Managing Inbound Domestic and International Transportation

Author(s):

Ms. Elena M. Johnson
Ms. Elena M. Johnson, Corporate Transportation Manager, QMS, Inc., Mobile, AL 36689-1250, 334-633-4301, extension 1539
Dr. Michael A. McGinnis, C.P.M., A.P.P.
Dr. Michael A. McGinnis, C.P.M., A.P.P., Professor of Marketing & Supply Chain Management, University of South Alabama, Mobile, AL 36688-0002, 334/460-7907

85th Annual International Conference Proceedings - 2000 

Abstract. A challenge facing those who manage inbound transportation is the complexities of managing international and domestic sourcing. In this situation the transportation manager has to be familiar with two processes. This paper focuses on the similarities and differences of managing domestic and international inbound freight. Topics include supplier selection, routing, product flow, terms of sale, problem avoidance, cost control, and popular misconceptions to avoid. Specific issues unique to international inbound transportation management, documentation, and customs clearance, are discussed. The paper is organized into five sections. They are International Transportation Logistics, International versus Domestic Freight Terms, Domestic Base Transportation: Elements of Purchase, Summarizing The Buyer's Role, and Conclusions.

International Transportation Logistics. The management of international logistics flows requires managing a wide range of elements. These elements include (not necessarily in order) origins & destinations, transportation services, equipment, service providers, service contracts, quality control, government & agency regulations compliance, cargo insurance, transit time, product payment, customs clearance, optimizing landed cost, and information gathering. Because of space limitations this section will briefly identify International Chamber of Commerce (ICC) terms of trade, called Incoterms-2000 (or INCO), that have been developed to reduce confusion in international terms of trade. These terms identify the responsibilities of the buyer and seller in any international transaction. Understanding these terms is an important first step in avoiding confusion in international trade. For a complete discussion of Incoterms 2000 see Intercoms 2000: ICC Official Rules for the Interpretation of Trade Terms available from ICC Publishing, Inc., 156 Fifth Avenue, New York, NY 10010. Phone: (212) 206-1150, Fax: (212) 633-6025, Internet: www.iccbooks.com. Ordering information is ICC Publication No. 560, ISBN 92-842-1199-9. The following summarizes these terms.

EXW: Ex works (...named place). The seller fulfills his/her obligation to deliver when he/she has made the goods available at his/her premises to the buyer. The buyer assumes all responsibility (and risk) from the seller's premises including loading the goods and taking the goods to buyer's destination. The buyer must carry out all export formalities.

FCA: Free Carrier (...named place). The seller satisfies his/her obligation to deliver when he/she has handed over the goods, cleared for export, to the carrier named by the buyer at the place named by the buyer. "Carrier" can include a transportation company or a freight forwarder.

FAS: Free Along Side Ship (...named port of shipment). The seller satisfies his/her obligation to deliver when the goods are placed alongside the vessel at berth or in lighters (barges) at the named port of shipment. The seller clears the goods for export unless it is stated clearly in the contract of sale that the buyer clears the goods for export. The buyer assumes all costs and risks of shipment, loss, and damage from that point on. This term is used only for sea or inland-waterway transportation.

FOB: Free on Board (...named port of shipment). The seller satisfies his/her obligation to deliver when the goods pass over the ship's rail at the named port of shipment. The seller clears the goods for export. The buyer assumes all costs and risks of shipment, loss, and damage from that point on. This term is used only for sea or inland-waterway transportation.

CFR: Cost and Freight (...named port of destination). The seller clears the goods for export, and pays the cost and freight necessary to bring the goods to the named port of destination. CFR requires that the seller clears the goods for export. The buyer assumes risk for loss and damage, as well as additional costs due to events that occurred after the goods have been delivered on board the vessel. This term is used only for sea or inland-waterway transportation.

CIF: Cost, Insurance, and Freight (...named port of destination). The seller has the same obligations as CFR, but also must provide minimum marine insurance against loss and damage during transportation. The seller clears the goods for export. This term is used only for sea or inland-waterway. transportation.

