- preparing and filing transport and customs documents to ensure compliance with all regulations and requirements
- packing, crating and warehousing of goods in transit
- transport tracking
- negotiating freight charges
- booking cargo space
- freight consolidation
- protecting against mishaps through cargo insurance (and taking care of any subsequent filing of insurance claims, if needed)
Why the big differences?
Generally, the total volume of a package has a greater impact than its weight when it comes to calculating shipping cost. This means that, oftentimes, a large and bulky – but lightweight – item may cost more to ship than a heavier but more compact one.What about online shipping & logistics companies? They offer great rates!
Is there any way to simplify this? I just want to get my stuff from A to B!
CEOs frequently point to freight costs as one of the most significant organizational threats. While cost is always a significant threat, it is not the only risk associated with a poorly managed transportation system. The triple threats related to transportation that can adversely affect buyers and sellers are costs, loss and damage, and delivery time.
Due to the potential impact on profitability, freight costs tend to be the most visible transportation threat. Unlike other costs that can be forecast, freight costs can be volatile, producing significant increases in short periods.
Controlling freight costs can be difficult, but buyers and sellers can take steps to mitigate the impact. One of the easiest ways to accomplish this is to monitor freight costs monthly as a service-related KPI (key performance indicator). Asking your finance department to alert you when monthly expenses exceed a pre-determined percentage can help identify trends early.
Developing strong supplier relationships and communicating order information to transportation carriers is also effective in managing freight costs. Employing technology like a Transportation Management System (TMS) to produce reliable information regarding shipment volume and frequency can help shippers negotiate lower rates in return for information that enables carriers to allocate labour and equipment resources more efficiently.
Shippers can also reduce freight costs by improving efficiencies in shipping practices – for example, by consolidating orders from LTL (less-than-truckload) shipments to FTL (full truckload) shipments. Crossdocking is another example of how technology can be used to reduce the threat of transportation costs, pre-labelling shipments so they can be moved across the dock to local delivery vehicles quickly when they are unloaded from incoming trailers. This practice has the added benefit of streamlining the warehousing function since goods move “across the dock” on a through bill of lading and do not have to be inventoried as an intermediate step.
More information:
Why are freight rates so volatile - particularly those from China?
Another key transportation-related threat is the susceptibility of goods to loss and damage – an issue frustrating for carriers as well as buyers and sellers. Although it is the shipper’s responsibility to package goods in a manner “suitable for transport,” shippers commonly pack goods in corrugated boxes of insufficient strength to protect the products inside during normal shipping and handling.
Another problem is the tendency of some shippers to place products on undersized pallets, where goods “overhanging” the pallet are damaged in transit. Products in barrels and pails are often shipped on pallets but should not be double-stacked with insufficient dunnage or strapping or with uneven top layers. Shippers who do not adhere to “best practices” in loss and damage management can expect eventual rate increases from their carriers to compensate for the administrative burden this scenario brings.
The threat in this case is twofold: the obvious costs associated with having to replace raw materials or finished goods inventories, and the unseen costs that ongoing loss and damage incidents can have on business relationships. Carriers who feel a shipper is trying to shirk its responsibility to pack goods suitably for transport may eventually walk away from the relationship, as may customers who are continually inconvenienced by suppliers who cannot deliver shipments complete and damage-free. Asking for carrier input on product packaging and handling requirements can provide valuable insight to reduce cargo damage and loss.
The larger threat, however, often comes from the resulting liability regarding loss or damage. Knowledge of legal liability and risk is essential to avoid unforeseen threats that can result in significant financial loss to a shipper. Quantify your risk to this threat by asking these questions of your organization:
- Where does ownership transfer for incoming shipments from suppliers and outgoing shipments to customers?
- In the event of loss or damage to goods in transit, who is responsible for filing a freight claim?
- Are we responsible for arranging transportation for incoming and/or outgoing shipments? Why? Why not?
- Do we declare an insurance value on incoming or outgoing shipments? Why? Why not?
- Are our suppliers and customers aware of our company’s policy on lost or damaged shipments? Where do we publish this information? When was it last updated?
