Logistics and Procurement
Logistics and Procurement tests the movement and sourcing side of the chain: who bears cost and risk at each point in the journey, what a supplier really costs, and how sourcing strategy changes with spend and supply risk.
Incoterms 2020
Eleven rules in two families. Any mode: EXW, FCA, CPT, CIP, DAP, DPU, DDP. Sea and inland waterway only: FAS, FOB, CFR, CIF. Key risk-transfer points: EXW at the seller's premises (buyer handles export clearance); FCA when goods are handed to the buyer's carrier, or loaded on the seller's vehicle at the named place; FOB when goods are on board the vessel; CFR/CIF risk also passes on board, though the seller pays freight (and insurance for CIF) to the destination port; DAP at destination ready for unloading; DPU unloaded; DDP after import clearance with duty paid. CIF requires minimum Institute Cargo Clauses C cover; CIP requires ICC A.
Total landed cost
Unit price + freight + insurance + duty and tariffs + brokerage and handling + inventory carrying cost of pipeline and safety stock + cost of quality and risk. Landed cost is the only fair basis for comparing suppliers.
Kraljic portfolio
- Strategic: high spend, high supply risk → partnership, long-term agreements, joint development.
- Leverage: high spend, low risk → competitive bidding, volume consolidation.
- Bottleneck: low spend, high risk → secure supply, qualify a second source, buffer stock.
- Non-critical: low spend, low risk → simplify, e-procurement, purchasing cards.
Worked example
Supplier A quotes $9.40 FOB, freight $0.60/unit, duty 6% of unit price, 45-day pipeline. Duty = 0.564, so landed before carrying = 10.564. Carrying at 20%/yr = 10.564 × 0.20 × 45/365 = 0.26, total ≈ $10.82. Supplier B quotes $10.00 DDP with a 75-day pipeline: 10.00 × 0.20 × 75/365 = 0.41, total ≈ $10.41. B wins despite the higher unit price, because A's duty and freight, partly offset by faster cash release, do not close the gap at these volumes.
Traps
- Reading FOB as risk passing at destination; it passes when goods are on board.
- Believing CIF includes import duty - it does not; DDP does.
- Choosing on unit price alone.
- Classifying a sole-source, low-spend critical component as non-critical instead of bottleneck.