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The Lowest Common Denominator

01 October 2014

It is a funny old world when prime beef cattle are being processed, not into traditional cuts of fillet, scotch, rump, skirt and flank, but instead processed into “ground beef” or hamburger for the US market – whatever can be produced, they’ll take. Any idealistic concept of “adding value”, up selling or individuality is a tough ask from a kilo of mince, albeit that beef prices have recently risen sharply.

I guess that is processing down to the lowest common denominator, but obviously still economically viable for producer, processer, importer and consumer.

Our industry also experiences a fair amount of this – we are occasionally asked to deviate from our policy of quoting the best or most appropriate options, the client instead seeking the “cheapest” option. We generally add all manner of “riders”, advising the client that they’ll almost certainly get the level of service they pay for – it is generally the lowest revenue cargo that gets compromised, left behind, delayed…

Like most other industries, freight is subject to a number of variances that have a huge impact on users. The most obvious is capacity – regardless of how big they may appear, and regardless of how many there appear to be, the capacity available on ships (and aircraft) is often outstripped by demand.  In their perfect world, it is in the ship owner’s interest to offer slightly less capacity than a lane requires ensuring demand remains firm – from the consumer’s perspective, the availability of several competitors keeps things honest, and hopefully, rates at an acceptable level.

A great example that has recently come into play are the massive new container ships that have doubled the number of containers carried at one time, great from the ship owners point of view, but a huge burden on ports in major cities that just don’t have the land or infrastructure to handle such huge numbers of containers at once.

The advent of the huge Airbus A380 brought similar issues with airports having to invest in equipment to cope with a new level in air transport.
Shipping lines have traditionally had cartels to try and protect their interests (mainly to try and stop them from cutting each-other’s throats), and most airlines now belong to “Alliances”, which allow them to widen their networks, but also offers a degree of protection from those who may otherwise be competitors.

So back to the importer seeking the “cheapest option”. His containers and air freight will almost certainly languish at origin (or worse still, at some transit point) for days or weeks as higher revenue cargo takes precedence, and all the screaming in the world won’t change a thing.

I am frequently amazed at the logic some importers use in making freight based decisions. Rather than considering all the options, they often opt for the single sailing offered by a forwarder.
Some basic arithmetic, in easy to work with numbers.

1 x 20ft container of product, purchase cost                      $100,000
Fast sailing from origin to NZ        15 days                         $1,000
Slow sailing from origin to NZ        22 days                        $750                   
Differential of                                                                      $250     
Cost of finance $100,000 x 12.5% $12500pa, / 365 days      
$34.25 per day

Additional cost of finance between fast and slow sailings
One further factor to throw into the mix – let’s assume:
Fast-sailing arrives on the 22nd of the month, is cleared and delivered,
devanned, processed and sold before the end of the month,
with payment due 20th month following.
The slow sailing arrives 29th of the month – not enough time to
process and invoice before month’s end – adding an extra 30 days finance cost to the mix $1027.50
Makes the “cheap” option quite expensive….


New Added by: Don Malcolm on 01 October 2014

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