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8. Transportation and Global Supply Chains

International trade has been growing at a phenomenal rate ever since the

end of World War II. Some of the institutions that were created at the end

of the war were specifically designed to stimulate and grow trade be-

tween different nations of the world. The Bretton Woods Conference in

July 1944 led to the creation of these entities:

The International Monetary Fund (IMF), which managed the stability of

exchange rates and established an international system of payment

The World Bank, which has changed its focus from World War II recon-

struction to poverty alleviation through trade and development

The General Agreement on Tariffs and Trade (GATT), whose aim was to

reduce tariffs and duties across the world to promote world trade, and to

guarantee “Most Favored Nation (MFN)” status to all its members, thus

preventing discrimination between locally owned firms and foreign firms

The World Trade Organization (WTO), a successor organization to GATT

created on January 1, 1995, whose goal is to “to help producers of goods

and services, exporters, and importers conduct their business, while al-

lowing governments to meet social and environmental objectives”

In addition, various countries have floated trade blocs to enhance trade

within specific geographic areas. Some of the prominent trade blocs are

the European Union (EU), Association of South East Asian Nations

(ASEAN), Gulf Cooperation Council (GCC), Southern Common Market

(MERCOSUR), North American Free Trade Agreement (NAFTA), and South

African Customs Union.

International trade can be divided between merchandise trade and trade-

in services. Merchandise trade involves export and import of physical

goods. Service trade involves the export and import of intangible prod-

ucts such as people skills, finance, education, legal, transcription, enter-

tainment, tourism, and communications. As far as the transportation in-

dustry and global supply chains are concerned, merchandise trade plays

a more important role, compared to the trade in services. Table 8-1 gives

a global overview of world merchandise trade and the share of some of

the bigger economies of the world in this trade.

1

Source: WTO, International Trade Statistics (ITS) 2012

(www.wto.org/english/res_e/statis_e/its2012_e/its12_toc_e.htm).

Table 8-1 Total Merchandise Trade in Value and Percentages for the

World and Select Economies.

Merchandise trade is dominated in both value and volume by the manu-

factured goods, followed by fuels and mining products, and finally by

agricultural products. Figures 8-1a and 8-1b track the rise of value of the

merchandise exports by absolute value and volume, respectively. Apart

from the global recessionary years (2008–2010), there has generally been

an uptick in the absolute value and volume of all three kinds of merchan-

dise exports, which has led to increasing demands on the various modes

of transportation worldwide.

Figure 8-1a World merchandise exports by value (2000–2011)...

Figure 8-1b ...and merchandise trade by commodity volume (1950–

2010).

Need for Global Supply Chains

International trade is often difficult and frustrating because of differ-

ences in culture, language, religious beliefs, traditions, morals, customs,

legal framework, environmental concerns, political systems, and mone-

tary systems. Since World War II, however, international trade has flour-

ished and even outpaced growth in the gross domestic product (GDP) of

the world (see Figure 8-2). Many economic theories and business models

(including the Theory of Absolute Advantage, Theory of Comparative

Advantage, Factor Endowment Theory, International Product Life Cycle

Theory, Porter’s Diamond Model, New Trade Theory, Ricardo-Sraffa Trade

Theory, and the International Production Fragmentation Trade Theory)

have tried to explain the growth in international trade that has led to the

creation of global supply chains. The Ricardo-Sraffa Trade Theory and the

International Production Fragmentation Trade Theory are extensions of

Ricardo’s Theory of Comparative Advantage and have been developed re-

cently to overcome the limitations of the Theory of Absolute Advantage

and Factor Endowment Theory. In essence, the growth in international

trade is primarily attributed to comparative advantages that different na-

tions have over one another and the ability of products to add value in

different nations to keep the price of the final product as low as possible.

This has enabled textile-trading firms such as Li & Fung to have different

parts of the clothing supply chain in South Korea, Taiwan, Bangladesh,

Thailand, and India, while catering to demand mainly in the United States

and Western Europe. To enable complex global supply chains, firms such

as Li & Fung rely extensively on efficient and effective modes of

transportation.

Figure 8-2 Growth of world merchandise exports and GDP (1950–

2011).

International Modes of Transportation

When shipping globally, mode selection becomes critical because of high

costliness, and there are many options transportation managers can

choose from.

International Ocean Transportation

Of all the modes of transportation, the most important one as far as inter-

national trade is concerned is ocean transportation. Oceangoing vessels

carry around 80 percent of world merchandise trade by volume and 70

percent by value. In 2011, the total volume of goods loaded worldwide

was 8.7 billion tons. The world fleet of ships grew 37 percent from 2008

levels to 1.5 billion deadweight tons (dwt) in January 2012. Container traf-

fic as measured by 20-foot equivalent units (TEUs) was 572.8 million TEUs

in 2011. In the United States, one in six jobs is related to marine trans-

portation: The industry employs 2.3 million people. In addition, 95 per-

cent of foreign trade is carried by ships, which accounts for 2 billion tons

of imports and exports.

