The process of global trade is simple to look at, especially if you look at it from the outside..
- There is a buyer who needs a product ;
- There is a seller who sells this product ;
- They discuss and agree on a price ;
- The buyer pays the agreed price ;
- The seller arranges for the product to be transported to the buyer
End of trade..
Simple, right..?? Well, many would wish it was so..
While there are several processes and documentary flows involved in trade negotiations, there are even further processes involved in the actual movement of the goods from Point A to Point B..
One such process in the movement of goods that influences product pricing is the process of freight negotiation and freight quotation..
As we have seen, a freight quotation is a document that outlines the charges involved in the movement of cargo from Point A to Point B..
The process of freight quotation comes in a few different flavours
- Freight Tender or RFQ
- Contract rates
- Open rates
- Spot rate
- Named Account rates
- FAK rates
Here we will discuss FAK Rates and how it works, but before that, here is a brief explanation of the ingredients of the above flavours..
Freight Tender or RFQ
Many multinational companies especially BCOs, who have large volumes moving across various trade lanes send out Request for Quotation (RFQ) through freight tenders which covers the freight rates for a set volume over a set period on multiple trade lanes..
An RFQ is a chance for the BCOs to competitively cost the services offered by the service providers..
Some shipping lines and BCOs may enter into a contract for the shipment of specified goods and volumes over a mutually agreed period of time..
This contract gives BCOs the option to have their freight rates fixed for that specified period of time which means they don’t need to worry about fluctuating freight rates which could impact their product pricing..
But a contract rate could come with a Minimum Quantity Commitment (MQC) which means that if the BCO doesn’t meet this MQC, they could end up paying penalities..
For the shipping lines, a contract guarantees the fixed utilisation of space for those volumes for that fixed period of time.. So the more contract rates they have, the better for them..
In both Tender and Contract, the BCO or shipping line could benefit or lose based on which way the freight market moves during that fixed period of time..
Each shipping line works with a set tariff of freight rates to move containers to Point A to Point B on various trade lanes..
Depending on the shipping line, trade, and country, these could also be known by many other names as MRG (Minimum Rate Guidelines), MMG (Minimum Market Guidelines), Tariff Rates etc..
If any new customer would call a shipping line, these are the rates that they would be quoted.. Open rates usually will have a long validity (at least 3 months) as these rates would generally be the highest rates which are sustainable for the shipping line..
There may be times when a shipping line is low on bookings on a specific vessel or during a specific period due to low demand..
Their ships may not be sailing with the optimal volumes.. In such cases, they may decide to offer “spot rates” in order to entice customers to ship with them..
Something like a “Sale”, but for B2B.. These spot rates usually will be for a specific voyage or a specific short time frame like a week or ten days..
Some customers who know how to plan their shipments, or are in the right place at the right time may benefit from these rates..
Named Account Rates
There are some BCOs who choose to let a freight forwarder handle all their freight negotiations under an open revenue arrangement with the forwarder..
In these cases, the forwarder will negotiate a Named Account Rate with the carrier.. In this option, the carrier will provide the forwarder a “special rate” only for that “named account”..
So in the line’s system, it will show the cargo is booked by the forwarder on behalf of the “named account” and for those shipments, this named account rate will apply..
Remember that the freight forwarder may or may not declare the details of the actual shipper at all times (like when they issue their House Bill of Lading)..
FAK Rate & How it works
Now to the subject of this article.. All the above rate types/negotiations are considered by many to be biased towards BCOs..
While logistics service providers like Freight Forwarders could also choose to use above, these rate types have been set to benefit BCOs more than the freight forwarders.. This is where FAK comes in..
FAK stands for Freight All Kinds which is a pricing model in which the freight rate charged is the same for all types of goods in a specific size/type of container (say 20′ GP) and does not depend on the cargo type inside the container..
FAK rates are used mainly by NVOCCs or by Freight Forwarders as it is much easier for them to quote, ship, and invoice because they handle containers with various types of cargoes..
Consider a global freight forwarder shipping millions of containers across the world on various trade lanes using shipping lines..
Imagine the administration work involved for both shipping line and forwarder if all the rates were based on commodity and each rate had to be filed individually..
Since the majority of the cargoes that the freight forwarder is handling may be general cargoes that do not require special handling, special containers, monitoring etc, FAK rate assists the forwarders and shipping lines in avoiding this additional administration burden..
Shipping lines usually apply FAK rates to all commodities without specific rate guidelines or requirements and also provide an exception list to which FAK cannot be applied.. FAK rates are not applied for cargoes such as below :
- Specific hazardous goods ;
- Declared High-Value Cargo (Cargo Value exceeding $500.000 per container) ;
- High risk or sensitive cargoes such as Government or military cargo ;
- ISO Tank containers/cargoes in flexitanks (because they are specialised) ;
- Special cargo types such as Out of Gauge Cargo, Reefer cargo ;
- Disputable cargo such as a charity or relief goods etc ;
Freight Forwarders who ship a variety of cargoes can get FAK rates from shipping lines which they can apply for all their customers other than named account customers..
These FAK rates are traditionally slightly better than Open Rates but higher than Contract Rates, Tender Rates and Named Account Rates..
These rates, however, would have shorter validities or are susceptible to changes depending on the markets..
But many ask, why should shipping lines charge different freight rates for different commodities when they don’t handle the cargo inside the container and the handling costs are the same for all containers..??
Well, it is mainly related to the value of the goods in the container and the risk of loss, damage, theft etc that the shipping line has to consider while the container is in their possession.. The liability of the shipping line could increase based on the commodity that is carried and therefore they need to protect their interests and exposure in this regard..
