What will Inco terms 2011 mean to you?

November 27, 2010

There are big changes for 2011 in Inco terms, Are you ready?  International Commercial Terms were first released by the ICC in 1936.  The purpose was to standardize international trade shipping terms, making it easier for drafting international trade contracts.  Inco terms are updated periodically generally every 10 years, 1990, 2000 and starting January 1 2011, INCO terms 2010 go into effect.  Trade throughout the world has changed in the last 10 years.  9/11 brought about need to additional security, China joined the World Trade Organization, the European Union expanded along with the acceptance of the euro, and in the US; Sarbanes-Oxley required clarity in revenue and expense recognition.

 

The new terms are segregated by mode of transportation: Waterway/Maritime or Any transportation mode.  Waterway/Maritime terms remain the same: FOB, FAS, CFR, CIF.  FOB has referred to maritime transportation for several revisions but is still commonly misused, to mean that the buyer pays freight from the sellers dock.   Any transportation modes are:  DDP DAP DAT CIP CPT FCA and EXW. DAP and DAT are new terms. The number of terms has been reduced from 13 to 11 DAF DDU DEQ and DES have been replaced by DAP and DAT.

 

Inco terms rules do say which party to the sale contract has the obligation to make carriage or insurance arrangements when the seller delivers the goods to the buyer, and which costs each party is responsible. These rules apply to both domestic and international sales. The new rules are intended to eliminate misunderstanding, and define roles and responsibilities of both the seller and the buyer,

 

It is imperative to understand that Inco terms do not address transfer of title or ownership of the goods. Ownership should be addressed in the sales contract.  Inco Terms do not specifically deal with revenue recognition; however they do clarify the issues of delivery, control, and risk transfer.

 

So, what has become of DAF, DES, DDU and DEQ?

 – DAF (delivered at frontier): rarely used and limited to ground transport

– DES (delivered ex-ship): limited to water shipments only

– DDU (delivered duty unpaid): not appropriate for domestic shipments since duty was implied and therefore irrelevant.

Are replaced with:

 

DAP (deliver at place) which can be used for any mode of transportation international or domestic. The seller obtains export clearance and handles export documentation.  The seller arranges and pays for all transportation, using any mode, to the buyer’s choice of destination. The seller also arranges for the documentation for release of the goods at the buyers named place.  The buyer is responsible for unloading the freight, import clearance, and carriage.

 

DEQ (delivered ex –quay) Is replaced by DAT (delivered at terminal) DAT requires the seller to unload at quay, terminal or warehouse and can be used for any transportation mode.

 

So what if your sales contract calls for deliver after January 1 2011 and calls for DDU terms?  You can still make the shipment, but be sure to indicate that the terms are DDU Inco terms 2000)

 

Make sure both parties are using the same revision so that any confusion is eliminated.  Inco terms are not law, but only rules to standardize contracts.  If both parties agree to different rules in the contract, then those terms would apply.

 

I welcome your comments.

 

How Supply Chain Risks Affect Customer Service

April 10, 2010

In a previous article, I discussed the value of having one supplier for a particular part; how sharing information can make both the supplier and the customer more profitable. Many companies have undergone the process of reducing the number of suppliers and relying on partnerships with their suppliers.  But that partnership is not without risk. Outsourcing has become common place and can add to the profit of the organization in a stable market.  However the reliance on an outsourced module is exacerbated in an unstable market.

Disruptions in the supply chain can have affects beyond the production floor, or the retail shelf.  A Gartner study showed a disruption in the supply chain affects the financial viability of the company, resulting in 107% reduction in operating income when production is halted. 

Risks are many but all have an effect on the supply chain, and then ultimately on the customer.  It could be a natural disaster from weather, to earthquakes, labor strikes, acts of terrorism, to disease.  The earthquake in Kobe Japan in 1995 caused damage to one of the busiest ports in Asia at the time.  Even today, 15 years later, Kobe has not recovered its status.  The SARS scare in 2003 affected flights in and out of China.  Logistics providers with operations in Asia said SARS reduced the air cargo capacity, as the number of passenger flights was reduced.  Capacities in ports can also impact the supply chain.  There have been stories where retailers missed an entire Christmas season when the hot new product was in a container on a ship in the Pacific Ocean, lined up waiting for a berth in one of the pacific ports.  In 2001 and 2002 tensions between nuclear powers India and Pakistan reached a new level.  Many US companies rely on a labor force in India.  The mere threat of an armed conflict in the area caused many of the companies with a presence in India to rethink that strategy. Labor strikes in the production plants are obvious disruptors of the supply chain.  But so is labor strife among border or customs agents in countries that seemingly are not in your transportation routes.  Similarly, changes in customs rules may hold up a shipment for long periods of time.  How many shippers have experienced the vagaries of changes in Brazilian importation rules?

