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Purchasing Management Skill Sets in Foreign Markets

Purchasing Management and Global Sourcing are becoming increasingly important verticals and disciplines in every company of every size that operates in global business.

This chapter provides an overview of the skill sets that any supply chain executive would benefit from in any aspect of import or export activity. However, the focus here is for the “purchasing” manager to have a set of skill sets that can be used when sourcing goods and material from overseas suppliers.

This pictorial outlines the flow of goods from point of origin
through to point of use or to the customer.

OVERVIEW

Companies have grown to realize that supply chain costs can seriously be reduced when foreign sourcing options are visited, particularly with “private label” merchandise.

This initiative to source globally requires another entire set of skills, capabilities, and wherewithal.

The skill sets, not limited to the following, include:

Global sourcing

Foreign contract management

Purchasing in foreign markets

Harmonized tariff classifications

Documentation

Customs (CBP) regulations

International logistics

Managing customhouse brokers and freight forwarders

Tariffs

Duties and taxes

Antiboycott regulations

Contemporary import issues

Customs Trade Partnership Against Terrorism Program (C-TPAT)

Security and terrorism concerns

Free trade agreements

Bonded warehouses and foreign trade zones

The array of challenges facing managers who engage in foreign procurement can be daunting. However, if the challenges are met with a can-do attitude, they can be managed successfully. Keys in this endeavor to getting it all right are the following:

Develop resources externally that can provide useful intelligence.

Foreign procurement is staying ahead of the learning curve, making learning always a “work-in-process.”

Master the gain of knowledge, training options, and procurement management.

Build good relationships with key support services: freight forwarding, customhouse brokerage, carriers, NVOCCs, international attorneys/bankers/accountants, and consultants.

Pay attention to detail at an extreme granular level.

Make sure trade compliance management is factored into every supply chain decision.

Create a balance between value and spend, cost and risk.

Build risk management strategies in the running of your global supply chain proactively and comprehensively.

Purchasing managers have several goals to consider when determining which overseas suppliers to buy from: costs, specifications, and scheduling.

COSTS

The bottom-line potential saving with product that is less costly from a supplier located in a country with cheap labor costs, deregulated Occupational Safety and Health Administration (OSHA)-type controls, less environmental issues, etc.

An analysis of the “landed cost” will assist in determining this cost issue. One must measure the “total” of all the incremental costs to then view the final landed cost in determining ultimate supplier options. This analysis process requires an experienced eye and tenure in operations, logistics, and negotiation management.

LANDED COST COMPONENTS

Quoting

Documentation

Handling

Inland freight

Export clearance

International freight

Import costs: license, registrations

Import clearance

Duty, taxes, and so on

Warehousing

Inland freight and on-forwarding

Possible repacking, remarking, or relabeling

Possible further processing, refinements, or manufacturing

Black money????

The experienced purchasing manager must evaluate all these parameters to make an intelligent decision about where to source product from.

MEETING PRODUCT SPECIFICATIONS

This parameter is relevant no matter where the goods originate. One only need to be sensitive to the differences in language, culture, legal, design metrics, and so on when comparing “apples to apples.”

Prior to the 1980s, foreign sourcing was always considered shabby. But the influence of western engineering, quality control, and technology on foreign manufacturing in the last twenty years has significantly brought up its capability. In some product lines, like communication and broadcast equipment and high-end automobiles, foreign suppliers have proven very capable.

If you are venturing into product lines in which the overseas supplier has little experience, the obvious initiative of being more diligent and exercising greater scrutiny brings on new meaning.

Based on my 40 years plus experience in global trade, most foreign manufacturers and distributors have experience exporting from their country and can be of great value in assisting the U.S. based importer with support in making sure the goods and export from their country.

MEETING DELIVERY SCHEDULES

I witness many importers frustrated when purchasing from foreign suppliers who continually miss shipping deadlines and delivery schedules. It is critical to bring this into the overall formula when evaluating an overseas source, as missing deadlines could prove to have deadly consequences to customer, inventory, or manufacturing schedules. If they can’t deliver on time, then “cheap” loses its value.

