Importers Discover Financial Advantage With Shipping Contract Terms

By Simon Kaye, CEO, Jaguar FreightKnowledgeable manufacturers that combine creative financial thinking with sophisticated computerized global shipment tracking can realize a substantial competitive advantage.

Global import and export merchandise trade is valued at nearly $12 trillion according to the World Trade Organization. Today’s most successful manufacturers rely on outsourced components and material from suppliers around the world, realizing the cost benefit and dealing with the complexities of a global web of suppliers.
 
Too often, small and medium sized manufacturers are reluctant to become a part of this inevitable trend. A recent report by The Manufacturing Institute and the National Association of Manufacturers showed 61 percent of these manufacturers import less than 10 percent of their materials and components by dollar volume.
 
Sourcing Problems 
One big reason for this reluctance is that global sourcing is complex. When shipments from any part of the global supply chain are lost or delayed, missed deadlines, halted production runs and delayed product launches result. Such problems can damage a manufacturer’s reputation when temporary delays in a shipment, caused by systemic supply problems, have made them miss production runs and lose business.
 
One of the most difficult global sourcing problems for manufacturers is the lack of transparency in traditional shipping methods. Suppliers and shippers hide data from each other and do not share information regarding the level of risk of a given line, or the best ports or supply nodes to use in a given region. Manufacturers that are not prepared can be at a disadvantage when it comes to a region and its vulnerabilities.
 
Electronic Tracking
This specifically means the creation of comprehensive databases that show what is happening at every step in the supply chain. Via links to the freight forwarder’s own information, importing manufacturers can cross-check and validate progress and timings of shipments. An interactive system allows manufacturers to authorize and initiate both the original transaction and any subsequent amendments, with the system providing written confirmation of such authorization.
 
Electronic tracking supports another important innovation that can make global sourcing attractive and effective for manufacturers, this one involving the terms under which their goods are shipped. Many companies still use the same trading contract terms and structure that were prevalent decades ago. As a result, manufacturers that source abroad are missing a major opportunity to improve their reported financial results by failing to take full advantage of a little-known aspect of Incoterms 2000, the internationally accepted standard definitions of trade terms.
 
Even major manufacturers that source globally do not realize how much flexibility they have to determine how and when the title to goods they import will transfer. Manufacturers relying on import sourcing can structure contracts of sale to use Incoterms, particularly those terms under Group F (including FOB) that enable them to pay for import shipping, allowing them to control, manage, and track their shipments themselves, while delaying the point at which they record the goods into their inventory.
 
This allows them to have their cake and eat it too -- if they specify title to transfer at some later point in the transaction, for example upon arrival at the destination port or delivery to their DC.
 
Defining Incoterms
Incoterms (International Commercial Terms) were developed by the Paris-based International Chamber of Commerce in the 1930s, and have been regularly revised to reflect changes in transportation and documentation. They specify the exporting seller’s and importing buyer’s obligations regarding carriage, risks and costs, and establish basic terms of transport and delivery.
 
Incoterms DO NOT define contractual rights other than for delivery, and both parties must specify the delivery terms as well as other issues such as loss insurance and title transfer, a fact often misunderstood when contracts are negotiated.
 
Newer and smaller importers generally specify Group C Incoterms (including CIF) in which the seller arranges and pays for the main carriage without assuming its risk, another fact often overlooked by importers. Believing that it’s more convenient for the seller to handle these details, they generally wind up paying a higher price because the seller builds inflated shipping costs into their landed price. The importer is then further frustrated having to deal with a freight company chosen by the seller and who does not represent their best interests.
 
Sophisticated manufacturers that rely on import sourcing prefer to use Group F terms (such as FOB, or “Free on Board”), giving them greater control over their shipments, and because risk and cost transfer from the seller to the buyer in any case, as with CIF or CFR, but this way they are able to manage and control their freight destiny.
 
When Does Ownership Transfer?
Increased supply chain visibility and the control of import shipments are critical FOB benefits. By taking control as cargo crosses the ship’s rail at the port of origin, importing manufacturers are better able to obtain accurate and timely shipment information through working with the third party logistics provider of their choosing.
 
Incoterms DO NOT deal with the transfer of ownership, when transfer of title in goods takes place, or other considerations necessary for a complete contract of sale. The issue of the transfer of title remains subject to what has been separately agreed upon between the parties in the relevant contract of sale and applicable law.
 
Importing manufacturers that take the initiative -- and have the market clout -- can specify in their contract that the title to the goods does not transfer from the seller until the importer takes possession at the port of entry or at a later point that they specify, even though the manufacturer is paying the cost of freight for the imports being sourced.
 
By deferring actual ownership until this future date, the manufacturer can delay accounting for costly shipments as inventory on their financial statements, thus lowering expenses and boosting reported income. The sales contract can provide for supplier invoicing upon confirmed arrival at destination port, and tracking will be made available to the supplier on-line and via email notification. An online tracking system can give visibility to both the seller and buyer as well as allow for real time cross-checking and timing of shipments -- a huge advantage in making such arrangements work.
 
Creative Thinking plus Sophisticated Technology
Any contract terms regarding transfer of title must conform to applicable tax and accounting standards, as well as financial reporting requirements imposed by the Sarbanes-Oxley Act and similar statutes. Each shipping contract that uses Incoterms is unique, and the parties must always specify that their contract is subject to Incoterms 2000. But proactively structuring contracts for the most advantageous transfer of title can provide a huge financial advantage to importers that pursue them.
 
Often, importing manufacturers feel they need to use Group C (including CIF) or Group D (including DDU or DDP) Incoterms, with all the problems and additional costs that are involved, and relinquish control of the freight to their suppliers, in order to delay recording stock on their books. That simply is not the case, and knowledgeable manufacturers that combine creative financial thinking with sophisticated computerized global shipment tracking can realize a substantial competitive advantage.
 
Jaguar Freight Services provides a fully integrated door-to-door freight solution including customs clearance, storage and distribution facilities, and proprietary Cybertrax, real time online information tracking system. For more information, visit www.jaguarfreight.com.
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