PE 425 – BASICS OF COMMERCIAL DIPLOMACY
Online/Distance Learning Course
SECTION 12A
BASICS OF SUPPLY CHAIN AND VALUE CHAIN MANAGEMENT
ALAN L. WHITEBREAD
THE NETWORKED ECONOMY’S IMPACT
ON PORTER’S FIVE FORCES
You need to understand these five forces
to put your firm in the best competitive
position.
Entry by potential competitors
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Rivalry among existing competitors
See Michael E. Porter’s Competitive Strategy [Free Press, 1980] for a comprehensive study.
SUPPLY CHAINS VS. VALUE
CHAINS*
SUPPLY CHAIN
The set of all
value-added business
entities and flows that
perform/support the
logistics functions
required for production.
These focus on upstream
supplier and producer
processes, efficiency,
and waste reduction.
LOGISTICS
VALUE CREATION
Enhancing value by
examining
every single event,
process, and/or system
from raw materials
through
customer satisfaction.
All activities
[regardless of ownership]
that seek to enhance
firm performance through the
efficient systems for
transporting and storing
products.
This tends to focus on
downstream value creation
for the customer.
THE VALUE CHAIN
MARKETING DISTRIBUTION
Firm A
Firm B
}
Potential
Customer A
Customer B
Conflict
Customer C
CHANGE
Requires continual adjustment by all.
UNCERTAINTY IS ASSURED
Choice – Competitive behavior - Negotiations
SUPPLY CHAIN MANAGEMENT
[SCM]
A network that performs the functions of:
– Procurement
• purchasing or materials management
– Conversion of materials into work-in-process
[WIP] and/or finished products
– The management of inventories
– Distribution of products to all resellers and
direct customers
– Creating and improving support systems
THE SUPPLY CHAIN AT WORK
Toyota builds more than 600,000 cars per year in Europe utilizing ~200 1ST
TIER suppliers with more than 400 factories. The number of suppliers grows
exponentially as you go to the 2ND and 3RD TIER suppliers.
UPSTREAM
DOWNSTREAM
STEEL
UPSTREAM
DIRECT
FORD, GM
DEALERS
RENTAL
COMPANY
SUPPLIER
SUPPLIER
CHRYSLER
AGENCIES
3RD
TIER
2ND
TIER
1ST
TIER
OEM
Manage all other tiers.
STEEL
FASTENERS
RADIATORS
Raw materials, semi-finished, and component products
CONSUMERS
BUSINESSES
CONSUMERS
FLEETS
SPECIAL
VEHICLES
VEHICLES
Finished products and components
THE VALUE CHAIN: Basic Functions
The efforts to increase value to any or all entities from raw materials
suppliers through customer satisfaction.
• Firm Infrastructure
– Financing of all needs, planning systems, investor
and certain stakeholder relations, administration
• Human Resource Management
– Recruiting, training, career planning, compensation
systems, benefits, legal HR compliance
• New Product & Technology Development
– Design, development testing, process design,
research of all types
THE VALUE CHAIN: Operating
Functions
• Operations
– Assembly, manufacture, and / or procurement of
components and finished products
• Logistics
– Material flow, order processing, warehousing,
scheduling, shipping, and reporting
• Marketing
– New product development, marketing programs,
sales, integrated marketing communications,
customer relations [installation, support, and repair]
MANAGEMENT NEEDS VALUE
CHAINS BECAUSE OF
• A large and expanding variety of products
• Rapid change in products
• Shorter product life cycles and life cycle
stages
SUPPLY CHAINS
Multiple demand schedules
70
60
50
40
30
20
10
0
1
2
Wholesaler
3
Retailer
4
5
Internet
6
Total
MATERIALS REQUIREMENTS
PLANNING [MRP]
•
•
•
•
•
•
•
•
Master scheduling
Item lead time analysis
Inventory analysis and tracking at all levels
Purchase requirements per time period
Shipment forecasts
Lead time analysis
Purchase order generation
Like Enterprise Resource Planning [ERP]
DEMAND AND MAKE TO ORDER
PRODUCTION SCHEDULE
1000
900
800
700
600
Level loaded facility –
usually the lowest cost
of operation
500
400
300
200
100
0
1
Distributors
2
3
Wholesalers
4
Retailers
5
6
Produced
TOTAL PRODUCTION COST
9,000
8,000
7,000
6,000
5,000
Likely lowest cost
schedule.
4,000
3,000
2,000
1,000
0
1
2
3
Make to order
4
5
Continuous
6
SCM ISSUES
• VENDOR INVOLVEMENT
– Flexible Business Relationships can be part of
any of the following.
•
•
•
•
•
Purchasing agreements
Blanket purchase orders
Single source arrangements
Primary / secondary sourcing
Alliances
SCM ISSUES
• VENDOR INVOLVEMENT
– Infrastructure compatibility
– Packaging [at all stages]
– Packaging shipment systems
• Customer required
SCM ISSUES
• VENDOR SECURITY: CONTAINERS
– Some of many key questions are shown
below.
•
•
•
•
Where have they been?
Where did they stop?
Who had access?
What security exists for transportation and port
workers?
• What are the security checks and verifications
used by your carriers?
THIRD PARTY LOGISTICS
PROVIDERS [3PL’s]
• Outsourced logistics functions include but
are not limited to
– Freight and transportation services, freight
payments, and auditing
– Fleet management
– Carrier selection and rate negotiations
– Warehousing operations
– Logistics information systems
– Supply chain management
BENEFITS FROM USING A THIRD
PARTY LOGISTICS SUPPLIER [3PL]
• The savings for all supply chain functions
in year one generally exceeds the
projected cost of operation.