Many importers who have “just in time” inventory controls need to be more on top of the inbound supply chain and more proactive in the face of potential delays or work flow stoppages.

Some importers hold extra inventory that is sourced from overseas, allowing potential delays to have minimal effect.

So, cost, specifications, and delivery capabilities are the key governing factors in determining overseas supply options. I know some import purchasing managers who live by managing all three concerns in a manner that avoids pitfalls and leverages opportunities.

Controls need to be put into place, driven by relationship building, contractual obligations, and potential financial consequences to the source for nonperformance or poor performance.

In certain markets, it is the financial consequence that will drive performance.

DETAIL, DETAIL, AND MORE DETAIL

Purchasing managers must pay attention to a lot of detail in making sure their inbound supply chains are managed cost-effectively and are competitive. (See Figure 1-3)

FIGURE 1-3. The flow of goods from the world into the United States is enormous.

The detail to be managed requires experience, creativity, and awareness of all of the parameters of inbound supply chain management.

Inbound supply chain management is as much an art as it is a science. I have outlined several areas that purchasing executives ought to consider in their day-to-day responsibilities.

Companies looking to foreign suppliers can create quality purchasing opportunities. However, the importer must go through several steps before buying the goods to make sure the deal will work successfully. For example, the importer must make sure that the party overseas is a “legitimate” entity approved to do business with U.S. companies.

Importers have an array of steps they must take to purchase goods from foreign suppliers. Some of these steps are

1. Make sure all of the entities you are doing business with are legitimate. This is general business sense—make sure you check them out, as you would any party within the United States, before you enter an agreement. I am always astonished at the lack of due diligence in checking out foreign suppliers in the face of million-dollar transactions.

2. In addition, you should check all of the U.S. government lists, like Denied Parties, Unverified, Office of Foreign Asset Control (OFAC) Sanctions, and State Department, to make sure the party and individuals you are engaging are not on them. In the appendix, the access to these government sites is provided. It is part of an importer’s due diligence to make sure these lists are checked.

3. Make sure that the supplier can meet all of your manufacturing and production needs. I would suggest that before moving all of your business to the new supplier and reaching long-term agreements, you allow a period of testing and review. There should be no reason to rush into a new supplier and arrange a long-term agreement until you are reasonably sure it can meet your needs on a timely and efficient basis. Do not give up your existing supply lines until the new one is solid. You may want to “wean” the new one into full time while the other is gradually turned off.

4. Review all vulnerabilities and set up “plan Bs” and contingency arrangements. Set up a committee with all of those engaged in the inbound supply chain. Make a checklist of “what ifs” and vulnerabilities. Then create a new checklist with a proactive strategy to deal with all of the issues.

5. Work with qualified consultants and attorneys in the United States and locally overseas. Typical “house” counsels lack the expertise required and ultimately can cause more harm than good. Check with outside counsel, trade associations, the Internet, and vendors for names of experienced international legal counsel. The National Institute for World Trade (NIWT.org) is a reputable option in this regard.

6. Develop contracts that limit exclusivity and have arbitration agreements in them. Do not commit to deals that restrict your ability to change or modify the agreement, if you’re not satisfied with your supplier’s performance. All disputes should be settled in a neutral setting like an arbitration panel in London, Toronto, or Sydney, not in the country where you are sourcing your goods.

7. Do extensive product testing before entering the U.S. market or for use in your full-scale manufacturing. It can become a real embarrassment when you have a “boatload” of goods coming in and the prototypes are not meeting specification. Buying from overseas markets requires patience and thorough diligence.

8. Make sure your suppliers’ products meet all regulatory requirements. These include customs, OSHA, USDA/FDA, BATF, DEC, DOT, FCC, and CDC, to name a limited few. It is imperative that the importer coordinates the import legal requirements with the various agencies that govern the specific product line. In many cases, there could be multiple agencies involved with similar or conflicting regulations. Larger corporations may have multiple compliance specialists in the various purviews, like a pharmaceutical company that would have a FDA compliance person, an OSHA compliance person, and an import compliance manager.

