Know Your Rates!

Many of the logistics contracts that we sign today are very complex, contain multiple services and a multitude of lanes. We know that we have achieved a certain percent of cost-down over the last contract, but, many times, the details of the deal escape us and our team.

As we move to the implementation mode, those contract details may be the key to further savings opportunities that you didn’t know existed.

It reminds me of the children’s book series: Where’s Waldo.

The deal you just signed (or inherited, if you are new to the job) contains a myriad of base rates, surcharges, transaction fees, stepped pricing matrices based on cargo weight.

To find an opportunity for savings is like finding Waldo in the beach scene below!

One opportunity that we discovered was the difference in transporting containers from Europe into the port of Houston. At first, we thought it was an incorrect rate that we had received, but after checking with our sales representative at the logistics company, we realized the difference was deliberate and due to the need to reposition 40-foot containers back into Houston.

Here’s what we found after reviewing the rates internally:
The cost to move a 20-foot container from northern Europe to Houston was $2,475.
The cost to move a 20-foot container from northern Europe to Houston was $2,450.

That’s right, it cost $25 less to move twice as much stuff (another 20-foot container!) from northern Europe to Houston!

That opened up some opportunities for real cost savings.

We reviewed our orders into Texas and the surrounding states, which discharged at other ports and developed a strategy to take advantage of the half price transport from Europe to the U.S. Gulf states.

We only found this opportunity by having a detailed understanding of what we were being billed for and why. Be sure that you and your team understand your rate structure as good as (or better than) your logistics service provider.

While investigating this phenomenon, we found that about 20% of total container flows at sea are empty and the costs of repositioning are about $400 per container for the ocean carrier.

Apparently, the positioning of empty containers is one of the most complex problems concerning global freight distribution.

You can also find reduced rates by using “non-operating reefers” (a.k.a. “NORs”). These are empty refrigerated containers that need to be repositioned back to where they are needed.

For instance, Brazil exports thousands of reefers filled with fresh produce and meat. With their rapidly growing economy, they also import a lot of dry commodities for infrastructure and development, leaving Brazil with too many dry containers and too few reefers. Due to this imbalance, many of the ocean carriers offer reduced rates to use these “non-operating reefers” to get dry cargo into Brazil.

The bottom line for your bottom line is to know the costs that you are being charged and know how to swing them to your advantage.

Find Waldo!


Sources for this article include:
1). http://compactcontainers.com/docs/Container_imbalance_strategies_JTG.pdf
2). https://people.hofstra.edu/geotrans/eng/ch5en/appl5en/ch5a3en.html
From The Repositioning of Empty Containers by Dr. Jean-Paul Rodrigue
3). http://gcaptain.com/filling-shippings-billion-hole/#.VrfjP_kw1mw
Filling Shipping’s $1 Billion Hole – The Logistical Challenge of Empty Shipping Containers from March 15, 2012 by gCaptain

The Incoterms Square

Incoterms, officially known as “International Commercial Terms”, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are widely used in international commercial transactions and procurement processes.

There are 11 three-letter trade terms related to common contractual sales practices.

Here they are: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAT, DAP and DDP.

These terms are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods as they move from seller to buyer.

For anyone in supply chain (the folks in Procurement or in Logistics), these 11 incoterms can be a jumble of letters with no real meaning. Yet these terms probably impact us the most!

An easier way to think of these 11 incoterms is to break them down into the 4 categories that these terms represent. Then it becomes easier to understand each and its impact on your sales transaction and your logistics costs.

The 4 categories are:
1. the single incoterm where the buyer is basically responsible for everything: EXW
2. the 3 incoterms where the main transportation is paid by the buyer: FCA, FAS and FOB
3. the 4 incoterms where the main transportation is paid by the seller: CFR, CIF, CPT, CIP
4. the 3 incoterms where the seller delivers the goods to the buyer’s side: DAT, DAP and DDP

Each category reflects varying degrees of cost and risk for the buyer and seller.

In the first three categories, the seller delivers by handing over the goods to a carrier somewhere on the seller’s side, that is, within the seller’s country. Depending on the terms, the place could be the seller’s premises, a carrier’s terminal, a forwarder’s warehouse, or alongside or on board a ship. Revenue can be recognized as soon as this happens.

The “C” terms are the most seller-friendly, as they give the seller the ability to select the carrier and forwarder and they allow revenue recognition as soon as the goods are handed over to that carrier or forwarder, even though it’s on the seller’s side (in the seller’s country).

The fourth category, often called “arrival incoterms,” is a destination contract term, since the seller delivers somewhere on the buyer’s side (to the buyer’s country).

Delivery on the buyer’s side means deferred revenue recognition for the seller. It also theoretically implies tracing every shipment to determine the date the goods physically arrive at the destination.

