The Ebb and Flow of Global Ocean Transport Costs and How it is Affecting Manufacturers
December 20, 2017 by IDW
One of the primary considerations affecting today’s manufacturers is how to efficiently get their products to market. The physical process of moving goods from one location to the other is extremely complex, and can have an enormous impact on the profit margins for manufacturing firms. The modern movement of goods across national and international barriers can take place on ground, ocean, or air. Each of these avenues of travel has advantages and disadvantages, including cost, shipping times, availability of services, and potential delays. In this article, we’ll be taking a closer look at ocean transport, including outlining why it is the most used method of moving goods globally, and where manufacturers and distributors are running into problems relying on ocean transport.
Global ocean transport accounts for the majority of goods that move across international borders. Of the three methods of transportation, air transport accounts for less than one percent of total imports into the United States. This means that the vast majority of goods entering the United States from overseas manufacturers is travelling by ship. Although air transport is easily the most convenient due to the speed with which goods can be moved between locations, it is also a cost prohibitive form of transport for manufacturers to rely on. The sole use of air transport would significantly drive up the cost to manufacture and deliver goods to market.
For manufacturers, there are a number of different factors that they must take into account when deciding how they are going to transport their products to market. The first factor is cost. Balancing these factors is critical to ensuring long-term profitability. The first factor that manufacturers must weigh is the cost of different modalities of transportation. Air transport is excessively cost prohibitive for most goods travelling overseas. Ground transport, including by truck or rail, is affordable and ideal for moving goods to a port or between landlocked countries. Sea transport is necessary for moving bulk products to overseas markets, but the costs of ocean transport can vary widely depending on market conditions. It is estimated that air transport costs currently cost roughly 12-16 times more than transporting the same goods by ocean, making ocean transport the obvious choice for most overseas manufacturing firms.
A second factor that manufacturers have to take into consideration is the time it takes for their products to reach overseas markets using different modalities of transportation. Air transport is the fastest, with delivery times a fraction of other transportation methods. Ocean transport can be slow, with transit times ranging from two weeks to a month. Because of the large amount of products entering ports via ocean transport, there is a significant additional time for products to clear customs and make their way to inland distribution centers from ports.
The time delay when using ocean transport is a significant consideration for manufacturers and distributors. With one to two month delays getting products to distributors, both manufacturers and distributors must accurately anticipate demand in order to maintain a steady supply. If demand is too great, there will be a shortage of goods that can exist for one to two months, leading to a loss in profits. If there are problems with a certain iteration of products, manufacturers must make changes to product design quickly and efficiently, in order to not create delays in the supply chain for their distributors.
Different modalities of shipping goods have unique costs, advantages, and disadvantages that manufacturers need to take into consideration. The use of ocean transport today to move goods between nations is being increasingly relied on by overseas manufacturers, creating higher demand for transport than existing ocean transport infrastructure can adequately meet. As such, during periods of high demand, manufacturers may face steep increases in cost to move their products to overseas markets, further driving down their profitability. Because of this, manufacturers must also weigh the advantages of manufacturing overseas versus manufacturing goods domestically in their largest markets. In some cases, setting up domestic manufacturing centers results in a positive cost benefit despite higher labor costs compared to manufacturing overseas. Balancing these considerations will continue to be critical for international manufacturing firms, particularly as the price and availability of ocean transport continues to experience volatility due to demand outpacing the supply of ready container ships.