The investigation of the effectiveness of factors taken into account when choosing Incoterms, carrier selection criteria, and carrier relationship management in the British American Tobacco corporation is the primary goal of this paper. Contracts are made between the shipper and the carrier every time commodities, products, or raw materials are moved from one location to another. These agreements, known as Incoterms, regulate the international transfer of products (Fugate, Davis-Sramek, & Goldsby, 2009). Cigarettes, electronic cigarettes, and other tobacco products are all made by British American Tobacco Corporation. This business is a significant global corporation with a trademark product available in more than 200 markets throughout the world. It has factories located in 42 countries with 44 production companies. BAT has consistently been among the top ten most performing companies in the London Stock Exchange market. By the close of business in the year 2016 BAT sold 665 billion cigarettes. The famous brands of cigarette produced by BAT are Dunhill which has been the famous global brand, Rothmans, Pall Mall and Lucky Strike. Other international brands include State Express 555, Peter Stuyvesant and Vogue (Grath, 2011).
The main competitors of BAT include Philip Morris International Inc, Swedish Match AB, and Imperial Brands PLC. Since 2014 BAT has redefined their strategies through the development of sustainability agenda. This agenda focused on three key areas which are farmers livelihood and sustainable agriculture, corporate behaviour, and harm reduction (Hofmann & Lampe, 2013). These three issues are imperative fundamentals of a business apart from being sustainability issues. These issues ensure that BAT has a continuous focus on issues which are of most importance to the stakeholders of the company (Lu, 2003).
Incoterms Selection Consideration
International Commercial Terms (Intercoms) is the international standard for the explanation of trade terms. Trade term is a brief catalogue highlighting obligations of both the seller and the buyer during delivery of a product. Every buyer and seller must understand the content of each term so that they know who is in charge of what during delivery of a product. Meaning that the traders need not mention who is in charge of what, or who take the risk of delivery, the cost of transportation, documentation, formalities, and insurance. In transportation, there are eleven trade terms under four categories three of which are for departure and one category for arrival:
Departure
E- terms. Under this category, goods are located at the seller premises awaiting buyer’s collection. The only term under this category is
Ex Works (EXW) – Under this term, the seller has the minimal obligation as the buyer is the sole contractual transporter of the product from the seller’s premises (Clifford, William, Randall, & Thomas, 2010).
F- Terms. In this term, the buyer takes the responsibility for the risks and cost of the main international transport. Terms under this category include FCA, FAS, and FOB.
Free Carrier (FCA)- The main obligation of the seller under this term is to load the product into the collection vehicle which is provided by the buyer. Under this term, some countries allow for the seller to deliver the product to the buyer at an agreed place/destination but using means of transport paid and provided for by the buyer. Export charges are catered for by the buyer under this term.
Free Alongside Ship (FAS) - This term simply means that the seller delivers the good on a barge or a quay selected by the purchaser at a specified shipment port. In this case, it is the responsibility of the seller to clear the products for exportation. However, the main international transportation is organized by the buyer or by the seller upon request and agreement that the buyer takes all the costs and risks (Choudhary & Shankar, 2013).
Free on Board (FOB) – In this term, the seller places the goods on board the transportation vessel or follows set customs on the port of departure. The responsibility of clearing the goods for export lies with the seller. However, the buyer organizes and caters for main international transport. In other circumstances, the seller may organize for the carriage at the expense of the buyer upon request and reach such arrangements.
C-Terms. Under these terms, the seller of the good caters for the main international transport, but the seller bears no risk thereafter since the freight is prepaid. There are four terms under this category which are CPT, CIP, CFR, and CIF.
Carriage Paid To (CPT) – In this case, the transporter is contracted to transport the good from one point to the other. The seller transfers the risks to the contracted transporter at the point of departure. The transportation cost is included in the selling price meaning the seller pays for the carriage. In simple terms, CPT refers to the carriage to a specified destination and not cost paid to the destination (Clifford, William, Randall, & Thomas, 2010).
Carriage and Insurance Paid to (CIP) – This term includes all the conditions under CPT with the only addition to procurement of cargo insurance. The insurance covering the goods on transit up to an agreed destination is procured and paid for by the seller. However, the advantage is that both the buyer and the seller can be allowed to purchase the covers in their countries to minimize charges resulting from the difference in currencies. The insurance cover taken is to the benefit of the buyer since they are the ones with the insurable interest (Branch, 2009).
Cost and Freight (CFR) – Under this term risk is passed at the port of departure at the point where the seller places products on board transportation vessel, Moreover, the seller caters for the main international carriage up to the agreed port of destination. The risk of goods on transit is for the buyer while the cost is taken care of by the seller.
Cost, Insurance Freight (CIF) – This is a modification of the CFR with the modification being the requirement that on the interest of the buyer, the seller purchases insurance cover for the cargo (Choudhary & Shankar, 2013).
Arrival
D- Term. In this case, all the risks and cost are the responsibility of the seller up to the final country of destination. Terms under this category include DAT, DAP, and DDP
Delivered at Terminal (DAT) – The delivery, in this case, refers to the seller placing the good at the disposal of the buyer after unloading it from the vessel of the carriage at the port or terminal destination. The terminal, in this case, refers to any place (such as container yards, warehouse, air cargo, rail or road terminal).