- Do we have to pay our suppliers if their shipments are lost in transit?
- Do we expect our customers to pay us if they do not receive our shipments?
In other words, does your company policy for handling loss and damage issues penalize your suppliers and customers, or does it reinforce and strengthen your business relationships and organizational strategy?
Knowledge of liability implies understanding the threat of potential litigation. This is perhaps the most complicated aspect of dealing with loss and damage claims, since legal liability varies by mode of transport and country. For example, North American shippers using trucking should be aware that carriers have different liabilities for shipments originating in Canada, the United States and Mexico. In some cases, the bill of lading may govern the carrier’s minimum legal liability; in others, it may be governed by legal statute (such as the Carmack Amendment, which applies to interstate shipments in the U.S.).
A similar situation exists for shippers of ocean freight, where the carrier’s liability is generally governed by the terms of the bill of lading, legislative framework or maritime convention. And while carrier handling and security practices have steadily improved to the point where global rates for loss and damage have declined to about 8 percent (Cerasis, 2015), few shippers would be happy to learn that carrier liability for a lost container may be as low as $500 (U.S.) in some cases. Shippers should also be aware that financial risk is limited not only to loss and damage of their shipments, but, in some cases, to the loss of goods belonging to other shippers, requiring coverage under general average insurance.
More information:
General Average - Are you covered?
Cargo Insurance - Is it worth it?
My shipment isn't that valuable. Should I bother to insure it?
Another highly visible transportation-related threat is delivery time. This is also one of the most common performance metrics applied by shippers, so it’s important for shippers to maintain strong relationships with their carriers to avoid misconceptions in this area.
Unless agreed by contract or specifically indicated on an applicable bill of lading, carriers are generally obligated to deliver shipments in a “reasonable” time, consistent with their “normal operations.” For example, truck shipments within a metropolitan area picked up one day can generally expect to be delivered the following day, and shipments to destinations up to 800 kilometres (500 miles) away can generally be expected to deliver within 48 hours. These expectations can be established in conversation between a shipper and carrier at the start of their service relationship. They need not be contractually specified as long as both parties acknowledge that shipments may occasionally be delayed due to bad weather or other conditions beyond the carrier’s control.
Some shippers request delivery appointments to reduce the possibility of delivery delay. This can be an effective process but may come at a cost in congested areas where carriers have to take drivers and equipment out of service for several hours to deliver on time. Worse, carriers are sometimes required to maintain appointment deliveries without compensation just to keep a particular shipper’s business. While this may work in the short term, there is some risk the carrier may abruptly refuse the shipper’s business if it determines the out-of-service time related to appointments is negating any profitability in the relationship.
Having open and frank conversations with carriers is the best way to avoid confrontations over delivery time. Sometimes a shipper’s requirements will fit routinely with a carrier’s capabilities in terms of routes, frequency and regular delivery times without the need for special services like appointments and “rush” delivery that can incur additional costs. Judicious use of performance metrics can alert shippers as to how well their carriers are performing in delivery times. And even without specifying actual delivery times, shippers are justified in asking carriers to alert them when delivery times are going to fall outside “normal” parameters.
The impact of delivery time is most often felt with shipments delivered by truck. International air-cargo shipments are frequently delivered airport-to-airport within 72 hours, while the expectation for rail and ocean shipments is generally much lower given the nature of those modes. With trucking, however, the expectation for speedy delivery is high, often without consideration for urban congestion, bad weather or customs formalities. As a result, the threat associated with late truck deliveries tends to be much higher, especially if promises are made to customers based on the expectation rather than the certainty that shipments will be delivered on time.
Developing a strategy for mitigating transportation threats can also form the basis of a comprehensive risk management policy. Strong supplier relationships with all stakeholders in the supply chain – including your suppliers, customers, carriers, freight forwarder, insurance agent, warehouse services provider and customs broker – is a vital part of this process.
More information:
What's the deal with shipping delays?
