Solving international transportation problems.
One solution to the problem of distribution complexities is to develop an external partnership with a third party facilitator specializing in small volume movements and international documentation. Most firms entering world markets begin on a limited scale and cannot afford to invest heavily in a separate internal department with the required expertise to handle transportation arrangements and documentation associated with exporting. Even firms projecting large volume movements can encounter serious problems in organizing for foreign distribution. However, understanding what is involved with international movements and in partnership with a third party intermediary, most companies can effectively develop export capabilities.
The following first examines the segments or components of an international movement along with the documentation required to complete the move. Second, the roles played by two external third parties, international freight forwarders and non-vessel-owning common carriers, in international distribution are examined. By understanding the requirements associated with an export movement, an appreciation can be developed for how a partnership with a third party intermediary can make exporting a reality.
International Transportation Considerations
International distribution is complicated by the fact that transportation from a point of origin to ultimate destination involves decisions or components not associated with a domestic move. The basic components of an international movement include:
1. Port Selection - Domestic and foreign ports are selected based on proximity to origin and destination, land routing, ocean and air carrier services available, port costs (e.g. wharfage and handling), and any delays which may occur at the port.
2. Inland Movement (Domestic origin to port) - A transportation mode and carrier must be selected and the routing from plant to a predetermined port established.
3. Port to Port Carrier Selection - For movements other than to Canada or Mexico, the choice of overseas modes is limited to ocean carriage and air freight. Selection of a mode is basically a function of rates, time in transit, and needs of the customer.
4. Delivery Movement (Foreign port to destination) - Upon arrival at the foreign port, arrangements must be made for delivery to the final destination.
In addition to these transportation concerns, other distribution related considerations include:
1. Packing/Packaging - International and carrier requirements often dictate a necessity for a change in the way a product is packaged. This can be particularly true for ocean transportation.
2. Transit Insurance - Ocean carriers accept minimal liability, necessitating the purchase of additional insurance. The type and scope of coverage must be determined.
3. Terms of Sale - A wide variety of sale terms are available which assign responsibility for method of payment, insurance, claims, and freight charges.
4. Import Duties - Duties are normally a function of the designed use of the product and product configuration.
5. Handling/Loading - Containerized cargo must be loaded at the plant, port, or by a third party. Break-bulk movements often require additional handling and packaging.
6. Method of Financing - The costs and risks associated with the different methods of financing must be considered.
A complete description of all the alternatives related to each of these considerations is beyond the scope of this paper. However, the above elements do provide the potential exporter with an appreciation for the variety of decisions that must be made.
Domestic transportation normally takes place using a single document, the bill of lading, the contract of carriage between the shipper and carrier. Most shipments within the United States can be completed with a Uniform Bill of Lading, but this is not the case with international distribution. Documents must be prepared to conform to prearranged terms of sale, regulations pertaining to clearance at both port or origin and destination, and carrier requirements. Some of the more common documents associated with an export shipment along with their purpose are describe in Exhibit 1.
Considerable expertise may be necessary to determine which documents are required and how they must be completed. Because requirements vary from country to country, it is necessary that care be taken to insure that all documentation conforms with current regulations of the individual countries. One source of information on these requirements is the Bureau of National Affairs International Trade Reporter, which provides information on marketing channels, commercial practices, tariff systems, documents required, packaging regulations, and special regulations regarding the importation of certain products.
Third Parties in International Distribution
Because there are numerous requirements associated with handling an international shipment, a potential exporter should consider forming an external partnership with a third party intermediary. These firms specialize in such activities as carrier selection, freight consolidation, and documentation. Two of these middlemen, International Freight Forwarders and Non-Vessel-Operating Common Carriers (NVOCC) can provide the necessary expertise for the first time, small volume or infrequent exporter. Even large firms may choose to turn over this portion of their business to a third party.
International Freight Forwarders are licensed by the Federal Maritime Commission to perform documentation and banking services, in addition to arranging for the transportation of freight. As such, they are licensed to act as an agent on behalf of shippers to perform all distribution functions which would be performed by an in-house export department. Non-Vessel-Operating Common Carriers (commonly referred to as an NVOCC or an NVO) are common carriers (like a trucking firm) specializing in consolidating small shipments from several shippers into container loads for movement by ocean carriage. An NVOCC purchases blocks of space from ocean carriers and then, in effect, resells that space in smaller quantities to individual shippers. Individually or collectively, these two transportation intermediaries can play an important role in arranging cargo movements to foreign countries.
If a shipper has freight which is to move to an international market (other than Canada or Mexico), the only options for port-to-port movement are ocean carriage and air freight. Because of the high cost of air freight, ocean carriage often provides the most economical means of transportation. There is, of course, a trade off associated with the speed differential, but careful planning normally permits timely arrival by ocean carrier. The following discussion will focus primarily on the role played by the freight forwarder and NVOCC in arranging for ocean carriage.