2

3

Types of Service

Ocean transportation is organized around two types of service: liners and

charterers (tramps). Liners are ships that operate on a regular schedule,

traveling from one predetermined port to another. Liners are often orga-

nized as conferences, whose aim is to provide service on a specific route

within a specified geographic region under uniform freight rates. They

are a form of cartel whose aims are to “facilitate the orderly expansion of

world sea-borne trade.” The bill of lading (B/L) issued by the master of

the vessel is the evidence of contract of carriage. Liners often carry

break-bulk/container cargo. Most B/Ls are drawn between the carrier and

the shipper, and international treaties often govern the liabilities of dam-

ages. Several intermediaries, such as freight forwarders, custom house

agents, and non-vessel operating common carriers (NVOCC), help facili-

tate the transaction between a carrier and shipper. Container ships are

an example of liners.

Charterers are ships that operate under conditions of supply and demand.

They do not have a fixed route, nor do they have a fixed port of call.

These ships carry break-bulk and bulk cargo (dry and liquid) and often

set freight rates with reference to the Baltic Exchange. Normally, a char-

ter-party (contract) is drawn between the charterer and the ship owner as

evidence of contract of transportation or affreightment. All terms and

conditions and references to international treaties are mentioned in the

charter-party. The B/L is issued by the charterer—examples are crude oil

carriers, grain carriers, car carriers, and commodity carriers.

The most common types of charter-parties are the voyage charter, time

charter, and bareboat charter/demise charter. As the name implies, a voy-

age charter refers to a contract based on chartering a ship from port of

origin to port of destination. A gross form of voyage charter obliges the

ship owner to take on the responsibility of paying for cargo loading, cargo

discharging, and trimming (stability) of the ship. In a net form of voyage

charter, the charterer pays the cargo loading, cargo unloading, and trim-

ming charges. Some key clauses incorporated in a voyage charter are lay-

time (period of time to load and unload cargo from a ship without pen-

alty) and demurrage (penalty imposed when the laytime is exceeded).

Sometimes a cesser clause is inserted into a charter party when the char-

terer and the shipper on the B/L are different. The cesser clause ensures

that the charterer is discharged of all the liabilities in case of any dues,

and the cargo of the shipper of the B/L is held as collateral for the dues

owed to the ship owner.

4

A time charter involves hiring the ship based on time and is independent

of the voyage. The charterers take complete control of the ship and are re-

sponsible for all the liabilities and damages during the charter period.

The ship owner normally takes an advance, to safeguard his or her inter-

est in this specific charter-party.

A bareboat charter, or demise charter, occurs when the charter hires only

the ship/vessel, without any fuel, provisions, cargo, or insurance. The

charterer has complete control over the vessel and is required to pay for

any incidental expenses, such as fuel, provisions, cargo, or insurance. A

variation of a demise charter allows for hire-purchase in the shipping in-

dustry. This form of bareboat charter is initiated by the charterer for an

extended period of time, with the intention of owning the vessel at the

end of the charter time.

Types of Cargo

The types of cargo carried in oceangoing vessels are diverse and normally

do not easily fit into a neat classification system. However, for the sake of

simplicity, cargo is normally classified as bulk (wet or dry), break-bulk,

and containerized cargo. Figure 8-3 shows the growth in different types

of cargo over the years.

Source: United Nations Conference on Trade and Development

(UNCTAD), Review of Maritime Transport 2012

(http://unctad.org/en/PublicationsLibrary/rmt2012_en.pdf).

Figure 8-3 International seaborne trade, by cargo type, selected

years (millions of tons loaded).

Bulk cargo is usually transported unpackaged. It is normally poured or

dropped into the hold of the ship. Sometimes palletized or boxed cargo

also is considered bulk cargo. Break-bulk cargo is normally noncontainer-

ized, unitized cargo in which individual pieces are loaded on the ship.

Containerized cargos are normally of fixed lengths (TEUs or 40-foot equiv-

alent units [FEUs]). Cargo is normally stuffed into these standard contain-

ers and then loaded into the ships. As an example, corn shipped in the

holds of the ship or shipped as bags placed in holds of the ship is consid-

ered bulk cargo. The same corn packed in individual drums and shipped

would be considered break-bulk cargo. If the corn were packed in TEU

containers, it would be considered containerized cargo. The share of con-

tainerized cargo is increasing over the years, as Figure 8-3 shows, and the

share of break-bulk cargo has been decreasing over the years. Over the

years, low container prices, coupled with the financial crisis, has

prompted consolidation within the container shipping industry (see

Figure 8-4). A smaller number of companies tend to deploy larger con-

tainer ships. Three companies, Maersk, MSC, and CMACGM, control 30

percent of the world container traffic.

Source: RMT 2012 (UNCTAD Review of Maritime Transport).

Figure 8-4 International seaborne industry profile.

Types of Vessels

Vessels are classified based on either the types of cargo they carry or their

size. Note that some ships fit into more than one classification system, de-

pending on their usage and the kind of cargo they carry.

Classification based on size follows:

Handysize—Ships that typically serve small and large ports, including

coastal shipping. They represent the bulk of the number of ships in the

world. Their capacity is between 15,000 and 35,000 dwt and can carry dry

and wet cargo.

