International Trade Logisticsjnujprdistance.com/assets/lms/LMS JNU/MBA/MBA...1/JNU OLE Chapter I Principles of Management Aim The aim of this chapter is to: • introduce the concept

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Index

ContentI. ...................................................................... II

List of FiguresII. ..........................................................VI

List of TablesIII. ......................................................... VII

Case StudyIV. ............................................................ 125

BibliographyV. .......................................................... 130

Self Assessment AnswersVI. ..................................... 132

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Principles of Management ........................................................................................................................... 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction to Management .................................................................................................................... 21.2 Brief History of Management .................................................................................................................. 21.3 Characteristics of Management ................................................................................................................ 31.4 Functions of Management ........................................................................................................................ 31.5 Different Approaches to Management ..................................................................................................... 4 1.5.1 Systems Approach .................................................................................................................... 4 1.5.2 Types of Systems ..................................................................................................................... 4 1.5.3 Contingency or Situational Approach ...................................................................................... 5 1.5.4 Difference between System Approach and Contingency Approach ........................................ 61.6 Administration and Management ............................................................................................................. 61.7 The Manager ............................................................................................................................................ 7Summary ....................................................................................................................................................... 9References ..................................................................................................................................................... 9Recommended Reading ............................................................................................................................... 9Self Assessment ........................................................................................................................................... 10

Chapter II ................................................................................................................................................... 12Export-Import Documentation ................................................................................................................. 12Aim .............................................................................................................................................................. 12Objectives .................................................................................................................................................... 12Learning outcome ........................................................................................................................................ 122.1 Introduction ............................................................................................................................................ 132.2 Need ....................................................................................................................................................... 132.3 Kinds of Documents .............................................................................................................................. 132.4 Principal Export Documents .................................................................................................................. 15 2.4.1 Commercial Invoice ............................................................................................................... 15 2.4.2 Packing List ........................................................................................................................... 16 2.4.3 Marine Insurance Policy/Certificate ...................................................................................... 16 2.4.4 Bill of Exchange .................................................................................................................... 16 2.4.5 Letter of Credit ....................................................................................................................... 172.5 Checklist for the Seller after the Documentary Credit Opening ............................................................ 19 2.5.1 General Points ........................................................................................................................ 19 2.5.2 Deadlines and Shipment of Goods ......................................................................................... 19 2.5.3 Draft ....................................................................................................................................... 19 2.5.4 Invoice ................................................................................................................................... 19 2.5.5 Transport Documents in General ........................................................................................... 20 2.5.6 Marine Bill of Lading ............................................................................................................ 20 2.5.7 Bill of Lading ......................................................................................................................... 20 2.5.8 Air Way Bill (AWB)/Air Consignment Note ......................................................................... 21 2.5.9 Combined Transport Document (CTD) ................................................................................. 22 2.5.10 GR/PP/VPP/COD/SOFTEX Forms ..................................................................................... 22 2.5.11 Export Inspection Certificate ............................................................................................... 23 2.5.12 AR4 and AR5 Form ............................................................................................................. 23 2.5.13 Shipping Bill ........................................................................................................................ 23 2.5.14 Certificate of Origin ............................................................................................................. 24 2.5.15 Shipment Advice .................................................................................................................. 24 2.5.16 Consular Invoice .................................................................................................................. 242.6 Auxiliary Documents ............................................................................................................................ 24

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2.7 Documents in Import Trade ................................................................................................................... 252.8 Export Documentation and Procedures - Step by Step .......................................................................... 25 2.8.1 Despatch of Documents to the Export Department of the Firm by the Factory Office ........ 26 2.8.2 Port, Shipping and Customs Formalities .............................................................................. 272.9 Some Useful Tips ................................................................................................................................... 29Summary ..................................................................................................................................................... 31References ................................................................................................................................................... 32Recommended Reading ............................................................................................................................. 32Self Assessment ........................................................................................................................................... 33

Chapter III .................................................................................................................................................. 35International Finance and Foreign Exchange Market ........................................................................... 35Aim .............................................................................................................................................................. 35Objectives .................................................................................................................................................... 35Learning outcome ........................................................................................................................................ 353.1 Introduction ............................................................................................................................................ 363.2 Growing Importance of International Finance ....................................................................................... 363.3 International Financial Management ..................................................................................................... 37 3.3.1 Globalisation and International Finance ................................................................................ 37 3.3.2 Scope of International Financial Management (IFM) ........................................................... 37 3.3.3 Role of the International Financial Manager ......................................................................... 38 3.3.4 Challenges of International Financial Managers ................................................................... 383.4 Global Financial Markets ....................................................................................................................... 393.5 Classification of Financial Markets ....................................................................................................... 39 3.5.1 Details of Offshore Markets................................................................................................... 40 3.5.2 Evolution of Offshore Markets .............................................................................................. 413.6 Introduction to Foreign Exchange Market ............................................................................................. 413.7 Functions of the Foreign Exchange Market ........................................................................................... 423.8 Forex Market Participants ...................................................................................................................... 423.9 Foreign Exchange .................................................................................................................................. 433.10 The Indian Forex Markets .................................................................................................................... 44 3.10.1 Forward Exchange Contracts ............................................................................................... 44 3.10.2 Other Regulations ................................................................................................................ 45 3.10.3 Early Delivery/ Extension or Cancellation of Forward Exchange Contracts ...................... 45Summary ..................................................................................................................................................... 46References ................................................................................................................................................... 46Recommended Reading ............................................................................................................................. 47Self Assessment ........................................................................................................................................... 48

Chapter IV .................................................................................................................................................. 50International Marketing ............................................................................................................................ 50Aim .............................................................................................................................................................. 50Objectives .................................................................................................................................................... 50Learning outcome ........................................................................................................................................ 504.1 Introduction ............................................................................................................................................ 514.2 Definition of Marketing ......................................................................................................................... 514.3 Understanding Strategic Marketing ....................................................................................................... 524.4 Post Modern Era of Marketing .............................................................................................................. 524.5 Global Marketing ................................................................................................................................... 534.6 Marketing Evolutionary Stages .............................................................................................................. 534.7 Factors Leading to Internationalisation ................................................................................................. 544.8 The International Product Trade Cycle .................................................................................................. 544.9 Orientation of Management ................................................................................................................... 55

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Summary ..................................................................................................................................................... 56References ................................................................................................................................................... 56Recommended Reading ............................................................................................................................. 56Self Assessment ........................................................................................................................................... 57

Chapter V .................................................................................................................................................... 59International Laws for Business ............................................................................................................... 59Aim .............................................................................................................................................................. 59Objectives .................................................................................................................................................... 59Learning outcome ........................................................................................................................................ 595.1 Introduction ............................................................................................................................................ 605.2 Need of Law ........................................................................................................................................... 605.3 International Trade - Legal Framework ................................................................................................. 62 5.3.1 Regulation of Imports and Exports ........................................................................................ 62 5.3.2 Global Business Enterprises .................................................................................................. 62 5.3.3 Regulation of Global Competition: ........................................................................................ 63 5.3.4 Protecting Business Property Rights ...................................................................................... 63 5.3.5 The MNE as World Citizen .................................................................................................... 635.4 Contracts ............................................................................................................................................. 64 5.4.1 Legal Provisions .................................................................................................................... 64 5.4.2 Letters of Credit ..................................................................................................................... 64 5.4.3 Transport and Insurance ......................................................................................................... 645.5 Payment Terms ....................................................................................................................................... 655.6 Payment Terms ....................................................................................................................................... 685.7 Foreign Market Objectives .................................................................................................................... 695.8 International Sales Agreements .............................................................................................................. 715.9 Terms And Conditions ........................................................................................................................... 725.10 Differences between an Agent and a Distributor ................................................................................. 73Summary ..................................................................................................................................................... 74References ................................................................................................................................................... 74Recommended Reading ............................................................................................................................. 75Self Assessment ........................................................................................................................................... 76

Chapter VI .................................................................................................................................................. 78Introduction to Material Management .................................................................................................... 78Aim .............................................................................................................................................................. 78Objectives .................................................................................................................................................... 78Learning outcome ........................................................................................................................................ 786.1 Introduction ............................................................................................................................................ 796.2 Background ............................................................................................................................................ 79 6.2.1 Importance of Materials for a Project .................................................................................... 80 6.2.2 Material Management ............................................................................................................ 816.3 Need for Material Management System ................................................................................................ 836.4 Goals of Material Management ............................................................................................................. 846.5 Benefits of Material Management ......................................................................................................... 85Summary ..................................................................................................................................................... 86References ................................................................................................................................................... 86Recommended Reading ............................................................................................................................. 87Self Assessment ........................................................................................................................................... 88

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Chapter VII ................................................................................................................................................ 90Supply Chain Management ....................................................................................................................... 90Aim .............................................................................................................................................................. 90Objectives .................................................................................................................................................... 90Learning outcome ........................................................................................................................................ 907.1 Introduction ............................................................................................................................................ 917.2 Supply Chain .......................................................................................................................................... 917.3 Supply Chain Management .................................................................................................................... 937.4 Objective of Supply Chain Management ............................................................................................... 947.5 Importance of Supply Chain Management ............................................................................................ 947.6 Activities of Supply Chain Management ............................................................................................... 957.7 Decision Phases in a Supply Chain ........................................................................................................ 967.8 Process View of Supply Chain ............................................................................................................... 977.9 Linking Competitive (Business) and Supply Chain Strategies .............................................................. 987.10 Supply Chain Drivers ........................................................................................................................... 99 7.10.1 Barriers of Supply Chain Management ............................................................................... 99 7.10.2 Scope of Supply Chain Activities ...................................................................................... 1007.11 Marketing Mix Model ........................................................................................................................ 100Summary ................................................................................................................................................... 102References ................................................................................................................................................. 102Recommended Reading ........................................................................................................................... 103Self Assessment ......................................................................................................................................... 104

Chapter VIII ............................................................................................................................................. 106Inventory Management and Control ..................................................................................................... 106Aim ............................................................................................................................................................ 106Objectives .................................................................................................................................................. 106Learning outcome ...................................................................................................................................... 1068.1 Introduction .......................................................................................................................................... 1078.2 Meaning and Definition of Inventory .................................................................................................. 1078.3 Management of Inventories ................................................................................................................. 1088.4 Objectives of Inventory Management .................................................................................................. 1088.5 Inventory Control ................................................................................................................................. 1098.6 Inventories Control Techniques ............................................................................................................110 8.6.1 ABC Analysis of Inventories ................................................................................................110 8.6.2 Fixation of Norms of Inventory Holdings ............................................................................111 8.6.3 Trial and Error Approach ......................................................................................................113 8.6.4 Stock Level Sub-system ........................................................................................................114 8.6.5 Pricing of Raw Materials ......................................................................................................115 8.6.6 Perpetual Inventory System ..................................................................................................115 8.6.7 Factors Influences the Level of each Component of Inventory ............................................1168.7 Control and Review ..............................................................................................................................118Summary ................................................................................................................................................... 121References ................................................................................................................................................. 121Recommended Reading ........................................................................................................................... 122Self Assessment ......................................................................................................................................... 123

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List of Figures

Fig. 1.1 Contingency approach ...................................................................................................................... 5Fig. 1.2 Distinction between administration and management ...................................................................... 7Fig. 4.1 Relation between product life cycle (Trade and investment) ......................................................... 54Fig. 6.1 Typical material management in construction ................................................................................ 83Fig. 6.2 Division of responsibilities for material management .................................................................... 84Fig. 6.3 General structure of a material management system ...................................................................... 84Fig. 7.1 A conceptual model of a basic supply chain ................................................................................... 91Fig. 7.2 A Supply chain network .................................................................................................................. 92Fig. 7.3 Key parts of supply chain ............................................................................................................... 92Fig. 7.4 Flow of supply chain ...................................................................................................................... 93Fig. 7.5 Supply chain management activity ................................................................................................. 95Fig. 7.6 Cycle view of supply chain ............................................................................................................ 97Fig. 7.7 Push/pull view of supply chain ....................................................................................................... 98Fig. 7.8 Linking competitive (business) and supply chain strategies .......................................................... 98Fig. 7.9 Supply chain drivers ....................................................................................................................... 99Fig. 7.10 Elements of marketing mix ......................................................................................................... 101Fig. 7.11 Market space model .................................................................................................................... 101

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List of Tables

Table 1.1 Advantages and disadvantages of systems approach ..................................................................... 5Table 1.2 Systems approach vs. contingency approach ................................................................................. 6Table 1.3 Administration vs. management ..................................................................................................... 7Table 4.1 Stages of domestic to global evolution ........................................................................................ 53Table 5.1 Payment and Risks with Letter of Credits ................................................................................... 66Table 5.2 Risk Factors Influencing Payment Terms .................................................................................... 67Table 6.1 Classification of materials ............................................................................................................ 80

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Chapter I

Principles of Management

Aim

The aim of this chapter is to:

introduce the concept of management•

elucidate the history of management•

explain the characteristic of management•

Objectives

The objectives of this chapter are to:

recognise the functions of management•

determine the different approaches to management•

elucidate the types of systems•

Learning outcome

At the end of this chapter, you will be able to:

understand the role of management•

identify the difference between system and contingency approach•

enlist the features of management as system•


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1.1 Introduction to ManagementManagement is the art of getting things done by a group of people with the effective utilisation of available resources. PeterF.Druckerdefinesmanagementas,“Management isanorgan;organscanbedescribedanddefinedonlythrough their functions.”

AccordingtoHenryFayol,“Tomanageistoforecastandplan,toorganise,tocompound,tocoordinateandtocontrol.”

AccordingtoF.W.Taylor,“Managementistheartofknowingwhatyouwanttodoandthenseeingthatitisdonein the best and cheapest way.”

AccordingtoKoontzandO’Donnel,“Managementisthecreationandmaintenanceofaninternalenvironmentinanenterprisewhereindividuals,workingingroups,canperformefficientlyandeffectivelytowardstheattainmentof group goals. It is the art of getting the work done through and with people in formally organised groups.”

With the development of an organisation the complexities also increase and there comes the need of an effective management system. This is the requirement of every organisation, not necessarily a business organisation but also for banks, schools, hospitals and many more.

1.2 Brief History of ManagementThe concept of management was developed from the days of Adam. Management is required where a group of people are working to achieve any objective. Henry Fayol gave the management theory in (1916) which was based onhisexperiencesinaminingcompany.Thismanagementtheorywascompiledinabooknamed“TheGeneralandIndustrialManagement”.Heclassifiedtheelementsofmanagementintofivecategoriesasmentionedbelow:

Planning•Organising•Commanding•Co-ordination•Control•

OtherimportantcontributionwasmadebyFrederickWinslowTaylor(19thcentury)whowasthefatherofScientificManagement.HegavethefollowingprinciplesofScientificManagement:

Science is not a rule of thumb: Where the worker is allotted fair work, standardised and proper system of payment •which discarded the old method of working.Harmony in group action: There should be peace and friendship in the group action and any kind of dissatisfaction •should be eliminated.Co-operation:There shouldbe cooperationbetweenmanagement andworkers; this is achievedbymutual•understanding and change in thinking.Maximum output: It is achieved through division of work and responsibility by the management and workers •together.Improvement of workers: Workers should be well examined on the physical, educational and psychological •parameters and should be provided with the training for their growth.SomeoftheothermajorworksinthemanagementfieldweredonebyPeterF.Drucker,MaxWeber,George•Elton Mayo, Mary Parker Follett, Henry L. Gantt etc.

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1.3 Characteristics of ManagementThe following are the characteristics of management:

Management is an art as well as a science•It is an activity of effective utilisation of available resources•It is a continuous process•Each activity in management is directed towards the achievement of pre-determined objectives•It is a group of organised activities•It is a factor of production•It is a system of activity•It is a discipline•It is a purposeful activity•It is a distinct entity•Itaimsatmaximisingprofit•It helps in effective decision making•It is a profession•The principles and practices of management have universal applications•It is dynamic in nature•It is needed at all levels•It is the function of executive leadership•

1.4 Functions of ManagementThevariousmanagementfunctionsareclassifiedasbelow:

Planning: It refers to the future course of action and is a primary function of management.•Organising: It is the distribution of work in a group or a section for effective performance.•Staffing:Itconsistsofactivitiesrelatedtotheselectionandplacementofrightpeopleforrightjobs.•Directing:Thisisaprocesswherethemanagerinfluencestheworkofhissub-ordinates.Itincludesguidance,•supervision and motivational aspects of the employees.Co-ordinating: It is a process of synchronising activities of various people in the organisation in order to achieve •goals.Motivating: Motivation is one of the key factors for the speedy and effective performance of employees which •is taken care of by resourceful leaders.Controlling: It deals with the process of verifying that the achieved goals are in order with the pre-planned •objectives. In case of deviation corrective measures are taken.Innovation: It includes developing new services, techniques, products and so on to cater to the changing need •of the consumers and the market.Representation:Itisafunctionwhereamanagerhastodealwiththecustomers,suppliers,governmentofficials,•banks,financialinstitutions,tradeunionsetc.asarepresentativeofthecompany.Decision-making: It helps in functioning of organisations as every employee has to take certain decisions on •everyday basis.Communication: It refers to the exchange of information for the frictionless regulation of job and coordination •of the activities.


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1.5 Different Approaches to ManagementThere are many approaches in management thought where each approach tries to explain the nature and content of management separately with different beliefs and views. Few important management approaches are as discussed below:1.5.1 Systems ApproachSystemsapproachwasdevelopedsometimeafter1950’sandinitiallydevelopedbyWeinerandlatermanysignificantcontributionsweremadebyotherpeopleaswell.System“isasetofinter-connectedandinter-relatedelementswhich are arranged in order and operate together to achieve certain goals.”

The parts of a system are:Input•Process•Output•

1.5.2 Types of SystemsThere are four types of systems. They are as discussed below:Closed systemThis system works without any external requirement and interference and works on the principles of unity of command span of control and equal authority and responsibility.

Open systemThissystemisdependentupontheoutsideenvironmentforfeedbackandresourcesandforthedisposaloffinishedproducts

General systemThis approach to management has a relation with formal organisation.

Specialised systemThis system includes the areas of organisation structure, job design and computerised information.

Features of management as systemThe systems approach has the following features:

Social system•Open system•Adaptive•Multidisciplinary•Dynamic•Integrated Approach•Multidimensional•Multivariable•Probability•

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Advantages of Systems Approach Disadvantages of Systems Approach

It helps in studying the functions of complex organisations.

It cannot be easily applied to large and complex organisation.

It highlights interdependence between various ele-ments in an organisation. It is not suitable for smaller organisation.

It provides clue to the complex behaviour of the people.

No tools and techniques are provided to the man-agers to implement it.

It analyses problems in relation to other problems. -

Table 1.1 Advantages and disadvantages of systems approach

1.5.3 Contingency or Situational ApproachThis approach was developed on the basic theme that there is no single best solution to the problems arisen in all situations.ItwasdevelopedbyJ.W.LorschandP.R.Lawrenceinthe1970’s,whichstatesthat“behaviourofonesub-unit is dependent on its environment and relationship to other units or sub-units that have some control over the sequences desired by the sub-unit”.

Features of Contingency Approach

There is no best way of doing things •Management action is situational and is susceptible to •outside the system or sub-system Management policies and practices are subject to •change as per the changes in the outside world No action is universal that varies with situation •Human relations skill is necessary for managers to •accommodate and stabilize change

It improves the diagnostics skills •It discloses the role and the performance of managers •in an organisation A manager is expected to know all the alternative •course of action before taking any action The managerial principles and functions to be •followed as per the discretion of the situation

Advantages of Contingency Approach

Fig. 1.1 Contingency approach


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1.5.4 Difference between System Approach and Contingency ApproachThe difference between systems approach and contingency approach are as given in the Table 1.2 below:

Systems Approach Contingency Approach

It treats all organisations as same and has no unique nature. It treats each organisation as unique.

The contributors of systems approach are social psychologists.

The contributors of contingency approach are sociologists.

Systems approach is the pioneer to the contingency approach.

Contingency system has been built over systems approach.

Systems approach may specify situations under which a particular type of organisation can function well.

Management action is situational and no situation is predicted accurately.

It provides a global theoretical model for understanding organisations.

It provides operational tools and techniques for analysing and solving problems.

Systemsapproachisvagueandunspecific. Contingency approach is pragmatic, specific andaction oriented.

The main concepts are input, output process, open system, system boundary, synergy, dynamic equilibrium,entropyandequifinality.

Therearenospecificconcepts.

Systems approach emphasises interactions and inter relationships among systems and subsystems.

Contingency approach emphasises. interrelationships and interdependencies and their influence on organisational design and managerial style.

It appears to be neutral and non-committal on the universality of classical principles.

Itrejectstheuniversalityofprinciples;thereisnoone best way of managing.

Systems approach suggests definite solutions ofproblemstoaspecifiedorganisation.

Contingencyapproachsuggestsprobableandflexibleapproach to problems.

It focuses the internal environment of an organisation.

It focuses the external environment of an organisation.

Table 1.2 Systems approach vs. contingency approach

1.6 Administration and ManagementThe terms administration and management are used synonymously. Some writers argue that both these terms have same meanings and there is no difference between these two terms.

Running of a business requires skill which is called management. Functioning of government departments and non-profitinstitutionsrequiringskilliscalledadministration.

Some writers argue that executive functions of a business unit are referred as management and executive functions of other institutions are referred as administration. In this way, administration is distinguished as a top level function while management as a lower level function. Policy and objectives of a business are determined by the top level executives (administration). At the same time, the lower level people (management) work to attain the objectives ofthebusinessunitandfollowthepolicyframedbytheadministrators.Thiscanbeshowninthefigurebelow:

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AdministrationBoard of Directors Top Levels

General Manager

Supervisor

Workers

Department Manager

Management

Fig. 1.2 Distinction between administration and management

The basic points of distinction between administration and management are as given below:

Sr. No. Basis of Distinction Administration Management

1. Policy and objectives

Determines policy to be followed and decide the objectives to be achieved

Implements the policy and achieve the objectives.

2. Directing of human efforts

Not directly involves in the execution of plan and achievement of objectives.

Directly involves in the execution of plan and achieving objectives.

3. Main functions Planning, organising andstaffing.

Direction, motivation and control.

4. Levels of executiveTop level executives (Owners or Board of Directors)

Lower level executives (Manager, supervisor and workers

5. Position Acts as a principal. Acts as an agency.

6. KnowledgeRequires administrative ability more than technical ability.

Requires technical ability more than administrative ability.

Table 1.3 Administration vs. management

1.7 The ManagerManagement is a creative process which integrates and uses various available resources effectively to accomplish certain goals. For which, an individual is responsible to develop ideas and get things done through others. The concernedindividualisdesignatedasmanager.“Anypersonwhoperformsthefunctionsofplanning,organisation,staffing, directing and controlling for the accomplishment of pre-determined organisation goals is called amanager.

Manager does not actually do the work but guides others to do things correctly. In other words, manager does not build factory or install machines and operate them or sell goods in the market but She/ He directs the efforts of others at lower levels of an organisation. The primary job of a manager is the management of people. The job of managerisverydifficultandrequiressomesignificantqualitiestogetthepossibleresults.Themanagershouldhavethe capacity and capabilities to meet the challenges of his/her job.


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Functions of a managerThe following functions are performed by a manager:

Planning the work•Taking decisions•Proper and effective communication•Getting co-operation of employees•Encouraging team spirit•Delegating authority•Solving the problems•Co-ordinating various individual efforts•Better utilisation of resources•Stimulating workers•Setting target•Solving the problems•Guiding sub-ordinates•Arranging training and development facilities•Controlling the deviations•Maintaining good human relations•

Role of a managerA manager is responsible to integrate all the activities which are performed in an organisation. Managers play various roles as given below:

Director: A manager gives direction to people working under him/her.•Motivator: A manager understands likes and dislikes of people working under him/her and motivates them •accordingly. Hence, motivation stimulates their performance of job.Human being: A manager treats all the people working under him/her equally and without any personal bias. •She/ He has to mingle with others and understand the feeling of other executives.Guide: Managers should be well aware of using the equipment, techniques and procedures involved in performing •specifictasks.Ifso,She/Hecanguideotherswheneverneedarises.Friend: A manager acts as a friend by coming forward voluntarily and eliminating the misunderstandings.•Planner: A manager has to plan the work and assign the same to the workers working under him/her according •to their position held on a daily basis.Supervisor: A manager has to supervise and control workers’ performance and maintain personal contacts with •them.Reporter: A manager acts as a reporter by providing the feedback information of the workers to the top •management. She/ He also act as a liaison between the low level management and the top level management.

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SummaryA business develops in course of time with complexities. With the increasing of complexities, managing the •businessconcernbecomesadifficultone.Theneedofexistenceofmanagementhasincreasedtremendously.Every business unit has objectives of its own. These objectives can be achieved with the co-operative efforts of •several personnel. The work of a number of persons is properly co-ordinated to achieve the objectives through the process of management.An individual cannot be treated as a managing body running any organisation. A minimum of two persons are •essential to form a management. These persons perform the functions in order to achieve the objectives of an organisation.Management is the group of activities which drafts, plans, prepares policies and arranges men, money, machine •and materials required to achieve the objectives.Management is concerned with the achievement of objectives of an organisation. These objectives are achieved •through the functions of planning, organising, staffing, directing, controlling and decisionmaking.Theorganisationalobjectivesareclearlydefinedandexplainedtoeveryemployee.Management is a must for every enterprise. The existence of management ensures proper functioning and •running of an enterprise.Management can plan the activities to achieve the objectives and utilise the available resources at minimum •cost.Management thought was developed due to the contributions of many intellectuals who have different background. •Thesecontributionshavenotbeensuitablyandadequatelyintegratedtogiveaunifiedtheoryofmanagement.Hence, various approaches for management analysis have been developed with the passage of time.A manager must create a climate which brings in and maintain satisfaction and discipline among the people.•A manager is responsible to integrate all the activities which are performed in an organisation.•A manager directs the efforts of others at lower levels of an organisation.•Management is a creative process which integrates and uses various available resources effectively to accomplish •certain goals.The jobofmanager isverydifficultandrequiressomesignificantqualities toget thepossible results.The•manager should have the capacity and capabilities to meet the challenges of his/her job.

ReferencesBenowitz, E. A., 2001. • Principles of Management, 1st ed., Cliffs Notes.Terry, G. R., 1953. • Principles of Management, 6th ed., Richard D. Irwin,Inc.Schramm, D. & Newman R., 1986.• Principles of Management[pdf]Availableat:<http://epdfiles.engr.wisc.edu/dmcweb/AA04PrinciplesofManagement.pdf> [Accessed 2 November 2012].Richard, L. D., 2004. • Principles of Management [pdf] Available at: <http://www.swlearning.com/pressroom/cat/08-CED-Mgmt.pdf.> [Accessed 2 November 2012].2011. • Principles of Management, [Video Online] Available at:<http://www.youtube.com/watch? v=7XGmIir35IE>[Accessed 2 November 2012].2011. • Principal of Management Introductory Concept [Video Online] Available at: <http://www.youtube.com/watch?v=kIfjPIfYvn4>[Accessed 2 November 2012].

Recommended ReadingBoone, L. E. & Kurtz, D.L.,1984• . Principles of Management, McGraw-Hill Companies.Terry, G.R. & Rue, L.W. , 1982. • Principles of Management,4th ed., Irwin Professional Pub.Baptise, S., 2012. • The Principles of Management. Kindle edition.


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Self AssessmentWho wrote the book General and Industrial Management?1.

Henry Fayola. Max Weberb. F.W. Taylorc. George Elton Mayod.

WhoisthefatherofScientificManagement?2. Henry Fayola. Max Weberb. F.W. Taylorc. George Elton Mayod.

Henry Fayol gave the management theory which was based on his experiences in a ___________ company.3. aircrafta. miningb. telecomc. softwared.

Managementisanorgan;organscanbedescribedanddefinedonlythroughtheirfunctions.Whogavethis4. definition?

Henry Fayola. Max Weberb. F.W. Taylorc. Peter F. Druckerd.

Which of the following statements is false?5. Management is a continuous process.a. Management is only a science.b. Management is a discipline.c. Management is a system of activity.d.

Which is the primary function of management?6. Controllinga. Directingb. Organisingc. Planningd.

___________ consists of activities related to the selection and placement of right people for right jobs.7. Controllinga. Directingb. Staffingc. Planningd.

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____________ is dependent upon the outside environment for feedback and resources and for the disposal of 8. finishedproducts.

Open Systema. Closed Systemb. General Systemc. Specialised Systemd.

Which of the following statements is false?9. Management is necessary to service organisation also.a. A minimum of two persons are essential to form a management.b. Management is a continuous process.c. There is no need of explaining organisational objectives to every employee.d.

The contributors of contingency approach are ___________.10. sociologistsa. psychologistsb. economistsc. scientistsd.


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Chapter II

Export-Import Documentation

Aim


introduce the concept of documentation•

elucidate the need of export documentation•

explain the kinds of documentation•

Objectives


explain the checklist of for the sellers•

determine the principles of export documentation•

elucidate the billing of lading•

Learning outcome


understand the documents in import trade•

identify the auxiliary documents•

describe the procedures of export documentation•

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2.1 IntroductionDocumentation and procedures, though complex and cumbersome, are integral part of international marketing operations. Full knowledge and accurate compliance of procedures and documentation formalities are as essential as looking into areas of marketing mix to ensure success in international marketing. Inadequate understanding of the various formalities on the part of the managers results in protracted correspondence, adversely affecting the businessandcashflowduetodelaysinrealisationofexportproceedsasalsothevariousincentives.

2.2 NeedThe physical transfer of good’s in international trade has traditionally been associated with a number of documents. Over the years, however, the number of documents and related procedures has multiplied making international trade complex and cumbersome. Need for documentation arises primarily because of certain peculiarities of international trade transactions. Unlike domestic trade, buyers and sellers are 8eparated by long distances in overseas trade transactions. This necessitates concluding a formal contract laying down duties and responsibilities of buyers and sellers respectively. Moreover, some intermediation becomes inevitable. No international trade transactions canoe-completed without the assistance of at least three intermediaries - a carrier, who undertakes to deliver the goods to the buyer on behalf of seller, an insurance company that covers the risks arising out of hazards of long voyage and finallyabankerwhocollectsthesaleproceedsfromthebuyerandhandsoverthesametotheexporter.Besides,other intermediaries are freight forwarders, freight brokers, chambers of commerce etc. Documentation and attendant formalities become necessary to ensure compliance of contract obligations of the concerned parties i.e., the exporter, importer and intermediaries.

International trade also means trading relationship between the citizens of two independent sovereign states. International trade is state regulated everywhere, even US government regulates the export import operations of domesticfirmsandinsistsondocumentationforinformationandcontrolpurposes.InIndia,severaldocumentshavebeen prescribed to ensure compliance of Export Trade Control, Foreign Exchange Regulations, Quality Control and Preshipment Inspection, Central Excise etc.

2.3 Kinds of DocumentsThesedocumentscanbebroadlyclassifiedintothefollowingcategories:Documentation as per requirements of the contract

Commercial Invoice•Packing List•InsuranceCertificate/Policy•Bill of Exchange•Shipment Advice•CertificateofOrigin•InspectionCertificate•Transportation Documents•

Bill of Lading �Airway Bill �Combined Transport Document �


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Documentation as per requirement of Government of IndiaExport Licence, if necessary,•AR4/AR5 Form•PreshipmentInspectionCertificate•Export Declaration Form GR/PP/VPP/COD/SOFTEX Form•Shipping Bill•

Documents as per requirement of the importing CountryCustoms Invoice•GSPCertificateofOrigin•

Documents required for claiming export assistanceApplication form•Shipping Bill duly authenticated by customs•Commercial invoice attested by bank•Bankcertificate•StatementofExportscertifiedbythenegotiatingbank•Registration cum membership form of concerned export promotion council.•

Another way of looking at the documents is to classify them as principal and auxiliary documents.

Principal documentsThese are:

Commercial Invoice•Packing List•MarineInsurancePolicy/Certificate•Bill of Exchange•Letter of Credit•Bill of Lading•Airway Bill•Combined Transport Document•GR/PPNPP/COD/SOFTEX Forms•ExportInspectionCertificate•AR4/AR5 Forms•Shipping Bill•CertificateofOrigin•Shipment Advice•Consular Invoice•

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Auxiliary documentsThese documents may be required for the preparation or procurement of some of the principal documents or for arranging some of the preliminaries in effecting shipment of goods, such as giving shipping instructions to freight forwarders, arranging pre-shipment inspections, marine insurance cover, shipping space, procurement of bills of lading etc. Documents normally required are:

Shipping Instructions Form•Application for Export Inspection Agency•Shipping Order•Mate Receipt and•Dock Challan•

2.4 Principal Export DocumentsManagers concerned with export/import business should be well acquainted with all the documents which are needed fromtimetotime.Thesedocumentsarebrieflyexplainedbelow:

2.4.1 Commercial InvoiceIt is a basic document which gives full details of the contents of the shipment and serves as seller’s bill of goods and, therefore, sets out the terms of sale. An exporter is required to prepare this complete document which must fully identify the overseas shipment and serve as a basis for the preparation of all other documents which, in greater or lesser detail reproduce information from it.

Normally, apart from the special requirements of the importer, form of invoice will be similar to that used for domestic business. There is no standard form and it is left to the exporter to change his own design, always ensuring that it will be convenient for use by foreign parties. In fact, the exporter should strictly follow the requirements of the purchaser in regard to invoicing and, as the requirements of foreign laws vary widely and are revise from time to time,’ it is important for an exporter to keep himself fully informed, about such changes in government regulations of the importing countries.

According to the Uniform Customs and Practices for Credit:Unlessotherwisespecifiedinthecredit,commercialinvoicesmustbemadeoutinthenameoftheapplicant•forthecredit;Unlessotherwisespecifiedinthecredit,banksmayrefusecommercialinvoicesissuedforamountsinexcess•of the amount permitted by the credit, andThe description of the goods in the commercial invoice must correspond with the description of the goods in •the credit.

The following check list of the items making up a commercial invoice should always be kept in view though not all items are required for every transaction:

Name and address of the shipper Invoice number and date•Buyer’s and Seller’s order number•Name and address of the overseas customer (buyer)•Name of the vessel and sailing date Terms of payment•Insurance reference•Customs, and consular declaration Shipping marks and number on packages•Quantities and description of commodities•Net weight and gross weight as well as measurement in metric units•Specificationofpacking•Unit price and total value•


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Terns of sale (F.O.B./C.I.F./C & F/FAS, etc.)•Any additional charges which should be itemized such as packing, cartage, consular, etc. (if the contract is on •f.o.b. basis)Bill of Lading number•Import Licence number and date•Letter of Credit number and date•Proforma invoice•

It is a preliminary, provisional, temporary invoice for an anticipated shipment which might or might not take place. Such invoices serve certain useful functions in that the overseas buyer is then in a position to deal with certain requirements before placing the order, e.g. obtaining an import licence. Secondly, proforma invoices, if made out, can be supplied to the bank when a Letter of Credit is to be established by the overseas buyer with the instructions that the L.C. (letter of credit) be opened in accordance with the invoice.

2.4.2 Packing ListExporters are required to prepare an accurate packing list showing, item by item, the contents of the packages or cases so as to enable the receiver of the shipment to carry out a check. The packing list should give a description of the goods, number and marks on the packages, quantity per package, net and gross weight, measurement, etc. Properly prepared, these packing lists ensure movement of goods and avoid unnecessary unpacking. There is no particular form to be used but for purposes of guidance a specimen copy may be seen.

2.4.3 Marine Insurance Policy/CertificateAmarineinsurancepolicy/certificateisadocumentassociatedwithtransitofgoodsintrade,wherebytheinsurerundertakes to indemnify the assured against damage for loss of goods due to risks/hazards in transit, to the extent and in the manner mentioned in this document. In a OF contract of sale, the seller has to take the requisite insurance cover to protect his own as well as the buyer’s interests in case of damage or loss of goods. The insurance policy/certificatemustbe,suchastosatisfytheconditionsoftheletterofcredit/salecontract,androustcoderallrisksspecifiedtherein,orwhichareconsideredtobenormallyassociatedwithtradeinaparticularproduct.

