Often overlooked, the question of how a product is going to reach customers is very important. This type of oversight can quickly turn a carefully designed product into a logistics nightmare. Your team will be left scrambling to secure rates which won’t turn your revenue stream upside down. Fluctuations in fuel, shifts of demand in certain lanes, and changes to volume all play a part in altering shipping rates from day-to-day. There are many factors that play into cost, but ocean freight shippers have another variable to consider. That variable is the Ocean Freight General Rate Increase (GRI).
Great supply chains are centered around one key piece of data. The cost of transportation, and knowing your costs upfront will maximize your bottom line. Furthermore, understanding transportation fees will allow you to price your product more effectively. With this in mind, let’s take a closer look, and take a step toward understanding the Ocean Freight GRI.
WHAT IS THE GRI?
Thanksgiving is our favorite time of year. It is for family, bonding…and eating. But mid-November also marks the start of one of our biggest challenges: restructuring our pricing to include the Ocean Freight General Rate Increase. Hawaii and Guam service providers like Approved spend hundreds of working hours to bring you the best rates possible.
Before 3PLs can understand the reality of rates in the coming year, the steamship lines perform an analysis of their own. The steamship lines crunch numbers and assess the state of the market. With data and projections, they arrive at an increase. This increase is implemented near the start of a new year.
We reached out to the pricing team at a top steamship line for some insight into the “what” of the GRI — from their perspective:
“The General Rate Increase is a tariff mechanism needed to make cost-recovery adjustments to an existing governing tariff.”
The Ocean General Rate Increase is an adjustment of prices based on an analysis of costs. These new, often higher costs, need to be recouped in order to maintain viability in the market. In order to maintain quality levels and elite service, steamship lines must increase their rates. This recouping of costs is vital to great service. It ensures necessary maintenance and upgrades are performed.
HOW IS THE GRI CALCULATED?
So now that we know what the GRI is, it will be a little easier to understand the assessments performed.
The GRI comes after intense analysis of shifts in costs over the previous year. The steamship lines know “each trade lane tariff has its own scope and with that, its own set of cost-impact factors to take into account when determining a responsible GRI rate level. Every measure of a carrier’s cost structure is reviewed and capital and expense projections are assembled for the coming year.”
This means the GRI is both a history lesson and a prediction of the future. It predicts the future of labor, consumer behavior, and government fees and taxes.
Steamship Lines Method
In addition, our ocean freight carrier works with service providers like Approved Freight to address top needs. They attempt “cost-recovery at a responsible and hopefully achievable rate.” Here is a quick example of their pricing staff on working with carriers to achieve the best rates possible:
“The market has witnessed the State of Hawaii’s efforts to recoup their expenses on transportation infrastructure with Hawaii and Neighbor Island Wharfages, Neighbor Island Excise Tax, Invasive Species and the newly created Port Facilities Security Fee. [We are] working toward true transparency and… to unbundle ocean rates that either include, or exempt line items from these surcharges… this provides our Hawaii customers a better understanding of State monies separate from the kinds of costs that carrier’s incur from operations.”
The steamship lines center their calculations for the GRI on the needs of their customers. They do this by examining new assessorial charges like:
- Terminal Handling Charges
- Hazardous Materials Fees
- Inland Arbitraries
Equally important, their team reviews all vendor agreements on ship maintenance, terminal, and equipment contracts, and trucking costs to create the most responsible and satisfying rate.
HOW DOES THE GRI IMPACT SHIPPERS?
Given these points, we can start looking at how the GRI affects shippers in all industries. The most important point to remember is that rates increase through the steamship lines. This means service providers’ rates must increase in order to offset the changes. This usually comes in a simple percentage pass-through increase to the shippers.
What can I do to offset the Ocean Freight General Rate Increase?
There are a few things you can do now to put you in the best possible position.
- Know your current transportation costs and margin. To achieve the most efficient and profitable supply chain, shippers must know their transportation costs. With events like the Ocean Freight General Rate Increase, we know these numbers are not static. Hold frequent assessments of costs throughout the year. Failing to anticipate, assess, and account for increases in costs attributed to the GRI will damage your supply chain.
- Run scenarios. Know exactly what you are making and run scenarios for price increases to see how they will affect your margin. Can you recoup the revenue you need elsewhere? Maybe a more accurate classification of your freight could be the spark you need.
- Start a dialogue with your service provider. All good service providers will be willing to discuss the General Rate Increase with you. Ask them for tips on how you can minimize the effects of the increase.
Understanding the Ocean Freight General Rate Increase is a great way to look back in time while ensuring a successful future. You will be able to see the trends of the last year, and it will give you insights into where your supply chain needs to be to maintain growth.
Approved Freight strives to be transparent about potential changes in our rates. We work with our customers to help them understand the GRI and effects on their costs.
We pride ourselves on working collaboratively and want to help all shippers move forward. To stay up to date on the GRI subscribe to our newsletter here.