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Notes and Comments

SAMEER KUMAR

Logistics Routing Flexibility and Lower


Freight Costs through Use of Incoterms
Recent decades have brought an increasing
rate of globalization of the economy and a
subsequent evolution within supply chains supporting this new economy. From this evolution,
more efficient supply chain networks have developed to keep pace with the increased trade as
products are no longer produced and consumed
within the same geographical area. The increased global trade has created longer, more
complex supply chains, thus changing the requirements in which the supply chain is managed (Levy 1995, Smith 2008).
This analysis aims to identify optimal methods of transporting goods that will allow reducing lead-time variability with the potential to
realize financial benefits by retail organizations
and also methods of more consistent execution
within key channels in their global supply
chain. This article focuses on universally applicable and sustainable logistics initiatives that
can be undertaken within the supply chain to
drive competitive advantage in a retail organization.
SOURCING FROM ASIA
An excellent example of the impact the globalization of the economy has had on trade between countries is what has transpired over the
last twenty-five years between China and the
United States (Lum and Nanto 2007). As recently as the mid-1980s, the United States
trade with China was characterized by an equitable exchange between the two nations totalling nearly U.S. $3.8 billion of goods moving
in each direction. The increase in trade between
these two countries began to change in 1990,
when United States imports began to rise at a
Mr. Kumar is professor of operations and supply chain
management and Qwest Endowed Chair in global
communications and technology management, Opus
College of Business, University of St. Thomas,
Minneapolis, Minnesota 55403-2005; e-mail
skumar@stthomas.edu.

disproportionate rate against exports as U.S.


consumer demand for inexpensive goods drove
an imbalance in trade of nearly six to one, with
the U.S. importing nearly $338 billion in 2008
demand (see Figure 1 for history of trade in
U.S. millions of dollars with China).
One of the biggest drivers of the increased
trade is U.S. retailers seeking low-cost production points to source consumer goods. The import penetration rate of these retailers, which
is the dollar value of goods sourced overseas
as a percentage of total goods sourced within
the organization, continues to rise. Several of
the largest big box retailers, who perennially lead the ranks as the largest containerized
importers, have retail import penetration rates
spanning 17 percent to 31 percent at retail (see
Table 1 for a breakdown of the top ten containerized importers in terms of twenty-foot equivalent units [TEUs] into the United States).
To characterize the impact retail has on
global trade, six of the top ten U.S. importers
are retailers, while two other importers are direct suppliers of electronic merchandise to retail organizations (see Table 1).
The primary commodities transported in the
Transpacific trade that drive the balance of
goods imported into the United States are made
up of retail merchandise produced in Asia (see
Table 2 for a breakdown of the top commodities transported into the United States from
Asia).
Of the top five containerized commodities
transported from Asia, all are retail products,
with the top five commodities accounting for
over 26.7 percent of the total containerized
trade from Asia. Retail merchandise clearly
dominates trade in the Transpacific (see Table
2). While China historically is the source of
the goods imported by U.S. retailers, sourcing
locations continue to evolve as new countries

2010

NOTES AND COMMENTS

49

Figure 1. U.S. Trade with China 1985 through 2008

Source: U.S. Census Bureau/Foreign Trade Statistics

Table 1. Top Ten U.S. Containerized Importers


Rank
1
2
3
4
5
6
7
8
9
10

Importer
Walmart
Target
The Home Depot
Sears Holding Corp
Dole Food Co.
Costco Wholesale
Lowes
LG Group
Philips Electronics
Chiquita Brands

Headquarters
Bentonville, AR
Minneapolis, MN
Atlanta, GA
Hoffman Estates, IL
Westlake Village, CA
Issaquah, WA
Mooresville, NC
Englewood Cliffs, NJ
New York, NY
Cincinnati, OH

TEUs in 2007
720,000
435,000
365,300
248,600
223,200
183,800
182,100
130,000
127,200
116,300

