Proforma-Invoice

What is Pro forma invoice (PI) in Import and Export- Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORTOcean Shipment

A pro forma invoice is essentially an estimated invoice issued by the seller/exporter in advance of a shipment. This is mostly given by the seller/exporter to the buyer to open the Letter of Credit (LC) or Telex Transfer (TT) from the buyer’s end. Pro forma invoice can be seen as a commitment from the seller to supply goods to the buyer.

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Function of Pro Forma Invoice

Sometimes we hear the term “pro forma invoice” used interchangeably with “commercial invoice,” but these are not the same things and we need to know the difference between the two. It is important to know the difference between the two shipping documents, pro forma invoice and commercial invoice, as both have different functions in the international trade.

If we see, pro forma invoice contains the similar information as the commercial invoice does (description, origin, quantity, value, terms of delivery and payment) but it is not a final invoice, nor a request for payment. It can be seen as a commitment from the seller to supply goods and when accepted by the buyer by way of LC or TT, it becomes legally binding.

Pro forma invoice are documents used as preliminary invoices in support of a proposal or for financial purposes (enabling a buyer to apply for foreign exchange or to open a letter of credit or Telex Transfer).

We also use a pro forma invoice to accompany shipments of no commercial value, for example, gifts and samples for free distribution at trade shows. While making a pro forma invoice, an exporter uses many shipping terms like ex-work, fob, cfr.

Let us see the details of the terms here.

FOB: Free On Board

FOB (Free On Board) applies to goods transported by ships and boats through seas, rivers, and canals. The seller is responsible for transporting the goods to the departure port and pays for all associated costs and risks. The seller acquires the necessary export permits and other documentation to export from the origin port. The seller also does the customs clearance in the seller port. The seller’s responsibility ends after the goods have been loaded on to the vessel, as shipped onboard, if the contract is free on-board Shipping Point.

CFR: Cost and Freight

CFR (Cost and Freight) is wherein it is the seller’s sole responsibility to arrange for the transportation of the goods to pay for transporting the goods by waterways, either by sea, river, or canal, to a destination port specified by the buyer. In addition to paying for the transport of the goods, the seller has to pay for delivering the goods to the agreed upon departure port. The seller must also pay for acquiring export licenses and for loading the goods on to the transport vessel. The seller does everything from making the goods, customs clearance in the seller port and shipping payment. The seller’s liabilities end here as the CFR contract does not require the seller to insure the goods for further transportation. The buyer will have to insure the goods if they think it necessary.

EXW: Ex Works

Ex Works contract, the buyer transports the goods from the seller’s premises to the buyer’s destination. The transport mode may be whatever is convenient for both parties, road, rail, air, sea, or waterways. The buyer is responsible for loading the goods for transportation, acquiring export and import licenses, getting security clearances, paying taxes and customs duties, unloading the goods at the destination, storing the goods at a warehouse at the destination, and all other costs and liabilities. The buyer is also responsible for insuring the goods while they are in transit. The only responsibility the seller has is to make sure that the goods are properly packaged and available for transport, and that all the documentation for customs and shipping are in correct order. In this payment term method, the seller only makes the product and the rest is done by the buyer.

Making the Pro Forma Invoice

The pro forma invoice is made in supplier pad, directing the invoice to buyer with buyer’s name in To: Buyer.

The pro forma invoice number is also given and the date.

To note, before the supplier provides a pro forma invoice, the buyer provides the supplier with purchase order(PO), which is the details of the goods the buyer is willing to purchase for the seller. So, in the pro forma invoice the PO date number and date is provided.

This is very important to note that the date of the documents must be aligned with the chronological sequence of the documents.  PO comes ahead of PI, so PO date will be earlier than PI.

The PI also contains from where the goods are shipped and the destination port and also the terms of the shipments.

Further, in the PI we can see, the description of the goods with the HS CODE of the goods, the amount of the goods the buyer is purchasing and the price.

We can also find the terms of payment are clearly mentioned. We can see 2 common payment methods that are used in international trade, which are LC and TT payments.

LC payment

A letter of credit, or “credit letter,” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. So in here the bank is taking the responsibility of the payment against the buyer to the supplier. This is a bank to bank guarantee. The importer bank is giving the guarantee to the supplier bank, so the risk is minimal in this transaction.

TT payment

T/T payment stands for ‘Telegraphic Transfer.’ This is a payment method where the payment can be made in advance or in the middle of the production or at the end of the production to the supplier, as per the agreement between the buyer and the suppler. In other words, we can say TT payment is an international wire of funds from the buyer’s bank to the seller’s bank.

The terms of payment can take many forms like: 100% LC, 100% advance TT, 50% advance TT and 50% LC or any other terms as per discussion between the buyer and the seller.

The pro forma invoice also contains the details of the supplier including the address of the address of the supplier, Supplier/Beneficiary bank, bank address, bank swift code, account number and any other information that is necessary by the supplier to inform the buyer.

The pro forma invoice is sealed and signed by the supplier and send it to the buyer through mail by scanning the original PI.

Difference between Pro forma Invoice and Commercial Invoice

Finally, let us see the difference between pro forma invoice and commercial invoice in a chart.

Pro forma InvoiceCommercial Invoice
A pro forma invoice is essentially an estimated invoice issued by the seller in advance of a shipment.It is a contractual document between buyer and seller, whereby the seller supplies a certain quantity of a specific product at an agreed price with some conditions, i.e., terms of delivery (Incoterm®) and terms of payment. Commercial Invoice is the final quantity that is actually exported from seller end.
It contains the similar information as the commercial invoice does (description, origin, quantity, value, terms of delivery and payment) but it is not a final invoice, nor a request for payment.It is the accounting document against which the buyer pays the seller
It can be seen as a commitment from the seller to supply goods and when accepted by the buyer by way of making LC or TT, it becomes legally binding.It is also the main document used to support the customs declaration, since it provides the information on the commodity description (which determines the Harmonized System (HS) code), the origin (which determines the customs tariff treatment), the quantity and the value (which determines the value for customs, on which duties and taxes are calculated).

