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5 Best Practices to Reduce International Freight Costs

5 Best Practices to Reduce International Freight Costs
Once you've mastered the basics of importing into the U.S. it's a wise move to look at reducing international costs. Before embarking on this journey, it helps to know about the best practices for accomplishing this goal.
By
Randy Hauck
July 26, 2021
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Importing products from outside the U.S. is a longstanding practice for American companies. This process is often used as a means to increase profits, boost manufacturing, and reduce production costs. When executed properly, these benefits can be obtained with relative ease. However, as time goes on, new business objectives are established and must be met. In order to meet these goals, many companies look at reducing international freight costs. Accomplishing this task requires a thorough analysis of all aspects of the supply chain. 

The best practices to reduce international freight costs include:

  • Switching to a different mode of transportation
  • Finding an alternative source for the products/goods
  • Negotiating shipping terms with current supplier
  • Establishing bulk shipping rates with a logistics company
  • Auditing past shipping invoices & customs entries

In our comprehensive guide below, we fully examine each strategy for reducing international freight costs. For each method, we give detailed examples of how to execute the given task along with when it’s likely to result in lower costs.

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1. Analyze (and negotiate) Shipping Terms With Your Suppliers

1. Analyze (and negotiate) Shipping Terms With Your Suppliers

First up on our list is to review the shipping terms that are currently in place with your supplier. This is our first suggestion because it’s often the quickest way to find an opportunity to reduce costs.

Find Your Shipping Terms

While the phrase “shipping terms” is used broadly for all types of shipping, Incoterms® (short for international commercial terms) are widely used for international shipments. In short, Incoterms® consist of 11 specific terms of sale designations.

The 11 specific terms of sale used in Incoterms® 2020 are listed below:

  • EXW- Ex Works 
  • DAP- Delivered at Place 
  • FCA- Free Carrier
  • CPT – Carriage Paid to
  • FAS- Free Alongside Ship
  • CIP- Carriage and Insurance Paid To 
  • DPU- Delivered at Place Unloaded  
  • DDP- Delivered Duty Paid      
  • CFR- Cost and Freight
  • CIF- Cost, Insurance, and Freight,
  • FOB- Free on Board

Each specific designation listed above outlines which party (buyer, seller, freight forwarder, etc.) is responsible for the various tasks and costs for logistics-related activities pertaining to a given shipment. 

To find the Incoterms® that have been used on your previous imports, you’ll want to take a look at past Commercial Invoices and/or Bills of Lading (BOL). 

The majority of commercial invoices and BOL’s will include the associated Incoterms® for an imported shipment. Most commercial invoices and BOL’s will include a separate line item that specifies Incoterms®/Terms of Sale. However, there’s no mandated format for either one of these documents, so the location of this information can vary. If you have previous documents, but can’t locate the Incoterms®, our Licensed Customs Brokers can assist you.  

To learn more about the basics of Incoterms®, check out our article What Are Incoterms®?

Which Incoterms® Rules Should I Try to Negotiate?

Unfortunately, the answer to this question isn’t a definitive one as there simply isn’t a “best” Incoterm rule that should be used in all cases. Every importing situation should be examined individually to determine which Incoterm rule is ideal. With that being said, knowing the terms that have been used for your previous import shipment(s) is the right place to start. 

Once you’ve located and identified the Incoterms® rules from past commercial invoices or BOL’s, you’ll be able to conduct your analysis. Each Incoterm® rule’s unique characteristics will typically lead to a specific path towards reducing costs. 

While the title of this article specifically mentions reducing freight costs, the cost reduction can often come from other areas not related to freight. Even more surprising, it’s often possible to reduce total costs by taking on more responsibility in the supply chain.

Take Control of the Supply Chain Through Your Incoterms® 

One of the most common methods for reducing international freight costs is to switch to an Incoterm® rule that gives you more control over the supply chain process. Each Incoterm® rule varies in terms of how much control over the supply chain is given and who it’s given to (either the buyer or seller). 

If you’re a buyer and your past import shipments use any of the following Incoterm® rules below, there’s a good opportunity for you to gain more control over the supply chain and reduce costs:

  • DDP
  • DAP 
  • DPU
  • CFR
  • CIF
  • CIP
  • CPT

Each of the Incoterm® rules above dictate that the seller of the goods cover the majority of costs associated with an import shipment. Along with covering the costs, the seller is also responsible for arranging most of the necessary logistics resources, but this varies for each rule. For example, shipments arranged under the DDP (Delivered Duty Paid) Incoterm® rule have the import clearance being handled by the seller. The others on the list have this task assigned to the buyer. 

