International Supply Chain ManagementDocumentation, payments& commercial terms

Faculty: Prof Amit Singla

Agenda
International commercial terms (Inco-Terms) Methods of payment International documentation Customs clearance Other important operational aspects

Incoterms- An introduction
Clearing goods for export Transporting goods Clearing customs in importing country Terms of trade(responsibilities of importer and exporter) Incoterms in 1936

Objectives of Inco-terms
Which tasks will be performed by the exporter/importer Which activities will be paid for by the exporter/importer When the transfer of responsibility for the goods will take place.

INCOTERMS
Ex-works(EXW) Free Carrier(FCA) FAS(free alongside ship) FOB(Free on Board) CFR(Cost and Freight) CIF(Cost Insurance and freight) DES (Delivery ex-ship) DEQ (Delivery ex-quay) DDU (Delivered duty unpaid) DDP (Delivered duty paid)

Logistics process for understanding Incoterms

Export packing Loading& Inland freight Export clearance

Arrange carrier
Load onto carrier Pay carrier Unload carrier Import Clearance Pay Duty Pay Inland freight

Details of Incoterms
Ex Works:
Exporter Tasks Packaging only Goods at the factory gate Importer tasks Pays for the complete journey Responsible for the transportation from factory gate

For all merchandise and all kinds of transport Written on Invoice: EXW Mumbai, India

Free carrier (FCA Mumbai) For multi modal transportation Delivery either at exporters plant after he loads or at the carriers dock. Here unloaded at the importers expense. Exporter clears for export

Free Alongside Ship (FAS Mumbai)

For Ocean transportation Exporter clears the goods for export, transports them to the port, unloads them and places them alongside the ship. His responsibility ends here. Importer handles port handling charges, loading on to vessel, insurance and transportation

Free on Board (FOB Mumbai) For ocean transport Delivery is on the ship beyond the ships rail Compared to FAS in addition the exporter loads the goods onto the vessel His responsibility ends when goods are loaded on to the ship

Cost& freight(CFR New York) Ocean transportation Delivery by the exporter at the port of departure (FOB point). Exporters responsibility ends here Exporter pre-pays for the shipment. He does not pay the insurance.

Cost, insurance& freight (CIF New York) Ocean transportation Delivery by the exporter at point of departure(FOB point). Exporters responsibility ends here Exporter pre-pays marine cargo insurance.

Delivery Ex-Ship (DES New York) Exporter pays till ship arrives at the destination port. He is responsible for the consignment till this point. He will not unload the goods on to the destination port.

Delivery Ex-Quay (DEQ New York) In addition to DES, exporter is responsible for paying and assuming responsibility till goods are unloaded from the vessel at the destination port.

Delivery duty unpaid(DDU New York) Exporter is responsible till goods are delivered at importers doorstep. The importer only pays for import clearance, i.e the duties.

Delivery duty paid(DDP New York) Exporter pays and is responsible for the consignment till the doorstep of the importer. He bears all costs and responsibility for the entire stretch.

Types of payment
Open account Letter of credit Confirmed L/C, Confirming bank, Associate bank bank Standy by Letters of credit Bill of Exchange Sight Draft(D/P at sight, documents against payment) Bank Guarantees Revolving L/C Documents against acceptance

Percentage of transactions conducted on a L/C(given location of importer)

Name of Country/Region European Union Rest of Europe North America Latin America Middle East percentage 9 20 11 27 52

Asia-pacific
Africa Asia Australia-New Zealand

43
49 46 17

Money Transfers
Within India payment is done by RTGS(real time gross settlement-Rs 30/transac) and NEFT(National electronic funds transfer)-Rs 5/transac The above is for different banks, for same bank, account number is enough-IFSC code is required In case of International transfers, SWIFT code is required, banks that handle foreign treasury operations will have one.

Letter of Credit

Prominent conditions in a L/C

Documents are to presented usually within 21 days from B/L date to the issuing bank. Docs are usually invoice, packing list and Bill of lading. In other cases more documents such as certificate of origin may be required. Shipping date is to be specified in the L/C and has to be adhered to

Executing an order via L/C

First Sales Contract shared by supplier with customer Customer receives the contract-It includes details of jurisdiction,other T&C.After approval he generates purchase order Once supplier approves P.O, he generates proforma invoice, which customer receives who then uses it to prepare L/C draft in consultation with his bank. Once L/C is given to supplier, he approves it and shipping arrangements can begin

..contd
Once the shipment leaves, the exporter collects and gives the documents to his bank who verify and send it to the importers bank which again verifies it and if everything is in order makes the payment to the exporters bank irrespective of the status of the shipment.