After the buyer gets the sealed and signed pro forma invoice from the supplier, the buyer starts the processing to open the LC or TT to bind the contract to import from the supplier.

Proforma-Invoice
Proforma-Invoice
Packing-List

What is Packing List (PL) in Import and Export- Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORTOcean Shipment

A packing list is a document that details the list of products that is exported. The packing list contains the items like quantity, description, item numbers, model numbers and weight of the contents, as well as dimensions, and net and gross weights of the shipping packages. It is prepared by the supplier and used by the importer/consignee for customs clearance when the goods are delivered, and also can be used for inventory management.

The exporter and the importer must know what information is put into the packing list before the final packing list is approved, as it is very important to ensure that PL conforms to the requirements of the importer/consignee and the regulations of the country of import.

It is to be noted that some countries require that the packing list for a container be put at the door inside the container, to facilitate the unloading. So we must always check both the exporter’s and the importer’s individual requirements, as well as the destination country requirements.

Packing list must be made in such a way that it easy for all the parties in the trade to clearly understand what is inside the box or the container.

Let us Highlight the Importance of Packing List in Import and Export

  • PL provides a means of quickly identifying merchandise within the shipment in the event of a customs inspection. Customs officers can easily identify what kind of products exists in the shipment and if necessary for products inspection, they can physically detect the products as per the packing list.
  • As a supporting document, the packing list is essential to support the insurance claim in the event of loss and/or damage. This is very important in the case of cargo lost in the shipment.
  • It gives the importer a means to quickly unpack/check the contents by package (i.e., a piece count); and It helps in planning pick-up and delivery, as it provides weights and measurements.

It is very important to note that Commercial Invoice and Packing List are the two vital documents that provide all the important information necessary to complete all other shipping docs in both import and export shipments.

Packing list can look slightly different depending on the product you are importing. For different products the measurements can be different in weight or pieces.

The packing list is made by the exporter. It is made in the exporter pad addressing it to the importer.

In the packing list you need to add the description of the goods, the HS Code of the goods, each item quantity in pieces or weight, total carton, total net weight, total gross weight and the CBM.

You can add many more details depending on the goods you are importing.

The packing list is signed and sealed by the supplier to send to the buyer.

Below is a demo of the packing list send by the supplier Koocu Technology Co.,Ltd to the buyer M/S Nahar for the 4 products import of mobile repairing tools.

Packing-List
Packing-List
Commercial-Invoice

What is Commercial Invoice (CI) in Import and Export- Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORTOcean Shipment

The commercial invoice is a legal document between the exporter and the importer that clearly describes the final goods sold by the supplier, the payment amount needed to be paid against the sold goods; it also contains the HS codes of the products, quantity amount sold, unit price of the products and other necessary details. The commercial invoice is one of the main documents used by customs in determining customs duties for the imported goods.

It should be noted that commercial invoice must correctly identify what is being exported as well as the currency value, which is taxed accordingly.

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Purposes a Commercial Invoice serves in an International Trade

Let us see what purposes a commercial invoice serves in an international trade.

  1. It is a contractual document between buyer and seller in the international trade, whereby the seller supplies a certain quantity of a specific product at an agreed price with some conditions, i.e., terms of delivery (Incoterm®) and terms of payment. The terms of delivery can be Ex-works, FOB, CFR and others are agreed between the importer and the exporter. The terms of payment can be TT, LC and others as agreed between the importer and the exporter.
  2. It is the accounting document against which the buyer pays the seller. The buyer after getting the commercial invoice pays the due amount through banking channel to the seller. Commercial invoice accounting amount is the final due amount the buyer needs to pay to the supplier for the goods purchased.
  3. It is also the main document used to support the customs declaration, and for the customs clearance, since it provides the information on the commodity description (which determines the Harmonized System (HS) code), the origin (which determines the customs tariff treatment), the quantity and the value (which determines the value for customs, on which duties and taxes are calculated), the unit price of the products, the terms of payment and the delivery terms.

For making commercial invoice almost all countries allow the use of English since this is the international language of trade, but it can be a good practice for the exporter to translate the commodity description in the language of the importing country. For example, some countries, in particular in Latin America, like to see statements as to the correctness of the commercial value in Spanish (or Portuguese for Brazil) right on the invoice.

Why Complete Accuracy of the Information on the Commercial Invoice is Essential ?

It should be noted that no matter what the language or languages of the document are, complete accuracy of the information on the commercial invoice is essential to avoid excessive duties and/or penalties. The commercial information is important to accurate as customs officer will charge huge fine to the importer if the quantity and declaration is not same as the physical goods examination. It can be seen that many times, the declaration of the goods in the invoice is ABC with HS CODE: 8392 00 67 with duty 37% but the original goods imported is XYZ with HS CODE: 9867 00 01 with duty 58%. So the goods are mis-declared in invoice to provide lower duty by the collaboration importer and exporter. Once the products are examined by the customs officials after arriving in the destination port, the customs find the mis-declaration after the physical examination and gives huge fine to the importer. So the importer now needs to pay both the original 58% duty as well as the huge fine incurred by the mis-declaration of the goods.

So it should be cautiously seen that accurate information is must in the commercial invoice in the international trade

How to Make a Commercial Invoice and What are the Information that exists in Commercial Invoice ?

Let us go into details of how to make a commercial invoice and what is the information that exists in commercial invoice.

To note, the commercial invoice does not need to be in a specific format and the seller can lay out the information freely, as per seller format; but it should be in mind that, the information on commercial invoice must be clear, legible, complete and accurate.

