The following post was written by David Stonich, Director of Logistics for ModusLink.
During my early days in the transportation industry, I remember the first time I was involved with international shipping and was asked to determine what Incoterm® applied. My first reaction was, “Well, it is freight prepaid, so I guess it is FOB destination.” Wrong answer! I was politely coached… Free On Board (FOB) destination is more of an accounting term, not an Incoterm!
This begs the questions--what are Incoterms anyway? How should they be used? Why should you care about understanding them?
In our global economy, it is essential for sellers and buyers of goods to understand ownership and responsibilities. To provide standards, the International Chamber of Commerce (ICC) developed an international set of trade terms called Incoterms that are the authoritative rules for determining how costs and risks are allocated to the parties. They define exactly the responsibilities and risks of both the buyer and seller for delivery of goods under domestic and international sales contracts. The word Incoterms is a condensed version of INternational COmmercial TERMS. Proposed, updated, and copyrighted by the ICC, they serve as global standards for uniform interpretation of common contract clauses in international trade. Incoterms historically have been updated only every 10 years, which means the changes typically come with questions like: How does this impact my business? Will this change my price?
Incoterms define responsibilities in the following key areas:
- Cost—who is responsible for shipping expenses?
- Obligations—who is responsible for export and import clearance, loading and unloading?
- Risk—who is responsible for damage or loss to the goods at any point during carriage?
But an important point to realize—and one that is often misunderstood— is that Incoterms are only rules for the interpretation of terms of delivery and not of other terms of the contract of sale. Incoterms deal only with obligations, who must procure insurance, who must clear them for export and import, but they don’t define payment terms, how to utilize a letter of credit in the transaction, or the price of the goods!
The Incoterms acronyms themselves are less important than are the implications to your business as a buyer or seller. If your company has strong transportation contracts and is selling goods, you may be inclined to sell under Carriage Paid To (CPT) or Delivered At Place (DAP), which gives greater control of shipping costs moving out of the country. But if you’re buying, and want more control over your freight cost, you may purchase Free Carrier (FCA), which gives greater control on goods being imported to your country.
Did my rookie mistake—stating “FOB Destination”—violate any laws? Luckily, no. But properly cited in a sales contract, the Incoterm is then accorded legal standing. In the event of loss, damage, or dispute over cost, the Incoterm may then eliminate any confusion over responsibilities between the parties.
I’ll give you an example. It may come as a surprise that FOB is a term for ocean transport only. Use of FOB in an air shipment can lead to an argument between buyer and seller in the event of loss because the term makes the seller responsible until goods have been “loaded on the vessel.” But most air cargo shipments are delivered to a freight forwarder’s warehouse. If something were to happen to the cargo at that warehouse, there is now ambiguity in the parties’ obligations. Had a more appropriate term been used, such as FCA, that ambiguity disappears and both parties clearly understand their respective responsibilities in the transaction.
The 11 terms in Incoterms 2010 provide definition for all types of seller-buyer transport arrangements, so it is certainly in the best interests of both parties to negotiate the most applicable terms in sales contracts. Learn them and use them appropriately!
Do you have any stories of a time when the use of a different Incoterm could have prevented a dispute? Share your stories in the comments section below.
In this video blog I provide insight on how to take cost out of the value chain by utilizing network design tools.
Do you have a success story of how changes in supply chain design reduced cost for your organization? Please share your stories in the comment section below.
Video running time: 01:50
In the July/August edition of Supply Chain Asia magazine (membership required to view past issues), I read a super article on the potential of China’s e-business market. Owen Cleaver writes that last year 108 million people in China purchased online. Within China the level of Internet usage is still relatively low compared to say U.S. standards, however, over the last number of years online spend has increased year on year by 45%.
Currently, most online sales are based on the Eastern coastal cities in China with Shanghai, Beijing and Guangdong accounting for 35% of demand. The reason for this concentration is based on the following:
- Developed, low-cost local logistics networks
- Level of credit card usage in cities.
