International Logistics: The Low-Down for Manufacturers

International Logistics: The Low-Down for Manufacturers

Interested in expanding your business internationally? Pick up a copy of my latest book, Business Beyond Borders: Take Your Company Global. Congratulations – you have made a sale to buyers overseas. Now, how do you get the goods to your new international customer efficiently, competitively, securely, and legally? It’s time to talk about international logistics. In this three-part series, I’ll be covering modes of transport, export documentation and key steps to a successful shipment.

What do I need to know about international logistics?

When you are shipping a product overseas as part of a commercial transaction, it is important to understand the basic principles of both sea and air cargo. Your product may be suited only for ocean shipping or for airfreight, or both, and rates can vary when new capacity is offered on trade routes and when new markets are serviced.

There are also packing, labelling, documentation, and insurance requirements that you will need to be aware of and comply with.

How can I send my goods overseas?

There are three or four main options when it comes to sending goods overseas. You can use express delivery or mail services, an international freight forwarder, or arrange your own shipping. Depending on which country you are based in, you may also be able to access the services of Shippers’ Associations.

Air or sea?

The choice between air and sea freight normally depends on your shipment’s size, weight, and contents, and on how fast your goods need to arrive.

Under normal conditions, shipping by air often makes a lot of sense for small shipments. It may cost more, but your goods will arrive within days rather than weeks. In sectors like retail, where quick turnover is key, or electronics, which benefit from air freight’s heightened security, air is usually the right choice.

COVID-19 has dramatically increased the cost of air freight, for two reasons. Restrictions on passenger transport have reduced space available for shipping, and what is left is prioritised for medical supplies.

However, airlines are flying, and even augmenting cargo plans with passenger planes so, if you need to, you can still ship by air.

Air freight is the best option when:

  • The cost of shipping is less than 15-20% of the value of the goods.
  • You are shipping goods that are not considered hazardous materials.

Ocean freight on the other hand is typically much cheaper than air freight, especially for larger shipments. Ocean freight prices are also far less volatile than air freight prices. If you have time to wait for your goods to arrive, try to ship by ocean when possible.

Ocean freight is the best option when:

  • You have a lot of goods to move and you are looking for more capacity and value – one container can hold 10,000 beer bottles!
  • Time is not of the essence. Ocean freight is usually much slower than air, and customs issues and port holdups can cause additional delays. However, Express LCL (less-than-container-load), increasingly available on more routes and by more forwarders, often guarantees a delivery date and is often not that much slower than air.
  • Sustainability matters. Ocean freight has a much better carbon footprint than air freight.

How do I negotiate the best freight rate for my cargo?

The cost of freight has increased astronomically since 2020, when the COVID-19 pandemic caused major disruptions to global supply chains, and getting the best freight rate for cargo is more important today than ever before.

Depending on the volume of goods you are sending, using a good customs broker and freight forwarder may be the most efficient way to ship your goods. These companies are experts in documentation, freight rate negotiations and finding the most economical way to get your product to the buyer. Increasingly, you will also find software platforms, which perform the same function.

Getting in touch with a few different international shipping companies and checking out a few platforms (Portilius, portilius.com is a pioneer in this field) to compare costs and available services is a good starting point. Along with their expertise in export forms and shipping documentation, many freight forwarders specialise in certain types of shipments.

A good freight forwarder should be able to give you a range of options to find the most cost-efficient rate, but it also pays to become familiar with freight markets so you can get the most competitive rate.

Your overseas buyer will often specify a preferred freight option. This could depend on ease of customs clearance at the port of discharge or the frequency and reliability of sailing. Transhipment is a common feature of liner shipping, and ‘hub’ ports such as Singapore, Hong Kong and Dubai distribute containerised cargo to other ports by ‘feeder’ vessels. If you are considering transhipment, make sure you use an efficient transhipment hub so your cargo does not suffer delays.