Below is an example of the minimum requirements for a commercial invoice. Note that additional information may need to be added, depending on requirements in the destination country. So once the supplier makes the commercial invoice, it should be checked by the buyer for confirmation from the buyer end. The buyer may have any information that needs to be included as per the buyer country customs in invoice. So after final confirmation from the buyer end the final commercial invoice is sealed and signed.

The commercial invoice is made in supplier pad and it is made by the supplier after all confirmation of the final quantity and invoice amount.

The commercial invoice is directed to the buyer of the goods, with buyer name, address, Tax Identification number, VAT number.

The commercial invoice is given a commercial invoice number and date. The date should be later than the date of pro forma invoice and LC date, as commercial invoice is generated after making the pro forma invoice and LC.

Also the mention of goods going from which origin port to destination port is mentioned and the mode of transportation it is taking, that is weather by sea, air or land.

Then details of the description of the goods are provided, HS Code, quantity in pieces and kg, unit price in pcs, kg, m or any other measurement needed as per product dimensions to determine the price is provided, total invoice amount.

Then the product origin is clearly mentioned.

Then the LC reference number or any other bank payment reference number is mentioned.

Finally the commercial invoice is sealed and signed by the supplier to send it to buyer.

To note, every bit of information is critical on the commercial invoice. An omission, an error, or a discrepancy could stop the goods before they even leave the country, delay the goods in the country of transit, delay the goods in the country of importation, or delay the shipper receiving payment.

Commercial-Invoice
Commercial-Invoice
Certificate-of-Origin-COO

What is Certificate of Origin (COO) in Import and Export- Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORTOcean Shipment

The certificate of origin (COO) is used to identify the country of manufacture of the goods in the export shipment. The COO is completed by the exporter and certified by a recognized issuing body of the exporter’s country, attesting that the goods in a particular export shipment have been produced, manufactured or processed in that particular country.

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Let us discuss the two main types of certificate of origin:

The “generic” COO also called “ordinary” COO or “non-preferential” COO

In this form of COO there is no specific format which is required. We can see this kind of COO is required in many countries accompanied by other shipping documents. The COO supports the commercial invoice in attesting the origin of the product for customs clearance purposes. This compulsory document is not tied to a specific customs treatment and no special benefits can be approved based on this generic COO. This COO is used to recognize from which country the product is produced, manufactured or processed.

The “preferential” COO

The “preferential” COO enables products to enjoy customs duty reductions or exemptions under a preferential tariff treatment or a specific free trade agreement and must be issued on specific forms and formats.

The preferential benefits are received in the trade of goods because of different regional trade agreements between countries and being the member of the trade blocs.

Also, Least Developed Country (LDC) enjoys duty free market access or reduced tariff rate facilities to export to various developed and developing countries in the world.

Let us see an example of a LDC country, Bangladesh, and the preferential benefits the country is getting because of the different trade agreements and being a LDC country.

Generalized System of Preferences (GSP)

GSP is a facility on preferential reduced or 0 tariff on various exported products by the LDC country. The developed and developing countries give this benefit to the LDC countries, by excluding the tariff on the imported goods. So giving the LDC countries a benefit on price competitiveness in the market and facilitating the increased export of goods from the LDC countries.

Generalized-System-of-Preferences-GSP
GSP

If we see the developed and developing countries that provide GSP benefit to Bangladesh are:

Country
Australia
Canada
European Union
Iceland
Japan
New Zealand
Norway
Switzerland
Russian Federation (2012)
United States
DFQF access of selected Developing Countries:
Country
Chile
China (2013)
India
Korea, Republic of
Chinese Taipei
Turkey (2011)

Bangladesh besides getting GSP facility for being a LDC country also has different trade agreements between countries like South Asian Free Trade Agreement (SAFTA) and Asia Pacific Trade Agreement (APTA).

Common Characteristics of a Certificate of Origin

Now, we can see some of the common characteristics of a certificate of origin:

  • The exporter/shipper/manufacturer or its legal representative completes and signs the certificate of origin declaring that the goods are of the origin shown in the COO
  • A legally authorized witness in the country of origin countersigns it, if it is required as per the export country regulations.
  • A local governing body in the country of origin then certifies it. As like, local Board of Trade, Export promotion bureau, Chamber of Commerce or similar organization for certification.

How to get the “generic” COO and what the generic COO contains

Let us see how to get the “generic” COO and what the generic COO contains:

The freight forwarder who represents the exporter can prepare “generic” certificates of origin and sign it on behalf of the exporter, as long as the freight forwarder is authorized to do so by the exporter.

The origin form together with a copy of the commercial invoice, packing list is sent to a local Board of Trade, Chamber of Commerce or similar organization for certification and approval.

Certificate-of-Origin-COO
Certificate-of-Origin-COO

Now we see what a generic certificate origin contains.

  1. The exporter name and address
  2. The consignee/buyer name and address
  3. The means of transport and route
  4. Country of destination
  5. Description of the goods
  6. HS code
  7. Quantity
  8. Commercial Invoice and Date
  9. Sealed and signed by the supplier or the authorized representative of the supplier
  10. Sealed and signed by the export country local Board of Trade, Chamber of Commerce or similar organization.
Certificate-of-Origin-COO
What-Certificate-of-Origin-COO
Letter-of-Credit

What is Bank Letter of Credit (LC) in Import and Export- Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORTOcean Shipment

A Letter of Credit is the written promise of a bank, undertaken on behalf of a buyer/importer, to pay a seller/exporter the amount specified in the credit, provided the seller complies with the terms and conditions set forth in the credit.