9. Make sure your new supplier meets all packing, marking, and labeling requirements. It is an importer’s responsibility, typically as “importer of record,” to ensure the goods entering the United States meet all requirements for how they are marked, packed, and labeled. For example, a cereal product must have the carton and internal wrapping meet FDA standards. The outside of the carton must meet United States Department of Agriculture (USDA) guidelines on communicating product, handling, and nutritional information.

With new security guidelines in place, like the 24-Hour Manifest Ruling and the Importers Security Filing (ISF), the importer must make sure that the details of what is entering the United States are manifested by the inbound ocean carrier at least twenty-four hours prior to the vessel sailing from the exporter’s outbound port.

Timeframes for new changes have occurred since 2008 and continue into 2018.

10. Control the inbound logistics by controlling the terms of purchase. Use free on board (FOB) or (FCA) Outbound Gateway or Ex Warehouse International Commercial (INCO) Terms. This will give you control of the inbound supply chain. This will typically allow you better pricing, control of delivery scheduling, and control of all compliance responsibilities.

Many importers have determined, unwisely, that removing themselves from the hassles of the import process and inbound logistics serves their best interests. My group has studied this circumstance for over twenty years. Every analysis clearly points out that importers are always in a “best served” position when they control the inbound and “importer of record” responsibilities.

The importer benefits in reducing overall logistics costs, managing compliance and security requirements, and maintaining control over the inbound status and disposition of the imported merchandise.

11. Control who the customs broker will be. Use your customhouse broker where you can have documentary and compliance controls in place—and where you have the relationship to make things happen. Many importers appreciate being out of the “loop” of the clearance process. Customs has regulations referring to “ultimate consignee”, which may force you to be the “importer of record” irrespective of who manages the clearance process.

We have always identified the scenario that those importers who “control” the importing and clearance process are better exercising due diligence and reasonable care, which are dictates of Customs Border and Protection.

12. Calculate the anticipated “landed costs.” This is imperative to make sure you are competitive in comparison to local purchasing or from other sites. This is covered in more detail on page 136. Too many times we have seen importers begin to import a product, raw material, or component from a foreign supplier and then get hit with duties, taxes, and inland charges, which make the transaction cost prohibitive.

13. Pay attention to detail. Make sure that all the minutia of information is relevant and accurate, including but not limited to valuation, classification, origin, language, and invoice data.

Failure to do so, after the fact, slows the inbound supply chain, adds unnecessary import costs, and opens you up to fine and penalty exposure. Utilization of quality and compliant customhouse brokers will greatly assist you in this endeavor.

14. Make sure your transaction from point of purchase to point of processing or sale is well documented and all records are maintained for at least five years. This is a “reasonable care” standard, for which failure can result in serious penalties. Five years is a good benchmark.

15. Make sure the shipment is insured for the full value of your expected loss. The valuation for insurance purposes can be calculated to full sales value, including profit. It is at the time of loss or damage that most companies worry about cargo insurance. Then it’s too late. Set up the insurances to provide “All Risk” “Warehouse to Warehouse” coverage on your imports with a quality third-party insurance company that specializes in international transportation risks.

16. Pay attention to global and local economic and political events and trends. Bring these circumstances into your equation for determining the viability of the foreign source you are contemplating. Not paying attention could cost millions. Many foreign companies invested money into construction projects in Iraq, pre-U.S. invasion. Now their investments are worth zero.

Business losses have been identified in 2017 in countries like Yemen, Sudan, Somalia and Libya, where terrorism and political events have resulted in economic hardships and financial losses to external interests.

Importers who pay attention to detail and follow the sixteen steps and integrate these into Inbound Supply Chain standard operating procedures (SOPs) will place themselves in the very best situation to always be compliant and secure, cost-effective, and competitive.

