APL Logistics. Free Carrier (FCA): Improving Supply Chain Performance

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1 APL Logistics Free Carrier (FCA): Improving Supply Chain Performance

2 FCA: Improving Supply Chain Performance 2 FCA: An Introduction Free Carrier (FCA) is an internationally accepted trade term that assigns the ownership of goods to a buyer when cargo is delivered to a specifically named place by the seller. FCA is one of the many voluntary Incoterms developed by the International Chamber of Commerce to establish relationships and obligations between buyers and sellers in international trade. The central feature of FCA is that it allows for ownership to change at the factory gate, rather than when the goods are loaded onto a vessel, as in the traditional Free On Board (FOB). As a result, FCA has recently been on the rise because a growing number of importers want take possession of goods as early as possible in the supply chain. Earlier possession results in the ability (1) to control the goods, and, thus, their security, and (2) to increase electronic visibility of goods, FCA enables buyers to acquire ownership at the factory gate rather than when a container is loaded onto a vessel. which can open the way to a more flexible supply chain. FCA offers importers two other primary benefits, as well: Transportation charges are removed from the all-in charges on the manufacturer s invoice, enabling a more refined calculation of the first cost of goods. Cost savings are available in the form of lower duty payments on merchandise costs that formerly included transportation, and from economies of scale and volume buying for transportation services. How Does FCA Work? When buyers and sellers use FCA to transfer ownership at the factory gate, the handoff is called FCA Factory. Rather than pick up cargo directly themselves, importers typically retain a third-party logistics provider (3PL) to take custody of the goods. The 3PL picks up the cargo, and stores it in its warehouse until the time comes to deliver the goods to the ocean terminal. The cargo is then carried by the 3PL to the port for loading. As illustrated in the accompanying chart, a large number of responsibilities transfer from the seller to the buyer when FCA is used in place of FOB. The seller is responsible for loading the goods onto the truck; however, the buyer becomes responsible for the move to the terminal, for the terminal handling charges and for many other aspects of the shipment. That is not necessarily a negative burden, however. Along with the added responsibility comes the opportunity to view many charges that may previously have been invisible because the manufacturer was including them in the price of the goods.

3 3 Comparative Responsibilities of and Seller in FOB and FCA FOB FCA Manufacture goods Seller Seller Export clearance Seller Seller Customs documents Seller Seller Load goods onto truck Seller Seller Inland move to terminal/cfs Seller Terminal handling charges Seller Warehousing fees Seller Consolidation/Management fees Carrier document preparation fees Seller Ocean freight Understanding the Benefits of FCA s Responsibility As described at the outset, FCA provides four general categories of potential benefit: Security Supply chain visibility and flexibility Added ability to remove transportation from the cost of goods Lower overall costs Security. Numerous overseas 3PLs meet U.S. Customs and Border Protection s requirements for its comprehensive security program known as the Customs- Trade Partnership Against Terrorism (C-TPAT). C-TPAT regulations for 3PLs cover their facilities security layout and procedures, employee and visitor identification programs, container security, and access to secure areas of the warehouse. Also included are other factors such as financial soundness and the ability to meet contractually specified security requirements. Whereas documented (and, indeed, specifically validated) security arrangements exist for many 3PLs, it is questionable whether similar security is provided by a large number of overseas manufacturers. Giving custody of cargo to C-TPAT-compliant 3PLs earlier in the supply chain may reduce the possibility of pilferage and the planting of contraband in shipments. Just as important, the 3PL s enrollment in C-TPAT can reduce the levels of U.S. Customs inspections and associated delays. If a security incident were to close a port, C-TPAT members might be allowed to resume operations sooner than others. The processes for compliance that a C-TPAT participant has set up will also help the importer meet future governmental security requirements. During an FCA factory cargo transfer, security-conscious 3PLs may choose to oversee the loading of the cargo into the truck or container at the manufacturer s location to ensure cargo integrity (making sure paperwork is in order) and that the load is matched by the shipping order. The 3PL may also have an employee personally seal the shipping container when loading is completed. FCA: Why Just Now? Although the term FCA was coined more than 15 years ago, the practice has only recently begun to be used by importers. Why is FCA now gaining in popularity? The International Chamber of Commerce released a broad set of revisions to its Incoterms in (The first set of Incoterms was published in 1936.) The new Incoterms including FCA provided clarity to the buyer-seller relationship that had not existed with the previous Incoterms. Throughout the revised Incoterms, language is used consistently, without substitutions of similar words for original words. In addition, terms such as shipper and Customs clearance are carefully defined, and the discussions are written to be clearly and easily understood. The greater clarity helped to bring about higher levels of transparency in business dealings and a higher degree of electronic visibility and flexibility in managing global supply chains. In addition and this was a principal motivation for the revisions the new Incoterms reflected the realities of modern, containerized ocean transportation. With respect to FCA, the Incoterm was revised to clarify buyers and sellers obligations in loading and unloading cargo. With all of the clarifications made, a growing number of importers now feel comfortable in adopting FCA in place of FOB in order to gain the benefits of earlier ownership of their goods.