Source: Salisbury 2008

Table 2. 2006 Transpacific Containerized


Imports
Commodity
Total Import Makeup (%)
Furniture
13.7%
Toys
3.9%
Footwear
3.2%
Womens wear
3.0%
Plastic Products 2.9%
Source: PIERS Maritime Research Services

model the success realized by China in satisfying U.S. consumers appetite for low-priced
goods. As these countries gain manufacturing
expertise and labor efficiencies, they will increasingly vie for an opportunity to increase
trade with the United States (see Table 3 for
the top five growing trade partners with the
United States).
Despite increasing trade with the growing
economies listed in Table 3, U.S. trade with
China is unmatched, as Chinas large population base will continue to offer inexpensive

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Table 3. Fastest Growing Sourcing


Locations for U.S. Containerized Imports
Origin Country
Vietnam
China
India
Pakistan
Malaysia

Annual Growth in 2008


165%
36%
23%
20%
8%

Source: PIERS Maritime Research Services


labor and an increasing quality of finished
goods. With these key points of competitive
advantage, China will continue to play a pivotal
role in supplying products to U.S. retailers to
meet demand (see Figure 2 for major trading
partners with the United States).
Despite recent quality concerns in products
originating from China and the current global
economic slowdown, goods continue to stream
into the United States as China continues to
be the largest sourcing point of products imported by U.S. retailers (Trebilcock 2006).
COMPLEX RETAIL SUPPLY CHAINS
As trade with China and other new countries
continues to evolve, longer and more complex
supply chains are arising as retailers capture
the benefit of low-cost sourcing alternatives
(Levy 1995, Smith 2008). The inherent complexities of global supply chains are immense

as characterized by a typical cross-border shipment requiring the involvement of over twentyfive parties, generation/transfer of thirty-fiveplus documents (Lowson 2001), and over 500
laws and trade agreements (see Table 4 for a
comparison of the domestic versus global supply chain network complexities) (Egan 2002).
As these complex supply chains develop,
retailers are increasingly realizing that to be
competitive, they need to be nimble and positioned for changes to accommodate trade with
these existing and newer sourcing locations.
The speed at which retailers secure products,
from product design and development to product placement in-store, is essential to remaining
viable in the competitive retail environment.
Retailers focus on speed and flexibility needs
to be weighed in conjunction with tight management of supply chain partners and processes
to ensure that a competitive advantage is maintained to drive optimal supply chain and financial results.
Supply chain processes used by retail organizations to ensure consistency in supply chains
for globally sourced goods vary widely across
differing/competing firms. Different sourcing
tracks and lead-time components within the
supply chain can drive significant variability
in landing products into the United States on
time and at the right cost. Any variability jeopardizes the overall consistency to land products
on their prescribed delivery dates and projected

Figure 2. Major Containerized Trade Partners with United States

Source: PIERS Maritime Research Services

Summer

2010

NOTES AND COMMENTS

51

Table 4. Complexity Comparison Domestic versus Global Network


Component
Transit time
Third-party sourcing
Government involvement
Time zones
Transport modes
Transportation cost
Languages/currencies
Document requirements

U.S. Domestic Network


57 days
+/ 4 parties
Low to medium
14
13
Medium
1
Low

margins. The source of supply chain variability


is driven by a number of controllable and uncontrollable factors. Causes of supply chain
variability on lead time include the following
(Christensen et. al. 2007, Kumar et al. 2007,
McCue 2009):
- Transportation schedules
- Capacity limitations
- Equipment shortages
- Customs inspections
- Data transmission errors
- Weather/natural disasters
- Security
- Labor issues
- Political instability
Within the scope of this analysis were processes used within the retail sector to identify
areas to drive financial benefit and reduce variability within the global supply chain. The
overriding objective of this analysis is to identify cost-effective ways to move goods while
driving less variability and more consistent execution within key channels in the global supply chain. This leads to tying the reduced variability to the financial benefits realized by retail
organizations.
RELATED WORK
Within the scope of this research, numerous
studies and literature were identified as ways
to optimize supply chains. One such study relevant to this article was conducted by Christensen et al. (2007) and titled Variance vs.
Average: Supply Chain Lead-Time as a Predictor of Financial Performance. This research sought to explore the aspect of supply
chain variability or lead-time variance to address the question, Which is more important
to an organizations success; reducing average
lead time or reducing the variability in those

