Company Products and Export Operations
The Tanagra Group is one of the biggest Bulgarian cheese exporters. We mainly export to Asia and North America. The volume of the exports ranges from 15 tonnes to 25 tonnes of white cheese per consignment. As an export manager of the Tanagra Group, I have received an order from the Japanese company Lapidary for 15 tonnes net weight of white cheese. Lapidary is a new client for the Tanagra Group, with good prospects for developing further business relationships. Therefore, my ultimate purpose is to satisfy the customer by ensuring a smooth export process, which we hope in the future, will generate more orders from the Japanese company.
The Export Process
The Tanagra Group is aware that the task of processing the export order from the time of the initial enquiry until payment for the goods is received is a crucial one. It involves the execution of four contracts with precision, expertise and timely application. Our export management strategy includes the following sequential steps:
1) The Tanagra Group export sales office receives the initial export enquiry from Lapidary.
2) Our costing department calculates approximate total weight or volume of the finished packed goods and completes non transport quotation
3) Our shipping department obtains quotations on insurance and freight charges to destination delivery point and submits the information to the costing department, which calculates the overall quotation.
4) Information on Lapidary is collected and we obtain satisfactory status report
5) Pro-forma invoice (including currency, terms of delivery and terms of payment) is prepared and send to Lapidary.
6) Purchase Order Received
7) After checking our stock availability, manufacturing lead time and delivery schedules we agree to accept the order provided Lapidary agrees on a letter of credit payment.
8) The buyer accepts
9) The letter of credit is received and our export office checks whether all the conditions can be met.
10) The export office accepts the conditions and despatches an acknowledgment to Lapidary.
11) The manufacturing of the goods commences
12) Lapidary does not require a pre-shipment inspection
13) The goods are produced within the arranged timeframe and are now packed. Packing list is provided.
14) Preparation of documentation that will involve the following control areas: customs at origin, transport, cargo insurance, payment
15) Booking of the cargo with the carrier NaviBulgar
16) Delivery of the goods to the shipping line
16) Checking despatch and advising buyer
17) Collection of the documents.
18) Confirming goods despatched on specific sailing. Lapidary is informed.
19) The documents are checked by our shipping department and since no mistake is found we raise a Bill of Exchange at a 90 days tenor signed by our managing director
19) The Shipping department checks the documents against the letter of credit and since no mistake is found, they are presented to our advising bank
20) We await acceptance of the Bill of Exchange
21) Bill of Exchange accepted.
22) We receive post shipment finance in the form of Discounted Bill of Exchange without recourse to the seller
23) Closed file
Mode of transport/Freight Charges
In determining the mode of transport factors such as speed and frequency of delivery, cost, variables of the cargo and quality of the service have been considered. Even though the buyer is a long way away he does not want the goods quickly but requires the cheapest mode of transport possible. The cheese is not perishable since it is vacuumed using a specialized technology and can last a long journey. Therefore, we have calculated that with the size of the order, the cheapest mode of transport will be by sea. Since the buyer wants the goods delivered to the port of Osaka, Japan, the journey will take approximately 25 days to complete
Terms of delivery
The delivery method that was agreed by both parties involved in the transaction is DEW Port of Osaka (delivered ex-quay). Under this term we as the seller arrange the goods to be made available to Lapidary on the quay of Port of Osaka. Therefore we have to bear the full cost and risk involved to bring the goods to the designated port. Once the goods are offloaded the ship and made available on the quay the risk is transferred to the buyer, who will be responsible to clear the goods for import and transport them to his premises. Under DEW term, Tanagra Group is responsible for: ‘supplying the goods in accord with contract sale terms; bearing all risk and expense of the cargo conveyance to the destination port; providing and paying for the customary packing of the goods; promptly informing the buyer of the expected date of arrival of the vessel and providing the buyer with Bill of Lading and any other documents required to enable the buyer to take possession of the consignment.’ (1)
The DEW delivery term is welcomed by the Tanagra Group, since we will be able to control the transit arrangements together with cost when concluding the arrangement. Since, Tanagra Group has a significant volume of business generated to Asia, we will be able to get a discount by using the national shipping line NaviBulgar (stated owned major shipping line in Bulgaria).