2.4.4 Bill of ExchangeAn exporter can send a bill of exchange for the value, of the invoice of goods for export through the banking system forpaymentbyanoverseasbuyeronpresentation.Abillofexchangeislegallydefinedas“anunconditionalorderin writing, addressed by one person to another, signed by the person giving it, requiring the person to which it is addressedtopayondemandoratafixedordeterminablefuturetimeasumcertaininmoney,toortotheorderof,aspecifiedperson,ortobearer”.

In other words an exporter prepares a bill of exchange (which looks something like a cheque) which is drawn on an overseas buyer, or even on a third party as designated in the export contract, for the sum agreed as settlement.

Thebill iscalledasightdraft if it ismadeoutpayableatsight i.e. òndemand’. If it ispayableàtafixedordeterminable future time’ it is called a term draft, because the buyer is receiving a period of credit, known as the tenorofthebill.Thebuyersignifiesanagreementtopayontheduedatebywritinganacceptanceacrossthefaceof the bill.

By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure greater control of the goods, because until the bill is paid or accepted by the overseas buyer the goods cannot be released. Conversely, the buyer does not have to pay or agrees to pay by some agreed date until he receives delivery of the goods from the exporter.

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An exporter can pass a bill of exchange to a bank in India. The Indian bank forwards the bill to its overseas branch or to a correspondent bank in the overseas buyer’s country. This bank, known as the collecting bank, presents the bill to whomever it is drawn upon, for immediate payment if it is sight draft, or for acceptance if it is a term draft. This procedure is known as a clean bill collection because there are no shipping documents required. Clean bill collections have become more popular, particularly, in some European countries where the method is also used in internal trade.

However, it is more likely that bills are used in a documentary collection method of payment. In this case, an exporter sends the bill to the buyer through the banking system with the shipping documents, including the document of title to the goods i.e,. an original bill of lading. The bank then releases the documents on payment or acceptance of the bill by the overseas buyer.

2.4.5 Letter of CreditAletterofcreditisawrittenundertakingbyabank,theissuingbank,totheseller,thebeneficiaryinaccordancewiththe instructions of the buyer, the applicant, to effect payment upto a prescribed amount, within a prescribed time period against prescribed documents, provided these are correct and in order i.e. they conform with the instructions of the applicant. Letters of credit are one of the most used methods of payment in international transactions. Letters ofcreditareusually issuedsubject to theprovisionsof the“UniformCustomsandPractices forDocumentaryCredits” issued by the International Chamber of Commerce. It contains the rules governing the letter of credit transactions and the interpretation of various terms relating thereto and has been subscribed by almost all the major trading countries of the world.

There are usually two banks involved in a documentary credit operation. The issuing bank is the bank of the buyer. The second bank, the advising bank, is usually a bank in the seller’s country. The second bank can, be simply an advisingbatik,oritcanalsoassumethemoreimportantroleofaconfirmingbank.Ineithercase,itundertakesthe transmission of the credit, and by doing so, implies the authenticity of the signature of the issuing bank. If the secondbankissimply“advisingthecredit”itwillmentionthisfactwhenitforwardsthecredittotheseller.Suchabankisundernocommitmenttopaytheseller.Iftheadvisingbankisalso‘confirmingthecredit’itwillsostate.Thismeansthattheconfirmingbank,regardlessofanyotherconsideration,mustpay,accept,ornegotiatewithoutrecoursetotheseller;providedallthedocumentsareinorder&thecreditrequirementsaremet.Figurebelowsummarizes the relationships between the partners to the letter of credit. A letter of credit contains essential details like seller’s name, buyer’s name, value, usance documents required, description of goods, shipment & negotiation dates, port of shipment & destination etc.

Letters of credit used in international trade are of various types:Revocable and Irrevocable Letter of Credit: A revocable letter of credit is rather rare now-a-days because it •means that the terms of the credit can be cancelled or amended by an overseas buyer without prior notice to the exporter. Most letters of credit are irrevocable which means that once buyer’s conditions in the letter have beenagreedbyanexporter,theyconstituteadefiniteundertakingbythebuyer’sbankandcannotberevokedwithout the exporter’s agreement.ConfirmedandUnconfirmedLetterofCredit:Aconfirmedletterofcreditcarriestheconfirmationofanother•bank,generally,inthecountryoftheexporter.Suchconfirmation,addedattherequestoftheissuingbank,bindstheconfirmingbankertonegotiatethedraftsdrawnunderthecreditprovidedthetermsandconditionsthereofarefulfilled.Without Resource and with Resource: A `without recourse to drawer’ letter of credit is one under which the •negotiating bank cannot have a recourse against the exporter if the draft is subsequently not taken up or reimbursed by the issuing bank provided, of course, the negotiation is without recourse.Sight and Usance: Documentary credit may provide for payment at sight or for acceptance of a usance bill of •exchange by either issuing bank in a buyer’s country or the correspondent bank in exporter’s country.Transferable:Atransferableletterofcreditisonewhichcanbetransferredbythebeneficiarynamedtherein•in favour of another party. A credit can be transferred only if it is expressly designated as transferable by the issuing bank.


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StraightandNegotiationCredit:Anegotiationcreditenableseitheraspecificallynominatedbank(oranybank,•ifthewords“Freelynegotiablebyanybank”areusedinthecredit)tocheckthedocumentsand,iftheyarein order, to pay them less the interest for the time it will take to obtain reimbursement from the issuing bank. Sellers would require negotiation credits where the currency of the credit is not their own currency, or where the seller’s local bank offers preferential rates or service.

Generally,anegotiatingbankpayswithrecoursetothebeneficiaryifanythinggoeswrong,butthelegalpositionisbynomeanssettled.Thisisaveryimportantpointforbeneficiary,asundereveryotherkindofLetterofCreditthereisnorecoursetohim.Allbeneficiariesundernegotiationcreditsshouldsettlewiththenegotiatingbankatpayment,whetherrecoursetothebeneficiaryisreservedornot.Revolving Letter of Credit: A revolving letter of credit is one which revolves to its face value as soon as the •bill negotiated under the credit is paid. Letters of credit can be made revolving on certain other conditions, e.g. negotiationofdraftwithoutwaitingforthebilltobepaid,atfixedperiods-saymonthlyoreveryquarter,etc.Revolving Letters of Credit are used when regular and continuous payments are required to be made to the exporter.RedClauseCredits:Redclausecreditscontainanauthorisationbytheissuingbanktotheadvisingorconfirming•banktomakeadvancestothebeneficiarybeforepresentationofdocuments.Thedescriptionredclausearisesfrom the colour of the ink that is used to draw attention to the credit’s special condition. The purpose of these creditsistoprovidepre-shipmentfinancetothesellerwhomightnototherwisebecapableofraisingthefinanceto produce the merchandise desired by the buyer.Green Clause Credit: Green clause credit is similar to red clause but advance is given only against a warehouse •receiptgivenbythebeneficiary.Back to Back Letter of Credit: A letter of credit issued on the strength of another letter of credit. It is in effect, •anextensionofthetermsandconditionsofthebackingcredit.Usually,thebeneficiary,undersuchcreditisasuppliertothebeneficiaryofthebackingcredit.

Some of the important points laid down in Uniform Customs and Practices for Documentary Credits issued by ICC, are as follows:

All credits should clearly indicate whether they are revocable or irrevocable. In the absence of such indicators •the credit shall be deemed to be revocable.A revocable credit may be amended or cancelled by the issuing bank at any moment and without notice to the •beneficiary.Anirrevocablecreditconstitutesadefiniteundertakingoftheissuingbank,providedthatthestipulateddocuments•are presented & that the terms & conditions of the credit are complied with.Whenanissuingbankauthorizesorrequestsanotherbanktoconfirmitsirrevocablecredit&thelatterhasadded•itsconfirmation,suchconfirmationconstitutesadefiniteundertakingofsuchbank(theconfirmingbank),inaddition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with.All credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance •or by negotiation.Banksassumenoliabilityorresponsibilityfortheform,sufficiency,accuracy,genuineness,falsificationorlegal•effect of any document, or for the general and/or particular conditions stipulated in the documents or super imposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight quality, condition, packing, delivery, value or existence of the goods represented by any documents or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.All credits must stipulate an expiry date for presentation of documents for payment, acceptance or •negotiation.The description of the goods in the commercial invoice must correspond with the description in the credit. In •all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the credit.

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Credits should stipulate the type of insurance cover required and, if any, the additional risks which are to be •covered.Failingspecificstipulationinthecredit,bankswillacceptinsurancedocumentsaspresented,withoutresponsibility for any risk not being covered.

2.5 Checklist for the Seller after the Documentary Credit Opening2.5.1 General Points

Does the documentary credit correspond with the contract, especially in connection with the following •points?

Amount/unit price �Period of validity/time limit for shipment �Terms of delivery �Description-and origin of the merchandise �

Isthedocumentarycreditrevocable,irrevocable/unconfirmedorconfirmed?•Is it transferable, if necessary?•Ifconfirmedorconfirmedbyabankabroad,howdoyouassessthe:•

Credit risk �Conditions in the buying country (political and transfer risks) �Mailing risk (if credit is available abroad)? �

Arethenamesandaddressesoftheapplicantandthebeneficiarycorrect?•Is the documentary credit subject to the ICC’s currently valid Uniform Customs and Practices for Documentary •Credits?Istheresufficienttimeavailabletocompleteattestationandauthenticationprocedures?•Are there declarations request in the documents which cannot be made?•Are documents stipulated which are contradictory to the terms of delivery?•Does the credit stipulate documents which need to be drawn up or countersigned by the buyer or his bank? In •such a case, the utilization of the credit depends to a large extent on the goodwill of the buyer.Cantherequirednumberofspecifieddocumentsbefurnished?•

2.5.2 Deadlines and Shipment of Goods

Can the shipment deadline be met?•Are the terms regarding the place where the goods are to be taken into possession and the points of departure •and arrival feasible?Are partshipments and transhipments prohibited contrary to the terms of contract?•Can the prescribed marks and modes of transport be provided?•Canthedocumentsbepresentedinthedesiredformbythedatesspecifiedinthecredit?(Ifthecreditstipulates•a transport document, the documents have to be presented at the bank not later than 21 days after the issue date of the transport document unless the credit stipulates another time limit.)

2.5.3 Draft

Are you absolutely certain about the way the draft should be made out?•

2.5.4 Invoice

Can the description of the goods in the invoice be taken word for word from the documentary credit?•


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2.5.5 Transport Documents in General

If the transport document is not described precisely, banks do not accept any document that is subject to a •charter party (only in the case of seaborne transport) designates, loading on deck (only in the case of seaborne transport) stipulates carriage by sailing ship is issued by a forwarding agent (regardless of mode of transport) except in the case of the FIATA Combined Transport Bill of Lading which is recognised by the ICC or where the forwarding agent is also carrier or agent of an expressly named carrier.If goods are exported through the intermediary of company domiciled abroad (a subsidiary), in some countries •the value of the merchandise has to be stated in the transport documents. Does this value correspond to the amount and the currency in your invoice?

2.5.6 Marine Bill of Lading

Therestrictionsa),b)andc)listedunder“Transportdocumentsingeneral”arealsovalidforthemarinebill•of lading.Themarine;billofladingshouldnotbeissuedby-aforwardingagent,unlessthelatterisalsoacarrieroracts•as agent for an expressly named carrier.If the bill of lading is to be issued to order of the buyer or is to be made out in his name, it will be extremely •difficulttoarrangeanyreturnofthegoods.Thispointshouldbetakenintofullaccount.Do the prescribed freight notations conform to the terms of delivery?•

Air waybillAir waybills issued by forwarding agents are not accepted by banks unless the forwarders act as carrier or as •agents for an expressly named carrier.

Insurance documentsCanthetermsofinsurancebefulfilled?•Are the risks to be covered accurately described in the credit?•Istheinsurancecoveragealsosufficienttomeetyourrequirements?•Clarifywhetherapolicyoracertificateisrequired.(Broker’scovernoteswillnotbeacceptedbythebank•unless expressly permitted in the credit.)

Certificate of originAre the Chamber of Commerce and a consulate willing to attest or authenticate the statements required to appear •onthecertificateoforigin?If legalization is necessary, does the respective country maintain a consulate where needed?•Canacertificateoforiginissuedinthecountryoforiginbefurnishedintime?•Can the legalization be effected in time?•

2.5.7 Bill of LadingOf all the documents, bill of lading is unquestionably the most important and valuable document. Issued by the shipping company, a bill of lading is:

a receipt/acknowledgement of cargo delivered for transportation•a contract of affreightment between the shipper and the carrier specifying their respective responsibilities and •obligationsa document of title to goods and provides interested parties including banks with title to the goods mentioned •thereinacollateral,thatcanbeusedforanyadvancesmadetothesellerortothebuyerintheprocessoffinancingthe•shipment

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Bills of lading are prepared by the shippers on printed forms supplied by the shipping company concerned and necessary particulars are entered therein the blank spaces provided for the purpose. Normally, a bill of lading shows the date of shipment., port of shipment, name of the carrying vessel, name of the consignor, consignee and notify party,portofdischarge,number,contentsandidentificationmarksofpackagesandgoodsshipped,andtheamountof freight ̀ paid’ or to ‘pay’. Bills of lading are normally issued in sets of four. Three copies duly signed are delivered to the shipper, while the fourth copy is unsigned and retained by the shipper’s master for his own use. Different copies are sent by different mails to reduce the risk involved by delay or loss in transit. Goods are released at the portofdestinationagainstoneofthecopiesofthebillofladingpresentedfirstandothercopiesbecomingvoid.Banks invariably take possession of full set of billl of lading, the number comprising the full set being indicated by the bill of lading itself.Bills of lading may be issued either in negotiable or non negotiable form. A negotiable bill of lading is issued to the order of consignee, or endorsed either in blank by a shipper or endorsed to the order of named party.

Bill of Lading can be of various types as discussed below:Received for Shipment B/L: It is issued by the shipping company when goods have been given into the custody •of the shipping company but have not yet been placed on board the ship.OnBoardShippedB/L:Itcertifiesthatthegoodshavebeenreceivedonboardtheship.•Clean B/L: It indicates a clean receipt. In other words, it implies that there was no defect in the apparent order •and condition of the goods at the time of receipt or shipment of goods by the shipping company, as the case may be.Claused or Dirty B/L: This bill bears a superimposed clause of annotation, which expressly declares a defective •conditionofthegoods.Theclausemaystate“packagenumber20broken”or“balenumber20hook-damaged”.By superimposing such clauses on the B/L, the shipping company limits its responsibility at the time of delivery of goods at the destination. It is very important to note that only a clean B/L is acceptable for negotiation of documents with the bank.Combined B/L: It covers several modes of transport for performing the complete journey from the exporting •country to the importer’s warehouse. For example, part of the journey may be completed by ship while subsequent parts may be undertaken by road, rail and air.ThroughB/L:Itcoversgoodsbeingtranshippedenroutebutwherethefirstcarrierhadtheresponsibilityasthe•principal carrier for all stages of the journey. For example, goods may be shipped from Bombay to Dubai and transhipped from Dubai to port in Latin America.Trans-shipmentB/L:IthassimilarcharacteristicastheThroughB/Lexceptthatinthiscasethefirstcarrieracts•only as an agent for effecting Trans-shipment of cargo.Charter Party B/L: It covers shipment on a chartered ship.•

The contract or the letter of credit will specify the nature of bill of lading that the exporter has to procure for the importer.Generally,theimportersinsistonthe“cleanon-boardshipped”billoflading,withtheprohibitionofthetrans-shipment of goods.

2.5.8 Air Way Bill (AWB)/Air Consignment NoteIn air carriage, the transport document is known as the Air Way Bill (AWB) or Air Consignment Note. The AWB merely evidences the air carrier’s receipt of the goods on the terms of the contract of carriage and does not represent the goods/title of goods. The goods are delivered to the consignee (receiver) mentioned in the AWB. The consignee will have to identify himself as the party named in the AWB and the goods may be delivered to him without any hindrance, usually on payment of some charges (depending upon the terns of the trade). When the seller has made the contract with the air carrier, the buyer can protect himself against the seller’s rerouting of the goods by obtaining the shipper’s copy of the AWB.

The air carrier may not accept instructions from any person other than the holder of such a copy of AWB, and if this duty is not observed, the air carrier will be liable to pay compensation for the loss incurred.


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SomeoftheimportantdetailscontainedintheAWBarethenameoftheconsignee/consignor/notifiedparty,theflightnumberanddateonwhichthegoodswillbeairlifted,briefdescriptionofthegoodsandquantity,departureairport and the destination airport, freight amount and AWB number, teens on which carriage is undertaken, and signature of carrier/its agent and shipper/agent.

2.5.9 Combined Transport Document (CTD)Exporters situated in interior parts of the country face the problem of delay in submitting shipping’ documents pertaining to the exports made by them to their bankers for negotiation as they have to depend on their shipping agents functioning at sea ports to obtain, shipping documents, especially, the marine bill of lading. To obviate this delay and also to popularise containerisation Government has established Inland Container Depots (ICD) at a number of places. In these depots, exporters can arrange to get the goods stuffed in containers, customs formalities completed and goods despatched to gateway ports in Customs Sealed Containers. The Combined Transport Operator (CTO) when undertaking to export goods from the ICD to the place of destination, will issue the Combined Transport Document (CTD) subject to Foreign Exchange Dealers Association of India (FEDAI) Rules contained in either FEDAI Brochure No. 08l or Brochure No. 082 as the case may be, to enable the exporters to negotiate the shipping documents with an authorised dealer. When goods are exported from LCD’s in India and relevant letter of credit does not call for a marine bill of lading, authorised dealers will accept CTDs drawn subject to FEDAI Rules. It may be mentioned that though a bank is authorised to accept a transport document issued by a freight forwarder under the Uniform Customs and Practice for Documentary Credits by the International Chamber of Commerce (ICC Brochure No. 400), FEDAI Rules permit issue of CTDs only by a person having as his ordinary course of business the carriage of goods by sea either as owner or charter of an ocean going vessel. Therefore, exporters, in cases where aCTDisacceptabletooverseasbuyer,shouldsoarrangethattherelevantexportcontractspecificallyprovideforthe production of a CTD drawn, subject to the FEDAI Rules. The date of CTD will be date of export in this case.

However,wheretheletterofcreditdoesnotpermitacceptanceofaCTDortheletterofcreditspecificallycallsfor a marine bill of lading, authorised dealers will accept CTDs drawn subject to FEDAI Rules with the CTO’s undertaking to have CTDs substituted by marine bill of lading soon after the goods are loaded on board of ocean going vessels. But the bill will be negotiated by the bankers only after the CTD is substituted by regular ocean bill of lading. This position is also applicable in cases where export is not covered by a letter of credit. The date of marine bill of lading will be the date of export in such cases.

2.5.10 GR/PP/VPP/COD/SOFTEX FormsThese forms are submitted to the customs authorities in compliance of exchange control regulations. All exporters other than those exporting to Nepal and Bhutan are required to submit a declaration in the prescribed form duly supportedbysuchevidenceasmaybeprescribedorsospecifiedandtrueinallmaterialparticularswhich,amongothers,shallincludetheamountrepresenting:thefullexportvalueofthegoods;orifthefullexportvalueofthegoods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions,expectstoreceiveonthesaleofgoodsintheoverseasmarkets,andaffirmsinthesaiddeclarationthatthe full export value of the goods (whether ascertainable at the time of export or not) has been, or will within the prescribed period be, paid in the prescribed manner.

These Forms are:GRForm:Itisrequiredtobefilledinduplicateforallexportsinphysicalformotherthanbypost.•PPForm:Itisrequiredtobefilledinduplicateforallexportstoallcountries,madebypostparcel,exceptwhen•madeon“valuepayable”or“cashondelivery”basis.VP/CODForm:Itisrequiredtobefilledinonecopyforexportstoallcountriesbypostparcelwiderarrangements•torealiseproceedsthroughpostalchannelson“valuepayable”or“cashondelivery”basis.SOFTEX Form: It is required to be prepared in triplicate for export of computer software in non-physical •form.

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2.5.11 Export Inspection CertificateItisissuedusuallybyGovernmentagencyentrustedwiththetaskofinspectingtheconcernedgoods,privatefirmsofreputespecialisingininspectionorattimesbuyer’sownrepresentativeinIndia.Thesecertificatesarerequiredby importers because they wish to be sure of the quality of merchandise as is agreed in terms of the sales contract. In India, however, all exports are subject to compulsory inspection prior to shipment by an authorised agency under the provisions of Export (Quality Control and Inspection) Act, 1963. Inspection of export items covered by this legislationiscarriedoutbyfiveregionalExportInspectionAgenciesundertheadministrativecontrolofExportInspection Council. Schemes for compulsory quality control and preshipment inspection are also operated by certain officialagenciesaswellsuchasAgriculturalMarketingAdvisor,BIS,DrugsController,TeaBoard,CoffeeBoard,Salt Commissioner etc.

Thebasisforinspectionisusuallytheimporter’sspecificationsorinthecaseofgoodsinvolvingsafetyorhealthhazards, certain minimum standards are enforced.

ExportInspectionCertificateissuedbythecompetentauthorityisrequiredtobesubmittedtothecustomsauthoritiesat the time of customs clearance. While negotiating documents, banks also insist on submission of Inspection Certificatealongwithotherdocuments.

2.5.12 AR4 and AR5 FormRefundofcentralexciseisanimportantfiscalincentiveforexportpromotion.Asyouknow,exportsshouldnotbear the burden of indirect taxes. Hence, exportable goods are either exempted from such taxes or these taxes are refunded, if exemption is not possible. In India, excisable goods are free from the incidence of excise duty levied bythecentralgovernment,bothonfinishedproductandrawmaterials.Theschemeisgovernedbysection37ofthe Central Excise and Salt Act, 1944 as amended from time to time. The rebate is granted on the duty levied at finishedproductandoninputsforthisfinishedproduct.Rule.12,191-B,and191-BBofCentralExciseRuleshavebeen integrated into Rule 13. This rule is applied for exports of goods in bond and utilisation of non-duty paid raw material for manufacture and export of excisable goods.

Both AR4 and AR5 forms can be used for export in Bond or under Rebate of Central Excise duty.•AR4formistobeusedwhereeitherfinishedstagedutyisnotpaidoritsrebateistobeclaimedlateron.Itcan•be elaborated as under:FormAR4istobeusedincaseofexportsinBond,ofallgoodswithoutpaymentofdutyonfinisheditem(not•on inputs).AR4Formisalsousedwherefinishedstagedutyispaidandrebatethereofistobeclaimedafterexports.•Form AR5 is used where goods are manufactured/ exported without the payment of duty or inputs (inputs stage •duty). It can be elaborated as under :

AR5formisusedwherenodutyispaidonproductioninputsandthefinishedstagedutyisalsonotpaid �on the account of their export being made in bond.AR5formisalsousedwhereinputsstagedutyisnotpaidbutdutyonfinishedgoodsispaidandtherebate �thereof is to be claimed after export.

2.5.13 Shipping BillShipping Bill is the principal document required by the customs authorities. It contains description of export goods andotherparticularslikenumberanddescriptionofpackage(s),marksandnumber,quantityandvalueasdefinedinthe Sea Customs Act, Indian or foreign merchandise, name of the vessel in which goods are to be shipped, country of destination, etc. It is only after the Shipping Bill, is stamped by the customs that cargo is allowed to be carted to Port sheds and Docks. It is used for export by sea or air or even for transportation from one port to another within the country.

There are separate forms of shipping bill for free goods (Free Shipping Bill), goods on which export duty is payable (Dutiable Shipping Bill), goods for which there is a claim for drawback of duty (Drawback Shipping Bill) and in case of imported goods for re-export which are kept in custom bonded warehouses (Shipping Bill for Shipment ex-bond).


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2.5.14 Certificate of OriginThiscertificateservesasanevidencetoshowtheactualcountryoforigin(placeofproductionormanufacturing)of the goods. It is signed in the exporting country by the consular of the importing country or by the exporter or by the Chamber of Commerce, as the regulations may require. The custom regulations of certain countries require a certificateoforigintobeproducedbeforeclearanceofimportedgoodsandforassessmentofduty.Thecertificateis usually required by the countries where goods from certain countries are granted preferential treatment or where importofgoodsfromcertaincountriesiswhollyorpartiallyprohibited.Sometimes,thecertificateoforiginisendorsedonthebackoftherelativeinvoicewhichisthenknownasa“certifiedinvoice”.Insomecases,thecertificateoforigin is combined with consular invoice for tariff purposes.

2.5.15 Shipment AdviceDependinguponthetermsofsaleonaspecificstipulationinthecontract,andimmediatelyaftershippingthegoods,the exporter has to inform the foreign buyer of the fact of shipment. This is usually done in the form of a `shipment advice’givinginvoicenumber;descriptionofgoods,quantity,numberofpackages,marksandnumbers,nameofthecarrier, bill of lading/airway bill number and date, expected time of arrival of the carrier at the port of destination, etc. This enables the foreign buyer to arrange insurance coverage in respect of goods in transit and also for making advance arrangements for the clearance of the goods at the port of destination.

2.5.16 Consular InvoiceA consular invoice made out on a specially printed form contains detailed particulars, such as description, quantity, gradeandvalueofthemerchandiseshipped.Itiscertifiedbytheconsulateoftheimportingcountrysituatedintheexportingcountryforwhichacertificationfeeischarged.Italsocontainsadeclarationoftheshipperastothetruevalue of the goods covered. The consular advice enables the custom authorities of the importing country to levy advoloram custom duty on the goods and helps in maintaining proper record of the imports for general statistical purposes.

2.6 Auxiliary Documents Shipping Instruction FormIt is used to send shipping instructions to the shipping company or the shipping agent regarding shipment of export cargo. This facilitates the preparation of bill of lading and other documents by the shipping agent. Also known as Cargo Declaration Form, it usually contains information about country of origin, marks on cases, number of packages, name and address of the consignee, exporter’s name and address, invoice value, steamer freight payable etc.

Application for Export InspectionForobtainingthecertificateasrequiredundertheprovisionsofExport(QualityControlandInspection)Act,1963,the exporter has to submit an application in the prescribed form (in duplicate) submitting the original to Export Inspection Agency and duplicate to the Export Inspection Council, seven days in advance of the expected date of shipment.Theapplicationformcontainsdetailsofshipmentincludingtechnicalrequirementincludingspecificationsasstipulatedintheexportcontract.Uponreceiptoftheapplication,thegoodsareinspectedandcertificateissued,if found in order.

Shipping OrderFor booking space, the exporter has to apply to the shipping company either directly or through a freight broker. If the space is available, the shipping company will issue to the broker/shipper a document called a shipping order, instructingtheCommandingOfficeroftheshipthatthegoodsfromtheshipperconcerned,asperdetailsgiven,should be received on board the vessel. The original is given to the shipper and duplicate is sent to the Commanding Officeroftheship.

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Mate ReceiptWhenthecargoisloadedontheship,theCommandingOfficeroftheshipwillissueareceiptcalledthe`MateReceipt’. This includes information about the name of the vessel, berth, date of shipment, description of packages, marksandnumbers,conditionofthecargoatthetimeofreceiptonboardtheshipetc.Thematereceiptisfirsthanded over to the port authorities for payment of port dues and then to the shipping company for obtaining the Bill of Lading.

Dock ChallanAlso known as Port Trust Copy of the shipping bill in Bombay and Export Application Form in ports other than Calcutta, Dock Challan is a document prescribed by the port authorities. When the cargo is brought at the dock gate, the shipper has to submit this document along with the Vehicle Ticket (in duplicate) to the Gate Inspector. At the gate, documents are checked to ensure that only goods duly passed by Customs are brought to the docks for shipment.

2.7 Documents in Import TradeImporter Exporter Code (IEC) Number: No person can import or export goods without obtaining an Importer-ExporterCode(IEC)Numberunlesshehasbeenspecificallyexempted.TheIECNumberisobtainedfromtheRegional Licensing Authority.

Bill of Entry: It is a document on which clearance of imported goods is effected. All goods discharged from a vessel, from foreign or coastal ports are cleared on Bill of Entry in the prescribed form. The Bill of Entry form has been standardised by the Central Board of Excise and Customs.

Four copies of bill of entry are submitted, original and duplicate for customer departments, triplicate is owner’s copy and the fourth copy is for the purpose of foreign exchange to be submitted to the bank. There are three types of Bill of Entry as discussed below:

Bill of Entry for home consumption (white in colour): Where an importer wants to get his goods cleared in one •lot he has to present the Bill of Entry for home consumptionBill of Entry for warehousing (into bond, yellow in colour): Where an importer wants to shift goods to a warehouse •and thereafter gets his goods cleared in small lots, he has to present ìnto bond’ bill of entry. Reason maybe that he is, unable to pay duty leviable on all goods at one instance or may be because of storage problem.Ex-Bond Bill of Entry (Green in Colour): When an importer wants to remove goods from the warehouse, he •has to present an Ex-Bond Bill of Entry which is green in colour. For imports through the medium of post there isnobillofentry.Insteadawaybillispreparedbytheforeignpostofficeforassessmentofduty.

2.8 Export Documentation and Procedures - Step by StepAsmentionedearlier,anyperson,whetheranindividualorafirm,importingorexportinggoodsinto/fromIndia,will require Importer-Exporter Code Number to be obtained from the regional import-export licensing authority.

Thefiststepistoexaminetheexportcontractand/ortheletterofcredittoensurethatthetermsandconditionsstipulated in these documents are in accordance with those originally proposed, and/or the amendments subsequently agreed to, by the exporter. On receipt of these documents, the exporter writes to the importer acknowledging these documents and, where necessary, drawing attention of importer to the discrepancies in the terms of conditions of contract/ letter to credit.


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Instructions to factory/supplier: If the above mentioned documents are in order, a delivery note (in duplicate) •containingthespecificationsandotherdetailsoftheorderissenttothefactoryforthemanufactureanddespatchof export cargo to the port of shipment the port of shipment.Pre-shipment inspection and central excise (clearance): As soon as the goods are ready for despatch, the factory •officearrangestocompletethefollowingformalities:

Make out an application to the export inspection agency for conducting preshipment and quality control �inspection. The Export Inspection Agency will depute an inspector to inspect the consignment and issue thecertificateofinspectionifthegoodsconformtotheprescribedspecifications.Secure clearance of export consignment from Excise Authorities.Despatch of consignment to the port of �shipment by rail and obtaining Railway Receipt or by road and obtaining Lorry Way Bill.

2.8.1 Despatch of Documents to the Export Department of the Firm by the Factory Office The factory office prepares a `DespatchAdvice’ and sends it to theExportDepartment alongwith followingdocuments:

Railway Receipt/Lorry-Way Bill•AR4 form (original and duplicate copies)•DuplicatecopyofDeliveryNotedulysignedb,factoryoffice.Itstatesthattheconsignmenthasbeensentto•the port town.CertificateofInspection•

Arranging insurance coverage: On receipt of these documents the Export Department makes an application to the InsuranceCompanyformarineinsurancecoverandrequeststhemtoissueaninsurancepolicy/certificateinduplicatewith appropriate risk coverage.

Instructions to Forwarding Agent: At the same time, the Export Department prepares a note for the forwarding agent at the port of shipment giving detailed instructions regarding the shipment of the consignment. The exporter must also give the details of the vessel on which space has been booked for shipment of the cargo. This note is sent to the forwarding agent along with the following documents:

AR-4 Form (original and duplicate copies)•Commercial Invoice (Adequate number of copies - generally 8/10)•Packing List (one copy)•GR Form, (Original & Duplicate)•Customs-Invoice (where required in the importing country)•Original Letter of Credit/Contract•Declaration Form in triplicate•QualityControlCertificate(0)•Purchase Memo•Railway Receipt/Lorry-Way Bill•

Itisdeclarationbytheexporterstatingthatthevalue,specifications,qualityanddescriptionofthegoodsbeingexported as mentioned in the Shipping Bill are in accordance with the terms of the export contract and that the statements made in the Shipping Bill are true.

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2.8.2 Port, Shipping and Customs Formalities On receipt of the documents, the Forwarding Agent takes delivery of the consignment from the Railway Station or from the road transport at the port of shipment and arranges its storage in the warehouse.

He alsoinitiatesactiontoobtaincustomsclearance.ForthispurposetheForwardingAgentpreparesfour/fivecopiesof the relevant `Shipping Bill’ and presents it along with the above mentioned documents (as mentioned under Step vi) to the Export Department of the Customs House. The Customs Appraiser examines these documents and appraises the value having regard to the following considerations:

That the value and the quantity declared in the shipping bill is the same as in the export order/letter of credit.

That the formalities regarding exchange control, preshipment quality control inspection etc. have been duly completed. After examination of documents and appraisement of value, the Customs Examiner/Appraiser makes an endorsement on the duplicate copy of the shipping bill giving directions to the Dock Appraiser about the extent of physical examination of the cargo to be conducted at the Docks. All the Documents, except GR(O) Form, the original Shipping Bill and a copy of the Commercial Invoice are returned to the Forwarding Agent to be presented to the Dock Appraiser.

After taking delivery of documents from the Export Department the Forwarding Agents presents the Port Trust Document(PortTrustcopyofShippingBillatBombay;DockChallanatCalcuttaandExportApplicationatotherports) to the Shed Superintendent of the Port and obtains carting order for bringing the export cargo to the transit shed for physical examination by the Dock Appraiser. He then presents the following documents to the Dock Appraiser for conducting Physical examination of the cargo:

Duplicate, triplicate and export promotion copies of the Shipping Bill•Commercial Invoice•Packing List•AR-4 Form - original and duplicate copies•InspectionCertificate(0)•GR Duplicate•

TheDockAppraiserafterconductingphysicalexamination recordsexaminationreportandmakes“LetExportEndorsement” on the duplicate copy of the Shipping Bill and hands it over to the Forwarding Agent along with all otherdocumentstobepresentedtothePreventiveOfficeroftheCustomsDepartmentwhosupervisestheloadingof the cargo on Board the vessel.

ThePreventiveOfficermakesanendorsement`LetShip’ontheduplicatecopyoftheShippingBill.Theduplicatecopy of the Shipping Bill is then handed over to the agent of the shipping company. This constitutes an authorisation by the Customs to the shipping company to accept the cargo on board and vessel.

Afterthegoodsareloadedonboardthevessel,theCaptainoftheshipissuesareceiptknownasthe“Mate’sReceipt”to the Shed Superintendent of the Port.

The Forwarding Agent then makes a payment of the port charges and takes delivery of the Mate’s Receipt. He presentstheMatedReceiptfirsttothePreventiveOfficerwhorecordstheCertificateofShipmentonallthecopiesof Shipping Bill, original and duplicate copies ofAR-4 form and returns the Export Promotion copy, a copy of Drawback Shipping Bill and duplicate AR-4 to the Forwarding Agent. The latter then presents the Mate’s Receipt to the Shipping Company and requests it to issue the Bill of Lading (2/3 negotiable and a few non-negotiable copies as required).


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Despatch of Documents by Forwarding Agent to the Exporter: After obtaining the Bill of Lading from the Shipping Company the Forwarding Agent sends the following documents to the exporter:

One copy of the commercial invoice duly attested by the Customs’•Export Promotion copy of the Shipping Bill•Drawback copy of the Shipping Bill•Full set of clean on-board bill of lading together with a few non-negotiable copies•Original letter of credit/contract order•Copies of Customs Invoice•AR-4 form (duplicate) and Gate Pass•GR Form (Duplicate)•

Certificateoforigin:Onreceiptof theabovedocuments, theexportermakesanapplication to theChamberofCommerceandobtainsa`CertificateofOrigin’induplicate.

IncaseofexportshipmenttocountriesofferingGSPconcessions,theGSPCertificateofOriginwillhavetobeprocured by the exporter from the concerned authority like Export Inspection Agency or others.