While these Incoterm® rules offer convenience to the seller, it often comes at the expense of cost. This is because sellers control the process and can charge more than what you’re comfortable with. Some sellers even increase the cost of a product based on using a specific Incoterm® rule. It’s also not uncommon for sellers to provide just one option during the negotiation process. 

Negotiating new shipping terms will vary based on the specific details of your situation. Some purchase orders are based on ongoing volume contracts and have specific conditions in terms of changing the agreement. Others aren’t as strict and can be more easily adjusted.

When negotiating the shipping terms, you can ask for a revised quote given the new desired terms. Some suppliers even offer multiple quotes for more than one Incoterm® rule when requested. 

As noted earlier, there isn’t a sole choice in terms of which Incoterm® you should switch to if you decide to negotiate. Each situation is unique and you should conduct an appropriate amount of research, including choosing a freight forwarder, before making a decision. 

Our team at USA Customs Clearance is well-versed when it comes to Incoterms®. With our extensive knowledge and insight, we can lead you to selecting the best shipping terms for your specific needs and goals. 

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2. Use the Most Efficient Mode(s) of Transportation & Warehousing

2. Use the Most Efficient Mode(s) of Transportation & Warehousing

Another area in which international freight costs can be reduced is in choosing the most cost-effective modes of transportation and storage. In most cases, numerous options are available in terms of transportations and storage methods. However, choosing the most cost-effective option or combination of options is the real challenge. Time-sensitive deadlines, geography, product dimensions, and more all factor into making the best choice. 

Get a Clear Picture of Your Current Logistics Structure

Before you can evaluate alternative options for transportation and warehousing, it’s critical to have a firm understanding of your current logistics structure. Your logistics structure is essentially the complete supply chain for your products. As noted in the previous section, having control of your supply chain will make this process possible.

Understanding the full supply chain journey of your products includes finding out:

  • Which modes of transportation are used and for which part of the journey
  • How long does each portion of the transportation process take place; This will vary so finding out the average in this case is okay.
  • The cost for each portion of the supply chain. It may not be possible to get a detailed breakdown for each step of the journey, especially if your seller is handling transportation for most of the supply chain process. 
  • What the geographic journey for each product is from door to door

Each detail above can be compared to alternative choices in the supply chain journey. This is where potential cost reductions will start to be realized. With that being said, some alternatives that seem counterintuitive may actually be more cost-effective. Because of this, it’s important to keep an open mind during this phase.

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An Indirect Path May Be More Cost-Effective

An Indirect Path May Be More Cost-Effective

In theory, the shortest, most direct path for products to travel should be the most affordable. However, this isn’t always the case. Surprisingly, taking a longer and less direct path may actually reduce costs in some cases 

Some of the surprising factors that can lead to reduced costs by utilizing longer, indirect paths include:

  • Port congestion
  • Commercial real estate costs
  • Carrier/Freight forwarder resources
  • Variance in fuel prices

Each of the above factors have unique characteristics that need to be considered when organizing the logistics of a shipment. 

Port Congestion

One of the biggest factors causing increased costs for international freight, especially in 2020 and 2021, is congestion at major ports of entry. The COVID-19 pandemic had a ripple effect on the shipping and logistics industry especially in terms of port congestion. Major congestion at hub ports like Long Beach and Los Angeles caused major delays for all parties involved. 

Over time, many shipping companies accounted for the delays caused by the congestion by increasing prices for shipments arriving at ports that were heavily impacted. 

Solution: Talk with your freight forwarder about importing goods through a less crowded port of entry. Depending on the pricing model of some freight forwarders, this can reduce your total freight costs for a given shipment. If you don’t have a preferred alternate port of entry, your freight forwarder should be able to recommend some options to meet your specific needs. 

Our sister company, R+L Global Logistics, is able to assist with all of your freight forwarding needs. Whether you’re facing port congestion issues or any of the other problems outlined in this article, they’re ready to help you. You can request a Customs Brokerage Services quote today to get started 

Commercial Real Estate Costs

On the warehousing and order fulfillment side of things, the cost of commercial real estate & warehousing can have an impact on your supply chain costs. 

Simply put, the more expensive a piece of land is or a warehouse costs to rent, there’s a chance you’ll pay more for warehousing and fulfillment services.

This is a common practice across all commercial real estate. Higher overhead costs mean customers – in this case users of the warehouse and its services – are often tasked with higher service and product fees. 

Solution: Utilize a warehouse in a more rural area. Warehouse costs are often lower in more remote areas which means these savings have the possibility of being passed on to you. Even if this means your products travel a bit further to reach the warehouse, the cost savings is often justified. 