17. Assess the risks and arrange all the necessary insurances throughout the inbound supply chain. Two specific areas will always need to be addressed—product liability and marine cargo insurance.

DETERMINING THE BEST OVERSEAS SUPPLIERS

For the most part, U.S. purchasing managers will have options when looking at potential foreign suppliers.

The following set of guidelines will assist the purchasing executive with a set of parameters to maximize the opportunity for the right choice.

Experience in manufacturing your specific product

Tenure in business

Experience in servicing foreign markets

Experience in selling into the United States and/or other destinations you are purchasing on behalf of

Quality of operations staff

Number of personnel who speak, write, and communicate well in English

Willingness to travel to the United States and/or other overseas facilities

Flexibility to change specifications and meet customer nuances

Ability to meet all the security and compliance regulations put forth by the U.S. government

Particularly meeting ISF, Importers Self Filing before goods are exported from the host or origin country

Capability to manufacture, mark, package, and label according to the multitude of various government agency requirements

Willingness to allow you as the importer to control the freight and logistics into the U.S. market

Willingness to extend credit

Policy on returns, defective parts, warranties, and exchanges

Willingness and ability to assist in market studies, R&D, trade shows, and so on, both from afar and hands-on, here in the United States

If applicable, the number of service centers in the Unites States

Noncompete and trade secrets policies

Exclusivity policies

Policy for extending coverage for product liability exposure in the United States on products manufactured by the supplier but sold in the United States

Intellectual property rights (IPR) not becoming an issue for either party

Offer competitive landed costing structures

An importer who uses these guidelines as a checklist for all import arrangements will reduce the opportunities for current and future problems.

The checklist needs to be reviewed for the specific nuances that are unique to your supply chain and incorporated into your existing business profile. Doing so will greatly assist you in choosing and managing your overseas suppliers.

MANAGING THE REQUEST FOR PROPOSAL PROCESS (RFP)

Purchasing and logistics managers and all those involved in running global supply chains periodically put their freight purchasing out to bid. This bidding process, usually accomplished annually up to every two to three years, keeps incumbents sharp and allows new players to show what they can do.

In the majority of these RFPs, price drives the process. I have managed over three hundred RFPs and have developed a formula based on an alternative concept that looks at the process from a different angle and can produce better results.

The key ingredient in this process is to remove price from the equation until the very end of the RFP process. Carriers, freight forwarders, customhouse brokers, TPLs, and others would much prefer to be judged on their capabilities first and price second.

This process does not minimize the importance of price, as we all know how critical that element is in running cost-effective supply chains. This process just removes that consideration to a later point in the overall RFP process, which can ultimately provide better results to the importer, exporter, or domestic shipper. This process ensures that the service providers can perform and meet the customer’s expectations before price enters the equation.

The ten steps are as follows:

1. Engage senior management in the process, as their support is critical to any changes with major suppliers and vendors.

2. Do your homework and know what qualified transportation providers exist that could be potentially included in the RFP.

3. Create a committee of internal stakeholders with vested interests and/or impacted by supply chain issues.

4. Identify and prioritize your supply chain needs and create a list of these key factors.

5. Reach out to your initial RFP participant list—this might be from three to five or as many as thirty—to determine their readiness to respond to your RFP.

6. Following the initial interview and/or meeting, create a “response inquiry form” or “scorecard” for them to complete.

Sample control areas may include the following:

Technology (PO management system)

EDI interface

Tracking and tracing

Experience of customer service and operations team

Foreign office and agency structure

Trade compliance officers

Risk and insurance issues

Consolidation capabilities

Drayage costs

Domestic distribution

Demurrage and ancillary charges

Transition management

Free time allowances

Value add services

Quarterly business reviews (QBRs)

This partial listing creates two needed control points: one identifying needs that are both generic and specific to your supply chain and the second beginning the setup of a “scorecard” to assist in the evaluation stage of the RFP process.

