Shipping to Canada? Five Secrets to Logistics Efficiency.
The breaking point for this Pennsylvania-based musical instruments manufacturer came when shipments to its Canadian music store customers not only arrived late but store managers had to physically travel to a warehouse to pick up the shipments. The situation was further exacerbated when the store managers were presented with unexpected invoices for duties and brokerage fees.
For the U.S. manufacturer, this was a perfect storm of logistics failures. Everything that could have gone wrong did go wrong, there was no plan B in the supply chain. When the manufacturer demanded an explanation from its logistics provider, it became clear that the two parties had neglected to agree upon the proper terms of service for deliveries – a critical oversight in international shipping.
What should have happened was for the manufacturer and its logistics provider to determine precise conditions and responsibilities for the shipment, as set forth in an internationally recognized list of rules known as IncoTerms. But since that discussion never took place, the manufacturer mistakenly assumed the logistics provider would pay all customs-related fees and ensure final delivery to the retail locations.
In fact, many businesses give little thought to terms of shipping, and instead they trust that their logistics provider is “on the same page” and will automatically provide the required services. In many instances, that is precisely what happens. But as the above example illustrates, when things go awry, they can have serious consequences.
Choosing the correct shipping term is just one of several lesser-known variables that are important in the cross-border shipping process. Other factors include:
- Consolidation efficiency
- Opportunities for duty relief
- Advantages of using a non-asset-based
- Awareness of the limitations of most
- Canadian carriers
In a perfect world, an experienced logistics partner would intuitively go the extra mile to ensure a customer’s international shipments take advantage of every opportunity to guarantee efficiency and manage costs. It’s not a perfect world though, which is why it’s helpful for a business to have a basic understanding of some of these important concepts that sometimes go unmentioned.
As the Pennsylvania musical instrument manufacturer learned, a little understanding can go a long way both in improving efficiency and ensuring that the right logistics provider is on board to oversee the cross-border process.
#1 Consolidation Can Improve Shipping Efficiency and Reduce Costs
Combining smaller shipments into one larger unit can be a tremendous source of savings. But not every carrier has this capability, and of those that do offer the service, not all perform it well.
Consolidation can be accomplished in a number of ways: placing multiple orders in the same carton, banding multiple cartons together, palletizing shipments, or using a full truck. By some estimates, consolidation can reduce freight costs by as much as 10 percent.
With regard to border clearance, a consolidated shipment can cross the border as a single unit, thereby reducing clearance wait times and associated fees. Once across the border, a consolidated shipment is then broken down, sorted, and directed to the appropriate distribution channel
#2 Choose the Correct Terms of Shipping (Incoterms)
A business that contracts a transportation provider to deliver its eCommerce shipments to Canada likely assumes that shipments will be delivered to the address printed on each package’s label. But to the transportation company, it is very possible that “delivery” means to a warehouse or transportation depot.
“Delivery” is one of many basic components of international shipping that, if left to chance, may lead to miscommunication, late deliveries, and frustrated customers. To minimize the risk of chaos, it’s essential for the shipper and carrier to agree – ahead of time – which party will take responsibility for various parts of the shipping process, including delivery, insurance, and tariffs. This is accomplished through an internationally recognized set of standard terms – called Incoterms – that establish the rules of the road. Because of Incoterms, a shipper in the United States will have the same understanding of what is meant by “risk” as a shipper in Japan, Mexico, or any of the more than 140 countries that have adopted the standards.
Incoterms is shorthand for “International Commerce Terms,” and they are developed and maintained by the International Chamber of Commerce (ICC), located in Paris, France. The first series of Incoterms was adopted in 1936 and provided a common understanding of specific trade terms.
Group One – Incoterms that apply to any mode of transport:
EXW Ex Works
This means that the seller delivers when goods are placed at the disposal of the buyer at the seller’s premises or another named place (i.e., works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle.
FCA Free Carrier
This means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for unloading. If delivery occurs at any other place, the seller is not responsible for unloading.
CPT Carriage Paid To
This means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed-upon place (if any such place is agreed upon between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
CIP Carriage and Insurance Paid To
This means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed-upon place (if any such placed is agreed upon between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
DAT Delivered at Terminal
Means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay; warehouse; container yard; or road, rail, or cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
DAP Delivered at Place
Means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
DDP Delivered Duty Paid
Means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport, and ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and important and to carry out all customs formalities.
Group Two – Incoterms that apply to sea and inland waterway transport only:
FAS Free Alongside Ship
Means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
FOB Free on Board
Means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that point onwards.