Global Network
2540 days
520 parties
High
8+
3+
Medium to high
Multiple
Significant

lead times? Further, the research examined the


relationship between an organizations financial success and supply chain lead-time variability. Indeed, Deming (1975, p.1) suggests
that All variation . . . causes loss and
Christensen et al. (2007, 351) contend that It
is logical to suppose that greater lead-time variance will reduce the profitability of an organization by burdening it with higher cost. It can
therefore be hypothesized that increases in supply chain lead-time variance are inversely related to financial performance. The key finding within their research is that supply chain
lead-time variance leads directly to financial
performance, whereas supply chain lead-time
average does not (Christensen et al. 2007). Attempts to identify key factors to optimize an
organizations supply chain to drive down optimal spending as well as to help drive down
that variability was limited within the scope
of this research. However, closely related to
mitigating lead-time variability were numerous
articles on best practices in reducing inventory
within an organization (Anonymous 2003,
Meyers 2004). Common themes running
through these articles included steps to reduce
variability of supply chain lead-time variance.
An article by LaMacchia (2004) titled Ten
Ways to Reduce Inventory, While Maintaining
or Improving Service cites among a number
of means to reduce variability in the supply
chain that a longer average lead time with less
variability may be better than a short average
lead time with high variability.
While the majority of research identifies the
idea that reduced lead time and reduced variability are means to drive down variability within
the supply chain, none addressed functional
methodologies to apply to an organizations
supply chain to derive financial benefit. With

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Summer

Figure 3. Process Map of Global Retail Supply Chain with International Transportation
Focus

the general framework laid out that reducing


supply chain variability drives financial benefit,
the scope of this article intends to tie practical
business applications within the retail supply
chain that will drive financial benefit while contributing to lower lead-time variance, thus improving bottom-line financials for an organization.
METHODOLOGY
This study focuses on readily accessible
practices that supply chain practitioners can
leverage to drive financial benefit within their
global supply chains. With this in mind, the
practices discussed do not require significant
capital investment in property, plant, equipment, or systems, to use to an organizations
benefit. These practices will also be a key
source of reducing lead-time variation in the
supply chain, which can disrupt the global supply chain stemming from factors such as the
number of service providers servicing a single
channel in the supply chain, the capacity of
these providers servicing this channel, service
speed, customs implications, and interchange
points, to name a few.
Supply chain lead-time variance for purposes of this study is defined as the level of
change [variability] in an organizations cyclerelated transportation lead-time process component between the sourcing point/manufacturer and the downstream customer or final
point of placement for customer consumption.
This analysis will focus on the international
transportation segment of this supply chain
from origin inland carriage of goods through
to entry into the U.S. supply chain network
before goods are available for domestic conveyance to the final point of placement of customer consumption (see Figure 3 for process
map of the global supply chain under study).

Within the context of these key considerations, the analysis will identify recent trends
in global sourcing and logistics from leading
retailers on innovative efforts to drive down
the total cost of ownership in the global supply
chain while positively impacting lead-time
variability within the overall order cycle time.
Analyzing the pre-sourcing activities and supply chain mode within the global sourcing sector will identify measures required to drive
bottom-line financial benefits in the global supply chain.
The approach to realizing these benefits is
related to leveraging incoterms to realize financial benefit and reduced variability. One new
practice being widely used by the retailer IKEA
for business from China to Europe has not been
put into widespread use within global retail
supply chains bringing goods into the United
States. This practice is the movement toward
optimizing international commercial terms, or
incoterms (Murray 2000). Broadly, incoterms
are a series of sales terms used by businesses
throughout the world used primarily to facilitate easier transactions in international trade
by clearly defining the terms, conditions, transaction cost, and ownership/transfer of goods in
a transaction. (See Figure 4 for a breakdown
of the implications of free on board [FOB]
versus free carrier [FCA] incoterms on the supply chain.)
FOB, or free on board, is followed by the
named port of shipment. With FOB the goods
are placed on board the ship by the seller at a
port of shipment named in the sales agreement.
The risk of loss of or damage to the goods is
transferred to the buyer when the goods pass
the ships rail, i.e., off the dock and placed on
the ship. The seller pays the cost of loading
the goods.

