Transport Management & Theory Practices (3)

Chapter 3Transportation’s

Role in Global Trade Planning

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

Introduction• Global economy in a volatile period

– Much downward pressure on transport rates

• In an economy focused on cost control, both carriers and their customers must plan effectively

• Chapter focus: proper global transport planning• Chapter organization

– Global transport industry: size, options, flows – Key planning issues: trade and payment terms,

documentation– Mode, carrier, and route selection criteria © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global Transportation• Total global merchandise exports

– $14 trillion in 2009, $15.8 trillion in 2008– $750 B. spent on transport services in 2007– 8 B. tons moved in international seaborne

trade in 2007, accounting for 80-90% of global trade

• U.S. is largest trading partner– Exports: $1.3 trillion, imports: $2.1 trillion– Creates large transportation flows to/from

U.S.© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global TransportationGlobal Trade Agreements Trade stimulated by free trade agreements

Agreements between nations that lift most tariff, quota, and fee/tax limitations on trade

Bi-lateral agreements are between two nations U.S. currently in 14 bi-lateral free trade agreements

Regional trade agreements involve 3+ nations U.S. currently involved in:

Free Trade Area of Americas Middle East Free Trade and Enterprise for ASEAN

Initiatives North American Free Trade Agreement (NAFTA)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global TransportationGlobal Trade Agreements• NAFTA includes U.S., Mexico, and Canada

– Principles include:• Unimpeded flow of goods• Enhanced cross-border movement of

goods/services

– Principles were to enable transport carriers to move more easily between countries• Today, Canadian carriers have same rights in U.S.

as U.S. carriers have in Canada– May transport domestic traffic when incidental to

return trip• Same accessibility is not currently available

between U.S. and Mexico© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global TransportationLogistics Channel IssuesTransaction channel activities

A key activity is specifying when and where legal title to goods transfers. Defines responsibility for: Mode and carrier selection and shipment routing Obtaining insurance coverage Payment for transport services, insurance, and

import duties Compliance with regulations, management of goods

while in-transit, and financial liability while in-transit © 2011 Cengage Learning. All Rights Reserved.

May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global TransportationLogistics Channel Issues

A 2nd key transaction channel activity is arranging payment for the goods Obtaining payment is riskier in global trade

compared to domestic trade Advance payment would be ideal for exporter Importer would be concerned about paying in

advance of seeing/inspecting the goods There are many terms of payment options used to

balance these risks


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Overview of Global TransportationLogistics Channel Issues• Communication channel

– Documentation requirements are much higher for global than for domestic transactions• Example: 150 documents required for each import

shipment of perishable food as it moves through cold chain

– Organizations requiring documentation include:• Countries of export and import• Transportation companies, banks, and the importer

– Many documents not in electronic form© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Overview of Global TransportationLogistics Channel Issues Distribution channel

Greater distance and complexity of global shipments means higher risk of disruptions Global freight moves through more facilities and

handled by more intermediaries Transport infrastructure, regulations, and service

options vary from country to country Requires more diligence in transport mode,

carrier and route selection decisionsproperly matching freight to the most appropriate mode will facilitate safe & cost efficient distribution of goods© 2011 Cengage Learning. All Rights Reserved.


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Overview of Global TransportationGlobal Transportation Challenges• Proper long-range planning requires:

– Monitoring macro-level issues, such as:• General business/economic trends, including fuel

prices• Changes in governmental regulations and

interventions• Consumer demand trends

– Monitoring specific issues, such as:• Trade level fluctuations• Carrier consolidation activity• Security risks• Shifts in regional sourcing


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Export Preparation Activities• Key export preparation activities are:

– Choosing terms of trade– Securing freight insurance– Agreeing upon terms of payment– Completing required freight documentation

• Completion of these activities helps to:– Clarify importer and exporter

responsibilities– Protect each party’s financial interest– Improve freight control and visibility– Facilitate problem-free transport


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Export Preparation ActivitiesTerms of Trade