The online market place is dominated by consumer to consumer (C2C) sites with Taobao being the market leader. In terms of sales, Taobao had a turnover of $29.3B last year. The market is based around discounting; however, the quality of merchandise is questionable in some cases as it is C2C.
So the key thing to growth in the Chinese market is building trust with the consumer. Innovative options include cash on delivery payments and easy refunds like those provided by Alipay that enable the consumer to get a refund within seven days of purchase. The variety of payment methods is very similar to different regions of Europe where cash on delivery and cheques are still used for payment.
In terms of the final mile delivery, many of the large online retailers in the cities have in-house delivery solutions where couriers deliver parcels direct to consumers even on the same day in some cases. For cities outside of the Eastern seaboard, the logistics services are more fragmented with varied delivery times. This will continue to be a challenge, although with the pace of development in China I think the major population areas outside of the Eastern seaboard will be accommodated quickly. So how can an online retailer succeed in China? Like in any business, understanding local market needs is critical.
The top areas to consider for China e-business expansion are as follows:
- Locate near the major cities.
- Utilize local delivery services.
- Make sure the website has a price focus as discounted products drive most of the current sales.
- Build trust with customers by having a variety of refund return methods.
- Be able to scale for growth!
I was recently engaged in a supply chain review for a large, multinational company. As part of the review, the client and my team went to visit a key supplier’s factory. It was very apparent to me that there were some big challenges that the supplier was facing. The supplier was very good at what it does; which is making parts but it was also obvious to me that it was very weak at managing its own supply chain.
Without getting into detail, they were sub-optimized when it came to packaging, operational flow, planning and logistics. The supplier got the job done, but there were efficiency gains to be had in many areas of the operation. My client, for various reasons, was leaving it up to its suppliers to manage their own supply chains. While there can be benefits to this strategy, the challenge is that some suppliers lack supply chain expertise. While the price my client pays is competitive, it should have been much better and with a better service level. Further, the supplier should be making more money by eliminating the waste in the value chain and passing some savings on to my client, while at the same time putting money back into its own pocket. I consider this a true win/win.
The good news is that my client knew that there were opportunities to improve; they just didn’t know what steps to take to get there. This is where ModusLink can show clients how they can quickly take steps to improve the overall value chain. This is not the first time I’ve seen this and suspect it won’t be the last especially when it comes to companies of this size.
Early in my career I learned the same lesson while working at Toyota. The challenge was in the quality of its steel from a local American-based steel manufacturer. Instead of firing the firm who had made a sizable investment, Toyota sent in a team of engineers and significantly enhanced the quality and operational efficiency at the steel company. Toyota of course immediately asked for a price reduction and then began to enjoy lower-cost, high-quality steel. I saw this as true supplier collaboration.
If you are interested in similar concepts or lessons learned I would invite you to visit the following website: http://www.vestedoutsourcing.com/. The concept of vested outsourcing comes from an industry leader named Kate Vitasek. If you are a procurement professional in charge of suppliers, I highly recommend you visit the website or even purchase the book that Kate authored.
I would love to hear your success stories or if you believe you can benefit from this approach we would love to hear about it.
I was at a quarterly review with a client this week and there was a great laugh when the weekly output chart was put up on screen. The client’s Supply Chain Director called it the flexibility chart and it looked as if someone’s toddler had been let loose on Excel to create a colourful and wildly erratic graph. It got me thinking, however, about the core of many supply chains, and of course the effort that goes on behind the scenes to smooth such enormously erratic swings in weekly or daily demand and ensure that the product flows smoothly to market and is always available on the retail shelf.
We all talk about demand spikes in relation to the hockey stick of so many quarter ends, but whether you are managing the totality of a global supply chain, or the final postponement, it’s the final stages where issues becomes more and more crystalised. No matter what marketing, engineering, product development or any other group has or has not done, or where it is that the timeline has slipped, the product still needs to be on the shelf and on time – and that requires flexibility in terms of space and labour, all at a competitive price.