*From a metrics perspective, China Transportation offers a more comprehensive response to the RFP analysis

7. Have the RFP participants respond to the list above and outline how they differentiate themselves in all those areas important to you. The scorecards created can utilize an “operations analysis” format, allowing metrics to enter the formula, which is necessary to obtain a clearer and more comprehensive perspective.

8. Run “dog and pony” shows with all RFP participants. This usually results in moving the participant list to a smaller group, maybe two to three. Now price enters the equation.

Benchmarking is an important responsibility of logistics and supply chain managers. When benchmarking is done with diligence, you will know what the range of pricing should come in at.

At this point, you will be certain that the final list of providers has all the capabilities, skill sets, and resources to meet your needs list. Hopefully there will be some “value adds” that will also provide real benefit and enhancement.

This is when you are now having the finalists compete with one another over price. Keep in mind that “price” by itself is not fixed and has other variables that will carry weight, such as but not limited to the following:

Transit times

Minimum volume commitments

Origin and destination ports

Surcharges and ancillary costs

What services are included in the overall base and adjusted pricing schedules

Payment terms

Consolidation and deconsolidation services

Chassis and drayage requirements

Technology interface

These are but a few of the variables that need to be clearly identified and when done responsibly will allow for a true “apples to apples” comparison between the finalists.

9. Bring the committee back together, review the pricing, make comparisons to the scorecards, raise a debate—make the best choice balancing out cost, risk, and service capabilities.

10. Create a transition strategy with the favored party and execute, allowing for flexibility, tweaking, and rethinking as the change or repositioning takes place.

Many experienced logistics and supply chain managers will utilize their own “sensibilities” in the decision-making process, and this is okay as another factor in the overall RFP process exercise.

When sensibilities, relationships, and metrics are all brought into the RFP process, it will allow for the best opportunity to get the most favored results.

An additional consideration should include trade compliance management as a key factor in determining the final selection. When you are successful at negotiating the best price, if the goods cannot make it through customs successfully or you are faced with government agency scrutiny, the benefit of that great price will be significantly diminished.

PURCHASING MANAGEMENT: DEVELOPING SUSTAINABLE RELATIONSHIPS WITH CARRIERS AND SERVICE PROVIDERS

When freight is managed as a commodity, there is little opportunity for long-term, more successful and profitable relationships in the purchasing of global transportation services between shippers of cargo, service providers, and carriers.

When we have sustainable relationships, we capitalize on the following:

Better working relationships between shippers, service providers, and carriers

We all want to work in an atmosphere in global trade where we would describe our relationships in the global supply chain as excellent. This allows for less stress and overall better results.

Longer-tenured relationships

Changing service providers and carriers frequently is disruptive and costly and never a preferred option. Everyone engaged in the supply chain does better in longer-term relationships.

Reduction of risk and spend in the global supply chain

When the relationships work well, we always see a direct relationship to the reduction of costs and risks as goods move through the supply chain cycle both domestically and internationally.

Consistency in pricing and service agreements

If we always have spikes and steep changes in our business models, no one will be happy in our companies and the difficult-to-manage operational issues will be very difficult all of the time.

The preference always is to have a smooth-gliding, more rhythmic path in the business model to follow so that changes are not large or small but even out on a more consistent basis.

Less angst in day-to-day business dealings

Angst causes stress. Stress causes anger. Anger causes bad decisions. Bad decisions usually produce bad results. Eliminate angst and have more success.

Ability to work through problems and bring quicker resolve to issues at hand

Global supply chain managers face challenges every day. Even in the best managed supply chains, problems will occur daily. They need to be resolved quickly. Good working relationships open the door to quick, swift, and comprehensive resolution.

Access to better security and trade compliance initiatives

Every international supply chain requires due diligence, reasonable care and supervision, and control to meet various government security and trade compliance regulatory requirements. Better working relationships foster a more secure and compliant environment to ship freight in.

Better access to and utilization of technology resources

Technology will always enhance business relationships with all the benefits of expediency, efficiency, exactness, and information flow.

