The New Normal for Maritime Transportation

The New Normal for Maritime Transportation

Since the lifting of extreme COVID-19 restrictions in Europe, the cost of maritime transport has increased three-fold. Unlike economic cycles of the past, such as the 2008 recession, the consensus in the market is that the price will not return to pre-COVID levels in the foreseeable future. This consensus is in part due to the excess stock leaving China and the lack of containers in the market to meet demand. During the pandemic, shipping companies greatly reduced the capacity of container ships. By the end of 2020, full capacity was put back on the market, however, the demand still exceeds the availability of containers.

According to the Shanghai Containerized Freight Index (SCFI), the cost of freight reached $2,900 for twenty-foot containers in January 2021, which is almost three times the cost at the same time last year. The SCFI reflects the fluctuation of spot freight rates on export container traffic based on the most used trade routes from Shanghai. Furthermore, the cost of the forty-foot container stands at $5,200 as compared to $1,800. An increase in the cost of shipping containers reflects the sharp rise in demand for solid bulks from China (such as cereal and grains).

Unlike European markets now, China can offer stable prices for the next 3 to 5 years, which has allowed it to secure long-term contracts to supply countries around the world. Bulk carriers have also experienced a dramatic increase in prices between May 2020 and January 2021, from $477 to $1,339. The Baltic Dry Index currently stands at $1,339, which reflects a new normal in the price of bulk containers. Since then, the price has fluctuated between $1,150 and $2,000 in a typical cycle.

As a result of the current shortage of capacity of maritime transport, it is recommended that companies book 5 or 6 weeks in advance to reserve space on vessels headed to Asia. Moreover, companies should book even further in advance – 6 to 8 weeks – for routes from Asia to Europe. In the Middle East, Turkey and Africa, it is particularly difficult to reserve space to transport goods, and some transports are not accepting reservations. Routes between Europe and North America/Latin America have slightly more availability, but companies should still reserve space a month in advance.

As mentioned above, routes from east to west (ex. Shanghai to Genova) are much more expensive than routes from west to east due to Asia’s need to hoard capacity. The index of the main maritime transport routes (pictured below) increased from $1,500 to $5,000 between January 2020 and January 2021.

Furthermore, the shortage of shipping containers, and subsequently the dramatic increase in costs, have greatly affected industries in Latin America such as coffee exporters in Colombia. In the past 6 months, the SCFI (Shanghai containerized freight index) on the route between Shanghai and South America has grown from $2,000 to $7,000, an increase that exceeds the index of the routes from Shanghai to Europe and North America. Countries in South America are particularly affected by the shortage due to the fact that transport companies prioritize routes with the highest round-trip cargo. For example, a shipping company would choose to assign a ship to Rotterdam rather than Santos because it will return faster and with more cargo.

Companies are navigating the higher costs by taking structural measures to shorten their supply chain, such as by limiting exports to certain locations. Still, the increase in shipping costs have forced them to reduce their profit margins in the short term. However, economic recovery could cause more firms to increase their prices to reflect the increase in maritime transport costs.

The reality of the “new normal” of maritime transport has greatly accelerated the transition to the use of planes and trains for container transport, especially between China and Spain. The graph below reflects the reduction in the number of shipping containers in transit between 2019 and 2020 (in millions of containers) for Spain. Overall, imports by sea to Spain from China and Hong Kong have fallen by -11.47% million euros between 2019 and 2020, while air and rail imports have increased by 52.49% and 1,088% million euros, respectively.

Based on these numbers, it is clear that many companies have begun to shift away from maritime transport to alternative forms, such as rail transport, in order to optimize their costs. Compared to maritime transport, rail transport boasts quite a few benefits including a reduction in lead times, increased efficiency and, most importantly, cost efficiency. Moreover, rail freight also is the most eco-friendly shipping option in terms of its exhaust emissions.

Since the introduction of express rail services between the EU and China in 2011, rail trade share has increased from less than 1% to 4%. While a vast range of commodities opt for rail transport over maritime transport including mechanical, electronic, vehicle, apparel, households and food, the most common commodities to be shipped by train tend to be higher value goods, time-sensitive goods and fast to market consumer products. Rail imports from China to Europe in 2020 included commodities such as electric equipment, nuclear reactors and boilers, machinery, vehicles, and textile and apparel.