Handymax—The workhorses of dry bulk cargo, with a capacity of less

than 60,000 dwt.

Supramax—Ships normally used in costal shipping and small ports.

They often carry dry bulk cargo with a capacity of between 50,000 and

60,000 dwt.

Panamax—The largest ships to transverse the Panama Canal. The high-

est capacity is capped at 65,000 dwt by the Panama Canal Authority. The

typical size of Panamax container ships is around 5,000 TEUs. Ship length

is restricted to 275 meters, with a width of 32 meters and a draught of

12.04 meters. They mainly carry commodities.

Aframax—Ships named after the Average Freight Rate Assessment

(AFRA) tanker rate system. They typically carry crude oil, with a capacity

of between 75,000 and 115,000 dwt.

Suezmax—Ships designed to navigate the Suez Canal. They can easily

dock at most ports in the world and are used for containerized dry and

wet cargo. They have typical capacity ranges between 120,000 and

200,000 dwt.

Capesize—Ships that generally cannot go through either the Panama

Canal or the Suez Canal—they must transit through either Cape Horn or

the Cape of Good Hope. Capacity ranges from 80,000 to 175,000 dwt.

New Panamax ships—Bigger and more efficient ships, with larger di-

mensions, thanks to the building of the New Panama Canal. They have

the capacity to carry 15,000 TEUs. The lengths of ships through the New

Panama Canal can be a maximum of 427 meters, with a width of 55 me-

ters and a draught of 18.30 meters.

Post New Panamax—Large container ships (Triple E Class) being built

for Maersk, with capacities reaching 18,000 TEUs. Plans also include

building container ships to hold 20,000 TEUs.

Very large ore carrier (VLOC)/ultra large ore carrier (ULOC)—Iron

ore carriers that travel primarily from Brazil to Europe and Asia. VLOCs

are typically greater than 200,000 dwt; ULOCs are greater than 300,000

dwt. The largest ULOC ever built, the Berge Stahl in 1986, had a capacity

of 365,000 dwt, a length of 343 meters, a width of 65 meters, and a

draught of 25 meters.

Very large crude carriers (VLCC)/ultra large crude carriers (ULCC)—

VLCCs typically have a capacity of between 180,000 and 320,000 dwt.

They serve the North Sea, Mediterranean, and West African Ports. ULCCs

have a capacity greater than 320,000 dwt and carry crude from the

Middle East to Europe, Asia, and North America. Knock Nevis, the largest

ULCC ever built, had a capacity of 564,763 dwt, with a length of 458 me-

ters, a width of 68.8 meters, and a draught of 29.8 meters.

Some ships are classified according to the unique geographical area they

serve or the specialized cargo they carry:

Malaccamax—These ships navigate the Strait of Malacca. They can have

a maximum length of 400 meters, a width of 59 meters, and a draught of

14.5 meters.

Seawaymax—Ships that can pass the locks of St. Lawrence Seaway can

have a maximum length of 225.6 meters, a width of 23.80 meters, and a

draught of 7.92 meters.

Q-max—These ships are named after Qatar and carry liquefied natural

gas (LNG) from Qatar to the rest of the world.

Roll-on/roll-off (RORO)—Self-propelled vehicles, railroad cars, and live-

stock often are carried by specialized ships called RORO. The advantages

are that the cargo does not need specialized cranes or gantries to load or

unload, so labor is often cheaper. The big disadvantage is that, in most

cases, the ships return to the port of origin empty because they are not ca-

pable of handling different kinds of cargo.

Container ships—Approximately 60 percent of world trade by value is

containerized. Container ships come in different sizes—the most common

can carry 5,000 to 6,000 TEUs. The newer container ships, called the

Triple E Class ships, will have the capacity to carry 18,000 TEUs.

Flags

Per international law, every ship must be registered in a country and

must fly the “flag” of that specific country. Ship owners are allowed to

choose which country they want to register their ships in. This has led to

“open registry,” with countries allowing any ship to be registered in that

country. The concept of flying the flag of a country entitles the ship to be

treated as an extension of the country. The naval force of the flagged

country is responsible for the security of the merchant ships. In addition,

the laws and regulations of the country in which the ship is registered ap-

ply on the ship. In return, the ship must pay all the taxes and dues in the

country of registration. Not surprisingly, ship owners choose “flags of

convenience,” based on the most relaxed regulations and lowest taxation

rates. Figure 8-5 gives the percentage of foreign and domestic ownership

of ships registered in select countries.

Source: UNCTAD, Review of Maritime Transport 2012.

Figure 8-5 Foreign and national ownership of the top 30 fleets by

flags of registration, 2012 (percentage share of fleet dwt).

Cabotage

Originally, the term cabotage (from the French word caboter, meaning “to

sail along the coast”) was the exclusive right of a nation to navigate its in-

land waters. The country could decide which entities could ply the inland

or coastal waterways. This term has now been expanded to cover all

forms of transportation. Within the United States, the Jones Act autho-

rizes the movement of cargo between two U.S. ports exclusively on U.S.

flagged ships. Proponents of the Jones Act and cabotage point to the fact

that 500,000 jobs and $100 billion in annual economic output accrue di-

rectly to the United States. In case of war, the United States has the ability

to requisition its domestic U.S. flagged fleet for the movement of troops,

equipment, and provisions. The safety record of ships flagged in devel-

oped countries tends to be greater than the safety record of ships flying

the flags of convenience. Opponents of the Jones Act point to increasing

cost of operations and fewer choices to consumers for shipping their

cargo.