CPT: Carriage Paid To (...named place of destination). The seller pays the freight for carriage of the goods to a named destination and clears the goods for export. Additional costs, as well as risk of loss and damage to the goods, shifts to the buyer when the goods are delivered to the carrier. When multiple carriers are used risk passes when the goods are delivered to the first carrier. This term applies to any mode of transportation, including multi-modal transportation.

CIP: Carriage and Insurance Paid To (...named place of destination).The seller has the same obligations as CIP, but also must provide cargo insurance against loss and damage during transportation. The seller clears the goods for export. This term may be used with any type of transportation.

DAF: Delivered at Frontier (...named place). The seller to deliver when the goods are available, cleared for export, at the named point and place on the frontier, but before the customs border of the adjoining country. It is critical that the point and place of the frontier in question be named precisely. This term may be used for any mode of transportation but usually applies to rail or road.

DES: Delivered Ex Ship (...named port of destination). This term means that the seller fulfills his/her obligations when the goods are available to the buyer on board the ship uncleared for import at the port of destination. The seller is responsible for all costs and risks of bringing the goods to the named port of destination. DES is used only for sea or inland-waterway transportation.

DEQ: Delivered Ex Quay - Duty Paid (...named port of destination). This term means that the seller fulfills his/her obligations when the goods are available to the buyer on the quay (wharf) at the named port of destination cleared for importation. The seller is responsible for all costs and risks, and other costs of delivering the goods to the destination. DEQ is used only for sea or inland-waterway transportation.

DDU: Delivered Duty Unpaid (...named place of destination). The seller fulfills his/her obligation when the goods are available at the named place in the country of importation. The seller bears all costs and risks involving bring the goods to the destination including the costs of customs formalities. These costs exclude duties, taxes, and other official importation charges. The buyer pays any additional costs and bears any risks caused by the failure to clear the goods for import - unless specified in writing. This term applies to any mode of transportation

DDP: Delivered Duty Paid (...named place of destination). The seller fulfills his/her obligation when the goods are available at the named place in the country of importation. The seller bears all costs and risks involving bring the goods to the destination including the costs of customs formalities, duties, taxes, and other charges cleared for importation. If the parties wish to exclude seller's obligations for some of the costs of importation, this should be specified in writing. This term applies to any mode of transportation

International versus Domestic Freight Terms. This section provides a summary of comparison of Incoterms-1990 (INCO) and the Uniform Commercial Code. When there is no equivalent it is noted:

INCO UCC Term and Comments

EXW FOB-Factory. Seller loads the goods aboard the carrier at the factory and the buyer bears all cost and risk thereafter.

FCA FOB-Named Place. Seller's cost and risk to deliver and load aboard carrier at named place of delivery. Buyer's cost and risk after loading.

FAS Same.

FOB Same

CFR C&F, CF (Cost and Freight). Deliver to any form of carrier, freight paid to named destination. Seller's risk when goods are in possession of the carrier.

CIF CIF. Delivery to any form of carrier, freight and insurance paid to named destination. Seller's risk ends when goods are in possession of the carrier.

CPT Use C&F, CF (Cost and Freight). Under UCC definitions, any type of carrier and any agreed place is applicable.

CIP Use CIF (Cost, Insurance, & Freight). Same as CIF under UCC rules. Any form of carrier, any destination applies.

DAF No equivalent.

DES Ex Ship. Same, but unloaded at seller's risk.

DEQ No equivalent.

DDU No equivalent.

DDP No equivalent. FOB-Destination has the same effect as DDP since import and duty issues do not apply domestically.

Domestic Transportation: Elements of Purchase. Major challenges in managing domestic transportation services include freight terms, shipping instructions, carrier selection, and other contract terms and conditions.

Freight terms. Freight terms were discussed in the previous two sections. The key to managing freight terms is balancing the cost, routing, delivery, and risk in a manner that is consistent with your needs.

Shipping routing instructions. Basic information includes the correct physical address where the goods are to be shipped. You can avoid problems by providing complete instructions to shippers. For example, some deliveries require additional equipment and/or special services. They can often be charged accessorial fees. Failure of the shipper to document these special requirements on the bill of lading can result in additional time and money. Also, failure to note the freight account on collect shipments can cause the you to lose the cash discount. Savings are also possible by selecting the supplier's closest location when possible. Other cost savings considerations include adjusting orders based on availability of substitute products, providing written instructions to suppliers, the use of consolidated shipments, and having suppliers with multiple warehouses ship from the closest location that carries the items you ordered.

