Trade Lane Management 101

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JAN HINZ: The key objective of trade lane management is to enable profitable volume growth. This requires empowering both origin and destination stakeholders to take an active role on both sides of the ocean.

Trade lane management requires active engagement with ocean carriers, customers, and every internal department from sales to finance or compliance. Proper trade lane management touches every freight forwarder's shipment.

A key responsibility is managing strategic relationships with our ocean carrier partners globally and locally. This involves negotiating the most competitive rates, specific routings, as well as space allocations.

A trade lane manager is engaged in strategic initiatives with our carrier partners from technology integration to differentiated service development, like guaranteeing space or fast boat options. Successful trade lane management teams effectively steer import and export volumes to maximize net revenue profitability and customer experience.

One example of how a trade lane manager would achieve this is by providing a balanced volume portfolio to our ocean carriers--

fixed rate business, and floating rate business. Ocean carriers aim for an even 50-50 split between the two rate models.

Carriers try to balance risk between guaranteed space and profitability, the spot market.

They prefer working with freight forwarders who can provide that right mix.

Our ocean carrier partners are in daily dialogue with the trade teams. Balancing and matching the unique client demand portfolio with the carrier's supply portfolio has many challenges to get it right.

Typically, the most active times of the year are the annual volume spikes around the Chinese national holidays, typically February, as well as fall peak season, typically September through November, December. This general uptick stress-tests both ocean carriers and freight forwarders in how they actively manage the increased container volume.

Freight forwarders work on allocations with ocean carriers and customers to ensure cargo moves on time while optimizing net revenue. Of course, nothing is ever perfect, so they also work to provide solutions when client demand outweighs the ocean carrier's available supply in space. Trade lane management is uniquely positioned at the intersection of demand and supply and, when done smartly, can provide immense value.

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NARRATOR: There are currently three primary alliances in existence. Those are--

2M, Ocean Alliance, and THE Alliance.

And these alliances, they see the participation of the largest global ocean carriers in the market.

The cooperation within the alliances is focused primarily on the large East West trades. And those are the trans-Pacific trade, the Far East westbound trade, and the trans-Atlantic trade.

Forming alliances has enabled the carriers to share the space and risk, and it also ultimately led to a lower unit cost for the shippers. The establishment of alliances and the consolidation of the services also led to less differentiation on a number of the global trade lanes, and that meant fewer services and fewer sailings available for the shippers.

Now, talking about service strings. On most of the trades globally, the carriers and the alliances, they work with fixed service strings and also called a loop. A string is basically a predefined schedule with a defined port rotation, a fixed departure date, and a fixed transit time between two ports.

You can think of this somewhat like the schedule covering your bus or your train within the public transportation system.

Typically these strings are organized around a weekly frequency. So you will have the same weekly departure out of Shanghai on a certain string every single week. And these strings have made it possible to build a more predictable and a more reliable supply chain.

PRESENTER: The majority of cargo moves by ocean vessels, or ocean FCL. The largest trade lanes being Intra-Asia, followed by Asia into the US, otherwise known as the Eastbound, and then Asia into Europe, otherwise known as Far East Westbound.

You may have heard different terms being used when talking about these different trade lanes, either East-West, North-South, Headhaul, Backhaul. Let's focus on the terms Headhaul and Backhaul.

Headhaul is the primary trade lane. So this is the one that the ocean carriers care the most about. This is the one that really drives the decisions in terms of blank sailings, how they're going to set up their fleet, and what ports they're going to add. And the reason for that is that this is where they make all their money, this is the dominant trade lane. The Backhaul is the return cargo, it's lower paying freight.

If we use an example of trade between the United States and Asia, for every one box that goes out, 2.3 come in.

This is a huge imbalance. And what ends up happening as a result of this is there's a large amount of competition for the Backhaul trade. And you can actually see a great disparity of anywhere from 5 to 10x on an inbound [INAUDIBLE],, depending on the time of the year.

The way the carriers treat these Backhaul trades is like an empty repositioning. So they don't actually make any money, they actually lose money on every single box. The other interesting dynamic on all this is, on the Headhaul, you have a lot of finished goods consumer products, whereas in the Backhaul, once again looking at United States, the largest commodity is actually waste, in addition to shipping things like food stuff, agriculture, machinery, and these are all very heavy commodities.

So even though you have this imbalance in terms of equipment, what you actually have is much more balanced trade when it comes down to weight. So since ocean carriers are very much global players, they very much look for ocean partners that will help support them on multiple different trade lanes, as well as provide them support on both the Backhaul, as well as the Headhaul trade lanes.