I N D U S T R Y   R O U N D U P

 C O M P A N Y   C O R N E R

Door to Door – For Less
A case study on how to reduce freight costs
on shipments from the Far East

	With footnotes from ED, host of our unique EDucation Seminars

Part One

Responding to the need to reduce costs, ABC Electronics decides to stop using a U.S. supplier and switches to XYZ Manufacturing Company in Yantian, China. They purchase the product on a CIF (Cost, Insurance & Freight) basis because it was the easiest way to set things up and they had no experience importing from the Far East.

Under this arrangement, XYZ Manufacturing pays full freight costs and the export licenses to get the freight from Yantian, China to the terminal in Toronto. XYZ bears full risk of loss and/or damages until the goods have been delivered to the terminal in Toronto. XYZ also pays insurance to the terminal in Toronto, where ABC Electronics takes control of the freight.

ABC’s responsibilities include arranging customs clearance for the shipment, transportation from the terminal in Toronto to ABC’s warehouse, and insurance from the terminal to ABC’s premises.

Initially, everything goes well. Shipments arrive as expected and the relationship with XYZ is solid. But the pressure to reduce costs continues, with ABC’s controller challenging everyone to find ways to become more cost efficient.

Mary, who is responsible for ABC’s purchasing agreements, reads an article in Route (the newsletter published by Universal Logistics) that explains how savings can be found in the purchase agreement with XYZ by taking the following steps:

Step 1: Review the current agreement

ABC is buying their product from XYZ on a CIF (Toronto, Canada) basis. XYZ has quoted a price of $2.45 / unit, which includes the cost of freight and insurance up to arrival in Toronto.

Step 2: Obtain pricing on an FCA basis

Mary sends an email to XYZ Manufacturing in Yantian, China, stating that ABC Electronics would like to explore the possibility of arranging for its own freight, and wants to begin by getting XYZ to quote the cost of its product on an FCA basis.

Ed’s Footnote:
FCA (Yantian, China): Free Carrier (Yantian, China). This means XYZ Manufacturing transports the shipment to a terminal in Yantian, China, where ABC Electronics takes responsibility of the freight.

Under this new arrangement, XYZ pays full freight costs and export licenses to get the freight from their premises to a terminal in Yantian, China. XYZ bears full risk of loss and/or damages until the goods have been delivered to the terminal in Yantian.

ABC’s responsibilities are to arrange freight, insurance and customs clearance for the shipment, as well as transportation from the terminal in Yantian to ABC’s premises in Toronto.

Step 3: Evaluate FCA versus CIF pricing

XYZ Manufacturing replies by stating they could sell their product at a price of $2.10 / unit, based on FCA (Yantian, China) terms, versus $2.45 / unit on CIF (Toronto, Canada) terms.

Knowing both the FCA and the CIF pricing, Mary can easily determine that XYZ Manufacturing was charging $0.35 / unit to arrange for shipping. As the typical purchase order placed with XYZ Manufacturing was 5,000 units, the total freight charge included in the purchase order was $1,750. One quick phone call to Universal Logistics revealed that same shipment of 5,000 units could be shipped for $1,190. Savings: $560 or 32%.


Ed’s Footnote:
As an importer, buy on EXW, FCA or FOB terms to reduce your freight costs and improve control of transit time.

Remember: by assuming responsibility for your freight needs, you control the costs. If you don’t take control, someone else will and many companies use this opportunity to add hidden costs to the final contract of sale.

As a general rule, vendors will include at least 10% mark-up on the freight cost to cover the administrative burden and extra risk of arranging the freight. Some will add as much as 40 - 50%! Moreover, by controlling your freight, you can choose the best routing and service level for your business. For example, if saving time saves you money, ensure your freight is moving on the fastest route available. If cost is the prime consideration, then you are better off with a deferred service that offers good savings.

Different carriers offer various service options, ranging from “no frills” to “executive treatment.” Choose what works best for you.

Step 4: Don’t forget about Insurance

Once ABC Electronics takes control of their freight on an FCA basis, they are responsible for their product from the point of receipt in Yantian to the point of delivery at their premises in Toronto. This means they will require insurance that mirrors the same terms of transport.

Placing insurance should be an incredibly simple and inexpensive process, but many times it is forgotten until it is too late and consequently, there are cost and risk implications.



Ed’s Footnote:
Taking control also allows you to choose your own insurance coverage. There are three basic forms of coverage: Institute Clauses A, B and C. It is important to review the coverage in place for your shipments and make sure it is adequate for your needs.

