Keeping your supply chain optimized means keeping a close eye on your costs, including any “extra” fees that can creep onto your ocean freight invoice.

 

With consumer spending down, inventory at high levels, and warehouse space at a premium, some businesses have found themselves confronted with per diem charges. Rather than accepting them as par for the course, it’s possible to reduce these “extra” charges—or eliminate them completely.

 

We’ll show you exactly what these per diem charges are, and we’ll give you some strategies for avoiding them. We’ll also walk you through several other ocean freight charges—detention and demurrage—so you can take control of your invoices and protect your margins.

 

First, let’s talk about why these per diem charges have cropped up for suppliers, wholesalers, retailers, or any business with a significant amount of inventory.

Consumer Demand Is Down, Warehouse Demand Is Up

According to current projections, consumer spending in the U.S. peaked in March 2021. By February 2023, nearly two years later, spending on goods was down 5.4% overall, according to the Financial Times. This downward trend held even through the traditional U.S. holiday season. Deloitte reported that consumer spending on durable goods fell 1.6% in December 2022, marking the second straight month of decline.

As a result of this decrease in spending, some businesses have been left with high levels of inventory and, in some cases, very little room. Warehouse capacity is low in the U.S., and that’s predicted to continue. Rising interest rates and supply chain challenges continue to impact the construction industry, which has started fewer new industrial projects.

When faced with this scenario, some importers feel they have no choice but to keep the shipping containers they’re receiving. While that might seem like a valid instant storage solution, it’s one that also comes with fees. Let’s dive into those next.

“Extra” Ocean Freight Fees:

Detention, Demurrage & Per Diem

For the last few years, ocean freight shipping has seen its share of challenges. Rate volatility aside, any “extra” fees you might incur will only eat into your margins—or force price increases on increasingly reluctant consumers. If you can avoid these costs from the start, you’ll find yourself in a much stronger position. Let’s take a look at several common ocean freight fees—and how to avoid them.

Free Time

First, it’s important to understand the concept of “free time.” When you’re shipping a full container via ocean freight, you’re essentially using the carrier’s equipment—their container and their chassis. When you book a shipment, you’re given a certain amount of time to pick up your container and a certain amount of time to return the container (and chassis) to the carrier’s terminal.

That period of time is called free time. As long as you pick up and drop off the equipment within your free time, you won’t be charged demurrage or per diem fees. Free time periods vary by carrier, by agreement, and by country. Make sure you understand your allotted free time up front to avoid unexpected charges.

While they can feel like a hassle, these fees do serve an important function: They keep freight moving to encourage free flow of cargo through ports and terminals—and they offer an incentive to return equipment promptly so it’s available for the next shipper.

Now, if you find yourself in the scenario above—too much inventory and nowhere to store it—you may think about keeping your container to use as overflow storage. Let’s take a look at the fees that might accumulate as a result.

Per Diem Fees

If you keep your container past its free time, you will be subject to per diem fees from your ocean freight carrier. These are daily charges for equipment use—and they may apply to both the container and the chassis it sits on. The cost varies by carrier, and they can really start to add up.

Note: Some people use per diem fees interchangeably with detention. However, detention can often also refer to a trucking company charging for the use of their equipment—or for detaining a driver past a certain time period. Be aware of these varied usages.

Demurrage Fees

You might also see a demurrage fee noted on your ocean freight invoice. Demurrage fees get tacked on when your loaded container sits in the carrier’s terminal past its free time. For example, if you’ve hired a drayage company to pick up the container from the port but they don’t arrive until after the free time has expired, you might get hit with demurrage fees.

If you’re using a freight forwarder to move your ocean freight, your forwarder should stay on top of this timeline to avoid demurrage fees. If you do see them on your invoice, it’s worth a conversation with your forwarder.

Finally, the Federal Maritime Commission (FMC) has gotten involved in the issue of demurrage and detention, with the intention of adding more clarity to demurrage and detention billing practices. The proposed rule currently under consideration would require greater transparency, timeliness around charges, and a time period to dispute those charges. Stay tuned to see how the rule progresses.

Now that you’ve got an understanding of the fees involved, let’s take a look at how you can reduce them—or avoid them altogether.

Logistics Solutions to Avoid Per Diem Fees

Before you decide that a per diem fee is just the cost of doing business in today’s environment, we’ve got a few alternatives for you to consider:

#1: Rent Storage from a 3PL or Freight Forwarder

Especially if your high inventory levels are a temporary situation, you might consider renting some temporary storage from a 3PL or freight forwarder.

Yes, this solution does involve “extra” storage costs. However, renting temporary storage is less permanent than expanding your footprint or moving to a new location—and it can be cheaper than the per diem fees you’ll rack up when storing your goods in a container on a chassis.

#2: Consider Cross-Docking

As we’ve watched warehousing costs rise around the Ports of Los Angeles and Long Beach, we’ve encouraged our clients to consider cross-docking. This logistics strategy keeps your freight moving with minimal sitting-around/storage time.

Let’s look at a quick example so you can see how cross-docking works. Let’s say you send a container of palletized goods to the Port of Los Angeles:

  • Your freight forwarder picks up the container, brings it back to their terminal, and unloads all your goods.
  • Instead of putting your pallets in their warehouse, your forwarder puts the pallets on the loading dock.
  • Shortly afterward, several trucks bound for your retail outlets arrive. Your forwarder loads the right pallets on the right trucks, and they head toward their final destinations—no container and no warehouse storage needed.

Of course, your particular scenario will be slightly different. However, if you can create a logistics flow in which your goods can keep moving, rather than sitting in a warehouse or a container, you could save yourself some significant money by avoiding warehousing costs and/or per diem fees.

Our experts have created solutions for customers with supply chains of all levels of complexity. If you want to talk about whether cross-docking could work for you, just reach out for a complimentary consultation.

#3: Return to Just-in-Time Inventory Management

During the pandemic, supply chain hiccups left many wondering whether this was the end of just-in-time inventory management. With many businesses looking at bloated inventory levels, it seems the pendulum might start to swing back the other way, toward the just-in-time model.

In other words, businesses who shifted toward a just-in-case strategy that involves stocking plenty of inventory might consider striking a balance. Just-in-time strategies require less warehouse space, reduce your carrying costs, and free up available cash—a few pros that can look especially attractive in today’s economic environment.

Reducing Your Costs and Creating New Efficiencies

Between the rise in U.S. storage rates (10.6% year-over-year) and the impact of the current tariffs on China, many importers find themselves faced with two possibilities: dealing with smaller margins or charging higher prices. However, by understanding the full range of storage options—as well as the logistics strategies that might save you money in these areas—you’re better positioned to control your costs from the start.

Looking for some help streamlining your logistics and combating higher costs? Our experts specialize in uncovering new supply chain efficiencies to reduce logistics expenses. Reach out for a complimentary consultation, and we’ll take a holistic look at your supply chain—together.

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