Arranging for Export Transportation
In general, an export movement can be handled by the shipper in several ways. Each option requires a different degree of shipper and/or intermediary involvement. The first alternative is for a shipper to deal directly with a steamship company and negotiate the best rate possible. In this case, all documentation must be performed by the shipper. Also, most steamship companies do not solicit small volume (less than container load or LCL) freight, leaving that job to the NVOCC. Therefore, a second alternative involves enlisting the services of an NVOCC who takes the shipment, combines it with other small shipments, and tenders it to the steamship company in a full container load (FCL). Again, the documentation must be performed by the shipper. The final possibility is for the shipper to work with an international freight forwarder who will handle all documentation and arrange for movement of the freight either through an NVOCC for LCL amounts or the steamship company in the case of FCL volumes.
Services of an International Freight Forwarder (IFF)
The basic function of an international freight forwarder is to make all the arrangements for inland movements of freight to and from the port and port-to-port movements via air or steamship companies. In addition, forwarders perform documentation, banking, and insurance services for the shipper. Some forwarders charge individually for specific services performed while others charge a single fee for the entire transaction. Piece work charges will normally cost $15-$20 per document (e.g. ocean bill of lading, Ex-Dec, certificate of origin, bank draft, etc.) plus phone calls, FAX charges, and other incidental expenses. Forwarders who charge on a per shipment basis normally charge $65-$85 per shipment, regardless of the paperwork involved. In addition, all forwarders charge for out-of-pocket expenses such as courier fees and consular fees. In addition to income derived from documentation services, forwarders receive commissions from steamship companies for freight booked with their line. Commissions may also be earned from booking freight through an NVOCC.
Some of the specific services provided by forwarders include the following:
1. Booking space on carriers - Forwarders will book carrier space using information provided by the exporter. Basic information needed by the forwarder include weight, cube (or dimensions), port of loading, and port of discharge. The forwarder then books the cargo and is provided information regarding the vessel name, booking number, loading date, departure date, and arrival date. Without this information, the shipper cannot deliver his cargo to the pier.
2. Preparing air way bill or ocean bill of lading instructions - Air freight forwarders issues air way bills as an agent of the airline. Ocean freight forwarders submit instructions to the carrier, who prepare the actual ocean bill of lading.
3. Prepare consular documents - Certain countries require information be submitted on their own forms called Consular Forms. The forwarder will prepare these forms in the required language.
4. Arranging for insurance - Because an international forwarder acts as an agent for the shipper, they do not accept liability for the freight while en route. However, they do arrange for marine insurance which covers the shipment while at sea. Most forwarders have a "open Cargo" marine insurance policy. If the shipper or consignee desires insurance, they may use the forwarders, at the current insurance rate. Forwarders prepare a certificate which accompanies the other documents. Premiums are based on the destination of the goods and their value, derived from the commercial invoice. In addition, inland carriers have cargo insurance, port facilities maintain stevedoring insurance, and ocean carriers have cargo insurance in port and to the three mile limit.
5. Prepare and send shipping notices and documents - Forwarders prepare "in-house" documents which inform the shipper and consignee regarding the status of the shipment. For example, a booking confirmation provides the shipper with the details of the cargo booking while a transmittal letter gives details of the documents being sent to the consignee or his agent.
6. Advising the shipper on terms of sale - Forwarders are well conversant with terms of sale and are able to advise the shipper about the best way to ship. Cargo terms of sale delineate primarily the point at which the title to the goods transfers from buyer to seller and who pays for and is responsible for the various logistics charges. These charges include inland loading and transportation, vessel loading/un-loading, freight charges, insurance charges, and final transportation to destination. For example, terms of sale stated as "C.I.F. Port of Discharge" indicates that the price charged to the buyer includes all charges (cost of product, insurance, and freight) except the unloading at the discharge port and inland transportation to destination.
7. Arranging for inland transportation - Most forwarders work closely with a variety of domestic transportation companies and are easily able to arrange quality service at competitive rates.
NVOCC (Non-Vessel-Operating Common Carrier) Services
An NVOCC or NVO is a common carrier but is not licensed to perform banking and documentation services. Their primary role is to act as a consolidator of less than container loads (LCL) of freight into full containers. Some firms operate both as an NVOCC and a freight forwarder in which case the full range of services offered by both types of intermediaries are provided. Operating separately, the NVOCC develops partnerships with freight forwarders who provide them with LCL shipments. By utilizing the vessels of steamship lines, an NVOCC provides ocean shipping services without operating ships.
