Freight Difference in Long Term Free-on-Board Sales - Case Study Example

Freight Difference in Long Term Free-on-board Sales Cargill Maritime Business - A Case Study Table of Contents Key Term Definition 4 Technical Meaning 4 Recent Application 5 Relation to Payment 5 In summary 5 Part One: The Business 6 Market Segment 6  Part Two: The Challenge 8 The Challenge 8 Expertise 8 Key Activities 8 Moving goods from farm to factory  8 Grain & Oilseed Supply Chain 9 Ocean transportation 9 Part Three: Driver to the Drivers 10 Determinants 10 Supply and Demand 10 Shipment size 12 Distances and Routing 13 Loading and unloading 14 Manufacturing activity 14 Other factors 15 Part Four: Conclusion 16 How Cargill is Managing? 16 Managing Fluctuations 16 Optimizing supply chains 16 Providing Physical freight Solutions 16 Providing Risk Management Services 17 Further Readings 18 Bibliography 19 Image Credits 19 Notes 19 Key Term Definition Technical Meaning FOB (Free On Board) relates to the point at which responsibility for goods passes from seller (exporter) to buyer (importer). Here the seller is liable for the goods and is responsible for all costs of transport, insurance, etc., until and including the goods being loaded at the (nominated FOB) port. Thus, an importing buyer would typically ask for the FOB price, (which is now often linked to a port name, eg., FOB Hamburg or FOB Vancouver), knowing that this price is free or inclusive of all costs and liabilities of getting the goods from the seller to the port and on board the craft or vessel. i Thereafter, the buyer assumes responsibility for the goods and the costs of transport and the liability. From the sellers point of view an FOB price must therefore include Haulage charges. This is the additional cost of the haulier. It is also the transportation cost. Forwarding Fee Therefore, the seller must recover his costs of transport from factory or warehouse, insurance and loading, because the seller is unable to charge these costs as extras once the FOB price has been stated. The FOB expression originates particularly from the meaning that the buyer is free of liability and costs of transport up to the point that the goods are loaded on board the ship.ii Recent Application Over the years the term has come to be used in a little different ways. For instance, FOB Destination have entered into common use, meaning that the insurance liability and costs of transportation and responsibility for the goods are the sellers until the goods are delivered to the buyers stipulated delivery destination. Relation to Payment Thus the liability and responsibility for goods passes from seller to buyer at the point that goods are agreed to be FOB. However, the FOB principle does not correlate to payment terms. This usually is a matter for separate negotiation. Therefore, FOB is a mechanism for agreeing price and transport responsibility, not for agreeing payment terms. In summary To sum up, FOB (Free On Board) if used alone, originally meant that the cost of transportation and liability towards the goods exported was vested with the seller until the goods were loaded onto the ship (at the port of exportation). Nowadays, FOB (Free On Board or the distorted interpretation Freight On Board) has a wider usage - the principle is the same, ie., seller has liability for goods, insurance and costs of transport until the goods are loaded (or delivered), but the point at which goods are FOB is no longer likely to be just the port of export - it can be any place that it suits the buyer to stipulate. Part One: The Business Ranked in the top ten of the fortune 500 list, Cargill is an international producer and marketer of food, agricultural, financial and industrial products and services. The company was founded in 1865 W.W. Cargill when he bought a grain flat house in Conover, Iowa, USAiii. Currently, Cargill is the largest privately owned company in the USA. In the fiscal year 2008, it had declared revenue of $120 billion USD, and earnings of $3.64 billion USD. It is employing over 160,000 employees at 1,100 locations in 67 countries. Cargill transports nearly 25 percent of all of US grain exports. It also supplies approximately 22 percent of the United States domestic meat market, exporting more products from Argentina than any other company. It is also the largest poultry producer in Thailand. All of the eggs used in McDonalds restaurants in the United States pass through Cargills plants. It is the only producer of Alberger process salt in the U.S.A., which is highly prized in the fast and prepared food industriesiv. Market Segment Cargill’s market segments include:  Agriculture: Buying, processing and distributing grain, oilseeds and other commodities to makers of food and animal nutrition products. Cargill also provide crop and livestock producers with products and services. Food: Providing food and beverage manufacturers, foodservice