Transportation Seventh Edition Coyle Novack Gibson Bardi

Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 10 Global Transportation 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. 2

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. 3

Overview of Global Transportation Global 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. 4

Overview of Global Transportation Global 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. 5

Overview of Global Transportation Logistics Channel Issues • Transaction 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. 6

Overview of Global Transportation Logistics Channel Issues – A 2 nd 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 © 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. 7

Overview of Global Transportation Logistics 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. 8

Overview of Global Transportation Logistics 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 decisions © 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. 9

Overview of Global 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 © 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. 10

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 © 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. 11

Export Preparation Activities Terms 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 © 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. 12

Export Preparation Activities Terms of Trade • Potentially, each country could have its own set of trade terms – This 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 © 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. 13

Export Preparation Activities Terms 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 © 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. 14

Export Preparation Activities Terms of Trade – 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. 15

Export Preparation Activities Terms of Trade • 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 © 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. 16

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,

Export Preparation Activities Cargo Insurance • International shipments exposed to larger financial risks and transport perils – Financial 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. 19

Export Preparation Activities Cargo Insurance • Managing risks – Decision between retaining or transferring risks – Retaining 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 owner – Risk 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. 20

Export Preparation Activities Terms 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. 21

Export Preparation Activities Terms 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. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22

Export Preparation Activities Freight Documentation • Freight documents control movement of cargo – Mistakes or missing documents inhibit flow of goods • Documentation requirements set by customs regulations of exporting and importing countries – Freight forwarders are documentation experts • Four types of documents – Invoices and transportation documents – Export and import documents © 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. 24

Export Preparation Activities Freight Documentation • 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. 25

Export Preparation Activities Freight Documentation • 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 © 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. 27

Export Preparation Activities Freight Documentation • 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 © 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. 28

Export Preparation Activities Freight Documentation – Certificate of manufacture • Indicates location of 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 © 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. 29

Export Preparation Activities Transportation Documents • Carrier manifest – Lists critical information needed to perform the transport service • Bill of lading – primary transport document – Contract of carriage between cargo owner and transport company – Serves as receipt for the goods – For 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. 30

Export Preparation Activities Transportation 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 © 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. 31

Export Preparation Activities Transportation Documents • Transport documents are largely paper-based – Major challenge: move toward electronic document format – International 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. 9 B, improve accuracy, and speed transmission of information – Other U. S. electronic document initiatives • Automated Commercial Environment • Auto. Brokers Interface System, Auto. Export System © 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. 32

Transportation Planning Mode Selection • Decision must achieve best fit and balance between: – Modal service capabilities • Accessibility, capacity, transit time, reliability, safety – Product characteristics – size, durability, value – Supply chain requirements for speed, service, cost • Decision must also align with corporate strategy, control risk and provide required level of customer service © 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. 33

Transportation Planning Carrier Selection • Decision based on best fit and balance between: – Geographic coverage – Average transit time and reliability – Reliability of on-time pickup and delivery – Technical capabilities, ability to share information – Equipment availability and capacity – Product protection/carrier’s freight damage experience – Carrier’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. 35

Transportation Planning Carrier Selection • Carrier selection strategy – Leverage transportation dollars by using a limited number of carriers – Build relationships with service providers – Monitor carrier performance, rates, and financial stability – Have contingency plan with back-up carriers • Differs from mode selection decision – Many more options to choose from – Decision 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. 36

Transportation Planning Route Planning • Carriers primarily responsible for routing • However, shippers should have input to ensure proper consideration given to: – Customer satisfaction and supply chain performance – Efficiency and product safety during transit • Routing decisions should be – Coordinated with mode and carrier selection – Aligned 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. 37