Take a cautious approach with any insurance placed overseas. Minimum coverage is often purchased to reduce costs, but this choice can leave you unprotected against many perils. Also, any claims must be settled with foreign insurance companies and in foreign currencies, which can be a huge headache. When you control the terms and buy on FCA terms, you also control the insurance and ensure that:

• insurance is always in place
• the right kind of insurance is in place (coverage from warehouse to warehouse)
• you can control the premium cost
• your interests are covered at all times
• you know your coverage is in Canadian Dollars – no foreign exchange risk

Step 5: Place your next order on FCA terms

All ABC Electronics has to do now is place their next order on FCA (Yantian, China) terms and tell their Client Care representative at Universal about the new terms. The rest is easy. Universal can make all the arrangements from receipt in Yantian to delivery in Canada, including all freight arrangements, insurance coverage, and customs clearance.

Next Issue: Tracking what happens from the time you place your purchase order to the arrival of your shipment in Canada.

Read Part Two

Future Issues
Arrival at first port of call in Canada
Customs clearance procedures
Transport from port to door

The real story on cargo insurance

Here are the facts: 70% of freight shipments are completed without incident. The remaining 30% suffer unavoidable losses. On just one day (Jan 14, 2008) two ships reported distress. It’s no surprise when you consider how often cargo is moved or lifted – the law of averages almost guarantees a loss at some point.

You also need to know about the “General Average Claim,” where expenses involved in saving a ship and its cargo are borne by all who had a stake in the voyage. All shippers on board will also be liable for their share of the value of lost cargo. Research shows that a shipper will face a General Average Claim once every 8 years. And one major claim could put a shipper out of business.

A common misconception is that shippers are covered by their carrier and there is no need for cargo insurance. But carriers are, by law, exempt from certain losses, such as Acts of God. In sharp contrast, Cargo Insurance pays the total insured value, regardless of who’s at fault.

For more information on cargo insurance, contact David Lychek, Manager – Ocean & Air Services.

Fuel surcharge spike sparks industry –
wide operations changes

It’s no secret – fuel prices are high – and while there are some minor ups and downs – annual fuel costs seem to go up every year. Jet fuel prices, for example, increased by more than 60% in 2007.

Fuel surcharges have historically been used to counteract high oil prices and to recover costs. However, in light of the most recent spikes, it has become necessary to adjust operations.

One of the more dramatic examples is a commercial ship powered partly by a 160 sq. ft. computer-guided kite. The kite harnesses high ocean winds to power the ship and saves 20% on its daily fuel bill. Inventor Stephan Wrage calls this green initiative, a first in the freight business, another example that proves “it pays to protect the environment.”

Others are making less drastic changes to operations by slowing down. In fact, decreasing speed by 10% can lead to a 25% decrease in fuel use. Despite the additional costs associated with this move, including increased operating, charter and interest costs, it has become an attractive alternative. Klaus Keims, spokesman for a leading container shipping line says, “We’ve saved so much fuel that we added a ship to the route and still saved costs. Why didn’t we do this before?”

Another emerging trend is a shift from air transport to cargo ships, not surprising given that surcharges for air freight are ten times higher than ocean.

Air cargo carriers are responding by trying to find more efficient ways to fly and operate.

For more information on changes necessitated by fuel surcharge increases, contact David Lychek, Manager - Ocean & Air Services.

The latest on ocean freight

Anyone who ships freight internationally should be aware of the following trends.

• Total import and export container movements in 2007 increased in Vancouver (4%) and Montreal (5.9%). Results for Halifax were not as strong, with movements decreasing by 5.6%.
• Statements from global container shipping companies suggest a less optimistic view for 2008. Following a fall in trans-Pacific volumes, it was initially speculated that growth in alternate lanes would compensate; but that has not happened, likely because of higher fuel surcharges.
• New emerging markets such as Vietnam, Latin America and South Africa are subject to rapid development trends. This is in contrast to the Chinese market, which is expected to slow to a steady rate over the next two years after a recent period of rapid growth.
• Statistical information on international trade and transport released in the 2007 edition of the Review of Marine Transport indicates increases in world seaborne trade, including a 4.3% increase in 2006. World container throughput increased by 13.4% in the same year.
• The Asia-Pacific region is expected to lead freight growth from 2007 to 2011, followed closely by the Middle East. Most cargo is expected to be outbound from Asia, causing an imbalance, assuming that most trade goes in one direction.

Learn more by contacting David Lychek, Manager – Ocean & Air Services.

• At least 80% of Ontario’s trade with the U.S. moves by truck – 75% of exports and 83% of imports.
• Since 1991, trans-border truck movements have increased by 9% per annum.
• Transportation costs in Canada account for anywhere between 5 to 40% of the delivered price, depending on the shipment.
• Trucks overlap with rail freight in about 10% of the market and that number is expected to rise. Typically, trucks are used for short-haul, small shipments and time sensitive freight; while rail is used for shipping large bulky commodities over long distances that are, by comparison, less time sensitive than truck freight. Rail is approximately 15% cheaper than truck shipping.
• Trucks are involved in less than 3% of the collisions occurring on Ontario’s highways per year, and are found to not be at fault 75-80% of the time.
• In recent budgets, the Ontario government has invested about $1 billion per year in highways under the Provincial Highway Management Program.