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Function of Letter of Credit (LC)

The letter of credit provides assurances to both sides of the sale: the applicant (importer/buyer) and the beneficiary (exporter/seller). The essence of the letter of credit is that payment is made against documents attesting that the goods have been shipped (commercial documentation and ocean bill of lading/air waybill/truck waybill), the quantity (packing list), and insurance coverage (insurance certificate). Any dispute over the condition of the goods is a separate issue. It is not the banks’ responsibility to guarantee the physical condition of the goods; banks deal only with documents. Correct presentation of the export documents by the exporter to the exporter’s bank is important for the payment of the money.

Parties Involved in a Letter of Credit Transaction

Now let us see the parties involved in a letter of credit transaction:

  1. The applicant (importer/buyer)
  2. The issuing bank
  3. The beneficiary (exporter/seller)
  4. The advising bank
  5. The confirming bank

The Applicant

The applicant is the buyer who starts the process of opening a LC. The applicant causes the contract to be created between the issuing bank, the advising/confirming bank and its customer.

The Issuing Bank

The issuing bank is the bank that the buyer applies to open the LC and issues the LC. The issuing bank undertakes a commitment on behalf of the buyer for payment to the beneficiary (exporter/seller) upon satisfaction of the credit terms and conditions. The issuing bank draws up and issues the letter of credit and then makes payment according to its conditions.

The Beneficiary (Exporter/Seller)

The beneficiary is the party who will receive the payment of the LC that the buyer opened in the issuing bank as stipulated in the letter of credit.

The Advising Bank

The advising bank is usually located in the exporting country and transmits the documentary credit to the beneficiary/exporter. The advising bank accepts a letter of credit opened by the importer from the issuing bank, verifies its authenticity, and forwards it to the beneficiary. The advising bank does not take on any payment obligations.

The Confirming Bank

The confirming bank is a bank that accepts the same responsibilities for payment to the beneficiary that are held by the issuing bank, adding a statement of confirmation to the letter of credit of the issuing bank. In the LC copy in the section of “confirmation instructions” it will be mentioned CONFIRMED.

Types of Letter of Credit

In this section we will see different types of letter of credit and the flexibility the LC provides to different parties in the trade to adapt to special circumstances.

Irrevocable Letter of Credit

An irrevocable letter of credit will not be annulled, revoked, recalled, cancelled, amended, altered, or changed in any way without the express approval of the beneficiary/supplier or applicant/importer.

It constitutes a definite undertaking and responsibility taken by the bank; secures the importer because the exporter will not get paid unless he has shipped the goods and presented the original shipping documents to the bank, and it secures the exporter because he is sure to get paid and not be defaulted because the letter of credit is an irrevocable instrument, i.e., the importer cannot change his mind in the process and cancel the order.

As long as a letter of credit is subject to the UCP 600 international rules of the banking system, it is by definition irrevocable.

If we see revocable letters of credit, it should not be processed and approved as they pose a high risk to the exporter with little or no guarantee that the transaction will be completed.

Transferable Letter of Credit

A transferable credit is one by which the original beneficiary transfers all or part of the proceeds of an existing credit to another party, typically the ultimate supplier of the goods.

Second beneficiaries can be located in the country of the original beneficiary or any other.

Letters of credit can be transferred only once. To be transferable, the original letter of credit must contain a provision that it is “transferable” and this need to be mentioned in the LC.

Revolving letter of credit

A revolving letter of credit is a single letter of credit that covers multiple transactions and shipments over a long period of time.

The revolving letter of credit allows the beneficiary to draw a specified amount over a specified time, with the full original amount becoming available again at the expiry of that time.

Standby Letter of Credit

Standby is a term used for a form of credit that functions only as a guarantee that payment will be made by the applicant/importer to the beneficiary without the usual documentary requirements at the time of shipping.

This letter of credit is drawn on only if the applicant does not pay the agreed-upon amount at the specified time. This type of credit is often called a non-performing letter of credit.

Collection on a standby credit usually involves a simple affidavit of the beneficiary certifying non-receipt of payment, plus copies of regular shipping documents.

Upon presentation, the issuing bank pays the LC amount. The actual shipment is to be consigned directly to the applicant and not to the order of the bank; all documents are forwarded directly to the applicant, as well.

Red Clause Letter of Credit

A red clause letter of credit includes a special condition that allows the beneficiary/supplier to receive a part of the LC credit amount as an advance payment before the fulfillment of all the conditions stated in the LC credit.

This type of LC credit is used when the beneficiary needs funds for the purchase, manufacture, or transport of goods.

The applicant guarantees the advance payment; thus, in order to use a red clause documentary credit, the importer should trust the exporter.

Back-to-Back letter of credit

A back-to-back letter of credit consists of two entirely separate documentary credits, but one credit act as security for the other.

The master LC acts as a security to the back to back LC that is opened against the master LC.

Types of Payment in Letter of Credit (LC)

1. By sight payment: payment on receipt of the documents by the issuing bank or the bank nominated in the letter of credit by the importer

2. By deferred payment: payment after a period specified in the letter of credit, often calculated as the number of days after the date of presentation of the documents or after the shipping date/onboard date

3. By the acceptance: acceptance of a draft (not to be presented together with other documents) by the issuing bank or by the bank nominated in the letter of credit, and the payments thereof at maturity time

4. By negotiation: the giving of value by the nominated bank to the beneficiary for the documents presented, subject to receipt of cover from the issuing bank.

Advantages of a Letter of Credit

  1. The exporter is assured of payment as long as he complies with all of the terms and conditions of the letter of credit.
  2. The letter of credit identifies which documents must be presented and the data content of those documents.
  3. The credit risk is transferred from the importer to the issuing bank of the LC.
  4. The exporter can enjoy the advantage of mitigating the issuing bank’s country risk by requiring that a bank in his own country confirm the letter of credit (confirming bank). That bank then takes on the risks of the issuing bank and protects the exporter.
  5. The exporter minimizes collection time, as the letter of credit accelerates payment of the receivables.
  6. The exporter’s foreign exchange risk is eliminated with a letter of credit issued in his currency.
  7. The buyer can stipulate times for shipping and documentary requirements to ensure the goods are as ordered.