Carrier/Freight Forwarder Resources

According to Ibisworld, there are over 87,000 freight forwarding companies in the U.S. in 2021. This is an astounding number considering that each freight forwarder differs in terms of their available resources, rates, and more. The same goes for licensed carriers, of which there are over 900,000

The level and types of resources available through a freight forwarder can affect your costs. For example, a freight forwarder or carrier with limited trucks available in an area in which you need a shipment moved can cause your rates to be higher. On the flipside, a forwarder with numerous trucks available in your area is likely to charge less for the same shipment. 

The same concept applies to other logistics resources including:

  • International Ocean & Air transportation
  • Rail transport
  • Warehouses
  • Customs brokerage

Solution: In the process of trying to reduce costs, communicate with your freight forwarder to see if there are other resources available. Surprisingly, it might be cheaper to have your goods transported and stored through an indirect path. This can be due to your partner having more adequate resources to meet your needs in other areas. 

Variance in Fuel Prices

The last detail that may cause you to look at alternative and indirect routes for your shipments is the cost of fuel. More specifically, the difference in the cost of fuel between specific regions and states. Similar to overhead costs for warehouse space, when fuel prices are higher the cost is passed on to you. This increase is especially impactful for shipments originating or going through specific areas.

California is one of the most notable examples of this. As of July 5, 2021 the cost of a gallon of diesel fuel in California was $4.19. This number was higher than the average of the entire U.S. It was also higher than all other regions of the U.S.

Solution: Explore the possibility of routing your products through an area with lower fuel prices. Even though your products may travel a longer distance, the reduced fuel costs can work in your favor. 

Utilize the Right Mode of Transportation Given Key Details

Utilize the Right Mode of Transportation Given Key Details

The last area in which you can see reduced costs is in reviewing the conveyance used to transport your goods. Coming from overseas, your options are limited to air or ocean. Once your goods arrive in the U.S. though, you can choose between road or rail. Making the best decision based on many factors will play a big role in the overall costs for your shipment.

Various details are at play in determining the best mode(s) of transportation for your shipment, including:

  • Shipping dimensions
  • Distance to destination
  • Transportability
  • Required shipping conditions
  • Compatibility with other goods

All of these elements lead to the best mode of transportation for a given shipment. For example, it’s typically cost-effective for shipments travelling long distances to be shipped by rail. However, the limitations for shipping dimensions are more strict. Likewise, lighter shipments that are easy to handle and stow are best suited to be shipped by air compared to heavy and difficult to maneuver. 

Choosing the wrong mode of transportation for one shipment likely won’t break the bank. With frequent and regular shipments though, this loss can add up quickly and should be avoided. 

You don’t need to be an expert in any of these areas or do hours of research to reduce your costs. An experienced and knowledgeable freight forwarder should be able to review these factors to determine how to make your supply chain more cost-effective. Our Licensed Customs Brokers work hand-in-hand with our freight forwarding team to help you achieve your goal of reducing international freight costs without sacrificing quality or putting your products in jeopardy.   

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3. Look at Product Sourcing Alternatives

Look at Product Sourcing Alternatives

The third practice on our list is one that’s often overlooked and deserves more consideration. Where you source your imported goods from is an extremely important part of the supply chain puzzle. Unfortunately, many importers agree to purchase goods from a supplier without realizing that more cost-effective alternatives are available.

It’s common knowledge to many people that China has been one of the top (often #1) trading partners with the U.S. for many years. However, in 2018, the United States Trade Representative (USTR) concluded an investigation which led to the gradual rollout of the Section 301 Tariffs. These tariffs applied additional import duties on essentially every product coming from China; some additional duties were as high as 30%. In addition to antidumping and countervailing duties on many Chinese origin products, this made importing from China less attractive and cost-efficient.

Nearshoring Opportunities

Nearshoring Opportunities

Due to the trade barriers discussed above, nearshoring is a viable, often more cost-effective alternative. Nearshoring involves importing products from a nearby country, as opposed to a country that’s further away. For U.S. importers, this option is even more attractive due to trade incentives, as well as other useful benefits.

The United State Mexico Canada Agreement (USMCA), formerly known as NAFTA, grants nearly every product traded between the three countries to be duty free. This benefit alone is often enough to offset the additional costs and uncertainty that come with importing from China. Still though, even more benefits exist that make importing from Canada or Mexico a worthwhile venture.

In addition to duty free trade on nearly every product imported from Canada and Mexico, other trade benefits include:

  • Close geographic proximity
  • Shared timezones
  • Limited cultural barriers
  • Stable trade relations

Each one of the above benefits can hold significant value for your business. Below, we’ll examine each benefit to understand how it presents an opportunity for reduced international freight costs.

