Harvesting the Benefits of Correct Terms
Usage
Domestic Freight Terms & Terms of Sale/Purchase
Executive Summary
Applying
the correct legal terms associated with the movement of freight
is one of the most important events in the entire purchase and
sales process! They establish the relationship between the parties
and every related event thereafter will rely on these terms to
satisfy the relationship.
Correct
terms, presented properly:
·
are
the full and complete representation of how the parties agree
to do business
·
firmly
establish the basis of the relationship
·
drive
satisfaction, payment and collection
·
function
as the fulcrum for all decisions regarding any disagreements or
disputes amongst the parties
·
will
drive down costs and improve operations
Intentionally and specifically applying the proper terms will
achieve the desired results, only if you have established
efficient and effective controls.
Click here to read the entire paper
The purpose of this paper
is to provide our readers with a basis to establish the best freight
terms and terms of sale/purchase, that are commensurate with their
corporate goals, objectives market culture and philosophy.
This
paper will show that the “best terms” are influenced as much by
business objectives as they are by logistics considerations.
The
topics below identify some of the more important concerns that
address the operative nature and implication of terms development
and use:
·
Method
of Approach
·
Establish
goals and objectives
·
Develop
and work within the strategy
·
Terms
selection that will yield profit and encourage customer acquisition
·
Proper
control methodologies
Method of Approach
Many
companies’ freight terms and terms of sale/purchase were established
by default! That is, their terms were copied from another
corporate model. To some extent, this method of selection
is acceptable provided that absolute consistency exists in all
relevant areas.
Terms
are pervasive and operative across the entire buy/sell and logistics
processes. They govern the conduct and entire relationship
amongst all of the parties. The processes, which are affected
by the terms, are dynamic; therefore any inconsistency between
the corporate model and the copycat could result in significant,
negative consequences, and unending symptoms. Essentially,
if inconsistencies exist, imitators run the risk of becoming future
victims.
Whether
you copy someone else’s terms or develop your own, a mission critical
objective of the terms development process is to establish meaningful
terms, that are easily understood, and can be communicated effectively
and efficiently. Another imperative that must be addressed
are the mechanics of the process. As an example, system
and operations penetration points, upon which there will be a
terms impact, should be identified early on. Such identification
will achieve effective and efficient implementation and enhance
the necessary communications that will be required. Identifying
the penetration points is best understood by giving consideration
to those events and tasks that will be both the custodian and
user of the terms.
Corporate
education is also mission critical, without which there is an
absolute inability to understand how the terms affect corporate
performance coupled with the inability to effectively deal with
situations that will arise. Once the terms are understood
and embraced, the terms can be meaningfully articulated both in
the respective documentation and in the spoken word. In
this connection, the following corporate areas could be the focus
of this requirement: Sales, Transportation, Distribution, Purchasing,
Customer Service and Finance. As an example, the Sales
area is constantly dealing with customer satisfaction and charged
with the responsibility of profitable sales. Customer
Service is at the back end of the process and is called upon
to address customer questions and challenges; Finance or Accounting
deals with chargebacks; Transportation deals with loss
and damage claims; Purchasing deals with on-time performance,
quality and count. Once the terms are understood and embraced
by the corporation, each of the identified departments is positioned
pro-actively and reactively to efficiently speak to any of the
situations that may arise.
Consideration must also be given to the demand that the terms
must operate pervasively, as such, each department must not only
understand and embrace the terms, there must be a “terms bridge”
that connects each department. Finance or Accounting must
be directly connected to each of the departments identified above.
Likewise, every department must be connected via the “terms bridge”
in every direction. As an example, Finance or Accounting
will ultimately make a decision regarding the freight budget.
If the budget is exceeded by actual cost, the offender might be
the payment of unnecessary freight charges in the form of payment
of charges that were the responsibility of the customer.
Further examination might reveal that customers should pay the
freight charges if their purchase was below the stated dollar
amount in the Terms of Sale. An efficient and effective
method that will trap this failure, in stream rather than waiting
for year end, is offered through
www.insourceaudit.com
and
www.routingguides.com.
These incremental solutions were designed to operate independently
as well as harmoniously. Insourceaudit will audit
and respect the rules of engagement and terms that are presented
from RoutingGuides. Further, the application web sites
provide other examples that efficiently manage, control and report
discrepancies, variances, pricing and delivered costs.
Establish Goals and Objectives
Goals
and objectives must be identified; they must be specific, established
and documented correctly on and in the appropriate legal instruments;
they must be embraced by the corporate philosophy and easily perform
within its unique operating systems, and internal and market cultures.
