Chapter 10 Global Transportation Planning 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.

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.

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.

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.

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.

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.

Overview of Global Transportation Logistics Channel Issues A 2nd 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.

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.

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.

Overview of Global Transportation 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.

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.

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.

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.

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.

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.

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.

© 2011 Cengage Learning. All Rights Reserved © 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.

© 2011 Cengage Learning. All Rights Reserved © 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.

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.

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.

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.

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.

© 2011 Cengage Learning. All Rights Reserved © 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.

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.

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.

© 2011 Cengage Learning. All Rights Reserved © 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.

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.

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.

Export Preparation Activities Freight Documentation Certificate of manufacture Indicates location of product 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.

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.

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.

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 $4.9B, 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.

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.

© 2011 Cengage Learning. All Rights Reserved © 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.

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.

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.

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.