The space is relatively straight forward, but it’s the labour element that takes the most creativity. Our facility in the Netherlands, for instance, goes from a weekly cycle of 10 shifts, to 21 shifts with a swing in headcount from peak to trough of more than a thousand full-time employees per week. We’ve solved it by working closely with partners and being creative in terms of working with agencies that support other industries that don’t have the same extreme spikes as we do (agriculture for example doesn’t have a Q4 spike). The other key element I would share is building up a core group that we can draw on again and again, and we can track their training and quality assurance records so we can ramp lines through buddy systems, balancing the novice and the veteran with the right skills to hit the quality output.
Whatever the tools and approaches in use, demand planning is an area where we constantly need to focus. The devil is in the detail, and when turn times can be same day to hit quarter end revenue targets, then it’s a detail you’d better pay attention to!
In this guest video post, John Gattorna, Author and Global Supply Chain Thought Leader, discusses the findings of his research on dynamic alignment in the supply chain.
Video running time: 01:47
Forecasting consumer demand will always pose a challenge for supply chain professionals. In this Value Unchained Live video I share insights on ways to mitigate the risks associated with over or under forecasting.
Video running time: 01:47
Or: How Blindly Following Your Competitors Could be Giving Them the Edge
While discussing company matters, a colleague of mine dismissed one of the options available to us by saying: “this would have us acting like mindless sheep.” Living - and also driving - in Ireland, I have somehow become aware of sheep, and narrowly avoided a handful of them on numerous occasions when visiting the family in the neighbouring county. And while I got the point my colleague was making, I thought (to myself!) that she was perhaps being a little unfair to the animal, at least some of them.
I have indeed come to observe that there is always one sheep leading the flock. The one that is is by far the most audacious. The one that moves forward with a purpose and you want to watch out for as it gives little warning before venturing your way. The other sheep following it seem to trust their ‘leader’ with their lives. They may sometime seem like they too know where they are going but would not appear exactly sure why they do so. They should however feel much safer, as I can easily anticipate their every move...
My apologies to the zoological community for this cliché, but it actually illustrates a phenomenon I have also observed in business. It is not so rare to see supply chain design decisions – for example – being ultimately made on the basis that the market leader or a competitor is “already doing it.” The reasoning is not totally unfounded. The leader might have invested a lot of time and effort coming to the conclusion of setting up its operations one way or another. He may also have somehow paved the way for others to what may have once been a Greenfield territory (with literally no road leading to it, never mind a broadband connection!).
The issue is that the leader’s decision was made to solve for the leader’s challenges, to meet its own business objectives in consideration of its own profile. By “blindly following the leader” and trusting that its choices should also be right for them, some companies may not fully realize that they might be ignoring all of the above. The competitor may have chosen - for example - the right solution for a high volume/low variability product portfolio well suited for automation, a low inventory model enabled by a stable demand, a distribution location at the centre of gravity of its market base to supply a particular channel, a centralized solution that may correspond to a lead-time acceptable to its customers and made affordable by its global freight agreement, or perhaps even just suited to its own financial/legal structure.
All these criteria are probably some of the factors influencing the leader’s decision. Some of these may be totally irrelevant or worse, contrary to your “challenger position” in the market. Following the leader may in some cases be damaging to your business and end up serving the competition more than yourself, where you may benefit from a differentiated strategy.
Often perceived less risky, easier to justify and sometimes even a cheaper option than status-quo (but not necessarily the cheapest option), the decision to ‘jump on the bandwagon’ is very tempting at first glance but may not be the best suited decision for your success. My personal advice: Follow the facts (your facts) rather than the competition and be the sheep that leads the flock!