Incoterms

As you get into the detail of shipping your products, you will also start to encounter shipping terms like FOB, EXW, FCA, CIF and so on. These are all part of Incoterms, a set of internationally-accepted terms spelling out which parties are responsible for various costs and details throughout the shipping process such as freight, insurance, duties, customs clearance and documentation.

Introduced in 1936 and modified since, Incoterms have precise definitions and are critical for the consignment and payment of goods shipped internationally. Incoterms rules are universal and provide clarity and predictability to business around the world. A requirement on every single commercial invoice, they greatly reduce the risk of potentially costly misunderstandings.

CFR (Cost and Freight): The CFR Incoterm means that all charges, including freight up until the intended port of destination, are borne by the seller. However, purchasers should be cautious, as the risk transfers to the purchaser when the goods are loaded on the vessel. Even though the purchaser is not paying for the freight, it carries the risk if anything goes wrong with the goods and so, as a purchaser, it is wise to insure your shipment. All remaining charges at the destination are then settled by the purchaser.

CIF (Cost, Insurance and Freight): This term is the same as CFR only the seller is responsible for the goods and any insurance up until the goods arrive at the intended destination port. Once the goods arrive, the buyer takes on all risks and final associated charges.

CIP (Carriage & Insurance Paid To): Similar to CPT terms, the seller is responsible for making the goods available at a named place of destination. The seller must also procure insurance to cover the goods during transit to the named destination. The buyer is only responsible for any additional transportation and duties and taxes upon arrival.

CPT (Carriage Paid To): For CPT shipments, the seller is responsible for making the goods available at a named place of destination. With these terms, the buyer is responsible for any additional transportation, duties and taxes. The buyer is also responsible for any insurance required during transit.

DAP (Delivered At Place): DAP means the shipment is delivered to a chosen location at the destination. The seller is responsible for all charges up until the goods are delivered to the final location. The buyer is responsible for unloading these goods and any duties and taxes applicable.

DDP (Delivered Duty Paid): DDP terms represent the least cost and risk for the buyer. The seller is responsible for ensuring the goods are delivered to the final destination import cleared. This means the seller takes on all costs and liability for the entire shipment. The buyer is only responsible for unloading goods upon arrival.

DPU (Delivered At Place Unloaded): This requires the seller to deliver the goods to the buyer after they have been unloaded from the transport that has brought them to the destination port. It is the only Incoterms rule that requires the seller to unload goods at the place of destination and it can apply to any—and more than one—mode of transport.

EXW (Ex Works): The Ex Works Incoterm places the lowest level of obligation on the seller in regards to shipping costs and liabilities. The seller makes the goods available at their premises and the buyer must organise all elements of shipping. This includes collection, freight, delivery, duties and taxes. The risk transfers to the buyer when they collect the goods from the named premises and the buyer takes on all costs until final delivery.

FAS (Free Alongside Ship): For FAS shipments the seller makes the goods available alongside the vessel at the named port of shipment and coordinates the export clearance. The seller takes on all origin charges including terminal charges but the buyer pays for loading onto the vessel and all charges thereafter.

FCA (Free Carrier): For FCA shipments, the seller makes the goods available to a carrier specified by the buyer and from here the risks and costs are transferred to the buyer. It is the buyer’s responsibility to coordinate the export clearance and bear terminal and loading charges at the port of origin. The buyer must also pay all charges from freight to final delivery and customs charges at the end destination.

FOB (Free On Board): When shipping on FOB terms the seller is responsible for all origin charges, including loading onto the named vessel. Once the goods pass the ship’s rail, the risks and costs are transferred to the buyer. The buyer is then responsible for the freight, any insurance required and all charges at the final destination.

To simplify the international contracts and more clearly specify the obligations of buyers and sellers, Incoterms were updated and organised by modes of transport in 2010.

