TRANSPORT vs. FORWARDING vs. LOGISTICS
Let’s start from the basics in physical flows of goods in the logistics chains and look at the services provided by carriers, forwarders and logistics companies all around the goods on their way from the place of origin to the place of destination. The transport service is the transport of cargo from A to B. Forwarding is organizing the entire transport process, i.e., contracting carriers, determining the trip route, providing for all documents, as well as helping the shipper to complete all customs formalities and other formalities mandatory when crossing customs borders. Logistics is barely only providing transport and forwarding services. It is primarily a whole range of the so-called value-added services all around the goods that reach beyond transportation and basic handling.
A logistics operator needs warehouse space to provide these services. For example, companies that specialize in servicing super and hypermarkets provide a picking & packing service. Picking & packing in its purest form is placing a diverse range of goods on one pallet. When the supermarket chain orders deliveries from its suppliers, it orders in large quantities. However, a single supermarket only orders as much of a given item that was sold in recent days. Picking & packing is then reloading collective packages of an offered assortment, which came on pallets from manufacturers into pallets intended for supermarkets with a different assortment on one pallet.
LOGISTICS SERVICE PROVIDERS
Let’s look now at the logistics services market. Service providers, i.e., those who provide services and their customers, i.e., those who buy these services. Service providers can be divided into two groups. The first group is those who provide services directly to logistics customers. The other group is their subcontractors. In fact, in logistics, we often deal with double outsourcing of services. Of course, we talk about suppliers only within the logistics industry and omit other service providers, for example, companies providing accounting services.
The primary group of service providers is carriers, i.e., those companies that transport goods from one place to another. For practical purposes, I divided the carriers into three groups: into carriers who perform a simple transport service from A to B, express carriers, i.e., courier companies as well as freight managers in the road transport. Carriers operate in all modes of transportation: on the road, rail, air, maritime and inland waterway transport.
Larger shipping companies in road transport become freight managers over time. Only having a larger fleet allows for more efficient transport management and better use of the economies of scale and scope of activity. A common feature of courier companies and freight managers is the provision of transport services based on networks. They handle a huge number of shipments or larger cargo. They simultaneously manage these shipments and the vehicle fleet to optimize transport processes and ultimately lower the cost of transport.
Forwarders and logistics operators are two other groups of service providers. I will talk on them later in detail.
Sub-contractors on this market are companies specialized in single services. They can be, for example, small road carriers who provide services based on one, two, three, four vehicles, sometimes a dozen or several dozen vehicles. They are often family businesses, or companies run as sole proprietorships. These are drivers who have a tractor unit with a semi-trailer or a delivery vehicle. Also, warehouses or logistics centers are not always the property of logistics operators. It may be that the logistics operator builds such a logistics center from scratch and finances it, but it can also be that he rents this center or this warehouse from its developer.
For large road carriers and logistic operators, there is no uniform rule when it comes to fleet ownership. It may be that the company owns the entire fleet, possibly leasing it. It may also be that they do not own vehicles at all, nor lease them. They sublet them from subcontractors, associated companies, or even from competitors. The standard solution is to own a certain part of the fleet on ownership or leasing, and a certain part rented from smaller carriers.
THE CUSTOMERS OF LOGISTICS SERVICES
Now the other side of the market, i.e., the customers. We can divide them into buyers of individual logistics products and buyers of wide-range logistics services purchased in a service package. The buyer of a single logistics product is a company that only uses particular services of its type, such as transport or forwarding. Buyers of complex logistics services are those companies that have given most or even all of their external logistics processes to logistics operators.
Logistics operators have already developed competence in servicing specific industries. Supermarkets and hypermarkets can serve as an example here. They are offered services not found in logistics packages offered to other customers. Also, specific competencies are required for the service of companies that produce in the JIT systems, i.e., companies that do not have factory warehouses with components needed for production. These components are delivered by the carrier shortly before entering the production line. This moment can be half an hour, it can also be a few hours or a day before the components enter the production line. The carrier must be able in this case to maintain a specific time regime so that his customer does not have production downtime. It may also happen that such a manufacturer will require the logistic operator to use specific loading units adapted for internal transport within their factory.
Talking logistics services offered in extensive packages, we often speak about contract logistics. These are long-term contracts between logistics operators and customers. The logistics operator must, after all, invest in the appropriate equipment, and perhaps also the adequately qualified staff. The contract between the logistics operator and the customer will be signed for a more extended period that would allow the logistics operator to reach the break-even point on the investment.
I will start with forwarding as it is a service relatively easy to describe, although it requires extensive specialist knowledge. A transport process within Europe, it relatively easy to organize. Contracting a forwarder can, however, be very useful in trade between continents.
