The 2007 ocean contracting season is soon upon us. Many companies have already started negotiations. I wrote this article late last year for another site, however given its timely relevance, I decided to republish it here on Freight Dawg. - Eric
Linda Taylor wrote an excellent article on “Hidden
Savings” in international supply chains in October 2006 for Electronic
Supply and Manufacturing. The crux of
Lindas' article was that in order to get products from point A to point B by
the most efficient and cost effective means, you must control first costs and
know what is happening to your freight while it’s in transit. That’s not rocket science, but many people
don’t know exactly “why" that is important and "how" we got to where we are today.
Linda wrote for the electronics industry, but the conditions
she notes could apply to almost any international supply chain. It is especially true in industries like Retail, where costs of
goods may be low relative to the cost to transport them.
Controlling costs means knowing what the
costs are. Depending on your buying
terms, there may be key transport costs that are either inefficient or marked
up at a profit. Hidden costs only
become visible when you pay for them.
Buying Terms Conversion: Asian Import Example
The Chart below shows the trend in the last 30 years toward
increased control by US consignees in terms of control of buying terms.
Back in the 1980’s when many companies first started their import departments, goods were purchased Landed, Duty Paid (LDP, or the old “CIF” buying term). Companies in industries like furniture and footwear had traditionally sourced domestically. With increasing costs of western manufacturing, sourcing managers started looking overseas for lower labor costs and sourcing closer to raw materials. Not being experienced internationalists; many companies bought through buying agents and allowed the goods to be delivered to destination for a fixed price. This left the cost of transportation entirely in the hands of the manufacturer or the agent.
Since consignees couldn’t see what the cost of transportation was, origin manufacturers often added additional profit margins to the transportation.
It didn’t take long for retailers to understand that they could save serious money if they controlled their own transportation. Soon buying terms changed from title changing hands on CIF delivery to FOB Port of Origin in say, Hong Kong.
Now major retailers were negotiating directly with ocean carriers. Rates negotiated by companies like Mattel and Nike would set the benchmark for all other ocean service contracts in the toy and footwear markets. Whether large importers accepted a rate increase often determined whether the whole trans pacific market would take one. Wal*Mart was a factor, but not the giant force it is today on ocean shipping (more on that later…).
China and the beauty of central planning.
By the late 80’s and early 90’s port infrastructure had built up in South China to handle the massive growth in container volume. The Port of Hong Kong remained the primary load port, but new ports in Chiwan, Shekou and Yantian were rapidly siphoning off Hong Kong traffic for two simple reasons. First was distance to port. With the factories in Dongguan, Guangzhou and other southern Chinese cities, it was simply closer to go to new port areas.
The other factor was the China / Hong Kong customs border crossing. In those days you didn’t send a truck from Hong Kong all the way to into Guangdong province to pick up goods. A vehicle license on a Hong Kong registered vehicle cost too much. ($40,000 US Dollars roughly). Instead, a Chinese truck would haul the goods to the border, and the goods would be trans-loaded into a Hong Kong vehicle. This added labor cost and a damage element to the transportation many western customers were not even aware of! The Chinese drayage companies however thought this highly efficient because it kept their assets (the trucks with HK licenses) moving and generating revenue.
Time and cost drove traffic to the South China ports. For this reason, importers changed terms again from FOB Hong Kong to the cheaper and more efficient locations in South China’s Guangdong province.
Chinese manufacturers were happy to transport the goods to whatever port their customers wanted. What many of their customers still didn’t fully appreciate was that the factory sometimes either owned the trucker who hauled the container to port, or even better, was owned by a family member. Transport costs to port were therefore rarely done at cost, but with a mark up buried in the buying terms.
By now a trend was rapidly developing whereby importers in the US and Europe were working harder and harder to control more and more of the supply chain. Factories didn’t like having the side businesses eaten up, so in some cases, manufacturers would just raise their prices to cover the lost income on transportation!
Whether that happened of course was often decided by factors such as how big a customer you were, how easily the seller could resell his goods to another buyer and whether you were buying a specialized component or a finished good. To control these factors, and to be “where the action is”, many importers now had buying offices in Asia. Buying offices were first located in Hong Kong, but increasingly are now in South China itself.