companies and retailers with high-quality ingredients, meat and poultry products, and health-promoting ingredients and ingredient systems. Financial: Providing agricultural, food, financial and energy customers around the world with risk management and financial solutions. Industrial: Cargill serves industrial users of energy, salt, starch and steel products. It also develops and markets sustainable products made from agricultural feedstocks.v  Part Two: The Challenge The Challenge Maintaining over $1 billion USD quarterly profit, thanks to the global food shortage and the expanding biofuels industry, it is a stupendous task to achieve. Much of Cargill’s revenue comes from its core areas of agricultural commodities and technology. Expertisevi The prime mover for Cargill’s success lies in its expertise which includes: Supply chains Risk management and Research & Development Close to 80 businesses in diverse segments form up the Cargill conglomerate and serve its customers and stakeholders worldwide. Cargill partners with farmers, food companies, manufacturers, energy producers and financial providers for creating end-to-end solutions. Key Activities Moving goods from farm to factory  For over a century Cargill has pioneered innovative supply chain management capabilities while moving massive amounts of raw materials from continent to continent and farm to factory. Grain & Oilseed Supply Chain The grain and oilseed supply chain of Cargillvii comprises of 13 highly integrated strategic business units operating globally. Cargill sources, trades, processes and distribute grain and oilseeds. The main bulk products constitute wheat, corn, oilseeds, barley and sorghum, besides vegetables, oils and meals. The group also includes its ocean freight and logistics business. It centrally coordinates all of Cargill’s ocean bulk freight needs and many other companies’ coal and mineral freight as well. The company charters a whopping 150 million metric tons of dry bulk tonnage and has tremendous logistical flexibility and opportunities in the supply chain. Replete with close cooperation with trade partners and structured finance business unit, the company’s risk management teams add further range of financial and hedging products to the products and services it offer through its grain and oilseed supply chain. Ocean transportationviii Cargill’s dependence on ocean transportation is obvious. With over 50 years of dealing in chartering, trading, logistics, operations and risk management, the company offers its customers expert solutions on ocean freight across all dry market segments and tankers. Keeping focus on safety, high quality and risk management, it is recognized as one of the most innovative customer oriented partner in the market. Cargill has been able to provide its customers safety of cargos, on time delivery and in good condition, largely due to the quality and size of its time charter fleet combined with the experience and expertise on its worldwide logistics. Part Three: Driver to the Drivers Behind Cargill’s success story in its supply chain management lays an impeccable strategy that manages the freight rates, which is an important driver of Cargill’s business. Determinantsix Differences in maritime freight depends on: Competition Distances and routing Economies of scale Imbalances Type and value of goods Port characteristics To give an idea, doubling the distance leads to an increase of maritime transport costs (incl. insurance) by about 15-20%. Similarly, moving 10 000 tons instead of 100 (in one transaction) reduces unit costs by 40 to 50%. Supply and Demand Freight rates like any other commodity follows a typical supply demand model. A shift in the balance of supply and demand alters the level of fright rates considerably, whenever there is a shortage in the capacity of transportation, freight rates start rising giving rise to twofold effects as followsx: Aging and less efficient vessels become profitable to operate and are brought to employment until The second effect this has on the world fleet is that in order to earn the maximum possible revenue, shipowners operate at increased speeds, fuller space utilization, and perform fewer and shorter trips in ballast. A greater utilization of operational capacity occurs. (Sewell) On the other hand, if there is an oversupply of vessels, freight rates fall. The least efficient vessels in the fleet - or those that cannot find employment – are unable to cover their operating costs and move into lay-up. Gradually the operational fleet falls towards the level of demand (Stopford, 2000). The charter market is usually marked by high volatility. That is why only the competent owner survives the long droughts and flourishes in the short grace periods the market has to offer. Shipment size There are economies of scale associated with grain shipments. Larger ships usually have lower per-unit at-sea operating