Chapter 10 Global Transportation Planning

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.

Why enter International Markets?
Law of Comparative Advantage Market Potential Geographic Diversification Excess production capacity + low-cost producer status Products late in life-cycle that could start up elsewhere New products and ideas Foreign competition in domestic market Need foreign sourcing of raw materials or components September 14, 2007 Logistics 110

Trade Between Countries
Importing The purchase of goods and services from foreign sources Exporting The sale of goods and services to foreign markets September 14, 2007 Logistics 110 4

Balance of Trade The difference in value between a country’s exports and imports Deficit – One country’s Imports are greater than its Exports Surplus – One country’s Exports are greater than their Imports September 14, 2007 Logistics 110

Government’s Role in International Transport
International carriage is an export to the nation operating the carrier-affects balance of payments International fleets and airlines may be subsidized Large nations must protect their flag carriers’ interests

Government Influences on Foreign Trade
Government controls on the flow of international trade Customs or duties Import quotas Health inspections Safety standards Currency outflow Political or military reasons (OFAC – Office of Foreign Assets Control) Port choice Non-trade reasons

International Market Entry Strategies
Exporting Licensing Joint Ventures Ownership Importing Counter-trade and duty drawbacks September 14, 2007 Logistics 110

Exporting Relatively Easy
Can use freight Fowarder, distributor, trading company, etc. to execute the documentation, shipments, etc. Greater flexibility and less risk No foreign investment Less impact of political instabilities Disadvantages Difficulty in competing with local firms Tariffs, import duties, quotas Currency risk Loss of control over marketing, distribution in the foreign country September 14, 2007 Logistics 110

Licensing Agreements that give permission and knowledge to foreign firms to use product, process, and technical knowledge to produce products for foreign markets Does not require capital spending Used where high tariffs or low quotas prevent direct exporting Caution: the licensee may become a competitor of the future September 14, 2007 Logistics 110

Joint Ventures Agreements between a domestic and foreign firm where the domestic firm takes an ownership interest in the foreign business Allows more control Requires greater knowledge of foreign markets where investment is made May be only way to enter some markets September 14, 2007 Logistics 110

Ownership Full ownership of foreign subsidiary
Allows greatest degree of control Highest risk needing the greatest knowledge of the foreign markets served Risks Long-term commitment Foreign government nationalization of foreign- owned businesses Exchange rates must be considered September 14, 2007 Logistics 110

Importing Importing involves the purchase of foreign goods
Brokers are often used for customs clearance Licensed by the US Customs Service Help define transport routes Estimate costs Check status of shipments September 14, 2007 Logistics 110

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.

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.

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.

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.

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.

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.

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.

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.

Incoterms (A visual example)

© 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.

Financing International Trade - Letter of Credit process
Pro forma sent from seller to buyer Acceptance by buyer Buyer applies for letter of credit Letter of credit is issued by buyer’s bank and transmitted to corresponding bank Corresponding bank notifies seller that LOC is available Seller delivers goods to the carrier Seller presents BOL and draft to corresponding bank 2 Acceptance 1 Pro forma invoice 10 Goods Carrier Goods Buyer Receipt 6 3 Seller 9 Payment is transmitted to seller by buyer’s bank through corresponding bank Buyer reimburses its bank for payment Carrier delivers goods to buyer and obtains delivery receipt Letter of Credit Application Signed BOL 7 $$ Bill of Lading draft Letter of Credit notice $$ 5 Letter of Credit Corresponding Bank 8 Buyer’s Bank 4 $$ 8

Figure 12-2: Irrevocable Letter of Credit

Other Financing Options in International Trade
Cash in Advance Date Drafts/Documents against acceptance Sight Drafts/Documents against payment Credit Insurance Open Account Can finance based on the credit worthiness of the seller or the buyer These instruments can be used in lieu and in conjunction with Letters of Credit (Commercial Vs. Standby) 36

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.

Counter-Trade – Growing phenomenon in Global Trade
Any transaction in which part of the payment for the trade is made with goods instead of money Barter – Involves the direct exchange of goods w/no money and no third party involved Buy-back – Seller sells a plant, equip., or technology to another country and agrees to accept the the products produced as partial payment w/ the equipment supplied Compensation – Seller receives some % of payment in cash and the rest in products Counter-purchase – Seller receives full payment in cash but agrees to spend a substantial amount of money in that country within a stated time period

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.