The effect this has on the organization is to increase their buffer stocks, which is counter to the strategy to outsource and minimize inventory risk and exposure.  Extended lead time affect the customer as I have discussed earlier, by either postponing the purchase to buying the competitors. 

Do businesses calculate supply risk?  Let’s define supply risk as

Risk = probably of disruption X the impact

How can a business determine the risk of disruption and the impact?  A though review of the supply risk, the demand risk, the process risk, control risk, environmental risk, and the social risk.  Even operations under the control of the business can disrupt the supply chain.  There is a famous story of a candy company that missed almost all their shipments prior to Halloween when their new ERP systems did not work and the orders were not recognized.  Every risk needs to be analyzed and a worst case scenario developed as well as a plan for crisis management.

The path to reduction of supply chain risk is simple to explain, but not so easy to implement.

Understand the supply chain                  Improve the supply chain                 Identify critical paths               Manage critical paths                       Improve network visibility                Establish a supply chain continuity team                   Partner with suppliers, customers and stakeholders

 Most businesses look at only the cost of production of an item, not the cost of transporting that item.  Therefore it is even more difficult to account for the crisis management contingency.  But the risk assessment will quantify the risk and the cost so the value is known.

 

I welcome your comments.

 

Where is the end of the supply chain?

March 11, 2010

The supply chain begins with procurement of raw materials? Where does it end? It doesn’t with the consumer!

Everyone agrees that the supply chain for any particular product begins with the procurement of raw materials. If you are producing a printer, you need plastic, ink, electronics, metal and other components. These are sourced from raw material suppliers or from other suppliers further up the supply chain. Raw material suppliers sell plastic pellets, steel in rolls, or electronic components to make up a circuit board. These components are assembled into a finished product.

The different components of the printer, the chassis, the circuit board, the plastic, the ink are assembled in another step of the supply chain. The finished product then goes to the warehouse, where it waits for an order. When that order is received the material is shipped to a retailer, who in turn sells it through to you and me. Is that the end?

No! I recently had a tour of the SIMS recycling facility in Roseville CA. Here is the not the end of the supply chain, but a link in the supply cycle. Here is where the last value is recovered from electronic devices. Obsolete and returned electronic devices are stripped of their last value, their residual value.

In the case of the printer we described above. The printer is stripped quickly of the plastic shell. The plastic goes on a box, the wire harness goes into a different box, and the circuit board goes in its own box. The plastic is ground into pellets. Each metal is separated, aluminum, steel, copper is salvaged from the wire. What’s left is ground up and separated. Each of the commodities are sold on the open market by SIMS metal. Plastic is added to virgin pellets and sold, adding post consumer material. No electronic material goes to the land fill, everything is recycled. Even the packing material is recycled!

Other electronic equipment such as computers are disassembled and the components that have value are recovered and resold. Batteries are separated by chemistry, and shipped another SIMS plant where the commodity components are recovered and resold. Monitors and televisions are a challenge since the tubes contain lead. These are accumulated and shipped to another SIMS plant, where they remove the gas and lead. The truck that delivers the tubes brings back electronics they have accumulated.

But what makes this a truly “green” facility is all the power is generated by wind and solar! The air being exhausted from the facility is cleaner then what it takes in, through use of filters.

The supply chain is not a linear chain, but a loop, where there is value in the product even after its useful life is over! I will never think of any product the same, and will think about the intrinsic value that each object has. When you buy anything, consider what will happen when you are done with it.

I welcome your comments.

 

Information instead of Inventory for Superior Customer Service

March 11, 2010

Through most organizations the supply chain is disconnected. Each function manages its own P&L and logistics functions. Each part of the organization has its own goals and reports their results up to management. The purpose is to maximize the results for each individual group, thinking that this will improve the entire organization. But there is no thought to the negative effect on the whole organization or the affect on the customer. The individual groups focus on cost efficiency. It is of little consequence if the cost is pushed to another function within the organization. The result is that each function buffers inventory to avoid the vagaries in the production each department causes. This could be in supplies, raw material, work in process, semi finished or finished inventory. All this costs the organization as a whole, but may save the cost center, department or function for the moment.