What is the current outlook for the future of maritime transport?

While there are currently sufficient numbers of shipping containers to meet the demand for a normal year, this has not been the case for 2021. The surplus of containers in Chinese ports in March of 2020 and the expectation that trade would fall with the spread of COVID-19 resulted in a reduction of orders for Chinese shipping containers. However, the dramatic increase in demand for Chinese consumer goods in mid-2020 caused the price of shipping containers to increase dramatically. Despite the increase in production of the containers, there continues to be a lack of used containers being returned to China. According to Bloomberg News, the lag in the shipping industry, as well as low inventories, port congestion in the U.S., and increasing consumer demand will likely extend the shortages far beyond the mid to late 2021, despite having moved out of the COVID-19 economy.


Optimizing Picking Systems. PTL vs. PTV

Optimizing Picking Systems

Picking systems describes the process in which a warehouse takes to select and pull items from inventory to fulfill a customer’s order. It is essential for warehouses to find their optimal method for picking that ensures accuracy and efficiency. The cost of labor, materials, technology, and accuracy can all play a crucial role in maximizing their bottom line. Thus, distribution centers are left with different methods to consider – all of which have some advantages depending on one’s needs. For this case, we will analyze three different methods: pick-to-light, pick-to-paper, and voice picking.

Pick-to-Paper

Pick-to-paper, also known as label processing, is entirely reliant on the paper orders for warehouse procedures. Typically, this is also paired with digitized methods of information storage via desktop terminals. A warehouse associated completes their tasks listed on pick lists, put-away labels, or other label documents. This process is most optimized for smaller processes and for those operations that cannot afford the large barrier to entry for other systems. Overall, this is a simple method to implement in even the most primitive settings.

However, this is one of the slowest methods of picking with upstream (how information is written in the label) and downstream (scan and verifying via desktop terminal) processes impacting its performance. Due to the nature of recording paper orders, it is impossible for a warehouse to maintain a real-time track of their inventory – dependent on data entries made by other associates. This inefficiency and many points for error make this process difficult to scale into larger settings.

The picture below is a depiction of what pick-to-paper looks like.

Source: NEConnected

Pick/Put-to-Light (PTL)

Pick-to-light systems are among the most popular methods used in distribution centers. This process is much more intuitive, guiding associates via light to the products needed for each order. It is a simple-to-use technology that can support large pick rates. PTL systems are equipped with software that activates light displays for every needed location, displaying the quantity needed for that order. These benefits result in a company’s ability to get an average worker productive quicker and with less down time.

Still, this system is very expensive, technologically complex, and requires a large initial capital investment to ensure functionality. The cost of the software alone, is in the excess of $100,000. Plus, this method cannot be applied to anything other than order selection. This limits the method’s versatility when dealing with receiving, put-away, and cycle counting.

Below is a depiction of what PTL systems look like.

Source: Pick to Light

Pick-to-Voice (PTV)

Alongside pick-to-light, voice picking has proven to be one of the most popular methods of picking. For this system, an associate is guided through picking via an audio device that lists its necessary items. Voice picking is an effective method of picking most useful for lower velocity SKUs, full case and pallet picking. It has the distinction of being slightly more accurate PTLs while also being slightly cheaper.

A drawback to voice picking, however, can be seen in its ability to integrate new workers. While training times can be relative short compared to pick-to-paper systems, it limits the distribution center of the kind of worker who can do the job. Language barriers and audio limitations can play a large role in limiting the effectiveness of the method.

Below is a depiction of what a pick-to-light system looks like.

Source: Bastian Solutions

Compiled together is a table between the advantages and disadvantages between the three different methods.

Pick-to-Light (PTL) vs. Pick-to-Voice (PTV)

In this blog, we have established that both options are much better alternatives to pick-to-paper. Both options present a system that is easy to use, has more of an increased efficiency, improves accuracy, and as a result lowers overall cost. However, both systems are more geared towards a bigger scale operation as both systems are expensive to implement. We have put together a list explaining the specific differences between the two below.