Risks involved in a Letter of Credit

  1. Since all of the parties involved in the letter of credit deal with documents and not with goods, the risk of the exporter not shipping goods as mentioned in the letter of credit still persists.
  2. The letter of credit as a payment method is costlier than other methods of payment such as open account or documentary collection.
  3. The exporter’s documents must comply 100% with the terms and conditions of the letter of credit for the issuing bank to make the payment. For example, if the letter of credit contains spelling mistakes, they must be reproduced in the documents, unless an amendment is requested by the beneficiary.
  4. Unless the letter of credit is confirmed, the exporter is exposed to the commercial risk of the issuing bank, the political risk of the issuing bank’s country.

How to Avoid Risks Involved in a Letter of Credit

  1. Good to conduct business with a reputable financial institution.
  2. Known sellers (exporters) and buyers (importers) pose less risk.
  3. An importer can ask the exporter to ship samples of the goods prior to the actual shipment.
  4. Insure the goods against “all risks.”
  5. Pre-shipment inspection is also a good solution to ensure the goods are as ordered.

How to Open a Letter of Credit and the steps to follow?

  1. An agreed order is finalized by the importer and the exporter with the total amount to be imported and the total value with the mode of payment
  2. The importer receives the PI from the supplier and after making all the necessary banking documents instructs a bank (the issuing bank) to issue a letter of credit in favor of the exporter. At this time, the importer becomes the applicant.
  3. The issuing bank, which is the buyer’s bank, transmits the credit to the exporter through a bank (the advising bank) in the exporting country.
  4. The advising bank informs the beneficiary/exporter of the details of the letter of credit, exporter carefully checks the letter of credit for its requirements. The advising bank informs the issuing bank of the acceptance of the letter of credit by the beneficiary.
  5. The exporter after getting the LC starts the production to export the goods
  6. After the production of goods is complete or in the process of production, the beneficiary prepares the required export documents and ships the goods to the importer.
  7. The beneficiary presents the required documents to the advising bank (exporter’s bank).
  8. The advising bank confirms that the documents presented by the exporter fulfill the terms of the letter of credit.
  9. After confirmation the advising bank, then forwards the documents to the issuing bank.
  10. The issuing bank confirms the fulfillment of the letter of credit, transfers the title of the shipping documents to the applicant/importer by stamping the shipping documents with “To the order of the importer”, and makes reimbursement to the advising bank according to the terms of the credit or issues the payment to the beneficiary.
  11. The issuing bank debits or secures payment from the applicant/importer in the manner agreed prior to issuance of the letter of credit.
  12. The issuing bank releases the shipping documents to the applicant/importer, who can in turn, claim the goods from the carrier and take delivery.
What-Letter-of-Credit
Letter-of-Credit
Types-of-Letter-of-Credit
Types-Letter-of-Credit
Warehousing-Efficient-Supply-Chain-1

Warehousing for Efficient Supply Chain: Public or Private Storage?

by with No Comment EXPORTIMPORT

It is very important to have an efficient supply chain and warehousing facilities to gain a competitive advantage in your business among your competitors.

Efficient warehousing and storage reduce cost and time management to deliver the product to the customers.

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Warehouses and Storage Facilities Categories

Warehouses and storage facilities can be divided into 2 categories:

  1. Public: A public warehouse offers services to a broad clientele of companies who need the facility of the warehousing. Public warehousing companies offer a broad range of services for the storage and distribution of goods, including inventory management, shipping and storage, insurance, claims inspection, transport documentation, freight consolidation, and cartage.
  2. Private: Private warehouses are operated as a division of a company whose core business is other than warehousing.

Different Types of Public Warehouses

Let us analyze the different types of Public warehouses we can get:

  1. General non-food-merchandise warehouses tend to be large, one-story facilities with high ceilings, equipped with sprinklers and burglar alarms. The facility will have multiple truck-level doors to handle the in/out activity of the merchandise.
  2. Temperature-controlled warehouses (to keep goods heated, refrigerated, cooled or frozen).
  3. Controlled drugs and narcotics warehouses have a high security requirement because of the sensitivity of the goods. The warehousing company must have a pharmacist on staff to handle product. Accurate record-keeping is also necessary.
  4. Tire and odor-producing-product warehouses.
  5. Dangerous goods storage warehouses. Warehouses facilities must comply with strict environmental laws and the Storage of Dangerous Goods Act. The cost of operating this type of facility is very high; therefore, operators can command premium rates for their services.

Advantages of Public Warehouses and Storage Facilities

  1. No initial big capital investment from the client end: The client avoids tying up his capital in buildings, land, and handling equipment, as well as costs associated with starting up the operation and training his own personnel.
  2. Flexibility in space and distribution requirements: The public warehouse option allows the user to contract for as much storage space as needed to meet practical requirements.
  3. Reduction of capital risk because of variable cost
  4. Economics of scale is met in public storage: Public warehouses are able to achieve economies of scale that would not be possible for a small firm. This is because public warehouses handle the warehousing requirements of a number of firms, and their volume allows the employment of full-time warehousing staff.
  5. Flexibility from the client end on taking the service: Public warehouses require only short-term contracts
  6. Prior knowledge of storage and handling cost to benefit in forecasting the total cost.

Disadvantages of Public Warehouses and Storage Facilities

  1. Control is less on the client hand in using public warehouses
  2. Specific needs of the client may not be fulfilled in public storage

Private Warehouses and Storage facilities

Advantages of Private Warehouses and Storage Facilities

  1. Control of the work: Control is the major advantage private warehouses have for the manufacturer, the importer, and the distributor over their public counterparts. This greater degree of control allows the firms to more easily integrate the warehousing function into the total distribution system of the company.
  2. Flexibility of the design and operation of the warehouse, to more efficiently develop the supply chain.