Shipment advice to importer: The exporter then sends `Shipment Advice’ to the importer intimating the date of shipment of the consignment by a named vessel and its expected time of arrival (ETA) at the destination port. The following documents are also sent along with the shipment advice so that the importer may start making arrangements for taking delivery of the consignment:

A non-negotiable copy of the Bill of Lading•Commercial Invoice•Packing List•Customs Invoice•

Presentation of documents to bank: The exporter presents the following documents to the bank for ne-gotiation/collection:

Commercial Invoice - (with requisite number of copies)•CertificateofOrigin-twocopies•Customs Invoice - (with requisite number of copies)•GR Form (Duplicate)•Packing List - (with requisite number of copies)•Full set of Clean-on-board Bill of Lading negotiable plus non-negotiable copies as required.•Original Letter of Credit/Export Contract•AdditionalcopiesoftheCommercialInvoiceforCertificationbytheBank•BankCertificateintheprescribedforminduplicate•MarineInsurancePolicy/Certificate•Bill of Exchange•QualityControl/Pre-shipmentInspectionCertificate•

At the Bank, these documents are processed in the following manner.The documents are examined with reference to the terms and conditions of the original order and also that of the letter of credit.

Asetofthefollowingdocumentsistransmittedtothebankoftheimporterbythefirstairmailfollowedbythesecondsetofthesedocumentsbythesecondairmailtoensurethatincasethefirstsetislostordelayed,theimporterorhis bank can take delivery of the consignment on the basis of the second set of documents.

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Commercial Invoice•Customs Invoice•Packing List•CertificateofOrigin•Negotiable Bill of Lading•InsurancePolicyCertificate•Bill of exchange•GSPCertificateofOrigin(innecessary)•CertificateofInspection•

The exporter receives payment against the above documents.Duplicate copy of the GR form is transmitted to the Exchange Control Department of the Reserve Bank of India on receipt of payment from abroad. The original copy oftheBankCertificateasappliedforbytheExporteralongwithattestedcopiesoftheCommercialInvoicearereturned to the exporter.

RebateofCentralDuty&DutyDrawback:Simultaneously,theexporterfilesaclaimwiththeMaritimeCollector of Central Excise, for rebate of Central excise duty or for getting credit in his Bond Account and also for duty drawback in accordance with the procedure laid down in this regard.

ExportBenefits:Theexporterinitiatesactionforclaimingbenefitsagainstexportsmadebyhimasperthe procedure outlined under the Policy for Registered Exporters.

2.9 Some Useful TipsA common complaint made by the bankers is that the documents submitted by exporters are often either incomplete or incorrect. This leads to delays, or even refusal of payment.

To avoid, these delays, it is necessary to be very careful about documentation, particularly in case of letter of credit. While exporting under letter of credit arrangements, immediately on receipt, read and re-read the letter of credit very carefully and check the terms against the contract of sale. It is necessary to check that the letter of credit:

isofthetypeagreede.g.irrevocableandconfirmedorjustirrevocable•hasanexpirydatethatissufficientlyfaraheadforthegoodstobeshippedandtherequireddocumentsobtained•and presented in timehas terms and conditions that can be met and that the required documents can be obtained exactly as called •for

If any amendment or extension is necessary the buyer should be asked immediately to instruct the issuing bank accordingly. A watch should be kept to see that the advice of amendment of the credit is received without delay.

In regard to documentation under letter of credit it is necessary that all the documents are prepared with great care. It should be remembered the letter of credit is the bank’s mandate to pay. The bank has no discretion. It is not allowed to approve errors and/or inconsistencies of whatever nature and howsoever small, in the documents presented to it and will not pay in such circumstances.

Even where the goods are exported on D/P or D/A terms, documentation should be correct and every care should be taken to ensure that there are no mistakes. The following points should be kept in view.

In regard to commercial invoice, it should be ensured that the document is properly signed, dated and all the necessary information pertaining to goods and terms of payment is given. Description of goods must tally with what is given in the contract to avoid any confusion at the buyer’s end.


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In regard to Bill of lading, the exporters should ensure that it is a clean, on board bill of lading and should clearly evidence whether freight has been paid or not. Unless agreed clearly in advance, it should not be a charter party but on board bill of lading.

Inregardtoinsurancedocuments,exportersshouldensurethatthepolicy/certificateshouldclearlyindicatethetypeand extent of coverage or risks as per contract. In case the contract is silent, exporters should ensure that coverage is quite comprehensive to cover all types of risk and is effective from the date of shipment/despatch.

Inregardtootherdocumentslikeinspection,certificate,certificateoforiginetc.exportersshouldensurethattheyare in conformity with laws in the importing countries.

In documentation relating government rules and regulations pertaining to exports, i.e. GR/PP form, AR4/AR5, Shipping Bill etc. exporters should ensure that all information should be absolutely correct. Inadequate or incorrect information may result in delay in shipment or even penal action against the exporter.

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SummaryInadequate understanding of the various formalities on the part of the managers results in protracted •correspondence,adverselyaffectingthebusinessandcashflowduetodelaysinrealisationofexportproceedsas also the various incentives.International trade also means trading relationship between the citizens of two independent sovereign states.•Auxiliary documents may be required for the preparation or procurement of some of the principal documents •or for arranging some of the preliminaries in effecting shipment of goods.Commercial invoice is a basic document which gives full details of the contents of the shipment and serves as •seller’s bill of goods and, therefore, sets out the terms of sale.The packing list should give a description of the goods, number and marks on the packages, quantity per package, •net and gross weight, measurement, etc.In a OF contract of sale, the seller has to take the requisite insurance cover to protect his own as well as the •buyer’s interests in case of damage or loss of goods.An exporter can send a bill of exchange for the value, of the invoice of goods for export through the banking •system for payment by an overseas buyer on presentation.The bill is called a sight draft if it is made out payable at sight i.e. ‘on demand’.•Ifitispayableàtafixedordeterminablefuturetime’itiscalledatermdraft,becausethebuyerisreceivinga•period of credit, known as the tenor of the bill.Thebuyersignifiesanagreementtopayontheduedatebywritinganacceptanceacrossthefaceofthebill.•By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure •greater control of the goods, because until the bill is paid or accepted by the overseas buyer the goods cannot be released.Letters of credit are one of the most used methods of payment in international transactions.•Letters of credit are usually issued subject to the provisions of the “UniformCustoms andPractices for•Documentary Credits” issued by the International Chamber of Commerce.A letter of credit contains essential details like seller’s name, buyer’s name, value, usance documents required, •description of goods, shipment & negotiation dates, port of shipment & destination etc.Aconfirmedletterofcreditcarriestheconfirmationofanotherbank,generally,inthecountryoftheexporter.•Atransferableletterofcreditisonewhichcanbetransferredbythebeneficiarynamedthereininfavourof•another party.A revolving letter of credit is one which revolves to its face value as soon as the bill negotiated under the credit •is paid.Redclausecreditscontainanauthorizationbytheissuingbanktotheadvisingorconfirmingbanktomake•advancestothebeneficiarybeforepresentationofdocuments.Bills of lading are prepared by the shippers on printed forms supplied by the shipping company concerned and •necessary particulars are entered therein the blank spaces provided for the purpose.In air carriage, the transport document is known as the Air Way Bill (AWB) or Air Consignment Note.•Thecustomregulationsofcertaincountriesrequireacertificateoforigintobeproducedbeforeclearanceof•imported goods and for assessment of duty.Theapplicationformcontainsdetailsofshipmentincludingtechnicalrequirementincludingspecificationsas•stipulated in the export contract.On receipt of the documents, the Forwarding Agent takes delivery of the consignment from the Railway •Station.Inregardtoinsurancedocuments,exportersshouldensurethatthepolicy/certificateshouldclearlyindicatethe•type and extent of coverage or risks as per contract.


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ReferencesJohnson, T. E., 1997. • Export/Import Procedures and Documentation.,3rd ed., AMACOMWeiss, K. D., 2002. • Building an Import/Export Business, 3rd Ed., Wiley.Belay, S., 2008. Export• -Import Theory, Practices, and Procedures, [pdf] Available at:<http://www.gbv.de/dms/zbw/543230260.pdf>[Accessed 2 November 2012].Nelson, C., 2000. Import• /Export: How to Start an Export/Import Business, [pdf] Available at:< http://www.msbdc.org/publications/exp-imp/ex-im.pdf> [Accessed 2 November 2012].2008.• Export- Import Classification-Part1,[Video Online] Available at: <http://www.youtube.com/watch?v=MUo8AuI5PvU>[Accessed 2 November 2012].2008. • Export Documentation, [Video Online] Available at: <http://www.youtube.com/watch?v=7Uj1rYqMUnY> [Accessed 2 November 2012].

Recommended ReadingJohnson, T. E. & Bade, D.L., 2010. • Export/Import Procedures and Documentation, 4th ed., AMACOM.Weiss, K. D., 2007. • Building an Import / Export Business.,4th ed.,WileyJohnson, T.E., 2002. • Export/Import Procedures and Documentation (Export/Import Procedures & Documentation).,4th ed., AMACOM

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Self AssessmentFull knowledge and accurate compliance of procedures and documentation formalities are as essential as looking 1. into areas of ______________ to ensure success in international marketing.

marketing mixa. documentationsb. proceduresc. domestic traded.

The physical transfer of good’s in international trade has traditionally been associated with a number of 2. _______________.

documentsa. proceduresb. tradesc. transactionsd.

Which of the following is not one of the categories of documents?3. Documentation as per requirements of the contracta. Documentation as per requirement of Government of Indiab. Documents as per requirement of the importing Countryc. Documents required for claiming import assistanced.

Which of the following not one of the types of principle documents?4. Commercial Invoicea. Commercial voiceb. Bill of Exchangec. Letter of Creditd.

___________________ is a basic document which gives full details of the contents of the shipment and serves 5. as seller’s bill of goods and, therefore, sets out the terms of sale.

Bill of exchangea. Commercial invoiceb. Packing listc. Letter of creditsd.

Which of the following is not one of the most used methods of payment in international transactions?6. Bill of exchangea. Commercial invoiceb. Packing listc. Letter of creditsd.

A______________ isonewhichcanbe transferredby thebeneficiarynamed therein in favourofanother7. party.

transferable letter of credita. sight and usanceb. straight and Negotiation creditc. revolving letter of creditd.


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Whichofthefollowingenableseitheraspecificallynominatedbanktocheckthedocumentsand,iftheyarein8. order, to pay them less the interest for the time it will take to obtain reimbursement from the issuing bank?

transferable letter of credita. sight and usanceb. straight and negotiation creditc. revolving letter of creditd.

A _________________ is one which revolves to its face value as soon as the bill negotiated under the credit 9. is paid.

red clause creditsa. straight and negotiation creditsb. revolving letter of creditc. transferable lettersd.

Which of the following statement is false?10. If the bill of lading is to be issued to order of the buyer or is to be made out in his name, it will be extremely a. difficulttoarrangeanyreturnofthegoods.Thispointshouldbetakenintofullaccount.Themarine;billofladingshouldbeissuedby-aforwardingagent,unlessthelatterisalsoacarrieroractsb. as agent for an expressly named carrier.Air waybills issued by forwarding agents are not accepted by banks unless the forwarders act as carrier or c. as agents for an expressly named carrier.OnBoardShippedB/Lcertifiesthatthegoodshavebeenreceivedonboardtheship.d.

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Chapter III

International Finance and Foreign Exchange Market

Aim


introduce International Finance•

elucidate the importance of International Finance•

explain the risk of International Trade•

Objectives


explain the role of International Financial Manager•

determine Globalisation and International Finance•

elucidate International Financial Management•

Learning outcome


understand the Global Financial markets•

identifythefinancialmarkets•

evaluate the offshore markets•


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3.1 IntroductionInternationalfinancesimplymeans theeconomic interactionamongdifferentnationswhich involvesmonetarypaymentsandexchangeofcurrency.Thecornerstoneofinternationalfinanceisforeignexchange,includingforeignexchange markets and exchange rates. International trade, the study of trade between nations, is a related area of international economics. A summary of international trade undertaken by a particular nation is given with the balance of payments.

3.2 Growing Importance of International FinanceInternationalfinance springs from increasing importanceof internationalflowofgoodsandcapital.Twomainreasons for the growing importance of international trade are:

Liberalisation of trade and investment has occurred via reductions in tariffs, quotas, currency controls, and •otherimpedimentstotheinternationalflowofgoodsandcapital.Muchofliberalisationhascomefromthedevelopment of free-trade areas like EU, NAFTA, ASEAN and so on.Anunprecedentedshrinkageof“economicspace”hasoccurredvia rapid improvements incommunication•and transportation technologies and cost reduction as a result. For example, cost of telephone calls, cost of internationalfinancespringsfromincreasingimportanceofinternationalflowofgoodsandcapital.

Rewards of International TradeIncreased prosperity by allowing nations to specialise in producing goods and services at which they are •efficient.There is more to successful international trade than comparative advantage which is based on productive •efficiencies.That is due to competitive advantage based on dynamic factors rather than static productionpossibilities. For example, Hong Kong’s growth with limited resources, French success in wine and cheese, German in beer andfinely engineered automobiles,British in cookies, Italian success in fashion,U.S. inentertainment.Insomecountries,thepresenceofconsumer’ssophisticatedtasteshasforcedfirmstoproducefirst-classproducts,andafterbecomingsuccessfulathome,theywereabletosucceedabroad.

Risk of International TradeRewards accompany risk: Most obvious risk of international trade arises from uncertainty about exchange •rates.Unexpectedchangesofexchangerateshaveimportantimpactonsales,prices,andprofitsofexportersand importers.Countryrisk:This includes theriskasa resultofwar, revolution,orotherpoliticalorsocialeventsafirm•may not be paid for its exports. This applies to foreign investments and to credit granted in trade. Some times foreign buyers may be willing but are unable to pay because their government unexpectedly imposes exchange restrictions. Moreover, uncertainty is due to imposition or change of import tariffs or quotas, subsidies to local producers, and non-tariff barriers.Practices have evolved to cope with risk: For example, special types of foreign exchange contracts have been •designed to hedge or cover some of the risks from unexpected changes in exchange rates.

Export credit insurance schemes are established to help country risk and letters of credit developed to reduce other risks of trade.

Increased globalisation of financial and real-asset marketsThere has been unprecedented growth of foreign versus domestic investment in the money market, the bond market, the stock market, the real-estate market and the market for operating business. At times, the importance of overseas investments and investors has swelled to overshadow that of domestic investment and investors.

Increased volatility of exchange ratesExchange risk has risen greatly because exchange rates have become increasingly volatile. This has been resulted from tension in Middle East or some other politically sensitive parts in the world, at times by news on economic conditionsofmajorcountryandmanysuchrelatedfactors.Thisvolatilityismeasuredbyusingcoefficientofvariationintheexchangerates.Someattributetheincreasedvolatilitytoflexibleexchangeratesystemadoptedin1973.

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Increased importance of multinational corporations and transnational alliancesThemultinationalisationofbusinessisnoteasiertomeasurethantheglobalisationoffinancialmarkets,corporateinvestment across borders, which is the essence of corporations’ becoming multinational. The power held by these massive, stateless enterprises has long been a source of government and public concern. The fear has been that by extendingtheiractivitytheycouldinfluencegovernmentsandexploitworkersandconsumers,especiallyinsmallernations that might control fewer resources than the corporations themselves.

3.3 International Financial ManagementInternationalfinancialmanagementmaybedefinedasthemanagementofvariousfinancialoperationsrelatingtointernationalbusinessorganisations.Itdealswithcrossbordermanagementofassets,liabilitiesandcashflows.Internationalfinancialmanagementdealswithdecisionstakingintoaccountsimultaneously:

theconditionsprevailingintwoormorefinancialmarkets•regulatory and institutional barriers to the international movement of funds•the changes in the exchange rates of national currencies•

Internationalfinancialmanagementreferstothefinancialfunctionofanoverseasbusiness.Itdealswithinvestmentdecisions,financingandmoneymanagementdecisions.

3.3.1 Globalisation and International FinanceAt present the world economy is becoming a single, huge and complex organism with highly interdependent constituents. Supersonic transport, satellite communications and computer technology have shrunk the world. In addition, thephenomenalgrowth in internationalexchangeofgoods,services, technologyandfinancehasknitseveral national economies into a vast network of economic relationships. Hence no nation at present can survive as an independent nation for a long time.

The volume of international trade has rapidly increased after the Second World War as a result of removal of the obstaclestothefreeflowofgoodsandservicesacrossnations.

Alongwiththerapidgrowthofworldtrade,therehasbeenfasterincreaseincrossbordercapitalflows,especiallyforeign direct investments. Hence, several multinational corporations came into existence, with production and marketing facilities spread all over theworld.Another significant development that has takenplace is that ofinternationalfinancialmarkets.Significantrevolutionhastakenplaceinthemoneymarketsandcapitalmarketsallovertheworld.Adynamicandcomplexinternationalfinancialmarketthatexiststodayhasbeentheresultofliberalisation, integration and innovation.

3.3.2 Scope of International Financial Management (IFM)The scope of IFM has been steadily increasing on account of development of new tools and techniques. However, broadly it includes:

foreign exchange market•exchange rate determination•exchange rate risk and its management•investment decisions of Multinational Enterprises (MNEs)•international working capital decisions•financingdecisionsofMNEs•international accounting and control decisions•international indebtedness•


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Internationalfinancialmanagementmaybestudiedfromtwoperspectiveswhichareeconomicperspectiveandbusiness perspective. From the point of view of economic perspective it is necessary to deal with macro economic issues such as:

balance of payments•establishment of internal and external equilibrium•internationalfinancialadjustmentprocess•determination of exchange rates•international reserves and transfer problems•inflationandinterestratesinvariouscountriesandsoon•

From thepoint of viewof business perspective, it is essential to study international business and itsfinancialimplications,problemsofinternationalinvestments,theirsourcesanduses,financialinstrumentsusedandsoon.

3.3.3 Role of the International Financial ManagerThemaintasksofinternationalfinancialmanagersmaybesummarisedasfollows:

Forecastingthefinancialenvironment:Prices,inflationrates,interestratesandexchangerates.•Exchange risk management: Measuring the effects of exchange rate changes on balance sheets, income, cash •flowsandmanagingtheirrisks.Management of assets: From cash management to international capital budgeting, both at home and abroad, in •terms of domestic and foreign currencies.Management of liabilities: Borrowing relationships and decisions, in domestic and foreign currencies and •markets, short term and long term.Performance evaluation and control: Accounting for outsiders, the tax authorities and for management, and •doing so across countries and currencies without distortion.

3.3.4 Challenges of International Financial ManagersFivekeycategoriesofemergingchallengescanbeidentified.

Tokeepupdatingthesignificantenvironmentalchangesandanalysetheirimplicationsforthefirm.Thevariables•to be monitored include - exchange rates, credit conditions at home and abroad, changes in industrial tax and foreign trade prices, stockmarket trends, fiscal andmonetary developments, emergence of newfinancialinstruments and products etc.To understand and analyse complex relationships between relevant environmental variables and corporate •responses own and competitive, to the changes in them.Havetheabilitytoadaptthefinancefunctionwiththesignificantchangesinthefirm’sownstrategicposture.A•majorchangeinthefirm’sproductmix,diversification,andsooncallformajorfinancialrestructuring,findinginnovative funding strategies, changes in dividend policies etc. Responses may be required.To avoid mistakes and part failures and to minimise their adverse impact. For example a wrong takeover decision, •alargeforeignloaninafastappreciatingcurrency,floatingratefinancingobtainedwhentheinterestrateswerelow and so on, errors of judgment which may take place under uncertain conditions. Hence, ways must be found to reduce the damage caused by such deviations.To design and implement effective solutions for taking advantage of opportunities offered by markets and •advancesinfinancialtheory.Increaseincomplexityandpaceofenvironmentalchangescallsforgreaterrelianceonfinancialanalysis, forecastingandplanning,greatercoordinationbetween the treasurymanagementandcontrol functions and extensive use of computers and information technology.

Thus, a manager has to remember that the success of the management of an international organisation depends on cost competitiveness and the ability to manage the bottom-line. Financial tools are basics for the manager in future.

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3.4 Global Financial MarketsDuringthemid1980’stherebeganaprocessofintegrationoftheworld’sfinancialmarkets.Theideawastohaveavastglobalfinancialmarket.Thefinancialmarketsacrosstheworldareintegratedwhichcanbeexaminedbythefollowing different perspectives:

The presence of legal barriers that prevent borrowers in one country from accessing markets in another and •investors in one country from acquiring foreign assets in another. Further, non-resident entities may be totally deniedaccesstoacountry’sfinancialmarketsormaybepermittedcontrolledaccess.Similarly,acountrymaytotally or partially prevent its residents from borrowing in foreign markets and investing in foreign assets. Also theremayberestrictions,whichkeepforeignbanksandfinancialinstitutionsoutofsomeorallsegmentsofthedomesticfinancialmarkets.Asecondfactorcausingsegmentationevenintheabsenceofanyformalrestrictionsoncrossbordercapitalflows•is the differences in generally accepted accounting principles, disclosure norms, regulatory structure, market practices, and so on, which create informational asymmetries between resident and non-resident investors. Thusnon-residentinvestorsmayfinditdifficulttoacquireandinterpretinformationaboutpotentialissuersina country even though the local government places no restrictions on foreign investors.The most important consideration involves the exchange risk factor. The exchange rate movements do not •compensate fordifferences in inflation ratesacrosscountries. Inaglobally integratedmarket,all investorswho have identical expectations should place an identical value on a given asset for example: stock/ shares of General Motors. Because of real exchange rate risk, this will not hold good.

Fromthesethreeissues,onecansaythatrestrictionsoncrossbordercapitalflowsarebeingprogressivelyremovedinmostmajorfinancialmarkets.Similarly,thereisasignificantincreaseinthepresenceofnon-residentfinancialinstitutions in the markets of OECD countries and to some extent even in developing countries. Informational disadvantages faced by non-resident investors can be easily overcome with time. However, there still remain significantdifferencesacrosscountriesinaccountingandreportingpracticesaswellasregulatorypolicies.Finally,valuation divergence caused by real exchange rate uncertainties will probably continue to segment the world’s financialmarketsforalongtimetocome.

3.5 Classification of Financial MarketsFinancialmarketscanbeclassifiedinvariousways.Forthepurposeofinternationalfinance,wewillfollowtwomain divisions:

Domestic or onshore market•Offshore markets•

Domestic markets are traditional national markets subject to the regulatory jurisdiction of the countries’ monetary and securities market authorities and trading assets denominated in the countries’ currency. Thus, the markets for government and corporate debt, bank loans, the stock market and so on, in India are the Indian domestic market and denominated in rupees. Similar markets exist in most countries though many of them in developing and emerging market economies are not that developed. In many countries, non-resident entities are allowed to raise funds in the country’s domestic market, which gives the market an international character. Thus, an Indian company (for example;Relianceindustries)canissuebondsintheUSbondmarketandaJapanesecompanycanlistitselfontheLondon Stock Exchange.

Offshore or external markets are markets in which assets denominated in a particular currency are traded, but the markets are located outside the geographical boundaries of the country of that currency. Thus, a bank located in London or Paris can accept a time deposit denominated in US dollars from another bank or corporation – an ‘offshore dollar deposit’. A bank located in Paris might extend a loan denominated in British pound sterling to an Australian firm–anoffshoresterlingloan.AnIndiancompanymightissueinLondonbondsdenominatedinUSdollars–anoffshore US dollar bond.


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The main characteristic of these offshore markets is that, they are not subject to many of the monitoring and regulatory provisions of the authorities of their country of residence or of the country of currency in which the asset is denominated.

Forexample;abankinUSacceptingadepositwouldhavetomeetthereserverequirementslaiddownbytheFederalReserve and also meet the cost of deposit insurance. However, the London branch of the same bank accepting a dollar deposit is not subject to these requirements. An Indian company making a US dollar bond issued in the US would be subject to a number of disclosures, registration and other regulations laid down by the Securities ExchangeCommission.DollarbondsissuedinLondonfacenosuchrestrictionsandthefirmmayfindthismarketmore accessible.

Since both investors and issuers are generally free to access both the domestic and off shore markets in a currency, it is to be expected that the two segments must be closely tied together. In particular, the interest rates in the two segmentscannotdiffersignificantly.Ofcourse,therewillbesomedifferenceduetothefactthatonesegmentismorerigorously regulated (as also protected against systematic disasters) but unless the authorities impose restrictions onfundsflowacrossthesegments,thedifferenceswillbeverysmall.

3.5.1 Details of Offshore MarketsTheeurocurrencymarketorsimplytheeuromarketwasthefirstoffshoremarkettoemergeduringtheearlypostwaryears.Itblossomedintoaglobalfinancialmarketplacebytheendofthe1980’s.

A Euro currency deposit is a deposit in the relevant currency with a bank outside the home country of that currency. Thus, a US dollar deposit with a bank in London is a euro dollar deposit. Note that what matters is the location of the bank – not the ownership of the bank or the ownership of the deposit. Thus a dollar deposit belonging to an American company held with the Paris branch of an American Bank is still a euro dollar deposit. Similarly, a euro dollar loan is a dollar loan made by a bank outside the US to a customer or another bank.

The term ‘Euro’ has now become outdated since such deposits and loans are regularly traded outside Europe, for example;inSingaporeandHongKong(thesearesometimescalledAsiandollarmarkets).WhileLondoncontinuesto be the main offshore centre, loans negotiated in London are often booked in tax haven centres such as Grand Cayman and Nassau for tax reasons. It must be noted that every offshore deposit has its counterpart in a deposit in the home currency of the relevant currency.

For instance if suppose, Microsoft wishes to place USD 50 million in a 91day deposit, it obtains rate quotations fromvariousbanksintheUSandinLondon;itfindsthattherateofferedbyBarclaysBankinLondon,8%ismostattractive. It instructs CITI bank, New York to remit USD 50 million to Barclays. Barclays London maintains an account with Chase New York. CITI debits the Microsoft account and credits the Barclay’s account with Chase. Thistransferwilltakeplaceviaaninterbankclearingsystemsuchas“ClearingHouseInterbankPaymentsSystem(CHIPS) in the US. Barclays create a deposit account in the name of Microsoft in London and credits it with USD 50 million. A Eurodollar or offshore dollar deposit has been created but ‘physically’, the dollars have not left the US. At maturity 91 days, Barclays will calculate interest payable as 50,00,0000 x 0.08 x (91/365) = $ 997, 260, 27 (assume year is considered as 365 days) and credit it to Microsoft’s deposit account.

SupposeMicrosoftwishestoextendthedepositforafurtherperiodof91days,andfindsthatCommerzBank,Frankfurt is offering the best rate. It instructs Barclays London to transfer the money to Commerz Bank. Commerz bank maintains an account with Bank of America, New York. Barclays instructs Chase to debit its account and transfers the funds to the account of Commerz Bank with Bank of America, so the process goes on.

It may also be noted that Barclays is not going to keep the funds idle for 91 days. It might keep some amount as reservesandfindaprospectiveborrowerforthebalance.Suppose,aFrenchfirmwishestodetain90-dayloanofUSD45MillionandfindsthatBarclaysrateisthemosteconomical.ItdrawstheloanandinstructsBarclaystotransfer funds to its bank BNP Paris. BNP maintains an account with Bank of America in Los Angeles. Barclays instructs Chase to transfer the funds to BNP’s account with Bank of America. BNP creates an offshore or euro dollar depositinthenameoftheFrenchfirm.Anothereurodeposithasbeencreated.

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It can be observed that BNP can and probably would repeat the process, which will lead to the creation of further euro dollar deposits. Just as in the case of a fractional reserve domestic banking system, euro banks can create multiple deposits based on an initial injection of funds into the system. But the funds never leave the home country of the currency in question (if at any period in the chain, the borrower wishes the loan proceeds to be transferred to an account in the US, the deposit expansion process will come to a halt).

Over the years, these markets have evolved a variety of instruments other than time deposits and short term loans forexample:CertificateofDeposit(CDs),EuroCommercialpaper(ECP)mediumtolongtermfloatingrateloans,Eurobonds(inkeepingwiththedefinitionofeurodeposits,adollarcommercialpaperoradollarbondissuedsayin London becomes, respectively, Euro dollar commercial and euro dollar bond). Floating Rate Notes (FRNs) and Euro Medium Term Notes (EMTNs).

3.5.2 Evolution of Offshore MarketsThe euro currency market especially the euro dollar market is said to have originated with the Russian authorities wishing to have dollar denominated deposits outside the jurisdiction of the US Government. Banks in Britain and France obliged and the Eurodollar market was born. The subsequent enormous growth of the euro dollar market is the result of the following factors:

Throughout the 1960’s and 1970’s, American banks and other depository institutions were subject to ceiling •ontherateofinteresttheycouldpayondeposits(RegulationQwhichspecifiedamaximumrateofinterestpayable on savings deposits). These restrictions were not applicable to banks outside the US and a number of American banks began accepting dollar deposits in their foreign branches. The dollars were often reinvested in the US. Most of these restrictions were lifted by mid 70’s.Further reserve requirements and deposit insurance implied higher effective cost of funds for US domestic •deposits. Since outside branches of US banks are not required to observe these restrictions, they could offer slightly higher rates to depositors and slightly lower rates to borrowers. Hence it was attractive to accept dollar deposits in foreign brackets rather than at home.DollarbecameavehiclecurrencyininternationaltradeandfinanceandthereforemanyEuropeancorporations•havecashflows indollarsandhence temporarydollarsurplusesand theneed tomakepayment indollars.Hence, the need to have deposits denominated in dollars. Convenience of the same time zone as well as greater familiarity with European banks, made these companies prefer European banks, a choice made more attractive by the higher rates offered by euro banks.These factors were reinforced by the demand for euro dollar loans by non–US Corporations and by US •multinationalstofinancetheirforeignoperations.Duringthe1960s,becauseofdeteriorationofUSbalanceofpayments,thegovernmentimposedaseriesofrestrictions,whichmadeitextremelydifficultandmoreexpensivefor US entities to borrow in the US. The voluntary foreign credit restraints of 1963, followed by mandatory controls on foreign landing and the interest equalisation tax (a tax on interest earned by US residents from foreigners) induced channelising of funds through the euro dollar markets where these regulations did not apply.Another contributing factor was the restrictions imposed by UK authorities sometime in the 1950’s, which •preventedUKbanksfromprovidingtradefinanceinSterling.

The emergence of offshore markets in currencies other than dollars can also be attributed to similar circumstances though better rates and familiarity perhaps played a more important role in these cases. As exchange controls were eased and offshore banking was encouraged by authorities, offshore markets developed in many other countries including the Far East.

3.6 Introduction to Foreign Exchange MarketThe mechanism through which payments are made between two countries having different currency systems is called foreign exchange. The existence of a number of currencies gives rise to the need to transact these currencies for settling international payments. We know that in international transactions, at least one of the parties would be dealing in a foreign currency.


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Forexample;ifanIndianexportersellssomegoodstosomeoneintheUSandthepriceisdeterminedindollars,the exporter would be dealing in a foreign currency. Similarly, if an Italian resident makes an investment in the German money market, he would deal with the German currency Euro which would be a foreign currency to him. Sometimes, the transaction currency may be a foreign currency to both the parties involved.

Thisfactresultedinthedevelopmentofamarket,whichdealsspecificallyincurrenciescalledtheForeignExchangeMarket or Forex or FX. This is an OTC (over the counter) market, i.e., there is no physical marketplace where the dealsaremade.Itisanetworkofbanks,brokersanddealersspreadacrossvariousfinancialcentresoftheworld.These players trade in different currencies through (and are linked to each other by) telephones, faxes, computers and other electronic networks. These traders generally operate through a trading room. The deals are mostly on an oralbasiswithwrittenconfirmationslater.

3.7 Functions of the Foreign Exchange MarketThe foreign exchange market performs the following important functions:

Transfer functions: The basic function of the foreign exchange market is to facilitate the conversion of one •currency into another i.e. to accomplish transfers of purchasing power between two countries. This transfer of purchasing power is affected through a variety of credit instruments such as telegraphic transfers, bank drafts and foreign bills.Credit functions: Another function of the foreign exchange market is to provide credit both national and •international, to promote foreign trade. When foreign bills of exchange are used in international payments a credit for about 3 months, till their maturity, is required.Hedging function: A third function of the foreign exchange market is hedge foreign exchange risks. In a free •exchange market when exchange rates, i.e., the price of one currency in terms of another currency, change, there maybegainorlosstothepartyconcerned.Underthiscondition,apersonorafirmundertakesagreatexchangerisk if there are huge amounts of net claims or net claims or net liabilities which are to be met in foreign money. Exchange risks should be avoided or reduced. For this, the exchange market provides facilities for hedging anticipated or actual claims or liabilities through forward contracts in exchange. A forward contract which is normallyforthreemonthsisacontracttobuyorsellforeignexchangeagainstanothercurrencyatsomefixeddate in the future at a price agreed upon.

3.8 Forex Market ParticipantsThe market for foreign exchange can be viewed as a two-tier market. One tier is the wholesale or interbank market andtheothertieristheretailorclientmarket.FXmarketparticipantscanbecategorisedintofivegroups:

International banks: International banks provide the core of the FX market. Approximately 200 bank’s activity •‘make a market’ in foreign exchange i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers in conducting foreign commerce or makinginternationalinvestmentinfixedassetsthatrequireforeignexchange.Bank customers: Bank customers include MNC’s, money managers and private speculators. Retail or bank •clienttransactionsaccountforapproximately15%ofFXtradingvolume.Theother85%oftradingvolumeisfrom interbank trades between international banks or non-bank dealers.Non-bankdealers:Non-bankdealersarelargenon-bankfinancialinstitutionssuchasinvestmentbanks,where•size and frequency of trades make it cost-effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs.FX broker: FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position •themselves. Brokers have knowledge of the quotes offered by many dealers in the market. Consequently, interbank trades will use a broker primarily to disseminate a currency quote to many dealers as quickly as possible. In recent years, since the introduction and increased usage of the automated dealing system, the use of brokers has declined.

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Central banks: The Central Bank (national monetary authority) of a particular country frequently intervenes in •theforeignexchangemarketinanattempttoinfluencethepriceofitscurrencyagainstthatofamajortradingpartner,oracountrythatit“fixes”orpegs”itscurrencyagainst.Interventionistheprocessofusingforeigncurrency reserves to buy one’s own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively selling one’s own currency for foreign currency in order to increase its supply and lower its price.

The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another called correspondent banking accounts. The correspondent bank account networkallowsforefficientfunctioningoftheforeignexchangemarket.

In India, all dealings in foreign exchange are required to comply with the foreign Exchange Management Act, 1999 (FEMA). The Reserve Bank of India is the regulatory authority for the Act. According to FEMA, only those entities can deal in foreign exchange as authorised to do so by RBI. The Act provides for entities to be authorised either as authorised dealers or as money changers. Authorised dealers are generally commercial banks and form a large part oftheinterbankmarketsinIndia.Moneychangerscanbeeitherfull-fledgedmoneychangersorrestrictedmoneychangers. While the former are authorised to both buy and sell foreign currency from their customers, the latter can only buy the same. Money changers are allowed to deal only in notes, loans and travellers cheques. Authorised dealersontheotherhandareallowedtodealinalltheitemsclassifiedasforeignexchangebyFERA.Thus,theyare permitted to deal with all documents relating to exports and imports.

The authorised dealers have to operate within the rules, regulations and guidelines issued by the Foreign Exchange DealersAssociationofIndia(FEDAI)fromtimetotime.Theoffices/branchesofauthoriseddealers(AD’s)areclassifiedintothreecategories.Theseare:

CategoryA:Theseareoffices /brancheswhichkeep independentforeigncurrencyaccountswithoverseas•correspondent banks / branches in their own names.Category B: These are the branches which do not maintain independent foreign currency accounts but have •powerstooperatetheaccountsmaintainedabroadbytheirheadofficeorthebranchescategorisedA.Category C: The branches, which fall in neither of the above categories and yet handle Forex business through •a category A or B branch, fall under Category C.

