The ultimate guide for sea freight and shipping from China

By Fredrik Grönkvist

Figuring out how sea freight works is challenging particularly for small businesses. This guide is a well-rounded introduction to shipping and sea freight.

Unlike most sourcing agents I didn’t have a clue about how sea freight worked by the time I set up my first business. Another thing that struck me was the fact that it was, and still is, very hard to find decent information on how sea freight and shipping from China is actually working. I know that this is a big concern for small businesses importing from China and I receive questions about this topic on an almost daily basis.

My hope is that this article is going to provide the reader with a well rounded introduction to shipping and sea freight. In this article, I’ll introduce the reader to the shipping process and some of the things that you better keep an eye on when importing from China.

Incoterms 

Shipping Incoterms are international standard codes that decide when and where cargo shall be transferred between the supplier and the importer.Incoterms may look a bit confusing at first sight, but they are not hard to get at all. Basically an incoterm consists of two components: a three letter code and a city name. The three letters incoterm code specifies “how far” the supplier shall ship the cargo. Basically how much of the shipping you pay the supplier to handle. Based on the incoterm you select, you can let the supplier handle the shipping of products to a nearby port in China or all the way to your front door. I recommend inexperienced importers to select an incoterm that takes the cargo as far as possible. 

FCL & LCL shipping

Sea freight is not exclusive to those importers who purchase large quantities from China. If you want to import by the container then FCL (Full Container Load) shipping is the right choice, it’s also the cheapest mode of transportation if counted by cost per kilogram. However, for smaller buyers LCL (Less than Container Load) is available. In fact, you can basically ship cargo with very small volumes - even less than one cubic meter. See an in depth guide to FCL and LCL shipping here.

Who’s managing the sea freight?

There are two options here, either the supplier or you. I’ll begin with explaining the latter. Letting the supplier manage the shipping is common among inexperienced importers and even we let the supplier manage the shipping from time to time. It’s very simple and all you need to do is to tell the supplier that you want them to ship the cargo as CIF “Port of destination” (you actually have to specify which port you want it to be delivered to) and they’ll do the rest. The downside is that you’ll probably end up paying a bit more than if you would have managed the shipping by yourself.

As mentioned, you can also manage the shipping by yourself. This doesn’t mean that you have to swim all the way to China, pick up your cargo and then swim back home. It can be done from the comfort of your home and office by hiring a shipping and logistics agent. These companies are everywhere and they tend to offer discounts in return for a fairly small yearly service fee. The shipping agent can then manage your shipping,  from the Chinese supplier to a nearby port or a specific location within your country (i.e your warehouse).|
Do I need to pay any fees or taxes in China? 
No, you don’t need to pay any “export tax” when importing from China. However, you will need to pay for transportation to the port of loading in China and the cost for export clearance papers. Both of these are included in every incoterm from FOB (Free on Board) and above so you don’t need to even bother with this unless you select EXW as your incoterm.What about insurance?Insurance is included when you select CIF, that’s why it’s called “Cost Insurance Freight”. However, the definition of the insurance may vary between different shipping companies. When you let your supplier manage the shipping you are not in control of which shipping they select, which is probably the cheapest. I suggest that you contact a local shipping agent if you want to know what the insurance actually covers.Delivery timeThe transit time from China to most locations in Africa, Europe and the US is roughly 29 – 35 days. However, keep in mind that it can take a few days – sometimes up to a whole week – before your cargo is loaded in the port of loading in China. The same thing is true in the Port of Destination, it usually takes two to three days before your cargo is cleared and ready for pick up.

Sea freight is indeed quite slow and this means that importing from China certainly requires a lot more long-term planning compared to domestic product purchases. This has also been a major cause for the recent surge in reshoring in Europe and the US. In general I recommend businesses to place an order at a minimum 3 months before they need the products in their warehouse.What happens when the cargo arrives at the Port of destination?
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Top tips for distributors in frontier markets

Planning on moving goods in Africa? An expert points you to the best path to success. 

