This document discusses planning for global transportation. It begins with an introduction noting the importance of effective planning given economic volatility and cost pressures. The chapter will cover the global transportation industry, key planning issues, and criteria for selecting transportation modes, carriers and routes. It then provides an overview of the size and flows of the global transportation industry and international trade agreements. The document also discusses important logistics channel issues like determining when legal ownership transfers, arranging payment terms, and managing extensive documentation requirements.

1. Chapter 3
Transportation’s Role
in Global Trade
Planning
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2. Introduction
• Global economy in a volatile period
– Much downward pressure on transport rates
• In an economy focused on cost control, both carriers and
their customers must plan effectively
• Chapter focus: proper global transport planning
• Chapter organization
– Global transport industry: size, options, flows
– Key planning issues: trade and payment terms,
documentation
– Mode, carrier, and route selection criteria
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2

3. Overview of Global
Transportation
• Total global merchandise exports
– $14 trillion in 2009, $15.8 trillion in 2008
– $750 B. spent on transport services in 2007
– 8 B. tons moved in international seaborne trade in
2007, accounting for 80-90% of global trade
• U.S. is largest trading partner
– Exports: $1.3 trillion, imports: $2.1 trillion
– Creates large transportation flows to/from U.S.
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4. Overview of Global
Transportation
Global Trade Agreements
 Trade stimulated by free trade agreements
 Agreements between nations that lift most tariff,
quota, and fee/tax limitations on trade
 Bi-lateral agreements are between two nations
 U.S. currently in 14 bi-lateral free trade agreements
 Regional trade agreements involve 3+ nations
 U.S. currently involved in:
 Free Trade Area of Americas
 Middle East Free Trade and Enterprise for ASEAN Initiatives
 North American Free Trade Agreement (NAFTA)
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5. Overview of Global
Transportation
Global Trade Agreements
• NAFTA includes U.S., Mexico, and Canada
– Principles include:
• Unimpeded flow of goods
• Enhanced cross-border movement of goods/services
– Principles were to enable transport carriers to move
more easily between countries
• Today, Canadian carriers have same rights in U.S. as U.S.
carriers have in Canada
– May transport domestic traffic when incidental to return
trip
• Same accessibility is not currently available between U.S.
and Mexico© 2011 Cengage Learning. All Rights Reserved. May not be
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6. Overview of Global Transportation
Logistics Channel Issues
Transaction channel activities
A key activity is specifying when and where legal title to
goods transfers. Defines responsibility for:
 Mode and carrier selection and shipment routing
 Obtaining insurance coverage
 Payment for transport services, insurance, and import duties
 Compliance with regulations, management of goods while in-
transit, and financial liability while in-transit
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7. Overview of Global Transportation
Logistics Channel Issues
A 2nd
key transaction channel activity is arranging
payment for the goods
 Obtaining payment is riskier in global trade compared to
domestic trade
 Advance payment would be ideal for exporter
 Importer would be concerned about paying in advance of
seeing/inspecting the goods
 There are many terms of payment options used to balance
these risks
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7

8. Overview of Global
Transportation
Logistics Channel Issues
• Communication channel
– Documentation requirements are much higher for
global than for domestic transactions
• Example: 150 documents required for each import
shipment of perishable food as it moves through cold
chain
– Organizations requiring documentation include:
• Countries of export and import
• Transportation companies, banks, and the importer
– Many documents not in electronic form
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8

9. Overview of Global Transportation
Logistics Channel Issues
 Distribution channel
 Greater distance and complexity of global shipments
means higher risk of disruptions
 Global freight moves through more facilities and handled by
more intermediaries
 Transport infrastructure, regulations, and service options
vary from country to country
 Requires more diligence in transport mode, carrier and
route selection decisions
properly matching freight to the most appropriate
mode will facilitate safe & cost efficient distribution of
goods © 2011 Cengage Learning. All Rights Reserved.
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10. Overview of Global
Transportation
Global Transportation Challenges
• Proper long-range planning requires:
– Monitoring macro-level issues, such as:
• General business/economic trends, including fuel prices
• Changes in governmental regulations and interventions
• Consumer demand trends
– Monitoring specific issues, such as:
• Trade level fluctuations
• Carrier consolidation activity
• Security risks
• Shifts in regional sourcing
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10

11. Export Preparation Activities
• Key export preparation activities are:
– Choosing terms of trade
– Securing freight insurance
– Agreeing upon terms of payment
– Completing required freight documentation
• Completion of these activities helps to:
– Clarify importer and exporter responsibilities
– Protect each party’s financial interest
– Improve freight control and visibility
– Facilitate problem-free transport
© 2011 Cengage Learning. All Rights Reserved.
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website, in whole or in part.
11

