Import Fundamentals

When it comes to importing and managing an international supply chain, the devil is in the detail. New Zealand-based importers face a barrage of decisions around currency and exchange issues, payment terms, insurance and quality control. Once the goods have arrived in New Zealand, these companies must pick their way through a myriad of options for local distribution, warehousing and storage.

So how can a newbie New Zealand-based importer make sure they get the essentials right?

In his time as president of the Customs Brokers and Freight Forwarders Federation of New Zealand (CBAFF), Willie van Heusden has seen many local SMEs learn to cope with these issues.

It may sound obvious, but a key factor for newcomers is ensuring they have sufficient funds to carry themselves through the anxious wait between paying for goods offshore and receiving product in New Zealand a month or more later.

Van Heusden cautions first-time importers to carefully assess buying terms before they sign on any dotted line. Standard international purchasing terms vary considerably, he says, each carrying their own set of risks, opportunities and obligations.

“The most risky is ex-works,” he says. “This is where the supplier is obliged to deliver the goods to the back door of their warehouse. The buyer has to take over the responsibility of getting them to the side of the ship or aircraft and from there onwards. It’s very popular in America.

“Other popular terms are FOB (free on board) or FCA (free carrier) where the obligation changes slightly. It’s up to the individual or company here to decide what risk they want to assume and which buying terms to accept.”

Cultural and linguistic differences can add a layer of complexity to some negotiations. So, too, can the delicate question of asking for a letter of credit.

“If you are dealing with someone for the first time you may need something as robust as a letter of credit,” says van Heusden, “but you need to make sure you don’t offend them either.”

In van Heusden’s mind, many of these issues boil down to quality control: a vital component for any importer wanting to protect their brand.

“Recalls can be costly,” says van Heusden. “And you want to be able to deliver on time, in full. That’s paramount, especially if you’ve got a new product for the market. You don’t want to be assuring someone the goods will arrive in three weeks only to realise your supplier is using a trans-shipment service and the goods are going to be stuck in Singapore or some other trans-shipment hub for a week.”

Once goods arrive in New Zealand, there is a wide variety of local distribution and warehousing or storage options.

“It’s a very competitive market so it pays to do your homework and get two or more quotes,” says van Heusden. “There will always be a cost trade-off between handling distribution and storage yourself and handing it over to somebody else.”

In contrast to their counterparts in Europe and the US, New Zealand importers show a strong preference for managing these operations themselves. Van Heusden says market penetration for third-party logistics (often referred to as simply 3PL) is relatively small in this country. 

“Kiwi companies feel the need to sit on top of their stock and be able to touch it,” observes van Heusden.

He advises new importers to sit down and work out the best business model for their own particular set of circumstances. “If you do [the logistics] yourself you’re entering the area of costs. You’ve got intrinsic and extrinsic costs: the cost of labour but also time, PAYE and HR issues, and other bits and pieces. Or you can outsource all that and make it someone else’s responsibility.”

He points out it’s a very competitive market. Get lots of quotes. There are plenty of warehousing and storage options.

“Make sure the company you select, deals in like products. You want them to be able to display some sort of competency and you don’t want foodstuffs, for example, going in with a non-compatible product.

“Inspect the premises and make sure they are a reputable member of an appropriate industry body such as ourselves, or the Chartered Institute of Logistics or a similar organisation.”

Integrated supply chain management

Like van Heusden, Nick Shier is all too familiar with the inherent complexity of managing an international supply chain from a base in New Zealand. Shier is chief executive of supply chain specialists Viisibility Systems.

His company provides technology to help link the many people and companies involved in importing, and exporting, product in our part of the globe.

He describes a client company which brings in product from China, struggling with a series of non-compatible systems before switching to Viisibility’s integrated technology.

“They have a planning system – that’s internal. They have a purchase order processing system – that’s internal. They need input from the supplier in China who has a different system with different spreadsheets. They also need input from customs and shipping people: all of them using different systems. These technical systems don’t talk to each other at all.

“People raise orders in their own internal systems. That gets faxed off or sent by email. Any further communications about it are by email, phone and pieces of paper, and nobody has a central point where everything relative to that order is kept.”