4 FCA: Improving Supply Chain Performance 4 In addition, C-TPAT-certified 3PLs expect their business partners in this case, trucking vendors to follow C-TPAT security guidelines. Whereas an overseas manufacturer might choose a trucker based on price or a personal relationship, C-TPAT requires that a 3PL make security a top criterion for vendor selection. Security measures required by 3PLs can include background checks on employees, and security awareness training that emphasizes spotting suspicious packages, checking trucks and containers, and being on the lookout for suspicious activity. Supply Chain Visibility and Flexibility. Another benefit to earlier control of goods is greater visibility and a broad array of shipping options. With FOB delivery, the first electronic visibility of goods may be as late as the Advance Shipping Notice, sent after the vessel has sailed. Having goods available on a truck or in a warehouse and visible through a 3PL s tracking system offers a number of possibilities. Goods can be held, they can be expedited, they can be broken down into smaller shipments, they can be bundled together with other items, and they can be rerouted to someplace other than the originally intended destination. A principal reason for taking earlier ownership of goods is the opportunity for importers to increase the security of their supply chains. Such flexibility enables the importer to respond more profitably to customer demand, especially variable regional demand or sudden consumer-driven demand. (If, for example, a certain designer fashion starts selling rapidly in one part of the destination country, more shipments can be directed there.) Flexibility and also greater delivery reliability from a competent 3PL can also reduce the need for buffer stock, leading to lower inventory costs. Removing Transportation from the Cost of Goods. When an overseas factory trucks goods to the port, it typically includes the transportation cost as part of the unit price of the goods. For example, the cost of a $3 blouse could be raised perhaps to $3.05. As a result, the price charged by the manufacturer is not the true cost of the goods, but, rather, a higher price that reflects more than simply manufacturing. In addition, the price contains not just the transportation costs, but also the manufacturer s markup. It can often be very difficult to persuade a manufacturer, who wants to protect its profits, to break the marked-up transportation cost out of the manufacturing cost. FCA: s and Sellers Responsibilities Throughout the Supply Chain Export and Customs documents Seller Load goods onto truck Inland move to terminal Terminal handling charges Warehousing fees Consolidator service fees FOB Seller Seller Seller Seller FCA Seller Seller

5 5 Arranging the trucking separately removes the transportation cost from the first cost of goods. As a result, the importer is able to view not only the true manufacturing cost, but also another component transportation that wasn t visible before. Lower Overall Costs. With transportation separated from the first cost of goods, negotiations might then proceed with the manufacturer in an effort to lower costs further. Reduced costs are also possible from two other sources, as well: Economies of scale and volume buying for transportation, and lower duty payments on goods whose costs formerly included transportation charges. Milk runs (chains of pickups and deliveries) in conventional trucks are also possible, creating more efficiency than exists when just one factory makes one delivery of one customer s goods. Lower duty costs are straightforward. Customs duties apply to the full cost of the goods even the portion that may represent transportation. When the transportation component is removed, the duty decreases proportionally. For importers who pay high duty rates, the savings can be significant. A large 3PL often has much more trucking volume than a single factory. Consequently, the 3PL can negotiate volume deals with truckers that result in lower prices for importers. The scale of the operations many customers and large numbers of trucks also opens opportunities for more efficient routing that can drive prices down further, providing savings that can be passed to the importer. FCA in Action The UK-based research organization Datamonitor has released a report on FCA in a variety of European industries. 1 The report focuses on domestic FCA, but many of its findings can be applied to international FCA, as well. In particular: Tesco, a British grocery firm and the UK s largest retailer, at the time of the report was using FCA for 90% of its frozen food and 30% of its goods overall. The company had seen the following results: On-time pickups from suppliers had increased by 15%. On-time deliveries to distribution centers had improved by 20%. Transportation was optimized by combining primary and secondary delivery functions along the same routes picking up goods from a supplier on the 1 Datamonitor, Factory Gate Pricing: A Study of Factory Gate Pricing With a Focus Upon Logistics Operators, London, Loading to vessel Ocean carriage Unloading from vessel Terminal and accessorial charges Inland move from terminal Deconsolidator service fees