Liability

Supply chains have become more complex, and the number of multi-

modal shipments has increased over the years since the Carriage of

Goods by Sea Act was passed in 1936. At the same time, technology and

newer forms of communication have changed the way cargo and docu-

mentation are generated, arranged, and transported when compared to

the previous century. The United Nations attempted to change with the

times by proposing the Hague Rules, the Hague-Visby Rules, and the

Hamburg Rules, but most countries never ratified these documents. The

latest effort by the United Nations is to adopt the Convention on Contract

for the International Carriage of Goods Wholly or Partly by Sea, popularly

known as the Rotterdam Rules. The Rotterdam Rules are now being de-

bated in the member countries and could be ratified in the coming years.

The salient features of the Rotterdam Rules as applied to global supply

chains follow:

One contract of carriage for multimodal transportation

Liability expressed clearly in terms of Special Drawing Rights (SDR)

New rules that take into account e-commerce, enhanced navigational

devices, and new ways of doing business

A clear description of the rights and obligations of the shipper, the ship

owner, and the receiver

International Air Transportation

The global air network has been growing phenomenally during the last

50 years: The air network size has been basically doubling every 15 years

since the 1970s. The number of passengers in 2011 rose to 3 billion, and

49.2 million tons of freight was carried in 2011. Figures 8-6a and 8-6b

give the growth rate of passengers (in terms of passenger-kilometers) and

cargo (in terms of freight ton-kilometer) for select years.

Source: International Civil Aviation Organization (ICAO), Annual Report

of the Council 2012.

Figure 8-6a Total scheduled traffic in passenger-kilometers per-

formed (2003–2012).

Source: ICAO, Annual Report of the Council 2012.

Figure 8-6b Total scheduled freight traffic (2003–2012).

Service

The airline industry can be broadly divided as passenger services and

cargo operations. Passenger services can be further divided as scheduled

services and nonscheduled services. Scheduled services are normally run

on a fixed time table, regardless of the demand in a short period of time.

Nonscheduled operators cater mostly to the tourism industry and private

business and leisure travel. Scheduled passenger services typically ac-

counted for 93.7 percent of the total traffic, and this number has been

growing as a percentage of total traffic. Table 8-2 gives the 2012 ranking

of the scheduled airlines, based on the passenger-kilometers flown. Table

8-3 gives the top 25 airports in 2012, based on the total passengers.

Source: International Air Transport Association (IATA), Scheduled

Passengers – Kilometres Flown (www.iata.org/publications/Pages/wats-

passenger-km.aspx).

Table 8-2 2012 Rankings of Airlines, Based on Passenger-Kilometers

(International + Domestic) Flown

Table 8-3 2012 Top 25 Airports, Based on Total Passengers

The cargo operations of airlines can generally be divided as scheduled air

freight services and chartered air freight services. Examples of scheduled

air freight services are FedEx and UPS Airlines, which operate on fixed

routes on a fixed schedule. Examples of chartered air freight services are

the Dreamlifter of Boeing and the Beluga of Airbus, which transport

cargo when there is demand. Approximately $6.4 trillion of cargo, repre-

senting 35 percent of the total world trade by value, is flown. Table 8-4

gives the ranking of scheduled airlines, based on the freight-ton kilome-

ters flown in 2012.

Source: IATA, Scheduled Freight Ton-Kilometers.

Table 8-4 2012 Rankings of Airlines, Based on Freight-Ton Kilometers

(International + Domestic) Flown

Leases

Both passenger and cargo aircrafts can be bought outright by various op-

erators. But in most cases, leasing companies buy the aircrafts and lease

them to various operators. This helps the operators reduce capital expen-

diture and gives them the ability to adjust the capacity of the aircraft, de-

pending on the demand, without much financial commitment. The only

downside is in the form of higher lease fees. Leases can be of three differ-

ent kinds:

Dry lease—The lessor provides the lessee with only the aircraft.

Wet lease—The lessor provides the lessee with the aircraft, crew, insur-

ance, maintenance, and fuel.

ACMI lease—The lessor provides the lessee with the aircraft, crew,

maintenance, and insurance (ACMI).

Tariffs and Liabilities

The airline industry normally charges tariffs on the principle of charging

what the market can bear. As with ocean transportation, the tariffs are

normally charged on the basis of volume or weight, whichever is higher.

About 240 airlines, or 84 percent of total air traffic, are represented by

the International Air Traffic Association (IATA). One of the functions of

IATA is to act as a clearinghouse for its member airlines and help ensure

seamless travel for passengers across the world.

The liability of damages to cargo and loss of life or incapacitation to pas-

sengers has been restricted over time. Currently, the Montreal Protocol of

2009 is in force and limits liability in terms of special drawing rights

(SDRs).