2010

NOTES AND COMMENTS

53

Figure 4. FOB versus FCA Incoterms in the Global Retail Supply Chain

FCA, or free carrier, is followed by a named


place for the seller to fulfill its obligation under
the terms of the purchase order when the goods
are handed over, cleared for export, and placed
into the charge of the carrier nominated by
the buyer at the named place. Of the current
thirteen incoterms used to define the rules of
a transaction, for purposes of this study the
FCA term (at named place) will define the
basis for driving more consistency and less
variance within the supply chain.
ANALYSIS
Within the scope of this analysis, it is readily
recognized that inventory and transportation
costs are the two single most expensive cost
drivers in the supply chain. Furthermore, it is
estimated that supply chain managers typically
control over 50 percent of an organizations
revenues (Heizer and Render 2006, 434). Thus,
it is a generally accepted assertion that effective
management of supply chain resources should
have a significant impact on many aspects of
organizational performance (Christensen et al.
2007, 351).
Corporations have focused on inventory
practices within their organizations for years;
however, less focus has been placed on the
transportation segment of the supply chain as
an opportunity to drive value and bottom-line
results (Lee 2000, Koudai 2005). The implications of a well-managed supply chain are now
becoming clearer as organizations see the efficiencies, economies of scale, and value a wellexecuted supply chain brings to an organization

(Guiffrida et al. 2008). The role of appropriate


supply chain strategy mixed with the choice
of supply chain technology is becoming important in achieving a competitive advantage (Harrison and New 2002).
Vendor locations can be optimized against
the myriad of load ports, particularly within
China (Kumar et al. 2007). Selecting these
ports in a tradeoff for fewer sailing options
can drive down origin inland pre-carriage cost
when combined with FCA incoterms. The recent infusion of investment in factories, ports,
and terminals over the past ten years has driven
the growth of viable port options from this
region, specifically from the ports of Yantian,
Chiwan, Shekou, and Nansha as more competitive and viable options from this sourcing region (Visser 2003).
Case in point: Manufacturers in Southern
China have elected to ship their products from
ports in Hong Kong for many yearsa key
reason Hong Kong has maintained its presence
as one of the busiest seaports in the world.
While Hong Kong is still one of the most
widely used load ports for products originating
from factories scattered throughout Southern
China, manufacturers and ultimately U.S. retail
importers pay higher transportation costs to
continue to use this as a port of export. Vendors
often select Hong Kong based on familiarity
with customs practices while bypassing ports
in Southern China that are closer in proximity
and less expensive for the pre-carriage movement. Exporters in Southern China choose to
ship their products from Hong Kong, paying

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Summer

higher drayage, Customs, and government export fees.


Through leveraging incoterms of sale that
allow U.S. importers to better retain control
of their goods within the supply chain, the
migration to free carrier incoterms has the potential to drive benefits within the global supply
chain. Specifically, these benefits entail:
1) Reduced U.S. Customs duty exposure
driving lower cost/higher margin through
removing drayage, terminal handling,
and government export fees from the first
cost of goods.
2) Introduction of more flexible routing options as the retail importer assumes control of origin inland carriage responsibility through a third-party logistics
provider in the market.
3) More consistent execution of goods
movement as the retail importer has more
control through leveraging regional
trucking volumes to ensure consistency
of meeting goal vessel sailing dates, minimizing delays stemming from missing
vessel departures.
4) Ability to demonstrate control and custody of freight in global supply chains to
U.S. Customs to drive preferential status
mitigating lengthy Customs exams and
delayed clearance of goods into the
United States.
The benefits of FCA incoterms can be demonstrated through a footwear vendor sourcing
goods from a factory in Donguan, China. Key
cost assumptions for this model are (please see
Appendix for a full breakdown of trucking rates
in this market):