CFR Cost and Freight
Means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
CIF Cost, Insurance, and Freight
Means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
According to the International Trade Administration (ITA), the most common Incoterms include:
- EXW (ExWorks)
- FOB (Free on Board)
- CIF (Cost, Insurance, and Freight)
- PT (Carriage Paid To)
- DDU (Delivered Duty Unpaid)
- DDP (Delivered Duty Paid)
Delivered Duty Paid is the only Incoterm in which the seller assumes responsibility for the entire transaction, including all customs-related fees and tariffs. Thus DDP can be a highly efficient option for eCommerce deliveries sent directly to consumers or for businesses that choose to offer customers a “landed cost” at time of purchase.
Keep in mind, though, not every country allows non-resident businesses to collect taxes, which would preclude the use of the DDP option.
However, Canada offers U.S. businesses the option to participate in its Non-Resident Importer program, through which registered businesses are permitted to collect Canadian taxes at time of purchase and act as importer of record in clearing goods into that country.
The ITA reports that “most B2B eCommerce agreements will use EXW, CPT, or CIF,” while most business-to-consumer (B2C) transactions will use either CPT, CIF, or DDP. “With the exception of DDP,” the agency notes, “the Incoterms mentioned above require the buyer to pay all tariffs and taxes upon arrival.”
The choice of Incoterms will vary based on the type of shipment, mode of transit, and intended destination. A business shipping goods to its own facilities, or to a manufacturing facility, may want to maintain responsibility for the shipment, while a retailer shipping to its consumers may find it more feasible to entrust that responsibility to its shipping partner.
#3 Consider the Advantages of a Non-Asset-Based 3PL
Logistics capabilities have come a long way, and shippers now have a wide range of options to choose from in determining their shipping strategies. Shippers no longer have to settle for services that don’t fit their precise needs or adapt their shipping schedule to meet a transportation provider’s one-size-fits-all service offering.
As eCommerce and consumer expectations have increased pressure on retailers for faster, more flexible, and less costly – preferably free – shipping options, smart logistics providers have stayed a few steps ahead with innovative, ideal solutions.
In most instances, more flexible logistics providers tend to be “non-asset based,” meaning the company does not own its own trucks, trailers, distribution facilities, or other logistics-related equipment. Instead, a non-asset-based 3PL relies on relationships with transportation providers, warehouses, and distribution centers. A non-asset-based provider will negotiate with the owners or managers of these assets and provide each customer with a customized solution.
Since a non-asset-based 3PL is not restricted to using only its own assets, it generally has greater flexibility in building solutions. A non-asset-based provider can take a big-picture view of all possible solutions – across multiple asset owners and carriers – and determine the best course to fit a particular shipper’s needs. In some instances, this may include combining services from multiple operators or an intermodal solution that includes a rail or air component.
Key non-asset-based 3PL benefits typically include:
Flexibility. The fulfillment manager at an Ontario-based healthcare products distributor expressed frustration with its logistics provider – a non-asset-based provider – because shipments were picked up each day at 4 PM, which did not give employees much time to process
daily orders received from doctors’ offices. The problem stemmed from the fact that doctors’ offices did not submit orders after the end of their busy days but generally needed to have supplies restocked via overnight shipments. Since the distributor was unable to have the orders filled in time for the 4 PM pickup, the manager faced the choice of having shipments arrive at the doctors’ offices late or having a staff member drive the shipments each night to the logistics processing center in order to make the next-day delivery window. Faced with these less-than-ideal options, the manager instead picked up the phone and called the logistics provider’s customer service representative and was delighted to learn that the pickup time could be pushed back to 7 PM. Problem solved!
The logistics provider was able to accommodate this request by switching the pickup to a different carrier. Because the provider was not beholden to using its own assets, it was able to take a big-picture view of all available service options and then lock in the most ideal option.
Transit Time. Non-asset providers can also help reduce transit times through direct line-haul service, thereby avoiding multiple stops and distribution center stopovers. One Southern California sporting goods manufacturer with retail customers located throughout Canada now has its shipments arrive in Canada days faster than it could previously. The reason? The manufacturer switched to a non-asset provider that takes advantage of a direct line-haul, which ensures direct service to the border with no stops or distribution center layovers. This is a significant time savings since, as reported by Logistics Management, a bypass solution can eliminate 7–14 days from the supply chain. The shortened distribution cycle is a lifeline for businesses trying to rush products to market and for those simply trying to control costs, meet customer delivery windows, and better manage transportation spend.
Scalability. Businesses with broad variances in shipping needs require solutions that allow service levels to fluctuate based on need. A garden equipment supplier that sees a huge spike in shipments during warmer months, for example, would benefit from a solution that allowed it to scale up service levels during peak periods and to scale back during slower months.
Scalability is also very important for retailers during the busy holiday period and for eCommerce businesses that may want to offer different tiers of service, including next-day or two-day delivery.
Non-asset-based providers can work with shippers to identify their precise needs and then draw from their wide pool of suppliers to build customized logistics strategies.