Importing Wooden Products into Canada
Transportation capacity typically mirrors industrial output. In growing markets, increased demand for transportation services usually increases equipment availability and carrier rates. Conversely, a decline in overall trade, and the resulting uncertainty concerning demand, usually creates volatility in capacity and may drive freight rates downward.
Managing a freight budget is challenging at the best of times, but uncertain trade volumes make it even more difficult. As a cost centre, transportation thrives on predictability in shipment size and frequency. These factors are at the heart of every rate negotiation: shippers want to be rewarded for volume, and carriers desire volume and frequency to maximize equipment utilization. This principle generally applies to all modes of transport: truck, rail, ocean, air and pipeline.
Consider a truckload shipper that promises a carrier a full truckload of 22 pallets every Monday, Wednesday and Friday – a respectable volume, in return for which this company could expect to negotiate an attractive freight rate. With predictable volumes, which allow carriers to plan labour, equipment and fuel requirements, many carriers would readily negotiate rates with shippers. For shipments suited to intermodal transport, the carrier could negotiate favourable rates with a railway, and the rail carrier would enjoy similar predictability in budgeting and forecasting labour and equipment utilization.
One of the unfortunate challenges of globalization is that predictability becomes an elusive target when it depends on extended supply chains. With ocean container shipments, for example, shipping lines value predictability to avoid long sailings with less-than-full capacity. To maximize their leverage in rate negotiations, importers and exporters should work closely with foreign suppliers and customers to honour volume commitments. Ocean carriers like Maersk, the world’s largest container carrier, are implementing online reservation systems, improving demand visibility and making it much easier for shippers to book their container shipping requirements.
For the carrier, however, this type of convenience can be a double-edged sword. Shippers often lose sight of the fact that ocean carriers have to invest in container inventory and ship capacity to handle demand. If shippers do not follow through with their online reservations due to inaccurate forecasts, or if they give their shipments to competing carriers in exchange for lower rates at the last minute, the original carrier must still bear the cost of idle containers and less-than-full vessel sailings. These container “no shows” have become so disruptive, some ocean carriers are reportedly considering shipper-carrier contracts that would penalize shippers for not delivering booked containers. If these trends continue, they will negatively impact rate negotiations for shippers.
Of course, not every shipper enjoys a high level of predictability, resulting in short-term contract rates at the best of times and surging spot rates when markets become volatile. A hallmark of volatility is lack of information: even if shippers understand the cause of market volatility, they’re unlikely to have enough information to counteract the impacts on freight budgets.
This is especially true when it comes to shipments by airfreight and pipeline, as these modes are even more difficult to forecast. For many organizations, airfreight shipments are considered overly expensive and are limited to shipments of samples intended to promote new business or shipments intended to correct previous mistakes – both unpredictable. Pipeline volumes are even more difficult to forecast given the nature of the commodities involved, amount of industry competition and impact of government regulation.
Nonetheless...
Information that enables forecasting is arguably the best resource for managing freight budgets affected by volatility. Cost centres do not work well in a vacuum, and transportation is no exception. Freight managers usually deal with orders as they arrive at the end of the supply chain, just prior to shipping. When faced with volatile, unpredictable volumes, freight managers need to gather insight into the other end of their supply chain – customer orders – and examine every aspect of their shipping processes for potential improvement.
To begin, build a cross-functional team including others in your organization who possess information that will help improve your shipping forecasts, including (for example) personnel from sales & marketing, order entry, production and finance. You may not be able to change customer demand, but you always have an opportunity to improve your forecast of demand. And that means you can improve your shipping forecasts to your carriers, which in turn improves your ability to negotiate lower, more predictable rates.
Other opportunities exist for managing freight costs amid market volatility, some of which may enable an organization to reduce its total shipments (and associated fuel surcharges) – for example, consolidations and crossdocking. Consolidations enable shippers to lower unit freight costs by combining multiple shipments into full truckloads, while crossdocking improves equipment and labour utilization by allowing carriers to deliver during non-peak hours.