Disadvantages of private warehouses and storage facilities

  1. Lack of flexibility to expand the facility in rush period or contract the usage when not in demand.
  2. High initial cost and capital

It is seen that many major manufacturers or importers find it advantageous to use a combination of public and private warehouses. Private warehouses are used to handle the basic inventory levels required for least-cost distribution and public warehouses used to store peak season volume goods requirements.

Factors Influencing the Public or Private Warehouse Decision

FactorsPublic WarehousesPrivate Warehouses
Initial InvestmentNoneHigh: Large facility, equipment and employee cost
ControlModerateHigh
Operating CostHigh, due to profit margin taken by the independent warehousing company that provides the warehouse facilityLow, if have the sufficient volume
RiskMinimumHigh, due to demand and supply of sales fluctuation
Economics of ScalePossible, due to serving many customersDependent on company’s size and volume
Storage and handlingKnow exact charges for decision makingGeneral, can only estimate

The Functions of Warehousing

Warehousing has two basic functions: storage and movement.

Storage: Storage may be either temporary or permanent.

  • Temporary storage emphasizes the movement function of the warehouse and involves only the product that is necessary for basic inventory turnover.
  • Permanent storage is the storage of inventory in excess of that required for normal replenishment. Permanent storage may be required because of seasonal or erratic demand, the conditioning of products such as fruits and meats.

Movement: Movement of the goods includes receiving, transfer, customer order selection and shipping.

Warehouse Layout and Design

A good warehouse facility will have the functions to increase output, improve product flow, reduce costs, improve service to customers, and provide better employee working conditions.

Below is a possible layout for a warehouse to construct:

GOODS ENTRY GATE
RECEIVING AREA
STORAGE AREA
ORDER PICK STORAGE AREA
PACKING AREA
STAGING AREA
EXIT GATE FOR SHIPPING OUT

No matter what layout is selected, it is vital that all available space be utilized as fully and as efficiently as possible, in order to maximize the space utilization and the subsequent return on investment.

Equipment Selection for Warehouse Handling

Warehousing

The forklift truck is a vital part of almost every warehouse operation. It is the basic piece of equipment in every warehouse. Other examples of standard systems include hand trucks, electric tractors, carts, cranes, and platform trucks. In each, there is direct human involvement (operation) with the piece of equipment.

Importance of Efficient Warehouse handling Systems

  • Increased productivity per employee through increased output.
  • Reduced operating expenses.
  • Optimized machine utilization.
  • Increased space utilization.
  • Reduced damage to inventory.
  • Increased customer service levels.
  • Reduced employee fatigue.
  • Reduced accidents.
  • Improved flow of material.

Overall the importance of warehousing and storage facilities are immense in overall supply chain process. The decision to choose public, private or mixture of both warehousing facilities depends totally on the task and operation of the company.  

Warehousing-Efficient-Supply-Chain
Warehousing
Types-Products-Carried-by-Ocean-Vessels

Types of Products Carried by Ocean Vessels Through Waterways in Export_2023

by with No Comment EXPORTIMPORTOcean Shipment

Products Carried by Ocean Vessels Through Waterways has been and still is the cornerstone of the international trade.

Around 95% of the world’s commodity volume is carried in ships.

In this article we will see how the different commodities carried by ocean freight are link with the different types of vessels and handling containers that are used:

Table of Contents

Bulk Cargo

Bulk cargo refers to commodities that are transported unpackaged in large quantities, usually pumped and blown into ships’ holds. It represents the largest volume of maritime commerce.

Materials are either in liquid or granular form and this category is divided into two sub-sections:

  • Dry bulk cargo: minerals (bauxite, copper, limestone, salt, etc.), cement, resin powder, fertilizer, coal, flour, sugar, grain, iron ore, scrap metal, wood pellets, etc.
  • Liquid bulk cargo: petroleum products (oil, liquified natural gas, gasoline), chemicals, edible liquids (cooking oil, vegetable oil), rubber, etc.

Break Bulk Cargo

This is the traditional mode of ocean transport, involving packaged and non-packaged goods (including machinery) being lifted individually by way of cranes and lowered into the vessel’s holds.

It is also called “conventional cargo.” It includes general cargo, machinery, lumber, bundled steel, newsprint, vehicles (as long as they are lifted on and off).

The security of the cargo is dependent on adequate packaging and protection, careful loading and unloading operations and adequate securing, blocking and bracing in the ships’ hold.

Containerized Cargo

This involves the loading of packaged goods, non-packaged goods and machinery into standard-size ocean containers.

The criterion is that the cargo must fit the confines of the container frame (space-wise as well as within the container’s weight carrying limit).

It is to note that some bulk commodities are shipped in containers (certain agricultural products, chemicals, lumber, etc.)
Some large “out-of-gauge” cargo can be shipped on specialized containers (open tops or flat racks) instead of break bulk. In these cases, the packaging of the cargo is as important as if it was shipped on a break bulk service, since the container affords little or no protection and is used merely for the convenience of cargo handling.

Roll-on/Roll-off Cargo

It is abbreviated as RO-RO, this method is for being mobility, as the cargo is either driven under their own power or towed onto the ship.

Automobiles, trucks, tractors, buses and heavy machinery are shipped this way.

Out-of-gauge cargo is also often shipped on RO-RO ships. It must first be loaded and secured on a special trailer with wheels, and then the trailer is pulled on board.

Over-dimensional Cargo

Oversize, out-of-gauge or over-dimensional cargo that does not fit in a standard ocean container must be shipped break bulk, roll-on/roll-off or on a specialized container (open-top, flat-rack or platform).

