THE CONTINUING INTERNATIONAL TURMOIL

As we wrote last month, negotiations for a new North American Free Trade Agreement (NAFTA) are not going well. President Trump has criticized the agreement repeatedly and succeeded in antagonizing both Mexico and Canada through the U.S. negotiating team. In spite of overwhelming support among U.S. businesses, we have delayed negotiations long enough that any action by Congress will be impossible before next year. By then, a new Congress and a new Mexican president could make an agreement even more problematic

If that were not enough to concern firms and consumers that would be affected, the president has started what could be a major trade battle, if not an all-out war. His philosophy is simple. If we penalize goods manufactured abroad, manufacturers and consumers in this country will be much better off. In principle, that sounds good; but most informed economists say it just does not work that way. Other countries will not sit idly by while we penalize products they are selling us. Let’s look at what has happened so far. It started with Canada and Europe when we imposed a tariff on steel and aluminum coming into the U.S. Canada struck back with a 10 percent levy on about $12 billion of U.S. products, including such things as chocolate, ketchup, soup, salad dressing, and beef. The European countries retaliated against motorcycles, whiskey, boats, and peanut butter. Mexico chose more than a dozen agricultural products, including pork, a major export to Mexico.

The most concerning contest of course, is with China. Last week, the U.S. levied a 25 percent tariff on $34 billion of Chinese exports to this country. Airplane parts and farm implements were the hardest hit. China immediately imposed tariffs on soybeans and automobiles. The soybean levies will be particularly hard on Midwest farmers who sell large amounts of soybeans to China. Currently, the U.S.  is threatening to penalize another $200 billion of Chinese products.

Although we buy much more from China than they buy from us, there are a number of ways they could retaliate. With China our number one supplier of toys, think about Christmas with the price of toys up 20-25%. It also would be very easy for the Chines government to penalize U.S. companies operating in China, organize boycotts, cut off student and tourist travel, or initiate other economic sanctions.

President Trump’s fantasy is that U.S. manufacturers will move back home, production will pick up here, employment will increase, and the economy will grow. Typically, what happens however, is that prices simply rise across the board, consumers are worse off, and no one wins.

For those companies who manufacture offshore, closing foreign operations would be easier said than done. Some firms have made huge investments in other countries and are not likely to readily abandon them. For the supply chain manager, these international conflicts become just one more issue with which he or she must contend. Changing product origins has an impact throughout the pipeline, and adds a major complexity to the supply chains of those companies affected.

Written By: Clifford F. Lynch

THE STATE OF LOGISTICS – 2018

On June 16, the Council of Supply Chain Management Professionals (CSCMP) released the “29th Annual State of Logistics Report”. This year’s report was entitled Steep Grade Ahead .The SOL report was launched in 1988, by the late Bob Delaney, one of the leading supply chain experts of that time; and after his death carried on by Rosalyn Wilson until 2015. Since that time, A.T. Kearney has performed the research and published the results. The complete report can be found at www.cscmp.org, and is free to members of the organization. Since non-members are charged $295, this week, I wanted to publish a brief summary of the report for those who might not see it otherwise

2017 business logistics costs totaled $1.5 trillion, or 7.7% of Gross Distribution Product. Expenditures were up 6.2% y/y, and the percentage of GDP was slightly higher than last year’s 7.6%. At the same time, GDP grew about 2.9%. Expenses for every category were up, ranging from 1.1% for water to 10.7% for rail intermodal.

2017 y/y?
Motor Carriers $641.4 B 7.8
Rail 80.5 8.2
Parcel 99.0 7.0
Airfreight 67.2 3.1
Water 41.0 1.1
Pipeline 36.4 5.8
Inventory Carrying Costs 428.0 4.6
Administration 101.2 4.9

ATK chose the title of this year’s report considering the fact that carriers continue to control the marketplace and are expected to do so throughout 2018. Demand is exceeding supply in every sector.

E – Commerce continued to grow by double digit percentages, and growth should continue at the same rate. Not surprisingly, the report indicated that Amazon is continuing to “raise the bar” as far as customer service expectations are concerned. It further suggested however, that on-line sales growth may be slowed somewhat by the lack of infrastructure capacity necessary to accommodate the tighter delivery requirements.

