INTRODUCTION TO LOGISTICS IN MEXICO

Author: Jorge Guerrero

Visit: www.door2doorlogistics.com

This book is dedicated to helping visitors learn about international trade basics, since International Trade is as extensive as goods and services are. However, our main focus in the services we provide will be in tangible goods and definite operations; that is one way imports or exports. There exists the modality of temporary operations, such as the maquiladora regime in Mexico; however, we are not offering services to this industry at this time. We want producers and manufacturers from any part of the world to do business in another part of the world by teaching and assessing them how to build their own supply chain, the opportunities and pitfalls we know of, and especially the opportunities and pitfalls they can expect and prepare for insomuch as time and common sense allow for.

LOGISTICS
It's simply moving things from one point to another. Things may be goods like merchandise and anything tangible and services, in the case of money and transport. Objective to Keep in Mind: Obtaining the LOWEST possible landed cost to the target market. The logistics chain or supply chain is what we want to build. You will see the operation as a broker sees the operation, and you will understand why we act the way we act, charge what we charge and the problems we face in sustaining long term customer relations. You will also be made aware that there are times when a broker is necessary in one or more links of the supply chain, no matter how much the Mexican Customs Brokers advise against us. A Customs Broker does not negotiate prices or quantities on products, outsource freight, give advise on duties, taxes, demurrage charges on warehouses and freight, OR integrate their own custom broker fees all to calculate the landed cost of a product. The difference between a Customs Broker and a Logistics Broker is that the Logistics Broker considers the whole supply chain; the Customs Broker only clears the merchandise against the customs authority of their home country once you've paid them the taxes, honorary fees, and provided them with all documentation to clear your merchandise. Customs Brokers are licensed by their home governments to clear merchandise as an Entry in the case of The US for inbounds, and as a pedimento of import or export in the case of Mexico. Logistics consists of three main links: Customs, Transportation, and Finance. Permits belong to Customs to clear your merchandise, contracts may be with the Broker or with any of the links of the chain. I wish I could give you a general spread sheet where you plug in your product and values and you automatically get duties, freight, customs broker fees, HTS classification, and time frames, but it's not that simple. Nevertheless, you must determine your costs, so we can attempt to create a spread sheet which may apply to a number of products. Once you know the supply chain, you have to do your homework to reach these objectives:

1. Determine your main players per link and have at least two replacements for each link. 2. Determine the lowest priced player per link. 3. Eliminate as many intermediaries as possible between buyer and seller, as these will increase your cost significantly, yes even logistics brokers, like me. You may need them initially, but you have to learn to either establish a solid contract with them for long term relationships or learn to live without them and end the relationship gracefully. It's nothing personal, it's just business. You can't do the above in just one swift move, unless of course, your major is international business or similar, as is a logistics broker's. It's also an ongoing process to become good at each step of the link, as there's always new customs regulations, better freight services, and cheaper ways to consolidate international banking operations to pay the whole supply chain. Also, the relationship between buyer and seller runs its cycle, as it matures and ultimately declines and ends, as is natural in all things. You may think I'm an idiot for writing against my own profession. Not at all. By illustrating the possibilities of international trade, I'm trying to encourage confidence between buyers and sellers for them to explore if their product is competitive oversees and hopefully have them buy my products and services at least initially or in some form of periodic contract. When people is in the dark of things and, worst of all, they have bad experiences, they avoid the supply chain, stick to their local market, and spread the word to their friends on their bad experience with international trade. I've made my mistakes in the past, and I don't believe in getting rich by taking advantage of people's ignorance, weaknesses, and yes, sometimes even their own ambition and ill will. I owe humanity a lot more than this site. And there are quality people out there who can increase their wealth by international trade. It's a matter of patience, knowledge, and perseverance. So, no, I'm not shooting myself in the foot. I hope that in knowing people will take a chance at this.

CUSTOMS
It's the most important barrier to international trade and the single indispensible link in the logistics chain. Customs is the governing authority of each country that determines duties, taxes, and non-duty regulations for each product entering a nation. Clear customs for your product, and the rest is just going through the motions of payments and transportation. It would be ideal to clear the product before moving it, but this is not the case. You need to make sure you: 1. Know your product on classification, the duties the classification determines, and any treaties between buying and selling countries. 2. Have the paperwork and permits for your product. 3. Label your product with the country of origin. Objective to Keep in Mind: Finding a customs broker or international broker with whom you have a CLEAR understanding and correctly classifying your products.