Open Skies

Cabotage and the rules under IATA and the International Civil Aviation

Organization (ICAO) give nations the power to restrict the number of do-

mestic and foreign airlines flying into their territory. Most international

flights are negotiated between countries on a bilateral basis. However, in

1992 the United States and Norway implemented the open skies policy, to

remove a restriction on the number of flights, routes, and capacity. All EU

members put the same policy into effect in 2007. The only restriction now

is the number of available landing slots at some of the key airports. This

open skies policy has led to more airlines flying into the United States and

Europe, and also has resulted in alliances being developed, such as be-

tween British Airways and American Airlines, and between Air France

/KLM and Delta Airlines.

Intermodal Transportation

The primary modes of international shipment are oceangoing vessels and

air. But land-based transportation such as trucking and rail are important

modes of transportation in their own right. Trucking and rail often pro-

vide domestic transportation, but they also provide last-mile connectivity

for international transportation. For land-locked countries, trucks and

rails are the only means of connecting to global supply chains.

The critical issues for a shipper to consider before hiring trucks to move

goods in any country include these:

Weight restriction on the truck

Weight restriction in the geographical area where it is operated

Hours of operation governed by local laws

Quality of infrastructure (roads, bridges, congestion, docks)

Size of trucks and trailers that can be used

Issues that shippers normally consider before sending goods through rail

include these:

Ownership of railroads (private versus public, and the availability of

subsidies to move goods)

Infrastructure available (including the gauge of tracks, electrification of

lines, maintenance of the system, availability of loading and unloading

docks and platforms, connectivity to the road network, and speed at

which trains can travel)

Relationship between passenger traffic and merchandise traffic, and the

priority of one over the other

Within the United States, the number of air carriers has been decreasing

steadily since 1990 (see Table 8-5) because of bankruptcy, mergers and

acquisitions (M&As), and reduced capacity in terms of seats offered and

routes flown. The number of Class I railroads that carry the bulk of the

traffic in terms of both volume and value has decreased due to M&As. An

exception to the decreasing trend has been trucking (motor carriers),

which has shown an increase in the number of carriers plying the

nation’s roadways. This could be because of the fragmented nature of the

business—ownership of trucks continues to be fragmented, with a prefer-

ence for owner-operators. The inland and coastal vessel operators have

seen a steady decrease because of the shift in traffic away from water-

ways to trucks and rail. These vessel operators also are more prone to va-

garies of nature, such as droughts and floods. The pipeline operators are

more insulated from market forces because they specialize in moving

goods such as oil, gas, and viscous chemicals in bulk at very low costs.

Table 8-5 Number of Carriers in Different Modes of Transportation

for Select Years

Intermodal transportation involves shipment of the same merchandise

through more than one mode of transportation with a single rate. The

Rotterdam Rules specifically provide and enhance documentation, secu-

rity, and liability terms for intermodal (multimodal) transportation. Some

of the features of intermodal transportation follow:

The cargo is not handled multiple times; the container/pallet gets han-

dled multiple times.

A single multimodal/intermodal B/L covers all modes of transport to pro-

vide “door-to-door” delivery.

Technology such as electronic data interchange (EDI)/Internet enables

coordination among transportation agencies and various arms of govern-

ments (such as Customs and port authorities).

Containerization of cargo is in standard units of TEUs/FEUs, for compati-

bility across various modes of transportation across the world. This en-

sures the integrity of goods inside the container.

Cargo from different shippers is consolidated in a container, to bring

down overall shipping costs.

The benefits of different modes of transportation, in terms of costs and

service levels, are utilized to optimize shipping time.

Economies of scale from speed and flexibility have reduced costs over

bulk shipments by more than 20 times.

Warehousing and security are enhanced because the shipping unit or

container is opened only at the destination.

Table 8-6 summarizes the factors that have led to increased intermodal

transportation.

Source: Jean-Paul Rodrigue, Intermodal Transportation and Integrated

Transport Systems: Spaces, Networks and Flows (unpublished working

paper, 2006), p. 10.

Table 8-6 Causes for Intermodal Transportation

Even within the United States, trucks and rail play a prominent role in in-

ternational trade, along with other modes of transportation. Primarily,

truck and rail are used in Canada extensively and, in a limited way, in

Mexico. Trucks from both Mexico and the United States are allowed only

to a certain point within the borders because of the limitations in the

NAFTA agreement. Trucks and rail are free to move within the United

States and Canada, as far as international trade is concerned. Table 8-7

gives the volume and value breakup of the imported and exported mer-

chandise goods.

Source: U.S. DOT, Federal Highway Administration (FHWA), Freight

Management and Operations, Freight Facts and Figures 2011

(www.ops.fhwa.dot.gov/freight/freight_analysis/nat_freight_stats/docs/11factsfigures/figure2_

Table 8-7 U.S. International Merchandise Trade by Transportation

Mode, 2010 (Billions of U.S. Dollars) Land Bridges

One consequence of the growth of intermodal transportation has been

the exploration of new ways of shipping goods to lower overall costs and

also decrease shipping time. One such innovation is the concept of land

bridges. As an example, the continent of North America is an obstacle for

oceangoing vessels between the ports on the east coast of Asia and the

ports on the west coast of Europe. To overcome this obstacle, intermodal

firms are now using the United States and Canada as land bridges,

whereby goods in containers are brought from, say, Shanghai to Seattle

by sea and then sent first from Seattle to New York by rail and then from

New York to Rotterdam by sea. In this case, the United States acts as a

land bridge between the Pacific Ocean and the Atlantic Ocean. A big issue

cropping up in land bridges is the availability of surplus capacity of infra-

structure and manpower to handle increased volume of shipments not

bound for the domestic market.