costs. However, not all ports are accessible to large bulk cargo ships. As a result, there are limits to ship-size economics of scale (Sewell) on freight rates. Distances and Routing Busier routes generally have more favorable rates because; there is always a chance for backhaul cargo. The chances are brighter for very large vessels not suited for lower-volume trade routes. In some shipping lanes due to trade patterns or prevailing conditions in bulk commodity markets, there tends to be more seasonality of demand. Loading and unloading The time to load and unload a ship also determines the vessel operating and fleet capital costs. For example, freight rates for shipments to countries with smaller ports can be significantly higher than those to more efficient ports. Ships incur labor, insurance, interest and other costs while at port, as well as opportunity costs. Port congestion, both at the origin and destination, as well as inadequate grain handling facilities increase the discharge time leading to higher freight costs. Manufacturing activity Freight rates in the dry cargo sector are influenced by the pace of manufacturing activity. Other factors Other factors that may affect freight rates include such expenses as canal tolls, distance travelled, nationality of vessel registry, fuel costs, economic conditions, excess capacity regulations, weather conditions, port conditions and government subsidies. Sometimes, there are also typically seasonal rate fluctuations. Part Four: Conclusion How Cargill is Managing? Managing Fluctuations Cargill has been able to accomplish this astounding feat by being able to manage the fluctuations in the industry. Some of the causes for fluctuation arise due toxi: Fluctuations in demand The pig cycle Speculation Lower variable costs The oil price and Trying to avoid future volatility To reduce the impact of fluctuations Cargill has successful adopted a long term approach, with optimize the entire process. xii Optimizing supply chains Cargill’s expertise in execution of supply chain management strategies and tactics has ushered crucial benefits such asxiii: Improved cost efficiencies, Improved revenues, Faster time to market, Faster product development cycles, Enhanced customer and supplier relationships Providing Physical freight Solutions Accordingly, Cargill provides physical freight solutionsxiv, which include: Competitive quoting backed by our promise to deliver Advise on spot timing Vessel routing and optimization High quality vessels from one of the most comprehensive vetting programs Unrivaled choice of vessel size from capes to coasters Providing Risk Management Services To complete the process, Cargill provides price risk management servicesxv, which include Contracts of Affreighment (short, medium or long term) Innovative and flexible pricing structures Forward Freight Agreements execution Freight Option execution Cargill is an exceptionally well integrated and managed company, successfully managing change since its inception from its inception way back in 1865. No wonder than it is one of the best companies in the world. Further Readings 1. Stopford, Martin. Maritime Economics. 2nd ed. London & New York: Routledge, 2000. 2. Grain: Carriage By Sea (Tom Sewell)   3. Prof. Lee. The Cost of Nontariff Barriers to Trade in Shipping, Constantino Stylianos Halkias, Substantial Research Paper, Spring 2000 4. Aspinwall, Mark. Moveable Feast. England: Avebury Ashgate Publishing Limited, 1995. 5. Association of Ship Brokers & Agents (USA), Inc. (ASBA). Basic Principles of Chartering. New York: ASBA, 1990. 6. Atkin, Michael. Agricultural Commodity Markets. London & New York: Routledge, 1989. 7. Cafruny, Alan. Ruling the Waves. Berkeley, Los Angeles & London: University of California Press, 1987. 8. Fearnleys. World Bulk Trades 1999. Oslo: Fearnresearch, 1999. 9.  White, Lawrence. International Trade in Ocean Shipping Services. Cambridge: Ballinger Publishing Company, 1988. 10. Official website of Cargill, www.cargill.com visited 10 December 2009. 11. Wikipedia on Cargill, visited 10 December 2009. 12. UNCTAD, Determinants of Transport Costs, Jan.Hoffmann@UNCTAD.org Geneva, May 2009 Bibliography Sewell, T. Grain: Carriage By Sea. Stopford, M. (2000). Maritime Economics. 2nd ed. . London & New York: Routledge. Image Credits 1. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim063951.jpg 2. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim060457.jpg 3. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim057527.jpg 4. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim057528.jpg 5. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim057523.jpg 6. http://www.cargill.com/wcm/groups/public/@ccom/@assets/documents/image/cim057736.jpg 7. http://www.cargill.com/wcm/groups/public/@ss-assets/documents/image/logo_cargill_reg.jpg 8. vi.unctad.org/windiesst09/docs/presentations/.../hoffmanntransportcosts.ppt Notes Read More