The Indian Forex market consists of three tiers:ThefirsttierconsistsofallthetransactionsbetweentheauthoriseddealersandtheRBI.•The second tier is the interbank market referred to earlier i.e. the market in which the authorised dealers deal •with one another. Money changers are required to offset their positions created by dealing with their customers, in this interbank market.The third tier is the retail segment, where authorised dealers and money changers deal with their customers.•

3.9 Foreign ExchangeForeignexchangeisdefinedintermsofsection2ofFEMA,1999asaforeigncurrencyincluding:

all deposits, credits, balance payable in any foreign currency•any drafts, traveller’s cheques, letters of credit and bills of exchange expressed or drawn in Indian currency and •payable in foreign currencyany instrument, giving anyone the option of making it payable either partly or fully in a foreign currency•

Herethetermcurrencyin“foreigncurrency”includescoins,banknotes,postalnotes,postalordersandmoneyorders. In other words, foreign exchange includes all kinds of claims of the residents of a country to foreign currency payable abroad.


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3.10 The Indian Forex MarketsPriorto1992,theIndianforexmarketsweretotallyregulated.ThevalueoftheIndianrupeewasfixed,firstintermsof the pound and later the US dollar. This value was revised once in a while when the regulator felt the need. All inward and outward remittances were required to be converted at this rate of exchange. The liberalisation of the forex markets started in 1992. In March 1992, a dual exchange rate system was put into place. This was known as Liberalised Exchange Rate Management System (LERMS). Two exchange rates were prevailing during this period, one determined by the market. This was the beginning of a movement towards a market-oriented rate. Under this system,40%ofcurrentaccountreceiptswererequiredtobeconvertedatanofficialrateandthebalancecouldbeconvertedatmarket-determinedrates.ThiswaslatermodifiedtobecometheUnifiedExchangeRateSystem,which came into effect from March 1, 1993. Under this system, all forex transactions are required to be routed through the ADs at market-determined rates. The RBI also announces its rates (which act as reference rates) based on market rates. As mentioned earlier, only permitted people can deal in foreign exchange (Ads, etc.). Hence, any other person desiring to buy or sell foreign exchange can do so only through these permitted people, and only for permissible transactions.

In August 1994, RBI announced relaxations on current account transactions and delegated further powers to ADs. They can now allow remittances for various purposes like travel, studies, medical treatment, gifts and services to theextentspecifiedbyRBIunderthevariousprovisionsoftheExchangeControlManual.Fromtimetotime,RBIbrings out rules regarding the various players who are allowed to operate in the forex market, the various permissible instruments (like forward contracts, swaps, etc.), the conditions in which these instruments can be used, etc. It thus regulates the operations of the market. Some of the important regulations and the relevant FEDAI guidelines as on January 7, 1999 are given below:

3.10.1 Forward Exchange Contracts

Can be booked only for genuine transactions and where there is exposure to exchange risk, not for speculative •purposes.Cannotbebookedforanticipatedtransactions,onlyforfirmexposure.•Can be booked in the currency in which the importer is exposed to exchange rate or in any other permitted •currency, i.e., any freely convertible currency.Value of the forward cover should not exceed the value of the goods contracted for.•The period and the extent of the exposure to be covered are left to the choice of the importer. However, the •last date of delivery of the forward contract should not exceed six months from the date of shipment/ expected shipment date (in case of contracts booked for covering exports or imports).Rollover forward covers are permitted to be booked as necessitated by the maturity dates of the underlying •transactions, market conditions and the need to reduce costs to the customers. Each time a forward contract is rolled over, the new contract can be for a maximum period of six months.In case of merchandising trade transactions (i.e., transactions where some good is imported only to be exported •elsewhere,inthesameorarefinedform),forwardcontractswillhavetobebookedsimultaneouslyforbothlegsofthetransactionsorforthenetamountofexpectedprofit.No ready sale or purchase should be made for a transaction for which a forward contract has already been •booked.Forward contracts can be cancelled by the party concerned whenever required. The exposure can be covered •again by the customer through the same or another AD subject to genuine exposure risk and permissibility of the transaction. However, for non-trade transactions, contracts once cancelled cannot be re-booked. Corporate can roll over such contracts on maturity at ongoing rates.Forward cover can be taken by resident corporate clients in respect of dividend due to overseas investors who •have made a direct foreign investment in India. The cover can be provided only after the Board of Directors has decided upon the rate of dividend.Forwardcovercanalsobetakenforforeigncurrencyloanstoberaised,anytimeafterthefinalapprovalforthe•loan arrangements have been obtained from RBI.

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ForGDRissues,forwardcovercanbeobtainedoncetheissuepricehasbeenfinalised.•On each forward sale / purchase contract booked, the ADs are required to charge a minimum commission of •Rs.250 (FEDAI rules).

3.10.2 Other Regulations

Exporters and certain other recipients of forex, at their option, can retain a portion of the proceeds in forex in •a foreign currency account opened with ADs in India. This account is known as Exchange Earners’ Foreign Currency deposit.Cross currency exposures can be covered in the overseas market through ADs, without necessarily covering the •rupee / dollar leg of the transaction.All actual out of pocket expenses of the bank such as postage, telex charges including those of the corresponding •bank shall be recovered from the customer.R – Returns are required to be submitted by ADs to the Exchange Control Department RBI – pertaining to the •transactions in foreign exchange, and in rupee with overseas banks during each fortnight. These returns serve as the principal source of information for compilation of BOP data. They also help RBI to check whether the powers delegated to ADs have been correctly exercised.

3.10.3 Early Delivery/ Extension or Cancellation of Forward Exchange ContractsIn many cases, a customer books a forward contract on the basis of an estimation regarding the time when he would need to deal in the foreign currency. With the uncertainties prevailing in international trade, in many cases customers mayfindthemselvesreceivingexportproceedsbeyondtheestimatedduedate,orpreferringtopayfortheirimportsbefore the due date to take advantage of a depreciating foreign currency or for any other reason. The actual date of delivery or purchase of foreign currency may vary from the date for which the forward contract is booked for a variety of reasons. In such circumstances, forward contracts may be extended or cancelled, or the customer could request an early delivery, if the bank is willing to accommodate him. In these cases, customers will have to bear the losses arising out of mature/ extended performance or cancelling of the contract. FEDAI Rule No. 8 regulates the charges that the customer has to pay to the bank. The rule says that:

Customers can request for an early delivery / extension / cancellation of a forward contract on or before the maturity date of the contract.

The bank will charge a minimum sum of Rs. 100 for entertaining any such request from the customer.

EarlyDelivery:Ifabankacceptsorgivesearlydelivery,inadditiontotheflatchargeofRs.100,thebankhas•to charge / pay the swap charges for the early delivery period from/ to the customer, irrespective of whether the bank actually enters into a swap or not. This swap cost/gain may be recovered from/ paid to the customer, eitheratthebeginningoftheswapperiodoratitsend,asthebankmaydeemfit.Asaresultoftheswap,ifthebank faces an outlay of funds, it has to charge interest from the customer at a rate not less than the prime lending rate,fortheperiodoftheswap.Ifthereisaninflowoffunds,thebankmay,atitsdiscretion,payinteresttothecustomer at the rate applicable to term deposits with maturity equal to the period of the swap. The timing of thiscashflowtooislefttothediscretionofthebank.Extension: An extension of a contract entails cancelling an existing contract and re-booking a corresponding •forward contract. The cancelling is required to be done at the relevant TT buying or selling rate as on the date of cancellation, and the re-booking would be done on the ongoing rate for a new forward contract. The bank is required to collect / pay the difference between the rate at which the original contract was entered, and the rate at which it is cancelled, from / to the customer. This may be done either at the time of cancellation or at the timeofmaturityoftheoriginalcontract.Thiswouldbeinadditiontotheflatcharge.Cancellation: In case of cancellation of a contract, it is required to be cancelled at the appropriate TT selling or •buying rate and the difference between the contracted rate and the cancellation rate is to be collected from/paid tothecustomer.Inaddition,theflatrateisrequiredtobecollected.

Any amount to be collected/ paid by the bank on account of early delivery/extension/ cancellation of a forward contract(exceptfortheflatcharge)shallbeignoredifitislessthanorequaltoRs.50.


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SummaryInternationalfinancesimplymeanstheeconomicinteractionamongdifferentnationswhichinvolvesmonetary•payments and exchange of currency.International trade, the study of trade between nations, is a related area of international economics.•Internationalfinancespringsfromincreasingimportanceofinternationalflowofgoodsandcapital.•Export credit insurance schemes are established to help country risk and letters of credit developed to reduce •other risks of trade.Exchange risk has risen greatly because exchange rates have become increasingly volatile.•Internationalfinancialmanagementmaybedefinedasthemanagementofvariousfinancialoperationsrelating•to international business organisations.Internationalfinancialmanagementreferstothefinancialfunctionofanoverseasbusiness.•The volume of international trade has rapidly increased after the Second World War as a result of removal of •theobstaclestothefreeflowofgoodsandservicesacrossnations.Adynamicandcomplexinternationalfinancialmarketthatexiststodayhasbeentheresultofliberalisation,•integration and innovation.Internationalfinancialmanagementmaybestudiedfromtwoperspectiveswhichareeconomicperspectiveand•business perspective.Informational disadvantages faced by non-resident investors can be easily overcome with time.•Domestic markets are traditional national markets subject to the regulatory jurisdiction of the countries’ monetary •and securities market authorities and trading assets denominated in the countries’ currency.Offshore or external markets are markets in which assets denominated in a particular currency are traded, but •the markets are located outside the geographical boundaries of the country of that currency.Theeurocurrencymarketorsimplytheeuromarketwasthefirstoffshoremarkettoemergeduringtheearly•post war years.A euro dollar loan is a dollar loan made by a bank outside the US to a customer or another bank.•The existence of a number of currencies gives rise to the need to transact these currencies for settling international •payments.The basic function of the foreign exchange market is to facilitate the conversion of one currency into another •i.e. to accomplish transfers of purchasing power between two countries.The interbank market is a network of correspondent banking relationships, with large commercial banks •maintaining demand deposit accounts with one another called correspondent banking accounts.Thecorrespondentbankaccountnetworkallowsforefficientfunctioningoftheforeignexchangemarket.•The actual date of delivery or purchase of foreign currency may vary from the date for which the forward contract •is booked for a variety of reasons.

ReferencesWeithers, T., 2006. • Foreign Exchange: A Practical Guide to the FX Markets (Wiley Finance)., 1st ed., WileyChen, J., 2009.• Essentials of Foreign Exchange Trading (Essentials Series)., 1st ed., Wiley.Kouwenberg, Ph, C., 2008.• International Financial Markets [pdf] Available at:< http://www.econ.chula.ac.th/public/members/phornchanok/nifm.pdf > [Accessed 2 November 2012].Rajesh, C., 2005.• Foreign Exchange Markets.,[pdf] Available at: < http://www.isb.edu/faculty/rajeshchakrabarti/FX_Basu.pdf>[Accessed 2 November 2012].

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2012. • International Finance and Foreign Exchange Market ,[Video Online] Available at: < http://www.youtube.com/watch?v=6iN0legMU-A>[Accessed 2 November 2012]2012. • International Finance and Foreign Exchange Market, [Video Online] Available at: < http://www.youtube.com/watch?v=b_Fm8sW_g98> [Accessed 2 November 2012].

Recommended ReadingEun, C., 2011. • International Financial Management (Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate), 6th ed., McGraw-Hill/Irw.Riehl, H., 1977. • Foreign Exchange Markets: A Guide to Foreign Currency Operations,1st ed., McGraw-Hill.Rodriguez, R. & Riehl, H., 1983.• Foreign Exchange And Money Market: Managing Foreign and Domestic Currency Operations, 2nd ed., McGraw-Hill.


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Self Assessment_________________ simply means the economic interaction among different nations which involves monetary 1. payments and exchange of currency.

International tradea. Internationalfinanceb. International rewardsc. Globalisationd.

Which of the following is not one of the risks of international trade?2. Country riska. Rewards accompany riskb. Practices have evolved to cope with riskc. Increased prosperity riskd.

Which of the following is not included in IFM?3. Foreign exchange marketa. Exchange rate determinationb. Balance of paymentsc. Exchange rate riskd.

Whichofthefollowingisnotoneofthetasksofinternationalfinancialmanagers?4. Forecastingthefinancialenvironmenta. Exchange risk managementb. Management of assetsc. Determination of exchange ratesd.

Duringthemid__________therebeganaprocessofintegrationoftheworld’sfinancialmarkets.5. 1980’sa. 1920’sb. 1940’sc. 1960’sd.

Whichofthefollowingisoneofthedivisionsoffinancialmarkets?6. International marketa. Offshore marketb. Global marketc. Control marketsd.

The_______________wasthefirstoffshoremarkettoemergeduringtheearlypostwaryears.7. dollar currencya. currencyb. euro marketc. euro currencyd.

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Which of the following deposit in the relevant currency with a bank outside the home country of that 8. currency?

Dollar currency marketa. Currency marketb. Euro market depositc. Euro currency depositd.

Which of the following is not one of the functions of foreign exchange market?9. Transfer functionsa. Credit functionsb. Hedging functionc. Offshore functiond.

Which of the following is not one of the categories of10. FX market participants?International banksa. Non-bank dealersb. Bank customersc. Market brokerd.


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Chapter IV

International Marketing

Aim


explain the general concept of marketing•

introduce the basic fundamental of International Marketing•

establish the relationship between product life cycle, trade and investment•

Objectives


enlistvariousdefinitionandoperationalactivitiesofmarketing•

explain global marketing•

enlist various marketing stage•

Learning outcome

At the end of this chapter, the students will be able to:

understand the concept of marketing•

difference between global market and local market•

analyse the product life cycle and how it affected by investments•

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4.1 IntroductionWhetheranorganisationmarketsitsgoodsandservicesdomesticallyorinternationally,thedefinitionofmarketingstill applies. Due to the globalisation the scope of marketing is broadened when the organisation decides to sell across international boundaries.

For example, the organisation’s language of business may be English, but it may have to conduct business in French, Japanese or German. This not only requires translation facility of various languages, but cultural conditions have to be accounted for as well. Doing business in different cultural forms may be different from doing it the English way.

Letus,firstlydefinemarketingandthenseehow,bymarketingacrossmultinationalboundaries,differences,whereever they exist, have to be accounted for.

4.2 Definition of MarketingVariousauthorshavedefinedthetermmarketinginmanywayssuchas;

S.Carterdefinesmarketingas:Theprocessofbuildinglastingrelationshipsthroughplanning,executingand•controlling the conception, pricing, promotion and distribution of ideas, goods and services to create mutual exchange that satisfy individual and organisational needs and objectives.Kotler says that marketing is the social process by which individuals and groups obtain what they need and •want through creating and exchanging products and value with others.AdcockdefinesMarketingastherightproduct,intherightplace,attherighttime,attherightprice.•Palmerdefinesmarketingisessentiallyaboutmarshallingtheresourcesofanorganisationsothattheymeetthe•changing needs of the customer on whom the organisation depends.Bartlesdefinesmarketingistheprocesswherebysociety,tosupplyitsconsumptionneeds,evolvesdistributive•systems composed of participants, who, interacting under constraints - technical (economic) and ethical (social) -createthetransactionsorflowswhichresolvemarketseparationsandresultinexchangeandconsumption.

The long held tenets of marketing are:Customer value•Competitive advantage•Focus•

This means that organisations have to study the market, develop products or services that satisfy customer needs and wants, develop the ‘correct’ marketing mix and satisfy its own objectives as well as give the customer satisfaction onacontinuingbasis.However,itbecameclearinthe1980’s,thatthedefinitionofmarketingwastoonarrow.

Preoccupation with the tactical workings of the marketing mix led to neglect of long term product development, so strategic marketing was born. The focus shifted from knowing everything about the customer, to knowing the customer in a context which includes the competition, government policy and regulations, and the broader economic, social, and political macro forces that shape the evolution of markets.

Inglobalmarketingterms,thismeanscreatenetworking,workingcloselywithhomecountry’sgovernmentofficialsand industry competitors to gain access to a target market. Also, the marketing objective has changed from one of satisfyingorganisationalobjectivestooneofstakeholderbenefits-includingemployees,society,andgovernment.Profitisstillessentialbutnotanendinitself.


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4.3 Understanding Strategic MarketingStrategicmarketingaccordingtoWensley,hasbeendefinedas:“initiating,negotiatingandmanagingacceptableexchange relationships with key interest groups or constituencies, in the pursuit of sustainable competitive advantage withinspecificmarkets,onthebasisoflongrunconsumer,channelandotherstakeholderfranchise.”

Whetheronetakesthedefinitionofmarketingorstrategicmarketing,marketingmuststillberegardedasbothaphilosophy and a set of functional activities. As a philosophy, embracing customer value (or satisfaction), planning, and organising activities to meet individual and organisational objectives, marketing must be internalised by all membersofanorganisation,becausewithoutsatisfiedcustomerstheorganisationwilleventuallydie.

Marketing is only a philosophy. It has some operational activities also like:Advertising•Selling•Promotional activities•Campaigning•Market research•Product development•

It is both. In planning for marketing, the organisation has to basically decide what it is going to sell, to which target market and with what marketing mix (5 P’s: product, place, promotion, price and people).

Although, these tenets of marketing planning must apply anywhere, when marketing across national boundaries, the difference between domestic and international marketing lies almost entirely in the differences in national environments within which the global programme is conducted and the differences in the organisation and programs ofafirmoperatingsimultaneouslyindifferentnationalmarkets.

4.4 Post Modern Era of MarketingIt is recognised that in the post modern era of marketing, even the assumptions and long standing tenets of marketing like the concepts of consumer needs, consumer sovereignty, target markets and product/ market processes are being challenged. The emphasis is towards the emergence of the customising consumer demand, that is, the customer who takes elements of the market offerings and moulds a customised consumption experience out of these.

Even further, post modernism, posts that the consumer who is the consumed, the ultimate marketable image, is also becoming liberated from the sole role of a consumer and is becoming a producer. This reveals itself in the desire fortheconsumertobecomepartofthemarketingprocessandtoexperienceimmersioninto“thematicsettings”rather than merely encounter products.

So in consuming food products for example, it becomes not just a case of satisfying hunger needs, but also can be rendered as an image-producing act. Like if someone wants to reduce his or her thirst in the month of summer, thenthefirstthingcomesintomindisCocaCola(“ThandaboletoCocaCola”).Inthepostmodernmarketplacetheproductdoesnotprojectimages,itfillsimages.Thisistrueinsomefoodstuffs.Theconsumptionof“designerwater”or“slimmingfoods”isastatementofaself-image,notjustaproductconsumingact.

Acceptance of post modern marketing affects discussions of products, pricing, advertising, distribution, and planning. However, given the fact that this textbook is primarily written with the developing economies in mind, where the environmental conditions, consumer sophistication and systems are not such that allow a quantum leap to postmodernism, it is intended to mention the concept in passing. Further discussion on the topic is available in the accompanying list of readings.

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4.5 Global MarketingWhen organisations develop into global marketing organisations, they usually evolve into this from a relatively smallexportbase.Somefirmsnevergetanyfurtherthantheexportingstage.Marketingoverseascan,therefore,be anywhere on a continuum of ‘foreign’ to ‘global.’ It is well to note at this stage that the words ‘international,’ ‘multinational’ or ‘global’ are now rather outdated descriptions. In fact ‘global’ has replaced the other terms to all intents and purposes.

‘Foreign’ marketing means marketing in an environment different from the home base, it’s basic form being ‘exporting’. Over time, this may evolve into an operating market rather than a foreign market. One such example is the Preferential Trade Area (PTA) in Eastern and Southern Africa where involved countries can trade inter-regionally under certain common modalities. Another example is the cold storage company of Zimbabwe.

In global marketing, the mode of operation is very different. Organisations begin to develop and run operations in the targeted country or countries outside of the domestic one. In practice, organisations evolve and Table 1.1 outlines a typology of terms which describes the characteristics of companies at different stages in the process of evolving from domestic to global enterprises.

4.6 Marketing Evolutionary StagesThe four stages of marketing’s evolution are as follows:

Management emphasis

Stage one Domestic

Stage two International

Stage three Multinational Stage four Global

Focus Domestic Ethnocentric Polycentric Geocentric

Marketing strategy Domestic Extension Adaption Extension

Structure Domestic International Worldwide area Adaption creation matrix/mixed

Management style Domestic Centralised top down Decentralised bottom up Integrated

Manufacturing stance Mainly domestic Mainly domestic Host country Lowest cost worldwide

Investment policy Domestic Domestic used worldwide

Mainly in each host country Cross subsidisation

Performance evaluation

Domestic market share

Against home country market share

Each host country market share Worldwide

Table 4.1 Stages of domestic to global evolution

Domestic focusStage one: Domestic in focus, with all activity concentrated in the home market. Whilst many organisations can survive like this, for example raw milk marketing, solely domestically oriented organisations are probably doomed to long term failure.

Home focusStage two: Home focus, but with exports (ethnocentric). Probably believes only in home values, but creates an export division. Example: Homemade pickles, spices which are distributed locally.

Multinational focusStage three: Organisations which come under stage two realise that they must adapt their marketing mixes to overseas operations. The focus switches to multinational (polycentric) and adaptation becomes paramount.


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Global focusStage four: Creating value by extending products, services globally and focus on serving emerging global markets (geocentric). This involves recognising that markets around the world consist of similarities and differences and that it is possible to develop a global strategy based on similarities to obtain scale economies, but also recognises and responds to cost effective differences. Its strategies are a combination of extension, adaptation, and creation. It is unpredictable in behaviour and always alert to opportunities.

4.7 Factors Leading to InternationalisationThere have been many underlying forces, concepts, and theories which have emerged as giving political explanation to the development of international trade. Remarkably, despite the trend to world interdependency, some countries have been less involved than others. Some of the major factors are like:

The reduction in trade and investment barriers in the post-World War II period.•The rapid growth and increase in the size of developing countries’ economies.•Changes in technologies.•

The USA, for example, has a remarkably poor export record. About 2000 US companies only account for more than70%ofUSmanufacturers’exports.Thishasbeenmainlyduetoitshugestatewidedomesticmarket,whichistantamount to international trade, for example, Californian fruit being sold three thousand kilometres away in New Jersey.Japanhasrisenfasttodominatetheexportrankings,withcountriesofAfricastrugglingtomakeasignificantmark,mainlybecauseoftheiremphasisonexportingprimaryproducts.Thissectionwillbrieflyexaminetheforceswhich have been instrumental in the development of world trade.

4.8 The International Product Trade CycleThemodel describes the relationshipbetween the product lifecycle, trade and investment (seefig. 1.1) and isattributable to Venon1 (1966).

The international product trade cycle model suggests that many products go through a cycle during which high-income,mass consumption countrieswhich are initial exporters, lose their exportmarkets andfinally becomeimporters of the product. At the same time other countries, particularly less developed but not exclusively so, shift frombeingimporterstoexporters.ThesestagesarereflectedinFig.1.1.

Exports production consumption developing developed countries countries

Imports consumption consumption developing developed countries countries

Imports

Exports

time

quan

tity

Standardised productMature productNew productKEY

Fig. 4.1 Relation between product life cycle (Trade and investment)

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From a high income country point of view:Phase 1 involves exporting, based on domestic product strength and surplus•Phase 2 when foreign production begins•Phase 3 when production in the foreign country becomes competitive•Phase 4 when import competition begins•

Theassumptionbehindthiscycleisthatnewproductsarefirstlylaunchedinhighincomemarketsbecausea)thereis the potential is vast and b) the product can be tested best domestically, near its source of production. Thus, new products generally emanate from high income countries and, over time, orders begin to be solicited from lower income countries and so a thriving export market develops. High income country entrepreneurs quickly realise that the markets to which they are selling often have lower production costs and so production is initiated abroad for the new products, so starts the second stage.

In the second stage of the cycle, foreign and high income country production begins to supply the same export market. As foreign producers begin to expand and gain more experience, their competition displaces the high income export production source. At this point high income countries often decide to invest in foreign countries to protect their share. As foreign producers expand, their growing economies of scale make them a competitive source for third country markets where they compete with high income exporters.

Thefinalphaseofthecycleoccurswhentheforeignproducerachievessuchascaleandstartsexportingtotheoriginal high income producer at a production cost lower than its original high income producer, at a production cost lower than its original high income supplier. High income producers, once enjoying a monopoly in their own market, now face competition at home. The cycle continues as the production capability in the product extends fromotheradvancedcountriestolessdevelopedcountriesathome,thenininternationaltrade,andfinally,inotheradvanced countries’ home markets.

Whilst the underlying assumption behind the International product trade cycle is that the cycle begins with the export of new product ideas from high income countries to low income importers, and then low income countries begin production of the product, etc., Things do not always turn out as the cycle suggests. Sometimes a high or even low income exporter may put a product into a high/low income country which is simply unable to respond. In this case, theTradeCycleceasestobetheunderpinningconcept.Thismaybeduetoanumberoffactorslike;

lack of access to capital to build the facilities to respond to the import•lack of skills or that the costs of local production cannot get down to the level of costs of the imported •product

In this case, product substitution between the exporter and importer may also take place. A classic example of this phenomenon is the case of Zimbabwe Sunsplash fruit juice drinks.

4.9 Orientation of ManagementPerlmutter(1967)identifieddistinctive“orientations”ofmanagementofinternationalorganisations.His‘EPRG’scheme identified four types of attitudes or orientations associatedwith successive stages in the evolution ofinternational operations:

Ethnocentrism - home country orientation - exporting surplus•Polycentrism - host country orientation - subsidiary operation•Regiocentrism - regional orientation - world market strategies•Geocentrism - world orientation - world market strategies•


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SummaryDue to the globalisation the scope of marketing is broadened when the organisation decides to sell across •international boundaries.Doing business in different cultural forms may be different from doing it the English way.•Marketing is the social process by which individuals and groups obtain what they need and want through creating •and exchanging products and value with others.Inthepostmodernmarketplacetheproductdoesnotprojectimages,itfillsimages.•‘Foreign’ marketing means marketing in an environment different from the home base, its basic form being •‘exporting’.In global marketing, the mode of operation is very different.•The international product trade cycle model suggests that many products go through a cycle during which high-•income,massconsumptioncountries,whichareinitialexporters,losetheirexportmarketsandfinallybecomeimporters of the product.High income country entrepreneurs quickly realise that the markets to which they are selling often have lower •production costs and so production is initiated abroad for the new products, so starts the second stage.As foreign producers expand, their growing economies of scale make them a competitive source for third country •markets where they compete with high income exporters.When organisations develop into global marketing organisations, they usually evolve into this from a relatively •small export base.

ReferencesCzinkota, M.R. & Ronkainwn, I. A.,2003.• International Marketing.,7th ed., South-Western College Pub. Rajagopal., 2010.• International Marketing.,VTB.Biswajit, N., • Basics of International Marketing [pdf] Available at:< http://www.unescap.org/tid/artnet/mtg/competitivenesss_s7.pdf> [Accessed 2 November 2012].Prathap, O. & Michael, J.B., 2005. • International Marketing Strategies in India: An Application of Mixed Method and Investigation, [Online] Available at: <http://www.vikalpa.com/pdf/articles/2005/2005_oct_dec_11_23.pdf>[Accessed 2 November 2012].2012. • Possibilities in a global market, [Video Online] Available at : <http://www.youtube.com/watch?v=AhXafzBeT7c> [Accessed 2 November 2012].2008.• Globalisation of Market, [Video Online] Available at : <http://www.youtube.com/watch?v=bOlOMGMLack> [Accessed 2 November 2012].

Recommended ReadingCateora, P., Gilly, M. & Graham, J.,2010. • International Marketing., 15th ed., McGraw-Hill/Irwin.Baack, D.W., Harris, E.G. & Baack, D.E., 2012. • International Marketing, 1st ed. Sage Publications (CA).Lascu, D.N., 2008. • International Marketing, 3rd ed., Atomic Dog.

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Self AssessmentOver the last few decades, ———————— have grown because of a number of market factors.1.

internationalisma. terrorismb. warfarec. restrictionsd.

EPRGschemeidentified—————typesofattitudesororientationsassociatedwithsuccessivestagesinthe2. evolution of international operations.

two a. four b. three c. fived.

Acceptance of ———————— marketing affects discussions of products, pricing, advertising, distribution 3. and planning.

post-moderna. pre-modernb. ancientc. marketing trendsd.

Standardised approach towards International Marketing can be aided and abetted with ———————.4. technology a. financeb. raw materialc. technologyd.

International ———————— cycle is that the cycle begins with the export of new product ideas from high 5. income countries to low income importers.

product tradea. culture tradeb. income tradec. custom traded.

The more culturally unbounded the product is, the more can ————— clustering take place.6. domestica. globalb. economicc. financiald.

The international product trade cycle ——————— suggests that many products go through a cycle.7. modela. trendb. directionc. processd.


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High-income, mass consumption countries which are initial —————, lose their export markets.8. importers a. exporters b. localc. global marketersd.

Stage two organisations which realise that they must adapt their ———— to overseas operations.9. marketing mixesa. culture mixesb. joint venture mixesc. corporate mixesd.

The scope of marketing is broadened when the organisation decides to sell across ————————— 10. boundaries.

domestica. internationalb. districtc. globald.

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Chapter V

International Laws for Business

Aim


introduce international laws•

elucidate the need of laws•

explain international trade•

Objectives


recognise the trade problems between countries•

determine the terms and conditions of trade•

elucidate the international laws of business•

Learning outcome


understand the regulation of export and import•

identify the letters of credits•

evaluate the contracts between countries•


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5.1 IntroductionLawisdefinedasasetofrulesestablishedbyagovernmenttoregulatetheconductofindividualsandgroupsina society. These rules are legal obligations imposed on citizens and enforced by the Sovereign. It is the duty of citizens to obey these rules and those who violate them are liable for punitive action. One of the major reasons for the development of law was to give protection to individuals, to society, and to property. Law is not limited to regulating relationships between individuals or between individuals and their society but also be used as a positive force to promote worthwhile social goals.

In fact, in our consumer-oriented society law touches every aspect of business life. Therefore, it is imperative to know what Business Law is. Business law is that part of the law which deals with mercantile transactions of mercantile people. One of the reasons for studying business law is to learn to predict what the law will be in the conduct of businesses both at the national and international level. Understanding business law will enhance the ability to take right decisions without violating rules framed by the government.

International Laws of BusinessBusinesstodayistrulyinternational.Internationaltradehasexistedsincetimesimmemorial.Therearefindingsto indicate that international trade existed as long back as 2000 B. C. With increasing complexities and volumes in international trade, an urgent need for a uniform code for regulating these transactions was keenly felt. The importance of international trade and a uniform code is more keenly felt in present day economy where domestic andforeignpoliticsplaytheirinfluencingroleinconductingtransnationalbusiness.

International Law for business aims at providing the regulations required for execution of international transactions involving more than one nation. Every country has its own set of laws for regulating business. Therefore, it is apparent that every international business transaction has to comply with provisions of both domestic as well as international law. In order to ensure performance of the transaction(s), parties enter into treaties/agreement. These treaties are framedaccordingtogeneralpracticeandcustoms.Themostsignificantaspectofinternationallawisjurisdiction.

Though it is not important for students to go for a detailed study of business law in each country, understanding the structure of the legal system in different countries helps in making a good comparative study.

5.2 Need of LawOne should keep in mind that the base for law is a dispute. The judgment of a decided case becomes a referral point - known as a precedent. The reason behind this reference is to facilitate uniformity in deciding similar cases. It may be noted that precedents may be overruled if the judgment pronounced earlier is found to be erroneous. To enable studentstohaveabetterviewofthelegalstructure,adiscussiononthelegalsystemexistinginfiveeconomicallyimportant countries like Canada, Germany, Saudi Arabia, Japan and China would be fruitful.

Canada, the second largest country in the world framed its own constitution in l982 by the act of British Parliament. It has a bicameral parliament - House of Commons and a Senate. Canada follows the principle of legislative supremacy, giving importance to precedents. Cases, statutes, customs and royal prerogative are the sources of Canadian law. The judges for federal and provincial courts are selected by Governor-General of Canada. The legal system of Canada is primarily based on the common law tradition. By and large, the regulatory framework is uniformly applicable throughout Canada with the exception of the province of Quebec. Quebec has been given special rights to preserve its culture, language and governing institutions.

Germany, the largest European country, follows the civil law tradition. Of all the civil codes, the German Civil Code hashadthewidestinfluenceinthedevelopmentoflawsinothercountrieslikeChina,JapanandmanyEasternandCentralEuropeancountries.WiththeunificationoftheerstwhiletwoGermannations, thepoliticalauthorityisdivided between the federal government and the states. Matters of utmost importance like defence, foreign affairs, currency, nationality and intellectual property are exclusively looked into by the federal government. The Chancellor, themostpowerfulpoliticalfigure,makespublicpolicyandappointsheadsofstate.Thereismarkeddifferenceinthe manner cases are resolved and the judiciary system that exists in Germany as compared to other countries. Two importantcodesplayasignificantrole.TheyaretheGermanCivilCodeandtheGermanCommercialCode.Thecivilcodehas2300sectionsdividedintofivepartswiththefirsttwocoveringlegalandcontractualobligations.Thecommercial code sets rules for doing business in Germany.

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Saudi Arabia, an Islamic country, has a legal system that follows the Sharia –commandments of Prophet Mohammad. Unlike other countries, Saudi Arabian government has only two wings - the executive and judicial, and the King is the supremeauthority.TheregulationsapprovedbytheKingarepublishedintheofficialgazette.Thereareagenciestoassist in regulating the administration of the Kingdom. The most important among them are the Supreme Commission on Labor Disputes, the Commissioner for the Settlement of Commercial Disputes and Board of Grievances. A well regulated country, Saudi Arabia strongly abides by the Holy Quran. As such students will note that unlike common law systems, charging of interest is prohibited among many other things. Dispute resolution normally results in damages or recession.

Despite the difference in the regulatory structure, the importance of Saudi Arabia in present day economy is continually growing.

Japan, is perhaps the only example of ‘real development’ in almost all areas. Japan which was battered and ravaged during the World War II is now among the most advanced counties of the world. A look at its legal system shows tracesoftheTokugawaperiodinfluenceoftheGermanCivilCodeandtheAmericaninfluence.Rightfromtheearly days, Japanese gave much importance to the Confucian system where the head of the family/village was the deciding authority. His word was rarely contested. The process of industrialisation in the nineteenth century saw Japan draw up a Civil Code based on the German Civil Code This however, underwent a drastic change after the SecondWorldWarwhentheAmericaninfluenceseparatedthechurchandstateandintroducedaparliamentarysystemwithadulyelectedPrimeMinisterandabicamerallegislature.Despite,theAmericaninfluenceJapanesehave a different outlook in matters of international trade. All contracts have the regular clauses. Yet, the Japanese treat an international transaction as an opportunity to develop personal ties and business relationships. They look forflexibility,amicablesettlementofdisputesandperformanceofcontractingoodfaith.

China has for many hundreds of years been known for the superior quality of goods it produces and its ancient medical practice. Thus, international trade has been an integral part of Chinese economy. Very much like the Japanese Confucian attitude, the Chinese have deep faith in behaving in an honourable and ethical manner. Until recently, the attitude of Chinese towards practitioners of law has been discerning. Primarily because it has gone through a lawless period during the Cultural Revolution known as ‘Dark Ages’ in 1966 and the second revolution which started in 1976 with the death of Mao Zedong’s. Today, China has a large, complex system of agencies, the most important among them being Ministry-of Foreign Economic Relations and Trade which renders guidance in matters related to foreign trade. The governing statute for foreign trade is Foreign Economic Contract Law (FECL). According to FECL all contracts should be in writing, must express the real intent of the parties who must have legal contractual capacity and the contract should not violate law or public policy. Before resorting to arbitration, Chinese prefer to settledisputesoutofcourtthroughfriendlyconsultations,whichagainreflectstheirrelianceontraditionalvalueofhonourable and ethical behaviour.

