One of the key factors behind this shift is the increase in air and sea freight carrier rates, which has sent the gross profit margins of freight forwarders at a 10-year low.2 Typically, the industry operates with up to 20% return on invested capital (ROIC). However, if these trends persist, freight forwarders may face a downturn. Moreover, the contraction of demand due to altered macroeconomic factors has already shrunk the market to $382bn in 2022.3
At this point, freight forwarders must maximize their operating margins to remain competitive amidst a heating market. By taking a page from the operating models of new-age, digital-native freight forwarders, legacy players can retain their leadership position in their geographies of operation.
Key freight forwarding challenges to focus on in 2023
For legacy players, a fragmented and siloed operating model is usually the root cause of their major difficulties. When the dot-com era triggered the digitization of businesses, freight forwarding followed suit. However, this wave of digitization focused on taking paper-based processes to the screen without focusing on the big picture. These technology systems were labeled cutting edge in those years, and in the next decade, most of the technology interventions came as point solutions.
As a result, freight forwarding organizations continued to operate in a siloed fashion. Finance had their ERP modules, sales teams ran on on-prem CPQ systems, operations teams had their ERP and Transportation Management Systems (TMS), and service teams kept themselves limited to the CRM. None of these systems could talk to each other, which resulted in inefficient operations – at least, by today's standards.
But when the industry is readjusting to new dynamics, the inefficiencies inherent to such a technology architecture turn into the difference between profitable operations and sub-optimal financial performance.
Spotting the fault lines
So, where do these inefficiencies manifest? In these key areas:
- Issuing accurate quotations: Sales teams find it difficult to issue profitable quotations when shippers have custom requests or a prospective order involves multi-leg, multi-mode scenarios.
- Keeping contracts profitable: Because up to 70% of contracts are long-term ones,4 changing carrier terms and evolving market dynamics can destabilize the value proposition of existing contracts.
- Optimal route selection: Selecting the most cost-effective route while taking multiple factors like distance, transit times, carrier rates, and special handling requirements proves difficult in multi-leg scenarios.
- High standalone bookings: Inability to consolidate bookings results in increased standalone bookings and inefficient container/vessel utilization.
- Operational inefficiency: Suboptimal process flows and low decision quality result in inefficient vessel and container utilization and delays in issuing quotes or creating orders.
- Human errors and delays: Because various systems (like the ERP, TMS, CPQ, and CRM) can not talk to each other, employees must load data from one system to another to drive the end-to-end process.