– Year one freight payment savings
– Year one inventory management savings
– Potentially many more
HOW SHOULD I SELECT A 3PL?
• General Issues
–
–
–
–
Price competitiveness
Financial stability
Experience in the same industry or with similar companies
Ability to service all locations including international
• 3PL Capabilities
–
–
–
–
–
–
Information systems and technology capabilities
Customer service
Capacity and expansion capabilities
Flexibility management style
Responsiveness
The ability to meet or exceed promises
SECTION 12A: REVIEW
• You should now have knowledge
of
– Porter’s Five Forces Model
– How supply chains and value chains work
– SCM issues
– 3PL selection and metrics
PE 425 – BASICS OF COMMERCIAL DIPLOMACY
Online/Distance Learning Course
SECTION 12B
LOGISTICS, PACKAGING, TRANSPORTATION, AND FEDERAL
SECURITY REGULATIONS
ALAN L. WHITEBREAD
SUPPLY CHAIN MANAGEMENT
[SCM] COMPONENTS INCLUDE
•
•
•
•
•
•
Facility Location
Customer Service
Order Processing
Demand forecasting
Production Scheduling
Facility Management
LOGISTICS
• Material Handling
• Inventory & Control
• Transportation
• Purchasing
• Packaging
• Standards
• Warehousing
• Return Goods Handling
• Salvage and scrap
disposal
LOGISTICS
•
Involves the processing and tracking of goods during warehousing,
inventory control, customs documentation, shipment, transportation, and
delivery of products.
•
Right Goods - Right Place - Right Time - Right Cost – Right Configuration
– Right Order
•
Logistics is important because those expenditures represent
up to 15% of manufacturing cost,
up to 26% wholesale or retail costs,
and consume around 25% of the firm’s assets.
•
A total systems approach is usually employed in sophisticated logistical
systems.
– Every part of a logistics system interrelates with all the other parts!
– If you evaluate any part of a logistics system, make sure you understand what
any change will do to the entire system!
LOGISTICS DECISIONS
• Order processing
– The efficient processing of customer requests.
• Inventory control
– Managing inventory to the maximum benefit of the
firm and its customers.
• Materials handling and warehousing
– The efficient storage and movement of inventory.
• Transportation management
– Arranging for the timely and cost-effective delivery of
inventory.
TYPICAL LOGISTICS GOALS
• Market coverage
– We will operate a network of stores so that 90% of the
U.S. population can reach one of our stores in less
than four hours travel time.
• Customer service level
– All customer calls will be answered within two
minutes.
• Product fit
– All products in the product mix must represent at least
2% of that product line’s sales.
• Cost minimization
– You create a state for this.
LOGISTICS PERFORMANCE
METRICS
• COST-BASED METRICS
– Total dollars as a percentage of sales
– Cost per unit of volume
– Cost improvement [decrease operating
expense]
– Reduced transportation expense
– Reduced expedited shipments
– Reduce maintenance expense
–…
LOGISTICS PERFORMANCE METRICS
• CUSTOMER SERVICE-BASED METRICS
–
–
–
–
Stock-outs
Shipping errors
Customer feedback
Service / quality index
INVENTORY AND CONTROL
Inventory costing methods
• FIRST IN, FIRST OUT (FIFO)
– The oldest cost incurred is the first cost charged to production.
The latest costs are shown in the inventory.
• LAST IN, FIRST OUT (LIFO)
– The latest cost incurred is the first cost charged to production.
The oldest costs are shown in the inventory.
MARGINAL INVENTORY COST
16.00
14.00
12.00
Set-up cost
10.00
Production cost
8.00
Holding cost
6.00
Total cost
4.00
2.00
0.00
100
500
1000 2500 5000
UNITS IN INVENTORY
CYCLE TIME
INVENTORY PER TIME PERIOD
1600
1400
Simple
min-max
inventory
system
1200
1000
800
600
400
200
0
1
1
2
3
4
5
6
2
7
8
9
10
11
Cycle frequency, time [duration], and magnitude
[stockout, minimum, maximum, average, safety stock ↑ ]
12
CAUSES OF INVENTORY
PROBLEMS
•
•
•
•
Poor quality of raw materials
Poor delivery performance
Unscheduled production downtime
Excess lead times: production decides
to increase inventory
CYCLE TIME MANAGEMENT
BENEFITS
• Reduced total inventory levels
• Lower total cost schedules
• Shorter time-to-market
• Improved sales forecasting and
production scheduling
INTERNATIONAL CYCLES ARE
AFFECTED BY
• WAIT TIMES
– For a complete set of order documents
– Inserting the order into the schedule
• EXTENDED TRANSPORTATION TIMES
– Ports
– Ship arrival, loading, transit, and unloading
• VERIFICATIONS AND INSPECTIONS
– Customs
– Other inspections required by the importing country or
customer
TRANSPORTATION COST FACTORS
•
•
•
•
Dollar cost vs. Total cost
Distance
Density
Handling
– Refrigeration, cranes, …
• Liability
– Susceptibility to damage, perishability, theft,
HAZMAT, value per pound
• Market factors
– Fuel
TYPES OF CONTAINERS
• Dry freight
– General purpose container
• High cube
– 9’6” high vs. standard 8’6” for additional volume
• Reefer or insulated or refrigerated
– For cooling, freezing, or heating of foods or
chemicals
• See http://forum.europa.eu.int/irc/dsis/coded/info/data/coded/en/gl007607.htm for a
complete ISO listing.