Enablers and Key Players in Transporting Goods to Global Supply Chains

Freight forwarders: Sending merchandise across global supply chains is

complex because of differences in customs, duties, tariff and nontariff

barriers, regulations, documentation, and coordination between govern-

ment and transportation agencies. Specialized agencies have evolved to

deal with the complexities. Freight forwarders are intermediaries who

specialize in booking space for the cargo, creating the necessary docu-

mentation, and calculating the total cost of shipment.

Custom brokers and custom house agents (CHAs): These agencies often

specialize in clearing goods for export and import with the customs of the

country. They are well versed with the documentation needs and the reg-

ulatory environment of the law of the land.

Non-vessel operating common carriers (NVOCC): The ship owners of

the air freighters, liners, and charterers rarely interact with full-con-

tainer-load (FCL)/less-than-container-load (LCL) shippers, unless the ship-

pers ship substantial volume in the ship owners’ fleet. The ship owners

often sell space in bulk to entities called NVOCCs, who then resell the

space to individual customers. The NVOCCs in the United States are regu-

lated by the Federal Maritime Commission. In most cases, the functions of

freight forwarder, custom broker, and NVOCC might reside in the same

organization, to provide seamless services to the shipper.

3PLs: A third-party logistics provider (3PL) supplies functional services,

compared to 1PL (shippers) and 2PL (asset-based carriers). The functions

a 3PL provides its clients could take the form of pick and pack, basic in-

ventory management, warehousing, and distribution. The latest innova-

tion of 3PL is to venture into the area of non-asset-based solutions such as

consultation on packaging and transport, freight contract negotiations,

auditing and tracking of freight, financial settlement with different parts

of the supply chain, and dispute resolution with customers.

4PLs: The fourth-party logistics provider (4PL) role is still evolving, and

its definition is still being contested. Some believe 4PL to be a totally non-

asset-based software solutions company that provides a common soft-

ware and hardware platform to all its clients, to enable the 4PLs to lever-

age savings from consolidation of loads, shipments, transportation, and

supply chain efficiency from different shippers. Another school of

thought defines 4PLs as firms that provide all the functions of a 3PL but

that also have elements of non-asset-based solutions to promote

commerce.

Incoterms

Incoterms are rules created by the International Chamber of Commerce,

headquartered in Paris, France. The current version, called Incoterms

2010 (shown in Figure 8-7a, b), following the descriptions), came into ef-

fect January 1, 2011. Incoterms are terms of trade that are often incorpo-

rated in contracts (domestic and international) to clarify issues of risk,

costs, and ownership of property. Contracts using Incoterms 2010 carry

the same meaning for each three-letter abbreviation anywhere in the

world. The current version has 11 Incoterms. A B/L, airway bill (AWB), or

multimodal B/L is the transportation document that prominently features

the Incoterm in addition to the contract itself.

Source: ICAO, Annual Report of the Council 2012.

Figure 8-7a Incoterms 2010.

Source: ICAO, Annual Report of the Council 2012.

Figure 8-7b Incoterms 2010.

The 11 Incoterms and a brief description for each follow. Carrier men-

tioned in the Incoterms can be substituted for first carrier, in case of a

multimodal transportation.

EXW: Ex-Works (EXW place)

The seller is responsible for making the goods available at the seller’s

premises.

Costs: The buyer bears all costs, from seller’s premises to destination, in-

cluding transportation.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

made available to the buyer. Ownership of goods transfers from seller to

buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

FCA: Free Carrier (FCA place)

The seller clears the goods for export and hands them over to the carrier

and place named by the buyer.

Costs: The buyer bears all costs, from the time the goods are handed over

to the carrier, at the place named by the buyer.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

handed over to the carrier at the place named by the buyer. Ownership of

goods transfers from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

FAS: Free Alongside Ship (FAS loading port)

The seller clears the goods for export and places them alongside the ship

at the named port.

Costs: The buyer bears all costs from the time the goods are placed along-

side the ship, including loading of the cargo.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

placed alongside the ship at the port named by the buyer. Ownership of

goods transfers from seller to buyer along with the risk.

Mode of transportation used: Sea, inland waterway.

FOB: Free On Board (FOB loading port)

The seller clears the goods for export and places them on board the ship

at the named port.

Costs: The buyer bears all costs from the time the goods are placed on

board the ship. The seller pays for loading of the cargo.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

placed on board the ship at the port named by the buyer. Ownership of

goods transfers from seller to buyer along with the risk.

Mode of transportation used: Sea, inland waterway.

CFR: Cost and Freight (CFR destination port)

The seller clears the goods for export and pays all charges, including

freight, up to the destination port mentioned by the buyer.