Once you have decided that a supply chain postponement strategy could be applicable for your business, (if you are not there yet, I suggest that you read our recent post: Postponement Strategies – Why Should You Care?) there comes the inevitable question of how do you start to implement this? As we go through this process for many clients each year, I decided to share some of the key steps for consideration:
Understand the current supply chain model
- Start by mapping the current product and financial flows. Pay particular attention to the trigger points of where you are committing to component or finished goods inventory coverage and the cash-flow triggers as ownership and liability changes hands. These will be important in understanding your business case benefits.
- Ensure you have visibility to the full bill of materials for the product and specifications (you would be surprised at the number of companies that do not have this detail for their products – this can be rectified but it will increase the administrative workload to implement a postponement strategy).
- Understand the breakout of the final assembly and packaging costs. Expect some resistance to this question if working with an original design manufacturer (ODM) /electronic manufacturing services (EMS) company or the response of, “it is all included in the total product price – we do not charge you separately for that.” Of course, they do charge for this, but it is often buried in their total costs. If you are working with a business process outsource (BPO) provider however they should be able to give you an indication of benchmark costs.
- Understand your current contractual terms with your ODM/EMS suppliers.
Develop postponement strategy options and model scenarios
- Postponement strategies may include changes to the place (likely closer to the customer markets), or the timing of when to postpone (likely closer to the timing of the actual customer demand) and may also include packaging and product redesign options.
- In each of these cases it should be possible to model the total cost and cash-flow impact of the scenario vs. the current supply chain. At a minimum, this should consider materials, labor, logistics and inventory implications but also pay attention to soft issues around customer service. Watch out for the impact of payment terms to ODM/EMS suppliers, but ensure that you model the potential reductions in inventory and rework costs that are enabled by the supply chain postponement strategy.
- This modelling can be contracted externally or can be provided as part of the service from your BPO provider. The good news is that you can build and evaluate an effective postponement strategy business case without ever moving a product, but be sure that you understand enough of the mechanics of the simulation to challenge the results of the models based on your knowledge of your business.
Map the revised product and information flows – validate costs
- Once you have selected the postponement strategy that best meets you business needs it is important to remap the product and information flows in the new supply chain configuration. The scope of this will need to extend from sales and operations planning, to customer order fulfillment and visibility.
- The revised product and information flows should also include detailed consideration of the transition from the old model to the new one – calling out the impact of inventory cut-offs, disposition of existing inventory and any set-up or exit costs likely to be incurred.
- This will help you understand the revised scope required from your manufacturing and postponement operations and can be used in the development of a detailed scope of work and in setting business expectations.
- This detailed scope can be used to negotiate and validate the revised costs from each of the future stakeholders and get a commitment to the changes that underpin the value of the business case.
- It also helps to communicate to sales and marketing colleagues and customers of the likely changes in the postponed supply chain environment.
Assign resources to manage the transition
- Key factors to a successful transition include:
- Senior resources assigned from all stakeholders to manage the transition
- Common understanding of the scope and timeline and a forum to manage progress
- Executive involvement and support to clear roadblocks
- Adequate time and attention provided to testing of the physical, process and technology elements of the postponed supply chain solution
- Agreement on go-live criteria
- Clear communication to all stakeholders
Once the process is completed it is important to clarify changes during the implementation phase, to validate the results vs. expectations and to take some time to appropriately celebrate success.
I hope that you find this helpful and would love to hear your own tips for successfully managing transitions to postponed supply chain models.
In this installment of Value Unchained Live, guest blogger and industry thought leader John Gattorna reviews the Li & Fung approach to network orchestration and discusses his views on the pros and cons of executing this model.
John is Executive Chairman of a Sydney-based specialist advisory business, Gattorna Alignment Pty Ltd, and collaborates with a large community of supply chain enthusiasts, worldwide.
What do you think of the Li & Fung approach? Do you know of other companies utilizing a similar methodology? Please share your insight in the comments section below.
Video running time: 02:21