A customs broker is the representing intermediary between the trader and customs. Customs is of the government, a customs broker is a business. An international broker may subcontract a customs broker for you; even though you're doing business with the international broker, your product still needs to go through customs and a customs broker. The only difference is in the shift in responsibility. Something goes wrong with customs and the international broker is your business agent, the broker responds, even though the error might've been of the customs broker the agent (international broker) subcontracted. In looking for a customs broker, consider these points: a. Make sure your broker or agent can read, write and speak well enough your own language. There have been cases where the parts did not understand each other and the labeling of the product was incorrect, making the operation a total mess. b. Make sure your broker gives you the attention as a customer and you feel cherished enough as a customer. Customs brokers and agents abound who only pay attention to large customers, as they represent a larger profit for their business, leaving small or medium customers ill attended or simply hanging. One of the reasons this happens is because the broker or agent is not large enough or prepared enough (as software/hardware infrastructure is concerned) to give operations their proper attention. c. Make sure your broker classifies your product correctly, as repeat operations of the same product with a different tariff classification can result in fines for the trader down the road. Many brokers like to classify products so as to pay less taxes or denominate a country of origin which has a preferred duty treatment only to gain the customer; actions that although illegal, the trader ends up paying in fines and trouble they cause when caught by the authorities. d. Find a broker who does not charge on percentage over your invoice total. Unless you're bringing new products they have to classify every time you have an inbound or outbound, find a broker who will charge a set fee for their services. In Mexico they have this ill tradition of charging over the invoice total, something which makes doing business in Mexico very expensive and the operation little profitable to completely unprofitable because of this backward and unjustified practice. The customs brokers, being an intermediary for the Mexican Government, follow in the practices of high honorary fees under the protection that you need to use them under the law, so beware of this when in Mexico or doing business with Mexico. Classify your products Once you have your customs broker, or agent, the customs broker (in Mexico) is the part legally authorized to classify your products. Nevertheless, you can check for the classification they determine against your own with the following sites:

Website US ITC CROSS

Instructions for use Instructions for US ITC Instructions for CROSS

ETCN UK Tariff CAAAREM (Mexico) SIAVI (Mexico)

Instructions for ETCN Instructions for UK Tariff Instructions for CAAAREM Instructions for SIAVI

Basics of the Harmonized Commodity Description and Coding System (HS) Designed in Brussels, Belgium, in the last half of the 20th Century, it is the system of classification of goods accepted by the member countries of the World Trade Organization (WTO). It is composed of 96 official chapters, with chapter 77 reserved for future use (thus making 97), and the first 6 digits of the code are the international base of the classification of the good. The final classification may consist of 8 to 10 or even 12 digits, according to the country of import. Additional chapters such as 98 or 99 may be added for special purposes by each country, for example chapter 98 is for special operations in Mexico, such as the maquiladora regime. So in order to classify a good, you must determine these first six digits and based on these digits you find the complete classification in the country of import's tariff. See the examples in the tabbed control for instructions on each site. a. Tariff goes from General to Specific. That means, the first chapters deal with live animals, live plants, whole grains, metals, chemical compounds and later chapters deal with manufactured goods, such as garments, machines, electronics, toys, measuring devices, etc... b. There are six general rules for classifying goods. You can run a search on an internet search engine under "six general rules for HTS classification". These rules you can also find in the websites I have posted for you if you look for them in these sites. How to interpret and use them is beyond the scope of this assessment. c. It is a good practice to get an official document from the government of the importing country so as to be on the safe side, since fines are hefty and classification of goods is not always clear, regardless of foul play. Once your goods are classified go ahead and calculate the duties for your product. This varies between countries, but the general way follows: CUSTOMS VALUE (CV=Invoice Total-without local taxes + Freight to port of crossing in importing country + changeovers and handling to port of crossing + insuranceif any) +DUTY: CV*15% (for our brooms sample into Mexico) +VAT: (CV+CV*DUTY)*16% (for importing into the interior of Mexico, not frontier zone) ADD: +Customs Broker Honorary Fees +Freight from Port to Warehouse +Unloading in your Warehouse

INCOTERMS are used to determine who will pay for what, but the truth is it's only a shift in responsibilities not in payments. That is, the buyer always pays for EVERYTHING. The seller takes responsibility and charges according to the INCOTERM. For more on INCOTERMS, see our Transportation link above.