12. Export Preparation Activities
Terms of Trade
• Terms of trade define where responsibilities
transfer from exporter to importer
• Govern decision making authority for movement
of the product
• Establish when and where ownership and title of
goods pass from exporter to importer
• Clarifies which organization incurs delivery-
related costs
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12

13. Export Preparation Activities
Terms of Trade
Potentially, each country could have its own set of
trade terms
This would create uncertainties in the meaning of
terms and raise transaction costs
Thus, a worldwide standardized set of terms and
definitions was established
 Known as the International Commercial Terms
 Common name is Incoterms
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13

14. Export Preparation Activities
Terms of Trade
• Incoterms
– 13 different Incoterms, divided into 4 primary groups, are
available
• All 13 apply to ocean transport
• Just 7 Incoterms are appropriate for air, truck, rail and intermodal
transport
– Typically expressed as three letter acronyms with a named
location
• Examples: DEQ, Long Beach, CA, U.S.A., Incoterms 2000
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14

15. Export Preparation Activities
Terms of Trade
4 primary groups of Incoterms
 E term: Importer takes full responsibility
 Consists of just one Incoterm: Example Works (EXW)
 F terms: Exporter has responsibility for getting shipment
from origin to port of embarkation
 3 F terms
 Free Carrier (FCA): may be used with any mode
 Free Alongside Ship (FAS): water transport only
 Free On Board (FOB): water only and exporter assumes
responsibility for cargo loading
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15

16. Export Preparation Activities
Terms of Trade
• C terms: Exporter obtains and pays for main transport leg
and/or cargo insurance. 4 C terms:
– Cost and Freight (CFR): water shipments only
– Carriage Paid To (CPT): any mode of transport
– Cost, Insurance, Freight (CIF) and Carriage and Insurance
Paid To (CIP): Exporter pays for main carriage and
insurance
• D terms: Exporter responsible for delivery of shipment to
foreign destination. 5 D terms:
– Delivered at Frontier (DAF): all modes.
– Delivered Ex Ship ((DES) and Delivered Ex Quay (DEQ) :
water shipments only
– Delivered Duty Unpaid (DDU) and Delivered Duty Paid
(DDP): all modes. Highest levels of exporter responsibility
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17. © 2011 Cengage Learning. All Rights Reserved. May not be
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whole or in part.
17
Table 3-2

18. © 2011 Cengage Learning. All Rights Reserved. May not be
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18
Figure 3-3

19. Export Preparation Activities
Cargo Insurance
International shipments exposed to larger financial
risks and transport perils
Financial risks for cargo owner
 Significant dollar limitations on ocean and air carrier liability
 If there is damage or delay, burden of proof falls on cargo
owner to prove that carrier was at fault
Transportation perils
 Many ocean-related perils, including cargo movement, water
damage, overboard losses, and hijacking
 Perils by other modes are relatively minor
© 2011 Cengage Learning. All Rights Reserved.
May not be scanned, copied
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website, in whole or in part.
19

20. Export Preparation Activities
Cargo Insurance
Managing risks
Decision between retaining or transferring risks
Retaining risk is essentially self insurance. Makes most
sense when:
 Goods shipped are low value or not susceptible to damage
 Carriers used rarely deliver damaged or lost freight
 A damaged shipment would have relatively minor financial
impact on the freight owner
Risk transfer via insurance is appropriate when above
conditions are not met
© 2011 Cengage Learning. All Rights Reserved.
May not be scanned, copied
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website, in whole or in part.
20

21. Export Preparation Activities
Terms of Payment
 Terms of payment exist to manage higher risks of
international sales transactions
 Letter of credit (LC)
 Ensures exporter is paid and importer receives goods as
expected
 Importer’s bank issues LC to the exporter
 Bank guarantees payment provided goods delivered per
terms of the LC
 Bank uses importer’s line of credit to guarantee payment
 Bank charges the importer a fee for issuing the LC
© 2011 Cengage Learning. All Rights Reserved.
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website, in whole or in part.
21

22. Export Preparation Activities
Terms of Payment
 Draft or bills of exchange
 Similar to a check, except title to the goods does not transfer to
importer until draft is paid
 Sight draft
 Used when exporter wishes to retain ownership until goods are
delivered and payment received
 The original ocean bill of lading (showing title) must be
presented to carrier before goods are released to importer
 Time draft
 Used when exporter extends credit to buyer
 Payment due within time period specified on draft
© 2011 Cengage Learning. All Rights Reserved.
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23. © 2011 Cengage Learning. All Rights Reserved. May not be
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23
Table 3-3