Although relationships between shippers and providers are becoming more common and more important, in the warehousing sector customers still are focusing on short term cost cutting rather than long term strategic partnerships. This was disappointing; and I believe as capacity becomes tighter, this could be detrimental to those firms concerned only about cost.

Looking ahead, ATK expects five trends to shape the logistics future,

  1. Strong macroeconomic growth, fueled by strong labor and tax cuts.
  2. Costs will rise as interest and fuel costs increase.
  3. Changing demand patterns and new competitors will “challenge old business models”.
  4. A fully digital and flexible supply chain, optimized for E – Commerce and tight delivery demands will be essential.
  5. Technology

For the past year, most reports on the subject of logistics have made some mention of blockchain, and this one was no exception. Kearney believes blockchain has application in three supply chain areas:

“simplifying payments and cross-border transactions; tracking goods as they move through the supply chain, and establishing the provenance and integrity of goods.” In spite of the hype about blockchain however, adoption will be slow. There are several reasons for this, but the major hindrance will be the lack of common standards. In this regard, it will not be unlike the standardization that was necessary to facilitate Electronic Data Interchange (EDI) several years ago.

For those who have access to the full report, a review of the document would be very informative..

Written By: Clifford F. Lynch

NAFTA NEGOTIATIONS ARE A STRUGGLE

Those of us who followed the presidential election campaign will recall that one of President Trump’s commitments, if elected, was to pull the United States out of the North American Free Trade Agreement (NAFTA). First proposed during the Reagan administration, NAFTA was signed into law by President Clinton in 1993. It is an agreement among Mexico, Canada, and the United States which removed trade barriers among the three countries. With a combined GDP of $20 trillion, NAFTA is the world’s largest free trade agreement; and today, trade among the countries exceeds $ 1 trillion. By all accounts, NAFTA has been very beneficial to all three countries, but President Trump called it the “worst deal ever”, citing the loss of manufacturing jobs in the U.S., resulting from the agreement.

Shortly after the election however, after calls from President Pena Nieto of Mexico and Canadian Prime Minister Justin Trudeau, Trump agreed to renegotiate rather than withdraw. Negotiations began last year; and so far there have been seven rounds of negotiations with no end in sight, even though an agreement was expected to be finalized early this year. Many feel that the president should have left well enough alone and that his assumptions about the agreement were either premature or incorrect. It is true that some U.S. firms have moved manufacturing to Mexico; and lately, as wage rates increase in Asia, and political and human rights issues continue to be problematic, more firms are considering returning closer to home. Mexico has emerged as the country of choice for many.

After the passage of NAFTA, the automobile manufacturers were early entries into the Mexican market. Mexico accounts for about 20% of North America’s auto production, up from 3% in the 1980’s, and is expected to reach 25% by 2020. Honda, Nissan, Audi, Ford, General Motors, and Chrysler all manufacture in Mexico, and the industry has set the pace for other industries through their labor education and quality initiatives. Obviously, the auto makers have profited from NAFTA because of the lower wage rates they have enjoyed, and would stand to lose if a tariff was slapped on each auto they sent to the U.S.

But did NAFTA cost us jobs? According to the Economic Policy Institute, about 800,000 jobs were lost to Mexico between 1997 and 2013; but it is not that simple. This is far less than the number of jobs that have been created by NAFTA. The U.S. Chamber of Commerce estimates that about 6 million jobs depend on trade with Mexico, and there have been studies that show that we have lost more jobs to automation than to Mexico. On that note, many feel Trump’s emphasis is misplaced. According to a recent report from Pricewaterhouse Coopers, 38% of U.S. jobs are at high risk of being replaced by automation over the next 15 years, far more concerning than Mexico.

Most informed experts believe that terminating NAFTA would be disastrous. In a recent presentation to a Canadian business audience, Tom Donahue CEO of the U.S. Chamber of Commerce said, “Withdrawing from NAFTA would be devastating for the workers, businesses, and economies of our countries”.

In any event, the negotiations have taken so long there is no way Congress can make any decision on recommendations before 2019. By then, we will have had mid-term elections, Mexico will be electing a new president, and negotiations could take a totally different direction or be abandoned altogether. In the meantime, the president continues to antagonize our other trading partners, especially Canada.

