AIR/SEA FREIGHT IMPORT/ EXPORT ELEMENTS AND NEGOTIATION TECHNIQUES

General

Air and sea freight charges are made up of several elements that will be examined in this paper. Comment will also be made in regard to the anticipated outcomes and recommendations for the best method of negotiating each element with freight suppliers

This document should be taken as general advice only, for specific assistance you can contact the Canterbury Manufacturers’ Association or an appropriate Service Partner.

1.1 Sea Freight

Normally set by the shipping line or group of shipping lines (called Conference Lines) in US dollars per cubic meter per 1000 kg for Less than a Container Load (LCL) or by Full Container Load rate (FCL). Rates are also in the other major currencies.

This freight cost can include Bunkerage Adjustment Factor (BAF) and Currency Adjustment Factor (CAF) within the rate (and state the fact) or show it separately. Example $USD1,000 + BAFCAF positive 10% gives a total freight rate of $US 1,100.
Suggestion 1: Make sure your rates show CAF and BAF separately to accurately track all changes.

Suggestion 2: Normally all rates are set on a “Freight All Kinds” (FAK) basis, but shipping lines do have other rates for some goods; if in doubt ask the question

1.2 Combination of BAF AND CAF Factors

These are minor adjustments (plus or minus) to the established freight rates and are monitored by the various freight conferences and lines against a standard set by them. The adjustments are expressed in percentages and are either positive (surcharge) or negative (rebate). For example BAF = 3.10% positive and CAF =14.7% negative then CABAF = 11.6% negative. This means that the freight rate will be reduced by 11.6%

2.0 Bunker Adjustment Factor (BAF)

This adjustment is applied to cover variations in world oil fuel costs set by the shipping line head offices The BAF has been quite high over the last 12 months due to the huge increase in world oil prices. In fact the shipping lines instigated a “Bunkerage Surcharge”, which has been steadily decreasing due to the oil prices have fallen and staying low.

Suggestion 3: The latest increase is a result of Sept 11 and the US involvement in the Afghan war. This surcharge should be withdrawn soon, as it can no longer be justified because of the success of the US in this conflict. If is not it should be a negotiating issue.

Normally BAF is very difficult to negotiate and usually is not worth the effort, unless there are significant worldwide events as mentioned above.

3.0 Currency Adjustment Factor (CAF)

This adjustment is made to compensate for any significant change in the relative exchange rates in the shipping or conference line basket of currencies between the standard rate set at the time the freight rate was established and the subsequent exchange rate movements.

All currency movements are monitored by the shipping lines from Wall Street on a quarterly basis and changes to CAF are then made accordingly.

CAF is virtually impossible to negotiate. Currently there is no CAF applicable to or from Europe, the USA or the UK. CAF has been levied on the trans-Tasman trade because of the NZ dollar downward push last year to the mid 70s against the AUD. The NZ dollar is now at AUD82/83. This may or may not be a point where the CAF for the trans-Tasman should be reduced; however, the question should be asked.

Normally, BAF and CAF factors are not negotiable as they are set by the shipping lines’ head offices in conjunction with their Wall Street banks.

Shipping lines set the exchange rate per voyage, called the “ship rate” approximately 5 days before the ship sails. This is the exchange rate that should be used when dealing with freight forwarders, so that they cannot make any exchange rates gains when converting your overseas freight charges into $NZD.

If off shore accounts are available to manage exchange risk you can opt to pay all overseas charges from these accounts.

Unless you are a huge importer, the major shipping lines would prefer you to work via a freight forwarder. This should be advantageous to you as the forwarders, because of their total volumes, should be able to secure better rates. However make sure you ask them to show in hard copy the volumes of freight they are actually shipping out of that port and what shipping lines they are using.

4.0 Sea Freight Structures

The amount and type of “add-ons” are directly dependent on the way the goods are purchased as detailed below:
Ex-Works - this means that the seller fulfils his obligation to deliver when he has made the goods available at his premises. The buyer is therefore responsible for:

Insurance and transport to port
Packing into container at port if LCL
Export documentation charges
Origin port fees (handling, loading etc)
Export duties, formalities, taxes etc
Terminal handling/receiving fees (USA only)

FOB (Free On Board) - this means that the seller must pay all costs (as above) relative to the goods until such time as they have passed over the ships rail or entered the loading area of the ship or aircraft at the named port of shipment. In the USA, FOB can be regarded as “Ex-Works” therefore in this case you need to specify the terms of sale “FOB PORT/AIRPORT”

CIF, C&F - these are “Cost, Insurance & Freight” and “Cost & Freight”. “Cost and Freight” means that the seller must pay all costs necessary to bring the goods to the named port of destination, but the buyer has to bear any loss/damage to the goods, once they are over the vessel’s rail. “Cost Insurance and Freight” means that in addition to the above the seller must provide marine insurance against the buyers risk of loss or damage.