PACKAGING ISSUES:
INTERMODAL STRESS POINTS
PLACE
FORCES
Truck
Acceleration / Deceleration [increasing speed; slowing; stopping]
Centrifugal [making turns; curves]
Retardation [slowing; stopping]
Vibrations from movement and bumps
Transfer point
Acceleration [lifting; lowering]
Impact [dropping onto surface]
Retardation [slowing; stopping]
Rail car
Same as truck plus
Shunting [train car switching operations]
Port
Same as truck plus
Impact [dropping onto surface]
Ship
Centrifugal [ship movements]
Heaving [the movement of the ship in response to the waves]
Pitching [the up-and-down motion of a ship]
Rolling [the side-to-side motion of a ship]
Swaying [the rocking motion of a ship]
Vibrations [caused by wave and impact forces]
Yawing [the degree to which the ship is pointed away from its intended course]
FEDERAL SECURITY
DEVELOPMENTS
• U.S. Customs - Container Security Initiative [CSI]
– Currently 20+ nations and 50+ ports including all 20 of the
world’s largest ports.
– See http://www.cbp.gov/xp/cgov/trade/cargo_security/csi/csi_in_brief.xml for CSI In
Brief.
– See
http://www.cbp.gov/linkhandler/cgov/trade/cargo_security/csi/csi_strategic_plan.ctt/csi_strategic_plan.pdf
for the CSI Strategic Plan presentation.
– See http://www.cbp.gov/xp/cgov/newsroom/fact_sheets/travel/ for a Fact Sheet.
– Identify and pre-screen high-risk U.S. inbound containers at the
port of departure or the U.S. port for
• physical examination or
• non-intrusive inspectional [NII] equipment [gamma-ray or Xray imaging] and radiation detection equipment
FEDERAL SECURITY DEVELOPMENTS:
AN OCEAN SHIPMENT TO THE U.S.
Container Security
Initiative [CSI]
[50+ Participating
Ports Only]
Manifest goes to
Homeland Security
24 hours before
loading.
Container is loaded
onto a truck which
passes through at
least one detection
device.
U.S. Customs and
Border Protection at
participating
port
verify information
and provide an OK to
load.
At sea, the manifest
is sent to the U.S.
Coast Guard.
≥96 hours before
entering the U.S. the
ship identifies itself
and all crewmembers
Coast Guard inspects
the ship.
Customs verifies only
U.S. bound
containers are
offloaded.
Coast Guard allows
entry or intercepts
ship far offshore
FEDERAL SECURITY
DEVELOPMENTS
• U.S. Customs Trade Partnerships Against
Terrorism [C-TPAT]
– Provide the highest level of security through close
cooperation with the owners of the supply chain,
importers, carriers, brokers, warehouse operators and
manufacturers through a detailed self-assessment
process.
– Requirements vary by type of carrier or storage.
– For details see
http://www.cbp.gov/xp/cgov/newsroom/fact_sheets/port_security/ctpat_sheet.xml
SECURITY DEVELOPMENTS
• Different devices are being tested and/or
used to improve container security in the
U.S.
– Nuclear material scanner
– UV or X-RAY scanner
– Scent analysis
– RFID container tags
PRICE EFFECTS
• The total cost of international products may be
increased due to
– product modification, container / packaging issues,
and / or documents and their preparation.
• Price escalation of international products may be
caused additional shipping, insurance, and
packaging costs and / or tariffs, special taxes,
and exchange rate fluctuations.
SECTION 12B: REVIEW
• You should now have knowledge of
– The logistics part of SCM, goals, and performance
metrics
– Inventory methods [FIFO, LIFO]
– Cycle time concept and its key components
– International cycles
– International transportation and container types
– Packaging
– U.S. security measures including CSI and C-TPAT
PE 425 – BASICS OF COMMERCIAL DIPLOMACY
Online/Distance Learning Course
SECTION 13A
BASICS OF INTERNATIONAL FINANCIAL INSTRUMENTS - I
ALAN L. WHITEBREAD
FOREIGN EXCHANGE
• MANAGING RISK
– CURRENCY REGULATION
• IMF CLAUSE VIII
– Guarantees currency conversion
– There are potential P&L and Balance Sheet issues
due to currency translation and / or financial
statement consolidation.
• ISSUES
– Inflation and inflation rates
– Government policies
• Taxation, investment, monetary policy, money flow, …
Sales Contract Payable in Foreign
Currency
The EXPORTER and IMPORTER enter into a Sales Contract requiring
payment to be made in U.S. Dollars. So the IMPORTER must convert the
their home currency into U.S. Dollars for payment. Businesses use a
foreign exchange table or a cross-exchange table to determine rates.
CROSS-EXCHANGE TABLE
Read down the column for the sell price. Read across the
row for the buy price. original
USD
GBP
EUR
JPY
USD
-
1.616
1.1378
0.0084
GBP
0.619
-
0.7041
0.0052
EUR
0.879
1.420
JPY
118.9750
192.2800
135.3500
0.0074
-
METHODS OF PAYMENT
• International trade presents a spectrum of risk,
causing uncertainty over the timing of payments
[and their relative values] between the exporter
[Seller] and the importer [Buyer].
METHODS OF PAYMENT
Least
Cash in
Advance
RISK TO THE EXPORTER
Confirmed
Irrevocable
L/C
Irrevocable
L/C
Documentary Collection
Sight Draft
for
Documents
Against
Payment
Most
Youngest
Most
Consignment
Open
Account
Time Draft for
Documents
Against
Acceptance
COST FOR THE BUYER
AGE OF THE RELATIONSHIP
Least
Oldest
CASH IN ADVANCE
1. The IMPORTER pays for goods per the EXPORTER’s terms.
2. The EXPORTER only ships goods after receiving and validating payment from
the IMPORTER.
This is the most favorable term for the SELLER.