This scenario, he says, is very common. In this particular case, the company decided to use Viisibility’s web-based integrated supply chain management system. The company now knows exactly what is happening to each order and can easily and reliably keep track of any changes to original plans as market conditions change.

Such systems are ideal for larger companies. For smaller companies, entry level costs start at around a monthly rental of about $5000. The system sits outside a client company’s own server and therefore there are no additional costs for hard- or software.

For SMEs, he says, it’s largely a question of being aware they’re going to have to face how they tie together such complex issues.

“Whether or not they use systems like ours, they need in their mind a mechanism for managing this process.

“We’ve got client companies turning over anything from $5 million upwards. It’s about going into importing with your eyes open.”

Shier says it is possible to ‘make compromises’ using Outlook and Excel. But any systems must be able to reliably tie together information from customers, suppliers, customs, freight companies and warehouse or other storage facilities in a fast and efficient manner.

There are intellectual property issues as well. “For one particular customer, the value proposition was that all information was being held in peoples’ heads and a series of spreadsheets. If anybody left the company all that IP would go with them. Now, the company has the information recorded in one place. That was a major consideration for them.

“The main thing is understanding your supply chain. Don’t take anything for granted. And get as much visibility of your supply chain as you can. If things are going to go wrong you want to know about it before it happens. You want to hear about problems from the people in charge of your supply chain: not from your customers.”

Insurance and liability issues

QBE Insurance (International) is a popular port of call if, or when, things do go wrong. So it follows that the company’s experts know more than a thing or two about how to best manage the intricacies of good supply chain management.

Marine and product manager Graeme Orchard advises SME owner/managers who are new to the insurance and liability issues of importing, to control incidental expenses when buying FOB or ex-works overseas.

“The norm is that the buyer is responsible for the goods from the point that they are loaded on board – obviously that is when the buyer’s insurance for the shipment kicks in,” he says.

“Marine cargo insurance is likely to be cheaper and offer wider cover in New Zealand than that supplied by the seller. Negotiate your own freight charges direct with the shipping company in New Zealand or use a local freight forwarder and use his buying power to get a better deal.”

He says some importers make the mistake of taking the easy way out and getting the supplier to deliver to the door in New Zealand. “But that means you’ll pay them a big margin on the actual costs.”

He advises importers to avoid online transactions where possible unless they have some independent verification that the terms of sale are being complied with.

“It is so very easy to pay for things over the Internet now or to effect funds transfers internationally and this removes some of the safeguards involved with the more traditional letters of credit which are supplied by banks.

“Unfortunately, this sometimes means that the goods may not be of the expected quality, may be damaged, or even may not arrive at all.

“It is highly recommended that businesspeople new to this area employ independent quality and quantity assurance companies – which are available everywhere – to make sure the goods are in accordance with expectations, are properly packed and that everything matches up with their contracts before payment is made.”

Orchard says there have been cases where suppliers have put damaged goods on board and the buyers have paid for the goods.

“In such cases, the buyers’ insurance cover comes into force when the goods come on board and would not cover any prior damage which occurred in the custody of the suppliers. The buyers would therefore have to try to recover their losses from the suppliers: in many instances an impossible task. By using an independent assurance surveyor these risks can be mitigated for a fairly reasonable fee.”

Steve Jacques, QBE’s liability specialist, says that to protect themselves from liability to third parties, it is important that importers or distributors read the small print in any agreement they enter into with a supplier.

“The terms of the agreement may go further than they expect and make them liable for damage or injury caused by defects in the goods. If in doubt, take advice before the terms are agreed.”

Finally, Mike Kayes, QBE’s New Zealand manager, trade credit, advises importers to always ensure that a properly drafted distribution agreement is in force as the first step to managing the risks inherent when importing goods into New Zealand.

“Importers should seek to have the agreement subject to the laws of New Zealand,” he says. “Whenever a contract is subject to the jurisdiction of foreign courts it can prove costly to engage legal representation and may prove difficult to receive a just result in the event of a dispute.”