5.0 Import Sea Freight

FOB
All inclusive unit price loaded safely on ship. On inbound you control freight method/type/vendor /timing/ insurance, Buyer knows the local scene, it may be a large exporter with access to its own transport. You are not dependent on your forwarder’s strength in the remote market.

Suggestion 4: FOB is likely to be the best option.

Import CIF and C&F under these terms the buyer has no control on who the seller will ship with and when. The buyer may not have any relationship with the shipping line therefore, delays in communication, getting shipping documents etc, failure to meet the buyers needed delivery times can occur

Suggestion 5: CIF or C&F are generally not recommended.

Suggestion 6: It is prudent to negotiate an “open marine policy” with your insurer for all shipments; you will have better control and reduce costs

Import Ex-Works could be negotiated with all charges to the port of origin but it can be complex and time consuming. It should be remembered that if your overseas vendor is of reasonable size and exports regularly, they should have good deals with transport companies and may be able to create their own export documentation. They should know the local scene, seaports and airports, regulations and requirements and be in a better position to find the best local deal that should be to your advantage.

t should also be noted that in some areas in the world your chosen forwarder may not be strong and therefore their ability to negotiate local charges may be very limited.

IHowever there is a relatively quick method of ensuring you are getting the best deal on origin charges.

Ex-Works vs FOB Costs
Take a typical size shipment that you would be buying from the overseas vendor.
Example: 100 units weighing 1 tonne and measuring 1m3.
Ask your freight forwarder for a broken down but total cost of transporting the consignment from your vendor to over the ship’s rail at the origin port. When you receive it divide it by 100; that is your ex-works to FOB piece price. If a Bill of Lading (BOL) charge is shown this can be negotiated to zero.

Ask your vendor for both an ex-works and FOB piece price. Subtract the ex-works piece price from the FOB piece price, that is the unit cost of transport ex-works to FOB. The two costs can be compared and renegotiated if needed, ultilising the broken down elements of the forwarder’s quote. This is because the vendor may well use a percentage “add-ons “ to give FOB pricing. Check with your vendor what FOB elements have been included.

Suggestion 7: It is important when negotiating an FOB price with a vendor they understand what costs will fall. Also inform your forwarder and the vendor that you will NOT accept and pay for any FOB type charges from that vendor that appear on your freight account.

Suggestion 8: In USA, question closely anyone who quotes terminal handling/receiving charges for US ports. These are generally not valid; do not accept them unless absolutely proven.

6.0 Goods Arrival Charges

Port services charges set by destination port, not negotiable, unless very high volume importer, even then they are doubtful.

De-vanning of LCL containers, now done by private companies and can be negotiable based on volume of business.

Customs clearance is negotiable based on volume; EDI customs fee of $5-8 transaction can be negotiated to zero. Set charge for custom clearance up to 5-10 lines instead of being charged a base fee then a extra per line charge. You should be able to avoid costs on transfer of documents sent to the transport company’s wharf box for consignment pick up.

Transport charges from the wharf to you are negotiable; if you have the same company for sea and air transport it should be possible to reduce these costs.

Delivery order fee of approximately $NZ25-40 is the fee charged by the shipping company to provide a delivery order after customs clearance so that your transport company is authorized to pick up your goods at wharf. This charge is difficult to negotiate down but it can be done. Shipping lines are very reluctant to reduce this charge.

7.0 Import Airfreight

The process of import airfreight is similar to the process of import sea freight; Rates are per kilo and apply by volume or weight whichever is the greater. Airway Bill (AWB) preparation charges are negotiable; try to avoid them.

Suggestion 9: The best method to buy product overseas using airfreight is usually FOB.

Use the ex-works versus FOB piece price method to ensure you get a good deal. In this case you are asking for “flat FOB” charges, but these need to be broken down into their components from your forwarder avoiding percentage markups.