CASH IN ADVANCE
• THE MOST LIKELY USE IS IF
– The Buyer is a new firm; or
– There is little or no credit information in the
Buyer's country; or
– Expert sources put Buyer's country as highrisk; or
– There is significant currency fluctuation or
currency exchange issues in that country; or
– There are small and/or Internet transactions
OPEN ACCOUNT
1. The EXPORTER ships goods after IMPORTER’s credit has been checked and
a line of credit has been established. Credit is based on history and there is no
guarantee of payment.
2. The IMPORTER pays after the goods are received in accordance with the
terms agreed to with the EXPORTER.
This is the most favorable term for the BUYER.
OPEN ACCOUNT
• THE MOST LIKELY USE IS FOR
– a very good customer with a long history of
good prompt payment; or
– orders from very large multinationals; or
– subsidiary payments to their parent company.
– Otherwise, it is a risky credit term.
DOCUMENTARY COLLECTIONS
• Documents against payment is when
– the presenting bank may only release the documents
simultaneously with payment from the BUYER.
• Documents against acceptance is when
– the presenting bank may only release the documents
against formal acceptance of a draft [Bill of Exchange]
by the BUYER guaranteeing payment n days after the
goods were shipped.
THE BANK ROLES IN A
DOCUMENTARY COLLECTION
1.
Facilitate the transaction and verify
documents.
2.
Assure compliance with the collection order.
3.
Act [in good faith] as agents for collection.
4.
Banks are under no obligation to do
collections for a client.
AN INTERNATIONAL DOCUMENTS
AGAINST PAYMENT FLOW CHART
1. BUYER receives an
Inquiry Letter [IL] from
SELLER.
2. BUYER examines
the IL and makes a
counter offer to
SELLER .
4. SELLER issues a
Pro Forma invoice to
the BUYER.
5. BUYER takes the
Pro Forma invoice to
its BANK to apply for a
Letter of Credit [L/C].
7. SELLER verifies L/C
is correct.
8. SELLER notifies
BUYER all is in order
and the order will ship
on x date.
3. SELLER notifies
BUYER it agrees with
the counter offer.
6. SELLER receives
L/C from BUYER via
SELLER’s BANK and
BUYER’s BANK.
AN INTERNATIONAL DOCUMENTS
AGAINST PAYMENT FLOW CHART
9. SELLER ships
merchandise.
12. BUYER’s BANK
notifies BUYER it has
received the export
documents.
10. SELLER sends
export documents to
SELLER’s BANK for
collection
13. BUYER inspects
the documents. If they
are in order BUYER
accepts the draft and
authorizes BUYER’s
BANK to remit
payment at maturity.
This is accurate for an ocean waybill only! If BUYER has an air,
rail, or truck waybill they can collect the goods even though
payment is not approved!
11. SELLER’s BANK
sends the documents
to BUYER’s BANK.
14. BUYER’s BANK
remits payment at
maturity
15. BUYER’s BANK
releases the export
documents to BUYER.
16. Only upon
payment, can BUYER
collect the goods.
SIGHT DRAFT DRAWN ON BUYER’S
BANK
A Sight Draft is payable on demand [when it is presented].
TIME DRAFT DRAWN ON BUYER’S
BANK
A Time Draft is payable on n number of days after the
documents are presented.
SECTION 13A: REVIEW
• You should now have knowledge of
– Foreign exchange rate issues and payments
– Contagion, hyperinflation
– Cash In Advance, Open Account
– Documentary Collections [against payment,
acceptance]
– Documents Against Payment flow chart and Sight
Draft
– Documents Against Acceptance and Time Draft
PE 425 – BASICS OF COMMERCIAL DIPLOMACY
Online/Distance Learning Course
SECTION 13B
BASICS OF INTERNATIONAL FINANCIAL INSTRUMENTS - II
ALAN L. WHITEBREAD
LETTER OF CREDIT [L/C]
DEFINITION
A written document by the Issuing Bank given to
the SELLER [beneficiary] at the request, and in
compliance with the instructions, of the BUYER
[Applicant or Account Party] to make a payment.
LAWS AND RULES GOVERNING
LETTERS OF CREDIT
• The International Chamber of Commerce’s
Uniform Customs and Practices [UCP] for
Documentary Letters of Credit Publication No.
600. [UCP 600]
• The U.S. law that applies is the Uniform
Commercial Code [UCC] - Article 5.
UCP 600
• Allows for acceptance, partial
acceptance, or rejection of amendments
to Letters of Credit.
• Provides issuance rules for banks
• Defines the roles of various banks
• Defines acceptable dates
• Provides guidance for transfers and
transport documents
UNIFORM CUSTOMS AND
PRACTICES UCP 500
• UCP 600
– See http://wer2031.coolfreepages.com/docs/UCP600.htm
for detailed information.
• eUCP
– bridges the current UCP of paper-based documents with
the processing of the electronic equivalent documents
– Find detailed information on the Internet.
• International Standby Practices 1998 [ISP98]
became effective Jan. 1, 1999
– Search the web for detailed information.
THE BANK ROLE IN AN L/C
1. Facilitate the transaction and verify
documents.
2. Payment guarantee [“Dishonor”] – the bank
may not refuse an L/C due to
–
Breach of contract or non-conformity of goods
3. Transaction [“Rule of Strict Compliance”]
–
–
The documents must be linked to the same goods.
The goods must be fully described.
A LETTER OF CREDIT
IS A THIRD PARTY COMMITMENT
Buyer’s Bank
Seller’s Bank
Seller/
Exporter/
Beneficiary
Buyer/
Importer/
Applicant
•Sales Contract
•L/C Application & Agreement
•Letter of Credit
LETTER OF CREDIT
BRAZILIAN IMPORTER
STEP 2
The Brazilian IMPORTER [BUYER] requests its Bank to issue a L/C in their behalf
to [technically “and in favor of”] the EXPORTER [SELLER]. IMPORTER’s Bank
then requires the IMPORTER [BUYER] to complete and sign an Application &
Agreement for a Commercial Letter of Credit. IMPORTER’s total line of credit is
reduced by the amount of the L/C when it is issued.
