Curbing costs on the long haul

Posted on 6 May 2009 by The Manufacturer

Purvinder Tesse, logistics director at leading global logistics supplier FCL UK, provides some useful advice on minimising logistics costs for importers and exporters.

Arranging the international movement of goods should, in today’s global village, be a simpler process than it was a few years ago. Yet it is one which many still see as too complicated or difficult to arrange or manage themselves, despite the costs involved and the potential cost savings achievable through effective negotiation and careful supplier management.

UK importers and exporters of goods are unnecessarily paying out millions of pounds on hidden transportation costs which, had they been properly checked beforehand, could have been reduced or even avoided altogether. Loading and unloading, haulage, containerisation, storage and ocean and air freight costs can all end up costing the buyer more than they need to, eating into their margins. If the cargo is time-sensitive, transportation costs are likely to be higher than standard rates.

However, regardless of time-sensitivity, committing to a contract of 12 months or above in the current economic climate is a questionable strategy, given that transportation costs have fallen on average by approximately 55% since the start of the economic downturn and may yet fall further. As an example, December 2007 rates for 20-foot containers were $1,100 for imports from base China ports, but 12 months later had fallen to $300 per container.

Bigger not always better
Historically, many pharmaceutical companies have assumed that dealing with the larger global carriers and freight forwarders will guarantee better rates, but this is not always the case. Some global carriers have been very slow to pass on the recent savings on shipping and air transport costs to their customers, assuming ongoing loyalty from customers on the basis of ‘better the devil you know’ or that the customer does not have time to shop around for a lower cost.

But some customer-focused forwarders are negotiating rates on an almost daily basis with the large shipping, air and road transport companies, to get the lowest possible prices for their customers. With forwarders, bigger is not necessarily better, as even smaller forwarders are buying in sufficient quantities to offer good economies of scale — even to customers moving only occasional consignments or a few containers each week.

Expensive coding errors
Importers need also to be aware of Her Majesty’s Revenue & Customs commodity codes for imported goods.

Careless and inaccurate use of these codes is potentially costing UK businesses millions of pounds each year. There is one example of a customer importing four containers a week and paying a massive £1,500 per container in duty, totalling £6,000 per week and thus close to £300,000 per year just from incorrect code allocation.

Ultimately it is the importer’s responsibility to ascertain the correct commodity code. A relatively small amount of time spent researching the available codes and methods of obtaining exemptions on certain goods can pay big dividends in cost savings on import duties.

HMR&C produces an array of fat booklets detailing commodity codes with their respective duty rates every few months, but many companies have neither the time nor the inclination to examine these and establish which of several categories the product they are importing might fall under.

Companies might either keep using the code they have always used or call the HMR&C’s commodity code ‘helpline’, which will just give them one category number under which to register the goods. However, due to the enormous and ever-growing number of subheadings, which change every two or three months, many goods can quite legitimately be registered under several different categories, with differing duty rates.

Import duty is normally charged as a percentage of the cargo’s value, but this money can never be reclaimed even if a mistake is revealed later on. It is no good, therefore, assuming that a company is using the most cost-effective code — spending time checking, or getting its supplier to advise or assist in this matter, could create big savings in the long run. A supplier can also deal with HMR&C on behalf of their client in the event of an audit by HMR&C.

Terms of sale as important as price
When negotiating an international sales contract, as much attention should be paid to the terms of sale as to the sales price. The almost universally accepted
international trade terms (Incoterms) set out several categories ranging from ‘Ex Works’ — where all the seller has to do is package the goods while the buyer
arranges transport — through to ‘Delivered Duty Paid’, where the seller pays for all aspects of transport all the way to the buyer’s premises, which covers all duty, taxes and customs clearance as well.

However, there are a further 11 categories between these two, each placing different responsibilities on the buyer and seller, and this is often where extra costs creep in if the responsibility for carriage costs is not clearly agreed in advance. When exporting goods from the UK by sea or air, the Cost & Freight (C&F) Incoterms category is usually the most favourable to the exporter, as the shipper has control of the cargo for the majority of the time.

However, if the agreed terms are Free Onboard Vessel (FOB), the UK shipper will incur higher charges from the nominated shipping line or freight forwarder, thus placing them at a disadvantage. This is because the consignee will specify to the exporter which carrier or forwarder they must use, who is then likely to charge a higher than average rate to the exporter, while quoting a lower cost to their regular customer (the consignee), but still making a profit procured from the difference between the higher costs quoted to the shipper and the cost reduction given to the consignee.

For importers of raw materials, purchasing on an FOB basis can result in significant savings on transportation. Indeed, buying on a C&F basis typically results in the importer paying 10%-15% more in transportation costs than they would have done had FOB terms been agreed.

To save time, many exporting manufacturers around the world often use one shipping line or forwarder which will provide a cost that is then simply marked up and passed on to the importer, as there is no incentive for them to negotiate a cheaper deal, while cheaper shipping costs may be counterbalanced by high haulage costs if the shipping company is itself using a third party haulier.

It is clear to see, then, how transport costs can often be as much as 20-30% higher when using a single shipping line than if the buyer arranged the transport themselves or used a forwarder. Even if the UK importer uses a freight forwarder for the UK legs of the journey, they do not necessarily enjoy the full benefits if the overseas manufacturer’s shipper or forwarder uses a different UK agent, with ‘handover costs’ often charged.

Leaving the responsibility of shipping goods with the manufacturer is therefore often likely to be an expensive option and one which should generally be avoided.

The impact of bills of lading
For imports, the terms of the ‘bill of lading’ — a document that gives proof of particular goods having been loaded onto a ship — can make a difference to costs too. The person to whom the goods are being sent normally needs to be shown on the bill of lading in order to obtain the release of the goods.

If the bill of lading is a ‘direct master bill of lading ’ — i.e. it includes only the name of the shipper and the consignee, and not the names of any third parties or
forwarders — then the importer can deal directly with the shipping line when securing release of the goods.

This can sometimes be an expensive route as freight forwarders typically import several thousand containers per annum will get better rates from the carriers than a company moving only small numbers of containers a month.

However, if the bill of lading mentions other intermediaries, such as a third party freight forwarder or agent, the importer has to deal with those intermediaries before those goods are released. The less scrupulous of these will take the opportunity to add on extra charges such as handover fees, charges for documents and so on, which can add several hundred pounds to the bill on a single consignment.

To get around this, importers can specify a direct bill of lading when booking with the shipper if importing on a Cost & Freight basis. Another alternative is to import the goods on an Ex Works basis, although this presents a different set of challenges.

To outsource or not to outsource
In a digital age with quicker forms of communication, international freight transport is not the minefield it once was, although the sheer volume of documentation, and the investment of time needed to get the best deal, make it very difficult for some organisations to manage the process in-house.

Placing the entire responsibility with a reputable freight forwarder can both remove worry and allow the buyer to access the most cost-effective transport suppliers. Not only is the forwarder used to dealing with manufacturers in distant parts of the world, hands-on account management by staff who can converse in local languages means the process is constantly being monitored and any potential hold-ups are quickly identified and dealt with. This process allows the buyer to focus on the important aspects of their business rather than being distracted by ancillary logistics, and to be satisfied that their transport costs are as low as possible.