It is often helpful to provide specific carrier choice instructions to your suppliers. For example you might instruct your suppliers "When shipping by truck and the shipment is < than "x" pounds use carrier ABC, if the shipment is > "x" pounds use carrier QRS; when shipping by air and the shipment is < "y" pounds use carrier WYZ, if the shipment is >"y" pounds use carrier TUV." Effective analysis can identify carrier selections that can greatly reduce your annual in-bound freight bill. Overall, carrier selection is based on the following: (1) Who has control/risk of loss and damage determines which INCO or UCC terms; (2) Who pays/bears the cost affects freight terms, (3) "ship from," "ship to," "when required vs. when available (speed)," and "shipment weight and volume" affect freight cost, and "carrier's terminal locations" and "transportation budget" provide limitations on your choice of carrier.

Carrier selection. Factors to consider when analyzing carriers for suitability to your needs include (1) importance of your business to the carrier (you want to be a large enough customer so that the carrier will respond positively to your needs), (2) desire to maintain a relationship with the carrier, (3) overall relationship with the carrier, and (4) carrier service performance.

Other contract terms and conditions. Some areas of negotiation that can save transportation dollars include (1) pricing, (2) discounts for volume and timely payment, (3) accessorial fees - can they be waived or reduced, (4) special handling equipment fees, (5) freight payment terms (net 30 rather than net 15), (6) product density for domestic and international air, (7) spot quotes for large and oversize shipments, and (8) currency exchange rates applied to international shipments.

Summarizing The Buyer's Role. Successful buying of inbound transportation depends on knowing your abilities and how to seek help when needed. Some things that have been useful include (1) knowing how to use the transportation terms of the purchase order to your advantage, (2) knowing the transportation requirements of the order, (3) knowing your transportation professionals and using them for guidance, and (4) knowing how to effectively use your supplier's knowledge. Areas where you often need to seek help include (1) overweight and oversize shipments, (2) problems with potential late delivery, (3) continuous/repetitive volume movement, (4) when transportation costs are a large percentage of the order value, (5) critical orders, (6) orders involving complex international distribution, (7) international expedites (air or deferred), and (8) tariff classifications.

The following useful rules of thumb that are mentioned as food for thought: (1) the farther away, the longer the transit time, (2) the farther away, the higher the cost, (3) the faster the transit time, the higher the cost, (4) the bigger (but "normal") the shipment, the lower the cost per shipping unit, (5) the lower the value of the goods, the lower the rate, (6) the higher the density of goods (as shipped), the lower the rate, (7) the more fragile the goods, the higher the rate, and (8) the farther beyond "normal," the higher the cost increase.

The following are some popular misconceptions to avoid: (1) air is always faster than truck, (2) air is always more costly than truck, (3) rail is always less costly than truck, (4) "exclusive use" truck is always fastest, (5) all rates of similar services by carriers of the same mode are the same, (6) consolidating shipments loses time, (7) all two-carrier routes are slower than all single-carrier routes, and (8) the higher the cost, the faster the service. Finally, avoid the use of terms such as "exclusive," "dedicated," and "hot shot." These are often expensive terms that do not improve service.

Conclusions. The management of in-bound domestic and international transportation is an area of logistics activity that has the potential to save (or cost) the firm a great deal of money. The ability to save money while meeting the organizations objectives depends on a thorough knowledge of all facets of transportation including freight terms, shipping instructions, carrier selection, the management of carrier terms and conditions, and the ability to negotiate from a position of knowledge. This knowledge should include a thorough understanding of your organizations needs and flexibility, the potentials and limitations the alternate terms of trade, a complete understanding of the needs and characteristics of each shipment, a comprehensive understanding of the potentials and limitations of each carrier option, an understanding of where each carrier fits into your overall domestic and international in-bound transportation needs, and the ability to creatively negotiate in a wide variety of situations.


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