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Supply Chain: Finding Safe Harbor in the World’s Ports

By: Simon Kaye
Posted: September 5, 2008, from the September 2008 issue of GCI Magazine.

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In foreign countries where sourcing cannot be assured of the due process of law, such as China, it is vital to collect data and keep track of all freight in a way that creates a provable and thorough paper trail. Crime, loss, bureaucracy and corruption must all be taken into account. Electronic tracking from a reliable freight forwarder is often the only way to overcome such roadblocks. Developing personal relationships are essential to understanding foreign business culture, and to cementing agreements between partners, who may or may not speak the same language. By taking advantage of established freight-forwarding agents in the region, a company can increase its ability to get results and track its goods effectively.

The Role of Shipping Terms

Using an established freight forwarder, working through efficient port facilities, generates another benefit when shipping terms are properly structured. Before the wide use of online technology, trading terms were limited generally to cost/insurance/freight (CIF) charges. In CIF terms, the shipper chooses the freight company and includes all insurance and freight charges in the shipping price. This makes verification of the charges for freight and insurance difficult, particularly as companies increase their number of overseas suppliers and overall freight volume. The greater the number of CIF shipments, the more problems can occur with obtaining accurate shipment information.

Importers may think that having their supplier arrange and pay for the main carriage is more convenient, but they generally wind up paying more when the supplier chooses the freight company. Sometimes the supplier does not have the vested interest or the leverage to get the best freight price. Other suppliers may build a higher rate into shipping terms to cover insurance costs, currency fluctuations or delays from bad weather. The result of these and related factors mean that shippers may build substantial additional freight charges into its rates, which are often not itemized for the importer. The United Nations, through its Centre for the Trade Facilitation and Electronic Business, has identified more than 200 additional freight charges that may legitimately be added to the importer’s costs.

In contrast, shipping Free On Board (FOB) offers more competitive freight rates and enhanced shipment control. FOB integrates perfectly with electronic tracking because increased supply chain visibility and control are critical FOB benefits—created because the importer, not the supplier, selects the logistics company. By taking title to the goods as they go onboard at the overseas port of shipment, the importing company is better able to obtain accurate and timely shipment information by working with the freight forwarder that it chooses. In this way, the importer is assured the freight partner is working for it, not the local supplier.

Moreover, the INCOTERMS (INternational Commercial TERMS) under which FOB shipments operate do not deal with the transfer of ownership, when transfer of title in goods takes place or other terms necessary for a complete contract of sale. The issue of the transfer of title remains subject to what has been agreed upon between the parties in the relevant sale contract and applicable law. In the contract terms, cosmetics manufacturers, particularly ones with high volume importing clout, can arrange to take title to the goods shipped only after arrival in port—offering significant accounting advantages relating to how inventory is reported. The sales contract can provide for supplier invoicing upon confirmed arrival at destination port, and tracking will be made available to the supplier on-line and via e-mail notification. An online tracking system is a huge advantage in making such cost-efficient arrangements work.

The Essential Ingredient