Reducing demurrage and detention charges is crucial in maximizing profits for import/export firms. Failing to manage these costs well can cause a substantial drain on what are already narrow profit margins in the container shipping industry.
What Are Demurrage Charges?
These are charges imposed by a shipping line on an importer for failing to move cargo containers out of the shipping line's terminal or port within a specified time limit.
What's the Difference Between Demurrage and Detention?
Demurrage is the penalty for leaving full containers at the terminal, while detention charges apply when an importer doesn't return empty containers within a specified time.
Shipping firms make their money based on the volume of goods they transport. The purpose of demurrage and detention charges is to increase profits by encouraging importers to unpack and deliver goods as quickly as possible. Clogged ports mean the shipping firm can't move goods.
How Is Demurrage Calculated?
Shipping contracts include a certain number of free days that containers can remain in port without incurring charges and a demurrage rate. These firms typically calculate demurrage charges by multiplying the penalty rate by the number of days past the time limit.
The demurrage rate will vary based on the volume of the container. The shipping industry typically uses the Twenty-foot Equivalent (TEU) measurement, which refers to the size of the cargo container used to ship the goods.
Examples of Demurrage Charges
Suppose a firm imports 10, 20-foot containers and exceeds the pick-up limit by ten days. If the demurrage rate is $100 per TEU per day, the importer will pay $10,000 in demurrage (10 days X 10 TEU X $100 = $10,000).
How to Reduce Detention and Demurrage Fees
In the past, importers had limited ability to reduce detention and demurrage charges. Weather, shipping traffic patterns, unexpected delays, trucking strikes or other unforeseen events could wreck havoc on a transport schedule. However, today's importers can significantly reduce penalties by using up-to-date data management tools combined with good planning.
Each port can have their own detention and demurrage rules. Somtimes, importers can extend the number of free days before a demurrage or detention penalty applies or reduce the rate through negotiation. Unfortunately, this is a solution that is typically only available to large importers.
2. Well-designed Importation Plan
Importers should have a realistic overall plan of how they will dispatch goods from departure until delivery to the final destination. This process can include dispaching goods, transport to the shipping line, arrival at the destination port, clearing customs, and moving goods to the final recpient which can involve a combination of rail and truck transport.
A good transportation plan will include a little time buffer at every stage. Many of these steps can include contracts with various firms to perform different tasks, and counting on each of these firms to meet an exact deadline is a recipe for disaster. Good planning includes anticipating such things as congested ports, bad weather, or labor problems.
You must allow a realistic amount of time to load and unload containers and include detailed shipment instructions to every party involved. Adding last-minute changes to a shipping contract risks disrupting many downstream arrangements which depend on proper execution of earlier steps.
Make sure every party involved knows the schedule they will be required to meet and ask all parties to keep their eye on the clock.
3. Real-time Tracking of Containers
Importers need the ability to track each of their containers at every stage of the importation process. Relying on the shipping carrier to track containers isn't a good idea. Importers need to take control of their data management.
Real-time tracking ability is critical. This capability will allow an importer to anticipate problems and make adjustments that can reduce or avoid expensive penalties.
4. Regular Analysis of Shipping Data
Import firms need to analyze records of their shipments on a regular basis. Are the time buffers for each step in the import plan long enough, or does your firm frequently miss deadlines? Are you having problems with one particular port or carrier? What is causing these delays?
The worst mistake an import firm can make is to incur regular penalties while doing nothing to solve the problem. Once an importer discovers a bottleneck in their supply chain, it must immediately seek a solution.
Should you shift goods to a different port to avoid a problem terminal? Is there as seasonal aspect to your problem? Are goods running too close to the free time deadlines? Are particular vendors or end-customers failing to offload goods fast enough? Pushing too close to the demurrage deadline can cause a detention penalty down the line.
You Can Avoid Most Demurrage and Detention Penalties
Regular demurrage and detention can destroy the profitability of ocean freight. However, these costs are mostly avoidable with good planning and regular data analysis.