Transportation
The cheese will be produced in Sofia, the capital of Bulgaria. Sofia is an inland city, which is about 198 miles away from the major Bulgarian port of Bourges. Therefore a multi-model transport system has to be used. The goods will be placed in a standard type container at our premises in Sofia. The two types of transport that we believe will be most cost effective are road transport and ship transport. From our premises in Sofia, the goods will be loaded on one of our own road trailers and delivered to the port of Bourges. The driver accompanying the vehicle throughout the road transit will exercise personal supervision and therefore reduce the risk of pilferage. When the goods arrive at the port of Bourges, they will be loaded onto the ship that will leave directly to the port of Osaka with no intermediate handlings of our goods on the way. The route of the ship will pass through Bosporus, Gibraltar, and the Suez Canal and to Japan after that. The goods will leave the port of Bourges on 25, November, 2005 and on schedule are expected to arrive at the port of Osaka on 20, December, 2005.
Packaging
Since ISO containerization will be used and no transhipments will be made en route, less extensive packing will be required. The cheese will be put in 1000 metallic tins each of 15 kg net, 20 kg gross weight- each tin further packed in a carton.
Export Price
The export price will include all the expenses to produce and transport the goods, as well as the profit of our company.
In EURO
Production of 1500 kg of cheese: 30, 000
Profit of 35% 40, 500
Packing and documentation cost 500
EX. Sofia: 80, 000
Carriage to port: 100
Depot Handling 500
Export custom clearance 100
FOB Bourges Port: 80, 700
Main carriage to Osaka Port: 2,500
Cargo insurance: 1,000
Unloading charge at destination 200
DEW Port of Osaka 84, 200
Insurance
The Tanagra Group is aware that cargo insurance is an indispensable part of overseas trade. ‘As well as protecting from maritime perils, insurance plays a vital role in the financing of overseas trade by making it possible for banks to lend money against cargo in transit- a proposition they will only consider if the cargo is protected by insurance.’ (2)
According to the sales contract between the Tanagra Group and Lapidary, the Tanagra Group will be responsible for insurance cover until the point the goods are unloaded from the ship at the designated port. When the goods are unloaded at the port of Osaka, in consistence with the term DEW, the risk is transferred from us (the seller) to the Japanese company (the buyer). Therefore, our insurable interest ceases and that of the buyer commences and continues until arrival of the goods at his/her premises. Ultimately, the buyer will be responsible for insurance cover from the quay of Osaka to his/her premises.
We have decided to insure the goods with a Lloyd’s agent. However, we intend to insure the goods only from the point when they are loaded on the ship to Japan. Since we cannot afford the higher premiums required we will bear the risks of the road transport of the goods. We bear in mind the fact that it is a short road journey and that the driver will ‘report in’ to our office at staged points en route. Therefore, we want the insurance policy to take effect immediately after the goods were loaded on the ship to Japan. The insurable value of the goods against all risks is EURO 50, 000 and this is the sum insured by the Lloyd’s underwriters. In case of an accident the principle of indemnity will take effect and we will be placed in the same position that we enjoyed before the lost occurred.
Method of Payment
Tanagra Group has never dealt with Lapidary before, thus the risk of default in payment should not be underestimated. Since we are in a strong bargaining position we have achieved an agreement on a non-transferable irrevocable letter of credit with 90 days credit terms. Documentary credit will protect us in case the buyer defaults on payment. The issuing bank of the buyer is Citibank, Tokyo. Previously, we have dealt with this bank and we are aware that it is one of the most reputable and profitable banks in Japan. Additionally, the country itself does not represent a major risk because Japan is a very stable economy and a country that is not likely to get involved in political conflicts. On the basis of the above, the Tanagra Group has decided not to require a confirmed irrevocable letter of credit and instead accept the issuing bank guarantee of payment. In result we will reduce our cost in terms of fewer fees payable to our advising bank Barclays Bulgaria.