The same is true for the supply chain. From the origination of the product, raw materials to the consumption by the ultimate consumer each step seeks to protect itself. If the focus is on cost when choosing suppliers, manufacturer, and distributor, the reality is this could cost more! Customer satisfaction and superior customer service suffer. I will explain how the lack of coordination through the supply chain costs the organization, and the customer.

In order to get the lowest price, the from a raw material supplier, assembly contractor or from a logistics supplier, multiple vendors are utilized, each competing to provide the lowest cost. In order to give the manufacturer the cheapest supplies, suppliers will “cut corners” to save money. They will supply materials at the minimum quality specification. This causes the manufacturer to test more incoming material and results in more handling, increasing costs. The supplier will increase their minimum order quantity, in order to take advantage of economy of scale, so the manufacturer has to place larger orders based on speculation of future orders. Thus the profit of the supplier is reduced and the inventory risk for the manufacturer increases.

Take an automotive company. They want to get the lowest possible price for plastic. They solicit bids from multiple suppliers, each supplier bids based on the guidelines of the automotive company. In order to cut cost of the material, the suppliers will supply the minimum quality required of the specification. They will require large orders to take advantage economies of scale. They will use the lowest cost delivery method. So the automotive company must increase their level of quality screening, increasing their cost for manufacturer. They can no longer receive the material on an expected day, but must accept a longer delivery window so the supplier can use cheaper delivery methods. The result will be production idled waiting for material, costing the manufacturer. The automotive company must store the increased amount of inventory, because of the higher minimum order quantity, and there is greater risk of stock outs due to longer delivery times.

So what is the solution? Information exchange and cooperation need to replace, the adversarial relationships. The supplier and the manufacturer must enter into a new “co-maker” relationship, where each party helps the other reduce costs, but not profit. When there is a free exchange of information both up and down the supply chain then each party can profit. This sharing of quality information through EDI, RosettaNet, of other form of immediate information exchange creates trust in the other. When each member of the supply chain can trust the other, every one profits and reduces cost for the ultimate consumer. The supplier is able to smooth the supply to the manufacturer and the manufacturer is able to smooth the production runs. Thus each realizes more profit and saves each other cost burdens.

VMI or Vendor Managed Inventory is a good example of how sharing information reduces the buffer stock that the supplier, the manufacturer and the retailer must maintain. The retailer sends POS or Point of Sale information the manufacturer. The manufacturer feeds production data to the supplier. The supplier stocks the manufacturer based on this information, and the manufacturer supplies the retailer. Ensuring there is a smooth replenishment and no stock outs.

This cooperation provides value to the consumer by allowing for the lower price, greater variety, improved quality, eliminates stock outs and higher profits for everyone.

 

Agile Customer Service

March 11, 2010

In order to provide superior customer service, you must have your product available. What they want, where they want and when they want! We have already discussed that if the product the customer wants is not available, they will buy the competitors, or delay their purchase. But how do you supply a variety of products, keep them current, and avoid obsolesce?

Lean inventory has been the goal of many manufactures and lean was designed to minimize waste, and improve efficiency. In the automotive industry this was the music that the manufactures marched to for many years. Keep supply ready to build, but minimize the inventory of parts. Only add inventory of parts at the moment they are needed. This lean inventory process was designed to provide stock with a short lead time. In reality the automotive manufactures are running very lean operations, but also probably some of the least agile operations. Lean by definition means with little fat. Agile on the other hand means nimble. If a customer wants a car with the color and the accessories they want, the lead time in weeks or months. Yet the automotive suppliers have inventories of unsold cars. What can we learn from this, and how can we use put agility to use to provide superior customer service?

First, lean does work well with products that are high volume, and low in variety. A video game console for instance. A WII is a WII, but they are also subject to obsolesce. Here lean makes sense; don’t buy the components until there is demand.

But what of a computer? Here there are endless varieties and high volume. In less predictable environment, agility is necessary for superior customer service. Agility is not a single company concept but must reach one end of the supply chain to the other. For a manufactures to have agility in their manufacturing process, they need agile partners. Those partners must be connected in a virtual supply chain based on sharing of information. Here are seven steps to superior customer service through agility:

  1. Synchronize activities through shared information. EDI (electronic data interchange) through web portals, or real time with RosettaNet. Quality information available immediately.
  2. Work smarter. Analyze business processes to determine where no value is added, and time is wasted.
  3. Partner with suppliers to reduce inbound lead times. Choose vendors based not only on price but on response time. Time is money and there is only one opportunity to be first in the market.
  4. Reduce complexity. The simpler the process the more likely it can be repeated, and less chance for less than perfect quality and customer satisfaction.
  5. Postpone final assembly or configuration. This reduces the risk of obsolesce and minimizes working capital tied up in unwanted finished goods.
  6. Manage processes not functions. Division of labor has created silos in business so makes change slow, and department goals and budgets can be at cross purpose.
  7. Utilize appropriate performance metrics. Budget based metrics do not encourage agility since cost is the only measure.