BRAZILIAN IMPORTER’s
[ISSUING] BANK
LINE OF CREDIT
• A line of credit generally refers to the total
amount of funds a bank will allow a customer to
access in various forms.
• When a Buyer takes out a Letter of Credit, the
funds are set aside and that amount deducted
from their available line of credit at the bank.
Those funds are no longer available to the Buyer
unless the L/C is cancelled by mutual
agreement.
– So if Buyer takes out a $500,000 L/C, they have
$500,000 less available to finance their business
operations.
LETTER OF CREDIT ATTRIBUTES
• Irrevocable
– Terms and conditions of the L/C cannot be amended
or cancelled without the written agreement of all
parties to the L/C.
• This type is strongly preferred by financial institutions and
sellers and is the most common form.
OR
• Revocable
– The issuing bank [on behalf of the BUYER] may
amend or cancel simply by notifying the accepting
bank.
• The most likely use is for a parent company to cover a very
large purchase for one of its subsidiaries. It is rare.
LETTER OF CREDIT ATTRIBUTES
• Confirmed
– SELLER’s bank has verified the L/C and the
issuing bank and has added its guarantee for
payment to SELLER for the L/C issued by
BUYER’s bank.
OR
• Unconfirmed
– SELLER’s bank does not guarantee payment
for the L/C issued by BUYER’s bank. Only
the issuing bank is assuring payment.
GUIDANCE
• Exporters are always advised to strongly
consider requiring the following.
– “Irrevocable Letter of Credit confirmed by a
U.S. bank”
• “Irrevocable” means the L/C can not be changed
without both parties agreement.
• “Confirmed” means Buyer’s Bank is guaranteeing
payment to Buyer. If there is a problem, it is
between Buyer’s Bank and Seller’s Bank but it
does not affect Buyer’s payment.
TYPES OF LETTERS OF CREDIT
• Transferable
– This must be marked as “transferable” on its face.
– It allows two or more parties to be paid from the L/C
while keeping their identities unknown to each other.
• The most likely use is for an exporter acting as an
intermediary of some type.
• For instance, a transferable L/C is issued to the exporter.
The exporter pays its supplier. The L/C is transferred to the
exporter which then receives the balance of the L/C.
TYPES OF LETTERS OF CREDIT
• Back-to-Back
– It is marked as “back-to-back” on its face and is
separate from the original L/C.
– It allows some payments before collections are
received.
• The most likely use is for an exporter having to pay suppliers
to complete an order before the customer pays for the goods.
• For instance, an exporter has an L/C. Then a Back-to-Back
L/C is issued to pay the exporter’s named suppliers within a
certain amount of time but before payment is due on the
original L/C.
TYPES OF LETTERS OF CREDIT
• Revolving
– It provides a credit limit to allow a free flow of goods
until the expiration date. Thus, it eliminates the need
for opening an L/C for every shipment.
• The most likely use is for a BUYER wanting to purchase
merchandise from numerous suppliers on a regular basis.
• For instance, BUYER opens a Revolving L/C for $1,000,000.
Buyer can then arrange for payment “in favor of” however
many suppliers and amounts as long as it does not exceed
the original amount unless amended.
TYPES OF LETTERS OF CREDIT
• Red Clause
– It allows payment to an exporter before documents
are presented. This provides pre-export financing for
the purchase or manufacture of the goods.
• The most likely use is for a BUYER to provide credit for a
small but key supplier. Payment can be in part or in full as
specified and is financed by BUYER’s bank.
TYPES OF LETTERS OF CREDIT
• Standby
– It is used to guarantee that a party will fulfill all its
obligations.
• The most likely use is for a parent company to provide
access to a certain amount of money for subsidiary if it is
needed for usually specified reasons.
• It may also be used similarly to a performance bond. In this
manner, if the SELLER can not perform according to the
sales contract, BUYER can draw the balance from the
Standby L/C.
CONSIGNMENT
Consignment may also occur at distributors [industrial products] and dealers or
retailers [consumer products].
STEP 1
In this example, EXPORTER delivers goods to their MANUFACTURER’s [Sales]
REPRESENTATIVE under an agreement that the MANUFACTURER’s
REPRESENTATIVE will store the goods and sell it to COMPANY A. The inventory
is on the MANUFACTURER’s books until it is delivered and invoiced to COMPANY
A.
CONSIGNMENT
STEP 2
The MANUFACTURER’s [SALES] REPRESENTATIVE sells the goods to
COMPANY A for a commission. Then the EXPORTER receives payment from
COMPANY A. Payment of the commission to the MANUFACTURER’S [SALES
REPRESENTATIVE] occurs according to agreed terms usually after EXPORTER
receives payment.
BANKER’S ACCEPTANCE
• Negotiable instruments [time drafts] to finance
the export, import, domestic shipment or storage
of goods.
• Must be drawn on and accepted by a bank.
• It is accepted only when a bank writes
“accepted” on the draft which shows its
agreement to pay the draft at maturity.
• A bank may accept the draft for either the
drawer or the holder.
TRADE ACCEPTANCE
• The same as a Banker’s Acceptance
except it is between firms and does not
involve a bank.
