International Logistics

Logistics is a total systems approach in exports or imports management and applies to the timely movement or flow of materials/products from the sources of supply to the point of manufacture, assembly, or distribution.

It involves two categories of operations.

• Materials management: The primary area of operation is inbound flows of materials or products. It encompasses acquisition of products, transportation, inventory management, storage and the handling of materials.
• Physical distribution: The key area of operation is outbound flows of materials or products. It includes outbound transportation, inventory management and proper packaging to reduce damage during transit and storage.

ICD / CFS

It was difficult for importers or exporters based in the hinterland, to come to a gateway port for clearance of imported or export goods. The development of multi-modal transport system with its stress on greater facilitation to importers/exporters, a need was felt to develop Inland Container Depots (ICDs) or Container Freight Stations (CFSs). These were to essentially function like a dry port.

An Inland Container Depot / Container Freight Station is a common user facility with public authority status equipped with fixed installations and offering services for handling and temporary storage of import/export laden and empty containers carried under customs control and with Customs and other agencies competent to clear goods for home use, warehousing, temporary admissions, re-export, temporary storage for onward transit and outright export.

Transshipment of cargo can also take place from such stations. The primary functions of ICD/CFS may be summed up as under.

• Receipt and dispatch/delivery of cargo.
• Stuffing and stripping of containers.
• Transit operations by rail/road to and from serving ports.
• Customs clearance.
• Consolidation and desegregation of LCL cargo.
• Temporary storage of cargo and containers.
• Reworking of containers.
• Maintenance and repair of container units

International Commercial Terms (Incoterm)

Incoterms are a set of simple three letter codes which represent the different ways international shipments may be organized. They allow sellers and buyers from different cultures and legal systems to decide at what point the ownership and the obligation to pay for freight, insurance and customs costs transfer from one to the other.

Incoterms were introduced in 1936 and they have been updated six times to reflect the developments in international trade. The latest revisions are sometimes referred to as Incoterms 2000. The Incoterms informs the buyer what is included in the purchase price since the costs of transportation, insurance and customs are split between the buying and the selling parties. The Incoterms determine the mutual responsibilities between the buyer and the seller in the contract and does not indicate the distribution of responsibilities among the consignor, the carrier and the consignee.

Incoterms are invaluable and a cost-saving tool. The exporter and the importer need not undergo a lengthy negotiation about the conditions of each transaction. Once they have agreed on a commercial term as CIF, they can sell and buy the goods without discussing who will be responsible for the freight, cargo insurance and other costs and risks.

Representation of Incoterms – There are thirteen Incoterms that are used by businesses and are used in four different areas.

Group E: used where the seller does not want to arrange transport.

• EXW – Ex Works – EXW means Ex Works and is followed by a named place, for example EXW Dallas. EXW means the seller’s responsibility is to make the goods available at the seller’s premises. The seller is not responsible for loading the goods on the vehicle provided by the buyer, who then bears the full cost involved in bringing the goods from there to the desired destination.

Group F: used where the seller can arrange some transport within his/her own country.

• FCA – Free Carrier – FCA means Free Carrier and is followed by a named place, for example FCA Brownsville. FCA means the seller fulfills its obligation to deliver when it has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into its charge.
• FAS – Free Alongside Ship – FAS means Free alongside Ship and is followed by a named port of shipment, for example FAS New York. FAS means the seller is responsible for the cost of transporting and delivering goods alongside a vessel in a port in his country. As the buyer has responsibility for export clearance, it is not a practical incoterm for U.S. exports. FAS should be used only for ocean shipments since risk and responsibility shift from seller to buyer when the goods are placed within the reach of the ship’s crane.
• FOB – Free On Board – FOB means Free on Board and is followed by the named port of shipment, for example FOB Baltimore. 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 ship’s rail, i.e. off the dock and placed on the ship. The seller pays the cost of loading the goods.

Group C: used where the seller can arrange and pay for most of the freight charges up to the foreign country.

