Managing Global Trade Operations - Coursework Example

Name : xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Tutor :xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Title : Managing Global Trade Operations Institution : xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date :xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx @ 2012 Managing Global Trade Operations Introduction International trading operations involves a business transaction taking place between two or more countries. The trade takes place between two or more groups of people from the countries involved. In this essay the trading operations between Indonesia and the UK will be discussed. A particular product called Indomie is the subject of this trade. It is a brand of instant noodles produced by Indofood CBP Sukses Makmur which is the biggest instant noodle manufacturer in the world. Indofood was founded in 1982 in Indonesia and it is among the largest pre packed food companies in Indonesia (Joshi 2005, 102). Various documents will be used to complete the transaction with the documentary credit being used to secure payment for the exporter. Transportation of the goods will be done by ship. This paper is dedicated to outlining the procedure and plan including the transactions that take place when Indomie is exported from Indonesia to the United Kingdom. This essay focuses on the exporter or seller of Indomie which in this case is Indofoods. Planning for export The United Kingdom being in Europe falls in a different trading bloc from that of Indonesia which is in Asia. Trade between the UK and Indonesia follows a certain procedure involving a number of steps. These ensure that the product is transported from the seller to the buyer. The goods will be shipped from Indonesia to the United Kingdom. The reason for the use of a ship is that the food products are bulky and transportation by air is not viable. Shipping is not as costly as air and it is suitable given that road or rail transport is not possible at all (Sullivan 2003, 56). Shipment is also appropriate since the two countries namely the UK and Indonesia are not landlocked and therefore goods can be transported through their ports. Indomie is not a perishable product and therefore shipping it to the UK will not present the problem of time. Incoterm Delivered Duty Unpaid (DDU) is the ‘D’ incoterm that will be applicable to the transaction. The seller will have to clear the goods before they are exported and he will make these goods available in the UK at the port in the period or date in the sales contract. The risk and cost of the import customs formalities is the responsibility of the buyer. Included here is the payment of formalities, taxes and customs duties as well as the rest of the charges based on contractual specifications. The seller has a higher business risk since he will bear any risk in the period of transit. Short term finance acquisition The two traders meaning the seller or exporter and the buyer can arrange for short term finance through securing of trade finance packages from their banks or insurance or cargo. The letters of credit can act as sources of finance. Another method is factoring where the person receives cash only after a few days after invoicing. The buyer or seller must however take the responsibility to collect his or her short term debt (Samuelson 2001, 89). Another method is forfeiting where the buyer or seller can make a cash sale out of a credit sale. The exporter can also use credit insurance facilities to raise short term cash. To get money, he will have to assign his credit insured invoices to a bank. In return to this the bank then offers a loan of up to one hundred percent of the debt that has been insured to the exporter (Samuelson 2001, 94). Documentary credit transaction The seller will ship the goods and after they have been received in the UK he will wait for 60 days before payment can be made. To spend these 60 days in peace the seller must have assurance that payment will be made without fail. Transaction will be done by documentary credit although the exporter may not have total control on the process of payment. However the exporter will have to try and secure some control over the process of payment. To achieve this, the seller will persuade the buyer during negotiations to use a bank that is the choice of the exporter in the issuance of the documentary credit (McKenzie 1954, 48). The exporter will also have to ensure that the buyer agrees to use a well known bank that is respected in the banking community. In this case the importer will use the Standard Chartered Bank in London. To ensure that the seller gets paid for the export of goods the documentary credit will have to be confirmed. If the exporter lacks confidence in the Standard Chartered bank, then the documentary credit must be confirmed by a bank in the United States. The obligation to pay is then taken up by the US bank. If the bank involved fails to pay then the seller will receive payment from the US bank (Samuelson 2001, 112). The buyer and seller must negotiate in advance before the documentary credit is issued about the documents that should be presented to the Standard Chartered bank so that payment can be done under the documentary credit. The seller is supposed to ensure that he has a small number of documents as possible with a very