Manufacture and Sale of Product - Case Study Example

Issue in case transaction PHASE I Manufacture and Sale of Product This form of business is taking place between businesses in two countries that are quite far away apart. Gumpbell Soup Company is based in the United States while Hen Hao is based in China. While Gumpbell does her valuation based on the USD currency, Hen Hao on the other hand conducts her valuation based on the Hong Kong Dollar currency. This is a pure case of International trade and hence the businesses are likely to be affected by both transaction risk as well as financial risk. The business during the manufacture and sale of large quantities of soup are likely to experience gains or losses due to the difference in foreign exchange translations. Losses or gains will also be experienced because of misjudgment on what, where or when to invest. This is a case of capital financing decision. A. Specifications The Oriental Delight soup product should and has to be produced just as the formula that was formulated by Specialty Laboratory. Apart from the production, the product must also be canned and labeled according to the requirements of Hen Hao. The specifications are well laid down and no change shall be made to them unless through writing. Concerning the specifications there is a risk that Gumpbell may not produce the goods exactly as prescribed and when this takes place, the company will suffer the damages as the goods are rejected by Hen Hao. Such an impact can be avoided if Gumpbell is sure of its production capacity to be able to fulfill the contract to the end. In addition, the labor employed by Gumpbell must posses the skills required by customers and when this is not available then Gumpbell has to recruit such a labor to avoid such risks. B. Quantities Quantities will depend on the demand requirements by the consumers as studied by the supplier (Hen Hao). Hen Hao’s annual demand is likely to be ranging between, 200,000 to 450,000 cases; this is within the term as prescribed in the supply agreement. Now Hen Hao is not capable of estimating that their current demand is and the time of the year they expect it to be shipped. Apart from the quantities depending solely on demand, the costs per unit would also influence the quantity that Hen Hao would demand. C. Purchase Order Procedure Hen Hao already has the specification of how they demand that the product be manufactured. The manufacturer already holds the specifications; what Hen Hao needs to do each time is to make purchase orders through order forms supplied by the producers (Gumpbell). Such order will be submitted online using internet resources. The purchase orders must be submitted early enough (30 days prior to when they are required) when it is expected that they would be acted upon in time. The purchase order will give the manufacturer the quantity demanded and hence decide on the amount to produce; as well, the shipping instructions and the shipping date are also included. The manufacturer is given a period from which they relax, this is despite the fact that an acknowledgement of Purchase order receipt. D. Forecasts At the onset, Hen Hao could not predict its requirements of the soup within a given specific time. This scenario is likely to change over a given period, as Hen Hao will be in a position to now conduct such forecasts and submit the purchase order forecast to Gumpbell. Failure to submit the forecasts would cause a risk that the soup may not be prepared in advance and the consumers whose appetites are sharp enough would be disappointed. Forecasts are important since most of the time they act as a guide towards that which is required. PHASE II: Transportation, Delivery, Transfer of Title and Risk of Loss Once a sales agreement has been got into, the tendency that the goods would move from one party to the other is certain. The movement involves physical movement as well as contractual movements. Just as goods would move from the manufacturer to the producers is the same way such goods are likely to move from the distributor to the manufacturer though in a different form altogether. A. Transportation Mode The readily identified mode of transportation is water in ships and this is mainly due to the bulky nature of the consignment to be transported all the way from the US to China. The mode is also quite cost effective hence affordable by most of the people. It would though attract additional costs such as insurance premiums that are quite high at times. B. Point of Delivery The point of delivery of the goods will depend on the agreement between the seller and the buyer. This will define the INTERCON used and hence defines who takes care of what cost during the period when the goods are moving from one point to another. Gumpbell manufactures the goods and during dispatch puts them in his loading bay. From here the buyer, Hen Hao would arrange how these soup products will move from the producers premises to the port for shipment and finally to the buyers warehouse. The arrangement between Gumpbell and Hen Hao is that where Gumpbell does not undertake any more costs apart from the manufacturing costs. Other likes insurance and Freight is well taken care of by Hen Hao, the buyer. C. Transfer of Title Transfer of the title to the goods is dependent on what the contract stipulates. In a contract to sale goods, the buyer is obligated to provide the product and strive to provide a transfer of the product in the goods from them to the buyer. The buyer on the other hand is obligated to give the price of the goods in return. The transfer of the title to the soup products will transfer from Gumpbell to Hen Hao when all the conditions of the contract has been fulfilled. Gumpbell has to produce the goods with the specifications required and Hen Hao has to provide the money consideration. D. Passage of Risk of Loss Transfer of the property of the goods from the seller to the buyer as well comes with more responsibility. In as much as Hen Hao would enjoy all the benefits from the purchases made, they have to also know that the loss because of loss also faces them. The buyer bears all the risks of loss once they have ascertained & accepted the goods and therefore paid for them. This form of sale ensures that the seller, Gumpbell tests the goods and ascertains that they meet all the prescriptions. Therefore, the title and risk of loss to the goods is transferred at the manufacturers’ premises at the time the buyer accepts them. PHASE III: Product Quality Control, Inspection, and Rejection Apart from the other obligations hat Gumpbell has, he has another, which involves production of high quality goods. The production of quality would be supported by the fact that Gumpbell has unlimited supply of fresh raw materials and as well possess a production capacity and qualified and skilled labor. In addition, a clear specification has been provided of the “Oriental Delight,” this coupled with the fact that Gumpbell has a R&D laboratory hence up to date with technology will ensure quality is upheld. QUALITY AND QUALITY CONTROL A. Quality Standards Hen Hao requires a manufacturer who will produce the Spicy Chicken with very high quality standards and maintain the consistency in the production and supply at that level. Despite