• CFR – Cost And Freight – CFR means Cost and Freight and is followed by a named port of destination, for example CFR Sydney. CFR requires the seller to pay the costs and freight necessary to bring the goods to the named destination, but the risk of loss or damage to the goods, as well as any cost increases, are transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. Insurance is the buyer’s responsibility.
• CIF – Cost, Insurance And Freight – CIF means Cost, Insurance and Freight and is followed by a named port of destination, for example CIF Miami. CIF is similar to CFR with the additional requirement that the seller purchases insurance against the risk of loss or damage to goods. The seller must pay the premium. Insurance is important in international shipping, more than domestic US shipping, because U.S. laws generally hold a common carrier to be liable for lost or damaged goods.
• CPT – Carriage Paid To – CPT means Carried Paid To and is followed by a named place of destination, for example CPT Kansas City. CPT means that the seller must pay the freight for the carriage of the goods to the named destination. The risk of loss or damage to the goods and any cost increases transfers from the seller to the buyer when the goods have been delivered to the custody of the first carrier, and not at the ship’s rail.
• CIP – Carriage And Insurance Paid To – CIP means Carriage and Insurance Paid To and is followed by a named place of destination, for example CIP Boston. CIP has the same incoterm meaning as CPT, but in addition the seller pays for the insurance against loss of damage.

Arrival (Group D): used where the seller can pay for most of the delivery charges to the destination country

• DAF – Delivered At Frontier – DAF means Delivered At Frontier and is followed by a named place, for example DAF El Paso. DAF means that the seller’s responsibility is complete when the goods have arrived at the frontier but before the customs border of the country named in the sales contract. This buyer is responsible for the cost of the goods to clear customs.
• DES – Delivered Ex Ship – DES means Delivered Ex Ship and is followed by a named port of destination, for example DES Vancouver. DES means the seller shall make the goods available to the buyer on board the ship at the place named in the sales contract. The cost of unloading the goods and associated customs duties are paid by the buyer.
• DEQ – Delivered Ex Quay – DEQ means Delivered Ex Quay and is followed by a named port of destination, for example DEQ Los Angeles. DEQ means the seller has agreed to make the goods available to the buyer on the quay at the place named in the sales contract.
• DDU – Delivered Duty Unpaid – DDU means Delivered Duty Unpaid and is followed by a named place of destination, for example DDU Topeka. The seller has to bear the costs involved in shipping the goods as well as the costs and risks of carrying out customs formalities. The buyer pays the duty and has to pay any additional costs caused by its failure to clear the goods for import in time.
• DDP – Delivered Duty Paid – DDP means Delivered Duty Paid and is followed by a named place of destination, for example DDP Bakersfield. The seller has to pay the costs involved in shipping the goods as well as the costs and risks of carrying out customs formalities. The seller pays the duty and the buyer has to pay any additional costs caused by its failure to clear the goods for import in time. DDP should not be used if the seller is unable to obtain an import license.

Types of Export Documents

In exports, it is quite common for cargos to require a variety of certificates before they are permitted to be imported into the country of destination. The purpose of a certificate is to provide pre-shipment confirmation of the status of a particular aspect (health, value, condition, origin, etc.) of a specific cargo.

Without these certificates, the cargo will not be permitted to be imported and so certificates play a very important role in the export process and one need to ensure that.

• required certificates have been obtained,
• That these certificates are correct and acceptable to the importing authorities (i.e. that you cargo complies with the requirements of the importing authority).

It is pointless in having a certificate, which confirms that the cargo does not comply with the import requirements; such cargo will simply not be permitted to be imported.

The types of certificates that one may be required to obtain, include.