Direct at Place (DAP) – Importation charges are catered for b the buyer and the obligation of the seller is to deliver the goods at an agreed place ready for unloading
Delivered Duty Paid (DDP) – In addition to the obligations of DAP, the seller is charged with the responsibility of obtaining all official authorizations and pay all other charges involving importation (Bowersox, Closs, & Cooper, 2002).
Among all these Incoterm British American Tobacco company should choose Incoterms that are of the arrival category (DAT, DAP, and DDP) for the acquisition of raw materials and Incoterms of the departure category for the supply of the final products (Branch, 2009).
Carrier Selection Decision
The process of decision making is the point that involves carrier selection and choosing the mode of transport to use. This stage is important in the evaluation of carrier performance, levels of services and negotiated rates, selection of the mode of transportation and carrier which are the most relevant transportation performance variables. According to Esper and Williams (2003) carrier and mode selection is the most important aspect of transportation management. Reason being the likelihood of shippers reducing the volume of carriers with whom they perform business with. BAT as a company has high volumes of cargo to be transported from the 44 factories or to the factories in over 42 countries. The finished products are to be exported to other countries and thus a reliable carrier and mode of transport are at the top of the list of transport manager. Moreover, carrier companies also prefer dealing with clients who deal in large volumes of shipments and are consistent for a long time.
Carrier selection process involves behavioural approach including organizational and environmental factors. The effectiveness of the entire transport department of any organization greatly depends on the performance of the transport carrier. For this reason, the process of carrier selection is very significant to the success of any company (Aizenman, 2004). However, market dynamics may call for the change of mode and carrier that a company has used for a long period of time. There are five factors that influence the carrier selection which are environmental issues, characteristics of a customer, features of the cargo (product), the structure of the market and philosophies and features of the transporting company. First, environmental issues can influence Carrier selection decision in that in some countries state (governments) have significant influence in the policies governing transportation. Second, characteristics of the customer directly affect the profit margin of a company. For example, customer order circle, after sales service requirements and the profile of a customer directly affect the profitability of trading with the customer. Third, characteristics of the product such as weight, size, and shape are factors that determine the mode and carrier selection. Next, in markets that are highly competitive delivery time maybe the difference between purchasing from a specific company and not a competitor. Finally, operation strategies of a company must be taken into consideration when selecting a carrier. Since transport manager must operate within guiding principles, strategies and philosophies of the company.
Based on a model developed by Esper and Willliams (2003), four carriers selection decisions stages exist. These stages include recognition of the problem, search, choice, and evaluation of the choice. First, the recognition of problem stage involves answering or finding solutions to the changing distribution patterns of the company, challenges facing the existing mode of transport and type of order made by the customer. Second, the transport manager carries out a search on the past experience of the carrier being considered, their sales calls, records of their shipping, brochures and customer reviews. Next, the stage of choosing a specific Carrier involves analysis of the search results and other executive decisions. Finally, the chosen mode and carrier is evaluated based on cost studies, delivery and one-time pickups, reviews of claims and damages, or in some cases BAT use statistical analysis in the evaluation of a carrier (Esper & Williams, 2003).
Carrier Relationship Management
In logistics, the statements “time is money” applies perfectly. However, concentrating on money or time aspect of transport management to the extent of excluding other factors such as management of the relationship between the carrier and the transporting company, can end up not saving time or money (Meixell & Norbis, 2008). For instance, too much attention on cost reduction can result in unintended negative consequences, over stretched carrier might be forced to take regulatory short cuts, decrease the number of quality staffs assigned to a particular shipment, lower the priority given to your shipment. In as must these strategies are aimed at reducing cost but they are on the other hand increase the chances of making mistakes, damaged or delayed shipment, violation of safety rules or results into hefty penalties and reduced customer confidence (Del Rosal, 2013).
The answer to the problems above is collaborative carrier relationship management. The relationship between shippers and carriers should be a collaborative one in which both parties forming a team dedicated to balancing performance and costs. These can ensure that both the parties are successful in the long-run (Bowersox, Closs, & Cooper, 2002). How to achieve this depends on the understanding and respect of each other’s goals hence attainment of a visualized and explored solutions. All these require transparency, respectful communication, and honesty among the parties. Some of the ways of improving the relationship are through the negotiation of rates and schedules in good faith, working as a team with the carrier in the identification and implementation of cost- and time-saving innovations, sharing of data and information with your carrier with the aim of improving their overall service delivery (Hein, Laporte, & Roy, 2009). Finally, working together with each other in ensuring that services provided are outstanding in terms of payment time, and to the satisfaction of customers, workers, providers, carriers and the shipper. In the case of British American Tobacco (BAT) the transport manager ensures that carriers relationship is properly managed (Mo, 2003).
Conclusion
Logistics is a key issue towards the sustainability of an organization. As mentioned earlier in the introduction British American Tobacco Company is among top ten companies in the London Stock Exchange market. It cannot maintain such impressive performance if the three aspects of transport management are not properly managed. These aspects as mentioned in the preceding sections include incoterm selection criteria- which involves choosing the best trade terms for transportation of raw materials or finished products (Liao & Rittscher, 2007). For BAT to be successful, the transport management sector recommends selection of terms that fall under departure category for the transportation of their finished products and those that fall under arrival category (DAT, DAP, and DDT) for transportation of raw materials to the factories. Second carrier selection decision is essential in the determination of profitability of BAT and as supported by the extraordinary performance of the multinational the transport management must have chosen the best carries in the market such as DHL (Liao & Rittscher, 2007). Finally, management of carriers aims at the sustainable growth of the company.
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