Creating a “partnership” approach

We cannot emphasize enough the importance of establishing a “mind-set” between all of the parties to approach matters on a “partnership” basis. This is the best course of action that achieves “trust and confidence” between shippers, service providers, and carriers.

Trust and confidence become “hallmarks” and allow all parties to both compromise and benefit from all of the actions that impact one another in the day-to-day movement of freight throughout the world.

The following key factors create a path to better relationships and sustainability.

Transparency

Share all the information necessary to get the job done right. Eliminate a mindset of clandestine behavior, working through “secret passageways” or “working in the shadows” mentality.

Put up all of the data. Shippers outline clear expectations. Service providers and carriers outline clear capabilities.

A no-nonsense, direct, no-B.S. approach works best.

Valuing Favored Incumbents

Always be loyal to companies that have serviced you well. Loyalty is what you expect from your customers, so give it to your vendors and suppliers when well deserved.

If you need to conduct a RFP (Request for Proposal) and bring in competition, always give some advantage to a favored incumbent.

Be Transparent and Honest, Consistently

The value of being open falls in line with being transparent but also adds on an element of frankness, truthfulness, and honesty. People trust those who are honest—period.

When you are more transparent and honest, you can get more done, as people better respect you and are more open to participate and go the extra yard to get better results.

Be Creative

The challenges of global trade can be daunting. Every approach will require a potentially different and maybe even a new revolutionary approach.

Creativity is a necessary element of being able to compete successfully, as creativity opens the door for problem resolution, progressive options, aggressive tactics, and, at times, advanced/rebellious/extreme/mutinous behaviors.

Make Sure Insurance Is Addressed

Claims are inevitable if you ship goods internationally. If you want to see a relationship “go south” quickly, have an unresolved claim. Liability for loss and damage in global trade is an area of major concern.

All parties in the supply chain—shipper, service provider, and carrier—need to know where their risk begins and ends and, if there is a claim, where indemnification will originate.

When this is left unclear, it creates frustration between the parties and eventually a loss of confidence, which leads to a breakdown in any opportunity for sustainability between the parties.

Address insurance concerns proactively, comprehensively, and with transparency and you will mitigate future relationship issues.

Quality relationships drive sustainability, which is always a preferred option in global trade.

WHAT PURCHASING MANAGERS NEED TO KNOW ABOUT POS AND THE UTILIZATION OF INCOTERMS

All companies and executives engaged in global trade must deal with the utilization of Incoterms in their purchase orders and export sales agreements.

Although Incoterms have been around formally since 1936, they are very often misunderstood, misutilized, and a cause of significant problems in international and domestic business.

In my practice spanning over 30 years, I have developed a set of guidelines that continually gets tweaked and updated but have developed a set of ten steps to assist in Incoterms utilization in global supply chain management:

1. Become familiar with the ICC and the details of Incoterms.

2. Differentiate between domestic and international utilization.

3. Comprehensively understand what Incoterms are and are not.

4. Incoterms can cause as much risk as they do minimize exposure.

5. Fit the Incoterm to your contractual intent.

6. Understand how Incoterms interface with “insurance.”

7. Understand how Incoterms interface with “title.”

8. Understand how Incoterms interface with “trade compliance.”

9. Be wary of the “FOB” term.

10. Assign “internal” Incoterm responsibility and obtain critical management and staff training.

Become Familiar with the ICC and the Details of Incoterms.

Incoterms are managed by the International Chamber of Commerce (ICC) in Paris (iccwbo.org). It is a structure making an attempt to standardize contractual terms of trade originally set up for business that moved between various countries.

Incoterms are updated almost every ten years, most recently in 2010, when they were opened to include domestic trade. There will be more changes and further simplification to INCO Terms in 2020.

In some countries, they are part of the legal structure, but not in the United States—directly. In other words, Incoterms by themselves have little legal standing in the United States. It is only in their role within purchase orders and sales contracts, which are legally binding, that their presence and weight are felt and measured.