Another point that influences the shipping line’s commodity-based rates is the WEIGHT of the cargo.. Most of the shipping lines currently are part of global alliances.. When working in an alliance, each line has its own allocation in terms of TEUs and Weight which is apportioned based on the total DWCC of the ship..
This allocation works on the basis of TEUs or Weight whichever is reached first which means that if lines are carrying heavy cargoes, they will always reach tonnage first before they reach TEUs thereby earning less..
So naturally, each line tries to optimise their liftings and try to strike a balance between TEU and Tonnage.. Therefore line’s may charge more for cargoes that are heavier than others..
Should all freight forwarders FAK it and is FAK rate a good option..??
We asked a few questions to 3 different freight forwarders in 3 different geographies and below is what they had to say..
|1) What % of your business moves on FAK compared to named accounts..??|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||Recently we have about 60% on named accounts|
|Johannes Saade, Head of Ocean Freight, Forto, Germany||N/A|
|Fauad Shariff, CEO, CoLoadX, USA||100% of our business moves on FAK|
|2) What is the normal difference between FAK rates with the lines vs named account or tender rates – is it like a USD100 or 200/TEU, or more or less..??|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||It differs on routes:
a. Europe its up to USD 400.00
b. Far East the rates stay stable which is a big positive. The up and down also varies in terms of the difference but in peak season up to USD 400.
|Johannes Saade, Head of Ocean Freight, Forto, Germany||Depending on the current market. Named account rates are stable with a longer validity period and committed volume from a specific customer, FAK rates are very volatile and can trade below or above-named account rates.
Currently FAK and named account rates or on a similar level. On a weighted average long term NAC contracts will be more competitive including beneficial side conditions.
|Fauad Shariff, CEO, CoLoadX, USA||N/A|
|3) Are FAK rates a good marketing tool for yours or any organisation..??|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||FAK is not a good tool but with lower volume accounts it’s the only solution|
|Johannes Saade, Head of Ocean Freight, Forto, Germany||As all our signed-up customers can pick and choose available vessels based on FAK levels on our booking platform SHIP it is a great differentiator.
In addition, we fully integrated with Maersk spot prior to the Chinese new year peak season and have seen amazing volumes coming through that channel.
|Fauad Shariff, CEO, CoLoadX, USA||FAK rates are not a marketing tool in our view. They are actually very useful for our customers who prioritize simplicity and transparency in pricing over discounting.
Commodity specific or named account rates do offer economic value but really only to BCO’s whose volume justifies volume discounts or commodity pricing.
|4) In your view what % of freight forwarders work on FAK rates..??|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||Most medium to small forwarders operate on FAK and this is the main reason as to why these business battles against the corporates.|
|Johannes Saade, Head of Ocean Freight, Forto, Germany||I would guess everybody|
|Fauad Shariff, CEO, CoLoadX, USA||100% of forwarders and NVOCCs have FAK rates and use FAK pricing as an option.
However, the specific break down of named account rates versus FAK rates sold depends entirely upon the client base of each forwarder.
We work with some large forwarders who simply don’t have a big ocean freight activity and hence FAK pricing meets their needs.
The fragmented nature of the forwarding market suggests that at least one-third of the container shipping market is using FAK rates and quite likely even more.
|5) Any tips for working with FAK rates..??|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||FAK requires a lot of work and also a lot of research to maintain competitiveness.|
|Johannes Saade, Head of Ocean Freight, Forto, Germany||Try to concentrate your volumes on a main partner per alliance to get to the Tier 1 pricing level quickly.
Use them consistently throughout the year not only opportunistically.
|Fauad Shariff, CEO, CoLoadX, USA||Make sure you’re getting billed what you were quoting & make sure your customer is happy with the pricing and service they are getting.
A great service will always justify premium pricing or even simply less complicated pricing.
|6) Can you name 1 stand out advantage and 1 stand out disadvantage with FAK rates..|
|Juan Enslin, CEO General Cargo, Contour Logistics, South Africa||Advantage: easy to obtain and quote
Disadvantage: not competitive and unstable
|Johannes Saade, Head of Ocean Freight, Forto, Germany||Pro: FAK rates normally get you on the vessel as they priced that way.
Con: Due to their volatility there is always great uncertainty in forward pricing. Be aware of drastic price changes
|Fauad Shariff, CEO, CoLoadX, USA||FAK rates are undeniably straightforward and easy to understand. That’s why CoLoadX focuses almost exclusively on offering forwarders & NVOCCs FAK rates.
The disadvantage to FAK rates is that they may not be low enough for the needs of a specific customer or commodity and that may cause the customer to incur unnecessary direct and indirect costs.
Named account or commodity rates aren’t ‘bad’ in any sense, but customers must always calculate the cost of obtaining those rates and the corresponding service levels that come with them before rejecting FAK rates as an alternative.
As you can see, FAK rates are favoured by some and not favoured by others, it works for some businesses and doesn’t work for others.. Also as you have seen, there are several different rate negotiation options available..
But FAK could be a good solution for your company if:
- You are a freight forwarder who deals with general cargo which doesn’t fall under a commodity classification ;
- You don’t have volumes big enough to have a contract rate which may sometimes include a minimum quantity commitment (MQC), but still require rates that are slightly lower than Open Rates ;
- Your cargo is not exceptionally high in value or heavy in weight ;
- You don’t want to go through the processes involved in contract negotiations or tenders