In my opinion, killing or weakening NAFTA would be a big mistake. It could cost us millions of jobs that depend on the trade with Mexico, and if Mexican costs rose because of it, companies would not just shut their doors and move back to the U.S. They probably would take a hard look at the next cheapest country. Somehow, antagonizing our next-door neighbors doesn’t seem like real good politics to me, especially when they bring so much to the table.

Written By: Clifford F. Lynch

THE CALF PATH

As we continue to read about the impact of Artificial Intelligence, Blockchain, Autonomous Vehicles, Robots, Drones. The Amazon Effect, and other technological advances on the supply chain, some supply chain managers are becoming increasingly nervous about the amount of change with which they are being confronted. Some of us are inherently nervous about any kind of change. Others are getting that way due to the increasing complexity of available options. Doing things the way they have always been done has been a safe technique for many, but usually results in the same, mediocre performance. In our industry, I am afraid those days over. We must confront change and embrace it. In this blog, I have included a poem entitled, The Calf Path, by Samuel Walter Foss that has helped me many times when I have been frustrated by change. Maybe it is time to step off the path.

 

One day, through the primeval wood,

A calf walked home, as good calves should;

But made a trail all bent askew,

A crooked trail as all calves do.

 

Since then two hundred years have fled,

And, I infer the calf is dead.

But still he left behind his trail,

And thereby hangs my moral tale.

 

The trail was taken up next day

By a lone dog that passed that way;

And then a wise bellwether sheep

Pursued the trail o’er vale and steep,

And drew the flock behind him too,

As good bellwethers always do.

And from that day, o’er hill and glade,

Through those old woods a path was made;

And many men wound in and out,

And dodged, and turned, and bent about

And uttered words of righteous wrath

Because ‘twas such a crooked path.

And still they followed – do not laugh –

The first migrations of that calf,

And through this winding wood-way stalked,

Because he wobbled when he walked.

 

The forest path became a lane,

That bent, and turned, and turned again;

The crooked lane became a road,

Where many a poor horse with his load

Toiled on beneath the burning sun,

And traveled some three miles in one.

And thus a century and a half

They trod the footsteps of that calf.

 

The years passed on in swiftness fleet,

The road became a village street;

And this, before men were aware,

A city’s crowded thoroughfare;

And soon the central street was this

Of a renowned metropolis;

And men two centuries and a half

Trod in the footsteps of that calf.

 

Each day a hundred thousand rout

Followed the zigzag calf about;

And o’er his crooked journey went

The traffic of a continent.

A hundred thousand men were led

By one calf near three centuries dead.

They followed still his crooked way,

And lost one hundred years a day;

For thus such reverence is lent

To well-established precedent.

 

A moral lesson this might preach,

Were I ordained and called to preach;

For men are prone to go it blind

Along the calf paths of the mind,

And work away from sun to sun

To do what other men have done.

To follow in the beaten track,

And out and in, and forth and back,

And still their devious course pursue,

To keep the path that others do.

 

But how the wise old wood-gods laugh,

Who saw the first primeval calf!

Ah! Many things this tale might teach –

But I am not ordained to preach.

Written By: Clifford F. Lynch

THE POTHOLE PROTECTORS

I am sure it won’t come as any great surprise to anyone that we will not be seeing infrastructure legislation coming out of Washington this year. With the mid-term elections coming up in November, members of Congress are far more interested in campaigning and working on legislation that will make them more popular with their constituents.  Infrastructure improvement, or more accurately, infrastructure funding is not one of those favored activities.

Such things are not uncommon in election years, but our problem seems to be that with some major election every two years, Congress seems to find it difficult to get much accomplished between them. This year could be even more problematic. If the November elections result in a major shuffle of Democrats and Republicans, we could see infrastructure pushed back to Square One.

The infrastructure plan presented by President Trump in February, was disappointing to many in that it proposed using Federal dollars as incentives to encourage the states and private interests to pay the rest of the bill. During the campaign, we had been promised a $1 trillion plan, and most believed that a much larger portion of it would come from the Federal government. It is clear now that is not going to happen. Nor does Congress have an appetite for increasing the fuel taxes that go into the Highway Trust Fund. This fund is the major source of money for improvements to roads and bridges; but according to the Congressional Budget Office, between 2021 and 2026, the fund will face a deficit of $204 billion annually.

