Tax & Accounting Blog

Improving Predictability in Logistics Costs

Blog, Checkpoint, Global Trade, ONESOURCE July 28, 2017

More and more we are seeing companies introduce themselves to the world of international trade, looking for opportunities to commercialize products outside their territories, and taking advantage of shortages or market gaps where they can capitalize.

Getting into the foreign trade business can bring certain challenges, ranging from the basic language and cultural barriers, to dealing with exchange rate risks, and possible political instabilities.

The budget and their variables

Unfortunately, and in most cases, it is common that estimated import costs can exceed those forecasted costs prepared by even the most seasoned business professionals.

With each import transaction come several variables that must be considered when managing the final cost of importing goods. Some of them are generally more predictable like the goods value, international freight and insurance, and the customs duties and taxes. However, some of the more difficult variables to include are the operating expenses that can vary depending on the difficulties that arise during the day to day operations, such as port and terminal expenses, customs broker fees, required license fees, and any additional local expenses that come with the arrival of the freight.

Import budgets are typically created under tight deadlines leaving professionals with very little time and resources to make the most accurate of forecasts generally resulting in big gaps between what was negotiated with their providers, forecasted in their plans and what were actually paid.

A typical case is to delegate these budget functions to the accounting department or to the finance areas, which usually take reference variables similar to those applied to local purchases and compare the historical fees and negotiated rates. In other cases, they leave the budget to the team responsible for imports, who can only adjust to a budget already established in previous times to be revalued or to give continuity. In worst case scenarios, these budgets comply with the premise of three budgets, where typically the cheapest one is selected.

Time is money

When it comes to Foreign Trade, any miscalculation could represent money lost or incurred expenses. Any deviations due to climate, seasonality, holidays, oil prices, exchange rates and even terrorism could mean additional unexpected expenses. Once a product is ready and negotiated with the supplier, it automatically becomes an asset that begins to depreciate or to be valued depending on the financial flow that a company determines.

On several occasions, companies contribute the slowdown of their import volume to changes in exchange rates, working under the assumption that this is main factor for their decrease, and not considering other factors that may be in their favor, such as managing low season transport prices, or using agreed taxe rates with some countries, or the management of forward exchange rates.

Taxes and duties

Although taxes and duties are the most fixed variable of the final goods value, it is important to keep in mind that this is an area where savings can be made. By taking advantage of duty savings programs, like Free Trade Agreements for example, companies can reduce their expenses significantly. Other duty savings can come based on the products being imported, for example if a company is importing investments in capital goods or imports of critical products related to health diagnosis and human treatments.

Shipping

Transportation costs generally are a main component of logistics when evaluating supply chain costs.  For example, any variation in the price of oil could directly affect shipping costs. This should be an important consideration when expending efforts to reduce expenses, and in outlining different strategies for overall logistics costs.

One of the options is to centralize the operations with fewer carriers, understanding that with a high volume of operations, businesses are able to negotiate better prices. Generally the department in charge of managing transportation dedicates a lot of time evaluating transportation companies to secure the best price and service. This can mean using multiple transporters that are closely monitored to ensure service agreements are being met. This strategy of using multiple carriers occurs when the best deal for each route has been negotiated; however this does not always take into consideration the entire global picture. The risk of reducing the number of carriers is that the company can become too dependent on a select few, potentially being left with covering transportation routes quickly with less carrier options.

Another option would be to consolidate shipments in order to make fewer trips, taking into consideration the distance and weight of each shipment in the decision process. While it is not always possible, shipment consolidation allows the company to reduce the number of trips and increase the company’s benefits from lower service rates given the volume of their operations.

Whatever strategy chosen, there will always be challenges.

Operating expenses

Here we have a universe of possibilities where control becomes more complex and there are always challenges that escape the original strategy defined by the company when it comes to dealing with import processes.

Undoubtedly, the most important thing is to have control over all of the necessary requirements for the release of the cargo within the expected timelines in order to avoid any unforeseen costs such as demurrage.

If a company can have true visibility to the date of arrival, any diversion to the schedule that is not controlled could in essence result in additional costs through added days of demurrage, or the hiring of additional resources for its early release.  The ultimate impact could be to commercial implications due to delays in entry or production.

Putting a lens on logistics costs

Although the particulars in each country may be different, a recent study by the Ministry of Economy in Mexico, together with other organizations, emphasized that average logistics costs for all (air, sea and land) in import processes being equivalent to 24% over the value of the negotiated goods value (including international and domestic freight, and customs clearance), with about half of this cost being international freight, followed by 20% representing local freight and 13% of the fees directly paid to the customs broker or agent.

Another factor measured by this report shows that the average days of storage are 7.18. In dealing with these types of costs, it is important to understand that only the first five days are within estimated costs, with an additional average cost of two additional days impacting the costs for a company’s operations.

Regarding air shipping, the average number of storage days is 5.32. Assuming that only two days are within the allotted period, there is an average additional cost of 3 days for each operation.

Clearing the Gap

The operation of international trade is not an exact science. For every operation, there are innumerable circumstances that can affect what was initially projected. Controlling all these variables in their totality is undoubtedly a difficult task to achieve for anyone, this is why today, through the use of technology efficiency can be improved and achieved. In fact, companies are looking to technology to provide them the visibility to accurately predict their time and costs within their supply chains.

It is has become essential for companies that when looking for a global trade solution they find one that offers not only the necessary infrastructure, but also has the capacity to align with the current needs and then grow in scale with the business.

Learn More About ONESOURCE Global Trade

Sources

Optimization of import and export logistic process. Logistical performance in Mexico. Ministry of Economy of Mexico (http://www.elogistica.economia.gob.mx/swb/work/models/elogistica/Resource/3/1/images/OptimizacionProcesosLogistcios.pdf)