• Terms of trade define where responsibilities transfer from exporter to importer

• Govern decision making authority for movement of the product

• Establish when and where ownership and title of goods pass from exporter to importer

• Clarifies which organization incurs delivery-related costs


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Export Preparation ActivitiesTerms of TradePotentially, each country could have its

own set of trade termsThis would create uncertainties in the

meaning of terms and raise transaction costs

Thus, a worldwide standardized set of terms and definitions was established Known as the International Commercial Terms Common name is Incoterms


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Export Preparation ActivitiesTerms of Trade• Incoterms

– 13 different Incoterms, divided into 4 primary groups, are available• All 13 apply to ocean transport• Just 7 Incoterms are appropriate for air, truck, rail and

intermodal transport

– Typically expressed as three letter acronyms with a named location• Examples: DEQ, Long Beach, CA, U.S.A., Incoterms 2000


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4 primary groups of Incoterms E term: Importer takes full responsibility

Consists of just one Incoterm: Example Works (EXW)

F terms: Exporter has responsibility for getting shipment from origin to port of embarkation 3 F terms

Free Carrier (FCA): may be used with any mode Free Alongside Ship (FAS): water transport only Free On Board (FOB): water only and exporter

assumes responsibility for cargo loading © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• C terms: Exporter obtains and pays for main transport leg and/or cargo insurance. 4 C terms:– Cost and Freight (CFR): water shipments only– Carriage Paid To (CPT): any mode of transport– Cost, Insurance, Freight (CIF) and Carriage and

Insurance Paid To (CIP): Exporter pays for main carriage and insurance

• D terms: Exporter responsible for delivery of shipment to foreign destination. 5 D terms:– Delivered at Frontier (DAF): all modes.– Delivered Ex Ship ((DES) and Delivered Ex Quay (DEQ)

: water shipments only– Delivered Duty Unpaid (DDU) and Delivered Duty Paid

(DDP): all modes. Highest levels of exporter responsibility


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Table 3-2


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Figure 3-3

Export Preparation ActivitiesCargo Insurance

International shipments exposed to larger financial risks and transport perilsFinancial risks for cargo owner

Significant dollar limitations on ocean and air carrier liability

If there is damage or delay, burden of proof falls on cargo owner to prove that carrier was at fault

Transportation perils Many ocean-related perils, including cargo

movement, water damage, overboard losses, and hijacking

Perils by other modes are relatively minor© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Export Preparation ActivitiesCargo Insurance

Managing risksDecision between retaining or transferring risksRetaining risk is essentially self insurance.

Makes most sense when: Goods shipped are low value or not susceptible to

damage Carriers used rarely deliver damaged or lost freight A damaged shipment would have relatively minor

financial impact on the freight ownerRisk transfer via insurance is appropriate when

above conditions are not met© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Export Preparation ActivitiesTerms of Payment Terms of payment exist to manage higher

risks of international sales transactions Letter of credit (LC)

Ensures exporter is paid and importer receives goods as expected

Importer’s bank issues LC to the exporter Bank guarantees payment provided goods

delivered per terms of the LC Bank uses importer’s line of credit to guarantee

payment Bank charges the importer a fee for issuing the

LC © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Export Preparation ActivitiesTerms of Payment Draft or bills of exchange

Similar to a check, except title to the goods does not transfer to importer until draft is paid

Sight draft Used when exporter wishes to retain ownership until

goods are delivered and payment received The original ocean bill of lading (showing title) must

be presented to carrier before goods are released to importer

Time draft Used when exporter extends credit to buyer Payment due within time period specified on draft© 2011 Cengage Learning. All Rights Reserved.


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Table 3-3

Export Preparation ActivitiesFreight Documentation

Freight documents control movement of cargoMistakes or missing documents inhibit flow of

goodsDocumentation requirements set by customs

regulations of exporting and importing countriesFreight forwarders are documentation experts

Four types of documentsInvoices and transportation documentsExport and import documents© 2011 Cengage Learning. All Rights Reserved.