Reviewing these costs as a comparison of


moving goods over the Port of Hong Kong
versus the Port of Yantian derives financial
benefit to the U.S. retail importer of the product
(see Table 5, which illustrates the financial
benefit of the change in incoterms).
In this model, movement of goods from a
vendor in Dongaun, China will derive $299
per container savings benefit by moving the
container of footwear over the port closer to
the factory location by leveraging flexibility
over the routing options. In addition to the
origin inland haulage savings derived by using
a port closer to the factory, $64.69 of duty
savings can be generated by lowering the dutiable value of the first cost of goods through
removing the inland haulage or drayage, as
well as the origin terminal handling charges,
from the first cost of goods.
While this is a best-case scenario for savings,
the more conservative savings benefit would
drive a $39.27 duty savings benefit to the U.S.
retailer importing these goods by taking the
inland haulage, terminal handling charges, and
documentation fees from the first cost of goods.
To further limit variability within the supply
chain, importers demonstrating custody and
control of their supply chains will help reduce
variability as U.S. Customs begins to look more
favorably on importers securing their supply
chain in a post-911 environment (McCue 2009,
Sarathy 2006). Achieving this favorable status
with U.S. Customs has the potential to drive
product consistency, as less intensive exams
allow for overall better network flow of goods
from origin to store shelves.

Origin Trucking Donguan, China to


Hong Kong Port:
US$375
Origin Trucking Donguan, China
to Yantian Port:
US$175
Origin Terminal Handling Cost
Hong Kong Port:
US$368
Origin Terminal Handling Cost
Yantian Port:
US$269
Origin Documentation Charge
Hong Kong Port:
US$18
Origin Documentation Charge
Yantian Port:
US$18
U.S. Duty for Footwear (sneakers):
8.5%

MANAGERIAL IMPLICATIONS
The overriding objective in logistics is to
have the right product at the right place at the
right time at the right cost. The implications
of this analysis across the retail organization
are meaningful, practical supply chain solutions that will help reduce variability within
the global supply chain, while providing bottom-line savings to a retail organization. However, the relative unfamiliarity of managers
dealing with incoterms and their subsequent
distance from this decision-making process in
the overall sourcing/negotiation process with
product manufacturers can lead to challenges

2010

NOTES AND COMMENTS

55

Table 5. FCA versus FOB Freight Savings Model (Per Container)

of fully identifying opportunities and implementing new terms. This analysis attempts to
bring visibility to the logistics routing flexibility and financial benefit of leveraging incoterms within the supply chain with little impact
to the overall structure of the merchandise
buyer within the retail organization.
Before a manager or supply chain practitioner can leverage these terms to move his
supply chain toward FCA incoterms, further
research on the potential risk associated with
assuming FCA incoterms includes:
- Understanding of the fragmented trucking
market in China.
- Scalability of trucking companies in the
China trucking market to take additional
volume.
- Better understanding of foreign markets
both locally and regionally within China.
- Understanding of the cost components of
changing incoterms to negotiate new terms
and product first-cost to secure savings.
- Systems implications or limitations to support FCA incoterms.
- Understanding of product lines being
sourced overseas and their duty status as
more items migrate toward duty-free
status.

practices within a global supply chain for a


retailer.
Primary limitations of this research are attributed to a lack of public information on retailers supply chain practices. Many supply
chain practices are highly proprietary within
organizations and considered core, competitive
advantages, making information about these
supply chain practices difficult to ascertain.
Further complicating this matter is the unique
footprint of each retail supply chain, making
one best practice applicable across many
organizations difficult to replicate.
For purposes of this analysis and the results
identified, this high-level analysis illustrated
general capabilities of leveraging such practices to drive financial benefit to an organization. Areas for additional research to lend further support to this study would include further
investigation on U.S. Customs clearance practices based on importers demonstrating custody
and control within the global supply chain.
Specifically, do importers receive preferential
consideration around practices of pre-clearance
of goods and lower intensive exam rates versus
importers not driving custody and control further up the supply chain?