Shipping oversize cargo in specialized ocean containers is expensive because the containers themselves are more expensive than regular containers and are in limited supply.

Although cargo exceeding standard container sizes can generally be accommodated on container ships, any over-width, over-height and/or over-length cargo will create “dead space” or empty space on board, and carriers will charge for that.

For example, a flat-rack container loaded with a piece exceeding the standard width on both sides will occupy the space of three containers. If the piece is both over-width and over-height, its container will occupy the space of six containers and carriers will tend to charge accordingly for the “dead space.” The same principle applies for over-length too.

Types-Products-Carried-by-Ocean-Vessels
Types of Products
Cargo-Aircraft-and-Air-Freight-Containers

Types of Cargo Aircraft and Air Freight Containers: Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORT

Table of Contents

Types of Cargo Aircraft

  • Passenger aircraft: With the passenger traffic (main source of revenue) of the aircraft the airlines are increasingly including transporting cargo in the belly of passenger airplanes.
  • Freighters: Specialized airlines that carry only cargo on freighters.

Types of Air Freight Containers

ULDs (Unit Load Devices)

Containers or ULDs (Unit Load Devices) are normally owned by the airlines, and each ULD has an identification number assigned to it.

Each identification number has three parts: the type of ULD, its serial number, and the name of the airline that owns it. This allows for easier identification for aircraft loading and unloading purposes, and tracking of ULDs as they move around the world on flights, to/from other airlines, and to/from freight forwarders and shippers. This is an example of an LD3, which is identified as AVE1234DB.

ULDs (Unit Load Devices)

Pallet

Pallets are flat sheets of aluminium that can hold stacked shipments. A net is usually used to cover each pallet to secure the stacked shipments from falling off the pallet.

Pallet
Cargo-Aircraft-and-Air-Freight-Containers
Cargo Aircraft
Cargo-Aircraft-and-Air-Freight-Containers
Air Freight Containers
Transportation-Charges-for-Export-Cargo

Transportation Charges by Airlines for Export Cargo : Complete Guide 2023

by with No Comment Air ShipmentEXPORTIMPORT

In order to calculate the transportation charges by Airlines to be paid by the shipper or to be collected at point of destination from the consignee, the following three factors must be taken into consideration:

  • The chargeable weight
  • The applicable rates and charges
  • The declared value for carriage.

The amount of cargo that can be loaded onto an aircraft is limited by both weight and volume.

Heavy and small loads will tend to reach the weight limitation of the aircraft before the volume limitation is reached, thus resulting in unsold volume capacity.

On the other hand, light but bulky loads will reach the volume limitation of the aircraft before the weight limitation is reached, thus resulting in unsold weight capacity.

It is, therefore, logical to establish the chargeable weight of a shipment on its actual gross weight if it is small and heavy, or on its volume weight if it is light and bulky to compensate for unsold capacity.

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Actual Gross Weight (for High-Density Cargo)

The actual gross weight is the weight of the shipment including packing materials.

The actual gross weight is used as the chargeable weight in the case of cargo that is heavy in relation to its volume. Examples of such cargo are gold, certain machinery, metal parts, etc.

High-density cargo (cargo that weighs MORE than):

1 kg/6,000 cm3.

1 kg/366 in3.

Volume Weight (for low-density cargo)

In the case of cargo that is bulky in relation to its weight, such as hats, woollen sweaters, etc., the chargeable weight will be established based on volume rather than on actual gross weight.

The “volume weight” will be calculated and used as the chargeable weight.

Low-density cargo (cargo that weighs LESS than):

1 kg/6,000 cm3.

1 kg/366 in3.

Establishing the Chargeable Weight for the Charges by Airlines

We have to bear in mind the rule that the chargeable weight is based on the HIGHER of the actual gross weight or the volume weight, it follows that both must be determined and compared.

This is in order to establish which of the two is to be used as the chargeable weight.

Dimensions in centimeters = weight in kilograms: L x W x H ÷ 6,000

Dimensions in inches = weight in kilograms: L x W x H ÷ 366

Let us see an example of how to establish a Chargeable weight and Freight charge:

Number of pieces: 1 wooden crate

Dimensions: Length 90 cm x width 60 cm x height 60 cm

Weight: 250 kg

Step 1: Calculate the actual weight

  • Multiply the number of pieces in the shipment by the weight of each piece.
  • 1 piece x 250 kg = 250 kg
  • The actual weight of this shipment is 250 kg.

Step 2: Calculate the volume weight

  • Calculate the cubic centimetres of the shipment
  • Multiply the number of pieces in the shipment by their length, width, and height (in centimetres).
  • 1 piece x 90 cm x 60 cm x 60 cm = 324,000 cm3
  • Calculate the volume weight
  • All air rates are based on the IATA ratio of 1 kg = 6,000 cm3. So divide the cubic centimetres by 6,000 kg/cm3
  • 324,000 cm3 ÷ 6,000 = 54 kg
  • The volume weight of this shipment is 54 kg.

Step 3: Determine the chargeable weight

The chargeable weight is the HIGHER of the actual weight or volume weight.

The actual weight is 250 kg and the volume weight is 54 kg.

The chargeable weight of this shipment is 250 kg (which was the actual weight).

This chargeable weight (250 kg) will be used to determine the freight charge.

Step 4: Calculate the freight charge
Multiply the chargeable weight by the applicable air cargo rate. 250 kg x $2.55 (an example of an air cargo rate) = $637.50

Therefore, the freight charge for this shipment is CAD $637.50.

How Air Freight Rates and Charges are Determined?

The freight rates and charges applicable to movement by air are governed by various market conditions.

  • Competition in the lane segment
  • Uplift demand during peak season(s)
  • Competing means of transportation
  • Type and quantity of goods shipped
  • Regularity of traffic
  • Value of goods
  • Special needs for certain types of goods, etc.