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Invoice or bill for the goods International invoices are more complex and there

are several types Commercial invoice is most common. Must contain:

Description of goods, quantities and value – may impact duties

Country of origin, Incoterms, and parties to the transaction

Pro-forma invoice - actually a sales quote Used by buyers to estimate total landed costs for potential

order Consular invoice - prepared by exporter

Certified in origin country by consul of destination country© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Figure 3-4


Export documents Used by many countries to:

Develop statistics (types, volume, value) of goods exported Control exports of strategic materials, national treasures

For exports from U.S., following documents required: Shipper’s export declaration (SED)

Required on all exports exceeding a nominal value and all exports requiring an export license

Export license Used to control export of sensitive materials to selected

countries Certificate of end use

Purpose: assure exporting country that product put to intended use


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Import documents Intended to:

Protect citizens from inferior quality products Properly classify products for collection of duties Limit imports of products deemed inappropriate

Certificate of origin Most widely required import document Indicates shipment origin, but not location of

production Used to determine appropriate import tariff


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Certificate of manufacture Indicates location of product production Also used to determine appropriate import tariff

Certificate of inspection Attests to authenticity and accuracy of

description of the goods shown in the commercial invoice

Other import documents Phyto-sanitary certificates Certificate of analysis Certificate of certification


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Export Preparation ActivitiesTransportation DocumentsCarrier manifest

Lists critical information needed to perform the transport service

Bill of lading – primary transport documentContract of carriage between cargo owner

and transport companyServes as receipt for the goodsFor international shipments, ocean bill of

lading and air waybills are used © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Export Preparation ActivitiesTransportation Documents

Various types of bills of lading Through bill of lading Intermodal bill of lading

Negotiable vs. non-negotiable bill of lading If non-negotiable, carrier must deliver only to

consignee named on the bill If negotiable, the person possessing the bill has

the right of ownership to the goods


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Export Preparation ActivitiesTransportation Documents

Transport documents are largely paper-basedMajor challenge: move toward electronic document

formatInternational Air Transport Association e-freight

initiative Intended to replace the 20 most widely used paper

documents with electronic messages Anticipated to reduce costs by $4.9B, improve accuracy, and

speed transmission of informationOther U.S. electronic document initiatives

Automated Commercial Environment Auto. Brokers Interface System, Auto. Export System


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Transportation PlanningMode SelectionDecision must achieve best fit and balance

between:Modal service capabilities

Accessibility, capacity, transit time, reliability, safety

Product characteristics – size, durability, valueSupply chain requirements for speed, service,

costDecision must also align with corporate

strategy, control risk and provide required level of customer service © 2011 Cengage Learning. All Rights Reserved.


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Table 3-4

Transportation PlanningCarrier Selection

Decision based on best fit and balance between:Geographic coverageAverage transit time and reliabilityReliability of on-time pickup and deliveryTechnical capabilities, ability to share informationEquipment availability and capacityProduct protection/carrier’s freight damage

experienceCarrier’s financial stability and freight rates

Service factors tend to outweigh cost© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Transportation PlanningCarrier Selection

Carrier selection strategyLeverage transportation dollars by using a limited

number of carriersBuild relationships with service providersMonitor carrier performance, rates, and financial

stabilityHave contingency plan with back-up carriers

Differs from mode selection decisionMany more options to choose fromDecision made more frequently but not for each

move© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Transportation PlanningRoute Planning

Carriers(pembawa) primarily responsible for routing

However, shippers(perkapalan) should have input to ensure proper consideration given to:Customer satisfaction and supply chain

performanceEfficiency and product safety during transit

Routing decisions should beCoordinated with mode and carrier selectionAligned with global sourcing, inventory, demand

fulfillment strategies © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Transport Management & Theory Practices (3)

Business

global trade planning

cengage learning

accessible website

introduction global

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trade bilateral agreements

domestic trade advance

transport mode