As an example, if a goal is to control all carrier routings, can
the corporate operating systems perform the necessary and associated
tasks to achieve this goal? Will the competitive assessment
demonstrate similarities or contradictions? Will the customer
market accept this goal, vis a vis the terms? Does the shipper
have a sufficient quantity of acceptable freight moving in desirable
lanes so that the freight rates and charges will yield competitive
delivered costs and service levels? At the end of the day,
the more questions raised and answered, the more acceptable the
goals and objectives will be along with the imposition of
acceptable terms.
Develop And Work Within The Strategy
In
order to have your freight terms and terms of sale/purchase achieve
the defined goals and objectives, it is necessary to create a
well understood strategy. As a starting point you might
consider, “a high level integrated logistics strategy that will
continually drive down costs and improve operations”. From
here you should zero in on the strategic components of cost and
operations as well as all areas of impact. Next, it would
be important to create a well orchestrated plan that will properly
address each of the topics.
Terms Selection That Will Yield Profit And Encourage Customer
Acquisition
By
satisfying the conditions in “Method of Approach”, you are positioned
to create those terms that will allow you to achieve your goals
and objectives.
Rather
than reproducing the freight terms and terms of sale/purchase,
your attention is directed to our white paper, “Freight
Terms”
Terms of Sale/Purchase and Freight Terms
Specific
terms selection is governed by the decision criteria identified
above and such other criteria as tax and liability issues.
Passage of title, if occurring at a point in which a governmental
agency may impose a tax, it would be prudent to select another
point or place where the tax implications are eliminated or reduced.
The passage of title decision, as it relates to location, may
be further constrained by issues such as: competition; customer
demand and routings. With respect to routings, the issue
might be one of co-loading or assembly and distribution.
In this regard, customers may request that the terms of sale/purchase
and freight terms be modified to reflect the interchange point.
Differences such as this can be remedied, provided that the stated
terms are first understood and respected by the proponents.
Thereafter, it is necessary to articulate the terms in a manner
that will allow the customer/vendor to understand, appreciate
and respect the stated terms.
The
beneficial owner of the freight is the party charged with all
of the benefit and liability associated with such ownership.
Ownership changes when title changes; title changes occur because
of the terms of sale/purchase. In this regard, the freight
itself should be part of the decision criteria regarding passage
of title. Companies that manufacture and distribute products
that are extremely hazardous might want to pass title as early
into the transaction as possible. On the other hand, companies
that manufacture and distribute products that are significantly
influenced by market conditions might want to vary their terms
of sale/purchase so as to take advantage of the current market
conditions. In other cases financial conditions such as
currency exchange rates could influence the passage of title.
3PL’s
represent other unique issues regarding terms of sale/purchase
because they are typically shipping from a facility which may
change from time to time and, at the very least, may be different
than the customers belief. Unless the terms of sale/purchase
are stated as “FOB Shipping Point” (rather than a named point
or place), other standard printed terms, such as those of the
3PL could contradict and unintentionally invoke a shipping point
other than the actual point, thus causing the shipment to incur
higher than expected or actual freight costs. Further, if
the 3PL holds product in various locations and can fulfill orders
from any of the alternate locations, pre-printed terms other than
“FOB Shipping Point“ will also incur similar problems. This
problem is not unique to 3PL’s and could occur when shipping from
more than one distribution facility.
Internal
costs can also escalate at companies using multiple distribution
centers. As an example, if orders are being fulfilled from
an out of distribution center market facility because of a shortage
at the proper facility, and the agreed to terms require that shipments
originate from the proper facility, the excessive freight cost
will be absorbed by the shipper. Unless the collateral processes
associated with the terms are designed to recognize and identify
the “spike”, the increased freight and associated handling costs
will continually erode the profit line.
Shippers
or sellers must be sensitive to competitive “delivered pricing”
and consignees or buyers must be sensitive to the “delivered costs”.
In this regard, order fulfillment from multiple distribution centers
can incur “phantom costs”. These costs usually occur when
the printed freight terms differ from the actual shipping points.
As an example, Bills of Lading whose printed origin differs from
the actual shipping point can incur freight charges based upon
the printed Bill of Lading origin. These higher or lower
costs may be missed in the typical audit and therefore may only
be recognized if the general freight budget is significantly inconsistent
with actual costs.
www.InsourceAudit.com
was designed to trap, identify and control these “phantom costs”
for both the seller and the buyer. Likewise,
www.routingguides.com
and
www.freighttracing.com
identify these “phantom costs” because the “rules of engagement”
are continuously operative across the entire shipment transaction
and by virtue of the “tracing flags” in “FreightTracing” users
are immediately notified of the inconsistency. Therefore,
the problem is timely identified thus, preventing the failure
from reoccurring.