  • Training Time / Ease of Use – Both PTL and PTV can reduce training times significantly. On average both systems can cut down up to 50% of the training time needed for pick-to-paper systems.
  • Productivity – Pick-to-Light and Pick-to-Voice systems are roughly the same in productivity. However, PTL systems have an added variability component where cheaper systems can be less productive. PTL systems can do approximately 110 – 350 lines per hour. This is very comparable to PTV systems which can do approximately 300 lines per hour. Still, on average both systems preform 25% better than paper systems.
  • Improved Accuracy – A more mechanized system of picking can reduce human errors. Both PTL and PTV systems allow for an associate to focus specifically on the product, instead of having to worry about labels or interfaces. As a result, PTL systems have an industry average of error at about 4 – 6 per 1,000 picks. PTV systems have an industry average of error between 0.2 – 2 errors per 1,000.

System Cost – Overall, both options are expensive endeavors. Pick-to-light systems attain most of their cost in the software required. PTL systems run at excess of $100,000 with each display costing between $100 and $150.

Pick-to-voice systems have options for how to implement the system. Voice terminals run above $2,500, vehicle mounted terminals run above $3,500, and wearable terminals cost above $2,000. More innovative technologies such as smart glasses are progressively being introduced into this PTV systems for about $800.

In the Real World

Warehouses mostly investigate PTL or PTV when they have reached optimum pick metrics using more simpler technologies such as pick-to-paper. PTL and PTV are mostly reserved for larger corporations looking to further increase productivity, accuracy, and reduce overall costs. For examples, Amazon has reported used PTL systems in their warehouses. This has been due to the language limitations presented by voice directed picking systems.

Meanwhile, the fourth largest pizza delivery chain, Papa John’s has replaced its picking process with voice-directed picking processes. This is especially useful in freezers, where temperatures can make working with hands more difficult.

 

RFID

Regardless of the differences between the three different methods of picking, there is one common denominator between the three of them. When picked, all items need to be scanned to provide management with updated information regarding inventory and movement of goods. Traditionally, this need is supplemented by barcodes – an effective, but a suboptimal method. This is where RFID can play a major role.

RFID (radio frequency identification) is a technology that is comparable to barcoding in terms of keeping track of data stored in a tag/label captured by a device and stored in a database. However, RFID uses radio waves to determine the movement of goods. This means that there is no need for optical scanners and a picker can focus solely on obtaining the right products to fulfill an order. Listed below are some benefits to RFID.

  • Simplifies tracking assets and inventory management.
  • Electronic control/upload of information reduces transcription errors.
  • Provides up-to-date data on inventory, ensuring availability of goods.
  • Saves overall time by automating and optimizing scanning.

 

Multipicking

RFID can be combined with different methods of picking to further increase efficiency. This where multi-order picking comes in. Multipicking is an effective method of streamlining order picking. This process involves the warehouse associate locating and picking multiple orders at the same time. Multipicking saves time by cutting down the amount of travel time made by the associate. This is mostly ideal for situations where a company must deal with many small orders.

This is where solutions such as Ehrhardt-Partner’s RFID multipicker can save time and cost. This product implements pick-to-light systems for multiple order picking and combines it with RFID technology for simple scanning. The RFID multipicker optimizes both the movement of multiple orders and tracking of goods at the same time.

Source: Ehrhardt-Partner

Conclusion

Overall, pick-to-voice and pick-to-light systems are extremely reliable. These technologies are not new and have been perfected over the course of decades. They serve as reliable systems to increase worker productivity, reduce errors, provide for ease of use, and overall create a return on investment over time. While smaller companies may find pick-to-paper systems more effective and easier to implement, this method should not be considered for companies looking to grow and expand. PTL and PTV systems can be extremely effective in ensuring appropriate picking. As to which is better for you, this would require more extensive research and tailoring to your needs. But either way, both are truly better and modernized for the warehousing issues of today.


Purpose and competitive advantage of CW and FTZ

Purpose and competitive advantage of Custom Warehouse and Free Trade Zone

What is the purpose of a Customs Warehouse? Free Trade Zone?

The purpose of a customs warehouse is to provide companies with the chance to store imported goods under customs control while deferring the payment of import duty and taxes. These items can go through non-transformative kinds of processes including breaking bulk, grouping packages, sorting, grading, and repackaging. However, there are other types of customs warehouses that can be sought after depending on the needs of a company; examples are listed below.