6 FCA: Improving Supply Chain Performance 6 way back from dropping off at a Tesco store, for instance (the equivalent of picking up materials from a supplier when returning from a 3PL s warehouse). Coca-Cola Bevande Italia, Italy s primary bottler of Coca-Cola beverages, had also combined pickups from suppliers with deliveries to customers, which had reduced empty trips. The arrangement had increased efficiency and enabled Coca-Cola Bevande Italia to consolidate its trucking vendors, thereby simplifying its operations. Similar consolidation and efficiency can also be expected in international FCA operations. Various customers of a large European dairy producer had adopted FCA, reducing the number of trips available to the producer s trucking vendor. Because the vendor s price per trip was based on volume, the trucker subsequently approached the dairy, asking to raise rates. If the dairy were to accept the higher rates, it would Importers are likely to make greater use of FCA as they grapple with issues of security, outsourcing and cost control. have to pass them on to other customers who were not using FCA. In other words, there would be a penalty to those who did not adopt the evolving practice of FCA. Another example of FCA comes from a large U.S.-based retailer a customer of APL Logistics that has suppliers in North China. The customer expects to save approximately 8% to 10% on its cost of goods in the first year of its FCA program. The savings are resulting primarily from lower duty payments and transportation savings from economies of scale. Is Your Company a Candidate for FCA? Companies that can use and benefit from FCA typically have the following characteristics: High duty rates for one or more imported merchandise categories Sophisticated supply chain practices and extensive performance metrics Integrated supply chain functions (i.e., alignment of sourcing, finance, transportation, IT systems, etc.) Strong supply chain leadership Strong concern about international supply chain security Importers are likely to make greater use of FCA as they grapple with issues of security, outsourcing and cost control. Increased demands for customer service, too, are causing companies to assert tighter control over inbound transportation programs. The trend signals a substantial change in the role of suppliers and 3PLs in global supply chains, and a future in which FCA is likely to become increasingly important.

7 7 What s Next? To find out more about FCA, and to discuss whether FCA can benefit your organization, please contact your APL Logistics Account Manager or visit Resources For a copy of the ICC publication, Incoterms 2000: ICC Official Rules for the Interpretation of Trade Terms, effective January 1, 2000, go to the ICC Bookstore online at For articles on FCA, visit the Institute for Supply Chain Management at Articles include: Insight into Incoterms Global Sourcing Operations: How & Why? International Purchasing Rules-of-the- Road About APL Logistics Among the foremost providers of international integrated supply chain solutions, APL Logistics combines origin and destination logistics with multimodal transportation services. APL Logistics offerings are enabled by industryleading IT and data connectivity tools that provide increased product visibility and better inventory management to meet changing market conditions. With distribution and logistics capabilities in the world s major sourcing and consumer markets, APL Logistics helps companies particularly those in the automotive, electronics/ hi-tech, consumer goods, and retail/apparel sectors drive efficiencies and improve flexibility in their supply chains. APL Logistics is a subsidiary of the U.S. $7.3 billion NOL Group, and sister company to APL, a global provider of container transportation services APL Logistics. All rights reserved. No part of this publication may be reproduced without the prior written permission of APL Logistics. APLLMC-434 APL Logistics apll_fca.pdf 04JUN08

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