RESEARCH LIMITATIONS AND FUTURE WORK


The research conducted within the scope of
this analysis is supported both by studies outlining the benefits of reduced variability within
an organizations supply chain, and empirical
research gained through industry knowledge of
best in class supply chain practices. This
research provides a better understanding of the
potential opportunities of focused logistics

CONCLUSIONS
Many factors are involved in the push to drive
a more efficient supply chain: Competition, financial awareness, and increasing customer demand for immediate gratification are reducing
lead times and placing businesses under growing pressure to consistently meet those lead
times. Optimizing inland routing via buying
terms or incoterms drives flexibility into any

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TRANSPORTATION JOURNAL

supply chain. Flexibility around leveraging optimal load ports can drive full supply chain efficiencies that fit a companys overriding supply
chain mission. Stepping outside commonly
used buying terms to take greater control of a
supply chain cannot only improve consistency,
but drive optimal costs within the process.
REFERENCES
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Companies Must Define What Works for Them.
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articles/08-03-Best_Practices.asp.
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Predictor of Financial Performance, Supply Chain
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349-357.
Deming, W.E. (1975). On Some Statistical Aids toward
Economic Production, Interfaces, Vol. 5, No. 4, pp. 1-16.
Guiffrida, A., M. Jaber, and R. Rzepka (2008). An
Economic Model for Justifying the Reduction of Delivery
Variance in an Integrated Supply Chain, INFOR, May,
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Harrison A. and C. New (2002). The Role of Coherent
Supply Chain Strategy and Performance Management in
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Heizer, J. and B. Render (2006). Operations Management,
Prentice-Hall, Upper Saddle River, NJ, USA.
Murray, M. (2000). International Commercial Terms.
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legalandgovernment/a/Incoterms.htm.
Koudai P. (2005). Unlocking the Value of the Global
Supply Chain, World Trade (July), pp. 24-28.
Kumar, S., C. DuFresne, and K. Hahler (2007).
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Partnership,
Information
Knowledge
Systems
Management. Vol. 6, pp. 343362.
LaMacchia, C. (2004). Ten Ways to Reduce Inventory,
While Maintaining or Improving Service, The Progress

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Group (Internet), accessed 13 April, 2009. http://


www.theprogressgroup.com/publications/wp15tenways.html.
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Levy, D. (1995). International Sourcing and Supply
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Lowson, R. (2001). Retail Operational Strategies in
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Maersk Logistics South China Trucking Tariff (2009),
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sw32113.asp.
McCue, D. (2009). Taking Supply Chain Security to the
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Appendix. Full Container Load versus Less-Than-Container Load Drayage Fees


Factory Location

Export Hong Kong

Export South China

Savings

Zhuhai
Zhongshan
Panyu
ChangAn
Zhangmutou
Donguan
Guanlan
Henggang
Shenzhen
Buji

$775
$675
$500
$375
$375
$375
$275
$275
$275
$275

$350
$325
$275
$200
$175
$175
$125
$100
$125
$125

$425
$350
$225
$175
$200
$200
$150
$175
$150
$150

/
/
/
/
/
/
/
/
/
/

$1,450
$1,300
$1,175
$925
$950
$950
$825
$800
$800
$800

/
/
/
/
/
/
/
/
/
/

$550
$500
$450
$300
$275
$300
$200
$175
$175
$175

Source: Maersk Logistics South China Trucking Tariff, April 2009

/
/
/
/
/
/
/
/
/
/

$900
$800
$725
$625
$675
$650
$625
$625
$625
$625

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