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!