Lead time reduction, and perfect order rate create customer satisfaction. A satisfied customer is a retained customer. A retained customer is adds to the revenue of the company and minimizes selling expense, which leads to greater profit.

I welcome your comments.

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Warehouse Operations for Superior Customer Service

December 3, 2009

In this paper I will discuss warehouse operations and how they improve customer service, or detract from customer service.  Many companies try to manage warehouse operations themselves.  Today warehouse operations are more than some shelves and a fork lift.  Warehouses are a sophisticated operation within the corporation.  In order to provide superior customer service the warehouse operations must also be planned to provide superior customer service.  Every contact with the customer must be done with superior customer service in mind which includes storage and delivery to the customer.

First I will discuss from the perspective of the supplier.  Maintaining a warehouse is expensive.  The building is a major asset carried on the balance sheet as a fixed asset.  This asset does not generate income.  The building itself is large, so is the maintenance of the building, heating cooling, insurance, staff, security, and the expense items go on.  A warehouse management systems (WMS) is a significant investment along with computers , scanners, bar code readers, RFID readers, the staff to operate the systems require training, and not for stereotypical warehouse worker.  Managing a warehouse is not the core competence or the niche that the supplier knows.  So the supplier has to be the best at supplying the goods they are known for; but also now must be best in class in warehouse operations to run an efficient warehouse and supply superior customer service. More times than not, the warehouse is an afterthought for the company.

Second, the customer can maintain inventory at their location.  This could follow 2 different scenarios.  The customer buys the inventory and stores the material in their warehouse.  This is a traditional model.  Here there are the same warehouse expense, control and management issues.  In addition, there is the cash outlay to purchase the inventory and the concern for risk shrinkage, obsolesce or market price erosion.  The other scenario is becoming more common, but fraught with the same problems.  The customer has the supplier put the inventory at the customer on consignment.  Here the customer still has to dedicate space for the inventory, staff, insurance, computer system etc.  The supplier or the customer may manage replenishment.  There is some inherent distrust in this process, and could raise issues with audit compliance especially with SOX compliance.  What is the obligation of the customer to consume that material?  If they are contractually obligated to consume the material on their site, then a case could be made they must recognize that liability at the time it arrives, which defeats the purpose of the consigned inventory program.

So what is the solution?  Third Party Logistics providers! These are the experts on customer logistics.  This is their core competency  and they provide expert service to the customer and to the supplier.  These companies invest in state of the art warehouse management systems, security, and locate to service the customer, and provide superior customer service.  There is a cost to this service, but there is an offset.  If the supplier no longer has to maintain their warehouse operations, then assets, cash and working capital can be freed.  The supplier no longer needs to maintain the sophisticated computer system needed to run a warehouse, not keep the staff, or the physical environment to safely store inventory. The warehouse is paid for on an activity based system, where they pay based on number of shipments received, number of SKU’s stored and number shipped.  Customers could also value, if they maintain consigned inventory on their premises in the past.  By removing that inventory, they free up space, and staff for their core activity. 

Third Party Logistics providers manage all aspects of inventory for both the supplier and the customer.  They manage replenishment of their stocks and the stock of the customer on a just in time basis.  In this win/ win scenario, the supplier can provide a more superior customer service product to the customer, enhancing their position with the customer by further distancing themselves from their competition.  The customer wins because they have access to the inventory and are more likely to receive their order in full without errors, with minimized risk of loss or damage in transit. 

Superior Customer Service by using professionals with expertise, and investment to maintain Superior Customer Service

I welcome your comments.

 

Accounting for Superior Customer Service

November 21, 2009

In this paper I will discuss how standard accounting practice does not account for the cost of customer service.  How a new model is required to show the true cost of customer service, and how Superior Customer Service can add to revenue and improve the bottom line.

Accounting systems, by design, track product costs not customer costs or customer value.    Expenses are assigned to various cost centers within the corporation according to the various accounts set up by the accounting group.  Costs are tracked as the product moves through the manufacturing cycle and as value is added to the raw material, through goods in process and to the warehouse.  Certain overhead costs are allocated based on some history or averages and are measured based on that history.  Are we over or under budget? 

