Since the start of the Covid pandemic, as global supply chain disruptions caused ocean freight rates to spike to historical highs on all trade lanes, Shippers saw their procurement costs and total cost of ownership increase drastically.
While the freight rate increases were primarily driven by Carriers charging rate premiums and diverse surcharges, the breakdown in hinterland transport connections led to an excessive increase in container turnaround times at all stages of the transport process.
The prolonged delays frequently exceeded the free days allowed by port operators and carriers, leading to global detention and demurrage charges doubling at the peak of the disruptions in 2021 from the year before.
American shippers and importers were particularly hard hit, as recent reports have found that detention and demurrage charges are highest at US ports.
New York and New Jersey have the highest average charge of USD 3,182/ day, two weeks after cargo arrival at port or discharge from the vessel.
The adjacent ports of Long Beach and Los Angeles have the second and third-highest average charges globally, at USD 2,730/ day and USD 2,673/ day, respectively. Oakland and Savannah are ranked fourth and fifth, with average daily charges of USD 2,325 and USD 2,210, respectively.
It’s no wonder American shippers have been voicing their concerns regarding detention and demurrage; even the FMC has begun investigating carriers for alleged unfair practices regarding charging detention and demurrage fees.
Detention and demurrage: Meaning and Purpose
While Detention and Demurrage are levied on containers, the fundamental nature and purpose differ.
Demurrage
Shipping lines generally give each shipper a certain number of free days to pick up full containers from the terminal; the cost is already built into the freight rates. This is known as free time, and if the container isn’t evacuated from the terminal within the free time allocated, demurrage is levied on a per diem basis.
Detention‍
Shippers are also entitled to a certain number of free days for picking empty containers from the carrier’s Empty Deport, taking them to their premises for stuffing, and thereafter returning the full container to the port.
If the shipper fails to return the container within the free days allocated, detention is applicable for each day over and above the free time that the container is in the shipper’s possession.
Purpose
The purpose of levying detention and demurrage is twofold.
The first is to ensure optimal usage of carriers’ container equipment and maximize asset turnover.
The second is ensuring that storage space in the port is not unduly occupied due to cargo owners’ tardiness or inability to arrange container evacuation on time.
To discourage shippers from exceeding the allocated free time, detention and demurrage charges are levied on an increasing scale, with the per diem rate increasing as the number of days increases.
While the objective is to drive the right behavior and ensure fast turnaround times, the revenue generated through detention and demurrage fees can quickly pile up.
Common causes of Detention and Demurrage
While the incurrence of Detention and Demurrage is to some extent inevitable in the normal course of international trade, these are essentially avoidable costs, which often accrue due to the following factors:
1. Lack of knowledge and Understanding
This can include a lack of awareness of the granted free time or how it is calculated, leading to miscalculations. Also, employees must be mindful of the potential costs and impact on business and profits caused by detention and demurrage fees, failure to understand could result in inadequate attention.
2. Lack of visibility
Given that the transport process involves multiple modes of transport, over vast distances and with multiple stakeholders, the status of the cargo is often unknown to the Shipper, rendering it impossible for them to plan and tackle contingencies.
3. Delayed notifications
A corollary of the lack of visibility is the delayed sharing of information. For example, if a notification regarding a vessel being re-routed is shared late, the shipper might not have sufficient time to arrange a timely pick-up.
4. No alerts on various milestones in the shipping process
Pre-alerts regarding milestones such as vessel arrival or cargo readiness are crucial in helping shippers plan pick-up and handling
5. Human oversight and inadvertent errors
With poor end-to-end visibility and absent timely pre-alerts, the probability of human oversight and inadvertent errors increase significantly, leading to the allowed free time being exceeded.
How Shippers can reduce Detention and Demurrage
Shippers can mitigate the risk of detention and demurrage charges by taking some elementary precautions and evolving their way of working, as explained below:
1. Advance planning and creating awareness of the impact of
detention and demurrage
Sharing information on free time allowed for each shipment, as well as educating employees on the detrimental impact on revenue and profits, will increase focus on reducing detention and demurrage.
In conjunction with this, shippers can also plan to ensure timely pick-up, handling, and delivery of cargo, such that all activities within the shipper’s scope are executed well within the stipulated timelines.
These steps will ensure that the organisation is, as a whole, geared towards ensuring operational efficiency and on-time delivery, thus reducing detention and demurrage to the minimum.
2. Negotiations on free time and waivers
Not withstanding the current scenario where congested ports, lack of storage space, and equipment shortages have put carriers in an extremely strong position as far as commercial negotiations are concerned, Carriers have generally been open to negotiations on free time terms.
Before the pandemic, when ample shipping supply compelled carriers to actively compete for cargo, Carriers were willing to offer extended free time, depending on the customer, volumes, commodity, equipment size and type, and trade lane.Â
Shippers can use this to their advantage by negotiating upfront additional free time, as warranted by genuine business requirements.
Additionally, in cases where detention and demurrage have already been incurred, shippers can try to negotiate and lower the amount payable.
Since detention and demurrage are related to opportunity costs (additional revenue from usage of equipment, if returned on time, and space occupied at the terminal) rather than the exact actual costs incurred, carriers can, at their discretion, waive off a certain proportion of detention and demurrage costs, particularly in case of customers with a longstanding business relationship or sizeable business.
3. End-to-end visibility
Shippers with end-to-end visibility are much better poised to plan cargo movement optimally, monitor for potential deviations and disruptions, and ensure the timely completion of all tasks.
With end-to-end visibility, shippers have access to the real-time status of their cargo, which they can use to plan labour and trucking allocations, track potential delays and anticipate other unplanned events.
As a result, visibility incorporates agility in overall supply chain planning and increases the shipper’s ability to react quickly when required.
Such tactical flexibility will greatly benefit the shipper in terms of completing shipments within the allocated free time, avoiding detention and demurrage charges.
4. Use Supply Chain Visibility platforms
Other than making the elementary precautions outlined above an integral part of their operational processes, shippers can elevate their capabilities to an entirely new level by using Supply Chain visibility platforms.
These platforms offer sophisticated technological solutions to various pain points and help alleviate the impact of the most common challenges in the supply chain.
Supply Chain Visibility platforms offer a broad range of functionalities, right from regular updates on the status and location of cargo to pre-alerts on various milestones (such as vessel arrival dates, port cut-off times, or expiry of free time).
These platforms not only automate and streamline the supply chain but also reduce the probability of human errors.
Popular Supply Chain Visibility Platforms and how they can help Exporters and Importers
While there has been a proliferation of supply chain visibility platforms in recent years, some platforms have come to be recognized as market leaders.
One prominent player in this market is Freightify, which has rapidly gained popularity due to its user-friendly interface and advanced functionalities.
The Freightify platform provides real-time shipping schedules and end-to-end visibility of vessels.
Therefore, freight forwarders can make their exporters & importers aware of the precise status of the cargo, which helps them be ready even before the cargo arrives and thus greatly enhances the accuracy of their planning.
The platform also tracks various milestones in the shipping process, enabling timely cargo handling and enabling shippers to adjust in case of delays.
To find out how Freightify can help your forwarding business, schedule a demo by clicking here.