The fuel tax has not been increased since 1993; and despite pleas from truckers, the United States Chamber of Commerce, and others, Congress has consistently refused to raise the tax. Even if they did, we will continue to see deficits due to better gas mileage and electric cars and trucks. We desperately need some new thinking and some new funding ideas; but this does not appear to be the year we will get them. In the meantime, according to the American Trucking Associations, the trucking industry experiences $50 billion annually in congestion expenses. And, this is in a country that can fly to other planets, produce autonomous vehicles, and sail self-propelled boats. If it were not for safety considerations, our newer aircraft would operate without the luxury of a pilot. At the same time, we seem to be gridlocked when dealing with things like potholes. In any event, it will be at least another year before we see any Federal program.

The saving grace for some states has been the fact that they have pushed ahead and increased their own fuel taxes as a means of funding necessary improvements. Now, we have a new possible source of income for the states that choose to use it. The United States Supreme Court has made it possible for states to legalize sports betting. (Sports gambling in Nevada, where it is already legal, totals $4.9 billion annually; and across the U.S. the illegal sports betting market is about $150 billion per year.) For the states, tax income can increase significantly if they choose to legalize sports gambling. Four states already have – betting on this decision. Experience in states earnings taxes from casinos, has shown that gambling can be a significant source of funds.

Despite this possibility, the Federal government needs to act. The maintenance of a highway system sufficient to meet the country’s needs is a Federal responsibility., and our government should step forward and meet this obligation.

Written By: Clifford F. Lynch

BE DILIGENT IN OUTSOURCING FREIGHT BILL AUDIT AND PAYMENT

For over fifty years, firms have outsourced the audit and payment of transportation freight bills. While not at the top of the list of outsourced functions in the supply chain industry, one third of the North American respondents in the 2018 Third Party Logistics Study indicated that they outsource the activity.

There are significant advantages to outsourcing freight bill audit and payment (FBAP). The auditing and analytical capability of a competent provider can be extremely helpful in managing transportation function. Because of the large amount of funds that flow through the process however, extreme care should be exercised. Several years ago, the industry suffered a blow when two large freight bill payment companies left its clients with over $25 million in unpaid freight bills. One of these situations was at least partially, a result of embezzlement.

Fortunately, most of the firms in the industry today are financially sound, well-managed businesses, and we don’t want to throw the baby out with the bath water. Even so, good risk management techniques, as well as common sense, dictate the importance of thorough financial due diligence in selecting a provider. Remember, if the provider doesn’t pay the carriers, you as a client are liable, even if you have already advanced the funds.  Keep in mind also, that the FBAP industry is not regulated, making it even more critical to investigate, analyze, and verify.

While nothing can be outsourced without some risk, I believe there are fifteen considerations that can minimize the financial risk of outsourcing FBAP.

  1. Insist on inspecting audited financial statements – even if the firm is privately held.
  2. Investigate the reputation of the auditing firm used by the provider.
  3. As a client or prospective client, make sure that the statements and other documents are examined by qualified financial personnel.
  4. Investigate the reputation of the senior management of the FBAP firm.
  5. Ensure that the firm’s financial controls are tested at least annually by an independent auditor.
  6. Be sure that the funds of your firm are not comingled with those of the provider.
  7. Understand the float and its impact.
  8. The provider should have a fidelity bond which would cover possible embezzlement of client funds by employees.
  9. Detailed background checks should be made on all new employees, and credit checks should be conducted on all that would have any access to funds and/or cash management.
  10. There should be a separation of duties in accounting and cash management functions to ensure that a single employee or group of employees cannot manipulate funds or bypass controls.
  11. Verify carriers.
  12. Finally, and most important, the client should manage the relationship, not leave it to the provider.

If the client firm is large or if the amount of freight charges involved is particularly significant, there are two other controls that may be considered.

  1. Explore the possibility of establishing minimum limits on financial assets.
  2. Consider the practice of awarding contracts only if the value of the contract is below a certain percentage of the provider’s total revenue.

