What Does a Freight Recession Mean for Overseas Purchases?

Several events have impacted the global freight industry over the past 12 months, plunging the sector into recession—a time of reduced trucking, ocean freight, and air freight capacity worldwide. This setback can be blamed on a myriad of factors but is often traced back to the coronavirus pandemic, geopolitical tensions in the South China Sea and the Black Sea, and climate-related challenges which led to a significant shift in supply and demand across all industries. 

In such times, employees are affected by tighter budgets, turnover is reduced, and pressure is placed on sourcing teams as freight companies look to protect their businesses from external factors. Also to consider are the issues that manufacturers face in navigating the challenges alongside their shipping partners. 

For companies that rely on overseas imports and exports to do business, it comes as no surprise that the ripple effects are seen across all areas and, while worldwide events overarch reductions in the amount of goods required and the ability for suppliers to deliver, it’s important to understand what this inflicts on purchasing teams. 

What is the Current State of the Freight Recession?

In 2023, the freight sector saw a major reduction in both supply and demand, with varying factors contributing to the overall implications—a slowdown of freight activity across trucking, marine transportation, air freight, and all the associated functions. 

The main external factors driving freight towards the current recession—expected to continue throughout 2024—are consumer behavior changes and the state of the global supply chain, both influenced by the overall economic downturn. The most recent change to consider is trade policy, as governments spend more person-hours adapting legislation and freight tariffs. 

Consumer Behavior Changes: Due to the increased cost of living, the end beneficiaries of the supply chain are demanding less, which reduces the need for goods, such as electronics, non-food consumables (where not essential to their livelihoods), and other nice-to-have products. With more and more items available from overseas vendors or reliant on components from other countries, this echoes up the chain and halts progress from the bottom up. 

Economic Downturn: The cycle has reached a low, meaning that (as mentioned above), in light of the economic instability caused by recent global events, fewer people are making non-essential purchases. The pandemic is just one of them; another primary driver is the Russia-Ukraine crisis—the consequences of which have led to the aforementioned cost-of-living spike. The lack of demand has slowed manufacturing rates and, therefore, transportation, which leads organizations to cut back on employment and reduce the number of consignments in and out. 

Global Supply Chain Disruptions: While this encompasses major international affairs, hindrances to supply chains can cause a decline in access to certain products. As such, both consumers and businesses are forced to use platforms like Octopart to find new sources of critical items.

Trade Policy Uncertainty: An increase in trade policy uncertainty (TPU) is known to reduce investments. As countries learn more about the benefits of policy, they take a more astute approach to writing regulations and managing their relationships with other nations. 

According to CNBC’s Supply Chain Survey, the first quarter of 2024 will see half of freight rates decline from somewhere between 5% to 15%, following a significant downturn in the past year. Beyond this point, the survey suggests that the rate is expected to recover in the year’s second half.

The Impact of Freight Recession on Overseas Purchases

The simpler answer to this is that a reduction in consumption induces a freight recession. As demand slows downstream (i.e., among consumers),  businesses will be less likely to retain their level of commerce (as seen in the earlier figures by CNBC). 

To align with demand, companies must reduce freight levels among certain suppliers as they look to protect their bottom lines and allocate work in more cost-effective ways. This can impact organizations in two ways: 

• It can leave them with an overstock of inventory as consumers or clients limit the orders they place or stock of finished goods with limited services to distribute them to customers. 
• This overstocking can leave costs tied up in components or finished goods. Companies purchasing components from overseas will likely see the recession coming in the early stages, which can be an indicator to inventory managers to minimize purchasing.

As freight slows in some areas and consignments become less frequent, the industries with retained or increased demand—the pandemic further highlighted those industries—struggle to operate even though logistics firms prioritize necessities. It’s also important to note that overseas purchases may also impact direct suppliers based in the same country, and therefore, all inbound supply should be considered and forming a strategy in the wake of reduced freight. 

How to Adapt to Reduced Overseas Freight

Navigating these challenges requires a level of foresight into future events. In order to establish a response to potential future freight recessions, it’s important to understand how economic indicators can allow manufacturers to gain visibility of such events before they impact production and sourcing. 

Gain Visibility of Inventory

A much tighter approach to inventory is required in times of crisis To exercise a lean approach to inventory, companies must first understand where their items are and the minimum requirement at all times. This starts with collaboration with suppliers and customers to establish a baseline inventory that will serve the minimum needs of the business. This will ensure a much faster response to change.

Adapt to Changes in Demand

Inventory visibility is not only crucial for lean production but can also mitigate overstocking—this reduces the cost implications during a freight recession, i.e., the sunk cost of inventory. The primary economic indicator of demand slowing down is the reduced number of consumer purchases, which have the power to reshape an industry.

Having mentioned visibility above, there are certain factors that cannot be predicted through the supply chain, and it’s therefore worth staying up to date with current industry events through mediums, such as CNBC’s Supply Chain Survey. 

Navigate a Reduction in Supply

Pivot your purchasing efforts to meet changing supply chain needs. Octopart’s industry-leading electronic component search engine is an excellent resource that gives companies access to millions of components via distributors and receives more than seven million searches per month. 

Manufacturers leverage Octopart to procure electronic components in the event of supply disruption, such as a freight recession, where companies must look for suitable routes for sourcing necessary parts.

Communicate with Suppliers

We saw the need for supplier communications increase rapidly over the past few years as firms sought to extend their lead times and prolong their payment terms to ensure that businesses could survive. This highlighted the importance of communication with suppliers, which extends to current purchasing efforts. 

However, communication can only occur effectively with greater visibility of inventory, coupled with insight on freight disruption, and insight into product availability and shipment status.

Understand Potential Cost Fluctuations

The inevitable reduction in supply means that costs of components will increase, which plays havoc with purchasing. Teams in the market for the best prices and availability of PCB parts can leverage the Octopart.com search engine to uncover suppliers to meet their needs in times of crisis, and select reduced quantities to better manage inventory. 

Why is it still important to monitor freight recession?

In 2024, the trucking industry alone is still in a phase of recovery. Having plagued the industry throughout 2023, some experts believe the sector could potentially see things carried into 2025. With such uncertainty around delivery frequency and the cost of sending shipments, it’s important to, as mentioned above, maintain a watchful eye over component and product inventory. 

Also, consider the impacts this could have on policies. As freight changes occur, governments look to adjust their policies to suit their needs, which is likely to impact the cost of both imports and exports. Governing bodies, particularly the Federal Maritime Commission in the US, are clamping down on certain overseas exports as a response to supply chain disruption in order to protect operations locally. 

Beyond the recession itself, companies stand to gain more insight into their supply chains through means of visibility and become much more efficient at sourcing components in the face of future disruptions.