Managing Inbound Transportation: All On Board FOB

Tags: Finance, Transportation

Tire importer TBC Corporation converts its inbound transportation to free-on-board terms and rolls out a supply chain transformation.

Given global trade's complexity and volatile pace of change, it's hard to conceive how simply altering a few letters on an ocean bill of lading (BOL) could radically change an organization's supply chain bearing. In the sea of everyday acronyms, Incoterms are adrift with countless other meanings. But on a BOL they mean everything.

Modifying Incoterms—the International Chamber of Commerce's commercial standards used to communicate the tasks, costs, and risks associated with transporting and delivering goods—isn't nearly as simple as playing alphabet roulette. It requires a deep commitment to supply chain business process change, often at the behest of a third-party partner or the directive of new leadership—sometimes both.

This was the reality for Palm Beach Gardens, Fla.-based TBC Corporation, a subsidiary of Sumitomo Corporation of America, one of Japan's major integrated trading enterprises. TBC is the nation's largest vertically integrated marketer of tires for the automotive replacement market, with retail operations under the Tire Kingdom, Merchant's Tire & Auto Centers, National Tire & Battery, and Big O Tires brands. The company also operates as a wholesaler to regional tire chains and distributors throughout North America.

When Jim Markey came on board in 2005 as vice president of logistics, he discovered a supply chain approach that was counter-intuitive to his previous experience managing transportation and logistics for various tire manufacturers, including Yokohama.

"TBC procured most of its shipments from suppliers on a Delivered Duty Paid (DDP) basis," Markey recalls. "TBC does a lot of customer-direct container shipping, and the total cost of delivering goods to the customer was included in the price."

Because TBC's suppliers are tire experts, not shipping experts, freight costs were not being managed as efficiently as they could have been. "I argued that the volatility in ocean freight rates—which account for 10 percent of our total cost—makes it more sensible to directly control that spend," Markey explains.

"When working with suppliers, you have to keep an ear to the ground and understand market trends," Markey says. "Why not bite the bullet and control costs, rather than negotiate with suppliers?"

In 2009, TBC partnered with Atlanta-based non-vessel operator (NVO) American Global Logistics (AGL) to help convert its inbound shipping terms to free-on-board (FOB) and proactively manage its transportation costs.

A New NVO Order

Companies that buy on a landed cost basis pay the price of the goods and the transportation. When freight rates rise, the total swells accordingly. But when they drop, there's no guarantee suppliers will prorate that cost.

"We've seen swings of $1,500 per container within six months for shipments to the East Coast," says Chad Rosenberg, CEO of American Global Logistics. "When you're moving several thousand containers a year, that fluctuation creates considerable opportunity for cost savings."

AGL specializes in moving furniture from Asia to the United States. But the tire industry also fits well within its value proposition. The intermediary banks on large accounts that place a premium on service, which isn't the typical NVO model.

AGL's average client moves more than 1,000 40-foot equivalent units every year—more in line with what a steamship line does than an NVO.

"We bring value to companies that ship containers direct to many customers, rather than several thousand containers to one distribution center," says Rosenberg. "These shippers and their customers have specific demands, delivery windows, and challenges."

TBC was a good fit for AGL because it runs a complex operation, and ships all over the United States and North America. It also gave AGL a clean slate to work with.

"We evaluated our best practices and TBC's needs, then worked from origin to destination to offer documentation, visibility, and carrier selection recommendations," Rosenberg says. "TBC gave us the opportunity to provide a total solution that might not have been possible if we were working with a more mature inbound practitioner."

Controlling inbound transportation is an established trend among direct importers with large-item quantities that fill containers. But companies are growing more sophisticated.

"Tire and furniture industry end users are now dictating how freight moves, as well as negotiating with vendors to be the importer of record," Rosenberg explains. "They want the control, but not the liability and risk."

This is exactly what TBC aspired to do. FOB terms ensure suppliers use carriers "nominated by the buyer," as Incoterms 2010 stipulates. Cost and risk are divided when the goods are onboard the vessel, and the seller must clear them for export.

"As a tire distributor with a relatively high liability risk for the product, we try to limit being the importer of record," says Markey. "We arrange for our suppliers to pay all expenses involved in moving product to us—for example, insurance—apart from the freight cost. We haven't completely unbundled the FOB; we take a hybrid approach."

While there is occasional resistance from suppliers that count on TBC's volume to leverage their own discounted rates with carriers, there are generally opportunities for compromise.

"In the past, we have offered AGL's rates to our suppliers," Markey says. "It's still an arm's-length deal, but it helps soften some concerns about taking away their freight. You can't do that unless you deal with an NVO that has attractive pricing."

FOB FYI

While Rosenberg acknowledges that he has never entered an FOB conversion where cost wasn't the top priority, managing inbound transportation at point of origin unleashes a flood of efficiencies downstream in the supply chain.

"Shippers want to dictate carrier selection, transit and idle time, and transport mode," he says. "They can have visibility to all those decisions by controlling the flow of goods."

For example, consignees can operate a drop-and-hook system if they have enough volume and control over who transports the freight. When vendors dictate transportation, it becomes more complex, almost necessitating live unloads. Once they load the container at the point of origin, the invoice is on the way.

Companies such as TBC derive great value integrating with NVOs, especially in terms of direct input regarding bookings and shipment tracking.

"We have been able to integrate that information all the way to accounts payable," says Markey. "When we started out, AGL sent us paper invoices. Now, data enters directly into our system daily. The system provides granular data that helps us quickly and easily slice and dice ocean freight and drayage costs, or bills for detention per diem."

AGL provides visibility to this information on its Web site. It also has an iPhone application customers can use to track a hot shipment. This level of transparency opens up even more opportunities to reduce costs.

"We just constructed a 1.1-million-square-foot warehouse in Charleston, S.C.," Markey says. "We would typically have included drayage as part of the ocean freight rate, but we've broken that cost out so we can negotiate with trucking companies independently, and focus on service as much as cost. That gives us more flexibility unloading and moving containers, and helps us avoid accessorial charges."

In the ocean trade, volatility is a given. Even with rates stabilizing recently as a consequence of surplus oceangoing capacity and continuing recessionary dips in trade, other factors keep logisticians such as Markey busy.

In 2009, the Obama Administration imposed a 35-percent duty on certain types of tires coming out of China, which makes importing cost-prohibitive for many manufacturers and distributors.

"Chinese production is being re-sourced to Japan—where we originally procured tires—and to countries in Southeast Asia," notes Markey.

TBC now receives shipments from Japan, Indonesia, Thailand, and India. Markey has been busy exploring how the company must adapt when the Panama Canal expansion opens. He was involved in the decision to locate the new DC in Charleston. Change is fluid within TBC's supply chain.

Working with AGL has enabled the importer to cut costs by capitalizing on its buying leverage and managing inbound freight on an FOB basis.

But it's the value-adds and non-commoditized service intangibles—be it a hot alert on an iPhone or a better drayage contract—that make this partnership a competitive differentiator.