We developed this simple square to help you to better remember these 4 categories of the incoterms.

When you start at the top (EXW) and work your way clockwise around, you move from the incoterms where the most responsibility is on the buyer (the red zones) to those terms where the most responsibility is on the seller (the green zones).

Good luck!

Saturated Skies: Air Freight from Europe to the USA

Most of us use this mode only in case of extreme emergencies.




We call them expedites or premium moves and these typically move by air freight.




If you have had any expedites over these past few weeks, then we have probably shared the same experience: delays, frustration and much higher costs than usual!

The cause for the bottleneck has been attributed to an increase in cross-border e-commerce, the launch of the new iPhone (for the Asia-to-USA lane) and an increase in emergency shipments.


Our odyssey started on Monday, November 13th, which is the day we expected our 4 crates to be picked up from our Italian supplier and flown to Texas. The expected arrival to El Paso was Monday, November 20.


We had gone out for quotes and awarded the business one week prior at a cost of $3.58 per kilo. That was for the standard (STD) service level, which provided a 7 calendar day transit time. That was just the timing that our folks at the plant required; we didn't need to upgrade to the expedite (EXP) service level as that would have cost $7.59 per kilo.


Then came the e-mail from our selected logistics service provider on the day that they were supposed to pick up the 4 crates: "My EU teams (Italy, Germany, France) are continuing to check earlier departure. At the moment, our current routing option is ETA Houston on November 24th and door delivery to El Paso by Sat/Sun (Nov 25-26)."


My colleagues at the destination plant were not at all happy with this timing. They could not understand how our logistics company could have reneged on their commitment.


I pushed and demanded, but there was no way that the logistics company could secure the initial space, timing and cost.


It was at that time that they advised us about the tight capacity coming out of Europe into the USA.


All airlines, freighters and hubs were overcapacity and trying to load cargo from days before!

I pushed and demanded more!


They committed; they promised to deliver in that timing and at that cost.


That's when they directed me to the fine print in their quote: "rates are subject to change based on availability at the time of booking.”


Damn...they had me!


All the yelling and screaming and threatening was going to get me nowhere. And, besides, this was one of our best logistics providers. They knew all the ins and outs of the industry. They had come through on countless occasions. Hand-holding, repackaging, covering our sins; they always provided top-notch service, but this time, it was just not possible, because there was no solution. Even their EXP service was no longer available!


Back to the drawing board.


We started checking on our own with air cargo companies and then with the big integrators: DHL, FedEx and UPS. Two of them immediately advised that our oversized crates would not fit on their planes.


One said that they were 99% sure that they could do it and maintain our timing for a delivery by Monday, November 20th!


The cost went up to $8.01 per kilo.


My team at the plant was in shock when I provided the new cost. The program lead asked "is this a joke?"


I explained the situation and they gave approval for the higher cost. We waited for confirmation of our booking.


And waited.


The e-mail finally came on Thursday, November 16th: "We cannot move this shipment through our network."


Back to the drawing board.


We had the act quickly and be prepared to pay even more. We finally found a service that would deliver on Saturday, November 25th for $11.28 per kilo!

The week was a roller-coaster of emotions and the costs were always going up!


Although we can never predict when we will have these one-off air freight shipments, it is important to know that the end of the year is particularly vulnerable to tight capacity and ever-increasing rates.


We have some lanes that are in expedite mode through the end of the year, so you can bet that we sent out a notification to all of our plants to advise them to provide forecasts of their expedite needs for the remainder of the year and insist that our logistics companies confirm that the space has been booked in advance to avoid the issues we experienced with these 4 crates.

Import Customs Duties and a Snuggie

As logistics professionals, our focus is to optimize the flow of materials based on product quality, transit time and overall cost.


We optimize these areas with the support of our purchasing department, our manufacturing facilities and other functional areas.


When dealing with an international network of suppliers and customers, we need to consider the impact of customs duties on the total landed cost of our products.

Many times, this piece of the "total landed cost" equation is left out, which means that we are not properly calculating all costs.


A critical part of determining these customs duties is to understand the proper classification of our materials; this classification, also known as the Harmonized Tariff Schedule code or HTS code, is the basis for the import duty percentage one must pay to the government when importing these goods.
Surprisingly, a recent radio story highlights the importance of proper customs classification with a story about the Snuggie, a "super-soft blanket with sleeves" that is sold on-line and in your favorite retail stores!

Here is the link.


As you will hear, classifying the Snuggie to the proper HTS code was not an easy task: one side thought it best fit the description of a "garment" like a priestly cloak or a graduation gown (very high import duty rate) while others, like the importer (!), thought it was best categorized as a "blanket" which carries a much lower import duty rate.


Some $16 million was at stake in this classification controversy.


You can hear how it all plays out, but the point is that understanding the potential product classifications can cost you or save you lots of money!