Close Geographic Proximity

The close proximity of the U.S. to Canada and Mexico offers several cost saving opportunities itself. The shorter distance that your products have to travel can lead to reduced transportation costs right away. As we noted in the previous section, transportation costs are about more than the distance travelled. However, distance is one of the main elements that determine costs. 

In addition to the close proximity itself, all 3 countries are connected by land which opens the doors for other, more affordables modes of transportation. Goods can be shipped via truck or rail between the 3 countries rather than being limited to ocean or air coming from overseas. 

Shared Timezones

Shared or closely similar time zones come along with geographic proximity and can surprisingly be a component leading to reduced costs. On the surface, being closer in time to a foreign supplier might simply seem like a convenience and not as a means to reducing costs. However, situations can arise during the course of an international shipment where quick communication is a must.

While importing into the U.S. can be a smooth process, especially for frequent, experienced importers, CBP and other government agencies may sometimes require additional information in order to clear a shipment. Many times, the information that’s needed is with the foreign supplier. If your supplier is in China, India, or another country in a completely different time zone, the response may not be instant. This can lead to delays in your shipment being cleared which may result in excess storage fees.

When working with a supplier in Canada, Mexico or even South American countries, you’re more likely to be able to communicate with them quickly to get what you need. While this benefit might not lead to consistent cost savings, avoiding costly and unexpected fees is a plus. 

Limited Cultural Barriers

Another indirect cost-savings benefit of nearshoring relates to having some elements of a shared culture. While each country has a unique and distinct culture, there are a number of shared elements that Canada, Mexico, and the U.S. have that lead to positive results when it comes to the international supply chain.

Some of the shared cultural elements between Canada, Mexico, and the U.S. include:

  • Common languages 
  • Similar religious beliefs
  • Some shared holidays
  • Entertainment crossover
  • Comparable forms of government

From the list above, shared languages is almost undoubtedly the one with the greatest boost to trade. Communication is key when conducting international business. Ensuring that there’s a common understanding regarding details related to manufacturing, shipping, and more is key to avoiding costly mistakes.

Stable Trade Relations

As noted at the beginning of this section, trade relations between the U.S. and China took a turn for the worse in 2018. This certainly wasn’t the first instance of trade instability between the two nations. In fact, the U.S. and China only renewed trade relations in 1979 after years of prior issues revolving around numerous topics. Based on the previous rocky history between the two nations, there’s no guarantee things will improve. 

On the other hand, trade relations between Mexico, Canada, and the U.S. have been stable for quite some time, and show no signs of souring. If your business was hit hard by the Section 301 tariffs, it may be time to consider the more stable alternative of sourcing goods from Mexico and/or Canada.

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Additional Alternatives

Mexico and Canada aren’t the only nations where you’ll be able to benefit from free trade. The U.S. actually has 14 free trade agreements in place that cover international trade with 20 countries; some agreements like USMCA cover multiple countries.

The 20 countries that are covered under free trade agreements are listed below:

  • Australia
  • Bahrain
  • Canada
  • Chile
  • Colombia
  • Costa Rica
  • Dominican Republic
  • El Salvador
  • Guatemala
  • Honduras
  • Israel
  • Jordan
  • Korea
  • Mexico
  • Morocco
  • Nicaragua
  • Oman
  • Panama
  • Peru
  • Singapore

If you’re importing from any country other than the ones listed above, there’s an immediate opportunity to at least review the cost of importing from one of these countries. Whether the free trade will be enough of a cost reduction to enable you to switch will need to be figured out.

It’s important to note that each free trade agreement is unique. To learn more about these agreements, check out our article on the U.S. Free Trade Agreements

4. Discuss Dedicated Freight/Lanes With Your Logistics Provider

Discuss Dedicated Freight/Lanes With Your Logistics Provider

In the second section of this article, we touched on the impact that carrier/freight forwarder resources have on your total costs. This topic deserves some additional explanation, specifically in regards to dedicated freight lanes.

What is a Dedicated Freight Lane?

A dedicated freight lane – sometimes just referred to as a dedicated lane – is a specific and repeatable route that a carrier completes on a regular basis. Some carriers and freight forwarders operate dedicated lanes, while others don’t. 

Along with the dedicated lane itself, these are usually accompanied by an exclusive contract between a carrier and shipper based on a predetermined shipping schedule and capacity. These exclusive contracts typically include reduced pricing for the shipper.

How Do I Arrange a Dedicated Freight Lane?