For more information, contact William Sanchez, Supervisor – Truck Services.

Work disruption averted at Vancouver ports

A planned work stoppage at Vancouver Ports was averted after the British Columbia Maritime Employers Association (BCMEA) and Transport Canada agreed to continued talks and a temporary exemption from the Marine Transportation Security Clearance Program (MTSCP) regulations, which expired in the third week of February 2008.

Since the inception of the MTSCP, International Longshoreman and Warehouse Union (ILWU) employees have refused to participate. The union subsequently launched constitutional challenges to Phase 1 of the MTSCP.

For more information go to the MTSCP page on the Transport Canada site or contact David Lychek, Manager – Ocean & Air Services.

20 years later – the Canada-U.S Free Trade Agreement

Twenty years ago, the Canada-U.S. Free Trade Agreement (FTA) was signed in January 1988, creating what we now know as NAFTA.

Since its inception, Canada's export of goods and services to the US has increased 240% rising from $117 billion to $398 billion. Imports from the US are up 200% jumping from $108 billion to $322 billion.

Despite initial concerns, this agreement has lead to a number of positive outcomes. Each country now produces more of what it is good at, and less of the things it can trade for. For example, manufacturing in Canada has shed 180,000 jobs while employment in the resource sector has seen an increase of 50,000 jobs and manufacturing in the durables sector is up by 80,000.

According to Stephen Poloz, Chief Economist at Export Development Canada, if one accepts the basic premise that trade in both directions is good, then the FTA has surely made a positive difference. Consumers are the big winners, according to Mr. Poloz. The lower cost of imports boosts purchasing power, and all that extra spending creates jobs since it is predominantly spent domestically.

Remember, to receive NAFTA benefits, it is necessary to submit all blanket Certificates of Origin to Universal Logistics.

For more on this article, or to learn how you can receive NAFTA benefits, contact Darren Lair, Customs Consulting Services.

GST now 5%

Effective January 1, 2008 the Goods and Services tax (GST) on the importation of all taxable goods released from Customs was reduced to 5%.

Additional information is available from the Canada Revenue Agency.

Mandatory EDI - Update

Universal Logistics continues to be well prepared for the shift to mandatory EDI. As of the October 15, 2007 deadline, we were releasing 91.4% of customs shipments electronically and that number increased to 97.3% as of January 2008.

The industry average at the time of the October deadline was 82%, which led to an extension and a phased approach from the Canada Border Services Agency (CBSA) to mandating EDI.

The move to mandatory EDI customs clearance is being implemented (with the exception of specific cases) to prepare importers for Phase III of the CBSA's Advance Commercial Information (ACI) initiative (also referred to as E-Manifest), which has already been implemented in air (Phase I) and marine (Phase II) modes of transport.

Phase III will include all modes of transport into Canada, adding truck and rail modes of transport and requiring electronic submissions for cargo admissibility and customs clearance data.

For more information contact Brian Rowe, General Manager – Customs Consulting Services.

China shifts focus to high-growth markets

China is the largest exporter to the United States (surpassing Canada) and now ranks as the world's second largest exporter of goods (Germany is #1).

Trade to the U.S. continues to expand, but the growth is being slowed by weaker growth in the U.S., rising protectionism and the decline of the U.S. dollar against China's currency.

China, concerned about having too much dependence on the U.S. market, is placing more emphasis on higher growth markets in Europe and other regions outside the industrial world, such as the Middle East.

For more information, contact Paul Glionna, Vice President - Operations.

Certified experts working for you

	Brian Rowe, General Manager –- Customs Consulting Services, CCS certified in both Canada and the U.S., is just one of the 23 Certified Customs Specialists at Universal Logistics.

Did you know that Universal Logistics meets your customs needs with 23 Certified Customs Specialists (CCS)? The CCS designation is the standard in customs education for the international trade marketplace - recognized, and demanded, by those who use brokerage services throughout the country.

Professional development doesn't just stop upon successful completion of the course and attaining the accreditation. In order to retain their CCS status, designates are required to attain annual continued education using a points system. CCS graduates are educated in the many complexities of customs, including tariff classification, valuation, compliance, AMPS, exports and drawbacks.

The Certified Customs Specialist program exists in both Canada and the United States, offering graduates the opportunity to gain a certificate that is recognized in both countries.

	Dave Lychek, Manager –- Ocean & Air Services

AT YOUR SERVICE

Ever wonder who’s behind many of those helpful Email Alerts! – it’s David Lychek, Manager –- Ocean & Air Services.

Dave is your “go-to guy” for information on how to manage your freight costs and transit times.