Chapter 7 – Global Logistics Planning and Management

7.1 Introduction

Will Covid 19 be the Catalyst of Change in Global Logistics?

The Covid-19 pandemic has caused havoc in many global supply chains. Microprocessor shortages stopped auto manufacturing, shipping container shortages delayed delivery, the rising cost of shipping rates is eroding the cost advantage of international trade. Is it time to move away from global suppliers and form new nearshore relationships?

Video Introduction to Global Freight

UPS. (2018). UPS global freight forwarding. [Video]. YouTube. https://www.youtube.com/watch?v=x_VF8EZpsXE.

7.3 Pre-Assessment

7.4 Global Transportation

​Global transportation is a complex and integral facet of an effective global supply chain. When we think of global transportation, it is essential to consider it as a whole system rather than only the individual mode. An effective global transportation strategy depends on how well the processes integrate. The transportation strategy formulation begins during the purchasing phase and ends when the goods are delivered.

Global supply chain involves dealing with suppliers in foreign lands, complying with the laws of the land, navigating the duties and customs regulations and finally arranging the transportation of the goods to the delivery point. The process can be confusing, and obtaining transparency in the supply chain is very challenging.

Step 1

Map the process.

The first step in global transportation management is mapping out the total cost and understanding the total landed cost of the goods. The cost mapping process needs to consider the cost of the goods, international and domestic duties, tariffs and customs-related expenses, transportation costs to the port of export, transportation costs of the international transportation, transportation costs from the port of import and transportation costs to the delivery point.

In addition to the costs of physically moving the freight, the transactional cost of paperwork, duties and tariffs must be included in the landed cost. Having a transactional cost category that captures items such as the terms of trade, terms of payment and cargo insurance is an important element in determining the total landed cost.

Terms of trade.

Terms of trade are vital because they define when the ownership of the goods pass from the seller to the buyer, which party is responsible for the transportation and where the exporters’ responsibilities end and the importers’ begin. A universally accepted resource to aid parties involved in global trade is the International Chamber of Commerce(ICC). ICC developed a defined list of trade terms referred to as Incoterms. As defined by The Supply Chain Management Terms, INCOTERMS are “international terms of sale developed by the International Chamber of Commerce to define sellers’ and buyers’ responsibilities.” Incoterms rules “ explain eleven of the most commonly-used three-letter trade terms which reflect contract language for business agreements ”(ICC,2021)

Each mode of transportation has a subset of incoterms specific to that mode. For example, FAS, FOB, CFR, CIF apply only to ocean freight. The intent of this resource is not to provide an exhaustive course in understanding how to use Incoterms but rather to introduce the student to the existence of Incoterms and provide an introduction to them. The International Chamber of Commerce offers several tools for learning more about how and when to use incoterms.

Think of Incoterms as a resource to describe:

• the obligations of each party in a global transaction
• when the risk transfers from the seller to the buyer
• which party pays for items such as transportation, packaging, loading costs

Note, Incoterms are not a substitute for a contract of sale. They are to be used within the context of a sales contract and provide a generally accepted vocabulary. Incoterms have been revised several times, and as such, the revision year needs to be referenced within the incoterm. The revision year needs to be clearly stated in the contract language. For example, if we used FOB in a contract, it would look like “ FOB (Vanterm, Vancouver) Incoterms 2020”.

Terms of Payment.

Although Incoterms define when the risk transfers from the seller to the buyer, they do not ensure that the seller will receive payment for the goods, nor do they ensure that the goods will be received in good quality by the buyer. In global trade, the risk of non-payment is real. If a seller extends credit to a foreign buyer and ships a product that will be paid by the buyer when received, this arrangement introduces the risk of non-payment for the supplier. Suppose the seller demands payment for the goods before shipping them. In that case, the buyer risks paying for a product in advance of inspecting the product and receiving a substandard product or, worse, not receiving a product at all. Using the services of an escrow agent aids in mitigating the risk of non-payment and the risk of product non-delivery. A letter of credit (LC) is one form of escrow facilitated by a bank. The bank will guarantee payment from the importer to the exporter provided that the terms of the letter of credit are satisfied. The use of an LC is beneficial because it clearly outlines the conditions of payment and it defines the product specifications that must be met. It protects both the exporter and the importer.