TRANSPORTATION
Motor Freight There is a lot to write about motor freight; unfortunately, one of the main determinants of price is the NMFC (National Motor Freight Class) Classification. This code is not allowed to be published to the general public. You can, however, obtain a copy from the Teamster's Site https://store.nmfta.org/ for $260.00 USD. Amigos, I live in Mexico, and have lived to see what harm unions cause. If this classification was nothing that affected the customer, I'd say nothing; however, the fact that it is used and that it is restricted only to a select few or those who purchase their book resembles the backwardness of obscurantism of information. Having said that, the main recommendation I make is to shy away from middle men and forwarders. Seek to deal directly with the transportation company; unless you're using an agent, and he or she has offered transportation as part of the package you're buying. Shop around and ask for the classification class of your product and other possible classifications for you to be convinced your product is correctly classified for freight. If the freight company will not give you this information, look elsewhere. You have the right as a customer to be informed of what you're being charged and to understand what this is as much as possible. There are many kinds of ground motor freight. I will describe a few of the most commonly used for you to know what to ask for when asking for price quotes from different vendors. Flatbeds are used for oversized freight, such as machinery, heavy duty vehicles or the like. They come in single drop and double drop. Double drop are deeper in case you have merchandise that is very tall, say a lathe machine or an excavator. Ask for flatbed rates and see what they offer on single drop and double drop rates. Also, if your goods are very large, you will be charged an overdimension rate. This does not always apply, so be sure to ask. Dry Box is perhaps the most commonly used freight. They come in 48' and 53' lengths. They also come in shorter than 48' and are called piggy boxes. Ask for their rates according to what your shipping out. You can also have a Less than Truck Load price quote (LTL) or Full Truck Load (FTL) according to your needs. Try to use a company which specializes in either/or. For example, use a company which offers only LTL or only FTL. Customs paperwork times change according to the type of freight you're using. LTL companies have to consolidate several shipments, so paperwork needs to be turned in sooner than with FTL companies. Some companies offer both kinds of freight, but stick to a company which specializes in only one kind, though. For dry box freight you need to load your goods in pallets for easy changeovers (loading from one container to another or to a warehouse). Considering pallets, you also need to factor in the cost of these. Some companies offer to rent their own, but don't count on it. Also, if you purchase these, try to purchase them

disposable, as you don't want to pay freight just to ship back your pallets. Consider the pallets part of your cost as a non-reimbursable expense. Refrigerated freight is used when shipping perishable goods such as fruits, vegetables, meat, purees, milk, etc.... This kind of freight is more expensive. In addition to getting a price quote for your freight, you need to look for refrigerated warehouses before you ship out, if you're not using the same container to move goods to destination. In addition to this, consider the changeover and storage charges of these warehouses. Some warehouses give you a grace period of 2 or 3 days for which you need to be aware in the mean time the new freight company comes in to pickup the goods. Dangerous materials freight is used for shipping explosive liquids, chemical compounds, etc... You will need insurance and special permits to transport toxic materials between states and between countries, so do a thorough research on all permits and insurance needed before transporting these kinds of goods. In addition to charging per mile, motor freight companies charge a fuel surcharge, which varies every month according to gasoline prices. Insurance may or may not be covered, so ask about this and if they do offer coverage in their price, what are the terms and up to what amount of money. Last but not least, ask for the time it will take for them to get your goods to destination. It is the case that you may be shipping by ocean freight and the merchandise needs to be at the dock by a certain date, not the date the vessel will ship out. Ocean Freight Just as motor freight, ocean freight can transport all kinds of materials. However, do seek an ocean freight liner, not a freight forwarder. The risk with freight forwarders is they just re-sell you the ocean freight service and take no responsibility for your freight or any spillover costs that may arise. Ocean freight rents you their containers, so you're against the clock for clearing your merchandise before incurring in expensive demurrage charges which increase heftily by the day. With ocean freight, you need to workout the logistics of where you will ship out. For example, it doesn't make sense to ship out of Altamira, Tamaulipas, MEXICO when the container will get changed over at the Port of Houston, TX, USA. Ship directly to Houston to lower both your risk and your cost. Also, there are not that many ocean freight liners in the world and not all of them go everywhere For example, it's very difficult to ship to South America, there are not that many vessels going there, because of decreased economic activity in those countries. You may have a vessel going out once a month or every two months from your nearest port of shipping, so consider this when doing business with Central and South America. Also, ocean freight liners do not contact you seeking your preference. Since there aren't that many, as I already stated, many agents and third parties do the selling for them. Unless the freight company has the policy of only selling through authorized representatives, BUY DIRECTLY from the ocean freight lines, and keep business relations mellow, as you don't

