The Future for Freight Forwarders

Freight forwarding is traditionally hugely competitive and, as service providers, forwarders have had to frequently adjust their operating models to align with the changing nature of cross border trade operations. As intermediaries between traders and carriers, forwarding agents have historically acted under the rules of agency, receiving a commission, known as Forwarding Agents Commission, from the carrier in return for business contracted. These commissions, usually around 5% of the freight amount, are rarely sufficient to keep any but the largest forwarding companies, with the highest traffic volumes, afloat nor profitable. Accordingly, forwarders typically look for niches in the market to supplement their basic freight income. These niches could include handling of hazardous cargoes / Dangerous Goods Safety Adviser services, cargo insurance, letter of credit documentation, groupage consolidations, packing, customs formalities and consignee agency services. When the author first became involved in international trading the oft cited mantra was “if you don’t know, ask the forwarder”. The forwarding agent was considered the font of all knowledge in relation to export and import formalities, procedures, regulations and documents.

Since the turn of the century the international trade landscape has changed considerably and many of the changes have placed the traditional concept of freight forwarding at risk. Whilst small and medium sized exporters and importers are still able to benefit from the buying power and economies of scale that forwarders can exercise with carriers, the traditional value added services provided are not quite so attractive. The internet has made a considerable difference. Traders are able to access information from several different sources, such as Market Access Databases and national customs agencies websites. Direct Trader Input means that, in many countries, importers and exporters can input their customs declarations directly without having to use a clearing agent or forwarder (interesting to note that, in UK, HMRC advise that this is only feasible for the largest declarants). It is relatively easy to establish open cover insurance contracts and, with the global implementation of the WTO Trade Facilitation Agreement, overall bureaucracy will reduce and, hopefully, complexity will diminish. Cumulatively, all these scenarios combine to suggest that the freight forwarding profession may need to modernise and re-establish itself if it is to survive.  Of course, there will always be traders that elect to outsource their ancillary operations, enabling them to focus om their core activities. This will not change but the decision making process on whether to use a forwarder or perform operations in-house is likely to be very different in the forthcoming international trade landscape.  

The author clearly recalls conducting a scoping visit for the introduction of Single Window in Mexico. On arrival at Mexico City Airport I was informed that I must go directly to a meeting of the freight forwarders trade association. On arrival in their conference room I was faced with around 30 of their membership. The first words of their association President to me were “you will put our members out of business”! I responded that, globally, the model of freight forwarding would undergo huge change in the forthcoming decade or two, clocks can not be put back, and therefore freight forwarding companies have to review their services offering. I continued that, if they do so, they will  prosper but if they continue as they are their days are likely to be numbered. The reality is that, as some offerings become obsolete, others may emerge. For example, the WTO TFA directs that the compulsory use of customs brokers (usually forwarding agents) in some countries will no longer be permitted so that will become an outdated offering. The other side of the coin is that new protocols, such as the need for VGM (Verifying Gross Mass) in relation to export containers, will emerge from time to time and these can become an element of freight forwarders service provision where required. Real time track and trace capability is also becoming an increasingly important service provision to be considered.

It is also evident that the metrics used by the trading community to select freight forwarders are changing. Cost, fees and freight rates will always be an element of selection as will membership of the national freight forwarding association, in the United Kingdom the British International Freight Association, but, in this era of globalisation, the reach of the forwarders overseas agency / representation arrangements is an increasingly important selection criteria. Additionally, the enhanced focus on supply chain security and compliance / governance means that the acquisition of trusted trader / Authorised Economic Operator status by freight forwarders is rapidly gaining significance. It is interesting to note that when the EU AEO scheme was launched the largest, initial, uptake was by freight forwarding companies. Procurement notices and requests for quotes / proposals are starting to evidence preference for ‘trusted trader’ bidders and sub-contractors – the latter including all types of logistics providers involved in the supply chain.

Like many professions, freight forwarders can be reluctant to change and slow to modernise, this is predictable and understandable. However, change is inevitable as the whole process of cross border trade practice evolves, significant change is predicted over the next ten to fifteen years. There will always be a need for freight forwarders that look forward and adapt to the changing needs of their current and potential client base. Freight forwarding is both a science and an art, figuratively speaking – the trick is to merge the two into a 21st Century service offering.

Article Written by Jon Walden - Associate of Strong & Herd LLP

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