Incoterms: Strategic Decision Making in Logistics

John Vogt, former Halliburton vice president of global logistics, presents the latest in his series on Incoterms, the internationally recognized set of trade rules that sellers and buyers must follow when devising a contract for the shipment of goods. New installments are published each month in BreakbulkONE.

On the back of his popular series, John will be leading a one-day Incoterms workshop at Breakbulk Americas 2023. To find out more about the much-anticipated session, and how you can save on ticket costs, click here.


The previous article portrayed the issues of using Incoterms strategically and how this impacted logistics movements. This article extends that concept and will explore the use of measurements to manage the processes that are involved. The next few articles will explore decision making using the total economic cost of a supply chain movement.

It is interesting to realize that Lord Kelvin (1824–1907), who invented the absolute temperature scale and determined absolute zero, stated this more than a hundred years ago: “When you can measure what you are speaking about, and express it in numbers, you know something about it… and can improve it”.

A century later, we are still struggling to find measures which can be applied to freight in all situations which are meaningful to manage and improve the network or delivery.

I sat at a recent conference and listened to the CEO of a trucking company saying they were developing data acquisition tools. This is something that any realistic company should have had in place over 20 years ago, let alone be developing today. If one listens to software and consultancy companies, they offer solutions to this problem, which should be inherent in every company involved in trade. Companies who are in the position of poor or no data are in dire straits.

The reasons for this can be boiled down into two major hurdles. The first is that financial data is not organized for a process involving multiple parties or even multiple departments in an organization; it is aimed at ensuring costs are captured correctly.

The second is that many of the terms in trade and movement are not precisely defined. In simple terms, the shipment to a supplier may be a few boxes; to a consolidator this may be a container or more, and to a shipping line this may be hundreds of containers or a whole ship.

If you think this data is a logistics only issue, consider the various date formats with at least three primary layouts of Day, Month, Year, then in America this is Month, Day, Year and then in some parts of the world they use YearMonthDay as a single number. So 01/08/2023 and 08/01/2023 (and you can see how easy it is to confuse these) and 20230801 are all the same date, but only if you know the formatting.

Of course, if you do not know which format the date is presented in, then the first two could be misconstrued and in a computer could produce erroneous results. Until these issues are resolved, the detailed data for deep analysis is stymied, but there are ways to achieve measurements that are meaningful and valuable.

The capability to acquire the data from the company as well as the logistics service providers, or LSPs, is complex and difficult. This difficulty becomes even more complex once the goods are moved internationally. In these moves there are, on average, some 25 different entities involved, and many of them regard the provision of data to a third party as giving away secrets and proprietary information.

But every supplier must know the order information and must ensure it has a POD to match this to the associated cost and revenue. This is also true for each of the entities handling the logistics process in moving the goods from source to end customer. The data therefore is difficult to coherently assemble in a movement from the source to the end customer.

Before we proceed to offer some measures, which are practical, let’s look at what happens if you measure the wrong aspects of the move.

Some measures make no sense but are used to impress unsophisticated clients. Take for instance the airline freight industry that quotes wheels up to wheels down times. These are useless as the need to palletize the goods for easy loading, as well as to unload the goods from the aircraft and then to unpack the goods for distribution take an order of magnitude longer than the flight only.

This is a useless piece of information to the owner of goods; what is required is the time from delivery to the LSP or airline, to the release of the goods to the next LSP for onward movement. The choice of measurement is important because whatever you measure is what you will manage. If you choose a measure that is of no value to your customers, then you are hiding your performance and managing the incorrect processes.

What measure is applicable and practical for every entity of the logistics chain, including the supplier and buyer?

From the supplier and buyer viewpoint, we have the order placement time and date to the final delivery point POD. Statistically – and I understand this causes many people to cringe, but this is important – one can measure the average delivery time simply from this data.

The average does not tell the whole story. A supplier could deliver goods in four weeks plus or minus one week or between three weeks and five weeks. This is not much of a delivery promise and, all things being equal, a supplier that can deliver in say 26 to 30 days would be preferred. We must therefore measure the variability from the average as well.

Now variation is really unreliability in our logistics industry, which is critical for performance, or said another way, lower variability is improved reliability. The variability is measured by the deviation from the average. We cannot just add these variations as, if there are equal numbers of early and late deliveries, the answer is zero.

The correct measure is the standard deviation which reflects the average deviation from the mean for the data as a positive number. The size of the standard deviation reflects the variability – the larger the standard deviation the more there is variation and hence unreliability.

The combination of the average and the standard deviation measures define the performance of a logistics chain. These two measures give sufficient insight into the performance and the management of the chain.

The average and the standard deviation can be measured for the supplier to the buyer in any professional organization, so the overall performance can be measured. But most of the individual entities involved in the movement will also have receipt and dispatch date and time as these allow them to charge for the services rendered.

The nice part of the statistics is that the averages of all the individual entities add up to the overall average and the standard deviations can be summed along the chain. As they are cumulative along the chain, we can say:

• Average of the whole chain = sum of the average of each of the contributing entities in the chain. 
• Standard deviation of the whole chain = sum of the standard deviations of each contributing entities in the chains.

That means that if you have the overall measurement of the average and standard deviation of a logistics chain, as you get data from each segment of the chain, you can determine these measures for these segments and find out which one is contributing to the poor results, or alternatively which one is delivering superior service.

Let’s look at an example and then extract the value of measurements out of this example.

The supplier moved container goods from the USA to Europe and the Middle East. The container deliveries from the USA to Rotterdam port were done on a particular shipping line and showed a sensible average and a small variability. As this was a named day service, where the container ship left on a particular day of the week, every week, the variability was only when goods arrived and were loaded into the container.

All this sets the scene for the problem that measurements identified. The service to Rotterdam also included containers moving onwards to the Middle East, which was done by the same line. The understanding of the supplier was the containers were unloaded in Rotterdam, moved to a ship in Rotterdam, and then moved to the Middle East.

What the measurements showed was that the variability was substantially larger than a move from one ship to another in a port should reflect. Detailed investigation showed the line first called in Antwerp (to the south of Rotterdam), and then moved to Rotterdam where the containers destined for Europe were unloaded as part of its named day service.

Unbeknownst to the supplier, the shipping line had decided to move all the containers, both European and Middle East bound, and then barge the containers back to Antwerp for onward sailing to the Middle East where another ship started its rotation to the Middle East. The measurements revealed the line made decisions that suited them, and the supplier was receiving a less than suitable service.

The line corrected this and unloaded the Middle East containers in Antwerp, and the reliability rose substantially! Without these measurements this would not have come to light.

All this should encourage any company to begin the acquisition of data for measurements. They are the lifeblood of the management of the delivery of your goods, whether they are for a domestic or for an international movement. It should also drive the contracts for service providers to provide the same data for shipments to the supplier or party who appoints them so these can be accumulated, and the performance of the logistics chain can be determined and used to improve… continuously!


John Vogt has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has travelled the world to improve trade. In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness.

PHOTO: vessels operated by Ramps Logistics in Guyana. CREDIT: Ramps