ELECTRONIC METHODS OF
PAYMENT
• Society for Worldwide Interbank Financial
Telecommunication [SWIFT]
http://www.swift.com
• TradeCard
– http://www.tradecard.com/
BANK GUARANTEES
• Advance payment guarantee
– This provides protection for BUYER[s] who are asked to provide
payment before goods or services are supplied. If SELLER fails
to fulfill their contract, BUYER has recourse to the guarantor to
recover any advance payment they have made.
• Performance / bid bond
– This guarantees the fulfillment of the contract and payment to all
subcontractors and material suppliers. It is submitted by the
winning bidder upon award of the contract.
• Staged payment structure
– Allows specific payments at specific points in time or at the
fulfillment of key events.
NONPAYMENT
• Nonpayment may occur for
– Civil unrest, or
– Foreign currency controls, delays, or
shortages
– Should any of these occur, advise your
American client to seek local legal counsel
immediately.
NONPAYMENT
• Numerous collection challenges exist.
– Collection in country
– Arbitration, mediation, conciliation
– Legal action [Litigation]
– This is for local legal counsel to undertake on
your American client’s behalf.
LITIGATION
• Results are always uncertain.
• Can be very expensive—potentially
multiples of the cost of the suit in the U.S.
• Advise your American client to seek local
legal counsel immediately.
MINIMIZING THE RISK OF NONPAYMENT
•
•
•
•
Cash in Advance [CIA]
Payment against documents
“Irrevocable L/C confirmed by a US bank”
Security interests in or liens against the
property being sold or delivered
– Not available in every country
• Purchase export credit insurance
– See Section 14
SECTION 13B: REVIEW
– Selected methods of payment
• Cash In Advance, Open Account
• Documentary Collections [against payment, acceptance]
• Documents Against Payment flow chart and Sight Draft
• Documents Against Acceptance and Time Draft
• Letters of Credit
–
–
–
–
UCP 500 and UCC Article 5
Names of parties
L/C flow chart
Types of L/C’s
• Banker’s Acceptance
• Electronic payment: SWIFT and TradeCard®
• Non-payment, litigation, and minimizing the risk of non-payment
PE 425 – BASICS OF COMMERCIAL DIPLOMACY
Online/Distance Learning Course
SECTION 14
BASICS OF INTERNATIONAL TRADE:
EXPORTING AND IMPORTING
ALAN L. WHITEBREAD
WORKING CAPITAL MANAGEMENT
• This is the management of short-term assets and
liabilities.
• Net working capital equals
Current assets – current liabilities
• Some of the key questions in working capital
management include
–
–
–
–
How much cash should we hold?
How much inventory should we carry?
What are the financial implications of our credit policy?
Where can we get short-term loans up to $...?
FUTURE VALUE [FV]
• The value of a fixed amount n time periods in the
future.
• Assume you start your career making $35,000
per year [S]. Also assume you never change
jobs but keep up with the average rate of
inflation [r = 4%] for your entire 42-year career
[n=42]. What would you be making when you
retired.
– The formula is FV = S * [1+rn]
– Build a spreadsheet and calculate the answer.
– Did you get $181,747.40?
COMPOUNDING
• The value of identical cash deposits at the end
of each time period for n periods.
• Assume you deposit $1,200 per year in a
savings account and earn an interest rate [net
after taxes] of [r = 3%] for your entire 42-year
career. How much money will this provide
toward your retirement?
– The formula is C = S * [1+r]n
– Build a spreadsheet and calculate the answer.
– Did you get $101,380.67?
PRESENT VALUE [PV]
• The value of a fixed amount n time periods expressed in
today’s currency.
• Assume you are making $100,000 [$S] per year. Your
employer offers you a five-year contract [n=5] that will
increase your annual salary to $150,000 per year in the
fifth year. Assuming a 9% [r] inflation rate, will this be
worth more or less than you are currently making?
– The formula is PV = S * [1/[1+r]n]
– Build a spreadsheet and calculate the answer.
– Did you find that the $150,000 in year five was worth only
$97,489.71 in today’s money?
DISCOUNTED CASH FLOW [DCF]
• This is the process of valuation by finding the
present value [PV] of some amount in the future.
• It can be calculated for a single amount or for
multiple amounts over time.
GOVERNMENT ASSISTANCE:
EXIMBANK
• Supported countries
– http://www.exim.gov/tools/country/country_limits.html#tblL
• Products
– Working capital [90% - 100% bank coverage]
– Insurance [generally up to 85% of contract value]
– Loan guarantee [up to 100% to $10,000,000]
– Direct loan [generally over $10,000,000]
– Special initiatives
• http://www.exim.gov/products/special/index.html
GOVERNMENT ASSISTANCE:
OPIC
• Products
– FDI Political risk [to 270% on initial
investment]
• Currency inconvertibility
• Expropriation
• Political violence
– Lending
• Many programs; any size of business
– Investment and private equity funds
COMMERCIAL SOURCES OF PRIVATE
EXPORT CREDIT INSURANCE
• These reimburse the seller for losses due to a buyer’s
bankruptcy, insolvency, or payment default. It extends to
include non-payment due to political events in the
buyer’s country, such as currency inconvertibility or
import license cancellation
• It enables you to offer open terms of payment to
Qualified Buyers. Some sources include
–
–
–
–
CNA
Hartford
Chubb
Many others
SECTION 14: REVIEW
• You should now have knowledge
of
– Working capital issues
– Financial concepts
– EXIMBANK
– OPIC
PE 425 – BASICS OF COMMERCIAL
DIPLOMACY
Online/Distance Learning Course
SECTION 15
BASICS OF INTERNATIONAL TRADING AREAS AND
AGREEMENTS
ALAN L. WHITEBREAD
IMPLICATIONS
• Benefits of trade
– New markets open and small markets grow
– Consumers have greater access to products and services
from around the world
– Competition makes domestic firms more efficient.