Differentiate Between Domestic and International Utilization

In the United States, trade terms, similar to Incoterms, are governed by the uniform commercial code (UCC), where the FOB terms dominate shipping domestically, with FOB origin and FOB destination being the two primary options.

When the ICC in 2010 opened the international utilization of Incoterms to domestic trade, a lot of confusion occurred, which still exists today.

In the UCC, the FOB term relates to any conveyance—air, rail, truck, ocean, or otherwise. In the Incoterms version, FOB can only be utilized with sea and inland waterways. That distinction can create some confusion if not clearly discerned within sales and purchase order wordings.

The author recommends that domestically the UCC terms are followed and internationally the Incoterms are maintained. At some point following state ratification, there is a potential that the UCC trading terms will be eliminated, but not soon.

Comprehensively Understand What Incoterms Are and Are Not

Incoterms are a set of guidelines—not an “end all” but to be utilized for defining a point in time in trade where the responsibility and liability is transferred from a seller to a buyer or an exporter to an importer or, in other words, where risk and cost passes.

They do not address areas such as but not limited to dispute resolution, governance, payment, and ownership. These other areas of contractual concern need to be addressed in other areas of the documentary process, such as invoices, agreements, contracts, and purchase orders.

Incoterms Can Cause as Much Risk as They Do Minimize Exposure

A primary intent of Incoterms are to define risk and cost. But Incoterms are not an “end all” in an international trade. Incoterms are a component of the transaction. Other variables apply.

Following is a good example of this: a U.S. exporter based in Chicago ships 5 pieces of heavy equipment, valued at four hundred fifty thousand dollars, to a buyer in Japan via ocean freight. The goods will be containerized shipped by truck to Long Beach, ocean carrier from Long Beach to Kobe, and truck to the destination.

The terms of sale are FOB Long Beach. The terms of payment are 10 percent paid upon PO acceptance and the balance once the goods arrive in Japan.

The FOB Long Beach term means to the buyer that once the goods are placed on board the vessel, the responsibility for loss and damage is passed to the buyer.

In this case, Long Beach is the last port of call in the United States and Kobe will be the first port of call in Japan. The forty-foot container is secured in a top stow on deck. This allows efficient utilization of port resources and will help turn the vessel around quickly in Kobe.

Six days later at sea, the vessel hits heavy weather and five containers are lost overboard, one for this shipment.

When the shipper and consignee are both notified is when the more serious problem occurs. Legally, the buyer in Japan has responsibility for loss and damage, as the goods were sold FOB Long Beach and were secured successfully on board. However, there are two issues—the goods never arrived in Japan and the shipper or exporters terms of payment on the 90 percent balance was to be paid once the goods arrived in Japan.

Common sense would say that the buyer needed to insure the shipment but failed to do so. And this is where the dilemma begins. You have an outright legitimate issue tied into a legally binding PO and sales invoice stating FOB Long Beach. The quandary is created by a term of payment that depends on the good faith of the buyer. Though an attorney would probably be able to sue and collect, how expensive would that be, over how much time, and at what cost to a good business relationship?

To have prevented this issue from the beginning would not require changing the Incoterm or payment term but building a business SOP into the sales process, which would have identified this risk and made sure ocean cargo insurance on a primary or contingent basis was acquired by one or both parties to offer protection in the case of a marine peril.

Fit the Incoterm to Your Contractual Intent

There are eleven Incoterms: Ex works, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, and CIF.

They are separated into two areas—those that can be utilized for all modes of transit and those that can only be utilized for sea and inland waterways.

In an import transaction when the Ex works term is utilized, the importer is taking responsibility and liability at the earliest point in time. If an importer requests DDP transaction, it takes responsibility and liability from a shipping perspective at the latest point in time.

The eleven Incoterms moves the needle of responsibility and liability down the line in the supply chain anywhere from origin, to port of export, to gateway of arrival to the destination, or any point in between that both parties agree to.

What is critical is that the seller and the buyer utilize the Incoterm that represents what they have intended to because of the negotiation of the sale and purchase order. This will then more clearly define risk and costs to both parties.

