Introduction
International trade is crucial since it involves political, cultural and economic factors for the transacting firms. China is relatively new to other global companies since only this early that it had opened its borders to international trade. This makes some of importers hesitant to the viability of the trade. This paper then points out the situation of FML and its strategy to promote trade relations by providing sound export system, collection method and period, and financing structures. The data are acquired from the firm’s website, the buyer’s () website and other relevant websites including books and journals.
Company Products and Export Operations
The FML Tea Trading Company is a manufacturer, exporter, packager and wholesaler of green tea. Aside from this kind of tea, there are many other produced of the firm available for export sale like white tea, oolong tea, black tea, flavored tea and artistic tea. Due to the incentive of China opening its borders to international trade, the firm is eager to build partnerships to foreign countries particularly those in the European Union. In this respect, it received an order 10 tonnes (net weight) from Tata Group. The latter firm is a UK-based which primarily sourced its tea inputs in a joint-partnership with an Indian firm. The trade pact between these two firms suggested that Tata wanted to diversify its current tea products to include green tea. For its part, FML is bounded to do all it can to deliver the products as it was explained in its website as “guaranteed quality and satisfying service at reasonable price.”
As green tea is minimally oxidized, it is bounded with shorter shelf life than other kinds of dried and fermented teas. This makes the trading under time pressure since the manufacturer provides shelf life for the foreign trader so as to maximize the latter profits.
The Export Process
FML has the experience in handling inquiries from foreign customers and has been able to from an organized system to streamline operations and obtain its export objectives. Tata’s order, as viewed by the FML, is a mere inquiry that necessitates mailing the former with quotations for the quantity being ordered. The steps to accomplish the system are as follows:
1) FML receives inquiry from Tata through electronic mail followed by international facsimile.
2) FML confirms the legitimacy of Tata including its supporting documents from its home country and other internal information related to trading.
3) If passed, FML will forward the inquiry to accounting department which will process all necessary information to make a reliable quotation.
4) At this point, FML poses an assumption that Tata is aware of its products that there is no need of further explanation of its qualities rather the pricing alone. The quotation will be attached with current discounts and other existing promotions that FML may offer to increase sales and satisfaction.
5) Quotation and other attachments (including purchase order form) are sent to Tata through fax supported by electronic mail.
6) The accomplished purchased order will be subjected to checking by the manufacturing department in general and production scheduling unit in particular. Go-signal from them will require Tata to issue letter of credit check against the time frame issued by FML.
7) Tata issued L/C and export department of FML counter-checks if conditions are met or at least possible to the firm.
8) If accepted, FML will start producing the goods, determination/ booking of/ to appropriate ship carrier (the low-cost is through sea) and preparation of insurance.
9) FML raises bill of exchange to the advising bank and receives pre-shipping financing.
10) File.
Mode of Payment
Documentary credit will be used in this transaction to allow FML financing after production and pre-shipping to minimize the risk of default from a new customer, Tata. This will also allow Xiamen ITG (a state-owned financier and export partner) to continue its financing support to the firm despite the bulk of Tata orders. The risk of default is minimized because a part of the total production and shipping costs are paid. This is done for healthy trade of both sides. The instalment will pay the effort given by FML to manufacture its seasonal green tea to a new customer. The payment contract will be facilitated by the two firm’s bank including checking of documents.
On the other hand, Tata’s instalment to the documentary credit will be favourable to its current standing as a relatively new importer. Green tea has its customer value since it is known for health benefits and freshness than any other kind of tea. In effect, it will provide Tata the advantage over other UK distributors because it strengthens its payment scheme with FML that will certainly be favourable to the seller therefore securing supplies of green tea to Tata. The fast cash conversion cycle of green tea jives with the efficiency and known brand of Tata that can be marketed in their distribution channels and other end-users. Its global brand name will be supportive to the payment scheme because the rate of turn-over of its current tea products is considered astonishing. Its operation and financial standing can shoulder the pre-shipping payment secured by documentary credit.
The process will involve the bank of Tata to check the bill of exchange issued by our bank in order for Tata to agree on the terms of shipping and production. If Tata agrees with the bill, payment (instalment at 50%) will be done before the goods will be uploaded to the ship. At this point, the risk is on the side of FML and so insurance is to the firm’s expense. As the payment is transacted through fast inter-bank transaction, goods will start to roll off the sea port of China on to destination UK. The other 50% of the total costs of goods will be paid after inspection of Tata’s representatives of the goods before actually carrying them into their UK-based site. In this stage, the trusted shipping company of FML will assure that goods will be in good condition until Tata’s representatives will be inspecting them.
