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International Supply Chain Management: Free Resources Solutions to the May 2003 examination You can download the May 2003 examination paper from the CIPS website. The solutions below have been prepared by Profex Publishing for the private use of individual students. They may not be reproduced, stored in a retrieval system or transmitted, in any form or by any means, without the prior permission of Profex Publishing. From the optional questions we have selected Questions 2 and 3. 1(a) When trading internationally it is crucial to be aware of the differences in all areas from the values and norms of the people you are doing business with, and the ways in which business is handled The socio-cultural environment consists of those physical, demographic and behavioural differences that influence business activities in different markets. The word that IBG’s purchasing strategy needs to appreciate is ‘different’. The markets you are dealing with are not inferior or superior, they are not doing things wrongly – they are doing things differently. These differences will impact on the areas of culture, customary practice and ethics. Success will come from a knowledge of the country and the people you are dealing with. Many differences will need to be considered such as language differences, levels of education, attitudes, religion and many others and how they impact on the organisation’s business. Each country has its own values and customs – the do’s and don’ts which make up the cultural pattern of the people. IBG need to be able to recognise the similarities which bring customers together but must be sensitive to understand and value cultural differences. To work effectively in a variety of markets they must appreciate the need to be aware of and show respect to other cultures, in both attitude and behaviour. Awareness of culture is an important element for any individual or organisation carrying out business overseas. The impact on IBG’s purchasing strategy will reflect in their desire to centralise parts of the purchasing operation while maintaining close contact with the market. IBG is considering several product opportunities. Food is core to the business but is also one of the most difficult to standardise within a branding strategy. (Even the flavour of Coca-Cola is changed to suit certain individual markets.) Each market has individual tastes and preferences that may mean adapting to local market needs while maintaining the consistency and quality necessary to underpin any successful branding strategy. Customary business practices vary from culture to culture and the proper protocol should be followed when operating overseas. Rules of etiquette are important: what is considered acceptable in your own country may be considered rude elsewhere. There are many social courtesies that accompany business and personal relationships and it is important to understand those that will apply in your business situation. IBG should develop policy and procedures in the areas of customary practice and ethics to ensure consistency throughout the group. Understanding and applying criteria on cultural, ethical and customary practice issues is crucial for the success of Co-Mart, not only within purchasing but across the business as a whole. 1(b) Co-Mart has made a strategic decision to change the nature and structure of its organisation to best meet the needs of the future. A change of this nature will require careful thought and management in order to lead to successful implementation. As with any change management scenario there will be uncertainty within the organisation and Co-Mart should plan to use the best practices of change management: effective and accurate communication, highlighting the future benefits, providing additional training where identified, as examples to ensure the organisation as a whole views the change in a positive light. The role of purchasing is pivotal to the successful outcome. The organisation is strategically developing the role of the purchasing operation in order to gain the benefit of economies of scale in purchasing and to ensure consistency of the product in order to underpin the branding strategy. It is useful to consider a four phase approach developed by Monczka and Trent. The role of purchasing within Co-Mart appears to be between Phase 2 (foreign buying based on need) and Phase 3 (foreign buying as part of a procurement strategy). The organisation uses both approaches to suit current needs: we are told that ‘purchasing is arranged nationally, with limited use of the group’s international purchasing power’. The organisation is now making a strategic commitment to Phase 4 (integration of a global procurement strategy). This will mean a steep learning curve for both the organisation and the role of purchasing within it. The need for organisational change has been recognised at a strategic level and Co-Mart would be looking at existing best practice when developing long-term strategic plans. A development of this scale and scope would not have been reached without considerable research and communication within the organisation. With the role of purchasing being given increased prominence there would be a move to increase the centralised control of the purchasing department. By doing this Co-Mart can achieve economies of scale in purchasing and foster a common attitude to quality. The danger of centralising the purchasing function would be a possible alienation of the national purchasing operations and dilution of their existing links with business. As the question states the need now is ‘to put in place a robust purchasing infrastructure’. A feature of this infrastructure will need to be the blend between centralising the purchasing function and the degree of autonomy to be left with the national purchasing organisations. Any changes of this nature will be a phased process and only developed following discussion and consultation. Changes could be handled on a project basis using inputs from teams across the purchasing skills base of the organisation in order that changes are agreed and seen to be to ‘owned’ not only by the purchasing department but by the entire organisation. This can be achieved by using cross-functional teamwork, A key consideration with a change of this scope is the contribution that can be made by supply chain thinking. It takes many years to develop and refine supply chains. Co-Mart will need to evaluate their existing supply chain network and look for improvements or new suppliers that will meet not only their current but also their future needs. In the exam text it says that suppliers are welcome to submit ideas for joint development and this could be taken outside the product arena to include supply chain issues. The Purchasing Department will see a considerable change in its work and attitude but will also need to link more extensively with other departments within the organisation to gain the full benefits of this change. 