Understand How Incoterms Interface with Insurance

Risk is the peril cargo faces when transiting within the global supply chain, both in motion and at a standstill. Cargo or marine insurance is the product or service we can acquire to help us mitigate the financial exposures of loss and damage within the global supply chain.

All the Incoterms discuss when risk of loss and damage passes between a seller and a buyer. Only two terms, CIF and CIP, bring insurance into the equation. In both instances the seller is obligated to acquire marine insurance covering the risk of loss and damage during the transit period from origin to the named CIF/CIP destination point.

One should clearly note that marine insurance is not an off-the-shelf product and must be manuscripted to fit the exposures specific to the nuances of a company’s risk profile within its supply chain.

In the CIF/CIP Incoterm option, the seller need only provide a minimal level of coverage and the quality of the insurance company or underwriter is never brought into the mix. This can create significant exposures when not completed comprehensively or responsibly.

Understand How Incoterms Interface with Title

Specifically written into the prologue of the Incoterms manual, section 4, is stated that Incoterms do “not deal with the transfer of ownership of the goods.”

This is often a very misunderstood issue with Incoterms in that many believe that “title” is transferred within the context of the Incoterm point of the trade. This is not true at any level.

Title needs to be addressed as a separate and independent concern within the structure of a sale or purchase order/contract/agreement.

Understand How Incoterms Interface with Trade Compliance

Trade compliance has become an increasingly important responsibility of both importers and exporters. Most of the Incoterms mention responsibility for clearance of the goods for export or import. This would bring in certain trade compliance responsibilities but not necessarily all of them and certainly not as clearly and concisely as it needs to be.

In the United States, both the importers and exporters need to take responsibility for trade compliance and be very proactive in making sure the regulations are being complied with. Transferring this responsibility to a third party is both risky and fraught with financial exposure.

Be Wary of the FOB Term

The FOB term for both importers and exporters has several concerns. The obvious one is what we discussed earlier relative to its use in domestic trade.

The other area of concern is relative to when our responsibility ceases in a FOB transaction when a vessel arrives and loads late (which we all know can happen often).

A shipper in China sells goods FOB Hong Kong. It delivers the goods to the port on July 1, anticipating a July 2 loading. The shipper is advised after delivery on July 1 that the vessel is running late and the goods will not load until July 10.

Per Incoterms 2010, FOB Rule B5, if the shipper notifies the buyer of the loading modification, delivery has been affected at that point and not ten days later, when loaded on board, as the FOB Term intended. This means that risk of loss and damage has passed at an earlier time than originally contemplated by the buyer.

The buyer would need to make sure that its cargo insurance has attached at that earlier point in time when risk has begun.

On the export side, when a shipment loading is delayed, it would be critical for the export company’s logistics department to notify the overseas buyer ASAP so that delivery to the terminal can affect a legal delivery under the FOB term if a sailing is delayed.

Assign “Internal” Incoterm Responsibility and Obtain Critical Management and Staff Training

Internally in corporations both large and small, it is a best practice to assign at least one person with responsibility in comprehensively understanding Incoterms and creating SOPs and protocols on how they will be utilized and managed within that company’s purchase and sales orders.

Additionally, internal training programs should be established to make sure everyone who has a global supply chain interface has a basic understanding of Incoterms and their application to risk, cost, and trade leverage or competitive advantage. One training facility, NIWT.org, customizes Inco-terms training for both large and small companies engaged in international business.

SUMMARY

Managing Incoterms will prove to be an invaluable risk management tool in developing SOPs in the global supply chain. More importantly, correct utilization of Incoterms can create leverage and competitive advantages for companies that understand and apply the options strategically.

CONCLUDING REMARKS

Purchasing management and inbound supply chain management require a unique set of skill sets in global trade. There is an array of considerations and outside influences that could seriously affect landed costs, freight, clearance, and security of the imported goods. This chapter and the balance of this book provide an encyclopedia of specific information to make this effort doable and possible.