A forwarder will organize the entire transport process for you. He or she will hire carriers and deal with all border crossing formalities. He will know of all the necessary documents needed in export or import. International organizations have long been trying to standardize commercial documents on a global scale. However, there are still documents and procedures specific to individual continents and to individual countries. The forwarder will advise on trading parties’ responsibilities as to the transport process. One side of the export-import trade contact does not necessarily have to be responsible for transporting the cargo along the entire route. It may happen that in the export and import contract from China to Europe, it will be easier for a Chinese contractor to organize a sea trip to a seaport in Europe, and it will be easier for a European contractor to arrange a landline from this port to a destination in inland Europe. The International Chamber of Commerce in Paris for almost a hundred years has been preparing ready contact terms for transport operations as well as the passage of risk related to the goods on the transport route. They are called INCOTERMS, which means International Commercial Terms. The current version of the ICC document contains eleven sets of contractual terms. They are marked with a three-letter abbreviation. To use them in a commercial contract, simply quote this abbreviation, enter the name of the place where the transport operation passes to your contractual party, write INCOTERMS, and after it, the date of the given set of formulas. The last version of 2010. Sure, some other trading rules may apply to different continents. The freight forwarder’s role will be to prompt the local importer or exporter of which terms to use.
Forwarding activities are often linked to the activities of a customs agency. A customs agent is someone who helps the owner of the goods in completing all formalities related to crossing customs borders, i.e., he represents the owner of the goods ahead of customs authorities of individual countries, alone or in cooperation with other customs agents. He might also provide customs warehousing and bonded warehousing services. A customs warehouse is a place where goods are stored under customs supervision for the time of arranging for customs formalities. Bonded warehousing is long-term storage under customs supervision without the need to release the goods in the country in which the storage takes place. The customs warehousing and bonded warehousing services are often regularly provided by logistics operators at their own terminals.
What can bonded warehousing be useful for? Imagine that we have cosmetics from Japan that came to the EU but are intended for sales on the whole European territory. If the order comes from an EU member state, we remove this product from the bonded warehouse and release it for sales in the EU. On the other hand, if the order comes from Ukraine, we send the cosmetics to Ukraine, and there we release them for sales.
Freight management in logistics is the comprehensive management of cargo flows using multiple vehicles between multiple points of dispatch and collection. (Freight is synonymous with the term cargo in this context. The second meaning of the word freight in transport is the transport fee.) The larger the transport company, the more trucks, and delivery vehicles it has at its disposal, the higher use it might do of the scale, scope, and range of its activities. Freight management is either based on a network of direct connections between shippers and recipients of cargo or on a network of connections using the cross-docking terminals. (I will explain cross-docking in another post.)
A freight manager is, for example, a shipping company with several thousand trucks on the way daily, handling connections between several hundreds of its customers and transporting thousands of tonnes of different types of cargo. Having many clients in many locations enables the efficient provision of return transport. For example, if a load is being transported between Warsaw in Poland and Liege in Belgium, the vehicle could return to Poland empty. But it would be most inefficient. However, after unloading cargo, the truck could be redirected from Liege to another customer in Belgium. The latter would have cargo, let us say, to be transported to its customer in Germany, at the given moment or in the next few hours. After completing delivery in Germany, the truck could be redirected to another customer located in Germany to carry yet another shipment destined, for example, to the Czech Republic. Another diversion may take place from the Czech Republic to Slovakia, where the driver would collect the Slovak manufacturer’s cargo intended for export to the United States, which will be carried out via a deep seaport in Northern Poland. So, if the truck left Warsaw to Liege with a load and then returned to Poland empty, the entire cost of traveling forth and back should be attributed to the cargo that was transported from Warsaw to Liege. But as on the return journey, which may not have been a direct return route, the truck picked cargo heading to Germany. From Germany to the Czech Republic and from Slovakia to Poland, the transport costs could have been spread over more cargo units. In this way, the freight manager was able to reduce transport costs per unit of cargo and charge lower freight rates to its customers than if he had decided to make empty mileage on the way back to Poland.
The other freight manager’s activity might be consolidating cargoes along the route. Let’s assume the load from Warsaw to Liege is less-than-a-truck load (LTL). The costs of transport could be reduced if, on the transport route, for example, in Germany, it would be possible to add on dozens of pallets intended for a customer in the Netherlands and this way form a full-truckload (FTL) for the remainder of the trip. Currently, 16% of truck mileage in Europe is empty, and the average vehicle fill is 60%. The best freight managers can reduce the empty mileage rate to just a few percents.
To improve network efficiency, freight managers create digital twins of their entire network and, almost in real-time, adjust the planning of routes and truck fill rates as new transport orders flow in from individual customers. The best freight managers recalculate the network even several times in 24 hours, each time rearranging it so that there are as few empty transports as possible and as few less-than-a-truck loads as possible.
Photos by: Brent Keane, Albin Berlin, Oleg Magni, Julius Silver, and Pixabay
To part two Logistics services explained. Transport >>>