• Consular Invoice: Required in some countries, a consular invoice describes the shipment of goods and shows information such as the consignor, consignee, and value of the shipment. If required, copies are available from the destination country’s embassy or consulate in the U.S. The cost for this documentation can be significant and should be discussed with the buyer.
• Commercial Invoice: A commercial invoice is a bill for the goods from the seller to the buyer. These invoices are often used by governments to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify its form, content, and number of copies, language to be used, and other characteristics.
• Certificates of Value: A Certificate of Value is intended to confirm the value of a cargo to assist in quick clearing of the goods in the country of destination. Often the Certificate of value is combined with a Certificate of Origin and is referred to as a Certificate of Value and Origin (CVO). A CVO outlines details about the labour and packing costs, royalties or commissions (if applicable), freight charges and any overseas insurance costs. The CVO also provides an exporter’s declaration and statement, in the form of clauses, about the value and origin of the goods.
• Bill of Lading: A bill of lading is a contract between the owner of the goods and the carrier (as with domestic shipments). For vessels, there are two types: a straight bill of lading, which is non-negotiable, and a negotiable or shipper’s order bill of lading. The latter can be bought, sold, or traded while the goods are in transit. The customer usually needs an original as proof of ownership to take possession of the goods.
• Export Packing List or Cargo Manifest: Considerably more detailed and informative than a standard domestic packing list, an export packing list lists seller, buyer, shipper, invoice number, date of shipment, mode of transport, carrier, and itemizes quantity, description, the type of package, such as a box, crate, drum, or carton, the quantity of packages, total net and gross weight (in kilograms), package marks, and dimensions, if appropriate. Both commercial stationers and freight forwarders carry packing list forms. A packing list may serve as conforming document. It is not a substitute for a commercial invoice. In addition, U.S. and foreign customs officials may use the export packing list to check the cargo.
• Health Certificate: For shipment of live animals and animal products (processed foodstuffs, poultry, meat, fish, seafood, dairy products, and eggs and egg products). Some countries require that health certificates be notarized or certified by a chamber and legalized by a consulate.
• Export Declaration Form: It is a Customs form completed and submitted by an exporter at the port of export, it is meant to serve two major purposes: (1) to provide information on amount, nature, and value of exports to the statistical office for compilation of foreign trade data, and (2) to serves as export control document.

Cargo Insurance

The term cargo insurance, popularly known as marine insurance, applies to all modes of transportation. The need for export (or import) cargo insurance often differs from exporter to exporter (or importer to importer) and from consignment to consignment.

Cargo insurance provides coverage against physical damage or loss of goods during shipping, whether by land, sea or air. Because of the many dangers inherent in shipping, most individuals and businesses choose to insure their goods while they are in transit even when the insurance is not mandatory in trade term.

Depending on the international commercial terms, either the seller (the exporter) or the buyer (the importer) is responsible for insuring the cargo. The seller is obligated to insure the cargo in the CIF and CIP terms. The seller may opt not to insure the cargo at his/her own risks in the DDU and DDP terms.

The trade terms DDU and DDP are often used in the turnkey projects where the amount at stake is large. In practice, the seller usually insures the cargo in the DDU and DDP terms.

Important aspects of Insurance are as follows.

• Insurance Policy and Cover Note: The insurance policy or policy is a document of the proof of insurance coverage. The format of insurance policy forms varies from insurer to insurer, but all essentially has the Institute Clauses and the same information as contained in the Insurance Application-Instructions (IAI). The policy has to be issued and signed by an insurance company or its agent. If more than one original is issued and is so indicated in the policy, all the originals must be presented to the bank, unless otherwise authorized in the letter of credit (L/C). The sample letter of credit requires “insurance policy in duplicate …” as such the presentation of one original and one copy (both signed) will satisfy the requirement. Unless authorized in the letter of credit (L/C), the cover note issued by broker, which is a temporary insurance coverage pending the later issuance of an insurance policy, is not acceptable.
• Insurance Policy and Insurance Certificate: The insurance policy, either a specific policy or an open policy, is issued once by the insurer. In the case of the exporter holding an open policy, he/she cannot send that sole policy to all the buyers and for all the shipments made over a period of time. Therefore, in lieu thereof an insurance certificate—certificate of insurance—is issued by the exporter to each shipment. The blank insurance certificates are supplied by the insurer pre-signed and bearing the open policy number of the exporter. Unless otherwise stipulated in the letter of credit (L/C), the insurance certificate issued under the open policy is acceptable. If the L/C specifically calls for an insurance certificate, the insurance policy is accepted in lieu thereof. In practice, the insurance policy is often used. In the sample letter of credit the insurance policy is required; hence the bank will not accept the insurance certificate.
• Open Policy : The open policy—blanket policy or floating policy—is issued once by the insurer under contract to cover all shipments made by the exporter over a period of time (one year usually) subject to renewal, rather than to one shipment only. It is more often used by the large exporter. In an open policy the exporter is required to periodically (monthly usually) declare every shipment made to any location, covering any type of goods, and using any means of conveyance, including multimodal transport and transshipment, in order that the insurer may calculate the insurance premiums and invoice them accordingly. The exporter completes the insurance declaration form supplied by the insurer and/or supplies the copy of the insurance certificates to the insurer. An insurance declaration form typically contains the information in an Insurance Application-Instructions (IAI).
• Specific Policy: The specific policy—voyage policy—is issued by the insurer to cover a particular shipment or one shipment only. The specific policy is often used in many countries. The exporter may use the Insurance Application-Instructions (IAI) or similar form to apply for a specific policy.