have a lot of options should you burn your bridges with any one of them, and I don't recommend you use freight forwarders. If you must deal with a third party rep of the ocean freight liner, ask for proof that they ARE authorized from the ocean freight company and don't just take their word for it! Rail Road Freight Even fewer than ocean liners are rail road freight companies. These companies also do not deal directly with customers. They use authorized representatives for their selling of freight. Also, they don't go everywhere, either. This kind of freight is great for moving whole grain or metals or cattle at very cost efficient prices. The dealings with rail road companies are a bit bureaucratic, so be sure you're going to have repeat business for your time invested in dealing with them. Also consider, they don't have loading ramps for all kinds of freight at any station. You need to do your research where the nearest loading dock for your goods is located and consider the motor freight transport, switchover, and perhaps storage charges of the operation for loading and unloading your freight between train freight station ramps, as they call them. Air Freight Air Freight is used when moving delicate goods, such as insects such as spiders or very time sensitive goods, such as spare parts for a production line or anything which requires immediacy, as live organs for transplants or the like. I don't have much experience with Air Freight, but my advice remains the same, don't use a forwarder, deal directly with the air freight company. Like Motor Freight, the other type of freights, also called multimodal when you use more than one type of freight, have their own classes for classifying goods. Ask for access to these classes to be on the same page and in agreement with your freight company so as to the type and class of freight for determining the correct rate.

INCOTERMS
Like I stated before, INCOTERMS or International Commerce Terms, shift responsibility from the seller to the buyer. Consider the charts below courtesy of withfriendship.com as increasing in responsibility for the seller and decreasing for the buyer as you move down the road. The images in the slide show illustrate INCOTERMS 2000; although the latest modifications from the International Chamber of Commerce ICC is of 2010, the terms do not change much. The hard thing about INCOTERS, even if correctly used, is the scarcity of arbitration mechanisms. We function as UN-official arbiters as financial intermediaries, but the trick is to get the seller to agree to ship the goods to a point of inspection BEFORE full payment is released. I, in my experience as a broker, know many people don't use them because of the reasons just stated. They are worth considering in the contract and you should celebrate one with arbitration clauses should anything go wrong. One of the easiest ways to do this is to

have your seller have legal representation and assets in your own country for him to respond to legal controversies. We offer the service of arbitration in an effort to protect the buyer and seller until merchandise is inspected at the buyer's port of entry. Should the goods not comply with what was agreed to, part or none of the remaining payment will be released to the seller. For more info on this service, see arbitration in our navigation site menu.

FINANCE
Although it may see self-evident, finance must be carefully considered, as all players of the supply chain must be paid. Consider bank commissions for sending money, as the most expensive commissions are those of sending money abroad. Also, it is an unwritten practice each part absorb their own bank commissions, so consider this when building your supply chain. Following are options to manage your supply chain's cash flow for operations to advance. Direct Bank Transfers The most common and usual form of doing business is a direct deposit from your business account to a third party seller. Consider the contract with each part and pay ONLY after contract has been fulfilled and there are no breaches in the agreement. Also, beware of blackmailing practices, as sellers may refuse to release official documents such as the House Bill of Lading or entry documents for the merchandise to keep flowing to its final port of destination. Letter of Credit Many people refuse to use these, as banks charge a hefty percentage anywhere from 5% to 7% or more on the invoice value for their service; also the contracts with the bank are long and may not be as friendly as you would expect them to be. Small yet Tedious Operations Consider also in this area that you may have to send checks and signed letters, especially when the ocean freight is to release the merchandise to your customs broker's warehouse. You will need to mail these expedited to your broker or agent clearing the merchandise for you It may be a chare no greater than 75 to 200 USD, but it needs to be paid by check and with a signed letter of release signed by the buyer; so consider these times, as demurrage charges can and have made more than one operation go south. Spillover Costs No matter how carefully you do your homework and how thorough your research and informative your contracts with the supply chain are, you're going to run into unexpected costs known as spillover costs. Many brokers and agents hate this term, because it makes

them look bad, but remember it is you who will ultimately pay for unforeseen expenses; these originate from errors in the supply chain, so consider spillover cost clauses in your contracts with the parties and enforce them by deducting them from the outstanding payment to the link in question. Don't let yourself be intimidated by denial of service should they not want to sign the contract or agree to your terms; it is illegal in most parts of the world to deny a publicly offered service and you can always find someone else. Don't be manipulated into emotions, as you're the one who will be paying the whole operation, it's only fair you get your terms secured and salvaged in a contract AND above all DON'T PAY ANY LINK ANYTHING COMPLETELY IN ADVANCE. That is, pay your customs broker until merchandise is cleared, pay the freight until merchandise is released, etc... It will take an extra effort, but it's worth it, especially if you will have repeat operations. Set your terms from the beginning and enforce them with a contract and by not paying anything fully until that part of the chain clears.