  • Private Warehouse: A warehouse owned and operated by an organization or corporations. These entities dictate who can store and operate in their warehouse.
  • Public Warehouse: A warehouse more geared toward import, export, manufacturing, distribution, and short-term distribution needs.
  • Automated Warehouse: Modernized warehouses are now equipped with mechanization (either in a small or large scale) to reduce labor costs, streamline functions, increase productivity, and reduce errors.
  • Temperature Controlled Warehouse: This storage option is equipped to handle imports that require more specialized handling. This is usually coupled with other specifications such as air conditioning and humidity control.
  • Distribution Center: This warehouse specializes on receiving products from suppliers and shipping them to customers. Products moving into a distribution center are not handled with storage in mind, but more towards breaking down, aggregation, resorting, and shipment.

Meanwhile, a free trade zone is a customs-free international zone where goods can be handled, manufactured, reconfigured, and reexported without intervention from customs.

 

Are there restrictions for access in a Customs Warehouse/Free Trade Zone?

Storage Time

In general, both a customs warehouse and a free trade zone allow for companies to store their products indefinitely. However, a custom warehouse has more flexibility and options that can be tailored to the needs of a company. For example, if a company is pursuing a short-term storage option to obtain enough time for customs procedures to be completed, they may choose to use ADT Warehouses (Temporary Warehouse Deposit). Importers may only keep their products stored for a period up to 45 days for maritime imports and 20 days for other types of imports.

Restricted Goods and Flexibility

When it comes to restricted goods, a customs warehouse is more accessible for those looking to store restricted goods (live animals, meat/dairy products originating outside of EU, firearms, etc.). A customs warehouse can allow for these products to come in given the clearing from customs. A free trade zone, however, these items are generally not allowed entry.

However, if a company is looking for a more accessible environment for their products, they should look towards a free trade zone. While a customs warehouse can provide many advantages, a company must be much more involved with the national customs agency. This limits the movement of goods and places it at the discretion of customs – both with approval and business hours. In a free trade zone, you are free to move products around this special tax area and at any time of the day. Additionally, a customs warehouse can only admit international products. A free trade zone can admit both domestic and international products.

 

How does RPA complement these types of warehouses/zones?

RPA (Inward Processing Regime) is a regime that allows companies to process, modify, destroy, or repair non-Union goods. This regime can be implemented inside EU customs territory without paying import duties or VAT.

RPA can be extended to companies willing to import and manufacture within their own warehouses or within customs manufacturing warehouses. However, it should be noted that this regime must be authorized by the local customs agency after an application is submitted. When it comes to free trade zones, they benefit from not being within customs territory and therefore are not subject to the charges imposed on value added manufacturing.

 

What kinds of competitive advantages are there when using Customs Warehouses/Free Trade Zones?

Specialized Storage

Overall, customs warehouses and free trade zones allow for the storage of large quantities and are equipped with long term storage options such as temperature and humidity controls. This optimization is ideal for companies looking for more specialized forms of storage and for those who need to move around large quantities of goods.

Security

Of course, with large movement of goods, a large risk – especially in terms of security. However, for both customs warehouses and free trade zones, the customs agency lays down security requirements at each installation to avoid theft and tampering. Additionally, customs warehouses also offer the companies the service of inspecting and taking account of goods. For a company operating in a free trade zone, this responsibility falls on them.

Streamlined Customs Processing

Customs processing can be a complicated and long process, especially for those who are not experienced enough to understand every little detail of regulation. Customs warehouses are prepared for this by having more trained personnel that deal with customs processing. They facilitate the storage and movement of goods to ensure legality. This challenge is exacerbated when imports are moved into a company/retail warehouse. For this case, it is recommended to look for a customs broker.

Free trade zones, on the other hand, do not offer this service. However, this disadvantage can be offset by avoiding customs overall. Given a free-trade zone’s international trade designation, any business occurring there can take advantage of a consolidated, simplified customs process. One place where this can be seen in when a company exports to the United States. In a free trade zone, you can take advantage of a consolidated weekly entry. Here, you are required to pay up to $528.33 a week for any number of entries into a free trade zone. Outside of this area, you are required to pay this amount for every entry made. This streamlined custom procedure can reduce the amount a company pays in fees. It can even reduce customs brokage fees by reducing the number of entries needed to be filed.