Costs: The buyer bears all costs from the time the goods reach the desti-

nation port. The seller pays for loading and freight of the cargo up to the

destination port.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

placed on board the ship at the port of origin. Ownership of goods trans-

fers from seller to buyer along with the risk.

Mode of transportation used: Sea, inland waterway.

CIF: Cost, Insurance, and Freight (CIF destination port)

The seller clears the goods for export and pays all charges, including

freight, up to the destination port mentioned by the buyer. The seller

buys insurance on behalf of the buyer.

Costs: The buyer bears all costs from the time the goods reach the desti-

nation port. The seller pays for loading, freight, and insurance of the

cargo up to the destination port.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

placed on board the ship at the port of origin. Ownership of goods trans-

fers from seller to buyer along with the risk.

Mode of transportation used: Sea, inland waterway.

CPT: Carriage Paid To (CPT place of destination)

The seller clears the goods for export and pays all charges, including

freight, up to the place of destination mentioned by the buyer.

Costs: The buyer bears all costs from the time the goods reach the place of

destination. The seller pays for loading and freight of the cargo up to the

place of destination.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

handed over to the carrier at the place of origin. Ownership of goods

transfers from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

CIP: Carriage and Insurance Paid to (CIP place of destination)

The seller clears the goods for export and pays all charges, including

freight, up to the place of destination mentioned by the buyer. The seller

buys insurance on behalf of the buyer.

Costs: The buyer bears all costs from the time the goods reach the place of

destination. The seller pays for loading, freight, and insurance of the

cargo up to the place of destination.

Risk and ownership of goods: Risk passes to the buyer as soon as goods are

handed over to the carrier at the place of origin. Ownership of goods

transfers from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

DAP: Delivery at Place (DAP place of destination)

The seller is discharged of all responsibilities when the goods are placed

at the disposal of the buyer on the mode of transportation on which it has

arrived and is ready for unloading at the place of destination.

Costs: The seller bears all costs until the goods are ready to be unloaded

at the place of destination from a mode of transportation (including in-

surance, if applicable). The buyer pays for unloading goods and every

other charge subsequent to unloading.

Risk and ownership of goods: The seller bears all risks up to the place of

destination and the point of unloading. Ownership of goods transfers

from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

DAT: Delivered at Terminal (DAT place of destination)

The seller is discharged of all responsibilities when the goods are placed

at the disposal of the buyer at the buyer’s terminal of choice after unload-

ing from the mode of transportation. “Terminal” includes a place,

whether covered or not, such as a quay, warehouse, container yard, or

road, rail, or air cargo terminal.

Costs: The seller bears all costs up to the unloading of goods at the buyer’s

terminal of choice. The buyer pays for all costs subsequent to unloading

the goods.

Risk and ownership of goods: The seller bears all risks up to the place of

destination and including the unloading of goods. Ownership of goods

transfers from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway.

DDP: Delivery Duty Paid (DDP place of destination)

The seller is discharged of all responsibilities when the goods are placed

at the disposal of the buyer at the place of destination requested by the

buyer. All export and import Customs clearance are the responsibility of

the seller.

Costs: The seller bears all costs until the goods are placed at the disposal

of the buyer. Costs include loading, unloading, tariffs, Customs duties, and

any other incidental charges required to be paid to deliver the goods to

the place of destination of the buyer.

Risk and ownership of goods: The seller bears all risks up to the place of

destination of the buyer until the buyer takes charge of the goods.

Ownership of goods transfers from seller to buyer along with the risk.

Mode of transportation used: Air, rail, road, multimodal, containerized,

sea, inland waterway. Source: ICAO, Annual Report of the Council 2012.

Key Documents Used in Enabling Transportation for Global Supply Chains

In the current environment, more countries are adopting EDI/Internet to

transmit key documents among various government agencies and entities

such as buyers, sellers, vendors, banks, port authorities, freight brokers,

and ship owners, to name a few. However, such countries are in the mi-

nority. Most of the documentation is still done physically, and the need for

accuracy and paperwork is relatively high when compared to domestic

trade. This section lists some of the key documents and their functions

that enable global supply chains to exit. It is by no means an exhaustive

list; each country might have its own set of documents before goods are

allowed to be imported or exported.

Pro-forma invoice—This invoice contains the initial quote that the

buyer and seller agreed to. Several Customs authorities around the world

require the pro-forma invoice to be part of the mandatory documenta-

tion. The contents, prices, and terms of trade listed on the pro-forma in-

voice need to be reflected accurately in the actual commercial invoice

and packing list.

Commercial invoice—A commercial invoice (or its copy) is the actual

document that accompanies the shipment. The original commercial in-

voice can be sent with the shipment itself or through banking channels,

as when a letter of credit is used as a method of payment. A commercial

invoice must state the nature of the goods, its harmonized system num-

ber, the dimensions, the weight, the Incoterms used for the shipment, the

currency to be used in the trade, the shipping information, and the names

and addresses of the buyer and seller.