These Incoterms apply to any mode of transport:

  • CIP – Carriage and Insurance Paid To
  • CPT – Carriage Paid To
  • DAP – Delivered at Place
  • DDP – Delivered Duty Paid
  • DPU – Delivered at Place Unloaded (formerly DAT Delivered at Terminal)
  • EXW – Ex Works
  • FCA – Free Carrier
These Incoterms apply to any mode of transport:
  • CFR – Cost and Freight
  • CIF – Cost, Insurance, and Freight
  • FAS – Free Alongside Ship
  • FOB – Free on Board

Knowing your Incoterms and discussing these with your buyer or seller prior to arranging a shipment will avoid any surprises during the shipping process. It is a good idea to speak to your freight forwarder and ask for comparison rates on different terms so you can calculate the best option for your business – before agreeing the terms of sale.

You can find more detailed information on Incoterms at the International Chamber of Commerce (ICC) website, www.iccwbo.org.

Harmonized System (HS) Codes

As part of the process to sell internationally, you will also need to know your product’s Harmonized System (HS) code. The Harmonized System is an internationally-accepted product classification system administered by the World Customs Organization (WCO), and is the foundation for import and export classification systems used in countries around the world. The HS assigns a six-digit number to each product that is traded internationally. Countries are allowed to add longer codes to the first six digits for further classification.

HS Codes apply to all goods that require international transport, and your product’s HS Code is a powerful bit of information. With it, you can use trade data, conduct market research and complete a successful export transaction.

There are thousands of HS Codes, and each code describes specific goods. All customs agencies are able to identify these goods easily using the number associated with the particular commodity.

Take potatoes for example. Fresh or chilled potatoes will be classified as 0701.90, but frozen potatoes will go under the code 0710.10.

Each code has a unique structure as follows:

  • A six-digit identification code
  • Five thousand commodity groups
  • Those groups feature 99 chapters
  • The chapters themselves then have 21 sections

The code is structured and logical and there are approximately 5,300 codes in use. More than 98% of internationally traded goods rely on the HS Code system for their classification.

Who uses HS Codes?

More than 200 countries which are parties to the International Convention on the Harmonized Commodity Description and Coding System use HS Codes. Customs authorities use HS Codes to identify what goods are being shipped and to apply relevant customs duties, taxes and regulations. Governments also use HS Codes to collect global trade statistics and create tariffs. Private companies use the same system to monitor goods, develop and advocate trade policies, collect statistics on traffic and transport and monitor prices.

Where should I use HS Codes in shipping?

When shipping freight, you must use the correct HS Code on each line of your commercial invoice, to ensure that your goods make it through customs seamlessly and without delay, the importer receives the goods faster and you get paid sooner.

Placing the right HS Code on your commercial invoice also means you will pay the correct amount of duty. If you do not include the HS Code on the commercial invoice, the importer risks paying the incorrect duty. You, the exporter may have to pay interest on any back-payments for incorrect classification, and your goods may even be seized.

Your product’s HS Code will tell you if the duty is suspended on any of your products and if any preferential duties rates can be applied on the goods being imported. Australia has free trade agreements with many countries, and using the correct HS Code may allow you to access certain preferential duties arising from those agreements.

An HS Code can also tell you whether tariffs or anti-dumping duties apply to your product. For example, a quick search of HS Code 0203.29.023 reveals that fresh, chilled or frozen swine exported from Australia to Japan is subject to a tariff under the Japan-Australia Economic Partnership Agreement (JAEPA).

You can search HS Codes using the Free Trade Agreement Portal administered by the Department of Foreign Affairs and Trade (DFAT).

How can I find applicable duty and taxes in an overseas market?

You will need the Harmonised Tariff Code (HTC) to search for import tariffs on the Tariff Download Facility on the World Trade Organisation website.

If you do not have the HTC, this can be obtained by contacting the Department of Home Affairs or its equivalent in your home country.

So what’s next?

Once you’ve identified your international mode of transport, Incoterms, HS codes and applicable duties and taxes, your next step is to make sure you get your export documentation right.

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Business Beyond Borders: Take Your Company Global

Business Beyond Borders: Take Your Company Global is the latest book from international business strategist, Cynthia Dearin. Get your copy today!

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The Manufacturers Ultimate Guide to International Expansion [2022]
Everything you need to know about taking your business global in 2022 and beyond.

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