Cross-Border/Global Reach. Shipping across an international border – any international border – requires capabilities that can only come with experience. These capabilities include knowledge and insight about customs/border clearance requirements, access to distribution within the international market, experience with that market’s infrastructure, local customs, and expectations. Did you know, for example, that Canadian is officially a bilingual country and all labels must be prepared in French as well as in English?
A non-asset-based 3PL will have access to a wide network of international providers from which to ensure service to a specific market. This will include the ability to provide critical last-mile services and ensure on-time deliveries. Since non-asset-based providers are in the business of developing seamless, integrated solutions, building and maintaining an international network of service providers is often a core capability.
#4 Take Advantage of Opportunities to Reduce – Even Eliminate – Duty Assessments
Most businesses understand that payment of duties is an integral part of international trade. But savvy businesses know there are ways to minimize duty obligations, which can result in considerable savings.
Duty relief for U.S. businesses is available in a number of ways, including government programs, free trade agreements, and effective application of tariff classification codes. But understanding how each process works, and how you may be able to take advantage, can be highly confusing.
Free Trade Agreement Benefits. The United States currently has in place 13 free trade agreements that affect trade relationships with 20 countries. (The most lucrative trade agreement, the North American Free Trade Agreement “USMCA”, which directs trade between the United States, Canada, and Mexico, is set to be replaced by the United States – Mexico – Canada Agreement “USMCA” if approved by the three countries’ legislatures, possibly during 2019.) In most instances, FTAs eliminate tariffs on qualified goods and commodities. Each FTA includes agreement-specific “rules of origin” that delineate specific qualification requirements.
A key consideration in all FTAs is “domestic content,” which refers to the amount of a product that must include “domestically” produced content in order to qualify for benefits. Domestic content, in fact, was a key consideration in the recent USMCA discussions.
Under the existing USMCA agreement, an automobile must be composed of at least 62.5 percent of North American parts to be imported duty free. The proposed USMCA gradually increases that requirement to 75 percent by 2023.
Determining FTA eligibility can be a very complicated process, but since the benefits can be quite lucrative, it is often time well spent. The International Trade Administration administers an “FTA Tariff Tool” to help determine a product’s likely tariff liability upon importation to any FTA-partner country.
Assign the Correct Tariff Classification Code. Every product entering Canada must be assigned a 10-digit classification code, which is used to assign tariff obligations, to determine FTA eligibility, and for additional classification purposes. The U.S. imposes a similar 10-digit classification requirement. For both the United States and Canada, the first six digits of the tariff classification code are rooted in the internationally accepted Harmonized System (HS) administered by the World Customs Organization.
Countries then supplement the HS with unique additional code numbers. The U.S. listing of codes is called the Harmonized Tariff Schedule of the United States, and importers are responsible for applying the correct 10-digit code to each product. In Canada, codes are also 10 digits and can be found in that country’s “Customs Tariff 2018” listing.
In many instances, identifying the correct code can be difficult since only slight nuances distinguish one code from another. But, in the rules of international trade, there is only one correct code for each product, and it is up to the shipper to ensure the correct code is assigned.
This is often easier said than done with Canada’s Office of the Auditor General reporting that 20 percent of shipments arrive at the border misclassified. An improper tariff classification can have important – and expensive – consequences, including:
- Overpayment of tariffs
- Missed opportunity to benefit from free trade agreements
- Missed opportunity to claim duty drawback
Duty Drawback – A Refund on Certain Import Duties. U.S. exporters may be eligible for a refund of up to 99 percent of import duties, taxes, and fees paid on goods that are subsequently exported or destroyed. The refund is called a “drawback,” and although the U.S. government has offered this trade incentive for more than 200 years, it remains a severely underutilized program. This is largely due to its highly complicated application, documentation, and record keeping requirements.
The U.S. Congress attempted to simplify these requirements with legislation that took effect in February 2018, but most eligible businesses still have yet to take advantage. As a result, an estimated $2 billion in drawback funds – money legally entitled to U.S. businesses – goes unclaimed each year.
The core concept of drawback is to encourage exports of U.S.-manufactured products to international markets. A business may choose from one of the four main types of duty drawback:
Manufacturing Direct Identification Drawback. Drawback may be claimed for duties paid on imported materials used in the manufacture of a product when the materials can be traced through the entire import and export process. An example would be buttons that are imported from Germany, sewn onto dresses manufactured in the U.S., and then exported to Canada. Since the buttons remain in the same physical condition and are identifiable, and assuming a precise paper trail can document the buttons’ history, the manufacturer may be eligible for direct identification drawback.
Manufacturing Substitution Drawback. Substitution is used more frequently than the direct identification option. Under substitution, a business may swap out “same kind and quality” merchandise in place of the “exact” original product. The substituted product must be of the same quality and perform the same function. For example, if a business imports a batch of chemicals that are then combined with identical, domestically produced chemicals, there is no way to separate out or track the imports. Instead, a claimant can validate a claim using the substitution option.
