In this volatile economic climate, Purvinder Tesse, logistics director at freight forwarder FCL UK, provides some tips on avoiding the hidden costs of international transport
Arranging the international movement of goods should, in today's global village, be a simpler process than it was a few years ago - yet many still see it as too complicated or difficult to arrange or manage themselves, despite the monetary sums involved and the potential cost-savings achievable through effective negotiation and careful supplier management.
Every year, UK importers and exporters of goods pay out millions of pounds on hidden transportation costs that, had they been properly checked beforehand, could have been reduced or even avoided altogether.
Loading and unloading, haulage, containerisation, storage, and ocean and air freight costs all need to be considered, yet virtually all of these can end up costing the buyer more than they need to, eating into their margins.
In the pharma sector, cargo is usually time-sensitive and thus transport costs are likely to be higher. However, regardless of the time-sensitivity of the freight, committing to a contract of a year or above in the current economic climate is unlikely to be a wise move, given that transport costs have fallen on average by around 55% since the start of the global economic downturn and may yet reduce further. As an example, December 2007 rates were at US$1,100 (Euro 870)for imports from base China ports for 20-foot containers, but 12 months later, they had fallen as low as $300 (Euro 237).
Historically, many pharma companies have assumed that dealing with large global carriers and freight forwarders will guarantee better rates, but this is not always the case. Some global carriers have been very slow to pass on the recent savings on shipping and air transport costs, assuming ongoing loyalty from customers on the basis of "better the devil you know" or the fact that the customer does not have time to shop around for lower rates.
However, more customer-focused forwarders are negotiating rates on almost a daily basis with the large shipping, air and road transport companies, to get the lowest possible prices for their customers, thus driving out cost from the supply chain.
The message is that when it comes to forwarders, bigger is not necessarily better, as even smaller forwarders are buying in sufficient quantities to offer significant economies of scale to their customers - even those needing to move only occasional consignments or a few containers regularly each week.
inaccurate coding
Importers of pharmaceutical products need also to be aware of HM Revenue & Customs (HMRC) commodity codes for imported goods. Careless and inaccurate use of these codes is potentially costing UK businesses millions each year. For example, a customer importing four containers a week is paying a massive £1,500 per container in duty, totalling £6,000 per week - close to £300,000 per year.
Ultimately it is the responsibility of the importer to ascertain the correct commodity code, and a relatively small amount of time spent researching the available codes and methods of obtaining exemptions on certain goods can pay major dividends in the form of cost-savings on import duties.
HMRC produces an array of booklets detailing commodity codes with their respective duty rates every few months, but many companies have neither the time nor the inclination to go through these and see which of several categories the product they are importing might fall under. They either keep using the code they have always used or call the HMRC "commodity code helpline" which will just give them one category number under which to register the goods.
But there is an ever-growing number of sub-headings, based on factors such as the type of material and its planned usage, which change every few months; this means that many goods can quite legitimately be registered under several categories, with significantly differing duty rates.
Currently, import duty is normally charged at a percentage of the value of the cargo, but this money can never be reclaimed, even if a mistake is later found out to have been made.
It is no good assuming that you are using the most cost-effective code - spending time checking, or getting your supplier to advise or assist in this matter, could create major savings in the long term. A supplier can also deal with HMRC on behalf of the client in the event of an audit by HMRC.
terms of sale
When negotiating an international sales contract, as much attention should be paid to the terms of sale as to the sales price. The almost universally accepted international trade terms (Incoterms) set out a number of categories ranging from "Ex Works", where all the seller has to do is package the goods while the buyer arranges transport, through to "Delivered Duty Paid", where the seller pays for all aspects of transport all the way to the buyer's premises and covers all duty, taxes and customs clearance as well.
However, there are a further 11 categories in between, each placing different responsibilities on the buyer and seller, and this is often where extra costs can creep in if the responsibility for carriage costs has not been clearly agreed in advance.
When exporting goods from the UK by ocean or air, the Cost & Freight (C&F) Incoterms category is usually the most favourable to the exporter, as the shipper has control of the cargo for the majority of the time.
However, if the agreed terms are Free Onboard Vessel (FOB), the UK shipper will incur higher charges from the nominated shipping line or freight forwarder, thus placing them at a disadvantage. This is because the consignee will specify to the exporter which carrier or forwarder they must use, who is then likely to charge a higher than average rate to the exporter while quoting a lower cost to their usual customer (the consignee), but still making a profit because the difference between the higher costs quoted to the shipper is greater than the cost reduction given to the consignee.
For importers of raw materials for the pharma industry, purchasing on an FOB basis can result in significant savings on transportation. Indeed, experience has shown that buying on a C&F basis typically results in the importer paying 10-15% more in transport costs than they would have done had FOB terms been agreed.
To save time, many exporting manufacturers around the world use one shipping line or forwarder that will provide a cost that is then simply marked up and passed on to the importer, as there is no incentive for them to negotiate a cheaper deal; meanwhile cheaper shipping costs may be counterbalanced by high haulage costs if the shipping company is itself using a third party haulier. It is easy to see, then, how transport costs often end up being 20-30% higher than if the buyer arranged the transport themselves or used a forwarder.
Even if the UK importer uses a freight forwarder for the UK leg of the journey, they do not necessarily enjoy the full benefits if the overseas manufacturer's shipper or forwarder uses a different UK agent, with sizeable "hand-over costs" often charged. Leaving the responsibility of shipping goods with the manufacturer is clearly, therefore, likely to be an expensive option and one that should generally be avoided.
bills of lading
For imports, the terms of the "bill of lading" (a document giving proof of particular goods having been loaded onto a ship) can also make a difference to costs. The person to whom the goods are being sent normally needs to be shown on the bill of lading to obtain the release of the goods. If the bill of lading is a "direct master bill of lading", ie, includes only the name of the shipper and the consignee, and not any third parties or forwarders, then the importer can deal directly with the shipping line when securing release of the goods. This can sometimes be an expensive route as freight forwarders typically importing thousands of containers a year will get better rates from the carriers than a company moving only a few containers a month.
However, if the bill of lading mentions other intermediaries, such as a third party freight forwarder or agent, the importer has to deal with those intermediaries before those goods are released - and the more unscrupulous of them will take the opportunity to add on charges, such as handover fees, or charges for documents, which can add to the bill on a single consignment.
To get around this, importers can specify a "direct" bill of lading when booking with the shipper if importing on a C&F basis. Another alternative is to import the goods on an "Ex Works" basis, although this presents another set of challenges.
With the advent of the digital age and more immediate forms of communication, international freight transport is not the minefield it once was, although the sheer volume of documentation, and the time investment needed to get the best deal make it impossible for some organisations to manage the process in-house.
However, placing the entire responsibility with a reputable freight forwarder both takes away worry and allows the buyer to access the most cost-effective transport suppliers. Not only is the forwarder used to dealing with companies in far-flung parts, hands-on account management by staff who can converse in local languages means the process is constantly monitored and potential hold-ups are quickly identified and dealt with.
Rather than worrying whether their freight will arrive, this process allows the buyer to focus on other aspects of their business while keeping their transport costs as low as possible.