simple description and to be in a position to produce every document required by the bank. The seller will have to prepare a transport bill of lading and a commercial invoice. The description of goods to be found in the invoice will be specified in the documentary credit. The seller will not receive payment if the goods description is not the same (McKenzie 1954, 23). The seller will not allow the buyer to possess the goods before payment has been done. The reason here is that in case of discrepancies in the documents so that payment cannot be made on the documentary credit, the buyer having possessed the goods will not have much incentive to waive discrepancies so that the exporter can receive payment. So that the goods can be kept out of the possession of the buyer prior to payment, the seller will get a marine bill of lading that has been consigned to the order of the bank (Jones 1961, 77).The marine bill of lading gives the bank a title to goods till when full payment is made for them by the buyer. After proper payment has been done the title is transferred from the bank to the buyer. The buyer will then go with the bill of lading to collect goods. If no payment is made the bank will hold the documents on behalf of the seller. The buyer will not be allowed to get the goods minus the title document. The buyer can ask the exporter to make out to order the bill of lading blank endorsed and to send it to the buyer in a few days after goods shipment. With this the buyer will be able to pick goods and have a disincentive of waiving any discrepancies in the documents that the seller takes to the bank (Leo, D'Arcy, Murray, & Cleave 2000 19). Meeting the deadlines There are 3 important dates on the documentary credit. These are the dates for shipping goods, date of presentation of documents and the date of expiry for the documentary credit. The seller or exporter will have to ensure that he meets all these dates and also allow a huge margin of error. Meeting these deadlines is very important if the exporter exports the transaction to go well and his money to be paid without any problems. After issuing the documentary credit and the seller discovers that it is hard to meet the date for goods shipping, he will be wise not to ship the goods till when the documentary credit is amended to allow for shipment at a later date (Buckman 2005 218). If the documentary credit lacks the date of presentation of documents the seller will have to present the documents before 21 days are over. The seller must ensure that the documentary credit date of expiry gives enough time for correction of mistakes within the documents. Under UCP 500 when the documents have been presented there are 7 days for the bank to tell the beneficiary of any discrepancies. If correction of discrepancies is possible they should be corrected before the documents are submitted again prior to the documentary credit date of expiry. The seller will therefore have to ensure that there is adequate time for correction of discrepancies (Schmitthoff 1969, 167). Choice of documentary credit The documentary credit will be the best option for this transaction because it has guaranteed payment when the documents are presented as specified in the documentary credit. It helps to reduce the risk of production whenever the buyer can change or cancel the order. The seller therefore has some assurance that he will not lose out on his money upon shipping the cargo to the buyer. It gives the ability of restructuring the schedule of delivery based on the interests of the exporter. It also gives the seller a chance to get financing for producing the goods on the pre-export finance basis (Hinkelman, Sibylla 2005, 210). There is a chance for getting financing before payment is received and after goods have been shipped especially when the payment has been delayed. It is hard for the buyer to refuse to pay because of the complaint over the goods. The importer should raise complaints over the goods delivered separately from the documentary credit. This gives the exporter an advantage of rectifying such issues. Use of a documentary letter of credit makes it possible for the exporter to reduce the risk of goods not being paid for after delivery (Kirton 2009, 92). Documentation for the transaction The transaction between the seller in Indonesia and the buyer in the UK will be accomplished by the help of various documents. Among these documents are: Export invoice which is the bill for merchandise for the seller and it has information on goods like total value, quantity, marks on packing, amount of packages, name of ship, destination port, payments, terms of lading number and terms of delivery (Hertel, Hertel 1999, 45-65).  