When the exporter delivers the goods, the insurable interest in such goods transfers at the point and time where the risk shifts from the exporter to the importer, as determined by the international commercial terms used.

The time the insurable interest transfers from the exporter to the importer is, technically, the time the exporter endorses the specific policy or the insurance certificate to the importer, as the case may be.

The insurance certificate bears the open policy number of the exporter and, like in a specific policy, the claim agent at port of destination and that claim payable at destination is also indicated.

The importer relies on the specific policy or the insurance certificate and the supporting claims documents as proof that the goods have been insured and that he/she has the insurable interest in the goods when filing for insurance claims against loss or damage.

In the trade terms DDU and DDP, the exporter is responsible for the risks up to the delivery of goods to the final point at destination (the project site or importer’s premises usually), as such the insurable interest in the goods does not transfer from the exporter to the importer in the shipment.

Some countries may require that the import and/or export shipments be insured with their national insurance companies.

• Utmost Good Faith: The principle of utmost good faith is indispensable in any insurance contract. Under the open policy the insurer usually knows only of the shipments made by the exporter after the receipt of the insurance declaration form and/or the copy of the insurance certificates. Under such circumstances, a consignment may have reached the importer in.
• Good condition, that is, without sustaining any loss or damage, before the insurer knows of such consignment. If the exporter knows that the consignment has safely reached the importer and deliberately does not declare such consignment in the insurance declaration form in order to avoid paying the insurance premium, such action is a breach of good faith. Consequently, the insurer may cancel the insurance policy issued to the exporter when the exporter’s bad faith is known.
• Bad condition, that is, sustaining loss or damage, before the insurer knows of such consignment. Whether or not the exporter knows that the consignment has not safely reached the importer and fails to declare such consignment in the insurance declaration form, the insurer is liable to pay for the loss or damage out of good faith.
• Indemnity: Cargo insurance is a contract of indemnity, that is, to compensate for the loss or damage in terms of the value of the insured goods. The amount insured as agreed between the insurer and the assured forms the basis of indemnity.
• Institute Clauses: The Institute Clauses of the Institute of London Underwriters, often referred to as the London Clauses or English Clauses, form the basis of the cargo insurance contract in many countries. In U.S.A. and some other areas, the Institute Clauses of the American Institute of Marine Underwriters, often referred to as the American Institute Clauses or American Clauses, are used. The American Clauses and the London Clauses can be different from one another. The most common Institute Clauses include the Institute Cargo Clauses, Institute War Clauses, Institute Strike Clauses, and Institute Air Cargo Clauses.
• Institute Strike Clauses (Cargo): The Institute Strikes, Riots and Civil Commotions Clauses is commonly referred to as the Institute Strike Clauses. The insurance covers the loss of or damage to the property insured caused by strikers, locked-out workmen, or persons taking part in labour disturbances, riots or civil commotions, and persons acting maliciously. However, it does not cover the loss or damage proximately caused by delay, inherent vice or nature of the property insured and the loss or damage caused by hostilities, warlike operations, civil war, revolution, rebel-lion, insurrection or civil strife arising there from.
• Institute Air Cargo Clauses (All Risks): The Institute Air Cargo Clauses (All Risks) are used specifically in air freight. The terms and conditions of cover closely follow the Institute Cargo Clauses (All Risks) revised to suit air shipments. The Clauses exclude sending by Post (i.e., postal shipments not covered).