Confirmed letter of credit

Here the issuing bank has an associate bank in the foreign country from where the export takes place and where the exporter is based. This foreign associate bank transfers the money to the exporter on receiving the documents from exporter. This bank then collects the amount from the importers bank on its own. The transaction is faster and happens when exporting party is unsure about the solvency of the bank in the importing country

Revolving L/C
In L/C usually the money that is to be paid is blocked in importers account or he needs to show collateral For multiple shipments over say a year, revolving L/C can be used. In this case terms& conditions are broadly the same for all consignments The revolving L/C is for one shipment at a time or for a period at a time(say one month) or for a certain amount at a time(say $1 million). After this period or amount is exhausted the L/C becomes active again when the next batch is going through. In this case only the said amount is blocked unlike in a L/C for the whole year in which case the entire amount for the year would have been blocked.

Leading causes of errors in L/Cs (as a % of all discrepancies)

Discrepancy percentage

Inconsistent data
Absence of documents Late presentation Carrier not named Incorrect goods presentation Incorrect data Incorrect BOL endorsement Incorrect insurance cover

25.1
8.4 7.9 8.8 4.1 7.1 3.8 1.8

Standby L/C
Here transaction/s are carried out without involving banks. The exporter sends shipment and the documents to importer who pays into exporters bank a/c In case the importer fails to pay, exporter can activate a standby L/C with the importers bank by showing the documents and then the bank will make the payment to the importer

Bank guarantee (B.G)

Here bank assumes guarantee for the exporter or

importer based on non-performance Unlike L/C where payment is made based on performance, in case of B.G it is based on nonperformance by either party. If exporter fails to ship, importer gets paid and if importer fails to pay, importers bank will pay exporter B.G is always a percentage of the value of the transaction. It is based on the partys creditworthiness. Here the bank guarantees partial payment without insisting on collateral from either party.

Open account transaction

Here transaction/s are carried out without involving banks. The exporter sends shipment and the documents to importer who pays into exporters bank a/c either immediately or after the credit period.

Bill of exchange
A draft drawn up by the beneficiary(exporter) either in the name of the bank or the importer where they accept their debt towards the exporter. It is a legal document in the country where it is accepted. It can also be drawn by a bank against say the importer when the bank has the title to the goods and transfers it to the importer and will take the money only after say a certain credit period.

Usance L/C
Suppose the L/C is for a 30-60 days credit and the payment is not at sight in that case the bank will usually give the title to the importer only after getting the importer to accept a debt towards the bank so the bank gets paid after the credit period expires. After accepting the debt, the bank may make the payment to the exporters bank immediately or depending on the agreement but the importers account will be debited only after the credit period.

Bill of Lading (B/L)

It is a document given by the carrier(shipping line) to the exporter. It is a receipt that the goods have been received. It is a contract that the goods will be delivered safely to the destination It is a title to the goods. The importer cannot clear the goods without this document. If the goods are in order the carrier gives a clean B/L(L/Cs ask for this), otherwise it is called a soiled B/L

Invoice& packing list

Invoice is issued by the exporter and gives details of the transaction like buyer, their address, incoterms, price, qty etc. Packing list lists details about the product/ package which is to be delivered. For eghow it is packed, dimensions of the package etc.

Certificate of free sale,end use& consular invoice

Certificate of free sale is when the exporting country is asked to provide evidence that the goods it is exporting can be legally sold in the exporting country. Certificate of end use is issued by the importing country to certify that the imported product will be only used for the purposes intended or as specified and will not be diverted for other uses. Consular invoice is when an exporting country needs to get the invoice on the importing countrys document, else the importer cannot clear it in the importing country. It is obtained through the importing countrys consulate in the exporters country.

Nostro accounts
Nostro acount is when a local bank uses a reference and opens an account in a foreign country in a foreign bank in foreign currency without having a physical presence in that country. For eg. A trading company in India could open an account in a canadian bank in canada in canadian dollars without having a physical presence there. It could now import from canada and pay the exporter there in canadian dollars. It thus minimizes exchange risk as well as conversion cost from one currency to another.

Trans-shipment
When a consignment transits through another port without clearing the customs in that transit port it is called transshipment Can be useful if one wants to avoid shipment of origin, in which case another B/L can be issued from the transit port.

Certificate of origin
Issue by the chamber of commerce in a particular country specifying that the product has its origin in that country

Documents against payment

Here the banks are involved but only as intermediaries and they do not assume responsibility of any payment if tasks are performed like in an L/C. The exporters bank delivers the documents to the importers bank which hands over the documents and title only when it gets the payment from the importer.

Documents against acceptance This is similar to the documents against payment except that here there is a credit period involved between the parties and hence the importers bank will handover the documents and title to the goods only after getting an acceptance(bill of exchange) from the importer that money will be paid to the bank after the credit period.

THANKS