European Community - The aftermath of the Second World War set the world leaders to think of a united Europe to achieve economic alliance and compatible political and legal setup. Thus, started the European community. The firststeptowardsthiswas,buildingacommonmarketbetweenFranceandGermanyforcoalandsteelthroughtheEuropean Coal and Steel Community (ECSC). The success of this led to signing of a number of treaties like the EURATOM, European Economic Community (EEC) and the Maastricht Treaty, all directed towards political and economic unity. To simplify the administration of ECSC, EURATOM and EEC, a merger treaty was subsequently signed.

The European community has a well organised administrative set-up comprising of council of ministers, parliament, and commission, courts of justice and auditors, and advisory committees. These community institutions have developed substantive laws- which prevail over individual country laws and create rights in individuals and businesses which are to be protected by national courts.


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5.3 International Trade - Legal FrameworkWehavelookedbrieflyintothevariouslawsprevalentindifferentcountries.Letusnowconcentrateonwhatwillbe the scenario if two or more nations wish to have trade relationships and the various regulations that one has to follow.

The General Agreement on Tariffs and Trade popularly known as GATT attempts to promote multilateral fair trade and reduce trade barriers. Members of GATT reduce trade barriers by granting ‘Most Favored Nation’ (MFN) status and charging the lowest applicable tariff rates for imports from MFN. GATT provides for promotion of fair trade by prohibiting ‘dumping’ and ‘unfair subsidies, bounties and grants’.

Lack of adaptability of GATT, to regulate world trade has resulted in nations entering into a direct trade relationship like the North American Free Trade Agreement for example. In other cases some developed nations have come forward to help the less-developed countries by permitting duty free imports of certain items under the Generalised System of Preferences.

5.3.1 Regulation of Imports and ExportsTariff or duty which is levied on imports is one of the important sources of income for a country. Tariff is levied basedontheclassificationofproducts,itsvaluewhichusuallyisthetransactionvalueanditsplaceoforigin.

The rateofduty leviedon importedgoodshas significant impacton thedomesticmarket for thatproduct.Tosafeguard domestic interests some countries may resort to imposition of non-tariff barriers like adherence to strict quality standards in order to ensure safety to health and environment. Quotas and embargoes are the other forms of non-tariff barriers.

Ontheotherhand,countrieswantingtopromoteexportsmayextendtechnical,market,andfinancialassistanceandtaxbenefitstotheexporters.Tocheckundueassistance,GATTimposescountervailingdutiesonexportssupportedby unfair subsidies. The United States regulates its exports under the Export Administration Act of 1979. The primary objective being to protect its economy in case of short supply, to protect national security and to further its foreign policy objectives. The US has a complex regulatory structure for both imports and exports which includes the anti-boycott regulations.

5.3.2 Global Business EnterprisesLet us now look at another important aspect of international law relating to international or global business organisations. International business organisations often known as Multinational Enterprises (MNE) are organisations havingbusinessentitiesintwoormorecountries.Theseentitiesaresointerlinkedthatoneexercisessignificantinfluenceovertheother.

MNEcanadoptdifferentchannelsfordoingbusiness.Itmaychoosetodobusinesseitherthroughitsownfirmorthrough agents and distributors. In the case of an agent and principal relationship, depending upon the country in which the agent would be operating, the terms and conditions are decided. Some countries provide for protective measures to safeguard against unfair termination of the agency.

Distributors on the other hand buy goods for the purpose of selling them and offering after-sales and warranty services. Unlike in agency contracts, distributors cannot bind the manufacturer with their acts. Distributorship contracts are normally for a fairly lengthy period as they involve large investment on part of the distributor.

Licensing of technology is another form of doing global business. Licensing agreement may: (i) permit manufacture of patented, trademarked or copyrighted product, or (ii) be a franchise arrangement.

MNE may also choose to carry-on business ion different countries by investing directly. This investment can be either by acquiring an existing company, opening a branch, establishing branches or starting a joint venture.

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5.3.3 Regulation of Global Competition:Competition may make businesses to resort to unfair, restrictive and monopolistic trade practices. Many developed as well as developing countries have adopted regulations to prevent such malpractices. For instance, the US has enacted antitrust laws – Sherman Act and Clayton Act. The European Community through Articles 85 and 86 of the Treaty of Rome also attempts at regulating unfair business competition. Japan too has antimonopoly law to prohibit unreasonable trade practices and abuse of dominant market power. Regulations have also been passed to check hostile acquisitions and strategic alliances.

5.3.4 Protecting Business Property RightsInventions, creations, technological advancements when protected take the form of copyrights, patients, trademarks or trade secrets. These intellectual properties are assets of business enterprises, as they are essential for the success of businesses. Hence, the need to encourage their growth and also provide legal protection against misuse, theft, etc.Copyright law gives authors and artists the right to control the reproduction and performance of their work(s). The period of protection varies in each country. By and large, protection is granted to authors for theirs life plus 50 years, and for photographic and works of applied art for25 years.

Patentsprovideexclusiverighttomanufactureoruseaninventionforaspecificperiodoftime.Patentlawsareprimarily territorial. However, there are a couple of international agreements to provide patent protection like the European Patent Convention and the Patent Co-operation Treaty. Lack of a universally accepted patent law hinders introduction of a product on a global basis.

Trademark is any work, name, symbol, or device or any combination thereof adopted and used by manufacturer or merchant to identify his goods and distinguish them from those manufactured or sold by others.

Apart from protecting their intellectual property rights, business enterprises are faced with a more complex problem of dealing with piracy and counterfeit goods. Pirators and counterfeiters cause great harm as they deprive the owner oftheprotectedworkhisshareofroyalty,theauthoriseddealerhisprofitandthebuyerofqualityproduct.TheUSgovernment through an amendment of the Trade Act of 1974, attempts to counteract such practices under Section 301 of the said act.

Another problem faced by business enterprises is the gray market, where legitimate goods are marketed through unauthorised channels. Protecting intellectual property rights do not prevent governments from expropriating such property for public use. The criteria for such expropriation should be that these properties are taken for public use and a just compensation is paid for their acquisition.

5.3.5 The MNE as World CitizenMerely by their size, MNE have an edge over other corporations. Their ability to access capital helps in developing countries. They also possess the powers to exploit natural and human resources, demolish local economies and corruptingandcontrollingpoliticalfigures.

The United Nations Commission on Trade and Development (UNCTAD) has been making efforts for evolving a codeofconductforMNEtoensuretheirpositiveinfluenceontheeconomyandavoideconomicmenacelikethecollapse of the Bank of Credit and Commerce International (BCCI) .the organisation for Economic Co-operation and Development (OECD), has set guidelines to protect corporations in its member countries from MNE abruptly. Following the Bhopal disaster, varies governments have through treaties and conventions sought to adopt policies to reduce various polluting activities and protecting environment.

Thus, International Law for Business covers a whole gamut of business aspects with an international perspective.


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5.4 ContractsAfter having discussed about the general legal framework prevailing in the international business scenario, let us nowdiscusstheotheraspectsinvolvedininternationalbusinesslaws,viz.,Contract-legalprovisions;paymentsterms;internationalsalesagreements;rightsanddutiesofagentsanddistributors.

5.4.1 Legal ProvisionsContractsareanintegralpartofbusinessandassumesignificanceincaseoftransactionsforsaleofgoodsbetweentwo or more countries. Different contract laws in each country necessitated formulation of a uniform international law - for contracts. Thus, in 1988, the United Nations Convention on Contracts for the International Sale of Goods (CISG) came into force with l0 nations endorsing it.

The CISG is organised in four parts. Part I (Articles I to 13) contains the Convention’s general provisions, including rules on the scope of its applications and rules of interpretation. Part II (Articles 14 to 24) governs the formation of contracts. Part III (Articles 25 to 88) governs the rights and obligations of buyers and sellers. Part IV (Articles 89 tol0l)containsprovisionsfortheratificationandtheentryintoforceofconvention.

The essentials of a valid contract are that there should be an offer and acceptance and consideration. Utmost care is required to be taken while drafting the contract for incorporating the terms and conditions. This is important as a single contract can be incorporated in more than one way in case of any ambiguity. To ensure uniformity in international contracts, certain common terms relating to price, delivery, title, insurance like FOB, CIF, C&F, FAS, etc., have come into use. These are known as Incoterms. These are used in contracts involving sale of goods.

It is reiterated that the term contract is not restricted only to sale of goods. There are contracts for setting up ventures, mergers and acquisitions and for transfer of intellectual property. In order to ensure performance of contracts and provide for remedy in case of dispute, CISG also provides a resolution mechanism. Generally, the choice of forum andenforcementclausesisincludedinacontract,soastodefinetheareaofjurisdictionincaseofadispute.

5.4.2 Letters of CreditNaturally, a contract for sale of goods involves purchase of goods for consideration .which is often money, and the mode of payment is an important clause in a contract. With today’s dynamic market transactions across countries, Letters of Credit” (LOC) is considered to be one of the safest modes of payment. (LOC is an instrument issued by a bankorotherpersonattherequestofanaccountpartythatobligestheissuertopaytoabeneficiaryasumofmoneywithinacertainperiodoftimeuponthebeneficiary’spresentationofdocumentsspecifiedbytheaccountPayee)

ThereisanotheruseforLOCinAmericaandJapan.Itisthe“standbyLettersofCredit”.Inthesetwocountries,banks are not permitted to engage in insurance activities. Standby LOC are more like insurance policies, performance bonds or repayment guarantees. Despite the inbuilt safety-net, frauds do take place in the transactions because the LOC requires payment to be made against presentation of documents and since banks are under no obligation to scrutinise the underlying transaction, the buyer may be defrauded. Two cases - United Bank Ltd. vs. Cambridge Sporting Goods Corporation and ltek Corporation vs. First National Bank of Boston make an interesting reading.

5.4.3 Transport and InsuranceA contract is incomplete unless the parties have decided on the mode of transport to be utilised for transporting the goods and the extent of risk coverage. Sales contracts involving transportation customarily contain trade terms like FOB and CIF. Transportation may be either by air or ship. When shipped, the parties to a contract may adopt the provisions of the Carrier of Goods by Sea Act (COGSA) to adjust their liability. One of the important shipping documents is the ‘Ocean Bill of Lading’ which is a contract between the carrier and the shipper. It serves as a receipt for the goods and also as a negotiable document of title. Where goods are transported by air, the documentation is called an ‘Air Waybill’. An air waybill performs the same functions as a bill of lading, except that it is generally non-negotiable. A bill of lading or an air waybill is among the many documents to be submitted to the banks for obtaining Payment under a LOC.Most contracts also have an insurance clause to minimise risk of loss or damage during transit.

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5.5 Payment TermsLetter of CreditA document issued by a bank (issuing bank) stating its commitment to pay someone a stated amount of money on behalfofabuyersolongasthesellermeetsveryspecifictermsandconditions.Lettersofcreditaremoreformallycalled documentary letters of credit.

Beforepayment,thebankresponsibleformakingpaymentonbehalfofthebuyerverifiesthatalldocumentsareexactly as required by the letter of credit. If a United States exporter is unfamiliar with the credit risk of the foreign bank, or if there is concern about the political or economic risk associated with the country in which the bank is located,itisadvisedthataletterofcreditissuedbyaforeignbankbe“confirmed”byaU.S.bank.ThismeansthattheU.S.bankaddsitspledgetopaytothatoftheforeignbank.Lettersofcreditthatarenotconfirmedarecalled“advised”lettersofcredit.ThelocalDepartmentofCommercedistrictofficeoraninternationalbankerwillhelpexportersdeterminewhetheraconfirmedoradvisedletterofcreditisappropriateforaparticulartransaction.

Types of Letter of CreditIrrevocable(unconfirmed)-Aletterofcreditthatcannotbeamendedorcancelledwithoutpriormutualconsent•of all parties to the credit. Such a letter of credit guarantees payment by the bank to the seller/exporter so long as all the terms and conditions of the credit have been met. This is the most popular form of letter of credit.Revocable(confirmed)-Aletterofcreditthatcanbecancelledoralteredbythedrawee(buyer)afterithasbeen•issued by the drawee’s bank. Revocable letter of credits are rarely used because of security concerns.Transferable- A letter of credit that can be redirected at the seller’s request. These are used when an export •broker is involved. Once all conditions on the letter of credit are met, the broker’s bank receives the payment, takes out his commission, and completes the transaction as negotiated.Sight - A letter of credit that requires payment to be made upon presentation of documents.•Time Draft- A letter of credit that states payment is due within a certain time (usually 30, 60, 90, or 180 •days).

Changes made to a letter of credit are called amendments. The fees charged by the banks involved in amending the letter of credit may be paid either by the buyer or the seller, but the letter of credit should specify which party is responsible. Since changes are costly and time-consuming, every effort should be made to get the letter of credit rightthefirsttime.

Anexporterisusuallynotpaiduntiltheadvisingorconfirmingbankreceivesthefundsfromtheissuingbank.Toexpedite the receipt of funds, wire transfers may be used. Bank practices vary, however, and the exporter may be able to receive funds by discounting the letter of credit at the bank, which involves paying a fee to the bank for this service. Exporters should consult with their international bankers about bank policy on these issues.


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Time of Payment Goods Available to Importer Risk to Exporter Risk to Importer

Irrevocable

At sight of presentation of documents to issuing bank;orspecifiednumber of days after acceptance by issuing bank

After PaymentRisk lies with United States confirmingbank

None

Revocable SameasConfirmed After payment

Risk lies with foreign issuing bank and economic conditions of issuing bank

None

Sight When shipment is made After payment Risk lies with local confirmingbank

Assured shipment is made, but relies on exporter to ship goods described in the documents

Time Draft At maturity of draft, may or may not be discounted

Usually before payment

Risk lies with local confirmingbank

Assured shipment is made, but relies on exporter to ship goods described inthe documents

Red Clause

A percentage of total amount before shipment. Balance is same as type of L/C

After payment See irrevocable and revocable

The percentage of payment in advance is at total risk. Balance same as type of L/C

Revolving Letter of Credit Variable Variable See irrevocable and

revocable None

Standby Letter of Credit

At time shipment is received

Usually before payment

Delay in payment. Also see irrevocable None

Back-to-back Same as irrevocable After payment None None

Transferable Same as irrevocable After payment Same as irrevocable None

Assignment of Proceeds Same as irrevocable After payment Same as irrevocable None

Table 5.1 Payment and Risks with Letter of Credits

Cash in Advance (CIA)Usually used only for small purchases and when the goods are built to order.

Draft (or bill of exchange)An unconditional order in writing from one person (the drawer) to another (the drawee), directing the drawee to pay aspecifiedamounttoanameddraweratafixedordeterminablefuturedate.Maybedate,sight,ortimedraft.

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Credit cardsUsed mainly in transactions where the dollar value of the items sold is low and shipment is to be made directly to the end user.

Open AccountThe exporter bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firmsabroadmakepurchasesonlyonanopenaccount,whichisaconvenientmethodofpaymentifthebuyeriswell established and has demonstrated a long and favourable payment record.

Consignment SalesExporter delivers goods to an agent under agreement that the agent sell the merchandise for the account of the exporter. The agent sells the goods for commission and remits the net proceeds to the exporter.

Counter trade/barterSale of goods or services that are paid for in whole or in part by the transfer of goods or services from a foreign country.

Payment ProblemsThe best solution to a payment problem is to negotiate directly with the customer. If negotiations fail and the sum involvedislargeenoughtowarranttheeffort,obtaintheassistanceofyourbank,legalcounsel,andotherqualifiedexperts. If both parties can agree to take their dispute to an arbitration agency, this step is faster and less costly than legal action. The International Chamber of Commerce handles the majority of international arbitrations and is usuallyacceptabletoforeigncompaniesbecauseitisnotaffiliatedwithanysinglecountry.

For more information on these issues, contact the U.S. Council for International Business, American National CommitteeoftheICC,212-354-4480;AmericanArbitrationAssociation,212-484-4000;TradeRemedyAssistanceOfficeInternationalTradeCommission,202-205-2200.

Letter of Credit Cash on Documents Open Account

Customer Relationship New Established Established

Type of Order Custom Production Production

Political Situation Unstable Stable Strong

Economic Situation Unstable Stable Strong

Competition No Yes Yes

Volatility of Price Changing Downwards for Buyer Yes No No

Cash Flow Timing and Needs Yes Adjustable Adjustable

Table 5.2 Risk Factors Influencing Payment Terms


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5.6 Payment TermsA list of things to consider when determining the best price for your product overseas.

Terms of SaleTerms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know the terms before preparing a quotation or a pro forma invoice.

Preparing Quotes for International BuyersWhile a sales contract that spells out the details of a transaction is warranted for larger, more complex deals, a quotationintheformofaProformaInvoicemaybesufficientforsmallertransactions.

Learn how to prepare Pro forma invoices and the information they should contain and more about how to prepare quotes.

Proper pricing, complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most problematic, even for an experienced exporter.

Pricing ConsiderationsThe price considerations listed below will help an exporter determine the best price for the product overseas.

Atwhatpriceshouldthefirmsellitsproductintheforeignmarket?•What type of market positioning (customer perception) does the company want to convey from its pricing •structure?Doestheexportpricereflecttheproduct’squality?•Is the price competitive?•Shouldthefirmpursuemarketpenetrationormarket-skimmingpricingobjectivesabroad?•Whattypeofdiscount(trade,cash,quantity)andallowances(advertising,trade-off)shouldthefirmofferits•foreign customers?Should prices differ by market segment?•Whatshouldthefirmdoaboutproductlinepricing?•Whatpricingoptionsareavailableifthefirm’scostsincreaseordecrease?Isthedemandintheforeignmarket•elastic or inelastic?Are the prices going to be viewed by the foreign government as reasonable or exploitative?•Do the foreign country’s antidumping laws pose a problem?•

Asinthedomesticmarket,thepriceatwhichaproductorserviceissolddirectlydeterminesafirm’srevenues.Itisessentialthatafirm’smarketresearchincludeanevaluationofallofthevariablesthatmayaffectthepricerangefortheproductorservice.Ifafirm’spriceistoohigh,theproductorservicewillnotsell.Ifthepriceistoolow,exportactivitiesmaynotbesufficientlyprofitableormayactuallycreateanetloss.

The traditional components of determining proper pricing are costs, market demand, and competition. Each of these mustbecomparedwiththefirm’sobjectiveinenteringtheforeignmarket.Ananalysisofeachcomponentfromanexport perspective may result in export prices that are different from domestic prices.

It is also very important that the exporter take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currencyfluctuation transactioncosts andvalue-added taxes (VATs).Theseadditionalcostscanaddsubstantiallytothefinalpricepaidbytheimporter,sometimesresultinginatotalofmorethan double the U.S. domestic price.

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5.7 Foreign Market ObjectivesAn important aspect of a company’s pricing analysis is determining market objectives. For example, is the company attempting to penetrate a new market, looking for long-term market growth, or looking for an outlet for surplus productionoroutmodedproducts?Manyfirmsviewtheforeignmarketasasecondarymarketandconsequentlyhave lower expectations regarding market share and sales volume. This naturally affects pricing decisions.

Marketing and pricing objectives may be general or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation where per capita income may be one tenth of that in the United States are necessarily different from the objectives for Europe or Japan.

CostsThe computation of the actual cost of producing a product and bringing it to market is the core element in determining ifexportingisfinanciallyviable.Manynewexporterscalculatetheirexportpricebythecost-plusmethod.Inthecost-plus method of calculation, the exporter starts with the domestic manufacturing cost and adds administration, researchanddevelopment,overhead,freightforwarding,distributormargins,customscharges,andprofit.

The effect of this pricing approach may be that the export price escalates into an uncompetitive range. It clearly showsthatifanexportproducthasthesameex-factorypriceasthedomesticproduct;itsfinalconsumerpriceisconsiderably higher once exporting costs are included.

Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct,out-of-pocketexpensesofproducingandsellingproductsforexportasafloorbeneathwhichpricescannotbesetwithoutincurringaloss.Forexample,additionalcostsmayoccurduetoproductmodificationfortheexportmarket that accommodates different sizes, electrical systems, or labels. On the other hand, costs may decrease if the exportproductsarestripped-downversionsormadewithoutincreasingthefixedcostsofdomesticproduction.

Othercostsshouldbeassessedfordomesticandexportproductsaccordingtohowmuchbenefiteachproductreceivesfrom such expenditures. Additional costs often associated with export sales include:

Market research and credit checks•Business travel•International postage, cable, and telephone rates•Translation costs•Commissions,trainingcharges,andothercostsinvolvingforeignrepresentatives;•Consultants and freight forwarders and•Productmodificationandspecialpackaging.•

After the actual cost of the export product has been calculated, the exporter should formulate an approximate consumer price for the foreign market.

Market DemandFor most consumer goods, per capita income is a good gauge of a market’s ability to pay. Some products may create such a strong demand such as popular goods like Levis, that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for the exporter to most lower per capita incomemarkets.Thefirmmustalsokeepinmindthatcurrencyfluctuationsmayaltertheaffordabilityofitsgoods.Thus,pricingshouldtrytoaccommodatewildchangesintheU.S.and/orforeigncurrency.Thefirmshouldanticipatethetypeofpotentialcustomers.Ifthefirm’sprimarycustomersinadevelopingcountryareexpatriatesorbelongto the upper class, a higher price might be feasible even if the average per capita income is low.


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CompetitionIn the domestic market, few companies are free to set prices without carefully evaluating their competitors’ pricing policies. This situation is true in exporting, and is further complicated by the need to evaluate the competition’s prices in each potential export market.

If there are many competitors within the foreign market, the exporter may have little choice but to match the market price or even under price the product or service in order to establish a market share. On the other hand, if the product or service is new to a particular foreign market, it may actually be possible to set a higher price than in the domestic market.

Quotations and Pro Forma InvoicesMany export transactions, particularly initial export transactions, begin with the receipt of an inquiry from abroad that is followed by a request for a quotation. The preferred method for export is a pro forma invoice, which a quotation is prepared in invoice format.

Aquotationdescribestheproduct,statesapriceforit,setsthetimeofshipment,andspecifiesthetermsofthesaleand terms of the payment. Since the foreign buyer may not be familiar with the product, the description of it in an overseas quotation usually must be more detailed than in a domestic quotation. The description should include the following 15 points:

Seller’s and buyer’s names and addresses.•Buyer’s reference number and date of inquiry.•Listing of requested products and brief description.•Price of each item (it is advisable to indicate whether items are new or used and to quote in U.S. dollars to •reduce foreign-exchange risk).Appropriate gross and net shipping weight (in metric units where appropriate).•Appropriate total cubic volume and dimensions packed for export (in metric units where appropriate).•Trade discount (if applicable).•Delivery point.•Terms of sale.•Terms of payment.•Insurance and shipping costs.•Validity period for quotation.•Total charges to be paid by customer.•Estimated shipping date from U.S. port or airport.•Currency of sale•

Pro forma invoices are not used for payment purposes. In addition to the 15 items previously mentioned, a pro forma invoiceshouldincludetwostatements.Onethatcertifiestheproformainvoiceistrueandcorrectandanotherthatgivesthecountryoforiginofthegoods.Theinvoiceshouldalsobeclearlymarked“proformainvoice.”

Pro forma invoices are models that the buyer uses when applying for an import license, opening a letter of credit or arranging for funds. In fact, it is a good practice to include a pro forma invoice with any international quotation, regardlessofwhetherithasbeenrequestedornot.Whenfinalcommercialinvoicesarebeingpreparedpriortoshipment, it is advisable to check with the U.S. Department of Commerce or another reliable source for any special invoicing requirements that may be required by the importing country.

Ifaspecificpriceisagreeduponorguaranteedbytheexporter,thepreciseperiodduringwhichtheofferremainsvalidshouldbespecified.Additionally,itisveryimportantthatpricequotationsstateexplicitlythattheyaresubjectto change without notice.

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5.8 International Sales AgreementsTerms of SaleIn any sales agreement, it is important that there is a common understanding of the delivery terms since confusion over their meaning can result in a lost sale or a loss on a sale. The terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know the terms before preparing a quotation or a pro forma invoice. The following are a few of the more frequently used terms in international trade:

CIF (cost, insurance, freight) to a named overseas port where the seller quotes a price for the goods (including •insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (Used only for ocean shipments.)CFR (cost and freight) to a named overseas port where the seller quotes a price for the goods that includes the •cost of transportation to the named point of debarkation. The buyer covers the cost of insurance. (Used only for ocean shipments.)CPT (carriage paid to) and CIP (carriage and insurance paid to) a named place of destination. These terms are •used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal.EXW (ex works) at a named point of origin (e.g., ex factory, ex mill, ex warehouse) where the price quoted •appliesonlyatthepointoforigin.Theselleragreestoplacethegoodsatthebuyer’sdisposalatthespecifiedplacewithinthefixedtimeperiod.Allotherchargesareputonthebuyer’saccount.FAS (free alongside ship) at a named port of export where the seller quotes a price for the goods that includes •the charge for delivery of the goods alongside a vessel at the port. The seller handles the cost of wharfage, while the buyer is accountable for the costs of loading, ocean transportation, and insurance.FCA(freecarrier)atanamedplace.Thistermreplacestheformer“FOBnamedinlandport”todesignatethe•seller’s responsibility for handing over the goods to a named carrier at the named shipping point. It may also be used for multimodal transport, container stations, or any mode of transport, including air.FOB (free on board) at a named port of export where the seller quotes the buyer a price that covers all costs up •to and including the loading of goods aboard a vessel.Charter Terms:•

Free In is a pricing term that indicates that the charterer of a vessel is responsible for the cost of loading �goods onto the vessel.Free In and Out is a pricing term that indicates that the charterer of the vessel is responsible for the cost of �loading and unloading goods from the vessel.Free Out is a pricing term that indicates that the quoted prices include the cost of unloading goods from �the vessel.

It is important to understand and use sales terms correctly. A simple misunderstanding may prevent exporters from meeting contractual obligations or make them responsible for shipping costs they sought to avoid.

When quoting a price, the exporter should make it meaningful to the prospective buyer. For example, a price for industrialmachineryquoted“EXWSaginaw,Michigan,notexportpacked”ismeaninglesstomostprospectiveforeignbuyers.Thesebuyerswouldfinditdifficulttodeterminethetotalcostandmighthesitatetoplaceanorder.

The exporter should quote CIF or CIP whenever possible, as it shows the foreign buyer the cost of getting the product to or near the desired country.

IfassistanceisneededinfiguringCIForCIPprices,aninternationalfreightforwardercanhelp.Theexportershouldfurnish the freight forwarder with a description of the product to be exported and its weight and cubic measurement when packed. The freight forwarder can compute the CIF price usually at no charge.

If at all possible, the exporter should quote the price in U.S. dollars. This will eliminate the risk of exchange rate fluctuationsandproblemswithcurrencyconversion.


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5.9 Terms And ConditionsThe manufacturer warrants each product sold by the manufacturer to be free from defects in material and •workmanship for a period of one year from the date of purchase, normal wear and tear excluded. No other warranty or guarantee is implied or expressed and manufacturer‘s liability is limited to replacement of defective products during the warranty period.The buyer shall not sell or distribute or promote the sale or distribution of the products back into the United •States.Buyer is solely responsible, at his/her own expense, for securing all import and other necessary permits, licenses •and registrations and complying with all regulatory requirements applicable to the sale or use of the products in buyer‘s state, province, and/or country.The relationship contemplated by this agreement is one in which manufacturer is the vendor and the buyer is •the vendee. The buyer is not an agent, employee, or legal representative of the manufacturer for any purpose whatsoever, and shall have no power or authority to incur or create any obligations or liability of any kind for or on behalf of the manufacturer. The buyer shall conduct its business as an independent contractor and all persons employed in such business shall be employees of the buyer.BuyermaynotusethenameTheStoryTeller,themotto―See,Touch,ListenandLearn,‖thelittleboykneeling•at the easel or the logo as their business name or any form thereof. The buyer recognises the validity of the manufacturer‘s intellectual property rights and will take no steps to register them or otherwise interfere with the ownership rights of the manufacturer.All orders must be prepaid in US dollars. Money orders, cashiers check, direct wire or credit cards (Visa, •MasterCard, and Discover) are acceptable forms of payment.Prices for the products sold to the vendee shall be the manufacturer wholesale price in effect at the time of •shipment. The manufacturer may change the wholesale prices in whole or part, with ninety-(90) days notice to the vendee.Productisshippedwithinfivedaysafterpaymentisreceived.Ifalongertimeisrequired,manufacturerwill•notify buyer.The manufacturer shall not be liable to the buyer or any of the buyer‘s customers for any loss, damage, detention •ordelayresultingfromfires,strikes,lockouts,insurrectionsorriots,civilormilitaryauthority,actsofGod,lackof timely instructions from or information from the buyer, war, act of government, unusually severe weather, default of any other manufacturer or supplier or subcontractor, freight embargoes, quarantine, transportation contingencies, or any other cause beyond its reasonable control.Freight carrier handling charges, procurement of documents, duties, customs and taxes of every nature, air or •ocean freight charges and insurance are paid by buyer. Shipments are sent freight prepaid unless arrangements are made otherwise.Productreturnsareacceptedwithin30daysofshipmentandaresubjecttoa10%restockingfee(basedonretail•dollars). The buyer will be responsible for all return freight handling charges, procurement of documents, duties, customs and taxes of every nature, air or ocean freight charges and insurance are paid by buyer.Pre-authorisation must be received before any return shipment.•Pre-authorisation can be received by, faxing (801) 423-2568, or e mailing ([email protected]) list of •items to be returned and reason for your request.This agreement shall be read and construed and have effect according to the laws of the State of Utah, US. •Should any questions or disputes arise as to the true intent and meaning of, or the performance or breach of any provision under this agreement, every such dispute shall be, if not settled amicably by mutual consultation, forthwith settled by arbitration. This arbitration shall be in accordance with the UNICITRAL Rules of Arbitration as at present in force. In the event the parties cannot agree on a mutually acceptable arbitrator within thirty (30) days of the delivery of notice of arbitration as provided under said rules, then the International Chamber of Commerce, Paris, France, shall be the appointing authority only for the purposes of selecting the arbitrator. The number of arbitrators shall be one (1) and the place of arbitration shall be Salt Lake City, Utah, UT. The language used in the arbitration shall be English. Judgment may be entered upon the award of the arbitrator and will be enforceable in accordance with applicable law against the liable party.

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Any award by the arbitrator or judgement of any court, as the case may be, shall include payment and/or •reimbursement of the prevailing party‘s costs and expenses incurred in connection with any dispute, controversy, claim or breach, including reasonable attorney‘s fee and costs of enforcing the award of the arbitrator.The authentic text of this agreement shall be English.•

Agent or distributorsAgency and Distributor arrangements are both examples of different methods of overseas market entry. For both Agency and Distributor Agreements, the basic parties involved are usually:

The Principal (Exporter)•The Overseas Intermediary (Agent or Distributor)•The Overseas Buyers/end-user•

However, the relationships between these parties will differ depending on whether the Intermediary is an Agent or Distributor. The term Agent is often used as a generic term to describe either an agent or a distributor. The term agent is often, confusingly used, to describe what a distributor arrangement is in fact. However, the two arrangements are fundamentally different in their operation, both offering different advantages and disadvantages to the parties concerned.

5.10 Differences between an Agent and a DistributorAn Agent is a person employed by a Principal to make contracts on the principal‘s behalf with Third Parties. The Agent puts the Principal into contractual relations with the overseas buyer(s). There is no contract of sale between the Agent and the Buyer. The agent does not take the commercial risk. It is the Principal who takes the commercial risk.

A Distributor buys goods for their own account to resell into their overseas market. The contract of sale is between the Principal and the Distributor. There is no contractual relationship between the Principal and the Distributor‘s customers.


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SummaryLawisdefinedasasetofrulesestablishedbyagovernmenttoregulatetheconductofindividualsandgroups•in a society.One of the major reasons for the development of law was to give protection to individuals, to society, and to •property.Business law is that part of the law which deals with mercantile transactions of mercantile people.•Understanding business law will enhance the ability to take right decisions without violating rules framed by •the government.International Law for business aims at providing the regulations required for execution of international •transactions involving more than one nation.Toenablestudentstohaveabetterviewofthelegalstructure,adiscussiononthelegalsystemexistinginfive•economically important countries like Canada, Germany, Saudi Arabia, Japan and China would be fruitful.The General Agreement on Tariffs and Trade popularly known as GATT attempts to promote multilateral fair •trade and reduce trade barriers.Tariff or duty which is levied on imports is one of the important sources of income for a country.•MNE can adopt different channels for doing business.•Copyright law gives authors and artists the right to control the reproduction and performance of their •work(s).Patentsprovideexclusiverighttomanufactureoruseaninventionforaspecificperiodoftine.•The essentials of a valid contract are that there should be an offer and acceptance and consideration.•A contract is incomplete unless the parties have decided on the mode of transport to be utilised for transporting •the goods and the extent of risk coverage.A letter of credit that cannot be amended or cancelled without prior mutual consent of all parties to the credit.•The International Chamber of Commerce handles the majority of international arbitrations and is usually •acceptabletoforeigncompaniesbecauseitisnotaffiliatedwithanysinglecountry.An important aspect of a company’s pricing analysis is determining market objectives.•In the cost-plus method of calculation, the exporter starts with the domestic manufacturing cost and adds •administration, research and development, overhead, freight forwarding, distributor margins, customs charges, andprofit.Marginal cost pricing is a more competitive method of pricing a product for market entry.•Thefirmshouldanticipatethetypeofpotentialcustomers.•Pro forma invoices are models that the buyer uses when applying for an import license, opening a letter of credit •or arranging for funds.The exporter should quote CIF or CIP whenever possible, as it shows the foreign buyer the cost of getting the •product to or near the desired country.The Agent puts the Principal into contractual relations with the overseas buyer(s).•A Distributor buys goods for their own account to resell into their overseas market.•

ReferencesChow, D.C. K. & Schoenbaum, T.J., 2010.• International Business Transactions,2nd ed., Aspen Publishers.Schaffer, R., Earle, B. & Agusti, F., 2004• . International Business Law and Its Environment.,6th ed., South-Western College/West.Pamela, S. E., 2007.• Introduction to International Business Law,[pdf] Available at:< http://www.csb.uncw.edu/people/eversp/classes/BLA361/Intl%20Law/PPTS/1.Intro%20to%20Intl%20Law.pdf>[Accessed2November2012].,8th ed., West Publishing.John, M.C., 2003. • International Law of Business Method Patents, [pdf] Available at: <http://www.frbatlanta.org/filelegacydocs/erq403_conley.pdf>[Accessed2November2012].

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2010. • America as Hegemon and international law, [Video Online] Available at : < http://www.youtube.com/watch?v=pBG37WYUprc>[Accessed 2 November 2012].2009. • Domestic and International Fringe Benefits, [Video Online] Available at : < http://www.youtube.com/watch?v=SnDCWcVIuMs>[Accessed 2 November 2012].

Recommended ReadingHotchkiss, C., 1994. • International Law for Business., Mcgraw-Hill CollegeAugust, R.A., Mayer, D. and Bixby, M., 2008. International Business Law.,5th ed., Prentice Hall.•DiMatteo, L. and Dhooge, L.J., 2005. • International Business Law: A Transactional Approach., 2nd ed., South-Western College/West.


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Self Assessment______________isdefinedasasetofrulesestablishedbyagovernmenttoregulatetheconductofindividuals1. and groups in a society.

Lawa. Regulationsb. Legal actionc. Punitive actiond.

Which of the following is that part of the law which deals with mercantile transactions of mercantile people?2. International lawa. Business Law b. International tradec. Uniform coded.

Who is the supreme authority in Saudi Arabia?3. Executivea. Judicialb. Kingc. Supreme commissiond.

_______________provideexclusiverighttomanufactureoruseaninventionforaspecificperiodoftime.4. Patentsa. Inventionsb. Lawsc. Treatyd.

Lettersofcreditthatarenotconfirmedarecalled_________________.5. advised letters of credita. irrevocableb. revocablec. time draftd.

__________________ is a letter of credit that requires payment to be made upon presentation of documents.6. Time drafta. Sightb. Revocablec. Irrevocabled.