the fact that the cost per unit of Gumpbell is quite high as compared to those of Slick Willie’s, Hen Hao tends to have confidence in Gumpbell. He believes he is in the position of delivering the standards of quality required by his consumers. Higher quality standards are of much importance since this will dictate whether the potential customers will stay or run away. B. Quality Control Procedures Quality control procedures are because Gumpbell already is aware of the product required by Hen Hao. He is therefore is in a position to maintain a quality control mechanism in terms of ensuring that the raw materials it receives from its suppliers conforms to the specifications and the objectives it intends to achieve. Quality control is further enhanced from the fact that the product is developed from the laboratory and has an existing formula. This prompts the control by Hen Hao for Gumpbell to do a test of their produce and accompany the delivery with a report. C. Product Warranties Product warrant requires that the products by the manufacturer meet all the specifications laid down. The timing of the production and the duration to which the product should last must also be exemplary. Gumpbell has to Assure Hen Hao of the durability of the Spicy Chicken soup produced and the fact that it would meet the specifications required by the consumers. INSPECTION, ACCEPTANCE AND REJECTION OF PRODUCT The products warranty period as stipulated will allow Hen Hao inspects the delivered goods and cross check, them together with the test results presented. Conformity with the required aspects will lead to the acceptance of the products and thereafter the sale to the consumers. The warranty period would also give the buyer room to get the customer responses concerning the products sold to them. Non-conformity of all or part of the products would lead to a rejection by Hen Hao, this is a big loss to Gumpbell and this makes him not dare produce low quality products or products, which do not meet Hen Hao’s standards as, provided in the specifications. PHASE IV: Pricing and Payment The sole and main objective of a profit making organization like both Gumpbell and Hen Hao is to create a margin between their costs and sales. This is the reason why Hen Hao ensured that it invests in a formula after doing a market research and finding what the consumers in Asia need. In addition, it is the same reason that it has to negotiate for a better deal with Gumpbell and consider Slick Willies offer incase they do not seal a deal with Gumpbell. Pricing is therefore very important and it is composed of the costs of production, packaging, and labeling. All these costs brought together forms the base price and from here a margin is set to form the unit price. Gumpbell has a total cost of $6.50 and has a set margin of $2.00 making its total unit price to be $8.50. This is in contrast to Slick Willies total unit price of $6.75 composed of a cost per unit of $5.50 and a desired margin of $1.25. Slick Willies is a non-union firm hence experiences very low labor cost a factor that has contributed to its low costs of production. The point of delivery will determine if other costs like insurance and freight affect the costs. Gumpbell does not incur any extra costs since their duty is to produce the product, test them in the independent laboratory by Hen Hao for authenticity, and then wait for Hen Hao to come for the goods at their parking bay. Once a negotiation is done, Hen Hao seeks for a deal that is stable in terms of price adjustments and only adjusts prices after a minimum duration of 3 years. This he claims will enable him aclamatize with its consumers as well. Commercial invoicing will be adopted by Gumpbell on the online platform and such a form of invoicing will ensure that the invoices sent through the internet have numbers to enable the sender be able to trace them and their progress. They will also indicate date, shipping date. Mode of transport, port of entry, delivery, and payment terms; In addition, the commercial invoice sent by Gumpbell will indicate a complete listing and the description of the goods in terms of quantities, prices and discounts. Invoices will be sent way after the goods are been delivered and accepted for the sake of their accuracy. Hen Hao after going through the invoices and ascertaining their correctness decides of whether to pay through direct transfer to the bank or use letter of credit. Payment through a letter of credit is normally preferred due to its ability to reduce risks between the buyer and the seller. Gumpbell would prefer to be paid through a letter of credit, as this will assure him of his payments as it is based on the conditions of delivery to the buyer. A letter of credit is also irrevocable hence; Hen Hao should use a trusted bank. For the use of a letter of credit, there has to exist the following documents:- The commercial invoice, a bill of lading, warranty of title and a letter of indemnity and the documents must not posses any defect whatsoever as this may render them non-compliant to the letter of credit. PHASE V: Proprietary Rights and Distribution Rights A. Proprietary Rights Each of the parties to the trade have a claim on what they call their rights of operations into the business they engage in and as well the right to maximally benefit from their ventures. Hen Hao has a right as a main distributor of food products in China. This is its area of establishment and hence posses a proprietary right. Gumpbell on the other hand has a well-built reputation as a producer and supplier of food products for himself as well as for label clients like Hen Hao. This is his field of operation and has proprietary rights. Either party should not at all cost move past their boundaries. Hen Hao dominates most of the market in the Middle East; Gumpbell only having Japan and South Korea. The “Oriental Delight” formula is since acquired by Hen Hao hence a proprietary right which has to be protected. B. Intellectual Property Rights Indemnification Organizations require indemnification for intellectual property rights. Specialty Foods Laboratories, Inc., which offered its services to Hen Hao hence helping in the development of the proprietary formula called “Oriental Delight,” is not an exception. Hen Hao has to offer indemnification to the independent food research and development laboratory. Intellectual property right compensation is something that should never be ignored of any individual in the field of academia. C. Distribution Rights Hen Hao as a major distributor in the Middle East must remain to dominate that market but this does not mean other firms are kept away. The competition provided by firms with production capacity like Gumpbell is much in order to benefit the consumer. Most of the distribution rights though remains with Hen Hao since it dominates the market. In Asia Gumpbell only has two major markets but striving for example through its deal with Hen Hao to expand its routes in the region and enhance the distribution of its products. In its home country that is the US, Gumpbell has grown and has even given out part of its ownership. It is one of the major distributors of food products in the region since its inception in 1896. Reference Refer to the case study Read More