If you still have concerns, you might want to consider the following.

  1. For maximum protection of your funds, retain the firm to provide only the audit and analytical functions and actually pay the bills yourself. This approach will not be met with enthusiasm by the provider, but can be a safe compromise.

The outsourcing of freight bill audit and payment is an important financial step for an outsourcing firm and should be treated as such. These arrangements often are complex

and can remove significant amounts of client funds from their control. Financial due diligence must be at the top of the list when qualifying potential providers. While no outsourcing arrangement is absolutely risk free, the client should try to ensure that its funds are as safe as they would be under its own management and control.

Written By: Clifford F. Lynch

LET’S HAVE A LITTLE EQUITY

There has been a considerable amount of discussion lately about what appears to be a pending trade war with China. In an effort to “protect American business”, President Trump has announced his intention to levy a 25% duty on over 1300 hundred products currently imported from China. China immediately called the bluff and promised a 25% tariff on approximately 100 items American businesses sell to China. Farmers are especially irate about the inclusion of soybeans in the list, as soybeans are the country’s second largest export to China. Midwestern states would be affected significantly if the scenario plays out. The president’s concern is the protection of American businesses from those countries he fells are undermining our industries.

Tariffs have always been controversial because of their retaliatory nature. Every time a country levies a tariff on goods from another country, the aggrieved nation responds in kind. Many economist believe the entire exercise is counterproductive and yields very little positive results. Few would argue that the protection of American industry is not a worthwhile objective; but while we are embroiled in the U.S. – China tariff argument, there is another subsidy that has received little attention until recently. Many manufacturers and consumers have been curious about how a shopper can order a product from Amazon that will ship from China with free delivery or a minimal shipping charge. The answer of course, is subsidy by the post office; but not the Chinese post office. It is our very own USPS that is subsidizing these cheap movements.

President Trump blames Amazon for paying so little postage on domestic shipping to a floundering USPS, but the problem is in our own Washington back yard. In 2011, the post office made an agreement with the postal agencies of China, Hong Kong, South Korea, and Singapore to allow small packages to be sent to the U.S. at very low rates. This option is called the ePacket, and the rates are so low that packages from these countries can move much more cheaply than domestic ones. Wade Shepard, in a recent article for Forbes, cited an example of how the postage on a one pound package from Beijing to New York is $3.66; but shipping it in the reverse direction would cost about $50.00.  (Forget about returning anything.) Moving the package domestically would average about $6.00. But why would the USPS ever make such a deal?

International postage rates are actually set by the United Postal Union (UPU), a U.N. agency established in 1874. One hundred ninety two countries meet every four years to set postage rates. Countries that are considered to be poorer or underdeveloped pay less than those who are not. China, believe it or not, is considered a poor country. If the ePacket rates were abolished, postage rates would revert back to the UPU levels which are even lower.

Finally, just last week, in an effort to provide some equity, a bill was introduced in Congress called the Ending Needless Delivery Subsidies (ENDS) Act. This bill would force the Secretary of State to negotiate the end to all international postage subsidies by 2021. This appears to be a good step toward providing at least some protection to American vendors. There still will be issues of cheaper foreign labor and other resources, but at least we would have a more level shipping playing field. Amazon gets blamed for a lot of disruption, sometimes well deserved, but this one is not on them.

Hopefully, this new bill will move through Congress quickly. Not only would it help American suppliers, but it would make a dent in the continuing, horrific USPS losses.

Written By: Clifford F. Lynch

SPOILER ALERT

For over a year, industry pundits have predicted that in 2018, we would experience a significant increase in rates for both truckload and LTL shipments. Many were predicting another “perfect storm”.  While I think the storm might have been somewhat overstated, it appears that basically, they were correct. ACT Research has said “Clearly, truckers are entering 2018 in the best negotiating position in many years”. The expected general rate increases have been announced at 4-6%, but it looks as if we will go well beyond these. According to Bloomberg, spot rates through March 23, were 28% higher than the same period last year. FTR Transportation Intelligence predicts that even the longer term, more stable contract rates will rise by 12% this year. This compares to about 4% in 2017. While there are several reasons for the increases, i.e. weather, higher demand, etc. the most often discussed are the lack of capacity and the competition among carriers for qualified, responsible drivers.