• Trade Barriers are a Marketing Challenge
– Trade Barriers
•
•
•
•
Raise prices for imported products
Limit how much non-members [of a trade area] can sell
Increase relative profitability of members
Generally dampen demand
SELECTED MAJOR TRADING
AREAS
• CACM
Central American Common Market
• CARICOM Caribbean Community and Common Market
• EAEC
East Asia Economic Caucus
• Formerly ASEAN Assoc. of Southeast Asian Nations
• EFTA
European Free Trade Area
• EU
European Union
Mercosur
• NAFTA
North American Free Trade Area
FORMS OF ECONOMIC
INTEGRATION
• There are six different forms of regional
economic integration from simplest to most
complex are:
–
–
–
–
–
–
Free Trade Area
Customs Union
Common Market
Economic Union
Monetary Union
Political Union
FREE TRADE AREA [FTA]
Encourages trade among its members by
eliminating trade barriers (tariffs, quotas, and
other non-trade barriers [NTBs]).
-EFTA [European Free Trade Area]
-NAFTA [North American Free Trade Area]
-LAIA [Latin American Integration Association]
-CIS [Commonwealth of Independent States]
-there are many FTAs around the world
FREE TRADE AREA: RULES OF
ORIGIN – BASIS FOR CALCULATION
Preferential Trade
Agreement [PTA]
MC%-RVC%
Value Point [% if
applicable]
PANEURO
50-30
Ex Works
NAFTA
60-50
60 FOB; 50 cost of
production [COP]
MEXICO-CHILE
50-40
50 FOB; 40 COP
CANADA-CHILE
35-25
35 FOB; 25 COP
US-ISRAEL
35
Ex Works
US-JORDAN
35
FOB
CUSTOMS UNION
Combines the elimination of internal trade barriers
among its members and the adoption of
common trade policies toward nonmembers
[unfortunately, these tend toward high common
external barriers, thus negating the benefits of
free trade].
-Mercosur
Argentina, Bolivia, Brazil, Chile, Ecuador, Paraguay, Peru, Uruguay,
and Venezuela
COMMON MARKET
This goes a step further than a customs union by
eliminating barriers that inhibit the movement of
factors of production—labor, capital, and
technology—among its members.
-CACM [Central American Common Market]
ECONOMIC UNION
The full integration of the economies of two or
more countries.
-Eliminates internal trade barriers
-Adopts common external trade policies
-Abolishes restrictions on the factors of production
among members and requires members to coordinate
economic policies
-monetary policy, fiscal policy, taxation, and social
welfare programs
Afro-Malagasy Economic Union [Benin, Cameroon, Central
African Republic, Chad, Gabon, Ivory Coast, Mali, Mauritania, Niger, Zaire]
MONETARY UNION
A Common Market with a common currency
and a supranational central bank.
-EU [beginning January 1, 1999]
POLITICAL UNION
The complete political and economic integration of
two or more countries thus making them one
country.
-[Former USSR]
DEGREE OF INTEGRATION
Stage of
Integration
Abolition
Of Tariffs
Common
Tariffs
Factor
Restrictions
Social,
Economic,
Regulatory
Free Trade
Yes
Customs Union
Yes
Yes
Common Market
Yes
Yes
Yes
Economic Union
Yes
Yes
Yes
Yes
Political Union
Yes
Yes
Yes
Yes
Political
Yes
CHARACTERISTICS OF TRADE AREAS:
EU – KEY ISSUES
• ENVIRONMENTAL
– THE GREEN DOT “Grüne Punkt” SYSTEM
• Germany’s packaging recycling system
• http://www.gruener-punkt.de/?L=1
• A world leader, watch for developments in France and Japan
– Restriction on Hazardous Substances [RoHS]
• Prohibits the use of lead in electronics
• Requires material declarations
• See Oracle’s program for RoHS and others
– http://www.oracle.com/industries/high_tech/rohs_overview.pdf
CHARACTERISTICS OF TRADE AREAS:
EU – KEY ISSUES
• PRODUCT AND CONFORMITY
– ISO 9000 SERIES SYSTEMS
• For consistency/reliability, not a quality system
– THE CB SCHEME
• For electrical products
– CE MARKING
• For product approval
EU – KEY ISSUES
• CE MARK
– French "Conformite Europeene"
– A new approach to product approval
– The CE mark certifies that a product has met
EU health, safety, and environmental
requirements, which ensure consumer and
workplace safety.
CHARACTERISTICS OF TRADE AREAS:
EU – KEY ISSUES
• CE MARKING
– OBTAIN CE CERTIFICATION
• 3 DIFFERENT WAYS
• OBTAIN A DECLARATION OF CONFORMITY
– AFFIX THE CE LOGO
– THE CE MARK & A Declaration of Conformity are
legally required for a product to be sold in the EU.
CUSTOMS AND TAXATION
http://europa.eu.int/comm/taxation_customs/customs/index_en.htm
•
•
•
•
Valuation
Rules of origin
Procedures and duty issues
Container security
TRADING AREAS - NAFTA
• U.S., CANADA AND MEXICO
• AGREEMENT ON TRADE,
INVESTMENT, LABOR, AND THE
ENVIRONMENT
– ORIGINAL TARGET: NO TARIFFS BY 2005
• CERTIFICATE OF ORIGIN
REQUIREMENTS ARE COMMON
TRADING AREAS – MERCOSUR
• Signed by 4 initial members 1/1/1991
– Immediately eliminated tariffs on 90% of the
goods traded within the bloc
– Exceptions phased out in 1999
• Established an average common external
tariff of 14% to 85% of the goods imported
from nonmembers
FTAA GUIDING PRINCIPLES
• Preservation and strengthening of the Americas.
