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Harvesting the Benefits of Correct Terms Usage
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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:
Intentionally and specifically applying the proper terms will achieve the desired results, only if you have established efficient and effective controls.
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 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, www.freighttracing.com and www.traids.net 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:
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:
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)
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