Chapter 7 Transportation and Delivery

7 - 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Total Transportation Costs United States*Canada* Highway$ 450$ 12.5 Railroads364.5 Water222.4 Pipelines 9N/A Air264.3 Freight forwarders 63.6 Shipper related 5N/A Total$ 554$ 27.3 * In Billions

7 - 4 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Major Issues Facing the Logistics Industry Congestion Mergers and anti-trust concerns Cargo and liability concerns Safety regulations

7 - 5 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Transportation Industry Segments Air cargo Air passenger Motor freight Railroad Marine Intermodal Pipeline

7 - 6 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Third-Party Logistics Suppliers Integration of services desirable -transport and logistics Opportunity for logistics/transport companies to provide more value-added services under deregulation Outsourcing issue for manufacturers $50 billion industry -Growth market

7 - 7 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Third-Party Logistics Suppliers Facilitated by advances in information technology -Logistics deals with the flow of goods and information TPL providers differentiated on the basis of: -geographic scope -industry specialization Potential economies of TPL -economies of scale -economies of scope -specialized expertise

7 - 8 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Selection of the FOB Point Determines Four Things 1.Who pays the carrier 2.When legal title to goods being shipped passes to the buyer 3.Who is responsible for preparing and pursuing claims with the carrier 4.Who routes the freight Since deregulation of the transport sector, purchasers are increasingly taking control of transport arrangements as a means of controlling costs

7 - 9 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Terms of Sale: Possible FOB Points Title passes to buyer Terms of Sale: F.O.B. Origin, Freight Collect Freight charges paid by buyer SellerBuyer Buyer - Pays freight charges Buyer - Bears freight charges Buyer - Owns goods in transit Buyer - Files claims (if any) Seller - Pays freight charges Seller - Bears freight charges Buyer - Owns goods in transit Buyer - Files claims (if any) Terms of Sale: F.O.B. Origin, Freight Prepaid Title passes to buyer Freight charges paid by seller SellerBuyer Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Title passes to buyer Freight charges paid by seller SellerBuyerSeller - Pays freight charges Buyer - Bears freight charges Buyer - Owns goods in transit Buyer - Files claims (if any) …then collected from buyer by adding amount to invoice

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Terms of Sale: Possible FOB Points (continued) Title passes to buyer Terms of Sale: F.O.B. Destination, Freight Collect SellerBuyerBuyer - Pays freight charges Buyer - Bears freight charges Seller - Owns goods in transit Seller - Files claims (if any) Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Title passes to buyer Freight charges paid by buyer SellerBuyer Buyer - Pays freight charges Seller - Bears freight charges Seller - Owns goods in transit Seller - Files claims (if any) Seller - Pays freight charges Seller - Bears freight charges Seller - Owns goods in transit Seller - Files claims (if any) Terms of Sale: F.O.B. Destination, Freight Prepaid Title passes to buyer Freight charges paid by Seller SellerBuyer Freight charges paid by buyer …then charged to seller by deducting amount from invoice

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Effects of Transportation Deregulation Greater innovation and efficiency -by carriers and shippers Wider range of services available to shippers Carriers free to experiment with geographical extent and nature of services Restructuring of transport industry -true of all modes Greater pressure on all suppliers to carriers to be more efficient Decreases in actual or real transport costs

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms Developed by the International Chamber of Commerce Updated: Incoterms 2000 Internationally recognized standard definitions that describe the responsibilities of a buyer and seller in a transaction -Variations across regions and among carriers possible so make sure to specify conditions 13 standard Incoterms Each term must be followed by a geographic location, such as a port or city

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Departure EXW: Ex Works (named place) -Buyer takes title when goods picked up at the supplier’s factory and is totally responsible for shipment, customs clearance and duties. -Places greatest responsibility on the buyer

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Main Carriage Unpaid FCA: Free Carrier (named place) -Goods have cleared by the seller for any export customs procedures and the seller is responsible for loading the goods -The buyer takes possession at the named place in the seller’s country FAS: Free Alongside Ship (named port of shipment) -The seller clears the goods for export and delivers them to the port of export -The buyer takes possession at the dock at the port of export

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Main Carriage Unpaid FOB: Free on Board (named port of shipment) -The supplier clears the goods for export and is responsible for the costs and risks of delivering the goods past the rail at the named port of shipment -The buyer takes responsibility for the goods as they pass over the ship’s rail during the loading process. -Note: This term is used differently from the conventional North American term “F.O.B.”

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Main Carriage Paid CFR: Cost and Freight (named port of destination) -The supplier clears the goods for export and arranges and pays freight as far as the port of entry -Title and risk of loss transfer to the buyer from the time the goods go over the ship’s rail in loading - the buyer owns the goods on a carrier selected by the supplier.

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms Main Carriage Paid CIF: Cost, Insurance and Freight (named port of destination) -The supplier clears the goods for export, arranges and pays the freight and marine insurance for the goods -Title and risk transfer once the goods clear the ship’s rail while being loaded CPT: Carriage Paid To (named port of destination) -The supplier clears the goods for export, delivers the goods to the carrier and pays for carriage to the port of destination, unloading customs clearance and duties -Title and risk risk of loss transfers when goods are transferred to the carrier

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms Main Carriage Paid CIP: Carriage and Insurance Paid To (named port of destination) -The supplier clears the goods for export, delivers the goods to the carrier and is responsible for paying carriage and insurance to the named port of destination -The seller is also responsible for costs of unloading, customs clearance and duties -Title and risk risk of loss transfers when goods are transferred to the carrier

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Arrival DAF: Delivered at Frontier (named place) -The supplier clears the goods for export and is responsible for making them available to the buyer at the named place at the frontier, and not cleared for import. -Title transfers at named place and time at the frontier. DES: Delivered Ex Ship (named port of destination) -The supplier is responsible for clearing the goods for export and for making them available to the buyer on board the ship at the port of destination, not cleared for import. -Title transfers from time the goods are made available at the named port

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Arrival DEQ: Delivered Ex Quay (named port of destination) -The supplier is responsible for clearing the goods for export and making them available to the buyer on the warf at the named port of destination, not cleared for import -The buyer is responsible for import clearance, duties and other costs upon import and transport to the final destination -Title transfers from time the goods are made available at the warf

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Arrival DDU: Delivered Duty Unpaid (named place of destination) -The supplier clears the goods for export and is responsible for making them available to the buyer at the named destination, not cleared for import. -The buyer is responsible for import clearance, duties and associated administrative costs. -Title transfers at the named place of destination

McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Incoterms: Arrival DDP: Delivered Duty Paid (named place of destination) -The supplier clears the goods for export and is responsible for making them available to the buyer at the named destination, cleared for import, but not unloaded -Title transfers at the named place of destination.