Global Sourcing; More Control In Your Import Supply Chain: Still Buying CIF?
Importing involves a more distant supplier with extended transit lead times. As lead times are one the critical components when deciding how much to order from suppliers, then knowledge and control of this lead time is necessary. Indeed, fixed reliable lead times are a “mandatory” component for effective inventory management.
However, what often happens is that many UK buyers decide to import on CIF or C&F Incoterms and therefore, they leave the organisation of the transit with the supplier. Effectively therefore, the associated supplier lead time is also externalised. Importing companies will then often spend and waste time expediting and checking where the goods are, when they will arrive etc.
Delays in transit times can also cause potential product shortages, impact on customer service levels and to not satisfying customer requirements. With regular repeat orders, then any delayed transit times will also inevitably lead to increased stock levels, as the buying company will then be holding additional stock as a protection against the uncertainty of the suppliers lead time.
Benefits of changing to EXW/FOB terms
It is however possible to better control imports by switching to Ex Works (EXW) or Free on Board (FOB) Incoterms and the following benefits will then be realised:
• Control and knowledge of exactly what is happening; (management needs to recall here that the management cycle not only involves planning, organising, directing but also controlling).
• Visibility and knowledge of exactly where the products are during the transit; as simply, the transit it is now in your direct control.
• Cheaper freight costs as you are now directly paying them. Importers and buyers need to appreciate that suppliers have a margin on the freight costs they have paid; after all, they are not over time, going to be losing money.
How to change
A useful place to start is to understand some of the aspects of total supply chain management, for example:
• What are your costs of holding inventory?
• What supply lead time is required?
• What part of the supply lead time, is the transit lead time?
• What would be the effects of reliable and consistent on time in full receipts for your business?
How does the above compare to your current situation?
Answers to these questions are always revealing and also often show, how the internal structure is fragmented and unorganised to undertake effective importing.
Answers will also provide the basis for accessing the benefits of changing.
The next steps
Ask for the suppliers EXW price.
• Negotiate freight terms, possibly by going out to tender for a global or regional freight forwarder.
• Check on the track/trace system to be used. This can be a simple key point reporting with spreadsheet recording, or, an instant on demand access to a carriers system.
• Assess the risk of changing, for example, any extra management costs, the insurance costs and the risks of direct exposure to regular variations in freight rates.
• Compare and contrast the current CIF price against the new EXW price plus the freight, insurance and risk costs. It is important to ensure a like for like comparison with the current methods as many of the current costs may well be hidden.
• If deciding to change, and effectively changing the procurement and buying strategy, then ensure that the internal structure will support the changes.
What others have done
There is much evidence to support that the changes detailed above are worthwhile as shown by the following three case studies.
1) A major food retailer had spending of £1200 million on imports via third party wholesalers and £500 million on direct imports. For example, home and leisure products were ordered through UK agents who arranged everything to DDP. Meanwhile, beers, wines and spirits were bought EXW works or FOB with freight arranged through various forwarders. A change in management identified that they had:
• no systems
• no cost visibility
• no economy of scale
• poor product availability
• an internal fragmented structure; for example, Trading on product selection, negotiations, selection of suppliers, and ordering; Finance on letters of credit, payments; Logistics on order quantity and phasing into supply chain
The company tendered and then outsourced to one forwarder but maintained and determined carrier selection when appropriate. The reported results were:
• Freight costs fell by 8 per cent
• Duty charges reduced by 10 per cent
• Fuller visibility of supply chain
• Reduced stock levels
• Centralised the previous fragmented internal control as a new structure followed the new strategy
2) A major clothes retailer with nearly 200 stores had 70% of products imported, mainly from Far East. They identified that they had the following problems:
• No accurate data therefore no visibility
• Orders arrive “unexpectedly”
• 40% time spent of phoning/checking
• Paid high demurrage/rent port costs
• Restricted on buying currency forward
• Poor QC
The solution was to:
• Change from C&F to FOB and use one UK forwarder
• Set up a simple database tracking on transfer points. PO, confirmed, tariff heading, cargo booked, authorise shipment, confirm shipment, documents banked, documents received, arrival time, clearance time, arrival at DC., QC checked, released/available.
• Integrated all their internal systems
The benefits reported were:
• Lower demurrage costs
• Improved warehouse efficiency due to scheduled arrival’s
• Improved finance due to forward currency buying
• Quicker customs clearances
• Better product availability
3) A supplier of branded and own label cleaning products to major retailers
Cost-cutting initiatives had become a way of life in the face of major supply chain challenges. The company’s supply chain manager noted that: “In the past four or five years we have had to work hard at controlling our costs at a time when there have been no price increases from our customers”.
The operation therefore changed to buying products ex-works. The challenge of bringing in consignments cost-effectively is made more difficult by the low-value nature of the products, many of which are very light and use up large quantities of space. The companies’ continued success is seen as directly related to its freight cost management and arrangements.
Stuart Emmett is a freelance independent trainer and consultant who trades under the name of Learn and Change – Stuart believes that in times of change, it is only those who consciously learn, that will inherit, a successful future.
Stuart has operational and strategic experience in varied commercial service industries - gained in the UK and Nigeria – and is particularly interested in the “people issues” of management processes, as well as logistics and supply-chain management. He has worked on 6 continents, in over 30 countries and delivered to over 50 nationalities.
Stuart has written many books on supply chain topics, for example "The Supply Chain in 90 minutes” published by Management Books 2000 "Excellence in Warehouse Management" published by Wiley
"How to Mentor and Support Learning" published by Capita "Logistics Freight Transport: Domestic and International" published by Cambridge Academic Press “Excellence in Supply Chain Management” published by Cambridge Academic Press "The Leadership Gospels" published by Cambridge Academic Press “Excellence in Freight Transport” published by Cambridge Academic Press “The Business Toolkits” (individual titles on Learning, Personal Development, Motivation, Team Building, Customer Service, Communication, Systems Thinking) published by Management Books 2000 “Excellence in Leadership and Management” published by Cambridge Academic Press,
Joint Author of:
"Stores & Distribution Management" published by Cambridge Academic Press "The Relationship Driven Supply Chain; creating a culture of collaboration throughout the chain" published by Gower “Excellence in Inventory Management” published by Cambridge Academic Press “Excellence in Procurement” published by Cambridge Academic Press "Excellence in Supplier Management" published by Cambridge Academic Press “Excellence in Services Procurement” published by Cambridge Academic Press “Green Supply Chains; An Action Manifesto” published by Wiley and was selected as the “Most Innovative Supply Chain Book of the Decade” in 2011 by Supply Chain Insight Vietnam "Excellence in Global Supply Chain Management" published by Cambridge Academic Press “Excellence in Maintenance Management" published by Cambridge Academic Press "Excellence in Public Sector Procurement" published by Cambridge Academic Press
Stuart can be contacted at email@example.com or by visiting www.learnandchange.com