To note some important points:

  • The rates are quoted from airport to airport and apply in the direction to be flown
  • The airport-to-airport rates do not include additional charges such as for pick-up, export and import clearance, delivery, storage charges, security, fuel surcharge
Charges-by-Airlines
Charges by Airlines
Sea-Air-Overland-Best-Transport

Sea, Air or Overland: Best Transport to Choose in Export & Import?

by with No Comment Air ShipmentEXPORTIMPORTOcean ShipmentRail or Truck Shipment

Sea, Air or Overland: Best Transport to Choose, Once all of the relevant information regarding an export shipment has been obtained from the client (it can be supplier or buyer), it is then necessary for a freight forwarder to review the various modes of transportation available to transport the goods and to make a selection of the best mode or combination of modes to meet that client’s needs.

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Who is a freight forwarder ?

So who is this freight forwarder and why an exporter or importer needs them in transportation of their goods from origin to the destination?

Let us go with the Wikipedia definition first and then go into details.

A freight forwarder, or forwarding agent, is a person or company that organizes export shipments for individuals or corporations (exporter and importer) to get goods from the manufacturer or producer to a market, customer or final point of distribution. Forwarders contract with a carrier or often multiple carriers (can be shipping line, airlines, rail or trucks) to move the goods from one country to another.

A forwarder acts as an expert in the logistics network. The freight forwarder  can use a variety of shipping modes, including ships, airplanes, trucks, and railroads, and often use multiple modes for a single shipment. For example, the freight forwarder may arrange to have cargo moved from a plant to an airport by truck, flown to the destination city and then moved from the airport to a customer’s building by another truck.

A freight forwarder is a firm specializing in the arrangement of cargo movement on behalf of shippers. An exporter or importer is not specialized in transportation of their goods and the documents and rules and regulations need to be followed in the export transportation process.

A freight forwarder being an expert firm provides this service to smoothly transport the goods from origin to the destination. The lists of services a freight forwarder can provide are:

  • Ocean, air, rail or road freight transportation
  • Inland transportation from origin and/or to destination
  • Preparation of documentation
  • Warehousing and storage services
  • Consolidation and deconsolidation
  • Cargo insurance and customs compliance

An exporter may be unaware of details of the transportation like:

  • Safety and security requirements for the cargo
  • Reasonable transportation costs
  • Scheduled delivery of cargo at destination.

A freight forwarder being an expert needs to work for the shipper taking into account:

  • The cargo itself
  • The packaging of the goods
  • The mode of transport
  • The urgency of the shipment
  • The value of the goods
  • The perishability of the cargo
  • Whether the cargo is hazardous or not, etc.
  • The price for the service the shipper is willing to pay

Let us see the features, advantages and disadvantages of different modes of transport and when to choose the alternatives from one mode to another

Ocean Freight

Ocean freight is used for the movement of goods that are heavy and voluminous and do not require fast transit times. Generally speaking, water movement is less expensive on a per-unit basis than land movement and air movement.

Ocean movement does have some downsides. It is comparatively slow. Arrival times are approximate.

Goods are exposed to more risks than in other modes of transport. Damage and loss risk is greater.

Ocean carriers have a very limited liability. Heavy packing and careful stowage are required.

Air Freight

Air freight is used for smaller shipments, those requiring fast delivery, those of high value, or perishables and items that are exceedingly fragile or delicate.

Sensitive electronic equipment or computers can ill stand the rolling and swaying of a three-week sea voyage, the bumping in a railcar, or the stop and go of a long truck trip. Even if the cargo is relatively bulky or heavy, the client may still opt for air freight. The high per-unit value of the goods can more easily bear the costlier air freight.

A broken-down machine may bring an entire production line to a halt. A replacement must be flown in regardless of cost; for the cost of a day’s lost production is almost certainly a multiple of the air freight cost.

The high per-unit cost is air freight’s chief drawback, but it isn’t always as bad as it may sound.

There are advantages of using air transportation that, in many cases, are not readily obvious:

  • Less costly packaging
  • Lower insurance rates
  • Less likelihood of damage; the quicker the goods reach the buyer, the quicker the seller gets paid; and low inventories and warehousing – the buyer keeps a limited supply of goods on hand and can replenish them quickly by using air freight.

Overland by Rail or Truck

A whole freight train might move as much as 400 TEUs with little personnel cost and over a readily available, traffic-free roadbed.

In this scenario if we imagine the number of trucks needed to move the equivalent volume, and the cost to do so. Add the restrictions imposed on trucks: licensing in each province traversed, weight limitations, mandatory rest periods for drivers, restrictions in some towns on night driving.

Long distance overland transportation is best with rail.

For shorter distances, trucks are definitely the better choice. They serve more communities and can go into remote places; they offer door-to-door delivery; they are flexible, and in many cases, they offer better rates.

Factors Determining the Transportation Mode and Routing of the Shipment in Best Transport to Choose

  • Geography of the place
  • Trade Routes
  • Departure frequencies of the transportation
  • Freight Rates
  • Terminal charges
  • Border-crossings customs procedures
  • Currencies

SEA/AIR Transportation

Let us explain the SEA/AIR transportation by an example.

To transport from the Far East to Europe through North America. Goods are brought by fast container ocean vessels to a West Coast port and then reloaded into a Europe-bound aircraft and air-freighted from those airports.

Transit time is about 14–16 days as compared with about 30 days or so by the all-water route. Cost is about halfway between the all-air and the all-water route, and thus represents a perfect alternative between cost and speed requirements.

Sea/Air combination transportation reduces the transit time but not increasing the cost as high as all-air shipment.

Best-Transport-to-Choose
Freight Forwarder
Best-Transport-to-Choose
Sea Shipment Pros & Cons