Setting up a distribution system in emerging and frontier markets can be a challenging undertaking. Below are a number of issues to consider:

Fragmented markets 
What is the balance between modern and traditional trade? Modern trade (e.g. Shoprite supermarkets) in most African countries, with the exception of South Africa and Kenya, is still in the very early stages of development. The contribution is in the low single digits. Reaching large numbers of traditional outlets (e.g. Mom & Pop, Dukas) is a difficult and costly business.

Product flow and reasons for purchase
How do products flow in the market? Often small groceries purchase product directly from the wholesale channel. The wholesaler is often in close proximity to these outlets (2-5km radius). They provide a basket of goods, and in some cases credit, if they have a good relationship with the small grocery.

Market and key business areas 
Define the key market and business areas. Identify feeder markets and hubs for product distribution.

Regional differences 
Define the regional, urban and rural differences in distribution. 

Channel strategy
How do channels function and operate? Define the key channels, characteristics and key buying decisions.  Are traditional and non-traditional channels well defined?

Outlet base 
In most emerging markets, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base, including the outlet density. A well defined every dealer survey (EDS) is a key component of any successful distribution strategy.

Territory 
When working with distribution partners, does the distributor have the ability to service the territory? Are routes and maps in place?

Services
Assess the service and delivery for each channel and the service partners. Review the key issues with service and delivery and map out the distribution models employed.

Customer service frequency
What is the frequency of product replenishment and reasons for the frequency? Outlets in emerging markets often have limited cash flow and, in some cases, limited space to stock product. Review the required service frequency and the need for micro supply depots or wholesalers.

3rd Party Logistics 
Where do the 3PLs operate in the country?  3PLs often cover the major roads well. However, in emerging markets they normally have a limited footprint in rural areas.

Selection criteria 
What are the key components of a successful distribution partnership? Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organisational structure.

Role definition
When working with distributors, are the roles for the company and distributor well defined? It is important to review the organisational structure and how the company will support the distributor. Ensure that each profile (e.g. salesperson) has a clear understanding of his or her role.

Account development
How should account development be managed? This a critical component of any distributor operation. Not all accounts are equal. In most cases, companies need to prioritize and focus their attention on high value or strategic customers. Companies also need to determine how they will split the account development activities between the company and the distributor.

Value chain
Do we understand the value and margin of partner in the system?

Cost to serve 
What is the true cost to serve? The true cost to serve is sometimes underestimated and companies must have a clear understanding of the cost to serve for both the distributor and the company. In many cases in emerging markets, financial cost centers provide limited data and financial modeling is essential to determine the true cost to serve. Many distributors fail because the remuneration is set too low and not adjusted for inflation on a periodic basis.

Low cost distribution
What local distribution solutions exist in the market that can be leveraged? Often small groceries are situated in congested areas, with narrow gravel roads where trucks can’t enter. In these markets you might find pushcarts, trolleys or motorbikes (e.g. Tanzania). Tapping into their distribution structure can lower cost and increase product availability.

Key performance indicators
What are the key performance drivers? By focusing on the key performance drivers of your business, avoid overextending yourself. Sometimes less is more. Include key performance measurements in your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point in tracking something just for the sake of tracking.

Processes
Are processes and systems well defined and standardised? Always aim to eliminate non-value adding activities where possible. Standard Operating Procedures (SOPs) simplify your business procedures and help to ensure the same quality in all operations.

Skills
What skills need to be recruited or developed? Emerging market operations often lack critical skills.  It is dangerous to make assumptions about what people can and can not do. For any principal working with a distributor, conduct a skills gap analysis to determine the training recruitment needs.

Complexity
Can the distributor handle the level of complexity in the business? In many cases distributors that distribute all SKUs (Stock Keeping Units) to all channels fail. Always aim to reduce the complexity in the business.

Collaboration
How will the distribution partners share information with the company? Too often critical information is only available at distributor level and not shared with the company. Also consider the role that technology can play in information sharing.

Appropriate technology 
What technology is necessary? Evaluate mid tech solutions and identify the “appropriate technology” for your operation. Don’t overdo it.

