise their own processes and also those of their customers so much so that it has spawned a new generation of digital freight forwarders for whom, process optimisation has become a USP..

 

Controlling overheads

Overheads in any business is bad for the bottom line and if it is left uncontrolled, it could get quite nasty.. This is especially true for freight forwarders who own and operate their own assets such as warehouses, depots, trucks, and handling equipment all of which may not always be used optimally..

Companies that run lean businesses not only save money in freight forwarding operations, but also have the flexibility to offer a better service, without any significant or additional capital investments..

Reducing overheads and running a lean operation allows the forwarder to offer customers a powerful value proposition in a market where providers have to compete through differentiating their service offerings..

 

Avoiding mistakes

No forwarder can claim to be 100% error free in their operation.. However, the key to a profitable freight forwarding operation is the ability to avoid or recover from mistakes made in the business.. These mistakes can take many forms – incorrect quotations, improper cargo packing, incorrect processes followed, incorrect documentation etc..

In order to avoid mistakes, one of the main things that is required is for the forwarder to have a deep understanding of the customer’s business and its requirements..

Using tried and tested processes and employing the right calibre of people with the right experience and industry knowledge is one of the other ways in which a freight forwarder can avoid costly mistakes..

 

Cost Control and Staff

Cost control is of utmost importance in a freight forwarding business and neglecting it will affect earnings quite easily and quickly.. Employee behaviour forms a key part of a good system of cost control because employees are instrumental in the achievement of an organisation’s goals especially one that of cost control and reduction..

Staff should be properly trained and motivated to identify the various cost levers and pressure points which can escalate costs for the company and client.. Experienced staff can bring tips and tricks to the table that will help the company save costs for themselves and their clients..

The absence of cost control measures will have a deep impact on the company’s profits and therefore it should be in place and strategically controlled across all departments, especially departments that deal with external service providers and external forces..

 

Other ways of ensuring profitability

Other than reducing costs, below are a few other ways in which a freight forwarder can ensure profitability..

1. Having a clearly defined organisational structure is key to the successes of many companies and everyone from the management to the driver must clearly understand the company values, culture, strengths, mission, vision and identify with these so everyone can move in the same direction.. For a freight forwarder, the entire staff complement must be aware of the “essence of freight forwarding” discussed above..
2. Providing value-added services which is customized to your customers’ needs and not just offering the same service basket to all customers, allows forwarders to improve their profitability substantially.. The business of global trade and logistics can be complex at the best of times and therefore, catering to complex demands from customers provides several opportunities to a freight forwarder to improve their business prospects and create a positive reputation..
3. Having an innate understanding of the customer’s business by asking the right questions, practical learning like visiting the customer’s business or factory to know how things are done at the customer, understanding their organisational abilities etc, is a huge plus for any forwarder.. Companies who develop a profound understanding of their customer’s business are able to adapt to their customer’s logistics needs which could end up saving costs for both them and the customer..
4. Having the right relationship works wonders in any business and by assigning specialised and experienced staff within your organisation to handle customers with special requirements, you can handle any complex requirements of the customer which will make them stick with your company providing you with a sustainable volume and profitable revenue stream..
5. Efficient data management is a key area which can assist a freight forwarder in increasing their profitability.. In any shipping transaction, a lot of data flows through a freight forwarder.. Data to Customs, Port, Carrier, Trade associations, Chambers of Commerce, Banks, Truckers, Police and many many more..
6. By aggregating these data flows, shaping it and using it effectively, a freight forwarder can collect and analyse a mountain of realistic and tangible data which will help them in not just understanding their customer’s requirements, but also commodity movements and cost implications..
7. For any freight forwarder, it is imperative to have a good customer mix across various trade lanes/cargo types and not just operate with the same customer mix..
8. Apply sound, tried and tested freight forwarding principles like many of the successful legacy freight forwarders have been doing over the decades..
9. Transport costs and efficiencies have a major impact on the business of a freight forwarder and this is one the areas where a freight forwarder may lose profitability if not managed properly..
10. But not everything is about rates/prices.. Client retention, new business development and growth are some of the organic ways in which a freight forwarder can maintain/increase profitability.. Below are some tips to achieve client retention and growth..
    • Be Reliable – reliability and market presence is one of the most important factors a client looks to in a freight forwarder.. Be reliable, punctual, transparent and honest in your approach to the customers ;
    • Be part of a Network – being part of a global freight network can provide some benefits for the freight forwarder such as
      1. reliable partners that can assist with the requirements of the customer in a new country ;
      2. reduce costs for the forwarder by way of volume-based rebates on rates both at origin and destination ;
    • Be proactive – problems happen in all areas of the business and as the agent responsible to handle the client’s requirements, it is up to the forwarder to be pro-active, consider eventualities that may come up and be prepared for the same when it does happen ;
    • Develop a Reputation – if you take genuine care of the customer, their business and their interests, it will give you a solid competitive advantage as a trusted freight forwarder and this will go a long way in generating repeat business and also referrals ;
    • Digitalise – digital technology gives a forwarder the competitive edge and ability to speed up the process of various processes including rates, bookings, documentation etc thereby saving them time and money..

 

Conclusion

While the global outlook for shipping seems to be dim right now, freight forwarding still seems to hold its place as a growth industry and contrary to popular belief, this is not the beginning of the end for the freight forwarder as we know them..

While cost control and cost reduction are one of the key areas where a freight forwarder can increase profitability, after a certain level, this cannot be done without compromising on the service offered to the client..

Freight forwarders need to position themselves strategically in the market to share in this growth.. This can be achieved by providing reliable and value-added service to the customers while being flexible in the approach to customer requirements..

Leveraging the capabilities of technology, digitalisation, AI, Big Data and IoT, a freight forwarder can exercise strict cost control which in turn can translate into innovative and cost-effective solutions to their customers and help them achieve, maintain and increase their profitability..

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