24. Export Preparation Activities
Freight Documentation
Freight documents control movement of cargo
Mistakes or missing documents inhibit flow of goods
Documentation requirements set by customs
regulations of exporting and importing countries
Freight forwarders are documentation experts
Four types of documents
Invoices and transportation documents
Export and import documents
© 2011 Cengage Learning. All Rights Reserved.
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website, in whole or in part.
24

25. Export Preparation Activities
Freight Documentation
 Invoice or bill for the goods
 International invoices are more complex and there are
several types
 Commercial invoice is most common. Must contain:
 Description of goods, quantities and value – may impact
duties
 Country of origin, Incoterms, and parties to the transaction
 Pro-forma invoice - actually a sales quote
 Used by buyers to estimate total landed costs for potential
order
 Consular invoice - prepared by exporter
 Certified in origin country by consul of destination country
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26. © 2011 Cengage Learning. All Rights Reserved. May not be
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Figure 3-4

27. Export Preparation Activities
Freight Documentation
 Export documents
 Used by many countries to:
 Develop statistics (types, volume, value) of goods exported
 Control exports of strategic materials, national treasures
 For exports from U.S., following documents required:
 Shipper’s export declaration (SED)
 Required on all exports exceeding a nominal value and all exports
requiring an export license
 Export license
 Used to control export of sensitive materials to selected countries
 Certificate of end use
 Purpose: assure exporting country that product put to intended
use
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27

28. Export Preparation Activities
Freight Documentation
Import documents
Intended to:
 Protect citizens from inferior quality products
 Properly classify products for collection of duties
 Limit imports of products deemed inappropriate
Certificate of origin
 Most widely required import document
 Indicates shipment origin, but not location of production
 Used to determine appropriate import tariff
© 2011 Cengage Learning. All Rights Reserved.
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28

29. Export Preparation Activities
Freight Documentation
Certificate of manufacture
 Indicates location of product production
 Also used to determine appropriate import tariff
Certificate of inspection
 Attests to authenticity and accuracy of description of the
goods shown in the commercial invoice
Other import documents
 Phyto-sanitary certificates
 Certificate of analysis
 Certificate of certification
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29

30. Export Preparation Activities
Transportation Documents
Carrier manifest
Lists critical information needed to perform the
transport service
Bill of lading – primary transport document
Contract of carriage between cargo owner and
transport company
Serves as receipt for the goods
For international shipments, ocean bill of lading and
air waybills are used
© 2011 Cengage Learning. All Rights Reserved.
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website, in whole or in part.
30

31. Export Preparation Activities
Transportation Documents
Various types of bills of lading
 Through bill of lading
 Intermodal bill of lading
Negotiable vs. non-negotiable bill of lading
 If non-negotiable, carrier must deliver only to consignee
named on the bill
 If negotiable, the person possessing the bill has the right
of ownership to the goods
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31

32. Export Preparation Activities
Transportation Documents
Transport documents are largely paper-based
Major challenge: move toward electronic document format
International Air Transport Association e-freight initiative
 Intended to replace the 20 most widely used paper documents with
electronic messages
 Anticipated to reduce costs by $4.9B, improve accuracy, and speed
transmission of information
Other U.S. electronic document initiatives
 Automated Commercial Environment
 Auto. Brokers Interface System, Auto. Export System
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32

33. Transportation Planning
Mode Selection
Decision must achieve best fit and balance between:
Modal service capabilities
 Accessibility, capacity, transit time, reliability, safety
Product characteristics – size, durability, value
Supply chain requirements for speed, service, cost
Decision must also align with corporate strategy,
control risk and provide required level of customer
service
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34. © 2011 Cengage Learning. All Rights Reserved. May not be
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whole or in part.
34
Table 3-4

35. Transportation Planning
Carrier Selection
Decision based on best fit and balance between:
Geographic coverage
Average transit time and reliability
Reliability of on-time pickup and delivery
Technical capabilities, ability to share information
Equipment availability and capacity
Product protection/carrier’s freight damage experience
Carrier’s financial stability and freight rates
Service factors tend to outweigh cost
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35

36. Transportation Planning
Carrier Selection
Carrier selection strategy
Leverage transportation dollars by using a limited number of
carriers
Build relationships with service providers
Monitor carrier performance, rates, and financial stability
Have contingency plan with back-up carriers
Differs from mode selection decision
Many more options to choose from
Decision made more frequently but not for each move
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37. Transportation Planning
Route Planning
Carriers(pembawa) primarily responsible for routing
However, shippers(perkapalan) should have input to
ensure proper consideration given to:
Customer satisfaction and supply chain performance
Efficiency and product safety during transit
Routing decisions should be
Coordinated with mode and carrier selection
Aligned with global sourcing, inventory, demand
fulfillment strategies
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37