Patience
How much time do you have? Ensure you have management buy-in. A Route-to-Market roll-out requires patience and a continuous improvement mindset. Small incremental changes can sometimes go a long way.

Regulatory environment
Review the regulatory environment including cross county or district tariffs where applicable. In some countries distributors and transporters are subject to multiple charges for crossing county borders. Assess transport bands (e.g. times truck can enter central business district) and traffic restrictions.

Culture
What are the culture issues? Take time to understand culture issues and don’t assume anything. Change your thinking when working in other markets.

Take note of the evolution
Are you taking the necessary steps to adapt to change? Too often supply chains in emerging markets evolve without any strategic plan. Modern trade and retailing are expanding and middle class consumers shopping patterns are changing. Consider how these changes in the market will affect your distribution.

This article is supplied by Frontier's content partner, The Supply Chain Lab. 

The Supply Chain Lab is is a group of supply chain improvement specialists with a focus on factory to village supply chain solutions in frontier and emerging markets. The company focuses on strategy, assessments and implementation.

Contact Tielman Niewoudt to learn more about the company's focus areas.

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Free download:  How to source goods in Africa

How to manage micro distribution in emerging and frontier markets

There is increased interest in micro distributors and the potential they hold within an inclusive business model.

By Tielman Nieuwoudt

Well documented micro distribution models include the Coca-Cola MDC (Micro-distribution centre) in Africa and Unilever’s Shakti model in India. Micro distributors can be found in emerging and frontier markets where markets are fragmented and modern trade (e.g. Walmart, Tesco) is still in the very early stages of development. Below are a number of issues to consider when activating a micro distribution model.

Advantages of micro-distribution

Entrepreneurial spirit - A micro distribution system allows companies to tap into the entrepreneurial spirit that is so evident in many emerging markets. However, entrepreneurs must have a long term view to ensure the same consistent quality service is provided to customers.

Flexibility - Micro distributors tend to be more flexible in responding to customer needs. For example, they trade longer hours and can also provide weekend and night deliveries. They can act as a credit provider to low income customers. They “live and breathe the streets” of the communities they work in and are in a much better position to control accounts receivables.

Issues to consider prior to implementation 

Channel focus - A micro distribution model is not a one size fits all solution for all channels. Micro distributors generally focus on selected channels in traditional trade e.g. mom & pop shops, Dukas (East Africa) and Spazas (South Africa).

Complexity - Due to the complexity of sale and distribution, micro distributors will likely struggle to service modern trade effectively. It is best to reduce the complexity (e.g. reduced stock keeping units) for the micro distributor, including expected tasks and activities. It is important to understand what the micro distributor can successfully take care of in the supply chain.

Role definition - Companies needs to determine which aspects of the business they would like to control. For example, the Coca-Cola model separates order generation from delivery. This allows the company sales person to focus on more value adding activities (e.g. meeting customers, getting orders) and the micro distributor to focus on warehousing (neighbourhood warehousing) and distribution.

Supply chain impact - When implementing a micro distributors system, companies must assess what impact the distribution model will have on the rest of the supply chain. For example, compared to larger distributors, micro distributors will require smaller drops sizes that will impact the warehouse and transportation infrastructure and processes.

Shared infrastructure - Profit margin are normally thin and it is important to determine if there are any opportunities to share infrastructure (e.g. warehouse, transport) with other non competitive manufacturers and distributors. This can significantly reduce cost and make the distribution model viable.

Regulatory issues - Companies also need to assess the impact that regulatory issues will have on the micro distribution system. This could include business licenses, zoning and transport bands (e.g. restrictions on delivery trucks during peak hours).

Standardization - During the design phase, companies need to standardized processes and systems as it will reduce set-up and training costs. For micro distributors, distributor turnover (the number that close down) is high and it is important to evaluate how set-up and training costs could be reduced.

Support - Micro distributors also have limited resources (e.g. capital, employees) and normally require a bundled approach (e.g. training, finance, process design) to ensure their operations are sustainable and viable.

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