Liability

Finally, an outsourced warehouse can serve as a good liability assurance for any lost/damaged/stolen goods. Since the responsibility of security lies on the third party, this can ensure that an incident will not hurt a business’s bottom line.

 

Conclusion

Overall, both options for exports are very similar in qualities. Both options serve to smooth out the trade process. However, when deciding on which option to use, it is important to consider all the intricacies of both options. If a company is more interested in maintaining revenue by reducing customs processing times and costs and outsourcing security, then a free trade zone may prove to be more beneficial. A customs warehouse would be ideal for those looking to outsource liabilities, distribute products, and ensure a better control on the taxes they pay.


Customs Warehousing and Free Trade Zones - Case Study

Customs Warehousing and Free Trade Zones – Case Study

When it comes to assessing the lowest costs, a product must be selected in order to obtain more concrete figures. A good case study to analyze costs associated in assembling and distribution of products would be automobiles. In this case study, three different scenarios will be taken into account. The first scenario will consider a finished product moving into a customs warehouse for either export into the U.S. or distribution into Spain. The second scenario would be importing an intermediate product such as steel into a free trade zone that will be used for assembling a car. The third scenario will focus on a hypothetical situation where every part of the production of a car occurs within Spain.

Case Study 1: Finished Product (Export/Import into a Customs Warehouse)

Consider having the car assembled and produced outside of Spain. Initially, this product avoids Spanish regulations and taxes. Once the product is exported to its destination, then the duties and taxes will be subject to the discretion of the final country of destination. Take a Spanish company that wants to access the European or American market with its line of cars, this company will want to store supplies until the market deems it necessary for use. Once an opportunity presents itself, the company will begin distribution of supplies depending on where it is necessary.

To export a finished car to the U.S. the company must pay a 10% VAT tax and a 2.5% tariff. The trader will also incur a merchandise processing fee of anywhere between a minimum of $27.23 to a maximum of $528.33 per entry in a customs warehouse at a rate of 0.3464% of value of a product. Finally, another cost incurred would be the harbor maintenance fee at a rate of 0.125% of the product value. For imports into Spain, the tax process is much simpler – with only two major components to worry about, a 21% VAT tax and a 10% tariff. To put this in numbers, €1,000,000/$1,000,000 worth of cars will be used as an example. The breakdown for numbers is listed below.

This goes hand in hand with the amount of storage costs that a company incurs a day. This process takes place preceding exporting from Spain or following arrival to the customs warehouse. To maintain cars within a customs warehouse, the average cost of storage is approximately €0.15 in Madrid and €0.2267 in Barcelona.

Case Study 2: Intermediate Product – Steel (Export/Import into a Free Trade Zone)

In this case, a company is to import an intermediate product that will ultimately be used in the assembly of the product. This may be a favorable option for companies that wish to take advantage of a free trade zone’s flexibility towards processing. A free trade zone would allow for transformative processing that a customs warehouse would not.

Taking a core component in the production of a car, steel, a rough estimate can be obtained over how much cost a company may incur. For steel being imported into Spain, from the U.S., the product will be subject to no taxes until a final product is manufactured. Once a car is assembled, the product is then subject to an additional 21% VAT tax rate and a 25% tariff. For steel exported into the U.S., the product will be subject to a similar merchandise processing and harbor maintenance fee mentioned in case 1. After a car is produced, the product is then subject to an additional 10% VAT tax. This process would be repeated for all the other differing products needed in a car. This car would then be subject to a storage fee preceding exports to another country or arrival to Spain prior to distribution. To maintain the cars inside a free trade zone, a company must pay anywhere in between €0.01054 – €0.0924 per cubic meter per day. In order to compare between the intermediate and final product, a €1,000,000/$1,000,000 worth of steel will be analyzed with destination or origin to the United States. Once again, the numbers are listed below.