Examples of Documentation
Issued by Purpose Air Waybill Airline or consolidator Contract between shipper and carrier Certificate of Origin Seller of Goods Certify origin of products; data for research Commercial Invoice Required for clearing through customs Dock Receipt Exporter or Freight Forwarder Used to verify details of shipment contents and condition upon delivery to the carrier Ocean Bill of Lading Steamship Line Contract between the shipper and the carrier Packing List Exporter Detailed list of contents; used by Customs in destination Shipper’s Export Declaration Required for any shipment exceeding $2500 or requiring validated export license Validated Export License US Dept of Commerce Constitutes permission to export a specific product September 14, 2007 Logistics 110

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.

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.

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.

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.

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.

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.

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.

Example of a Land Bridge

Forces toward Globalization (343)
Global market forces. Technological forces. Global cost forces. Political and economic forces.

Global Market Forces Pressures created by foreign competitors, as well as the opportunities created by foreign customers. Presence of foreign competitors in home markets can affect their business significantly. Much of the demand growth available to companies is in foreign and emerging markets. Increasing demand for products throughout the world through the global proliferation of information.

Global Market Forces Particular markets often serve to drive technological advances in some areas. Companies forced to develop and enhance leading-edge technologies and products. Such products can be used to increase or maintain market position in other areas or regions where the markets are not as competitive

Technological Forces Related to the products
Various subcomponents and technologies available in different regions and locations Successful firms need to use these resources quickly and effectively. Locate research, design, and production facilities close to these regions. Frequently collaborate, resulting in the location of joint facilities close to one of the partners. Global location of research-and-development facilities driven by two main reasons: As product cycles shrink, locate research facilities close to manufacturing facilities. Specific technical expertise may be available in certain areas or regions

Global Cost Forces Often dictate global location decisions
Costs of cheaper unskilled labor more than offset by the increase in other costs associated with operating facilities in remote locations. In some cases cheaper labor is sufficient justification for overseas manufacturing. Other global cost forces have become more significant Cheaper skilled labor is drawing an increasing number of companies overseas.

Political and Economic Forces
Exchange rate fluctuation Regional trade agreements Tariff system Trade protection mechanisms More subtle regulations Local content requirements Voluntary export restrictions Government procurement policies

Risk Management Outsourcing and offshoring imply that the supply chain is geographically more diverse and hence more exposed to various risks. Recent trends toward cost reduction, lean manufacturing and just-in-time imply that in a progressive supply chain, low inventory levels are maintained. In the event of an unforeseen disaster, adherence to this type of strategy could result in a shutdown of production lines because of lack of raw material or parts inventory.

Sources of Risks FIGURE 10-1: Risk sources and their characteristics

International Supply Chains
International distribution systems Manufacturing still occurs domestically, but distribution and typically some marketing take place overseas. International suppliers Raw materials and components are furnished by foreign suppliers Final assembly is performed domestically. In some cases, the final product is then shipped to foreign markets. Offshore manufacturing Product is typically sourced and manufactured in a single foreign location Shipped back to domestic warehouses for sale and distribution Fully integrated global supply chain Products are supplied, manufactured, and distributed from various facilities located throughout the world.

International Logistics – Questions to Ask
Environment – Requirements and characteristics of the international target market Planning – Who what when where how Structure – How do we structure our logistics? Plan Implementation Control

Free Trade Zones FTZ: isolated, enclosed area in or adjacent to a port of entry, used to used to import, process, and reship products to foreign markets. Main purpose for using FTZ’s are to avoid, postpone, or reduce the tariff on imported goods FTZ’s differ depending on their major functions. transshipments, storage, exhibition and display, manufacturing

Movement to Port or Airport
To adjacent countries, move is similar to domestic, with more paperwork To ports Use containerization Land bridge operations To airports Chartered aircraft Scheduled air carriers Integrated air carriers International Air Transport Association (IATA)

Global Transportation Special Considerations
Metric/ English All sizes are different Packages Roadways Equipment Container is universal, 20’ and 40’ Rail Gauges can vary by country Log 125

Packaging/ Labeling Packaging to meet international regulations IATA and IMDG can drive packaging Labeling may need to be dual-language International markings Log 125

Blocking and Bracing Longer transportation routes require more blocking and bracing Wood must be heat-treated Equipment at destination must be considered Log 125

Chapter 10 Global Transportation Planning

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