__________________ invoices are models that the buyer uses when applying for an import license, opening a 7. letter of credit or arranging for funds.

Pro formaa. Quotationsb. Translationc. Commissiond.

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A___________describestheproduct,statesapriceforit,setsthetimeofshipment,andspecifiesthetermsof8. the sale and terms of the payment.

quotationa. translationb. commissionc. pro formad.

_____________________ to a named overseas port where the seller quotes a price for the goods, all transportation, 9. and miscellaneous charges to the point of debarkation from the vessel.

CIFa. CFRb. CPTc. EXWd.

An/A _____________ is a person employed by a Principal to make contracts on the principal‘s behalf with 10. Third Parties.

distributora. agentb. exporterc. over sea buyerd.


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Chapter VI

Introduction to Material Management

Aim


introduce material management•

elucidate the background of material management•

explain the categories of material•

Objectives


recognise the importance of material for a project•

determine material management•

elucidate the task associated with a material management system•

Learning outcome


understand the material management in construction•

enlist the goals of material management•

evaluate the need of material management•

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6.1 IntroductionMaterials constitute a major cost component for any Industry. The total cost of installed materials (or Value of Materials)maybe60%ormoreofthetotalcost,eventhoughthefactorycostmaybeaminorpartofthetotal,probablylessthan20-30%.Thisisbecausethemanufactureditemmustbestored,transported,andrestoredbeforeitisputinplaceor“consumed”atthesite.Thetotalcostofmaterialswillinclude,inadditiontothemanufacturerselling cost, the cost of procurement (cost of placing processing and paying the material, physical distribution, the distributor’s cost, and the transportation of materials), and the site-handling costs (cost of receiving, storage, issuing, and disposal).

Theefficientprocurementandhandlingofmaterialrepresentakeyroleinthesuccessfulcompletionofthework.Itisimportantforthecontractortoconsiderthattheremaybesignificantdifferenceinthedatethatthematerialwasrequested or date when the purchase order was made and the time at which the material will be delivered. These delays can occur if the contractor needs a large quantity of material that the supplier is not able to produce at that time or by any other factors beyond his control. The contractor should always consider procurement of materials is a potential cause for delay.

Poorplanningandcontrolofmaterials,lackofmaterialswhenneeded,pooridentificationofmaterials,re-handlingand inadequate storage cause losses in labour productivity and overall delays that can indirectly increase total projectcosts.Effectivemanagementofmaterialscanreducethesecostsandcontributesignificantlytothesuccessof the project.

6.2 BackgroundTheWebster’sdictionarydefinesmaterialsas“theelements,constituents,orsubstancesofwhichsomething iscomposedorcanbemade.”Ballot(2006)definesmaterialsasthephysicalmaterialsthatarepurchasedandusedtoproducethefinalproductanddoesnotsuggestthatmaterialsarethefinalproduct.Inotherwords,materialsarethepartsusedtoproducethefinalproduct.Baileyetal.(2009)definematerialsasthegoodspurchasedfromsourcesoutoftheorganisationthatareusedtoproducefinishedproducts.

Stukhart(2007)definesmaterialsastheitemsthatareusedtoproduceaproductandwhichincluderawmaterials,parts,suppliesandequipmentitems.DoblerandBurt(2009)classifymanufacturingmaterialsintofivecategories.These categories are:

Rawmaterials-Materialsthatthecompanyconvertsintoprocessedparts.Thismightincludepartsspecifically•produced for the company and parts bought directly off the shelf (i.e. bolts, nuts).Purchased parts- Parts that the company buys from outside sources (i.e. rubber parts, plastic parts).•Manufactured parts- Parts built by the company (i.e. tower case for a computer).•Work in process-These are semi-finishedproducts found at various stages in the productionprocess (i.e.•assembled motherboard).MRO supplies- Maintenance, repairing, and operating supplies used in the manufacturing process but are not •partofthefinalproducts(i.e.soap,lubricatingoil).

Chandler(2001)states thatconstructionmaterialscanbeclassifiedintodifferentcategoriesdependingontheirfabricationandinthewaythattheycanbehandledonsite.Heclassifiesthematerialsintofivecategories.Thesecategories are:

Bulk materials- These are materials that are delivered in mass and are deposited in a container.•Bagged materials- These are materials delivered in bags for ease of handling and controlled use.•Palleted materials- These are bagged materials that are placed in pallets for delivery.•Packaged materials- These are materials that are packaged together to prevent damage during transportation •and deterioration when they are stored.Loose materials- These are materials that are partially fabricated and that should be handled individually.•


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Table6.1presentssomeexamplesofcommonlyusedmaterialsinconstructionandtheirclassification.

Material Bulk Bagged Palleted Packaged Loose

Sand X

Gravel X

Topsoil X

Paving Slabs X

Structural Timber X

Cement X X X

Concrete X

Pipes X X

Tiles X

Doors X

Electrical Fittings X

Table 6.1 Classification of materials

Stukhart (2007) states that the main categories of materials encountered in a construction project are engineered materials, bulk materials, and fabricated materials.

Bulk materials- These are materials manufactured to standards and are purchased in quantity. They are bought •in standard length or lot quantities. Examples of such materials include pipes, wiring, and cables. They are more difficulttoplanbecauseofuncertaintyinquantitiesneeded.Engineeredmaterials-Thesematerialsarespecificallyfabricatedforaparticularprojectoraremanufacturedto•anindustryspecificationinashopawayfromthesite.Thesematerialsareusedforaparticularpurpose.Thisincludes materials that require detailed engineering data.Fabricatedmaterials-Thesearematerialsthatareassembledtogethertoformafinishedpartoramorecomplicated•part. Examples of such materials include steel beams with holes and beam seats.

6.2.1 Importance of Materials for a ProjectProblemsrelatedtomanagingtheflowofmaterialscanbefoundineveryorganisation.Theefficientmanagementof materials plays a key role in the successful completion of a project. The control of materials is a very important and vital subject for every company and should be handled effectively for the successful completion of a project. Materialsaccountforabigpartofproductsandprojectcosts.Thecostrepresentedbymaterialsfluctuatesandmaycomprisebetween20-50%ofthetotalprojectcostandsometimesmore.Somestudiesconcludedthatmaterialsaccountforaround50-60%oftheprojectcost(Stukhart,2007andBernoldandTreseler,1991).

Materials are critical in the operations in every industry since unavailability of materials can stop production. In addition, unavailability of materials when needed can affect productivity, cause delays and possible suspension of activities until the required material is available. It is important for a company to consider that even for standard materials,theremaybesignificantdifferenceinthedatethatthematerialwasrequestedordatewhenthepurchaseorder was made, and the time in which the material will be delivered. These delays can occur if the quantities needed are large and the supplier is not able to produce those materials at that time or by any other factors beyond

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the control of the company. The company should always consider that purchase of materials is a potential cause for delay (Willis, 2008). Unavailability of materials is not the only aspect that can cause problems. Excessive quantities of materials could also create serious problems to managers. Storage of materials can increase the costs of production andthetotalcostofanyproject.Whentherearelimitedareasavailableforstorage,themanagershavetofindotheralternatives to store the materials until they are needed. Some of these alternatives might require re-handling of materials, which will increase the costs associated with them.

Provisions should be taken to handle and store the materials adequately when they are received. Special attention shouldbegiventotheflowofmaterialsoncetheyareprocuredfromsuppliers.

It is obvious that materials should be obtained at the lowest cost possible to provide savings to the company. In the late 1970’s, construction companies experienced an increase in costs and a decrease in productivity. Owners of thesecompaniesthoughtthattheseincreasesincostwereduetoinflationandeconomicproblems.Furtherresearchconcluded that thesecompanieswerenotusing their resourcesefficientlyand that thedecrease inproductivitywas also attributable to poor management. Material Management has been an issue of concern in the construction industry.40%ofthetimelostonsitecanbeattributedtobadmanagement,lackofmaterialswhenneeded,pooridentificationofmaterialsandinadequatestorage.

The need for an effective materials planning system becomes mandatory. Some companies have increased the efficiencyoftheiractivitiesinordertoremaincompetitiveandsecurefuturework.Manyotherfirmshavereducedoverheads and undertaken productivity improvement strategies.

Considerable improvement and cost savings would seem possible through enhanced materials management. Timely availability of materials, systems, and assemblies are vital to successful construction. Materials management functions are often performed on a fragmented basis with minimal communication and no clearly established responsibilities assignedtotheowner,engineerorcontractor.Bettermaterialmanagementpracticescouldincreaseefficiencyinoperations and reduce overall cost. Top management is paying more attention to material management because of material shortages, high interest rates, rising prices of materials, and competition.

There is a growing awareness in the construction industry that material management needs to be addressed as a comprehensive integrated management activity.

6.2.2 Material ManagementDifferent researchers providedifferent definitions formaterialmanagement, therefore different definitions canbefoundindifferentreferences.Basically,materialmanagementisconcernedwiththeplanning,identification,procuring, storage, receiving and distribution of materials.

The purpose of material management is to assure that the right materials are in the right place, in the right quantitieswhenneeded.Theresponsibilityofonedepartment(i.e.materialmanagementdepartment)fortheflowof materials from the time the materials are ordered, received, and stored until they are used is the basis of material management.

Ballot(2006)definesmaterialmanagementastheprocessofplanning,acquiring,storing,moving,andcontrolling•materials to effectively use facilities, personnel, resources and capital.TersineandCampbell(2004)definematerialmanagementastheprocesstoprovidetherightmaterialsatthe•right place at the right time in order to maintain a desired level of production at minimum cost. The purpose of materialmanagementistocontroltheflowofmaterialseffectively.Beekman-Love (1998) states that a material management structure should be organised in such a way that it •allowsforintegralplanningandcoordinationoftheflowofmaterials,inordertousetheresourcesinanoptimalway and to minimise costs.Chandler (2001) states that material management systems should be implemented to plan, order, check deliveries, •warehousing, controlling the use of materials, and paying for materials. He adds that these activities should be interrelated.


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Ammer,Dean(1991)definesmaterialmanagementastheprocessinwhichacompanyacquiresthematerials•that it needs to achieve their objectives. This process usually begins with the requisition of materials from the supplier until the material is used or incorporated into a product.BaileyandFarmer(2009)definematerialmanagementasaconceptconcernedwiththemanagementofmaterials•until thematerialshavebeenusedandconvertedintothefinalproduct.Activitiesincludecooperationwithdesigners, purchasing, receiving, storage, quality control, inventory control, and material control.Gossom (1999) indicates that a material management system should have standard procedures for planning, •expediting,transportation,receipt,andstoragetoensureandefficientsystemformaterialscontrol.Cavinato(1994)statesthatmaterialmanagementinvolvesthecontroloftheflowofgoodsinafirm.Itisthe•combinationofpurchasingwithproduction,distribution,marketingandfinance.Arnold (2001) states that material management is a function responsible for planning and controlling of materials •flow.Headdsthatamaterialsmanagershouldmaximisetheuseofresourcesofthecompany.Stukhart(2007)definesmaterialmanagementastheactivitiesinvolvedtoplan,control,purchase,expedite,•transport,storage,andissueinordertoachieveanefficientflowofmaterialsandthattherequiredmaterialsarebought in the required quantities, at the required time, with the required quality and at an acceptable price.Plemmonsetal.(1995)definematerialmanagementastheplanandcontrolofallactivitiestoensurethecorrect•qualityandquantityofmaterialsandequipment tobe installedarespecified in timelymanner,obtainedatreasonable cost and are available when needed.DoblerandBurt(2009)statethatmaterialmanagementisdesignedtoimprovetheactivitiesrelatedtotheflow•of materials. They add that material management should coordinate purchasing, inventory control, receiving, warehousing, materials handling, planning, and transportation.

The role that a materials manager plays in an organisation is strictly economical since the materials manager should keep the total cost of materials as low as possible. The person in charge of handling materials should keep in mind the goals of the company and insure that the company is not paying extra money for materials. The goal of every companyistomakeaprofit.Thisisthebasisforcompany’ssurvival,costsshouldnotexceedincome,butkeepingin mind customer’s expectations.

The typical tasks associated with a material management system are:Procurement and purchasing•Expediting•Materials planning•Materials handling•Distribution•Cost control•Inventory management / Receiving/ Warehousing•Transportation•

Purchasing and procurement deals with the acquisition of materials to be used in the operations. The primary function of purchasing and procurement is to get the materials at the lowest cost possible, but keeping in mind quality requirements. Expediting is the continuous monitoring of suppliers to ensure on time deliveries of materials purchased. The purpose of materials planning is to procure the materials for the dates when they are needed, storage facilities,andhandlingrequirements.Theprimaryfunctionofmaterialshandlingistomanagetheflowofmaterialsin the organisation.

The manager has to assure that the costs associated with handling materials are kept to a minimum. In cost control, the manager has to insure that the costs to buy materials are kept to a minimum. In other words, the manager has to insure that he is buying the products at the lowest possible price. The inventory management deals with the availability of materials.

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Transportation involves using the safest most economical means to transport the materials to the site where they are needed. Fig. 6.1 depicts the different phases of the material management process including the relationship and interdependencybetweenthedifferentactivitiesineachphase.Fromthisfigureitcanbeseenthatdecisionstakenat each phase in the system, directly affect the activities of the phases that follow:

Distributors/ suppliers

Manufacturers

Material Take OffEngineered/Manufactured/

Initial Bulk Material

Field purchase (Major bulk material)

Engineering and Design

Jobsite

Home Office

Procurement Costs ($)

Delivery (Expediting/ Quality Assurance)

Site

Receiving(Identification/Inspecting/Recording)

Storage

Issuing Distribution

Disposal

Ordering

Storage

Packaging/ Out loading

Shipment

Ord

erin

g/D

eliv

ery

Purchasing (Requisition, Investigate Suppliers

Selecting/Negotiating/Purchase Order)

Materials Selling Costs ($)

PROJECT (customer)

Site Handling Costs ($) Indirect Costs ($)

Fig. 6.1 Typical material management in construction

As a result, a successful implementation of a material management system needs to consider the different decisions made at various phases of the supply chain.

6.3 Need for Material Management SystemThe costs associated with material management are hidden in other activities or included as overhead costs. Stukhart (2007) states that studies from the Construction Industry Cost Effectiveness Project (CICEP) concluded that senior management have not recognised the contribution of material management to cost issues in projects, that personnel involved in material management activities do not receive an adequate training, and that the computer systems used by companies are not good sources of information for materials control. Historically managers had paid more attention to the costs associated with personnel, equipment and plant and little attention has been given to materials. For manufacturing organisations, the costs related to materials have increased and had become the largestexpenditureoftheorganisation;thereforemoreattentionhasbeenplacedintoactivitiesrelatedtomaterials.The cost of materials has escalated to twice the cost of Labour between 1975 and 1980 inducing companies to pay more attention to activities related to materials.

Traditionally the responsibilities for activities related tomaterials flowhave been divided between differentdepartments. Figure 6.2 depicts the division of responsibilities for material management. The activities related to materialmanagementaredividedbetweendifferentdepartments.Forexample,thefinancedepartmentisinchargeof the purchasing activities while the manufacturing department is in charge of the control of materials during production.Thisdivisionofresponsibilitiesmakesitdifficulttocoordinatetheactivitiesrelatedtomaterials.Inaddition,thisdivisioncanmakethecontrolandidentificationofmaterialsextremelydifficult.


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The integration of the functions related to materials into a single department makes it easier to control and identify all theactivitiesrelatedtomaterialflowandcosts.Figure6.3depictstheintegratedapproachforMaterialManagement.Material Management is designed to coordinate and control the materials needed and activities related to those materials. In a typical organisation, the material activities are interrelated.

General manager

Personal Manager

Finance Manager

Purchasing Manager

Other Activities

Production Manager

Other Activities

Manufacturing Manager Sales Manager Chief Engineer

TrafficManager

Other Activities

Fig. 6.2 Division of responsibilities for material management

President

executive vice president

Manager Finance & Accounting

Manager Human

Resources

Purchasing and

Supply

Production Scheduling

Inventory Control

Stores and Receiving

Inbound Traffic

Manager Engineering

Manager Materials

Manager Manufacturing

Manager Marketing

Fig. 6.3 General structure of a material management system

6.4 Goals of Material ManagementAs was mentioned previously, the role of the materials manager is strictly economical within an organisation. This section will describe some of the aspects that the materials manager should keep in mind to handle all activities related to materials appropriately. Cavinato (1994) states that the objectives of a material management system should includelowestfinalcost,optimumquality,assuranceofsupply,andlowestadministrativecosts.

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The materials manager should obtain the materials needed at the lowest cost possible. By buying products at the lowestpossiblecosts,operatingcostscanbereducedandprofitscanbeincreased.Properhandlingandstorageofmaterialscanreducethetotalcostofmaterials;thereforethematerialsmanagershouldensurethatmaterialsare handled properly and stored in the most adequate places. Quality is a very important aspect that the materials managerhastokeepinmind.Whenspecificationsrequireahighqualityproduct,qualitycouldbecomethemostimportant objective. Suppliers play an important role in any organisation. Many companies rely greatly in outside suppliers for the materials needed for production. Good relations with suppliers might be decisive for a company to be in business.

Companies that have good relations with suppliers could be more successful in attracting customers than companies thathavebadrelationswithsuppliers.Whenacompanyhasgoodrelationswithitssuppliersitcouldbenefitfromcost reductions, cooperative environment from the employees of the supplier, and willingness to help with materials ordered and orders pending. When a company has bad relation with their suppliers it might be possible that it experiences late deliveries or wrong materials delivered. This will have an impact in the total cost of the product, possiblyincreasingthetotalcosts,anddelayingthecompletionofthefinalproduct.Materialsacquisitionfromtheprocurementtimeuntilitisreceivedinthefieldcanhaveasignificantimpactonthescheduleofaconstructionproject. Based on the studies presented, it is clear that effective management of materials can minimise the impact that lack of materials or improper management of materials could have in the overall schedule and cost of the project. The materials manager should assure that effective and economical transportation are used to transport materials to the site.

6.5 Benefits of Material ManagementAneffectivematerialmanagementsystemcanbringmanybenefitsforacompany.PreviousstudiesbytheConstructionIndustryInstitute(CII)concludedthatLabourproductivitycouldbeimprovedbysixpercentandcanproduce4-6%inadditionalsavings.Amongthesebenefitsare:

Reducing the overall costs of materials•Better handling of materials•Reduction in duplicated orders•Materials will be on site when needed and in the quantities required•Improvements in labour productivity•Improvements in project schedule•Quality control•Betterfieldmaterialcontrol•Better relations with suppliers•Reduce of materials surplus•Reduce storage of materials on site•Labour savings•Stock reduction•Purchase savings•Bettercashflowmanagement•

Thischapterprovidedanintroductiontomaterialmanagementandthebenefitsthatcouldberealisedbyhavinganeffective material management system. The basic knowledge needed to understand the basis of the research and why it is important to undertake this research work was presented.


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SummaryMaterials constitute a major cost component for any Industry.•Theefficientprocurementandhandlingofmaterialrepresentakeyroleinthesuccessfulcompletionofthe•work.Poorplanningandcontrolofmaterials, lackofmaterialswhenneeded,pooridentificationofmaterials,re-•handling and inadequate storage cause losses in labour productivity and overall delays that can indirectly increase total project costs.Ballot(2006)definesmaterialsasthephysicalmaterialsthatarepurchasedandusedtoproducethefinalproduct•anddoesnotsuggestthatmaterialsarethefinalproduct.Materials are critical in the operations in every industry since unavailability of materials can stop production.•Storage of materials can increase the costs of production and the total cost of any project.•Specialattentionshouldbegiventotheflowofmaterialsoncetheyareprocuredfromsuppliers.•Timely availability of materials, systems, and assemblies are vital to successful construction.•Top management is paying more attention to material management because of material shortages, high interest •rates, rising prices of materials, and competition.The purpose of material management is to assure that the right materials are in the right place, in the right •quantities when needed.The person in charge of handling materials should keep in mind the goals of the company and insure that the •company is not paying extra money for materials.Purchasing and procurement deals with the acquisition of materials to be used in the operations.•The primary function of purchasing and procurement is to get the materials at the lowest cost possible, but •keeping in mind quality requirements.Expediting is the continuous monitoring of suppliers to ensure on time deliveries of materials purchased.•The purpose of materials planning is to procure the materials for the dates when they are needed, storage •facilities, and handling requirements.In cost control, the manager has to insure that the costs to buy materials are kept to a minimum.•Transportation involves using the safest most economical means to transport the materials to the site where •they are needed.The integration of the functions related to materials into a single department makes it easier to control and •identifyalltheactivitiesrelatedtomaterialflowandcosts.Quality is a very important aspect that the materials manager has to keep in mind.•The materials manager should assure that effective and economical transportation are used to transport materials •to the site.

ReferencesBozarth• ,C.andHandfield,R.B.,2012.Introduction to Operations and Supply Chain Management., 3rd ed., Prentice Hall.Handfield,R.B.and• Nichols Jr. E.L., 1998. Introduction to Supply Chain Management., 1st ed., Prentice Hall.Katrin, B., 2010. • Sustainable Materials Management for Europe, [pdf] Available at: <http://www.euractiv.com/sites/all/euractiv/files/SMMfor%20EuropeStudy_0.pdf> [Accessed 2 November 2012].SkyLogistics• ., 2007. A New Vision in Materials Management, [Online] Available at: <http://www.lsgskychefs.com/fileadmin/lsgskychefs/downloads/inf_equip_logistics/lsgsc_skylogistix.pdf>[Accessed 2 November 2012].2008. • Materials Management, [Video Online] Available at :< http://www.youtube.com/watch?v=qqsrtSeJ3sE> [Accessed 2 November 2012].2008• . Inventory Management, [Video Online] Available at :< http://www.youtube.com/watch?v=HZPMaTifdBg&playnext=1&list=PL1701A3CA64E40D20&feature=results_video> [Accessed 2 November 2012].

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Recommended ReadingArnold, T.J.R., • Chapman, S.N. and Clive, L.M., 2011. Introduction to Materials Management.,7th ed., Prentice Hall.Bozarth,C.andHandfield,R.B.,2007.• Introduction to Operations and Supply Chain Management., 2nd ed., Prentice Hall.Arnold, T.J.R., 1996. • Introduction to Materials Management., Prentice Hall.


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Self AssessmentTheefficient_______________andhandlingofmaterialrepresentakeyroleinthesuccessfulcompletionof1. the work.

procurementa. managementb. contractorc. planningd.

__________________isdefinedastheelements,constituents,orsubstancesofwhichsomethingiscomposed2. or can be made.

Planninga. Materialb. Productc. Equipmentd.

________________arethepartsusedtoproducethefinalproduct.3. Productsa. Equipmentsb. Materialsc. MROd.

Dobler and Burt (2009) classify manufacturing materials into ________ categories.4. foura. twob. fivec. threed.

Which of the following is not one of the categories of manufacturing materials by Dobler and Burt?5. Raw materialsa. Purchased partsb. Manufactured partsc. Bulk materialsd.

__________________ are parts that the company buys from outside sources.6. Bulk materialsa. MRO suppliersb. Raw materialsc. Manufactured partsd.

_________________ are materials delivered in bags for ease of handling and controlled use.7. Bulk materialsa. Palleted materialsb. Bagged materialsc. Packaged materialsd.

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__________________ are materials that are partially fabricated and that should be handled individually.8. Packaged materialsa. Bagged materialsb. Bulk materialsc. Loose materialsd.

________________arematerialsarespecificallyfabricatedforaparticularprojectoraremanufacturedtoan9. industryspecificationinashopawayfromthesite.

Fabricated materialsa. Engineered materialsb. Bulk materialsc. Bagged materialsd.

_______________statesthatmaterialmanagementinvolvesthecontroloftheflowofgoodsinafirm.10. Cavinatoa. Gossomb. Bailey and Farmer c. Arnoldd.


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Chapter VII

Supply Chain Management

Aim


definesupplychainandsupplychainmanagement•

explainthekeypartsandflowsofsupplychain•

describe the supply chain drivers•

Objectives

The objectives of this chapter are to:•

explicate the supply chain concept•

explain the decision phases in supply chain management•

elucidate the marketing mix model•

Learning outcome

At the end of this chapter, the students will be able to:

enlist the barriers of supply chain management•

describe the strategies in supply chain management•

understand supply chain management•

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7.1 IntroductionTheglobalmarketfacesafiercecompetitiontoday.Theintroductionofproductswithshorterlifecyclesandtheheightened expectations of customers have forced business enterprises to invest in, and focus attention on, their supply chains. This, together with continuing advances in communications and transportation technologies (example, mobile communication, internet, and overnight delivery), has motivated the continuous evolution of the supply chain and of the techniques to manage it effectively. Recently, the pressure of the competitive market and new information technologies has affected the structures of the production systems, calling for:

reduction of time to mark•higherflexibilityofthesystems•drastic reduction of costs•extended quality concept•

7.2 Supply ChainA supply chain is a system of organisations, people, technology, activities, information and resources involved •in moving a product or service from supplier to customer.A supply chain is a network of retailers, distributors, transporters, storage facilities, and suppliers that participate •in the production, delivery and sale of a product to the consumer.Theseactivitiesareassociatedwiththeflowandtransformationofgoodsfromtherawmaterialsstagetothe•enduser,aswellastheassociatedinformationandfundsflows.Supplychainactivitiestransformnaturalresources,rawmaterialsandcomponentsintoafinishedproductthat•is delivered to the end customer.Insimpleterms,asupplychainisthelinkbetweenafirmorbusinessanditssuppliersandcustomers.•

Supplier Firm Customer

Fig. 7.1 A conceptual model of a basic supply chain

The supply chain, which is also referred to as the logistics network, consists of suppliers, manufacturing centres, •warehouses, distribution centres, and retail outlets, as well as raw materials, work-in-process inventory, and finishedproductsthatflowbetweenthefacilities.


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Suppliers

Material costs

Transportation costs

Manufacturing costs

Inventory costs

Transportation costs

ManufacturersWarehouses and distribution centers Customers

Fig. 7.2 A Supply chain network

A supply chain has three key parts:Supply which focuses on the raw materials supplied to manufacturing, including how, when, and from what •location.Manufacturingwhichfocusesonconvertingtheserawmaterialsintofinishedproducts.•Distribution which focuses on ensuring that the products reach the consumers through an organised network of •distributors, warehouses, and retailers.

Distribution SupplyManufacturing

Fig. 7.3 Key parts of supply chain

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Asupplychainencompassesallactivitiesinfulfillingcustomerdemandsandrequests.•In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual •value is recyclable.A supply chain strategy refers to how the supply chain should operate in order to compete in the market. The •strategyevaluatesthebenefitsandcostsrelatingtotheoperation.Thesupplychainstrategyfocusesontheactualoperationsoftheorganisationandthesupplychainthatwillbeusedtomeetaspecificgoal.Thesupplychainintegrates,coordinatesandmonitorstheflowofmaterials,information,andfunds.•

Raw MaterialSuppliers Manufacturing Retailers End Customers

Information Flow

Material Flow

Fund Flow

Fig. 7.4 Flow of supply chain

7.3 Supply Chain ManagementSupplychainmanagement (SCM) is theoversightofmaterials, information, andfinancesdistributed from•supplier to consumer. The supply chain also includes all the necessary stops between the supplier and the consumer.Supplychainmanagementinvolvescoordinatingthisflowofmaterialswithinacompanyandtotheend consumer.TheCouncilofSupplyChainManagementProfessionalsdefinessupplychainmanagementasfollows:“Supply•chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities”. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.Supply chain management is an integrating function with primary responsibility for linking major business •functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, and financeandinformationtechnology.SCM is also called the art of management of providing the right product, at the right time, right place and at •the right cost to the customer.Supplychainmanagementcanbedividedintothreemainflows:•

TheProductflowincludesmovinggoodsfromsupplier toconsumer,aswellasdealingwithcustomer �service needs.TheInformationflowincludesorderinformationanddeliverystatus. �TheFinancialflowincludespaymentschedules,creditterms,andadditionalarrangements. �

Supply chainmanagement is a set of approaches utilised to efficiently integrate suppliers,manufacturers,•warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimise system-wide costs while satisfying service level requirements.


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7.4 Objective of Supply Chain ManagementAsupplychainisaglobalnetworkoforganisationsthatcooperatetoimprovetheflowsofmaterialandinformation•betweensuppliersandcustomersatthelowestcostandthehighestspeed.Thefinalobjectiveofasupplychainis customer satisfaction.The supply chain management takes into consideration every facility that has an impact on cost and plays a •role in making the product match to customer requirements: from supplier and manufacturing facilities through warehouses and distribution centres to retailers and stores.The main purpose of the supply chain is to maximise overall value generated. Value is the difference between •what the cost supply chain incurs and the worth end product has to the customer. Value of the commercial supply chainiscorrelatedwithitsprofitabilitygenerallyknownassupplychainsurplus.For example, A customer purchase a personal computer from IBM at $2,000, which indicates the revenue supply •chainachieved.Allthestagesincurcoststomakesuretheefficienttransferoffunds,information,storageoftheproduct,transportationtothefinalconsumeretc.Thedifferencebetweenthesupplychaincostandrevenuegeneratedfrompersonalcomputerrepresentthesupplychainsurplusorprofitability.Supplychainsurpluscanbedefinedasthetotalprofitsharedbyallthestagesandintermediariesofasupply•chain. The greater the supply chain surplus the more successful is supply chain. But, Supply chain success is measuredbyitsoverallsurplusnotbytheprofitateachstage.Thesupplychainmanagementhastobeefficientandcost-effectiveacrosstheentiresystem;fromtransportation•anddistributiontoinventoriesofrawmaterials,workinprocess,andfinishedgoods,aretobeminimised.Theemphasis is not on simply to minimise transportation cost or reducing inventories but, rather, on taking a systems approach to supply chain management.The objectives of supply chain management can be listed below:•

enhancing customer service �expanding sales revenue �reducing inventory cost �improving on-time delivery �reducing order to delivery cycle time �reducing lead time �reducing transportation cost �reducing warehouse cost �reducing supplier base �expanding depth of distribution �

7.5 Importance of Supply Chain ManagementThe importance of supply chain management comes into picture if there is sharp focus on the loss due to •theabsenceofaneffectivesupplychainstrategyand/orthebenefitduetoaneffectivesupplychainforanyfirm.Basically,itrefersthathowgoodistheintegrationofsupplychainthatmattersforanyfirm.Theimportanceof•having a robust supply chain management can be depicted from the following example:

Suppose, ABC is any company that manufactures the cycle chains for a cycle manufacturing company �XYZ. Another company PQR manufactures bits used in the cycle chain manufactured by ABC. Now, in coming days, as per the market forecast, XYZ shall need 50,000 units of cycle chain, information that is not available with ABC. Accordingly, PQR also does not know how many bits to produce in order to meet ABC’s requirement. The result would be either both ABC and PQR hold high safety stock inventory or lose business respectively with XYZ and ABC. Now, if in this example showing only three supply chain partners,absenceofacriticalinformationamongthepartners,thatisofproductionforecastatXYZfirmresults into either a higher inventory level or loss of future business.

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The importance of supply chain management is to:•reduce inventories along the chain �share better information among the partners �plan in consultation rather than in isolation �

7.6 Activities of Supply Chain ManagementThere are three levels of activities of supply chain management that different parts of the company will focus on:

Strategic: At this level, strategic decisions concerning the whole organisation, such as the size and location •of manufacturing sites, partnerships with suppliers, products to be manufactured and sales markets are taken. Suchdecisionshavealong-lastingeffectonthefirm.Thisincludesdecisionsregardingproductdesign,whattomakeinternallyandwhattooutsource,supplierselection,andstrategicpartneringandtheflowofmaterialthrough the logistics network.Tactical:Tacticaldecisionsfocusonadoptingmeasuresthatwillproducecostbenefitssuchasusingindustry•best practices, developing a purchasing strategy with favoured suppliers, working with logistics companies to develop cost effect transportation and developing warehouse strategies to reduce the cost of storing inventory. Such decisions are typically updated anywhere between once every quarter and once every year. These include purchasing and production decisions, inventory policies, and transportation strategies, including the frequency with which customers are visited.Operational: Decisions at this level affect how the products move along the supply chain. Operational decisions •involve making schedule changes to production, purchasing agreements with suppliers, taking orders from customers and moving products in the warehouse. Such decisions refer to day-to-day decisions such as scheduling, lead time quotations, routing, and truck loading.

Business

IS Strategy

Shared Understanding

Communication

IS Users

IS Department Business Department

- Business executive

- IS executives- IS team

Strategic Level

Operational Level

IndividualLevel

Fig. 7.5 Supply chain management activity


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7.7 Decision Phases in a Supply ChainSuccessfulsupplychainmanagementrequiresmanydecisionsrelatingtotheflowofinformation,product,andfunds. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame over which a decision phase has an impact. The design, planning, and operation of a supply chain have astrongimpactonoverallprofitabilityandsuccess.

Supply chain strategy or designDuringthisphase,thesupplychainisstructuredandconfigured.•It is designed that, how resources will be allocated, and what processes each stage will perform.•Strategic decisions made by companies include:•

location and capacities of production and warehouse facilities‚‚ �products to be manufactured or stored at various locations‚‚ �modes of transportation to be made available along different shipping legs‚‚ �type of information system to be utilised �

Supply chain design decisions are typically made for the long term (in years) and can be expensive to alter on •short notice. Consequently, when a company makes these decisions, they must take into account uncertainty in anticipated market conditions over the next few years.

Supply chain planningDuring this phase, the time frame considered is a quarter to a year. It starts with a forecast of demand in the •coming year.Asa result, the supply chain’s configurationdetermined in the strategic phase isfixed.The configuration•establishes constraints within which planning must be done. Planning establishes parameters within which a supplychainwillfunctionoveraspecifiedperiodoftime.Companiesstarttheplanningphasewithaforecastfor the coming year of demand in different markets.Planning decisions include those regarding markets to which a given production facility will supply and target •production quantities at different locations.The companies must include uncertainty in demand, exchange rates, and competition over this time horizon in •their decisions.Given a shorter time horizon and better forecasts than the design phase, companies in the planning phase •try to incorporate anyflexibility built into the supply chain in the designphase and exploit it to optimiseperformance.Asaresult,companiesdefineasetofoperatingpoliciesthatgovernshort-termoperations.•

Following are the planning decisions undertaken in supply chain:which markets will be supplied from which locations•planned build up of inventories•subcontracting, backup locations•inventory policies•timing and size of market promotions•

Supply chain operationThe time horizon is weekly or daily, and during this phase companies make decisions regarding individual •customer orders.At the operational level, supply chain configuration is consideredfixed andplanningpolicies are already•defined.

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The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During •this phase, the following activities are undertaken:

firmsallocateinventoryorproductiontoindividualorders �setadatethatanorderistobefilled �generate pick lists at a warehouse �allocate an order to a particular shipping mode and shipment �set delivery schedules of trucks �place replenishment orders �

There is less uncertainty about demand information because operational decisions are being made in the short •term horizon (minutes, hours, or days).The goal during the operation phase is to exploit the reduction of uncertainty and optimise performance.•The main aim here is to implement the operating policies as effectively as possible.•

7.8 Process View of Supply ChainThe process view of supply chain can be categorised as:

Cycle view: In this, processes in a supply chain are divided into a series of cycles, each performed at the interfaces •between two successive supply chain stages.

Customer Order Cycle

Replenishement Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manucacturer

Supplier

Fig. 7.6 Cycle view of supply chain

Each cycle occurs at the interface between two successive stages:Customer order cycle (customer-retailer)•Replenishment cycle (retailer-distributor)•Manufacturing cycle (distributor-manufacturer)•Procurement cycle (manufacturer-supplier)•

Cycleviewclearlydefinesprocessesinvolvedandtheownersofeachprocessspecifytherolesandresponsibilitiesof each member and the desired outcome of each process.


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Push/pull view: In this, processes in a supply chain are divided into two categories depending on whether they •are executed in response to a customer order (pull) or in expectation of a customer order (push).