Cargo Insurance.

Depending on the value of the goods, mitigating the risk of loss or damage is a good business practice. Finding cargo insurance for international freight is challenging due to the transportation risk and the introduction of jettison, overboard cargo, water damage and a host of transportation perils. Due to the complex nature of international cargo insurance, the specific terminology and differing regulations in international regions engaging an organization’s expertise in international trade is imperative. Knowledge of the Carriage of Goods by Sea Act needs to be discussed and understood during the planning phase of global transportation.

Step 2

Select Transportation mode.

The Second Step in Global Transportation is determining the actual method of transportation. When considering global transportation, ocean and air freight are the two predominant modes. However, many times global transportation involves three modes of transportation. Namely, truck, ocean and rail. When more than one mode of transportation is required, it will be defined as a multi-modal or an intermodal move.

Both multi-modal and intermodal moves involve utilizing two or more modes of transportation. For example, the transportation moves could entail a truck and an ocean carrier or truck, ocean and rail. The combination of the various modes does not define a multi-modal or intermodal move; instead, the structure of the contract defines the move. In multi-modal moves, the consignee enters into one contract with the consignor. The consignor arranges all the transportation regardless of the number of modes of transportation required to complete the delivery. In an intermodal move, the consignee will enter into a contract with the service provider for each mode of transportation. The consignee could have up to five separate contracts for one shipment.

When determining mode selection, the criterion will revolve around capacity, transit time, accessibility and reliability. Accessibility is dependent on the region’s access to ports, airports, railways, pipelines and highways. Not every area has access to every mode.

Step 3

Validate Systems.

Processes and systems need to be validated and tested to ensure that a company’s global logistics strategy is successful. Integration with offshore suppliers’ systems and validating the ability to receive timely Advance Ship Notices (ASN) improve the communication between exporter and importer. The Importer’s Transportation Management System (TMS) should be able to model multi-modal inbound and reverse logistic routes. Mapping the Domestic and international workflow is imperative, and often, at this stage, many companies discover an expertise gap that may exist in one or more of the essential processes. Identifying gaps and establishing strategies or partnerships to address the shortfalls occur during this step in the global logistics validation mapping process. Custom brokerage integration and carrier selection for both international and domestic routes will be completed, and contracts prepared.

A critical link in global transportation is establishing a robust financial settlement process. Payment terms will be decided during step one of the process; however, the execution of the payment process must be mastered so that the flow of material is not interrupted by payment-related issues or missing documentation.

Step 4

Executing the strategy and moving goods.

Finally, after all the planning, mapping, validating, and testing of the global infrastructure, contracts will be prepared, and the strategy will be implemented. Even the best-planned plans will have operational challenges. Transportation delays, inclement weather, and supplier shortages test the expertise and problem-solving ability of the transportation management team.

Ocean Freight

When reviewing global logistics, the dominant mode of transportation is ocean shipping. According to the International Chamber of Shipping (ICS), the international shipping industry accounts for 90% of all world trade. Based on the statistics from Infomaritime, the country controlling the largest fleet of ships is Greece with 17.6% of the world’s ships.

7.5 Post Assessment (Check Your Understanding)

CNBC. (2021). What’s causing the container ship traffic jam clogging up global trade [YouTube]. https://www.youtube.com/watch?v=E7t5yj1rScI&t=56s.

7.7 Chapter References

International Chamber Of Commerce. (2021, June 22). INCOTERMS® 2020 – ICC – International Chamber of Commerce. ICC. https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/

Roberts. (2021, September 3). World’s merchant fleet in graphs. Infomaritime.eu. http://infomaritime.eu/index.php/2021/09/03/where-is-registered-and-who-owns-worlds-merchant-fleet/