Consolidators
With increased control, comes an increased need to know exactly where your goods are. In order to gain visibility and control, consignee retailers started to use consolidation companies and freight forwarders to insure that the goods that the retailer ordered were the goods that the manufacturer shipped (order compliance) as well as to make sure that goods were shipped on time and in appropriate quantities.
The consolidators and 3PL’s all of course charge for their services. Origin handling fees are collected from the factory, which the factory accounts for in their cost of goods and pass along to importers. The 3PL also charges the consignee for whatever services are rendered whether its order compliance, tagging, crating, garment handling, whatever.
Here’s a little secret: Origin Receiving Charges are almost always non-negotiable in Asia. The reason? The factories all talk to each other. If a 3PL gives a “deal” to one factory, in about 2 days or less, everybody in South China will demand the same deal.
The key for a western consignee is to have the ORC billed by the consolidator at destination. That’s the only way a 3PL is likely to negotiate a receiving charge. The consolidator just wants to protect his revenue stream without jeopardizing his entire tariff with one deal. This is yet another reason for consignee control and buying terms that support it.
Supply Chain Visibility
Demand for tracking and supply chain visibility software also increased in order to know where a particular order was. Buyers are the rock stars of any retail organization. Their job is to put the right merchandise on the store shelves that customers want. A buyer wants his goods NOW. If he is worried he may not get them on time, he orders more.
To keep the phone calls to the logistics department down, and to keep order quantities in check, importers demanded visibility software and EDI connections with their carriers, trading partners and vendors. And…since Logistics folks never seem to have any money for IT related things, they wanted it Free. Guess what? They pretty much got it. Whether its DHL, APL, United Airlines, Maersk Logistics, UPS or Joe the freight forwarder, all provide at least some tracking software now. That’s a good thing…because in 2001 the US got attacked.
September 11th
Since 9/11 and the advent of C-TPAT (US Customs and Trade Partnership against Terrorism), importers have needed to insure that what they bring into the US exactly matches the cargo bill of lading or manifest. Use of buying terms that require the manufacturer to turn over control of the goods either at their door or the door of the consignees 3PL or freight
forwarder, helps insure cargo security and control.
Wal*Mart imports almost 400,000 containers of goods a year from around the world. The vast majority comes from Asia. 400,000 container loads (FEU’s) is enough to run your own shipping line. With Maersk K class ships averaging 6000 TEU’s in capacity, Wal*Mart could operate 133 voyages with nothing but their own freight.
M/V Kate Maersk (6000 TEU Capacity)
Don’t think that’s lost on Wal*Mart either. I'm not sure if they still do it, but Wal*Mart ran their own mid stream container operation in conjunction with Great Western Steamship out of Hong Kong. The fact is though that Wal*Mart is so huge and their sourcing so varied that they have to use many of the major shipping lines for both capacity and container management.
It is for these reasons, that tight management of first costs, transportation and supply chain visibility are so important. Whether you compete with Wal*Mart or you ARE Wal*Mart, the time and distance and control of inventory are the difference between profit and loss. The key is ability to control these factors. Buying term conversion is the first key to control.
Eric
clipped from blogonlog.blogspot.com
The deal with Hard Rock Cafe includes supporting Hard Rocks "Top of the Rock" awards program, which recognizes the top revenue producing Hard Rock Cafes around the world with the honor of displaying its famous memorabilia collection. Each month, DHL will transport one of two guitars, one played by rock 'n' roll legend 
Jerry M. Hempstead is a 32 year air express industry veteran and consultant. He is President of Hempstead Consulting based in Orlando, FL. Jerry is a contributing author to freightdawg.com and may be contacted by email at 
The scanner sees too much! Images from the scanner are detailed enough to become a personal privacy invasion. They have the capability to show an individual without clothing. The TSA has listened to complaints on this issue and modified the imagery to create a more obscure outline image. While this limits image "detail" it also limits the imaging of contraband. Fortunately, use of the scanner is voluntary. Passengers have the option of being manually screened by a TSA officer.
Having been a proper dot.communist in the early 2000's, I recognized
scooters, Low fat, high energy snackage and foozball as trinkets to the
fact that most of these employees are extremely young, extremely smart,
and easily bored...but nevertheless probably work 70+ hours a week.
Hell, why not? Google is worth billions of dollars and I'm fairly sure
some stock options are involved.
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