When sales are increasing, reducing dimensional charges holds little appeal for many companies as it’s often considered little return for a lot of work. But when freight costs increase due to volatility, dimensional charges increase exponentially. That’s the time to look at product packaging for all goods for which the company pays freight costs. The formula for calculating these costs will vary by mode and often by carrier, but it will typically include 10 pounds per cubic foot by truck, 6,000 cubic centimetres per kilogram by air, and 1 cubic metre per 1,000 kilograms by ocean. The applicable formulas can be found on carrier websites or bills of lading.
The rule of dimensional weight is based on the concept that packages should not take up more space in a shipping conveyance e.g., truck trailer or ocean container) than they weigh. For example, applying volume charges to large bulky shipments of lightweight paper goods ensures carriers do not lose revenue on space taken up by one shipper at the expense of another with no compensation for the carrier. Oversize packaging can be costly since shippers are paying for “air” with every shipment. Quantify any dimensional freight costs, calculate potential savings related to improved package design, and meet with sales & marketing and production personnel to identify attainable efficiencies.
Many of these suggestions assume that shippers have access to data related to their organizations’ shipping patterns. If this is not the case, improved technology resources, such as a Transportation Management System (TMS), may be in order. While the cost of a TMS may not be popular in times of market uncertainty, relevant data on origin-destination combinations, shipment size, weight, appointment and other special handling requirements, shipment frequency and dimensional charges may help establish the basis of a (new) negotiating position.
Now is the time to share relevant information with your carriers and identify mutually rewarding opportunities to improve service and reduce costs. Many shippers shy away from sharing information with their carriers, fearful it will put them at a disadvantage when negotiating. To the contrary, most successful carriers strive to become “valued suppliers” and, given the chance, can provide valuable insights into operational improvements that may help shippers reduce freight costs, even amid volatility.
What are Incoterms?
- the obligations of each party (e.g. who is responsible for services such as transport, import and export clearance, etc.), and
- the point in the journey where risk transfers from the seller to the buyer.
Show me some Incoterms!
- EX Works (EXW): Selected when the buyer wants to hold responsibility for all costs and risks from the time the shipment is picked up from the seller’s location. EXW can be used with all modes of transport. This Incoterm is more appropriate for domestic trade; it is not recommended for international trade as it places responsibility for export customs clearance with the buyer.
- Free Carrier (FCA): Places responsibility for costs and risks with the buyer when the goods are delivered to the first carrier, typically the freight forwarder, at the seller’s premises or another named place. FCA can be used with all modes of transport and is appropriate for containerized shipments.
- Free on Board (FOB): This Incoterm is recommended for marine shipments only, and is appropriate for bulk shipments. One of the most commonly used, and misused, Incoterms, it is often used inappropriately for shipments in ocean containers. FOB transfers cost and risk to the buyer when the goods are loaded on board the vessel nominated by the buyer.
- Carriage and Insurance Paid To (CIP): This Incoterm places responsibility for selecting the carrier, and paying transport costs to a named destination point, with the seller. It is important to note however that the buyer still holds responsibility for risk of loss when the goods are picked up from the seller by the seller’s carrier or freight forwarder. CIP enables the buyer to obtain cargo insurance from the seller (at the seller’s expense), can be used with all modes of transport, and is appropriate for containerized shipments.
- Delivered Duty Paid (DDP): This Incoterm places responsibility for all costs and risks with the seller up to a named point of destination. It can be used with all modes of transport and is appropriate for containerized shipments, but is not recommended as it places responsibility for import customs clearance with the seller.
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Familiarize yourself with all of the current terms.
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Discuss selection of the appropriate Incoterm with your international vendor or customer prior to finalizing the sale of goods.
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Select an Incoterm that is appropriate for the mode of transport, particularly when goods are shipped in ocean containers (this mode of shipping uses the seven rules applicable to all modes of shipping, not those for marine shipments).
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Consider using a Contract of Sale to reduce the potential for liabilities and risks not covered by Incoterms.
Obtain a copy of the Incoterms 2010 Guide from the International Chamber of Commerce or any major bookseller. Read more...
More information:
Download Incoterm Infographic Illustrations
Why Incoterms Matter - Stop leaving your profits at the door