Case Study 3: Production in Spain

For this case, the entire process of putting together a car is done inside Spanish/EU customs zone. Ignoring labor costs and fixed costs, we can determine the effect of VAT taxes on intermediate processes of the car. For this process, a manufacturer must acquire raw materials and pay a 21% VAT tax on the amount purchased. This cost is then pushed down onto the next manufacturer as a new sale price is set. VAT, at this point, is taxed on the gross margin at each point of the manufacturing, adding to the total VAT tax. Finally, this total VAT is then pushed onto the consumer, who ultimately pays for it once a final price is set. Once again, the additional VAT is added due to the gross margin proposed by the retailer.

For a complicated process of putting together a car, it may prove to be too expensive to go about this route. There are too many intermediate points of value added and compound with each middleman. It is always much better to pay VAT once, rather than several times. While the cost of VAT is ultimately recuperated at the sale of the product, it may prove to dig into a company’s cash flow when moving large quantities of products.

Conclusion

Overall, there are three different approaches a company can take to go about processing and creating a car. Based on the options presented, the first two options seem to be the most cost-effective option. However, this is dependent on the product being produced. For a company looking to cut costs while also continue processing, a free trade zone proves to be the most cost effective. A company focused on storage and logistics, then a customs warehouse is more effective.


Customs Warehousing and Free Trade Zones

Customs Warehousing and Free Trade Zones

Taxes and Cost

In the current free market, there are some options an exporter may take to ensure they produce their products efficiently and cost-effectively. For a company considering moving their products abroad, there are some main concerns that a company must consider moving into an international market. The most important factor to a company’s profit in this case would be import taxes, value added taxes, and commercial policy measures. This is where both customs warehouses and free trade zones play an important part in trade. Both customs warehousing and free trade zones provide an opportunity for exporters to defer these taxes and provide special treatment for goods and storage.

In fact, by deferring value added tax until the point of exportation, businesses have reported up to 25% to 30% overall savings. This is due to the high levels of VAT taxes the Spanish government imposes on imports. With the VAT tax rate being at approximately 21% for most goods, the overall total customs estimate totals between 20%-30%. The total customs estimate is just the combination of costs due to duty, VAT tax, and customs fees. In the United States, this burden is less with total customs rate imposed is approximately 10-20%. These are savings that can be allocated into other areas of logistics for the distribution of cargo.

Overview of Differences

While both storage options offer a good tax incentive, there are other variables that make either one of these options more fitting for the right company. For exports in the United States, there is a time limit of five years set for goods to be held in bonded warehouses, whereas they can be held indefinitely in a free-trade zone. However, for this time limit is not present in the European Union. This opportunity allows for companies to delay introduction of a product to market until there is greater demand. Listed below are some important distinctions between the two:

  • Domestic Reach – Custom warehouses allow for quick domestic response to domestic demand.
  • Restricted Goods – Restricted goods are only limited to customs warehouses.
  • Processing – Only processing that does not fundamentally change the product is accepted in customs warehouses. Manufacturing can take place in free zones.
  • Allowable Exports – Custom warehouses are exclusive to only foreign exports while free trade zones are open to both foreign and domestic goods.
  • Duty Payment – Payment of duty is made once the goods leave the customs warehouse or exits non-custom territory. However, movement can be made between free zones.
  • Control of Goods – Local customs officials are in control and supervision of stored goods in customs warehouses and their movement. In contrast, free trade zone officials have full control of the stored product.
    • However, customs warehouses carry the added benefit of offering logistical services for transport, packaging, waste management, etc.
  • Ease of Withdrawal and Removal – Withdrawal from a customs warehouse is done with permission from Customs and must be withdrawn in its entirety. A “as-needed” withdrawal requires special permission. Goods in free trade zones can be withdrawn more freely.

Here is a table summing up the differences between the two options:

Conclusion

Overall, the choice behind what kind of storage option is right for your company is based on what the end goal and necessity is. A customs warehouse is geared more towards a company that has more manufacturing capabilities. A free trade zone is more geared towards international trade. As it stands, it may seem to the average consumer that the more cost-effective and freeing choice is a free zone. However, a company must acknowledge the savings on taxes and its comparative savings on logistics. If the goal is to focus on a more domestic market with an international product, a place where supply needs to be satiated at a moment’s notice, then a customs warehouse would likely be a better option. This allows for less customs red tape and for a more dynamic procedure. For a more international focused trade, free trade zones may prove to be more cost effective. Ultimately, the goal is to reduce the amount of cost a company incurs and maximizing logistical output.