ProcurementManufacturing andReplenishment cycles

Customer Order Cycles

Customer Order Arrives

PUSH PROCESSES PULL PROCESSES

Fig. 7.7 Push/pull view of supply chain

Theflowofsupplychainhelpsin:Closeconnectionbetweendesignandmanagementofsupplychainflows(product,information,andcash)and•supply chain success.Playingasignificantroleinthesuccessorfailureofafirm.•

7.9 Linking Competitive (Business) and Supply Chain StrategiesThecompetitivestrategydefinesthesetofcustomerneedswhichafirmseekstosatisfythroughitsproducts•and services. It includes low cost, rapid response, product differentiation etc.Supply chain strategy determines the nature of material procurement, transportation of materials, and manufacture •of product or creation of service, distribution of product.Consistency and support between supply chain strategy, competitive strategy, and other functional strategies •is important.

Competitive (Business) Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy

Finance, Accounting, Information Technology, Human Resources

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Fig. 7.8 Linking competitive (business) and supply chain strategies

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7.10 Supply Chain DriversSupply chain drivers determine the supply chain performance. For each driver, managers must make tradeoffs betweenefficiency(cost)andresponsiveness.Thedriversofsupplychaininclude:

Inventory:Itconsistsofallrawmaterials;workinprocess,andfinishedgoodswithinasupplychain.Inventory•is maintained in the supply chain because of mismatches between supply and demand. Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.Transportation: It involves moving inventory from one point in the supply chain to another point. A number •of decisions have to be taken in designing a supply chain regarding transportation. The six basic modes of transportation are:

air �truck (road) �rail �ship �pipeline �electronic transportation (the newest mode for music, documents etc) �

Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence, facilities can be •categorised into production facilities and storage facilities. The facilities related decisions involve location, capacity, manufacturing methodology or technology and warehousing methodology.Information: It consists of data and results of analysis regarding inventory, transportation, facilities, customer •orders, customers, and funds. Good information drives good decisions.

How to achieve

Efficiency Responsiveness

Inventory Transportation Facilities Information

Drivers

Supply chain structure

Fig. 7.9 Supply chain drivers

7.10.1 Barriers of Supply Chain ManagementThe obstacles of supply chain management include:

lack of top management support•non-aligned strategic and operating philosophies•inability or unwillingness to share information•lack of trust a mong supply chain members •unwillingness to share risks and rewards•inflexibleorganisationalsystemsandprocesses•cross-functionalconflicts•


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inconsistent or inadequate performance measures•resistance to change•lack of training for new mindsets and skills•

7.10.2 Scope of Supply Chain ActivitiesThe scope of supply chain activities includes:

sourcing and procurement‚‚•production scheduling and manufacturing•order processing•inventory management•warehousing•customer service•distribution•reverse logistics•

7.11 Marketing Mix ModelMarketingmanagersandstrategistshaveusedthe‘FourP’s’modelofmarketingmixtodefinetheirbusiness•strategyforproductspecification,deliveryandpromotion.Theterm“marketingmix”becamepopularafterNeilH.Bordenpublishedhis1964article,TheConceptofthe•MarketingMix.Cullitondescribedthemarketingmanagerasa“mixerofingredients”.McCarthyproposedaFourPclassificationin1960.These four P’s are the parameters that the marketing manager can control, subject to the internal and external •constraints of the marketing environment. The goal is to make decisions in the target market in order to generate a positive response.Anyorganisation,beforeintroducingitsproductsorservicesintothemarket;conductsamarketsurvey.The•sequence of all ‘P’s as above is very much important in every stage of product life cycle. These four most important ‘P’s of marketing mix are generally accepted to be:

Price (the amount a customer pays for the product) �Product(specificationandbranding) �Promotion (all of the communications that a marketer may use in the marketplace, advertising, public �relations, personal selling and sales promotion)Place (the location where a product can be purchased, distribution channel) �

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Product

Place

Marketing Mix

Price

Promotion

target market

Fig. 7.10 Elements of marketing mix

TheMarketspaceModel(deMeyeretal)isausefulmodelthatidentifiesthreekeyfeaturesofe-businessthatareenabled through technology, as an extension of the traditional ‘4 P’s’ marketing model. Customer relationship is rightly placedatthecentre,becausethecustomerisuniquelyidentified.Theon-linenatureoftheinternet,relationshipsbetween organisations and customers are becoming more interactive.

Interactivity is the two-way exchange of information and ideas with the customer through an on-line interface, which enhances the richness of customer relationships and gives rise to new paradigms of product design and customer service, such as internet forums.

Interactivity Connectivity

Product

Internet www

Placement

Customer Relationships

Price

Promotion

Fig. 7.11 Market space model


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SummaryThe pressure of the competitive market and new information technologies has affected the structures of the •production systems.A supply chain is a system of organisations, people, technology, activities, information and resources involved •in moving a product or service from supplier to customer.Supplychainactivitiestransformnaturalresources,rawmaterialsandcomponentsintoafinishedproductthat•is delivered to the end customer.Thestrategyevaluatesthebenefitsandcostsrelatingtotheoperation.•The supply chain strategy focuses on the actual operations of the organisation and the supply chain that will be •usedtomeetaspecificgoal.SCM is also called the art of management of providing the right product, at the right time, right place and at •the right cost to the customer.Asupplychainisaglobalnetworkoforganisationsthatcooperatetoimprovetheflowsofmaterialandinformation•between suppliers and customers at the lowest cost and the highest speed.Value is the difference between what the cost supply chain incurs and the worth end product has to the •customer.The difference between the supply chain cost and revenue generated from personal computer represent the •supplychainsurplusorprofitability.Supplychainsurpluscanbedefinedasthetotalprofitsharedbyallthestagesandintermediariesofasupply•chain.Operational decisions involve making schedule changes to production, purchasing agreements with suppliers, •taking orders from customers and moving products in the warehouse.The design, planning, and operation of a supply chain have a strong impact on overall profitability and•success.The goal of supply chain operations is to handle incoming customer orders in the best possible manner.•Thecompetitivestrategydefinesthesetofcustomerneedswhichafirmseekstosatisfythroughitsproducts•and services.Supply chain strategy determines the nature of material procurement, transportation of materials, and manufacture •of product or creation of service, distribution of product.A facility is a place where inventory is stored, manufactured or assembled.•

ReferencesBlanchard, D., 2010. • Supply Chain Management Best Practices., 2nd ed., Wiley.Lambert• , D.M., 2008. Supply Chain Management: Processes, Partnerships, Performance., 3rd ed., Supply Chain Management Institute.Zigiaris, S., 2000. • Supply Chain Management, [pdf] Available at: <http://www.urenio.org/tools/en/supply_chain_management.pdf> [Accessed 2 November 2012].Mukhopadhyay, J. • Supply Chain Management: A Comparative Study Between Large Organised Food and Grocery retailers in India [pdf] Available at: <http://www.iasms.in/pdf/nationalseminar.pdf> [Accessed 2 November 2012].2008. • Supply Chain Management an Introduction, [Video Online] Available at: <http://www.youtube.com/watch?v=ShdyWIa_GSk> [Accessed 2 November 2012].2009. • Supply chain Management, [Video Online] Available at : < http://www.youtube.com/watch?v=KN5OBvezO1k> [Accessed 2 November 2012].

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Recommended ReadingHugos, M.H., 2011. • Essentials of Supply Chain Management., 3rd ed., Wiley.Chopra, S. & • Meindl, P., 2009. Supply Chain Management., 4th ed. Prentice Hall.Myerson, P., 2012. • Lean Supply Chain and Logistics Management.,1st ed., McGraw-Hill Professional.


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Self AssessmentA supply chain has _______ key parts.1.

twoa. threeb. fourc. fived.

_________focusesonconvertingtheserawmaterialsintofinishedproducts.2. Manufacturinga. Distributionb. Productionc. Supply chaind.

Whichflow includesmovinggoods from supplier to consumer, aswell as dealingwith customer service3. needs?

Productflowa. Informationflowb. Financialflowc. Materialsflowd.

What is the term given to the difference between what the cost supply chain incurs and the worth end product 4. has to the customer?

Lead timea. Sales revenueb. Valuec. Supplier-based.

Which decisions focus on adoptingmeasures thatwill produce cost benefits such as using industry best5. practices?

Tactical decisionsa. Strategic decisionsb. Operational decisionsc. Supply chain design decisionsd.

Supply chain design decisions are typically made for _______.6. monthsa. yearsb. daysc. weeksd.

Which of the following statements is false?7. Strategic decisions made by companies include location and capacities of production and warehouse a. facilities.Operational decisions involve making schedule changes to production.b. Tacticaldecisionsfocusonadoptingmeasuresthatwillproducecostbenefitssuchasusingindustrybestc. practices and developing a purchasing strategy with favoured suppliers.Tactical decisions affect how the products move along the supply chain.d.

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Which of the following statements is false?8. Cycle view clearly defines processes involved and the owners of each process specify the roles anda. responsibilities of each member and the desired outcome of each process.Thecompetitivestrategydefinesthesetofcustomerneedswhichafirmseekstosatisfythroughitsproductsb. and services.Increasing inventory gives lower responsiveness but results in higher inventory carrying cost.c. Supply chain drivers determine the supply chain performance.d.

There are ______ P’s’ in the model of marketing mix used by marketing managers and strategists.9. fivea. twob. fourc. threed.

________is the two-way exchange of information and ideas with the customer through an on-line interface.10. Interactivitya. Customer relationshipb. Promotionc. Internetd.


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Chapter VIII

Inventory Management and Control

Aim


introduce inventory management•

elucidate the meaning of inventory•

explain the management of inventory•

Objectives


explain inventory control•

determine the advantages of ABC analysis•

elucidate the objectives of inventory management•

Learning outcome


understand the inventory control technique•

describe the norms of inventory management•

identifytheefficiencyofinventorycontrol•

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8.1 IntroductionInventories occupy the most strategic position in the structure of working capital of most business enterprises. It constitutes the largest component of current asset in most business enterprises. In the sphere of working capital, theefficientcontrolofinventoryhaspassedthemostseriousproblemtothecementmillsbecauseabouttwo-thirdof the current assets of mills are blocked in inventories. The turnover of working capital is largely governed by the turnoverofinventory.Itisthereforequitenaturalthatinventorywhichhelpsinmaximiseprofitoccupiesthemostsignificantplaceamongcurrentassets.

8.2 Meaning and Definition of InventoryIndictionarymeaningofinventoryisa“detailedlistofgoods,furnitureetc.”Manyunderstandthewordinventory,as a stock of goods, but the generally accepted meaning of the word ‘goods’ in the accounting language, is the stockoffinishedgoodsonly.Inamanufacturingorganisation,however,inadditiontothestockoffinishedgoods,therewillbestockofpartlyfinishedgoods,rawmaterialsandstores.Thecollectivenameoftheseentireitemsis‘inventory’.

Theterm‘inventory’referstothestockpileofproductionafirmisofferingforsaleandthecomponentsthatmakeup the production.

The inventory means aggregate of those items of tangible personal property which:are held for sale in ordinary course of business•are in process of production for such sales•they are to be currently consumed in the production of goods or services to be available for sale•

Inventories are expandable physical articles held for resale for use in manufacturing a production or for consumption in carrying on business activity such as merchandise, goods purchased by the business which are ready for sale. It is the inventory of the trader who dies not manufacture it.

Finished goodsGoods being manufactured for sale by the business which are ready for sale.

MaterialsArticles such as rawmaterials, semi-finishedgoods orfinishedparts,which the business plans to incorporatephysicallyintothefinishedproduction.

SuppliesArticle, which will be consumed by the business in its operation, but will not physically, as they are a part of the production.

Theshort inventorymaybedefinedas thematerialwhichiseithersaleable in themarketorusabledirectlyorindirectlyinthemanufacturingprocess.Italsoincludestheitemswhicharereadyformakingfinishedgoodsinsome other process or by comparing them either by the concern itself and/or by outside parties. In other words, the term inventory means the material having any one of the following characteristics. It may be:

saleable in the market•directly saleable in the manufacturing process of the business•usable directly in the manufacturing process of the undertaking, and•ready to send to the outside parties for making usable and saleable productions out of it.•

Inthepresentstudyrawmaterials,storesandspareparts,finishedgoodsandwork-in-processhavebeenincludedinventories.Firmalsomanufacturesinventorytosupplies.Suppliesincludedofficeandplantcleaningmaterials(soap, brooms etc. oil, fuel, light bulbs and the likes). These materials do not directly enter into the production process,butarenecessaryforproductionprocess.Inventoryconstitutesthemostsignificantpartofcurrentassets


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of a large majority of companies in India. For example, on an average inventories are more than 57 percent of current assets in public limited companies and about 60.5 percent in government companies in India. Therefore it isabsolutelyimperativetomanageinventoriesefficientlyandeffectivelyinordertoavoidunnecessaryinvestmentinthem.Anundertakingneglectingthemanagementofinventorieswillbejeopardisingitslongrunprofitabilityand may fail ultimately. It is possible for a company to reduce its level of inventories to a considerable degree e.g. 10 to 20 percent without any adverse effect on production and sales.

8.3 Management of InventoriesInventories consist of raw materials, stores, spares, packing materials, coal, petroleum products, works-in-progress andfinishedproductsinstockeitheratthefactoryordeposits.Itismostimportantcomponentofcurrentassetsinthe cement industry and was 42 percent of total current assets for sample companies as on March 31, 2004. In other industries too it is very important component of total investment.

The maintenance of inventory means blocking of funds and so it involves the interest and opportunity cost to the firm.InmanycountriesespeciallyinJapangreatemphasisisplacedoninventorymanagement.Effortsaremadeto minimise the stock of inputs and outputs by proper planning and forecasting of demand of various inputs and producing only that much quantity which can be sold in the market.

The inventory cost is not only interest on stocks but also cost of store building for storage, insurance and obsolesce andmovementofinputsfromplaceofstoragetothefactorywherethematerialshavetobefinallyusedtoconvertthemintofinishedgoods.InJapanindustrieshaveadoptedconceptofJIT(JustinTime)andcomponents,materialsarereceived when required for which detailed instructions are given to suppliers. There are many engineering companies who receive components directly at assembly point and that too only for 3-4 hours requirements at a time. Even in case of bulk materials like iron ore, which is imported from abroad, the minimum possible inventory is kept.

As against this by and large in India the inventory of coal, raw materials and packing materials is very high and many items become junk or obsolete causing heavy loss to the enterprise. Lack of inventory planning in India has been pointed out by various committees but due to uncertainties in supplies, problem of timely receipt of railway wagons, lackofplanningandunreliablesuppliers the investment in inventories isquithigh.Thefluctuationindemandaffectsinventoryoffinishedproductofwhichcementindustryhasbeenavictimmanytimes.

The situation in cement industry has been analysed in this chapter after studying the principles of inventory control and relating it with cement industry.

Incaseofrawmaterialsthefirstrequirementistostudyleadtimebetweenthedateoforderandreceiptinthefactoryand same is applicable in case of coal.

In case of cement industry the basic raw material i.e. lime stone is not purchased from the market but form one’s own queries which are within 10 to 15 Km distance from factory and only in few cases distance is more up to 50 Km. It is transported to cursing mills by trucks, rail or overhead ropeways to the factory. The only uncertainty is with regard to problem of quarrying in quarries, which may be affected due to labour problem, problem in supplies of electricity or explosives. But in spite of these factors industry feels that 3-4 days of stock of raw material is enough. This, from any standard is on the high side when self-produced raw material is used. Actually for ideal situation, there should be stock for a few hours, requirement and at the most for one day need. The industry is keeping larger stocks of limestone because of uncertainties in quarrying and transportation.

8.4 Objectives of Inventory ManagementThe primary objectives of inventory management are:

tominimisethepossibilityofdisruptionintheproductionscheduleofafirmforwantofrawmaterial,stock•and sparesto keep down capital investment in inventories•

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So it is essential to have necessary inventories. Excessive inventory is an idle resource of a concern. The concern shouldalwaysavoidthissituation.Theinvestmentininventoriesshouldbejustsufficientintheoptimumlevel.Themajor dangers of excessive inventories are:

theunnecessarytieupofthefirm’sfundsandlossofprofit•excessive carrying cost, and•the risk of liquidity•

The excessive level of inventories consumes the funds of business, which cannot be used for any other purpose and thus involves an opportunity cost. The carrying cost, such as the cost of shortage, handling insurance, recording and inspection, are also increased in proportion to the volume of inventories. This cost will impair the concern profitabilityfurther.

On the other hand, a low level of inventories may result in frequent interruptions in the production schedule resulting in under-utilisation of capacity and lower sales. The aim of inventory management thus should be to avoid excessive inventory and inadequate inventory and to maintain adequate inventory for smooth running of the business operations. Efforts should be made to place orders at the right time with the right source to purchase the right quantity at the right price and quality. The effective inventory management should:

maintainsufficientstockofrawmaterialintheperiodofshortsupplyandanticipatepricechanges•ensure a continuous supply of material to production department facilitating uninterrupted production•minimise the carrying cost and time•maintainsufficientstockoffinishedgoodsforsmoothsalesoperations•ensure that materials are available for use in production and production services as and when required•ensurethatfinishedgoodsareavailablefordeliverytocustomerstofulfilorders,smoothsalesoperationand•efficientcustomerserviceminimise investment in inventories and minimise the carrying cost and time•protect the inventory against deterioration, obsolescence and unauthorised use•maintainsufficientstockofrawmaterialinperiodofshortsupplyandanticipatepricechanges•control investment in inventories and keep it at an optimum level•

Problems faced by management:Tomaintainalargesizeinventoriesforefficientandsmoothproductionandsalesoperation.•To maintain only a minimum possible inventory because of inventory holding cost and opportunity cost of •funds invested in inventory.Control investment in inventories and keep it at the optimum level.•

Inventory management, therefore, should strike a balance between too much inventory and too little inventory. The efficientmanagementandeffectivecontrolofinventorieshelpinachievingbetteroperationalresultsandreducinginvestmentinworkingcapital.Ithasasignificantinfluenceontheprofitabilityofaconcern.

8.5 Inventory ControlInventory control is concerned with the acquisition, storage, handling and use of inventories so as to ensure the availability of inventory whenever needed, providing adequate provision for contingencies, deriving maximum economy and minimising wastage and losses.

Hence Inventory control refers to a system, which ensures the supply of required quantity and quality of inventory at the required time and at the same time prevent unnecessary investment in inventories.

Itisoneofthemostvitalphasesofmaterialmanagement.Reducinginventorieswithoutimpairingoperatingefficiencyfrees working capital that can be effectively employed elsewhere. Inventory control can make or break a company. Thisexplainstheusualsayingthat“inventories”arethegraveyardofabusiness.


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Designing a sound inventory control system is in a large measure for balancing operations. It is the focal point of manyseeminglyconflictinginterestsandconsiderationsbothshortrangeandlongrange.

Theaimofasoundinventorycontrolsystemistosecurethebestbalancebetween“toomuchandtoolittle.”Toomuchinventorycarriesfinancialrisesandtoolittlereactsadverselyoncontinuityofproductionsandcompetitivedynamics.Therealproblemisnotthereductionofthesizeoftheinventoryasawholebuttosecureascientificallydetermined balance between several items that make up the inventory.

The efficiencyof inventory control affects theflexibility of thefirm. Insufficient proceduresmay result in anunbalanced inventory. Some items out of stock, other overstocked, necessitating excessive investment. These inefficienciesultimatelywillhaveadverseeffectsuponprofits.Turningthesituationround,differenceintheefficiencyoftheinventorycontrolforagivenlevelofflexibilityaffectsthelevelofinvestmentrequiredininventory.Thelessefficientistheinventorycontrol,thegreateristheinvestmentrequired.Excessiveinvestmentininventoriesincreasecostandreduceprofits,thus,theeffectsofinventorycontrolofflexibilityandonlevelofinvestmentrequiredininventories represent two sides of the same coin.

Controlofinventoryisexercisedbyintroducingvariousmeasuresofinventorycontrol,suchasABCanalysisfixationof norms of inventory holdings and reorder point and a close watch on the movements of inventories.

8.6 Inventories Control Techniques8.6.1 ABC Analysis of InventoriesThe ABC inventory control technique is based on the principle that a small portion of the items may typically represent the bulk of money value of the total inventory used in the production process, while a relatively large number of items may from a small part of the money value of stores. The money value is ascertained by multiplying the quantity of material of each item by its unit price.

According to this approach to inventory control high value items are more closely controlled than low value items. Each item of inventory is given A, B or C denomination depending upon the amount spent for that particular item. “A”orthehighestvalueitemsshouldbeunderthetightcontrolandunderresponsibilityofthemostexperiencedpersonnel,while“C”orthelowestvaluemaybeundersimplephysicalcontrol.

It may also be clear with the help of the following examples:“A”Category–5%to10%oftheitemsrepresent70%to75%ofthemoneyvalue.“B”Category–15%to20%oftheitemsrepresent15%to20%ofthemoney.“C”Category–Theremainingnumberoftheitemsrepresent5%to10%ofthemoneyvalue.

The relative position of these items show that items of category A should be under the maximum control, items of category B may not be given that much attention and item C may be under a loose control.

Afterclassification,theitemsarerankedbytheirvalueandthenthecumulativepercentageoftotalvalueagainstthepercentageofitemisnoted.Adetailedanalysisofinventorymayindicateabovefigurethatonly10percentofitem may account for 75 percent of the value, another 10 percent of item may account for 15 percent of the value and remaining percentage items may account for 10 percent of the value. The importance of this tool lies in the fact that it directs attention to the key items.

Advantages of ABC AnalysisIt ensures a closer and a more strict control over such items, which are having a sizable investment in there.•It releasesworking capital,whichwouldotherwise havebeen lockedup for amore profitable channel of•investment.It reduces inventory-carrying cost.•Itenablestherelaxationofcontrolforthe‘C’itemsandthusmakesitpossibleforasufficientbufferstockto•be created.It enables the maintenance of high inventory turn over rate.•

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8.6.2 Fixation of Norms of Inventory HoldingsEither by the top management or by the materials department could set the norms for inventories. The top management usually sets monitory limits for investment in inventories. The materials department has to allocate this investment to the various items and ensure the smooth operation of the concern. It would be worthwhile if norms of inventories were set by the management by objectives, concept. This concept expects the top management to set the inventory norms (limit) after consultation with the materials department. A number of factors enter into consideration in the determination of stock levels for individual items for the purpose of control and economy. Some of them are:

Lead time for deliveries.•The rate of consumption.•Requirements of funds.•Keeping qualities, deterioration, evaporation etc.•Storage cost.•Availability of space.•Pricefluctuations.•Insurance cost.•Obsolescence price.•Seasonal consideration of price and availability.•EOQ (Economic Order Quantity), and•Government and other statuary restriction•

Any decision involving procurement storage and uses of item will have to be based on an overall appreciation of theinfluenceofthecriticalonesamongthem.Materialcontrolnecessitatesthemaintenanceofinventoryofeveryitem of material as low as possible ensuring at the same time, its availability as and when required for production. These twin objectives are achieved only by a proper planning of inventory levels. It the level of inventory is not properly planned, the results may either be overstocking or under stocking. If a large stock of any item is carried it will unnecessarily lock up a huge amount of working capital and consequently there is a loss of interest. Further, a higher quantity than what is legitimate would also result in deterioration. Besides there is also the risk of obsolescence if the end product for which the inventory is required goes out of fashion. Again, a large stock necessarily involves an increased cost of carrying such as insurance, rent handling charges. Under stocking which is other extreme, is equally undesirable as it results in stock outs and the consequent production holds ups. Stoppage of production in turn, cause idle facility cost. Further, failure to keep up delivery schedules results in the loss of customers and goodwill.Thesetwoextremecanbeavoidedbyaproperfixationoftwoimportantinventorylevelviz,themaximumlevelandtheminimumlevel.Thefixationofinventorylevelsisalsoknownasthedemandandsupplymethodofinventory control.

Carrying too much or too little of the inventories is detrimental to the company. If too little inventories are maintained, company will have to encounter frequent stock outs and incur heavy ordering costs. Very large inventories subjects the company to heavy inventory carrying cost in addition to unnecessary tie up of capital.

Anefficientinventorymanagement,therefore,requiresthecompanytomaintaininventoriesatanoptimumlevelwhere inventory costs are minimum and at the same time there is no stock out which may result in loss of sale or stoppage of production. This necessitates the determination of the minimum and maximum level of inventories.

Minimum levelThe minimum level of inventories of their reorder point may be determined on the following bases:

Consumption during lead-time.•Consumption during lead-time plus safety stock.•Stock out costs.•Customers irritation and loss of goodwill and production hold costs.•


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TocontinueproductionduringLeadTimeitisessentialtomaintainsomeinventories.LeadTimehasbeendefinedas the interval between the placing of an order (with a supplier) and the time at which the goods are available to meet the consumer needs.

Therearesometimesfluctuationsinthelead-timeand/orintheconsumptionrate.Ifnoprovisionismadeforthesevariations, stock out may take place-causing disruption in the production schedule of the company. The stock, which takescaretothefluctuationindemand,variesinlead-timeandconsumptionrateisknownassafetystock.Safetystockmaybedefinedastheminimumadditionalinventory,whichservesasasafetymarginorbufferorcushionto meet an unanticipated increase in usage resulting from an unusually high demand and or an uncontrollable late receipt of incoming inventory. It can be determined on the basis of the consumption rate, plus other relevant factor such as transport bottleneck, strikes or shutdowns.

In the case of uncertainly, the probabilistic approach may be applied to determine the safety margin. To avoid stock out arising out of such eventualities, companies always carry some minimum level of inventories including safety stock. Safety stock may not be static for all the times. A change in the circumstances and in the nature of industry demand, necessitates are adjusted in its level. In this study, an effort has been made to examine how the current companies determine their minimum level for re-order inventories, safety stock, whether a level of study is maintained throughout the year or not.

For each type of inventory a maximum level is set that demand presumably will not exceed as well as a minimum level representative a margin of safety required to prevent out of stock condition. The minimum level also governs theorderingpoint.Anordertosufficientsizeisplacedtobringinventorytothemaximumpointwhentheminimumlevel is reached.

Maximum levelTheupperlimitbeyondwhichthequantityofanyitemisnotnormallyallowedtoriseisknownasthe“MaximumLevel”.Itisthesumtotaloftheminimumquantity,andECQ.Thefixationofthemaximumleveldependsuponanumber of factors, such as, the storage space available, the nature of the material i.e. chances of deterioration and obsolescence, capital outlay, the time necessary to obtain fresh supplies, the ECQ, the cost of storage and government restriction.

Re-Order levelAlso known as the ‘ordering level’ the reorder level is that level of stock at which a purchase requisition is initiated by the storekeeper for replenishing the stock. This level is set between the maximum and the minimum level in such awaythatbeforethematerialorderedfor,arereceivedintothestores,thereissufficientquantityonhandtocoverbothnormalandabnormalcircumstances.Thefixationoforderingleveldependsupontwoimportantfactorsviz,the maximum delivery period and the maximum rate of consumption.

Re-Order quantityThe quantity, which is ordered when the stock of an item falls to the reorder level, is know as the reorder quantity or the EOQ or the economic lot size. Although it is not a stock level as such, the reorder quantity has a direct bearing upon the stock level in as much as it is necessary to consider the maximum and minimum stock level in determining the quantity to be ordered. The re-order quantity should be such that, when it is added to the minimum quantity, the maximum level is not exceeded. The re-order quantity depends upon two important factors viz, order costs and inventory carrying costs. It is, however, necessary to remember that the ordering cost and inventory carrying cost are opposed to each other. Frequent purchases in small quantities, no doubt reduce carrying cost, but the ordering costs such as the cost inviting tenders of placing order and of receiving and inspection, goes up. If on the other hand purchases are made in large quantities, carrying costs, such as, the interest on capital, rent, insurance, handling charges and losses and wastage, will be more than the ordering costs. The EOQ is therefore determined by balancing these opposing costs.

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Economy order quantityThe EOQ refers to the order size that will result in the lowest total of order and carrying costs for an item of inventory. Ifafirmplaceunnecessaryordersitwillincurunneededordercosts.Ifafirmplacestoofeworder,itmustmaintainlargestocksofgoodsandwillhaveexcessivecarryingcost.Bycalculatinganeconomicorderquantity,thefirmidentifiesthenumberofunitstoorderthatresultinthelowesttotalofthesetwocosts.

The constraints and assumption followed:Demand is known- Using past data and future plans a reasonably accurate prediction of demand can often be •made. This is expressed in unit sold in a year.Sales occur at a constant rate- This model may be used for goods that are sold in relatively constant amount •throughouttheyear.Amorecomplicatedmodelisneededforfirmswhosesalesfluctuateinresponsetothereseasonal cyclical factors.Costs of running of goods are ignored: Cost associated with storage, delays or lost sales are not considered. •These costs are considered in the determination of safety level in the re-order point subsystem.Safetystocklevelisnotconsidered:Thesafetystocklevelistheminimumlevelofinventorythatthefirmwishes•toholdasaprotectionagainstrunningout.SincethefirmmustalwaysbeabovethisleveltheEOQneednotbe considered the safety stock level.

Total Ordering Cost (TOC)=(A/Q)*OAverage Inventory=Q/2Total Carrying Cost (TCC)=(Q/2)*CTotal Inventory Cost=TOC+TCCTotal Cost=(AO/2)+(QC/2)Where A=total annual demandQ=Quantity order in unitsO=Order cost per orderC=Carrying cost per unitThebasicformulaisEOQ=2(U)(OC)/CC%PP

Where 2=mathematical factor that occurs during the deriving of the formula, U-Units sold per year, a forecast provided bythemarketingdepartment.OC=Costofplacingeachorderformoreinventoryprovidedbycostaccounting.CC%=Inventory carrying cost expressed as a percentage of the average value of the inventory, an estimate usually provided by cost accounting. PP = Purchase price per each unit of inventory supplied by the purchasing department.

8.6.3 Trial and Error ApproachSelect a number of possible lot (order) sizes to purchase, then determine the total cost for each lot size chosen, now select the ordering quantity that minimises the total cost.

Quantity Discount and Order QuantityThe standard EOQ analysis is based on the assumption that the price per unit remains constant irrespective of the ordersize.Whenquantitydiscountareavailablewhichisoftenthecase,priceperunitisinfluencedbytheorderedquantity. This violates the applicability of the EOQ formulas. However, the EOQ framework can still be used as a starting point for analysing the problem.

To determine the optimal order size when quantity discount is available, the following procedures may be followed:

Determine the order quantity using the standard EOQ formula assuming no quantity discount.•IfQenablesthefirmtogetquantitydiscountthenitrepresentstheoptimalordersize.•


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IfQislessthentheminimumordersizerequiredforquantitydiscount(callit-G2)computetochangeinprofit•as a result of increasing the order quantity from O1 to O2 as follows:=AD+[A/Q1-A/Q2] O-[Q2((P-D)/2-(Q1PC/2)=Changeinprofit,A=totaldemand,D=discountperunitwhenquantitydiscountinavailable,Q1=EORassuming no discount, Q2 = minimum order size required for quantity discount, O = order cost, P = Purchase price without discount, C = carrying costIfchangeinprofitispositive=Q2•Ifchangeinprofitispositive=Q1

8.6.4 Stock Level Sub-systemThissystemkeepstrackofthegoodsheldbythefirm,theinsuranceofgoods,andthearrivaloforder.Itismadeup of the records accounting for the goods in stock. Thus, the stock level subsystems maintain record of the current level of inventory for any period of time, the current level is calculated by taking the beginning inventory, adding the inventory received and subtracting the cost of goods sold. When ever those subsystems reports that an item is atabelowtherecorderptlevel,thefirmwillbegintoplaceanorderfortheitem.

Uncertainty and safety stockInpractice,thedemandorusageofinventoryisnotgenerallyknownwithcertainty.Usuallyitfluctuatesatagivenperiod of time. In this case formula is (Maximum daily usage rate x Maximum lead time) – (Average daily usage rate x Average lead time).

Reorder pointThereorderpointisthelevelofinventoryatwhichthefirmplacesanorderintheamountofEOQ.Ifthefirmplacestheorderwhentheinventoryreachesthereorderpoint,thenewgoodswillarrivebeforethefirmrunsoutofgoodsto sell. In designing reorder point subsystem, three items of information are needed as inputs to the subsystem.

Usage rate- This is the rate per day at which the item is consumed in production or sold to customers. It is •expressed in units. It may be calculated by dividing annual sales by 365 days. If the sales are 50,000 units the usage rate is 50,000/365 = 137 Units per day.Lead time- This is the amount of time between placing an order and receiving goods. This information is usually •provided by the purchasing department. The time to allow for an order to arrive may be estimated from a check ofthecompany’srecordandthetimetakeninthepastfordifferentsupplierstofillorders.Safety stock- The minimum level of inventory may be expressed in terms of several days’ sales. The level can •becalculatedbymultiplyingtheusagerateandtimeinthenumberofdaysthatthefirmwantstoholdasaprotection against shortages.Re-order point = (Usage rate)(Lead time + Days of safety) = (Lead Time x Consumption rate) + Safety stock.•

The probabilistic approach is found to be cumbersome and unfeasible for a multi period problem. It is proposed an orderpointwherebyanorderisplaced.Wheninventoryreachessomanyunits(SeeArthurSnynder,“Principleofinventorymanagement,”FinancialExecutive,32(April64(13-21);

Re-orderpointS(L)+F√SR(L)L = Lead TimeR = Average number of units per orderF = Stock out acceptance factor.

The foregoing analysis is based on certain simplifying assumption. In the real worked some additional consideration ought to be taken into account:

Anticipated scarcity of raw material•Expected price charge•Obsolescence risk•

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Government restriction on inventory•Competitive market.•

8.6.5 Pricing of Raw MaterialsWhen issues are made out of various lots purchased at varying prices, the problem arises as to which of the receipt price should be adopted for valuing the materials requisitions.

First in first outMaterials receivedfirstwill be issuedfirst.Theprice of the earliest consignment is takenfirst andwhen thatconsignment is exhausted the price of the next consignment is adopted and so on. This method is suitable in times of falling prices, because the material charge to production will be high while the replacement cost of materials will be low.

Last in first outMaterialsreceivedlastwillbeissuedfirst.Thepriceofthelastconsignmentistakenfirstandwhenthatconsignmentis exhausted the price of the second last consignment is adopted and so on. In timing of rising prices this method will show a charge to production, which is closely related to current price levels provided that the last purchase is made recently.

Weighted average cost methodUnder this method, material issued is priced at the weighted average cost of material in stock:WAC = Value of material in stock/Quantity in stock.

Standard price methodUnder this method a standard price is predetermined. The price of issues predetermined for a stated period taken into account all the factors affecting price such as anticipated market trends, transportation charges, and normal quantity of purchase. Standard prices are determined for each material and material requisition is priced at standards irrespective of the actual purchase price. Any difference between the standard and actual price results in materials price variance.

Current priceAccording to this method, material issued is priced at their replacement or realisable price at the time of issue. So the cost at which identical material could be purchased from the market should be ascertained and used for valuing material issues.

8.6.6 Perpetual Inventory SystemAnother method of inventory control is the maintenance of inventory control on a continuous basis. After the material are received into the stores, the storekeeper will arrange for the storing of each item in the allotted rack, bin, shelf or other receptacles and attach a card to each bin for the purpose of making entries there-in, relating to the receipts, issues and balance. The bin card or the locker card, this becomes a perpetual inventory record for each item of stores. If the stores balance is recorded on continuous basis after every receipt and issue, the record is said to be one of perpetual inventory and the method of recording is called the perpetual inventory system. Thus, the perpetual inventory is a method of recording store balance after every receipt and issue to facilitate regular checking and to obviate closing down for stock locking.

As a perpetual inventory record, the bin card records the receipt, issues and the balance of every item of stores only in physical quantities, and not in value. This feature of the bin card is in accordance with the accepted principle that the storekeeper true to his designation should be responsible for the safe keeping of the items of stores entrusted to him, and his accounting for stores should always be in physical quantities and not in value. The perpetual inventory system includes continues stock taking also.