After arrival to UK port, Tata inspectors will be tasked to assure that quantity and packaging are according to the documents provided by the shipper and FML. In unloading the cargo, the risk is then passed to Tata including the payment of the remaining 50%. The trusted shipper will be the one who will initiate to contact FML if goods are ready for the last payment. Any other post-unloading complaints that are commonly created at the buyer site proper will be entertained by FML as long as it does not deter contracts entered by the two parties and other legal provisions (like defamation). The final payment will prove that goods, in the eyes of parties, are complete.
This mode of payment technique is for both protections of traders. FML is a known exporter of different kinds of tea and in assumption will not paint its name with a bad image especially when customers are first-timers. The pre-instalment will denote its product superiority and effort given in its production. The other 50% at the post-shipping and pre-loading payment is made for FML’s excellence customer service and adoption of best practice of exchange. Tata, on the other hand, will be benefited by the scheme to assure that there is no lacking box or mishandling on the part of shipper and exporter. The presence of banks as intermediaries will cost both parties extra-money but what is money when trade continues and lasts for a long time due to such payment scheme.
Time Frame of Payment
Since there are documents that will support the fact that both parties are well-aware for each others responsibilities in the trade from the commencement of Tata’s inquiry, there is of minimal hindrance that obligations are not met especially they are dealing with international trading. Green tea, in addition, is a perishable good lasting for at most three months from production. Due to this, the production time for the first payment (50%) is done for a maximum of one month. While the other half (50%) is made for another half a month. This is somewhat carries with it features of documentary collection. However, what it supports its identification as documentary credit is that it allows the buyer to pay the other half after inspection, thus, minimizing the risk of incompliance of the seller.
For this specific product (green tea), the time frame for payment is made in such a short-time so to give the manufacturer the working capital to start plating fresh plants of green tea once again. It has several customers locally and aboard that makes it a strong bargaining supplier. However, quality and reliability of shelf life is guaranteed. The supply for green tea is minimal and so compensating with short span of time is but equitable for traders. The customer will then receive fresh supply of tea ready for turn-over to end-users. This time frame is also made to avoid future possible defamation from new customers that shelf life or other ocular defects do not meet the contract. New customers are handled differently when it comes to payment than their preferred and regular counterparts.
Finance Facility
Due to the short-term status of payment, FML will basically want to receive to its financier Xiamen ITG a capital that would give the former to meet the quantity of orders by Tata. This is in the case when internal materials fall short of the required production input to obtain the order. Beyond that, the one month estimated production which no payment is made, Xiamen ITG will give FML working capital to be able for FML to outsource additional machines or hire a sub-contractor for additional labor. This one-month will also necessitate FML to disregard other orders for other kinds of tea that undergo the same process as green tea or use its facilities. As a result, cash flow will be minimal and partially dedicated to green tea orders. This is so to maximize economies of scale and promote efficiency.
Due to this, Xiamen ITG will be the one responsible to guarantee the firm working capital in the course of fulfilling its obligation to Tata. The first payment after production and before shipping will be used to compensate investments of Xiamen to the firm at the time of concentrating to green tea production. The second payment will be used to be retained to be able for FML to have liquidity in the case that another international and bulk order ensues. Basically, exchanging with a European Union is new to the firm and the experience in trading with a member country will post additional knowledge that will be beneficial in building the learning curve. The export duties will also be an issue. Xiamen ITG, being a state-owned enterprise, will make FML passable in export clearance and payment of duties.
Conclusion
FML is basically new to an EC customer. Giving the limited supply of green tea including its feature of freshness, the firm should develop a payment scheme that will compensate both the opportunity lost with the production of green teas and the costs of outsourcing supply of green tea when raw materials fall short of the internal supply. As a result, documentary credit is provided to Tata in order to introduce a warm welcome to Chinese trade as well as both advantageous stances for both firms. FML will finance the production and outsourcing of inputs while Tata is given the Bill of Exchange before first payment will be made. The state owned financier of FML, Xiamen ITG, will support the complimentary costs and export documents of FML for a successful trade. In effect, the reputation of FML is maintained and acknowledged by Tata for a continued business interaction. In return, the scheme will provide Tata’s ability to pay and also reputation.
Credit:ivythesis.typepad.com
0 comments:
Post a Comment