Each customer and each order has a different cost.  Each customer will order a different mix of products each with a different margin.  Each customer will require a different amount of effort from sales, from order entry, credit check, pick pack and ship and collection effort.  Different sales channels have different cost associated.  All of these costs are allocated to different departments and profit, loss, margin, cost of goods sold, G&A, etc are calculated on the accumulation of these costs.  This does not yield a true cost, nor does it yield a true profit for that customer, for that channel, for that market, for that promotion. Think about the variables in each order… cost of the product, commissions, cost of the sales call, management time, bonuses, and discounts to the customer, order processing cost, promotional costs, merchandising costs, non-standard packing, inventory holding costs, warehouse space, returns and refusals, cost of credit. 

Traditional cost accounting and budgeting puts expense in accounts.  Budgeting for these costs is a guess at best, historical data plus or minus.  So various aspects of superior customers are rolled into other departments and accounts.   Allocating these costs by department can have cross purpose for serving the customer.

Logistics and customer service add costs, but they also add revenue and market appeal.  Return on investment is more than:  

 

 

So in order to improve margin companies either improve sales or cut costs.  In today’s economy, it is cut costs!  But return on investment there is also based on capital efficiency


                                                  

So, increased sales with the same capital expenditure or investment also improve the ROI!

 

Changes in logistics, and customer delivery processes are slow to be implemented because they defy common cost accounting processes.  Logistics is flow oriented and so difficult to allocate cost.  If a logistics program increases total cost yet provides greater service to the customer and as a result increases revenue. How can this be measured?  If the increase in revenue is greater than increase in cost it can lead to greater cost effectiveness, and greater return on investment, ROI.

 

A new accounting process needs to be established that accounts for the cost of each customer, for each market and for each channel.   Costs should allocated based on the cost to do business with a particular customer.  Let’s call each customer or channel a mission and see the grid below

 

 

It is only when all the costs, sales, marketing, transportation, warehousing , etc  are analyzed for each mission can the true cost and the effectiveness be discerned.  Only after all the associated costs are captured can the true cost per unit be determined.  The attributed cost for each program is the cost per unit that could be avoided if the function were discontinued without any other change to the organization.  At this point we can analyze the effectiveness of the customer.  We can compare of cost of the mission to the revenue loss for abandoning the customer.  What costs would I avoid and what revenue would be missed if I lost this mission, customer or channel.  If the revenue generated is greater than the cost, than we have an effective mission. 

In my next entry I will discuss how eliminating fixed cost and overhead can improve the cost structure for the supplier and the customer.

 

 

Supply Chain is more than Procurement

November 6, 2009

Supply chain has become the catch all title for all activities from sourcing, purchasing, delivery, logistics, and manufacturing.  Delivery to the customer is an afterthought today when speaking of supply chain. Yet it is the delivery of the material that is the last contact with the customer, so is the impression the customer is left with.

The major component to the supply chain today is sourcing raw material and components to make the product that the company sells. Companies are doing everything they can to cut costs in this area, from reductions in price costs of materials to finding a cheaper manufacturing location to saving on the transportation throughout the manufacturing process.  All of the movement adds to the cost of the process, so having an efficient process of moving goods around the world to take advantage of lower cost manufacturing and labor.  The cost of these movements is easily to allocate to various accounts within the organization.  But can’t be allocated is cost of delays and exceptions along the supply chain.  In the series of documents I will post, I will discuss the affect on the customer and the costs to the supplier.

What is the impact that Logistics has Customer Service, Marketing and Customer Satisfaction? Failure of the Logistics process has one of the following affects on the consumer:

Don’t Purchase

Delay Purchase

Select a Competitor’s Product

Select a Different Product from the same Supplier

Buy from the same Product from a different Source.

The supplying company needs create a level of satisfaction in the consumer so they do not seek or feel it necessary to consider alternative suppliers.  None of the scenarios above foster that level of satisfaction to retain customers in the long run.  The company must identify key components of customer service then establish the importance of each component to the customer.  It is important to the company that they differentiate itself from its competitors in order to foster satisfaction in the consumer, and retain profitable customers.  Customers want goods on time, their orders in full and error free.

It is obvious that superior levels of customer service are not without added cost.  As the service level goes up, so does the cost of that service.  Superior logistics processes add to costs, but they also add revenue and market appeal.  If the revenue created is greater than the cost of the service, then it is a win, win situation.

In the future I will cover solutions, core competencies of the company,  accounting for customer service, and my other ideas for creating superior customer service.

I welcome your comments and questions

 

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