The key to getting a dedicated freight lane is to have consistent, regularly scheduled shipments. This one detail determines whether or not a carrier will allocate the resources necessary to operate a specific lane. 

Be aware that some carriers/partners will require that you ship a minimum number of loads in order to qualify for dedicated lane pricing and availability. If you don’t meet this minimum, you’ll likely end up paying a higher rate. 

Our team can help you determine if you might be a good candidate for a dedicated lane. We work alongside our capacity procurement team to ensure that we secure the proper resources to meet your supply chain needs. Reach out to our experts today to see how we can improve upon your existing supply chain structure. 

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5. Conduct Thorough Invoice & Entry Audits 

Conduct Thorough Invoice & Entry Audits

To say there’s a lot of paperwork involved in customs clearance would be an understatement. Every formal entry of goods into the U.S. requires importers to provide CBP agents with a wide variety of documentation. Each individual piece of documentation requires specific details pertaining to the shipment. The details that are included within the documentation also come from multiple sources including the shipper, carrier, freight forwarder, and more. All of these factors lead to opportunities for costly mistakes to occur in the importing process.

It’s not uncommon for mistakes to be found on standard import documents, especially the Commercial Invoice. 

Commercial Invoice

In the CBPs’ publication, Importing into the United States A Guide for Commercial Importers, common commercial invoice mistakes are specifically noted and include:

  • Incorrect invoice cost
    • Failure to include applicable discounts or surcharges
    • Manufacturing cost included on invoice instead of instead of the sale value
    • Net price of goods doesn’t include accounted allowances for defective returned goods
  • Inaccurate descriptions; partial product descriptions, listing multiple products as one when they should be separate line items
  • Listing the importer as the purchaser when the actual purchaser of the goods is another party involved in the sale
  • Inconsistent HTS tariff classification when compared to CBP Form 7501 (Entry Summary)

Any one of the mistakes listed above can lead to a direct cost error that once fixed can lead to savings for you. For example, if an incorrect higher value is listed on a commercial invoice and accepted during the import process, total duty paid will end up being more.

The mistakes above also have the potential to cause delays in your shipment clearing customs. These delays can sometimes lead to unexpected fees or slowdowns in your supply chain which may indirectly affect your costs. 

CBP Form 7501/Entry Summary

The other common form that can lead to costly mistakes is CBP Form 7501, also known as the entry summary. If you’re working with a customs broker, they’ll submit this form on your behalf. While Licensed Customs Brokers are specifically trained to handle customs clearance, mistakes can still occur. 

One of the most common mistakes made on the Entry Summary is an incorrect HTSUS tariff classification. This is the key detail used by CBP agents to determine the rate of duty that should be charged at the time of import. 

Having an incorrect tariff classification for your product(s) on the entry summary can have multiple consequences:

  1. CBP agents will delay the release of your shipment to determine what the correct tariff classification of your products
  2. You will need to gather additional documentation to support which tariff classification should apply to your product
  3. Upon confirmation of the correct tariff classification, your Customs Broker will need to revise and resubmit the entry summary; many Customs Brokers charge a fee to do this
  4. If the revised HTSUS for your products has a higher rate of duty, you’ll need to pay the difference

An example of #4 on the list above is almonds. Almonds have 5 different HTS codes that can apply to them. The rate of duty between the 5 codes is 7.7¢ per kilogram to 32.6 ¢ per kilogram. For large shipments, this variance can lead to a difference of thousands of dollars in import duty. 

One of the most important tasks of a Customs Broker is ensuring your imported products are classified with the correct product codes. If your Customs Broker isn’t asking you specific questions about the products you’re importing before completing required customs documentation, this could be a red flag. 

Our team of Licensed Customs Brokers exercise due diligence in ensuring your products are properly classified. If necessary, our team will even assist you in obtaining a tariff classification ruling. To learn more about this, check out our article Tariff Classification Ruling: What You Need to Know. We’re here to help you conduct thorough invoice and entry summary audits to identify all opportunities to reduce costs and ensure accuracy.

Optimize Your International Freight With USA Customs Clearance

Taking on the task of reducing international freight costs can be overwhelming and complex. The process is made much simpler by partnering with an experienced and knowledgeable logistics partner. Our team at USA Customs Clearance, along with our trusted partners are equipped to help you tackle this challenge.

We take time to carefully review and evaluate your current supply chain to identify opportunities to reduce costs. At the same time, we ensure that reduced costs aren’t being achieved by sacrificing quality. Through our established network of carrier and warehouse partners, you’ll experience a cost-effective and high quality supply chain.

Reach out to our team today to take the next steps towards reducing your international freight costs.  

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