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Stocktakingorstockverificationisdonemainlywithaviewtofindingoutwhetherthebookbalancesasrevealedbythestockrecordsagreewiththephysicalorthegroundbalance.Although,therefore,stockverificationisoneof the tools of inventory control, and is done for exercising control over the stock of every item, is an integral part ofmaterialcontrolforthepurposeofpreparingtheB/S,thephysicalverificationofstockmustbedoneattheendof year.

Suchverificationattheendoftheyearisknownastheperiodicalstocktakingasagainstthecontinuousstocktaking,which is done throughout the year. The periodic stock taking method usually adopted by concerns which cannot maintain perpetual inventory records due to the nature of the items which are usually stored in open yards and not in bins and as a such, bin cards cannot be employed for them, or do not want to maintain such records and employ stockverificationstafftodotheworkofstockcheckingthroughouttheyear.Underthismethodofstocktaking,theverificationofthewholeofthestockanditsvaluationareaccomplishedonlyonceatthecloseofthefinancialyearand difference in stock is adjusted only once. As such, the stock in hand would tend to be accurate for the balance sheetpurposes.Itisalsopossibletofindoutslowmovingitems.Nevertheless,theperiodicinventoryhasitsowndisadvantage.Inthefirstplace,itbecomesnecessarytoclosedownthefactoryonthedayofstocktaking.Secondly,discrepancies in stock cannot be corrected by an executive action immediately as and when they occur. Thirdly, since alltheitemsarecheckedonlyonceinaparticularday,asurpriseverificationwillnotbepossible.Lastly,reasonforthediscrepanciescannotbefoundoutbecauseofthelongintervalbetweentwoconsecutiveverifications.

These disadvantages of the periodical inventory system are overcome in the case of the perpetual inventory system. Underthismethodofcontinuousstockverificationthepurposeofverificationiscarriedonthroughouttheyearbyaspecially trained staff. This duty is to verify a few selected items in details so that each item is checked up a number of times during the year. The day and time of checking not being known to the staff, they are taken by a surprise. As such,notonlysecrecyoftheitemstobeverifiedcannotmaintain,amanipulationofeverytypecanbeprevented.Discrepancies are located, reasons are ascertained, the necessary adjustment is made in the accounting records, and correlative action is taken then and there to prevent their recurrence. The advantages of a continuous stocktaking where perpetual inventory records are maintained may thus be summarised as follows:

The elaborate and costly work involved in periodic stock taking can be avoided.•Thestockverificationcanbedonewithoutthenecessityofclosingdownthefactory.•Thepreparationofinterimfinancialstatementbecomespossible.•Discrepancies are easily located and corrected immediately.•It ensures a reliable check on the stores.•Itexercisesamoralinfluenceonthestoresstaff.•Fastandslowmovingitemscanbedistinguishedandthefixationofproperstocklevelspreventsnotonlyover-•stocking, but under-stocking also.A perpetual inventory record of the nature of the bin cards enables the storekeeper to keep an eye on the stock •levels, and replenish the stock of every item whenever the limit falls to the reorder level.It provides reliable information to the management of the number of units, and the value of every item of •stores.Itensuressecrecyoftheitemsthatareverified.•

8.6.7 Factors Influences the Level of each Component of InventoryRaw material inventory

The volume of safety stock against material shortages that interrupt production.•Considerations of economy in purchase.•The outlook for future movements in the price of materials.•Anticipated volume of usage and consumption.•Theefficiencyofprocurementandinventorycontrolfunction.•The operating costs of carrying the stocks.•

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The costs and availability of funds for investment in inventory.•Storage capacity.•Re-component cycle.•Indigenous or foreign.•The lead-time of supply.•Formalities for importing.•

Work-in-process inventoryThe length of the complete production process.•Management policies affecting length of process time.•Length of process in runs.•Action that speeds up the production process, e.g. adding second or third production shifts.•Management’s skills in production scheduling and control.•Volume of production.•Sales expectations.•Level of sales and new orders.•Price level of raw materials used, wages and other items that enter production cost and the value added in •production.Customer requirements.•Usual period of aging.•

Finished goods inventoryThepolicyofthemanagementtogeartheproductiontomeetthefirmorderinhand.•The policy to produce for anticipated orders and stock keeping.•Goods required or the purpose of minimum and safety stocks.•Salespoliciesofthefirm.•Need for maintaining stability in production.•Pricefluctuationsfortheproduct.•Durability, spoilage and obsolescence.•Distribution system.•Abilitytofillordersimmediately.•Availability of raw material on seasonal basis while customer’s demand spread throughout the year.•Storage capacity.•

Stores and Spares InventoryNature of the product to be manufactured and its lead-time of manufacture.•State of technology involved.•Consumption’s patterns.•Lead time of supply.•Indigenous or foreign.•Minimum and safety stock and ordering quantities.•Capacity utilisation.•Importing formalities.•


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Some of the important inventory policies relates to:minimum,maximumandoptimumstocks;•safetystocks,orderquantities,orderlevelsandanticipatedstocks;•waste,scrapspoilageanddefective;•policiesrelatingtoalternativeuse;•policiesrelatingtoorderfilling;•

Measure of Effectiveness of Inventory ManagementSize of Inventory = Total inventory/Total Current assets•Size of Raw material Inventory = Raw material inventory/Total inventory•Size of Work in Process Inventory = Work in process Inventory/Total Inventory•Size of Stores and Spares parts Inventory = Stores and Spares parts inventory/Total •

InventorySize of Finished Goods Inventory = Finished goods inventory/Total inventory•Overall inventory turn over ratio = Cost of goods sold/average total inventories at cost•Raw material inventory turnover ratio = Annual consumption of Raw material / •

Average Raw material inventoryWork-in-process inventory turnover ratio = Cost of manufacture/average work-in-process inventory at cost•FinishedGoodsinventoryturnoverratio=Costofgoodssold/Averagefinishedstock•Stores and spare parts inventory turnover ratio = Stores and Spares consumed/Average stock of stores and •sparesAge of Finished Goods inventory = 365/Finished Goods inventory turnover ratio•Average age of raw material inventory = 365/Raw material inventory turnover ratio•Average age of Work-in-Process inventory = 365/Work-in-Process inventory turnover ratio•Age of Stores and spare parts inventory = 365/Stores and spare parts inventory turnover ratio•Inventory holding period = 365/Inventory turn over ratio•

8.7 Control and ReviewTheefficiencyofinventorycontrolaffectstheflexibilityofthefirm.Thereareseveraltoolsofinventorycontrol.Some of these are:

The economic order quantity which enables determination of optimal size of order to place on the basis of •demand or usage of the inventory.The technique of safety stocks to overcome problems of uncertainty.•The order point formula, which tells us, the optimal point at which to reorder a particular item of inventory.•

Together,thesetoolsprovidethemeansfordetermininganoptimalaveragelevelofinventoryforthefirm.Ratioanalysishasawiderapplicationasameasureofinventorycontrolamongmostmanufacturingfirms.Someoftheimportant ratios are explained below:

Inventory to sales (Total Inventory/Sales for the Period)The ratio explains variations in the level of investment. An increase in inventory levels, substantially beyond that whichmightbeexpectedfromanincreaseinsales,mayreflectsuchphenomenaastheresultofaconsciouspolicyshift to higher stock levels, of unintended accumulation of unsold stocks, and of inventory speculation, or simply stocking in anticipation of an almost certain surge of orders.

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Inventory turnover (Cost of Goods Sold/Average Inventory)The ratio tells us the rapidity with which the inventory is turned over into receivables through sales. Generally, the highertheinventoryturnover,themoreefficientthemanagementofafirmis.However,arelativelyhighinventoryturnover ratio may be the result of too low a level of inventory and frequent stock outs. Therefore, the ratio must be judgedinrelationtothepastandexpectedfutureratiosofthefirmandinrelationsofsimilarfirmsortheindustryaverage or both.

Sales to inventory (Annual Net Sales/Inventory at the End of Fiscal Period)The ratio indicates the volume of sales in relation to the amount of capital invested in inventories. When inventory forafirmislargerinrelationtosales(theconditionwhichcausesittohavealowernetsalestoinventoryratiothanotherfirms)thefirm’srateofreturnislesssinceithasmoreworkingcapitaltiedupininventoriesthanhasthefirmwith a higher ratio.

Inventory to current assets (Total Inventory/Total Current Assets)The ratio indicates the amount of investment in inventory per rupee of current assets investment. Generally an increasingproportionofinventoryisindicativeofinefficientinventorymanagement.Theratiomayalsoindicatethe state of liquidity position of concern. The lower the inventory to current assets lowers the liquidity as compared to other current assets, viz., receivables, cash and marketable securities.

Inventories expressed in terms of number of days sales (Inventory/Sales x 365)Theratioindicatesthesizeofinventoryintermsofnumberofday’ssales.Forthispurposefirstthesalesperdayarecalculated and inventory is divided by the amount of sales per day. The increasing inventory in terms of number of day’s sales may indicate either accumulation of inventory or decline in sales. Inventory for this purpose is assumed toincludefinishedgoodsonly.Whiletheformersituationsignifiespoorinventorymanagement,thelaterindicatesthe poor performance of the marketing department.

Sundry creditors to inventory (Sundry Creditors/Inventory)The ratio reveals the extent to which inventories are procured through credit purchases. Inventories for this purpose are assumed to include raw materials and stores and spares only. If the ratio is less than unity, it reveals that the credit available is lower than the total inventory required. It also explains the extent of inventory procured through cashpurchases.Indirectlyitemphasizestheinventoryfinancingpolicyofthefirm.Iftheratioismorethanone,itexplains that the entire inventory is purchased on credit.

Inventory to net working capital (Inventory/Net Working Capital)Theratioexplainstheamountofinventoryperrupeeofequity/long-termfinancedportionofcurrentassets.Ahigherratio may mean greater amount of net working capital investment in inventory. In order to control each category of inventory, the following ratios can be calculated.

Inventory turnover (Cost of Goods Sold/Average Inventory)The ratio tells us the rapidity with which the inventory is turned over into receivables through sales. Generally, the highertheinventoryturnover,themoreefficientthemanagementofafirmis.However,arelativelyhighinventoryturnover ratio may be the result of too low a level of inventory and frequent stock outs. Therefore, the ratio must be judgedinrelationtothepastandexpectedfutureratiosofthefirmandinrelationsofsimilarfirmsortheindustryaverage or both.

Sales to inventory (Annual Net Sales/Inventory at the End of Fiscal Period)The ratio indicates the volume of sales in relation to the amount of capital invested in inventories. When inventory forafirmislargerinrelationtosales(theconditionwhichcausesittohavealowernetsalestoinventoryratiothanotherfirms)thefirm’srateofreturnislesssinceithasmoreworkingcapitaltiedupininventoriesthanhasthefirmwith a higher ratio.


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Inventory to net working capital (Inventory/Net Working Capital)Theratioexplainstheamountofinventoryperrupeeofequity/long-termfinancedportionofcurrentassets.Ahigherratio may mean greater amount of net working capital investment in inventory.

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SummaryInventories occupy the most strategic position in the structure of working capital of most business •enterprises.The turnover of working capital is largely governed by the turnover of inventory.•Theterm‘inventory’referstothestockpileofproductionafirmisofferingforsaleandthecomponentsthat•make up the production.InventoryconstitutesthemostsignificantpartofcurrentassetsofalargemajorityofcompaniesinIndia.•Inventories consist of raw materials, stores, spares, packing materials, coal, petroleum products, works-in-•progressandfinishedproductsinstockeitheratthefactoryordeposits.The maintenance of inventory means blocking of funds and so it involves the interest and opportunity cost to •thefirm.The excessive level of inventories consumes the funds of business, which cannot be used for any other purpose •and thus involves an opportunity cost.The aim of inventory management thus should be to avoid excessive inventory and inadequate inventory and •to maintain adequate inventory for smooth running of the business operations.Theefficientmanagementandeffectivecontrolofinventorieshelpinachievingbetteroperationalresultsand•reducing investment in working capital.Inventory control refers to a system, which ensures the supply of required quantity and quality of inventory at •the required time and at the same time prevent unnecessary investment in inventories.Theefficiencyofinventorycontrolaffectstheflexibilityofthefirm.Insufficientproceduresmayresultinan•unbalanced inventory.Excessiveinvestmentininventoriesincreasecostandreducesprofits.•The ABC inventory control technique is based on the principle that a small portion of the items may typically •represent the bulk of money value of the total inventory used in the production processThefixationoforderingleveldependsupontwoimportantfactorsviz,themaximumdeliveryperiodandthe•maximum rate of consumption.The re-order quantity depends upon two important factors viz, order costs and inventory carrying costs.•The EOQ refers to the order size that will result in the lowest total of order and carrying costs for an item of •inventory.As a perpetual inventory record, the bin card records the receipt, issues and the balance of every item of stores •only in physical quantities, and not in value.Stocktakingorstockverificationisdonemainlywithaviewtofindingoutwhetherthebookbalancesasrevealed•by the stock records agree with the physical or the ground balance.

ReferencesWild, T., 2002. • Best Practice in Inventory Management., 2nd ed., Butterworth-Heinemann.Silver, E.A., Pyke, D.F. & Peterson, R., 1998.,• Inventory Management and Production Planning and Scheduling., 3rd ed., Wiley.David, V. J., 2003. • Basics of Inventory Management, [pdf] Available at: <http://www.axzopress.com/downloads/pdf/1560523611pv.pdf> [Accessed 2 November 2012].Ajilon., • Inventory Management., [pdf] Available at: <http://www.ajilon.com.au/en-AU/Documents/pdf_brochures/Ajilon_Inventory_Management.pdf> [Accessed 2 November 2012].2010. • Inventory Management, [Video Online] Available at: < http://www.youtube.com/watch?v=9gH0rMpUHVY> [Accessed 2 November 2012].2012.• Effective Inventory Management, [Video Online] Available at: <http://www.youtube.com/watch?v=8qAgaFMts2E> [Accessed 2 November 2012].


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Recommended ReadingMuller, M., 2011. • Essentials of Inventory Management, 2nd ed., AMACOM.Waters, D., 2003. Inventory Control and Management, 2nd ed., Wiley.•Bragg, S. M., 2011. • Inventory Best Practices, 2nd ed., Wiley.

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Self Assessment_______________ occupy the most strategic position in the structure of working capital of most business 1. enterprises.

Inventoriesa. Finished goodsb. Materialsc. Suppliesd.

Goods being manufactured for sale by the business which are ready for sale are called _______________ 2. goods.

materialsa. suppliesb. finishedc. inventoryd.

The_________________maybedefinedasthematerialwhichiseithersaleableinthemarketorusabledirectly3. or indirectly in the manufacturing process.

material goodsa. short inventoryb. finishedgoodsc. inventory goodsd.

Which of the following statement is false?4. Inventories are expandable physical articles held for resale for use in manufacturing a production or for a. consumption in carrying on business activityFirm also manufactures inventory to supplies.b. Inventorydoesnotconstitutethemostsignificantpartofcurrentassetsofalargemajorityofcompaniesinc. India.Inventories consist of raw materials, stores, spares, packing materials, coal, petroleum products, works-in-d. progressandfinishedproductsinstockeitheratthefactoryordeposits.

Which of the following is not one of the characteristic of inventory materials?5. Saleable in the marketa. Directly saleable in the manufacturing process of the businessb. Usable directly in the manufacturing process of the undertakingc. Consumed by the business in its operationd.

Which of the following is not one of the dangers of excessive inventories?6. Theunnecessarytieupofthefirm’sfundsandlossofprofita. To keep down capital investmentb. Excessive carrying costc. The risk of liquidityd.


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Which of the following is one of the most vital phase of material management?7. Investmenta. Inventory controlb. Sales operationc. Control investmentd.

.Thelessefficientistheinventorycontrol,thegreateristhe______________required.8. suppliesa. materialsb. investmentc. profitsd.

Which of the following is also known as ordering level?9. Maximum levela. Minimum levelb. Re- order levelc. Re- order quantityd.

The _____________ refers to the order size that will result in the lowest total of order and carrying costs for 10. an item of inventory.

EOQa. Minimum levelb. Re- order levelc. Re- order quantityd.

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Case Study I

Materials Management

Collinson Latitude developed a multifaceted international campaign to ignite loyalty programmes among aviation and hospitality brands Collinson Latitude is a leading provider of products that deliver incremental revenues for brands and enhancements for rewardandloyaltyprogrammes.Thecompanytargetsbrandsacrossthetravel,financialservices,telecommunicationand retail industries.

Maintaining loyal customers has been a particular concern for airlines and hotel companies in recent years. Both industrieshavebeensignificantlyimpactedbytheinternet,withpricecomparisonwebsitesmakingcustomersshoparound in search of the best deals to the detriment of brand loyalty. At the same time, the global recession has caused difficulttradingconditionsforalltravelbusinesses,inparticularaviationandhospitalityorganisations.

Industry challengesOne of the challenges with loyalty programmes lies in encouraging customers to spend the loyalty currency they have accrued. These transactions are essential to ensure customers maintain close and consistently rewarding relationships with loyalty programme providers.

Encouraging redemption has become even more important with the introduction of ‘IFRIC 13’ in 2008. This international accounting standard requires companies to reflect unspent loyalty currency as a liability in theiraccounts,therebyimpactingcorporatefinancialperformance.

Collinson Latitude wanted to encourage airlines and hotels to tackle the issue of low loyalty redemption and help give brands’ loyalty programmes a new lease of life. In particular, it sought to raise awareness and understanding of its online shopping and rewards programme RewardAll and online redemption platform iRedeem, both of which arespecificallydesignedtomakecustomersmorefrequentusersofloyaltycurrency.

Ongoing successIn January 2012, Collinson Latitude launched a second phase of the campaign broadening the target market with deeper messaging relating to the challenges of retaining customer loyalty.

This second phase provided an opportunity to follow up with contacts made during the initial phase, while at the same time approaching new targets.

(Source: Materials management, [Online] Available at: <http://astraindiainfosystems.com/astraindiainfosystems-materialsmanagement.aspx> [Accessed 20 November 2012]).

Questions

What does material management deal with?1. Answer Material Management provides products that deliver incremental revenues for brands and enhancements for rewardandloyaltyprogrammes.Italsotargetsbrandsacrossthetravel,financialservices,telecommunicationand retail industries.

What are the industrial challenges in the 2. field of material management?Answer One of the challenges with loyalty programmes lies in encouraging customers to spend the loyalty currency they have accrued.


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What did the company do to overcome challenges and succeed?3. Answer In January 2012, Collinson Latitude launched a second phase of the campaign broadening the target market with deeper messaging relating to the challenges of retaining customer loyalty. This second phase provided an opportunity to follow up with contacts made during the initial phase, while at the same time approaching new targets.

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Case Study II

Supply Chain Management

AbstractThe focus of this case study is the supply chain management practices of Dell. Dell has been following its unique ‘directbuild-to-order’salesmodelformorethan20years.CustomerscanplantheirownconfigurationandplaceordersdirectlywiththecompanyviathephoneoritsWebsite.Overtheyears,Dell’ssupplychainefficienciesanddirect sales gave it a competitive advantage.

Can Dell regain its market leader position from HP?In 2006 however, Dell faced several problems. Many customers complained about long delays in supplies. Recall of Sony battery cells in its laptops brought undesirable media hype to the company. Increasing discontent of customers led to a slowdown in sales. Consequently, Dell lost its market leadership to Hewlett-Packard Co. (HP). Industry analysts felt that, with Dell’s competitors also improving their supply chains and matching Dell’s direct model, the company had been losing its competitive edge. Dell will have to bear additional costs with its foray into retail distributiontherebyminimisingitscostadvantage.Besides,profitmarginsofDellwilldropfurthersinceitwillhave to offer incentives to compete with HP in retail stores. Though Dell spruced up its product design and range but Apple is clearly far ahead of it. Many experts feel that such new initiatives will only distract Dell from its supply chain operations.

This case study covers the following issues:Examine and analyze Dell’s Direct model, its basic working, success and future challenges•Typical Working of Dell’s Supply Chain and future supply chain challenges•Highlights Dell’s evolving Supply Chain practices and strategy and steps being taken by it to recapture its •lost market leader position Dell’s market share in U.S. and Worldwide (in Q1 2009) compared to other top PC makersInyear2010,PCsalesareexpectedtorise12.6percent,accordingtoresearchfirmGartner.•

Case Snippets/Update50.00%

40.00%

30.00%

20.00%

10.00%

0.00 HP Dell Acer Apple Toshiba Other

US

Worldwide

(Source:Supply Chain Management, [Online] Available at: <http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html> [Accessed 20 November 2012]).

QuestionsWhat is the main idea behind this case study?1. What are the possibilities of Dell taking over the competition from HP?2. What were the issues faced by Dell?3.


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Case Study III

Walmart: Supply Chain Management

IntroductionOver the past ten years, Walmart has become the world’s largest and arguably most powerful retailer with the highest salespersquarefoot,inventoryturnover,andoperatingprofitofanydiscountretailer.Walmartowesitstransitionfrom regional retailer to global powerhouse largely to changes in and effective management of its supply chain.

Walmart began with the goal to provide customers with the goods they wanted when and where they wanted them. Walmart then focused on developing cost structures that allowed it to offer low everyday pricing. The key to achieving this goal was to make the way the company replenishes inventory the centre piece of its strategy, which relied on a logistics technique known as cross docking. Using cross docking, products are routed from suppliers to Walmart’s warehouses, where they are then shipped to stores without sitting for long periods of time in inventory. ThisstrategyreducedWalmart’scostssignificantlyandtheypassedthosesavingsontotheircustomerswithhighlycompetitive pricing. Walmart then concentrated on developing a more highly structured and advanced supply chain management strategy to exploit and enhance this competitive advantage.

Components of Supply Chain Management (SCM)The main elements of a supply chain include purchasing, operations, distribution, and integration. The supply chain begins with purchasing. Purchasing managers or buyers are typically responsible for determining which products their company will sell, sourcing product suppliers and vendors, and procuring products from vendors at prices and termsthatmeetsprofitabilitygoals.

Supply chain operations focus on demand planning, forecasting, and inventory management. Forecasts estimate customerdemandforaparticularproductduringaspecificperiodoftimebasedonhistoricaldata,externaldriverssuch as upcoming sales and promotions, and any changes in trends or competition. Using demand planning to develop accurate forecasts is critical to effective inventory management. Forecasts are compared to inventory levelstoensurethatdistributioncentreshaveenough,butnottoomuch,inventorytosupplystoreswithasufficientamount of product to meet demand. This allows companies to reduce inventory carrying costs while still meeting customer needs.

Moving the product from warehouses or manufacturing plants to stores and ultimately to customers is the distribution function of the supply chain.

Supplychainintegrationreferstothepracticeofdevelopingacollaborativeworkflowamongalldepartmentsandcomponentsinvolvedinthesupplychaintomaximizeefficienciesandbuildaleansupplychain.

Walmart’s Method of Managing the Supply ChainWalmarthasbeenabletoassumemarketleadershippositionprimarilyduetoitsefficientintegrationofsuppliers,manufacturing, warehousing, and distribution to stores. Its supply chain strategy has four key components: vendor partnerships, cross docking and distribution management, technology, and integration.

Walmart’ssupplychainbeginswithstrategicsourcingtofindproductsatthebestpricefromsupplierswhoareina position to ensure they can meet demand. Walmart establishes strategic partnerships with most of their vendors, offering them the potential for long-term and high volume purchases in exchange for the lowest possible prices.

Suppliers then ship product to Walmart’s distribution centres where the product is cross docked and then delivered to Walmart stores. Cross docking, distribution management, and transportation management keep inventory and transportationcostsdown,reducingtransportationtimeandeliminatinginefficiencies.

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Technology plays a key role in Walmart’s supply chain, serving as the foundation of their supply chain. Walmart has the largest information technology infrastructure of any private company in the world. Its state-of-the-art technology and network design allow Walmart to accurately forecast demand, track and predict inventory levels, create highly efficienttransportationroutes,andmanagecustomerrelationshipsandserviceresponselogistics.

Benefits of Efficient Supply Chain ManagementWal-Mart’s supply chain management strategy has provided the company with several sustainable competitive advantages, including lower product costs, reduced inventory carrying costs, improved in-store variety and selection, and highly competitive pricing for the consumer. This strategy has helped Walmart become a dominant force in a competitive global market. As technology evolves, Walmart continues to focus on innovative processes and systems toimproveitssupplychainandachievegreaterefficiency.

(Source: University of San Francisco, 2012. Wal-Mart’s Keys to Successful Supply Chain Management. [online] Available at: <http://www.usanfranonline.com/wal-mart-successful-supply-chain-management/> [Accessed 21 November, 2012])

QuestionsWhat is the main element of supply chain?1. What is supply chain integration?2. Whatisthebenefitsofefficientsupplychainmanagement?3.


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References2008. • Export Documentation, [Video Online] Available at: <http://www.youtube.com/watch?v=7Uj1rYqMUnY> [Accessed 2 November 2012].2008. • Inventory Management, [Video Online] Available at :< http://www.youtube.com/watch?v=HZPMaTifdBg&playnext=1&list=PL1701A3CA64E40D20&feature=results_video> [Accessed 2 November 2012].2008. • Materials Management, [Video Online] Available at :< http://www.youtube.com/watch?v=qqsrtSeJ3sE> [Accessed 2 November 2012].2008. • Supply Chain Management an Introduction, [Video Online] Available at: <http://www.youtube.com/watch?v=ShdyWIa_GSk> [Accessed 2 November 2012].2008.• Export- Import Classification-Part1,[Video Online] Available at: <http://www.youtube.com/watch?v=MUo8AuI5PvU>[Accessed 2 November 2012].2008.• Globalisation of Market, [Video Online] Available at : <http://www.youtube.com/watch?v=bOlOMGMLack> [Accessed 2 November 2012].2009. • Domestic and International Fringe Benefits, [Video Online] Available at : < http://www.youtube.com/watch?v=SnDCWcVIuMs>[Accessed 2 November 2012].2009. • Supply chain Management, [Video Online] Available at : < http://www.youtube.com/watch?v=KN5OBvezO1k> [Accessed 2 November 2012].2010. • America as Hegemon and International Law, [Video Online] Available at : < http://www.youtube.com/watch?v=pBG37WYUprc>[Accessed 2 November 2012].2010. • Inventory Management, [Video Online] Available at: < http://www.youtube.com/watch?v=9gH0rMpUHVY> [Accessed 2 November 2012].2011. • Principal of Management Introductory Concept [Video Online] Available at: <http://www.youtube.com/watch?v=kIfjPIfYvn4>[Accessed 2 November 2012].2011. • Principles of Management, [Video Online] Available at:<http://www.youtube.com/watch? v=7XGmIir35IE>[Accessed 2 November 2012].2012. • International Finance and Foreign Exchange Market ,[Video Online] Available at: < http://www.youtube.com/watch?v=6iN0legMU-A>[Accessed 2 November 2012]2012. • International Finance and Foreign Exchange Market, [Video Online] Available at: < http://www.youtube.com/watch?v=b_Fm8sW_g98> [Accessed 2 November 2012].2012. • Possibilities in a Global Market, [Video Online] Available at : <http://www.youtube.com/watch?v=AhXafzBeT7c> [Accessed 2 November 2012].2012.• Effective Inventory Management, [Video Online] Available at: <http://www.youtube.com/watch?v=8qAgaFMts2E> [Accessed 2 November 2012].Ajilon., • Inventory Management, [pdf] Available at: <http://www.ajilon.com.au/en-AU/Documents/pdf_brochures/Ajilon_Inventory_Management.pdf> [Accessed 2 November 2012].Belay, S., 2008. • Export-Import Theory, Practices, and Procedures, [pdf] Available at:<http://www.gbv.de/dms/zbw/543230260.pdf>[Accessed 2 November 2012].Benowitz, E. A., 2001. • Principles of Management, 1st ed., Cliffs Notes.Biswajit, N., • Basics of International Marketing [pdf] Available at:< http://www.unescap.org/tid/artnet/mtg/competitivenesss_s7.pdf> [Accessed 2 November 2012].Blanchard, D., 2010. • Supply Chain Management Best Practices., 2nd ed., Wiley.Bozarth,C.andHandfield,R.B.,2012.• Introduction to Operations and Supply Chain Management., 3rd ed., Prentice Hall.Chen, J., 2009.• Essentials of Foreign Exchange Trading (Essentials Series)., 1st ed., Wiley.Chow, D.C. K. & Schoenbaum, T.J., 2010. • International Business Transactions,2nd ed., Aspen Publishers.

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Czinkota, M.R. & Ronkainwn, I. A.,2003. • International Marketing,7th ed., South-Western College Pub. David, V. J., 2003. • Basics of Inventory Management, [pdf] Available at: <http://www.axzopress.com/downloads/pdf/1560523611pv.pdf> [Accessed 2 November 2012].Handfield,R.B.andNicholsJr.E.L.,1998.• Introduction to Supply Chain Management., 1st ed., Prentice Hall.John, M.C., 2003.• International Law of Business Method Patents, [pdf] Available at: <http://www.frbatlanta. org/filelegacydocs/erq403_conley.pdf>[Accessed2November2012].Johnson, T. E., 1997. • Export/Import Procedures and Documentation.,3rd ed., AMACOMKatrin, B., 2010. • Sustainable Materials Management for Europe, [pdf] Available at: <http://www.euractiv.com/sites/all/euractiv/files/SMMfor%20EuropeStudy_0.pdf>[Accessed2November2012].Kouwenberg, Ph, C., 2008. • International Financial Markets [pdf] Available at:< http://www.econ.chula.ac.th/public/members/phornchanok/nifm.pdf > [Accessed 2 November 2012].Lambert, D.M., 2008. • Supply Chain Management: Processes, Partnerships, Performance, 3rd ed., Supply Chain Management Institute.Mukhopadhyay, J. • Supply Chain Management: A Comparative Study Between Large Organised Food and Grocery retailers in India, [pdf] Available at: <http://www.iasms.in/pdf/nationalseminar.pdf> [Accessed 2 November 2012].Nelson, C., 2000. • Import/Export: How to Start an Export/Import Business, [pdf] Available at:< http://www.msbdc.org/publications/exp-imp/ex-im.pdf> [Accessed 2 November 2012].Pamela, S. E., 2007. • Introduction to International Business Law,[pdf] Available at:< http://www.csb.uncw.edu/people/eversp/classes/BLA361/Intl%20Law/PPTS/1.Intro%20to%20Intl%20Law.pdf>[Accessed2November2012].,8th ed., West Publishing.Prathap, O. & Michael, J.B., 2005. • International Marketing Strategies in India: An Application of Mixed Method and Investigation, [pdf] Available at: <http://www.vikalpa.com/pdf/articles/2005/2005_oct_dec_11_23.pdf>[Accessed 2 November 2012].Rajagopal., 2010. • International Marketing.,VTB.Rajesh, C., 2005. • Foreign Exchange Markets,[pdf] Available at: < http://www.isb.edu/faculty/rajeshchakrabarti/FX_Basu.pdf>[Accessed 2 November 2012].Richard, L. D., 2004. • Principles of Management [pdf] Available at: <http://www.swlearning.com/pressroom/cat/08-CED-Mgmt.pdf.> [Accessed 2 November 2012].Schaffer, R., Earle, B. & Agusti, F., 2004. • International Business Law and Its Environment.,6th ed., South-Western College/West.Schramm, D & Newman R., 1986. • Principles of Management [pdf]Availableat:<http://epdfiles.engr.wisc.edu/dmcweb/AA04PrinciplesofManagement.pdf> [Accessed 2 November 2012].Silver, E.A., Pyke, D.F. & Peterson, R., 1998.• Inventory Management and Production Planning and Scheduling., 3rd ed., Wiley.SkyLogistics., 2007. • A New Vision in Materials Management, [pdf] Available at: <http://www.lsgskychefs.com/fileadmin/lsgskychefs/downloads/inf_equip_logistics/lsgsc_skylogistix.pdf>[Accessed2November2012].Terry, G. R., 1953. • Principles of Management, 6th ed., Richard D. Irwin,Inc.Weiss, K. D., 2002. • Building an Import/Export Business, 3rd Ed., Wiley.Weithers, T., 2006. • Foreign Exchange: A Practical Guide to the FX Markets (Wiley Finance)., 1st ed., WileyWild, T., 2002. • Best Practice in Inventory Management., 2nd ed., Butterworth-Heinemann.Zigiaris, S., 2000. • Supply Chain Management, [pdf] Available at: <http://www.urenio.org/tools/en/supply_chain_management.pdf> [Accessed 2 November 2012].


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Recommended ReadingArnold, T.J.R., 1996. • Introduction to Materials Management., Prentice Hall.Arnold, T.J.R., Chapman, S.N. & Clive, L.M., 2011. • Introduction to Materials Management, 7th ed., Prentice Hall.August, R.A., Mayer, D. & Bixby, M., 2008. • International Business Law.,5th ed., Prentice Hall.Baack, D.W., Harris, E.G. & Baack, D.E., 2012. • International Marketing., 1st ed. Sage Publications (CA).Baptise, S., 2012. • The Principles of Management. Kindle edition.Boone, L.E. & Kurtz, D.L., 1984• . Principles of Management, McGraw-Hill Companies.Bozarth,C.&Handfield,R.B.,2007.• Introduction to Operations and Supply Chain Management., 2nd ed., Prentice Hall.Bragg, S.M., 2011. • Inventory Best Practices, 2nd ed., Wiley.Cateora, P., Gilly, M. & Graham, J.,2010. • International Marketing., 15th ed., McGraw-Hill/Irwin.Chopra, S. & Meindl, P., 2009. • Supply Chain Management., 4th ed. Prentice Hall.DiMatteo, L. & Dhooge, L.J., 2005. • International Business Law: A Transactional Approach., 2nd ed., South-Western College/West.Eun, C., 2011. • International Financial Management (Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate), 6th ed., McGraw-Hill/Irw.Hotchkiss, C., 1994. • International Law for Business., Mcgraw-Hill CollegeHugos, M.H., 2011. • Essentials of Supply Chain Management., 3rd ed., Wiley.Johnson, T.E. & Bade, D.L., 2010. • Export/Import Procedures and Documentation., Revised and Updated 4th ed., AMACOM.Johnson, T. E., 2002. • Export/Import Procedures and Documentation (Export/Import Procedures & Documentation).,4th ed., AMACOMLascu, D. N., 2008. • International Marketing, 3rd ed., Atomic Dog.Muller, M., 2011. • Essentials of Inventory Management, 2nd ed., AMACOM.Myerson, P., 2012. • Lean Supply Chain and Logistics Management.,1st ed., McGraw-Hill Professional.Riehl, H., 1977. • Foreign Exchange Markets: A Guide to Foreign Currency Operations,1st ed., McGraw-Hill.Rodriguez, R., & Riehl, H., 1983. • Foreign Exchange And Money Market: Managing Foreign and Domestic Currency Operations.,2nd ed., McGraw-Hill.Terry, G.R. & Rue, L.W. , 1982. • Principles of Management,4th ed., Irwin Professional Pub.Waters, D., 2003. • Inventory Control and Management, 2nd ed., Wiley.Weiss, K. D.,2007.• Building an Import / Export Business.,4th ed.,Wiley

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Self Assessment

Chapter Ia1. c2. b3. d4. b5. d6. c7. a8. d9. a10.

Chapter IIa1. a2. d3. b4. b5. d6. a7. c8. c9. b10.

Chapter IIIb1. d2. c3. d4. a5. b6. c7. d8. d9. d10.

Chapter IVa1. b2. a3. a4. a5. b6. a7. b8. a9. b10.


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Chapter Va1. b2. c3. a4. a5. b6. a7. a8. a9. a10.

Chapter VIa1. b2. c3. c4. d5. d6. c7. d8. b9. a10.

Chapter VIIb1. d2. c3. b4. a5. d6. a7. a8. d9. a10.

Chapter VIIIa1. c2. b3. c4. d5. b6. b7. c8. c9. a10.