Earlier this year, the Washington Post, following a survey of 1600 shippers, concluded that trucking capacity (or lack thereof) would be the industry’s “primary hurdle” this year. Much of the blame for the capacity shortage has been laid at the feet of the Electronic Logging Device (ELD) mandate. Since they were first suggested several years ago, it has been predicted that they would result in decreased capacity. After several attempts to block their installation, they finally were mandated to be in place by December 18, 2017. Strict enforcement however, was to be delayed until April 1, 2018. Most large carriers installed theirs years ago, but the smaller carriers and particularly the owner-operators, have resisted right down to the wire (and beyond). With full enforcement in effect, a broader adherence to the driver hours of service rules is expected, which in turn will reduce capacity. The log “fudge factor” has been taken away. It is hard to believe that forcing drivers to comply with the rules will make that much difference, but capacity losses have been estimated to be between 4 and 7%. We will know more as we get more experience. It is clear now however, that more drivers will be needed to meet the current demand.

The second contributing factor is the competition for qualified drivers. Rarely, is a capacity problem caused by lack of equipment. More often than not, it results from the lack of drivers to operate it. The shortage of drivers is well known, and I won’t belabor it here. There is an underlying issue with which we deal every day. Now however, as carriers start to compete for those in the driver pool, salaries finally are increasing. Carriers willing to pay more are finding their capacity issues reduced. Those who are not are paying the price through loss of business and increased driver turnover. According to the American Trucking Associations (ATA) driver salaries rose 15-18% from 2013 – 2017. A private fleet driver now can earn as much as $86,000 annually, plus benefits. Salaries for entry level truckload drivers have risen 15% from 2013, to about $53,000. A number of carriers have added several cents per mile to driver compensation, and some are offering substantial “sign up bonuses”.

An interesting contradiction to the driver shortage is the fact that carriers are ordering new equipment at a rapid pace. During the first three months of this year, they ordered about 134,000 heavt duty trucks – almost double last year’s purchases for the same period. The new tax laws have freed up cash for many which is being used to upgrade fleets and add capacity.

Hopefully better pay and more equipment will help negate the driver shortage and the capacity shortfall in the entire industry, but the improvements will come at a price that will ultimately be paid by the shippers.

Written By: Clifford F. Lynch

THERE IS LIFE AFTER AMAZON

Several years ago, I wrote that the three major impacts on the supply chain during my career were technology, globalization, and Wal-Mart. Recently, a colleague asked me if I was ready to add a fourth, which of course would be Amazon. A good question, but at this point, I am not so sure. Let’s take a look at Wal-Mart. When Sam Walton opened the first Wal-Mart store in 1962, he probably had no inkling of the way he would be changing the retail landscape of the country. Building on the success of that first store, by the 1970’s, Wal-Mart had begun its march through small-town America, then not-so-small-town America, and the world. By 2015, the company had 2.3 million employees, serving 200 million customers weekly, in 11,000 stores in 27 countries. In its wake, it left thousands of casualties as neighborhood hardware, appliance, apparel, and other local businesses collapsed under the weight of the competition from Walmart’s selections and lower prices. Thousands of workers were displaced, but every new Wal-Mart brought new job opportunities; and to many, the lower prices justified the job losses.

But as Wal-Mart and the local competitors and customers settled into new relationships, the company was turning to its supply chain as a major factor in holding down prices, and has been a true pioneer in the supply chain industry. Automated warehouses, huge cross dock facilities, top notch technology, sustainability programs and modern truck fleets have not only improved Wal-Mart’s operations; but the techniques and processes they have introduced have made major impacts on the operations of others.

To state that Amazon has changed the face of on-line buying is unnecessary. Electronic commerce continues to grow.  Much of the increase has been going to Amazon, and their share of the pie is expected to expand. Just as Wal-Mart did in the 1970’s, Amazon is having a major impact on the competition and employment. In 2017, 7000 retail stores closed, and so far this year, 1770 have locked their doors. Toys ‘r Us recently announced the closing of 800 more. According to the recent issue of Forbes, Jeff Bezos, CEO of Amazon is now the richest man in the world. Still, Amazon’s annual sales of $180 billion are far behind Wal-Mart’s $500 billion. If Sam Walton were still alive, he would have the richest man distinction. As it is, he has three very rich kids.

