Outsourcing Essentials 5 - Logistics

Assuming you have succeeded in selecting a suitable supplier and transferring your documentation and instructions to this supplier in a manner that is easily understood and interpreted, you will now be looking at how you are planning to transport finished goods from your supplier to their destination.

Do you want all finished goods to return to your warehouse for storage and / or testing and QC checks?

Do you want the supplier to act as a distribution centre and ship direct to end customers on your behalf?

Do you have sufficient quantity to justify a sea container as means of shipment and have you accounted for the delivery time impact sea freight will impose on your ordering and storage requirements?

What will be the most cost effective method of shipping for your products?

Have you included freight and customs considerations in your costing analysis for the outsourcing venture?

The final logistics requirements of your products is a major consideration in the outsourcing process to a LCC vendor. You no longer have the opportunity to arrange a courier or staff member to collect items from a local supplier. Your items need to be sent via the best possible method to accommodate your supply and budgetary requirements. Sometimes sea freight will not be the best option and at times it may actually be less expensive to send your products by air freight. To start looking at logistics requirement we should first look at clarifying and exploring the terms imposed by the LCC supplier on your orders.

Common Order Terms

EXW - "Ex Works". If your LCC supplier has stipulated EXW terms for all your orders, this means that all costs incurred on their domestic side is not covered by the terms of the order and is payable by you. Depending on the distance of the factory from a shipping port these can amount to a considerable cost. If you are shipping a container load a considerable distance overland in order to be able to be placed on a ship for sea freight purposes, the costs incurred for this exercise can be comparable to the actual sea freight costs for your container. It pays to investigate the geographical location of your supplier and to verify where the nearest port is in comparison to their manufacturing facility so you can add the overland contingent of freight transportation to your overall cost for the product.

FOB - "Freight on Board" or FOB terms basically means that all domestic costs involved in transporting your order from the factory to the nearest departure port will be met by the supplier. The cost of sea freight should then only include the actual shipping, customs and domestic charges incurred by the receiving country.

CIF - "Cost, Insurance and Freight". CIF terms basically means the supplier will cover all costs involved in shipping your order to the destination port of your choosing. This does not imply they are also covering domestic costs involved in clearing the shipment through customs, duties or any domestic freight costs incurred. These will all be the responsibility of the buyer. They will provide all insurance and documentation that you require in order to arrange clearance and delivery from the destination port.

Shipping Considerations

Contrary to popular belief it is not always the most cost effective practice to arrange shipment of your order by sea freight. Typically smaller orders need more consideration and investigation into the best possible method of shipment. Often an order that does not hold sufficient volume to fill a shipping container is shipped as a LCL (less than a container load) at the choice of the buyer. This then imposes significant domestic charges involved in unpacking the container at the port and allocating your goods for delivery. Typically the costs involved to have the domestic port arrange for this to be undertaken pushes the overall cost of the consignment up significantly, sometime to the point where an airfreight shipment would not only be faster but would actually be less expensive.

A general rule of thumb for sea freight is to consider and compare the costs of shipment between airfreight and seafreight if the volume of the container is less than 1/3 of a 20" container. If you are shipping more than 1/3 of a 20" container you should consider sending the container as a FCL (full container load) even though the majority of the container is empty. The cost to ship a container that is 2/3 empty is often still less than the additional costs you will incur by having it unpacked at the port.

You should also investigate options for having the supplier use their common carrier to ship your order by air if the volume of your products is relatively small and does not warrant a seafreight container. In many cases suppliers may have substantial discounts in place with common express freight carriers that would make logistic operations with these carriers more attractive than your commonly used carrier and possibly more attractive than the seafreight option. Depending on the volume of freight your supplier dispatches using a particular carrier they may be attracting a freight discount up to 75% of the standard rate.

Before your freight arrives you will need to pre-arrange a customs broker to ensure the freight is cleared as soon as it arrives so you are not paying additional storage fees (these will start to accumulate as soon as your shipment is released from the docks).

Duties

If you are importing your products back into Australia from your LCC vendor, it pays to familiarize yourself with the harmonized codes applicable to your products and to check if there are any applicable codes which are regarded as duty free.(http://www.dfat.gov.au/fta/ausfta/final-text/Annex2b_Tariff_Elimination/Annex_2-B_Australia_Tariff_Schedule.pdf )

If not then you can expect to pay an additional 5% - 25% on the value of your shipment as imposed customs duties.

Warehousing

Another consideration in your logistics solution is whether you wish to use your LCC supplier as a warehouse or delivery centre for your products. This would typically be a more attractive option if you have global distribution of your products where having a more centralized location for your warehousing and shipping requirements can save you time and cost in the shipment of your goods to the buyer. Additionally as mentioned above you may also have the option to be able to offer significant freight savings to your customers by leveraging on the discount arrangements that are currently in place with your supplier and their standard carrier.

Warehousing costs in a LCC are typically going to be less than you would expect to pay domestically as well as the costs incurred for having staff on hand to manage the shipping and logistic process.

If you are looking to use a LCC vendor as a warehousing and distribution centre, you should ensure that you either conduct periodic reviews of the supplier and products or arrange for random samples from each manufacturing cycle to ensure continued quality and adherence to your specifications.


Brian Le Mon

Principal Consultant at GBOS

Offshore manufacturing has become the only option for many Australian industries competing in the global economy – but thorough preparation is essential. Inconsistent quality and unreliable delivery are just two of the potential hazards awaiting companies that go into this major exercise inadequately prepared. If you’re considering offshore manufacturing, or you’re not satisfied with an existing offshore manufacturing partner, then GBOS can guide you through the minefield.

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