How Does the Freight Forwarder Arrive at a Rate?
Besides the physical logistics of your actual shipment, here are some other factors that will affect how your freight forwarder calculates your shipping rate:
1. The tariff on your product. Unless they file a new rate for your product and destination, freight forwarders use rate books to determine the tariff.
2. The amount of traffic to and from your destination point.
3. How the industry as a whole is performing. For example, is demand exceeding available transportation services, or the other way around?
4. Exchange rates play a major factor in the transportation calculation. This will be reflected in your quote as the CAF, or currency adjustment factor. Let’s say a freight forwarder quotes you a rate of U.S. $1,800 for a 20-ft. container-load from a United States West Coast port to Tokyo, Japan, and lists a CAF of 57%. That means you must add 57% on to the U.S. $1,800 base rate to arrive at a total rate of U.S. $2,826!
When your freight forwarder gives you a quote, the total charge will be broken down into the following line items:
Inland transport: $______?
Ocean transport: $______?
CAF XX%: $______?
- Inland transport is the cost to move the product from a factory door to a port of exit within the same country.?- Ocean transport is the cost to move the product from the port of exit to the port of entry in the destination country.?- CAF stands for currency adjustment factor, which is the going rate of exchange from one currency to another — for example, U.S. dollars to Japanese yen.?- Documentation represents the freight forwarder’s fee for handling all documentation associated with the shipment, including letters of credit.
You should also familiarize yourself with the most commonly used terms of shipment. These are known as “Incoterms” and will affect the final numbers on your export quotation, as well as your financial responsibility for the shipment. For example, with CIF (cost, insurance and freight), you are responsible for paying the freight and insurance costs in advance. You will collect these later when you invoice your customer. Normal practice is to insure a shipment for 110% of its CIF value. Let’s say you are insuring a shipment to the Far East (Japan, Korea, Taiwan) at a rate of $.6175 per $100.
Invoice Value: $12,000.00?Freight: $ 1,200.00
Clearance/Handling: $ 100.00?TOTAL: $13,300.00
110% of TOTAL: $14,630.00?INSURANCE: $ 90.34?CIF TOTAL: $14,720.34
Here’s how you arrive at the CIF total: add the invoice value (cost), freight, and clearance/handling charges. Multiply this total by 110%, then divide by 100. Take the resulting figure and multiply it by $.6175. In this case, the result is your insurance charge of $90.34. Add this to your invoice, freight and handling total of $14,630 for a CIF total of $14,720.34. It’s good to know how this is done, but you won’t have to concern yourself with this calculation or actual issuance of the certificate if you use a freight forwarder. All you have to do is ask the freight forwarder to quote you insurance coverage at the 110% CIF rate.
Preparing the Cost Analysis and Proforma Invoice
Your next step is to enter these itemized charges on your own invoice form, which, as you will see shortly, will become what is known as a proforma invoice. Your document will have all the familiar components of an ordinary domestic invoice — a description of the product, an itemized listing of charges and sales terms. Let’s say you want to get your customer a landed price quote for a shipment of widgets to their port of entry, in this case CNF (Cost and Freight) Tokyo:
U.S.A. Widgets to Tokyo via Ocean — Calculating Landed Price per Unit
You have 100 cases of widgets, packed 12 units to a case. Each case is priced at $120, or $12 per unit. Total cost for the order is $12,000.
Selling price: $12,000 — F.O.B. (Free on Board) factory door in U.S.A.?Inland transport: $ 700?Ocean transport: $ 1,500?Duty: $ 300?CAF: $ 1,250?Documentation: $ 125?TOTAL LANDED PRICE (or Total CNF Tokyo): $15,875
The selling price is your cost to buy the product from the manufacturer, plus your markup. Add that figure to the total shipping costs and divide that total by the number of cases. That gets you your landed price per case. Divide that figure by the number of units in a case. That gets you your landed price per unit. In front of the word “invoice,” type “proforma.”
You have now finalized your price quotation and created a proforma invoice. Don’t forget to specify a precise time period during which your quote is valid, and add the freight forwarder’s quote reference number.
Once your customer approves the proforma invoice, it will become your actual invoice for the order. The customer will also use the proforma invoice to obtain any necessary funding or import licenses.
Your customer should communicate acceptance in a short written sentence or two such as the following (usually via fax), with a signature: “We accept your proforma invoice No. 1234 against our P.O. No. ABCD.” You will then respond: “Acknowledge and confirm your P.O. No. ABCD against our proforma invoice No. 1234.”
That’s it. You have a sale. You’re in business! Before you release the order, though, you and your customer must negotiate terms of payment. At this point, call your banker for an overview of the most common — and the most secure — methods of arranging payment for export goods, as well as an array of export financing sources.
Upcoming: in our final installment, we’ll show you how to evaluate the trial run. From there, you’re on your own. But should you run into trouble, you know where to find us!