It is important to keep things in perspective.What Amazon has done is speed up the entire selling and delivery process, and through their reselling of others products, are to some extent, helping their competition. Other competitors are scrambling to find ways to provide same and next day deliveries. Amazon has opened  over 150 distribution centers to shorten the “last mile”. Through its purchase of Kiva, a robotics company, most of these buildings are equipped with robots to assist in product movement. They also employ thousands of order pickers; and like Wal-Mart, they are not known for their high wages and sensitivity toward employees.

As far as real contribution to the body of supply chain knowledge, I do not see too much. They obviously employ some very smart minds but some of their innovations seem to be solutions looking for a problem. Drones certainly a part of our future, but I do not see delivering pizzas or Zappo’s shoes their highest and best use. Amazon’s patented distribution center in the sky is pretty exciting stuff and has Star Trek fans salivating as they await the assumption of command by Captain Kirk. But a practical contribution to the supply chain? I don’t think so.

It is a rapidly changing world for the supply chain manager. Consumer buying habits and expectations have changed dramatically. Amazon and others are not just accommodating these changes, but are part of them; and supply chain managers must reeducate themselves accordingly. At the same time, we must separate the hype from the reality. This is not the first seismic change we have seen in supply chain management, nor will it be the last.

Written By: Clifford F. Lynch

COMING TO TERMS

For those supply chain managers working for firms that engage in foreign trade, one of the major concerns is likely to be the delivery arrangements – in particular, the potential for confusion surrounding the responsibility for freight, insurance, customs charges, and damage in transit. To assist in understanding, the International Chamber of Commerce has published 11 International Commercial Terms, or Incoterms, which are internationally recognized and have clearly defined both the buyer’s and seller’s obligations in common transactions.

Last revised in 2010, the new terms are divided into two groups – seven terms which apply to any mode of transport and four which are to be used for ocean and inland waterway transport only. Some managers have been confused by the terms; but hopefully, the following list and explanations will aid in understanding.

INCOTERMS FOR ALL MODES (7 terms)

Ex-Works means the buyer assumes total responsibility for the shipment. Delivery is accomplished when the product is handed over to the buyer’s representative at the plant or DC. The buyer is responsible for freight costs, insurance, export and import clearance, and all customs charges.

FCA (Free Carrier) provides that the seller fulfills his responsibility when he delivers the product to the carrier.

CPT (Carriage Paid To) provides that the seller pays transportation costs and export clearance charges, but the buyer pays for insurance.

CIP (Carriage and Insurance Paid To) This term is used primarily for multimodal moves and is the same as CPT, except the seller must also purchase cargo insurance in the buyer’s name.

DDP (Delivered Duty Paid) This is the maximum obligation that can be assumed by a seller. The seller is responsible for all risks and charges up to the consignee’s door.

DAT (Delivered at Terminal) (new) Delivery is accomplished when goods are unloaded and placed at the disposal of the buyer at a named terminal.

DAP (Delivered at Place) (new) Delivery is accomplished when goods arrive and are ready for unloading at the destination.

(Note: These last two terms replace the 2000 Incoterms for Delivered at Frontier, Delivered Ex – Ship, Delivered Ex – Quay, and Delivered Duty Unpaid.)

INCOTERMS FOR OCEAN AND INLAND WATERWAY TRANSPORT (4 terms)

FOB (Free on Board) means that the seller is responsible for getting the goods to a port. The buyer bears the cost and responsibility from that point on.

FAS (Free Alongside Ship) requires the seller to deliver the product alongside a given vessel at a port.

CFR (Cost and Freight) deals with the cost of the merchandise as well as the freight costs. The seller is responsible for the product and the transportation costs to the destination port.

CIF (Cost, Insurance, and Freight) provides that the seller pays for insurance in addition to the product and transportation costs.

A clean understanding of these terms is important. They have been designed to cut down on the uncertainty arising from differing interpretations of terms of sale from one country to another.  The new terms can be found at several locations on the internet, and free, printable charts are readily available.

Written By: Clifford F. Lynch