A packing list is the statement for the number of packs or cases as well as the details of goods in the packs. It has the nature and details of goods on export and the form through which they are exported. The certificate of origin is another document and it gives the specification of the country from which the goods have been produced. In this case it will indicate Indonesia. This certificate makes it possible for the importer to make claims of tariff concessions or any other exemptions like non applicability of the restrictions of quotas on goods from certain nations. This certificate is necessary whenever imports of certain products have been banned in particular countries. The goods will be allowed into the importing country only if their origin is not a banned country (International Business Publications 2007, 213). The certificate of inspection is used where quality is required. It is required that goods be inspected by certain authorized agencies that issue the certificate for inspection. Mate’s receipt is handed to the exporter by the ship commanding officer when the goods have been loaded on the ship. It shows the name of vessel, date, berth, package description, shipment date, numbers and marks, condition of goods at the time of shipment and other details. The shipping company will not give the bill of lading till it gets the mates receipt. Another document is the shipping bill which is the major document that the customs office uses to permit the exportation. The shipping bill specifies the particulars of the goods on shipment, vessel name, port where cargo will be discharged, final destination country, address and name of the exporter. Bill of lading is the document upon which the shipping company provides its receipt of the cargo transported on its ship. It also undertakes to take them to the destination port. It also serves as the document of title to the goods and can be transferred freely through delivery and endorsement (Lessambo 2009, 83). Marine insurance policy is the certificate of insurance contract in which the insurance company accepts to pay a premium for indemnification of the insured against any loss that the latter may incur on goods exposed to the sea environment. The cart ticket, gate pass or cart chit is made by the seller and has details of the goods such as the amount of packages, shipping bill number, name of shipper, destination port, and the number to the vehicle that carries the goods. Letter of credit is issued by the bank of the importer as a guarantee that the bank will honor the export bills payment up to a given amount to the exporter’s bank. This document is the most secure and appropriate method that is used in settling international transactions (Rajagopal 2007, 69). The bill of exchange is an instrument that is written and the person that issues this instrument gives directions to the other party to give a particular amount to a given person or the person having the instrument. In the export and import transactions the exporter draws the bill of exchange to the importer and asks him to pay a given amount to certain person or the person having the bill of exchange. The documents that gives a title to the consignment are given to the importer when the he accepts that order inside the bill of exchange. Finally there is a document called the bank certificate of payment. This is a certificate showing that a negotiation has been made over the necessary documents related to the consignment and that the seller has received payment according to the regulations of exchange control (International Business Publications 2007, 250). Other documents Apart from the basic documents for shipment the seller and buyer will need invoices, forwarder’s receipt, legalized invoices, consular invoices, insurance certificates, certificate of conformity or analysis. The seller will also need documents to claim for compensation in case of damages. Such documents include senior officer’s report or survey report, invoices and estimates for the costs of repair, short landing certificates and a copy of claim letters (Rajagopal 2007, 80). Conclusion In this essay, the plan for global business operations has been discussed. The plan was based on the export of indomie a product of Indofoods from Indonesia to the United Kingdom. The discussion has featured among other things the transactions to be done and the appropriate documentation to complete the transaction. Transactions will be done through the documentary credit. Transportation for the goods will be done by ship from Indonesia to the United Kingdom. There are several documents that will be required to accomplish the transaction. Among them is the packing list, certificate of origin, shipping bill, and certificate of inspection, bill of lading, marine insurance policy, letter of credit, bill of exchange and the bank certificate of payment. The seller waits for 60 days after the goods have arrived in the UK for him to receive the contracted payment. The exporter has to make prior arrangements to ensure that all documentation that is required with the documentary credit is secured if he has to be sure of getting his payment. It is important that the seller agrees with the buyer over the bank to be used so that his payment can be secured. Bibliography Ashwell, Davis & Co., (1920) Export trade volume 2, MacMillan Buckman G. (2005) Global trade: past mistakes, future choices, Zed books Hertel T.W, Hertel W.T (1999) Global Trade Analysis: Modeling and Applications, Ashgate Hinkelman G.E, Sibylla P. (2005) Dictionary Of International Trade: Handbook Of The Global Trade World Trade Press Jones, R. W. (1961). "Compartive Advantage and the Theory of Tariffs". The Review of Economic Studies 28 (3): 161–175. doi:10.2307/2295945. Joshi, R. 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Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 446 USA International Business Publications, Ibp Usa (2007) Indonesia Export-import Trade and Business Directory, International Business Read More