5 Factors to Consider in Making Smart Logistic Decisions for Your Business

In international trade, unexpected disruptions to the supply chain can happen with very little notice or no notice at all.

One of the most important decisions that businesses have to make in International shipping relates to the selection of the mode of transport; whether to use ocean freight or air freight.

So there are two important points to consider when making a call on deciding on logistic modes. This decision could arise due to;

  • Sudden transport mode changes in existing contracts/orders
    Example: a buyer may request the seller (exporter) to make a sudden change in a pending order from AIR to SEA freight, and then later some of the month-end orders to be changed from SEA to AIR freight.
  • New contracts/orders from existing buyers under new terms
    Example: Due to a request for a change in payment terms from “DP sight” to “DA120” days from the Airway bill or Bill of Lading date.

What are some of the key factors to consider when making smart logistic decisions if your business is faced with similar situations/issues?

01. Contract

An exporter should strictly follow the contract and then the buyer’s requests. Stick to the basics – apart from the right quality and quantity, pay full attention to timely delivery, and payment terms too. To make a clean transaction, it is IMPORTANT that both buyer and seller meet contractual obligations. And it’s the exporter’s responsibility to make sure that the contract is amended according to the buyer’s required changes. Also, one thing to keep in mind is that because of the current global economic situation, there’s a high risk of defaulting on payments. Therefore, it’s always a smart thing to look for additional protection. As a seller, you should explore options of having these risks covered by customized export credit insurance policies – which are available for small, medium, and large companies. This helps exporters stay safe against non-receipt delayed receipt of payments, insolvency, non-acceptance and so on.

02. Cost Model and Price Forecast

Both the buyer and seller should agree on any price/cost changes and should be comfortable with price forecasts, before going ahead with implementing the changes in the business transactions. One common understanding is that shipping by SEA is always cheaper than AIR. For example, airlines charge freight based on the gross weight or volume weight of a shipment. Whereas sea carriers charge freight per container, and if the shipment is less than a full container load, the freight charges will be per cubic meter. And on top of the freight, destination fees and charges may be applicable. So even if your sea freight shipping costs are cheaper, it would be good for the seller to consider end-to-end other costs like destination surcharges, warehousing/storage fees, handling charges, detention and demurrage and so on, which will add to the total cost other than the shipping freight cost.

03. Contract Lead Times & Management of Temperature Controlled Cargo

There’s no question that air freight is faster. Air freight takes about a day or two. Whereas by sea it’ll take about a month or so to arrive. Since sea shipments take time, you should give special attention to understand, the conditions in that the cargo is transported. For example, if it needs special temperature controlled containers, picking the right reefer container is critical, especially for products that need cold chain management. These products need special environments to store, manage, and transport from point A to point B. We call this handling the cold chain management end-to-end.

04. INCO term Change & Transport mode.

Contracts should always mention the correct INCO term. The use of incorrect INCO terms can get your business into real trouble. For example, most common INCO terms like FAS, FOB, CFR, and CIF are exclusively recommended for water-based transport, while FCA, CPT and CIP are used for multimodal transport. But we see so many businesses using FOB instead of using FCA for multimodal transport. So we especially recommend using FCA instead of FOB for containerized cargo, and consider other multimodal INCO terms as appropriate, because it gives you better control. Also, take a look at the ICC new Incoterms® 2020 rule book to better understand which INCO term to use. You can still use Incoterms® 2010 if you prefer, but keep in mind to specifically mention the year of publication.

05. Insurance

Please take a good look at the existing insurance policy to see whether all aspects of AIR / SEA modes requirements have been captured. Analyse the entire route, and identify the risk transfer points from seller to buyer as per the applicable INCO term. If in case there’s a possibility of an open risk, make sure you cover that with additional policies.
Also, keep in mind that according to the latest Incoterms® 2020, the “CIP” term requires an insurance cover complying with ‘Institute Cargo Clause A’, whereas the “CIF” term remains with no change with the same earlier ‘Institute Cargo Clause C’ insurance cover. The buyer and seller should really understand the risk levels according to the cargo, and whether it requires special transport conditions and environments like controlled temperatures. And if you require special conditions for your cargo, you should make it a point to have a separate discussion with carriers before loading/transporting in order to include the relevant clauses in your insurance policy.
These are only a handful of tips to keep in mind when it comes to changing logistic modes. Once everyone understands and agrees on their responsibilities – it’s all smooth sailing for your trade.

This article is a part of the Business Tips for Trading Across Borders series — A collaborative effort of 
The Ceylon Chamber of Commerce and United States Agency for International Development (UASID) Partnership for
Accelerating Results in Trade, National Expenditure and Revenue (PARTNER) Activity
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