• Well-being through economic integration and free trade.
• Eradication of poverty and discrimination.
• Guarantee of sustainable development and preservation
of the environment for future generations.
• Status: currently in discussion
TRADING AREAS – EAEC
East Asia Economic Caucus
• Effective November 6, 2001
– ASEAN + China + Japan + South Korea
• Gross GDP >$2 trillion
• See http://www.infoplease.com/ipa/A0874911.html
SECTION 15: REVIEW
• You should now have knowledge of
– The cost of protectionism
– Selected major trading areas
– Forms of economic integration
– Characteristics of trade areas
• EU - CB Scheme, CE Marking
– NAFTA, MERCOSUR, FTAA, ASEAN [EAEC]
PE 425 – BASICS OF COMMERCIAL
DIPLOMACY
Online/Distance Learning Course
SECTION 16
CHOOSING FROM GROWTH ALTERNATIVES
ALAN L. WHITEBREAD
FINANCIAL CONSOLIDATION
ISSUES
• Cross-border income
• Tax liability and payments
• Treatment of subsidiaries, affiliates,
mergers, and acquisitions
• Currency translation, gain, and loss
• Disclosure
URUGUAY ROUND: TRIMS & TRIPS
• TRIMS
– TRADE-RELATED INVESTMENT MEASURES
• prohibits members from imposing or maintaining certain
measures relating to investment that adversely affect trade in
goods
• TRIPS
– TRADE-RELATED ASPECTS OF INTELLECTUAL
PROPERTY RIGHTS
• attempts to increase the commonality of IP laws and
minimum standards for protecting IP among member nations
WTO - DUMPING
• Article VI of GATT [Tokyo Round] allow contracting
parties to apply anti-dumping measures to an export
priced below its “normal value”.
– Usually the price of the product in the exporting country
– If such dumped imports cause injury to a domestic industry in the
importing country.
• The Uruguay Round negotiations have resulted in
improvements to many weak or unclear areas of the
current Agreement.
WTO – SUBSIDIES & COUNTERVEILING
MEASURES
•
“Prohibited” subsidies are
1. Contingent upon export performance, OR
2. Based upon the use of domestic versus
imported goods
WTO – SUBSIDIES & COUNTERVEILING
MEASURES
•
“Actionable” subsidies show
–
–
“Serious prejudice” when the subsidy
exceeds 5% of the ad valorem value
the burden of proof is on the granting
country to show no serious prejudice
WTO – SUBSIDIES & COUNTERVEILING
MEASURES
• “Non-actionable subsidies can be either
– non-specific subsidies, or
– specific subsidies involving
• assistance to industrial research and precompetitive development activity, or
• assistance to disadvantaged regions, or
• certain type of assistance for adapting existing
facilities to new environmental requirements
imposed by law and/or regulations
FOREIGN DOMESTIC INVESTMENT
[FDI]
• Foreign domestic investment [FDI] is the
investment in real assets such as
factories, offices, or distribution facilities.
• Foreign portfolio investment [FPI] is the
investment in bonds, debt instruments, or
stocks.
FDI COUNTRY COMPARISON
ITEM
CZECH REPUBLIC
RUSSIA
None
Many
Very high
Medium
Domestic market size
Small
Large
Access to major
markets
Close
Close
Exchange / capital
controls
Total FDI
The exchange / capital controls may be so significant to Firm A
that the major facility is in the smaller Czech Republic and the
minor one in Russia.
FIRMS INVEST IN FDI TO
• Have production to satisfy local demand or
export to other markets
• Gain access for less expensive or a greater
quantity of raw materials.
• Shift production to countries where one or more
of the factors of production are significantly less
expensive.
• Gain access to new technologies or managerial
expertise
• Establish operations in countries unlikely to
interfere with private enterprise
TYPICAL FDI INCENTIVES
•
•
•
•
•
•
•
•
•
•
Tax credits, exemptions, deferrals, or deductions
Land and/or building[s]
Grants
Equipment
R&D
Training
Relocation
Easy regulatory approvals
Subsidies
Many more
FINANCIAL CONSOLIDATION
ISSUES
•
•
•
•
Chart of Accounts
Taxation
Currency translation
Rolling into consolidated corporate level
financial statements
• Special issues with goodwill, subsidies,
privatizations, and other items
KNOWLEDGE OF U.S. TAX LAWS
• Corporate
• Income
• Employee labor in U.S.
– Immigrant and local; illegal
• Working abroad
• Property
• Extraterritorial
TRANSFER PRICES
• The price a parent company charges a
subsidiary for products or services from
the parent company that are sold by the
subsidiary in its market.
– If the price is too high, it may encourage a
gray market [parallel imports].
– If the price is too low, it may be dumping.
TRANSFER PRICING
• The price paid by another part of the
organization when the product crosses a
national border.
– Arms-length price (unrelated parties)
• Cost-based or negotiated
– Most favored customer (best / largest)
– Tax implications
CORPORATE FIDUCIARY
RESPONSIBILITY
• All American board members and
executives [VP and above] have fiduciary
responsibilities to the shareholders
whether it is a public or a private entity.
CORPORATE FIDUCIARY
RESPONSIBILITY
• Act in the best interest of the
shareholders.
• Lead and manage in an ethical and legal
manner.
• Utilize resources to maximize shareholder
value.
• There should always be transparent
disclosure of information.
SECTION 16: REVIEW
• You should now have knowledge of
– Financial consolidation issues
– Uruguay Round: TRIMS and TRIPS
– WTO position on subsidies and counterveiling
measures
– FDI and FPI
– International consolidation and tax issues
– Transfer pricing
– Corporate fiduciary responsibility