How does documentary credit operate?
1. Lapidary will approach its bank, the issuing bank, and ask them to issue a documentary credit in our favour (the beneficiary).
2. If the issuing bank (Citibank, Tokyo) agrees it takes responsibility to pay us in case Lapidary becomes insolvent. Next, Citibank asks our advising bank (Barclays Bulgaria) to advise the details of the credit. The advice will include details of the amount, the required documents and the expiry date.
3. Barclays Bulgaria will transmit the details of the credit to the Tanagra Group
4. We will immediately despatch the goods, and present the stipulated documents to Barclays Bulgaria. Amongst the documents will be a bill of exchange drawn by The Tanagra Group at a tenor of 90 days. Payment of the Bill will be guaranteed by Citigroup, Tokyo if all conditions of the credit are met.
5. We will receive the payment within 90 days after the buyer has accepted the Bill of Exchange with the necessary documents.
However, our company is likely to face cash flow problems if it does not receive payment immediately. This is why we need post- shipment finance to cover the 90 days credit period. In this situation our bank has proposed Bill of Exchange discounting without recourse to the seller. In other words, Barclays Bulgaria will calculate the net present value of the face value of the Bill utilising a cost of funds, interest rate and a margin. The net value calculated will be advanced to us. Since the Bill is guaranteed by Citigroup (Tokyo) and Lapidary has a strong credit rating, Barclays Bulgaria will waive its rights of recourse to the Tanagra Group. Usually this type of loan is given easily, especially with credit insurance, which we intend to arrange, since the documentary credit is not confirmed by our advising bank
Required Documents
In processing an export consignment, there can be up to four contracts to execute: the export sales contact, the contract of carriage, the financial contract and the contract of cargo insurance. Each of those requires extensive documentation. In our case the most important documents that we should provide are:
1. Bill of Lading- ‘This is the most important commercial document in international trade and is used to control delivery of goods by sea. It is a receipt for goods shipped on board a vessel, signed by the person who contracts to carry them. The most important point about Bill of Lading is its ability to act as a document of title, thereby allowing transfer of title during transit.’ (3)
2. Insurance Certificate- this is a document that proves that the cargo has been insured against all forms of damages (in our case). There will also be a credit insurance certificate which will be a guarantee for the payment.
3. Certificate of Origin- it specifies the nature, quantity, value and the place of manufacture of the goods. It will be issued by the Bulgarian Chamber of Commerce. It is required by Japan to simplify its customs duties.
4. Certificate of shipment- ‘it will be supplied by our designated carrier. Essentially, certificate of shipment is a declaration of export of the mentioned goods. If the exporter has been zero rated for VAT, and without the certificate of shipment as a proof of export, the VAT authorities can claim VAT payment from the exporter.’ (4)
5. Export Cargo Shipping Instruction (EASY) – it will be raised by The Tanagra Group and will provide full details of the shipment and instructions for the shipment to the carrier. The information given is enough to specify which party will pay which charges originate customs declaration and arrange delivery to the carrier.
6. The invoice- it is originated by the Tanagra Group and provides full details of the products supplied; in terms of pricing, relevant Inco term 2000 as specified in the credit as well as shipping details.
7. Packing List- The packing list will be provided to the Japanese authorities by the Tanagra group. It is a mandatory document required by the Japanese customs and the banks involved under the documentary credit systems.
8. Quality Certificate- this document will be issued by our company and will be signed and stamped by the Bulgarian Chamber of Commerce. It will prove that the goods meet the expected quality.
Bibliography
1. BRANCH, Alan, (2000), Export Practice and Management, 4th edition, Business Press Thomson Learning: London (1), (2)
2. COWBELL. Paul et al (2000), Finance of International Trade, 8th edition, Financial World Publishing: London
3. Week 5 handout (International Transport and Customs Documents) – (3), (4)
4. Tanagra group website
5. Bulgarian chamber of commerce website
Credit:ivythesis.typepad.com
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