Export ABC's: Documentation control
August 13, 2008
By Frank Reynolds, Journal of Commerce
The March and April columns covered document-driven payment terms. Transportation documents are commonly used to trigger payments as they are evidence of shipment. Depending on the transportation mode, they are typically prepared by forwarders or carriers, but in all cases are executed by carriers.
“Forwarders and carriers” presupposes a situation that doesn't always exist. When I started exporting, forwarders were companies that represented shippers, making transportation arrangements on their behalf with carriers. They looked after shipper interests -- even versus carriers when necessary. Today, forwarders and carriers are often divisions of the same organization.
Forwarders assume the role of ocean carriers when they act as non-vessel-operating common carriers. They issue their own house bills of lading that are backed up by actual bills of lading issued to them by the performing ship lines. Forwarders do the same for airfreight by issuing house airwaybills that are backed up by master airwaybills issued by performing air carriers.
It can work the other way around, too, usually through carriers acquiring forwarders. Fritz Cos. is now part of UPS, while Danzas is part of DHL, which is in turn owned by Deutsche Post World Net.
Either way, the result is that there are fewer and larger service providers. This is particularly true when you add in the largely European-owned huge multinational forwarders and North American giants. There are advantages and disadvantages for shippers.
On the plus side, one-stop shopping is now readily available for transportation, documentation, insurance, import clearance and even specialties such as drawback. Large service providers are highly automated, and can trace cargo quickly. Some provide extensive employee training and even continuing education requirements. Being large, they can often command lower freight rates from performing carriers.
The downside is that fewer service providers means less choice. There's also the issue of relative size. A 200-container-per-year shipper is reasonably large to a smaller forwarder, and as such can expect some “tender love and care.” The same quantity is far less impressive to a large outfit. Further, one can hardly expect a forwarder to shop for carriers against its own in-house NVOCC service.
Smaller forwarders can compete by providing exceptional service and obtaining competitive freight costs through shipping associations. Some smaller forwarders also develop expertise to become dominant players for pleasure boats, objects of art, perishables and other niche products.
Selection of forwarders usually goes hand-in-hand with carrier selection, as the party bearing the risk of contracting for transportation will usually want to use its forwarder. This is also the way carriers pay brokerage. And, with carriers and forwarders increasingly being parts of the same company, the question of who selects the forwarder often becomes who selects the carrier.
Carrier selection is usually determined by freight cost. Buyers are more likely to allow sellers offering low freight costs to handle shipping by agreeing to C-Group Incoterms. Conversely, buyers that have developed lower transportation costs will insist on selecting the carrier and forwarder and buying on F-Group Incoterms. Because freight rates are volume driven, big users get bigger, and smaller users struggle to control transportation and the resulting documents. This can be important, because carriers and forwarders will follow the instructions of the party that selects and pays them. Working with buyer-appointed forwarders presents an additional area of risk for sellers that rely on correct documentation to make their payment terms work.
Forwarders typically do more than arrange transportation and prepare transport documents. They can arrange and prepare an array of other services and documents, including certificates of origin, insurance certificates and consular paperwork. They can also report exports, and with routed transactions buyer-appointed forwarders filing Electronic Export Information (EEI) is the default situation. This may increase the risk of noncompliance with foreign trade regulations and liability under recently enhanced penalties.
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