Unlike the international freight forwarder, who only acts as an agent for the shipper, the NVOCC is itself the prime carrier. As such, it accepts liability for shipments for which it has issued bills of lading. Their relationship with the shipper is the same as any other common carrier who chooses to use the underlying services of another carrier (steamship companies in this case). Therefore, the NVOCC acts as a carrier for the shipper and at the same time is a shipper itself when dealing with the steamship company. Specific services offered by the NVOCC include:
1. Offering space on vessels through prior booking - By design, the NVOCC specializes in LCL cargo and concentrates its entire attention on the LCL shipper. Steamship lines normally direct their attention to the volume shipper leaving the smaller firm at a disadvantage when it comes to obtaining a favorable rate. A NVOCC's profit is derived from purchasing volume space at volume prices and essentially reselling that space at LCL prices. The spread between those prices becomes the profit margin. For example, an NVOCC might be able to purchase space for $800 per container using an FAK (freight all kinds) rate which requires at least three shippers and five commodities within the container to qualify. For a 25 cubic meter container the space is resold at $90 per cubic meter generating a $58 per cubic meter profit. Additional charges are made for inland movements.
2. Arranging for inland transportation - The pickup and/or delivery of the shipment itself to the NVOCC is often provided by a trucking firm affiliated with the NVOCC, otherwise, arrangements are made with an independent firm to provide this service. In either case, an additional charge is required. Some NVOCC's will pay inland carrier charges and simply add the cost on to their own freight bill.
3. Loading containers - NVOCC's load containers at their facility (or purchase such services) and rates quoted include this service. For ease of delivery, containers are often loaded for sequential delivery overseas.
4. COD - As a common carrier, a NVOCC may collect C.O.D. charges in foreign countries and remit the proceeds to the seller.
In recent years, trucking companies have diversified into the NVOCC market as a logical extension of their existing business. The trucking firm provides the inland portion of the export move along with the pickup of freight for the NVOCC prior to the stuffing of the container. A-P-A Transport, Preston Trucking, and Ryder Truck Lines have all entered the NVOCC market. Exhibit 2 provides a summary of the basic difference in the roles played by the international forwarder and the NVOCC.
Partnerships in International Distribution
During the 1980's the use of external partnerships in distribution became recognized as an effective means of gaining a competitive advantage. The outsourcing of distribution activities to a third party often allows a firm to increase service to buyers and reduce costs. In the process, fixed investment, expenses, managerial burden and transit times can be reduced. Shippers can then concentrate more resources on other activities such as production and marketing.
For firms wishing to export, a good relationship with a reliable international transportation specialist is a necessity. A good place to start is with an international freight forwarder and/or NVOCC. In addition, these two intermediaries develop working relationships with each other allowing each organization to concentrate on a given segment of the business (consolidation or documentation). Finally, international forwarders often have close working relationships which other international intermediaries. For example, forwarders have close ties with custom house brokers which oversee goods through customs in the importing nation. Also, export packers work closely with forwarders acting as a consolidation point and container "stuffer" for smaller volume shipments (similar to the NVOCC). These partnerships provide the shipper with a "one-stop shopping" point and precludes the need for establishing a separate department for export distribution.
First time, small volume, or infrequent exporters are faced with the formidable task of coordinating both multiple transportation movements and a wide variety of documentation and financing arrangements. However, the task can be made manageable by developing working relationships or partnerships with third party intermediaries who specialize in providing necessary services. International freight forwarders and non-vessel-operating common carriers are only two of the many types of firms available to assist the shipper. Together, it is these partnerships which dispel the myth that only large firms can take advantage of rapidly developing world markets.
Anderson, David and Calabro, Robert, "Logistics Productivity Through Strategic Alliances", Proceedings: Council of Logistics Management, Vol. 1, 1987, pp. 62-75.
Estic, Toby B., "NVOCCs: A Low Cost Alternative for LCL Shippers", Traffic Management, June, 1988, pp. 83-88.
Fuerst, Judith, "Sorting Out the Middlemen", Handling and Shipping Management, March, 1985, pp. 46-50.
Lota, Gerd-Peter E., "International Freight Forwarders", Business Credit, June, 1988, pp. 29-31.
Pope, David, and Thomchick, Evelyn, "U.S. Foreign Freight Forwarders and NVOCCs", Transportation Journal, Vol. 24, No. 3, Spring, 1985, 26-36.
Trunick, Perry A., "Staying Afloat Without a Boat", Handling and Shipping Management, February, 1983, pp. 48-54.
Wasserman, Rodger D., "How to Build a Successful Partnership", Transportation and Distribution, August, 1988, pp. 26-29.
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|Title Annotation:||includes glossary|
|Author:||Sherwood, Charles S.; Bruns, Robert|
|Publication:||Review of Business|
|Date:||Jun 22, 1992|
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