Airfreight FOB charges have essentially the same structure as sea freight, such as internal freight costs to airport, documentation charges, export and handling charges. However, they also can levy all sorts of “disbursement” charges, some quite strange and questionable. To alleviate this, flat FOB charges are desirable. This will eliminate any other “add-ons” being slipped in later. Check what elements the vendor has included in the FOB price.

Once again ensure your vendor fully accepts and understands the FOB charges they will be paying for and what you won’t be paying for. Inform your forwarder accordingly.

Airfreight does not have a formal BAF system, but has levied fuel and security surcharges (Sept 11 again). It is very hard to negotiate away these costs as the terrorist threat is here for the foreseeable future, although fuel prices are expected to fall during 2002.

The fuel surcharge issue should be raised with your freight forwarder.

Freight forwarders handle all import airfreight, not the airlines. One of the big issues with airfreight is the minimum airway bill charge. The airlines charge a minimum charge for all consignments with a weight of up to around 10kgs. Negotiating any airfreight forwarder to waive their minimum airway bill rate is very difficult. It can be done, but it is difficult to implement and maintain, especially as their overseas offices and agents are involved.

Suggestion 10: One method of solving this problem is to internationally courier all items less than 10kgs. It will be fast and includes pick up customs and delivery to your door. Do the comparisons between air and courier factoring all costs.

Suggestion 11: Try and ensure your freight forwarder has sufficient volume out of all the airports you plan to use, so that you know they can provide good rates and service to your company.

Suggestion 12: Ensure your forwarder can provide fax or email consignment documentation for pre customs clearance free of charge.

Suggestion 13: CAF on airfreight forwarders charge between 5-10% CAF on incoming shipments, supposedly to protect them against exchange rate fluctuations between origin departure and destination arrival. As most transit times are less than 5 days, this charge is invalid and can be easily reduced to zero.

8.0 Airfreight Arrival Charges

Customs clearance: essentially handled or negotiated the same way as sea freight. Minimum charges for small consignments should be virtually zero if the suggestion of using international couriers for small consignments has been adopted.

International Transfer Fee (ITF), this essentially is a charge made the forwarder and passed onto the customs agent to release documentation for consignment shipped by them to you by another forwarder at a cost of about $25-30.

However if you are using your airfreight forwarder to clear your goods this charge is waived. This is recommended as it makes the process more seamless and gives your more negotiating power. All your sea freight import customs work should be with the same customs agent. All that then needs to be done is to ensure your sea freight forwarder gets advance fax of sea freight documents for every shipment to your nominated customs clearance agent.

Storage charges: forwarders can charge you between $NZD0.06-0.10 per kilo per day if your goods are not picked up within 3-5 days of arrival. This can easily be negotiated to zero and free unlimited storage.

Transport of goods from airport to your premises are negotiable with a transport company, include sea freight volumes if appropriate

9.0 Export Sea Freight

As with import sea freight, the export rates are set by the shipping or conference lines by cubic metre/1000kg for LCL shipping or by full container load (FCL). Rates for export are set in NZD only for the trans-Tasman trade. All other rates are set in USD.

CAF and BAF are monitored and applied same way as import. BAF is applicable for all export routes but the only route that CAF is applied is the trans-Tasman trade at this time and should be negotiated or challenged (ref import notes).

CAF and BAF should be shown separately from the freight rate.

Check the applicable freight rate for your goods with your shipping line or forwarder if they are not “general type items” (FAK) e.g. refrigerated needs, food, etc.

Once again, unless you are a huge exporter, the best scenario is to use a freight forwarder, especially if you export numerous LCL shipments

For FCL consignments, insist on using ship’s currency rate struck, if shipping on C&F, CIF, FIS terms, except, of course, for trans-Tasman shipments that are in NZD

10.0 Export Charges

As with import all export charges are directly dependent on the way you sell your goods to an overseas buyer.

Ex-Works: generally the best option for the seller, as he only has to make goods available at his premises, but may have to pack a container or pack goods suitably for export.

FOB: Under FOB export terms the seller is responsible for all charges until the goods are loaded on board the ship or aircraft and must pay and be responsible for:

Packing goods into export pallet or container
Insurance and road transport
Export documentation charge (BOL, export Entry $NZD40)
Freight rate which includes PSC Service charges both for LCL and FCL cargo. (few countries in world do this)
Minimum BOL charge of 1 cubic metre or 1000kg

C&F and CIF: The seller under these terms and conditions is taking on the responsibility to deliver the buyer’s goods to the destination port on time and undamaged. In addition to his FOB responsibilities, the seller needs to find a reliable shipping line or forwarder that can provide a good service, transit time and rate to the buyer’s nominated port, plus be cost effective and reliable (these aspects are very important, in order to keep repeat export business). The shipping line or forwarder also needs to demonstrate that they ship sufficient volumes of freight to the country you are interested in.