Packing list—A packing list breaks down the shipment in unit sizes

(drums, pallets, boxes, bags). It disaggregates the description in the com-

mercial invoice and lists the units of goods that are physically packed to-

gether. This document is helpful in case damages occur because specific

shipments can quickly be identified and isolated. It also helps customs in

identifying unique shipments based on identifiers such as batch numbers

or lot numbers.

Bill of lading (B/L)/airway bill (AWB)—A B/L or AWB is the primary

transportation document. It lists the names and addresses of the buyer

and seller, Incoterms used for the terms of trade, the terms of contract for

transportation, the name of the carrier, and identifying marks of the ship-

ment. The B/L has three main functions: a) a contract of affreightment be-

tween the shipper and carrier, b) a receipt by the carrier that the goods

have been received from the shipper, and c) a certificate of the title of the

goods. Normally, limited “negotiable” B/L and AWB are made of every

shipment as the goods are released to the bearer of the “negotiable” B/L.

A B/L is considered a “clean B/L” if the master of the vessel does not notice

visible damages while loading the goods onto the ship. The B/L is consid-

ered a “soiled B/L” if defects are noted on it, which can delay payment to

the seller of the goods.

Certificate of analysis—Most times, the buyer wants to be reassured

that the products conform to certain standards. The seller normally issues

a certificate of analysis itself (or through an inspection agency) to satisfy

the buyer.

Export/import licenses—Certain countries prohibit or limit the import

or export of certain kinds of goods. In such cases, the countries issue

export/import licenses to be furnished at the time of clearance of goods at

Customs. Importers and exporters need to check in advance whether the

goods they want to trade are not on a “negative” or “restricted” list by any

of the countries concerned and obtain any necessary export/import li-

censes in advance.

Certificate of origin—Certain countries give least

developed/underdeveloped countries preferential access to their markets

at concessional import tariffs. In other cases, countries might want to

trade in certain commodities with limited nations. In all such cases, the

importer must furnish a certificate of origin from the exporter to prove

that the goods were actually made in the country of the exporter. In most

cases, the chamber of commerce in the exporter’s country issues this

document.

Certificate of inspection—This is similar to the certificate of analysis.

The importer requests that an independent agency inspect the goods ei-

ther at the place of origin or at the place of destination (or both) to certify

that it fits the description of the goods and adheres to the terms of the

contract in weight, description, number of units, and quality of the goods.

The independent inspection agency then issues a certificate of inspection

with or without any defects noted on it.

Certificate of insurance—When the goods are shipped on a CIF or CIP

basis, the importer normally requires the exporter to furnish a certificate

of insurance from an insurance agency to cover the risks of the shipment

in case of unforeseen circumstances. Insurance is normally given to

goods or services that have pure risk (that is, the probability of a loss

only), as opposed to speculative risk (the probability of a loss or gain).

Losses can be due to undesirable movement of cargo during its trans-

portation, theft and pilferage, exposure to weather, acts of God, piracy,

and force majeure clause. As far as shippers go, the higher the risks that

are covered, the greater is the premium paid for the insurance. Types of

insurance follow:

Institute Marine Cargo Clauses (A)—The highest insurance that a ship-

per can get is Coverage A, which is similar to “All Risks Coverage” and

covers losses or damages to the shipment under consideration.

Institute Marine Cargo Clauses (B)—Coverage B is normally called the

“named peril” policy because it specifically states the perils (such as fire,

collision, water damage, sinking, jettison, and piracy) that are covered for

a shipment.

Institute Marine Cargo Clauses (C)—Coverage C provides the mini-

mum coverage required under the CIF/CIP Incoterms. It normally covers

fire, stranding, sinking, collision, and jettisoning.

Many other types of insurance coverage exist, and insurance companies

can negotiate with exporters and importers to tailor coverage to specific

clients’ requirements.

Summary

This chapter focused on how transportation enables the functioning of

global supply chains. We covered the basic modes of transportation and

their importance to the functioning of international trade. We looked at

key players who participate in the transportation process. We detailed

Incoterms that have standardized the terms of trade throughout the

world. Finally, we examined some of the key documents that form the ba-

sis of every shipment.

Key takeaways from this chapter include:

Understand the various modes of transportation to enable global supply

chains

Distinguish between the various kinds of sea and air services, based on

type of service and size.

Know and apply all the 11 Incoterms appropriately.

The role of the key enablers in transporting goods in international trade.

The use and importance of the key documents on which transportation

is based, specifically the role of bill of lading (B/L).

Endnotes

1. World Trade Organization (WTO), “Understanding the WTO: Who we

are,” www.wto.org/english/thewto_e/whatis_e/who_we_are_e.htm.

2. United Nations Conference on Trade and Development (UNCTAD),

“Review of Maritime Transport 2012,”

http://unctad.org/en/PublicationsLibrary/rmt2012_en.pdf.

3. National Ocean Policy Coalition (NOPC), “Oceans Impact the Economy,”

http://oceanpolicy.com/about-our-oceans/oceans-impact-the-

economy/.

4. Admiralty and Maritime Law Guide, International Conventions,

“Convention on a Code of Conduct for Liner Conferences,” Geneva, 6 April

1974, www.admiraltylawguide.com/conven/liner1974.html.