Proper Control Methodologies That Will Respect The Terms
Pre-rating and pre-pricing routines are reasonable and appropriate
controls that will significantly trap, identify reduce or eliminate
“phantom costs”. These routines are also effective controls
that can be employed to address tax and other liability issues
associated with terms of sale/purchase.
Control
methodologies should understand your customers’ terms. Once
understood, they should be compared with your policies, budgets,
goals and objectives. Once this test is satisfied, it is
imperative to document them; once confirmed, we call them the
“rules of engagement”. As logistics activity and shipment
transactions occur, either at time of pre-notification, actual
shipment, receiving or payment processing, the pre-pricing and
pre-rating routines should be invoked. We have identified
several penetration points and it is imperative that they be properly
aligned with the specific activity. As an example, with
respect to terms of sale/purchase, exposure to unnecessary liability
must be addressed early on in the process so as not to incur the
liability at anytime after the shipment leaves. Unlike chargebacks
or freight cost reductions, liability focuses on both the documented
and actual activity. If the documented title passes at a
point that incurs taxes, the documentation will prevail.
Likewise, when shipping hazardous materials, once title passes,
the potential problems become the burden of the beneficial owner
of the freight. This usually occurs because of the chain of document
preparation, one leads to the next—first the terms of sale/purchase,
then the freight terms, next, the Bill of Lading and finally the
Freight Bill.
As
another example of “phantom costs”, freight terms might be shown
as “prepaid shipping point”. If the goods are shipped from
a location other than that understood by the consignee, and the
freight costs are higher than they would have otherwise been,
the shipper is within his rights to assess the higher freight
costs. In this regard, it is important to penetrate the
transaction prior to shipment.
Benefits of Terms on Cash Flow
Companies
can take advantage of terms of sale/purchase and freight terms
that will influence cash flow. Proper employment of the
following terms can positively impact your cash flow. The
use of terms for this purpose requires a keen understanding and
since each company presents different situations, companies must
develop their own index of acceptable standards, albeit with input
and insight from logistics, transportation or finance management
professionals that are knowledgeable in transportation law.
Therefore, it is impossible to offer any standards in this white
paper. In this regard, it clearly behooves those that seek
to create this opportunity to carefully explore the resources
that can provide these important benefits.
Below
are just a few of the examples of the stated terms that, if used
correctly and in the proper combinations, will achieve improved
cash flow:
FOB
QC
FOB
Origin
FOB
Destination
Prepaid
Prepaid
and add
Collect
Prepaid
to a point, collect beyond
Conclusion
Freight
Terms and Terms of Sale/Purchase should be considered mission
critical components for success. They govern the entire
formal relationship between buyers and sellers. These
terms are the specific area of reference that becomes the forum
for dispute resolution. Further, they address other critical
areas, often missed when establishing terms, such as cash flow.
Additionally, if the terms of sale/purchase and the freight terms
are not articulated and effectively communicated, they could become
the focus of discontent. On the other hand, when they are
understood by the parties at the outset of the relationship and
a mutuality of understanding is achieved, the terms become the
business rules that govern the conduct of the parties and very
little time or attention is devoted to dispute resolution.
Lastly,
the following items must be considered when developing effective
and efficient freight terms and terms of sale/purchase.
These areas of exposure, if not properly addressed will haunt
the business and probably incur unnecessary expense in connection
with, at the very least, writing off of chargebacks, customer
dissatisfaction, clerical and executive expense.
Areas
of concern that are impacted by freight terms and terms of sale/purchase
that must be addressed:
shipments
from vendor to customer
national
distribution center programs
customer
returns
shipments
from 3PL’s
returns
to 3PL’s
returns
from customers that originated from 3PL’s
shipments
from one vendor to another vendor (for completion of process)
shipments
from 3rd party vendors to the original manufacturer
Shipments
to the port of export
Import
shipments
Shipments
that involve quality control
etc.
The
point of showing only eleven (11) areas of concern is to impress
upon the process the need to be completely and fully aware of
all of the areas of exposure so that proper protection is in place
and that the appropriate terms can be properly applied to any
and all reasonable situations that might occur.
Continuation
Please
consider this white paper as a continuum in this subject area,
succeeding white papers will address common issues and address
them with common solutions. We encourage our readers to
direct any specific questions or comments to
papers@transportgistics.com .
Disclaimer
The information presented
above represents the opinion of the author but not necessarily
the opinion of TransportGistics, Inc. nor is it presented as a
legal position or opinion.
All
content copyright by TransportGistics, Inc. All rights are reserved.
The authors of the articles retain the copyright to their articles.
No material may be reproduced electronically or in print without
the express written permission from the individual authors and/or
TransportGistics, Inc. (papers@transportgistics.com)