Under CIF terms, the buyer will require you to provide marine insurance for the consignment. If you have an ‘Open Marine Policy’ this is easy and costs you nothing, as in essence, you normally pay a set amount per year based on your proven or forecasted shipments.

Ensure that you have accurately and realistically priced your C&F or CIF piece price to your buyer, plus a reasonable margin.

Watch out for unique requirements that each respective country requires for import; for example, Australia, which requires that all shipments packed with wooden packing or pallets have a certificate accompanying them that certifies they are made of fumigated wood. Failure to provide such documentation can lead to the goods having to be fumigated in Australia causing delays and extra cost.

If you are selling on C&F /CIF and especially FIS, it is recommended that you maintain good communication and information flow with your customer.

FIS “Free into Store” means that the seller has the same obligations as CIF but in addition is also now responsible to deliver the goods to the overseas buyer’s premises “door to door” scenario. This is a complex and time consuming option and should be avoided by the seller if at all possible. Exporting on a FIS is quite common to Australia, less so to other countries.

Suggestion 14: new exporters should not attempt FIS, unless supported by a reliable and very experienced Freight Forwarder.

Under FIS terms, once the cargo arrives at the destination port the seller is responsible for:

Import Port service and handling charges
Local MAF/Quarantine inspection
Local taxes
Customs clearance
Inland transport

It must be realized, that conditions, regulations, and costs vary from country to country. No two are alike. Customs clearance and inland cartage can be very expensive, 3-4 times the cost of NZ. NZ has some of the cheapest customs clearance and inland cartage rates in the world. Things we take for granted here, like truck “swinglift” used to pick up and off load containers just aren’t available in the USA or UK and rarely in Australia.

Suggestion 17: If you are exporting FCLs to USA on a FIS basis by sea, one of the best methods is to ship into the US West Coast - Los Angeles, then use the container stacker trains that send FCLs all over the USA. The customer can then pick up his freight from the nearest rail-head (called ramps) to his premises.

FIS freight rates can be provided by the Forwarder either as one sum, or split into the ocean freight & inland portion. The second option is recommended.

11.0 Export Airfreight

The approach and process for export airfreight is based on the same principles as export sea freight.

Export airfreight charges are in NZD/kilo only for trans-Tasman traffic. All other countries’ rates are in their own currencies.

All handling and loading charges for export airfreight are included in the rate quoted
The only document change is that an AWB is generated instead of BOL and the documentation costs are similar. Minimum AWB charge applies to goods under 10kg.

To avoid min AWB charges, send all consignments under 10kg by international courier.

Ensure you choose a reputable air forwarder with short transit times to the customer’s airport/premises. They need to absolutely demonstrate that they can absolutely do what they claim they can do per country.

Ensure they will fax or email all export documentation to your customer promptly and free of charge.

All other FOB, CIF and FIS type charges, such as customs clearance, inland freight are the same as sea freight.

No BAF, but fuel surcharges and CAF can apply.

12.0 Negotiation Techniques for Export Sea and Airfreight

Approach several freight forwarders and ascertain what their services, transit times and expertise are in the countries your plan to export to, based on your selling terms.

They will need to provide airfreight rates/kilo, plus broken down costs of all FOB/CIF/FIS type charges, which need to be compared and negotiated.
All export documentation charges are negotiable.
The Flat FOB charge approach for export airfreight is not suitable.

Minimum BOL charges for LCL shipments should be able to be reduced from 1m3 to 0.5 m3.
All FIS type charges need to be supplied, broken down, verified and compared and negotiated based on “best price “ scenario

13.0 Payment Terms for Air & Sea Freight- Import/Export

If you are dealing directly with shipping companies the best payment terms possible are 7-14 days after ship has sailed.
Make use of offshore accounts to pay overseas charges.

If you are dealing with a freight forwarder and you have a reasonable level of business, then you can negotiate 20th month following terms. If you can consolidate all your freight business with one vendor for sea and one for air, this will strengthen your case for 20th of month terms.