Unused Merchandise Direct Identification Drawback. This applies to merchandise that is imported and subsequently exported or destroyed within five years without having been used. As the product is exported or destroyed, a business will have to show that it is the same item that was originally imported. This can be proven through an identifying mark such as a serial number.
Unused Merchandise Substitution Drawback. This applies to situations in which U.S. Customs and Border Protection (CBP) permits a claimant to swap “commercially interchangeable” merchandise. This is a similar concept to the “same kind and quality” swap used with the manufacturing drawback. Following is an example of the unused merchandise substitution drawback as presented by Neville Peterson LLP: “Acme Corporation imports 1,000 ‘Type X’ transistors, paying customs duties of $200 thereon. Within three years, Acme exports 1,000 domestically made “Type X” transistors. The exported transistors are completely fungible with the imported transistors, are in the same condition as the imported transistors, and have not been used in the United States. Upon compliance with applicable customs regulations, Acme may claim a drawback equal to 99 percent of duties paid on the imported transistors, i.e., .99 X $200 = $198.”
It is possible then, in some cases, for a business to mitigate the impact of tariffs and duties, thus gaining a competitive advantage over competitors. However, any mistake can be costly. Improper claims can result in penalties and fines, and will also set off alarm bells within CBP, increasing the chances of an offending business being subject to a compliance audit. An experienced logistics provider will ensure its customers avail themselves of all potential duty relief opportunities. If your provider has not raised any of these options with you, it may be in your financial interest to bring up the subject or consult with a third party with customs expertise.
#5 Most Carriers Do Not Offer Comprehensive Coverage Throughout Canada
Many U.S. businesses have learned the hard way that most carriers do not offer comprehensive coverage throughout Canada. Instead, upon arrival at the border, shipments are often transferred to a Canadian service provider, which often means the shipment leaves the U.S. carrier’s chain of custody, resulting in a loss of visibility and control.
The transfer to a Canadian carrier is exacerbated by the “regionalization” of many service providers. Most Canadian carriers only provide coverage to certain provinces or within a specific radius. Among Canada’s leading trucking companies, for example, service limitations are in place, including “transport between points in Ontario and Quebec, Western Canada and Intrawest services,” “service mainly to Western Canada,” and “service to Edmonton, Victoria, Vancouver, and Regina.” One leading trucking company proudly advertises itself as Canada’s leading ice road trucking company and “the last frontier of trucking in Canada’s North.”
This means a U.S. retailer – or its U.S. logistics provider – with shipments headed to multiple destinations will have to patch together a network of carriers to reach different regions. In doing so, a retailer essentially entrusts the critical last mile to an unknown entity.
A U.S. business can prevent this patchwork approach by choosing a logistics provider with a distribution network in place to service all of Canada. For example, how better to ensure access throughout Canada than to partner with…the postal service? Certain savvy logistics providers have done just that and use their partnerships with Canada Post – Canada’s national postal service – to ensure delivery throughout Canada, including service to the more remote outer provinces and territories.
Comprehensive service throughout Canada does exist, but a business must take the time to carefully research a potential logistics provider and make sure it has the required service capabilities.
Purolator. We deliver Canada.
The Canadian Trade Commissioner Service (TCS), which is charged with identifying and promoting trade opportunities for Canadian businesses, described the importance of smart logistics by noting: “Shipping and delivery are critical for exporters to get their goods to market, yet they often remain a mystery or an afterthought.”
A representative of the Ontario regional office of the TCS expanded on that comment with: “Shipping is always a challenge; a lot can go wrong. Once you put your goods on the truck or boat, they’re out of your control. The key is to manage that lack of control.”
A good place to start to “manage that lack of control” is by focusing on some of the less- understood aspects of the cross-border shipping process. This includes being aware that not every logistics provider is an expert in U.S.-Canadian shipping, and therefore they may be unable to offer the same level of value-added services – customs insight, streamlined shipping strategies, comprehensive service – as a provider truly experienced in the Canadian market.
Having an experienced logistics partner can mean the difference between success and failure in the Canadian market. A business will find, though, that with the right partner on its team, accessing the Canadian market can be a highly rewarding, relatively straightforward experience.
Purolator is the best-kept secret among leading U.S. companies who need reliable, efficient, and cost-effective shipping to Canada. We deliver unsurpassed Canadian expertise because of our Canadian roots, U.S. reach, and exclusive focus on cross-border shipping.
Every day, Purolator delivers more than 1,000,000 packages. With the largest dedicated air fleet and ground network, including hybrid vehicles, and more guaranteed delivery points in Canada than anyone else, we are part of the fifth-largest postal organization in the world.
But size alone doesn’t make Purolator different. We also understand that the needs of no two customers are the same. We can design the right mix of proprietary services that will make your shipments to Canada hassle-free at every point in the supply chain.