1(c) Co-Mart is a diverse retail group that operates over 29 countries and as such will be involved in numerous transactions involving many different currencies. The organisation is exposed to ‘currency risk’, ie the risk of one currency moving against another which may result in either an additional profit or unplanned loss. Co-Mart is in the retail business, not the currency markets, and so should take steps to minimise any possible exchange risk areas. Currency management will be a key area of the organisation’s business with an ongoing requirement for operating capital in a number of currencies. This will require professional management to minimise risk and to attract interest in the short-term money markets. Tools that can be used to reduce identified risks include the range of forward exchange contracts offered by banks. A forward rate is a rate of exchange which is fixed now for a deal that will take place at a fixed date, or between two dates, in the future. A forward exchange contract is a binding contract between a bank and its customer for a purchase or sale of a specified amount of a stated foreign currency at an agreed future date, the rate of exchange being fixed when the contract is made. There are two main types of forward exchange contracts: If the exact date of payment or receipt is known in advance the customer may enter into a fixed forward exchange contract. This type of contract is suitable when the precise date of the transaction is specified. If the date of payment is uncertain an option forward contract may be agreed between the customer and the bank. The customer undertakes to buy or sell currency from or to the bank between the two specified dates. The option means that the date of settlement is optional between the specified dates; the contract itself is not optional and must be fulfilled. An alternative is to use foreign currency options (not to be confused with option forward contracts) which offer a greater degree of flexibility to customers. They are agreements by which a customer can pay a premium (fee) to the bank for the right, but not the obligation, to buy from or sell to the bank a specified amount of money at an agreed rate of exchange. The option can be exercised at the customer’s discretion or can be allowed to lapse (eg if exchange rates have moved in the exporter’s favour) in which case the exporter loses the option premium paid. By using the appropriate contract to suit varied circumstances Co-Mart can reduce their exposure to possible exchange risk. 1(d) With an operation of the scale and scope envisaged by IBG the area of contract management is one that needs to be considered fully. With a more centrally based structure the ability will be there to work on standardising many aspects of contract management and with a greater skills base amongst the staff to address issues. It will be of crucial importance that buyers undertake a contract risk assessment in order to gauge the level of protection required from any contract placed with an overseas buyer. Research on the abilities of the supplier may prove more difficult because of distance, language, access to impartial information and so on, so initially the buyer needs to be sure of the suppliers and their ability to deliver. The negotiation stage needs to be considered carefully. With the cultural and customary practice issues discussed earlier both parties need to be clear on their commitments and responsibilities. Keeping minutes and copies of documentation should be an integral part of the process to ensure that any issues that may cause dispute have an audit trail. Clear procedures relating to evaluation of quotes and tenders should be adopted to avoid any contractual disputes over offer and acceptance in the contract. Co- Mart will have considerable buying power and should insist that the contract is under English law in the case that any disputes reach the courts. This can usually be avoided by using the alternatives to litigation (eg mediation, conciliation, alternative dispute resolution, or arbitration) offered by the International Chamber Of Commerce or the United Nations Commission on International Trade Law (UNCITRAL). (For more detail on this, see page 119 of your study text). The contract should clearly state the ICC route as first choice. Methods of payment to be used should be fully discussed. These include open account (where you trust the buyer to pay in full on the due date), bills of exchange (a more secure method of payment where the buyer either makes payment on sight of the documents or acknowledges the debt in their own country under a term draft), and irrevocable letters of credit (that represent a total guarantee of payment as long as the terms on the letter of credit are complied with in full). Agreeing the appropriate method of payment is crucial in the negotiation phase. Terms of trade (Incoterms 2000) are also discussed in depth in the negotiation phase. Incoterms define where risk and responsibility pass in the delivery of goods and in some cases (eg CIF terms) define when and where documents should be delivered. Incoterms are incorporated in the contract by specifying the appropriate term and place of delivery and are widely accepted and understood in international trade. Issued by the ICC they can offer the range of mediation services etc in case of disputes. Insurance is an issue covered in Incoterms but minimum cover is specified. It may be necessary to specify Cargo Clause A instead of the minimum cover (Cargo Clause C) for the type of goods Co-Mart are involved with. Areas such as liabilities and exclusions should be reviewed for each contract. Consideration should be given to inclusion of a Romalpa clause (retention of title) if supplying. Co-Mart will increasingly be developing a supply chain philosophy in their working relationship with suppliers and customers. As with any supply chain structure driving out waste is crucial. Contracts and contract management should be built on suiting the needs of both parties and the supply chain overall. 2(a) (Question 2 is chosen because it offers easy marks for rote learning. Provided you have studied Incoterms 2000 you can pick up marks here simply for repeating what you have learned. That won’t be enough to get you full marks, but it will certainly move you very close to a comfortable pass mark.) Incoterms 2000 are a set of international terms of trade that define the risks and responsibilities of buyers and sellers in the sale of goods in international markets. They represent a set of internationally agreed and widely accepted trade terms that are used by the vast majority of trading nations. As the question states they are issued by the International Chamber of Commerce based in Paris. They do not form part of any nation’s law but are incorporated into the commercial contact by the inclusion of the agreed term and reference to Incoterms 2000. For example, the contract might specify ‘CIP Wilson Freight, London Heathrow Airport (Incoterms 2000)’. Incoterms are categorised under four main headings according to how the seller makes the goods available to the buyer. E terms (EXW) – on departure from the exporter’s premises F terms (FCA, FOB, FAS) – to a carrier or vessel nominated by the buyer C terms (CFR, CIF, CPT, CIP) – where the seller pays for carriage but without assuming the risk for loss or damage to the goods after shipment D terms (DAF, DES, DEQ, DDU, DDP) – where the seller bears all costs and risks to bring the goods to the country or premises of the buyer. Incoterms 2000 give a clear demarcation line between risk and responsibility in international trade. For example, they clarify who is responsible for import or export clearance, who is responsible for freight and handling charges and where risk passes between buyer and seller. When incorporating Incoterms 2000 into a contract both parties will then have a clear understanding of their obligations under these areas. 2(b) Incoterms is short for International Commercial Terms. They are focused on the commercial issues of the contract involving risk and responsibility as described above. Incoterms clearly indicate areas of risk and responsibility to an agreed point and costs will be calculated to that point. For example, CIP will include cost of goods, freight, insurance (minimum cover unless agreed otherwise) and various ancillary costs (loading, packing etc) that may be applicable. They do not cover considerations regarding the method of payment such as open account, bills of exchange or letters of credit, which is a further commercial consideration based largely on the security required to ensure payment. Incoterms clearly define where risk passes. For example, with CPT risk passes on delivery to the nominated carrier but this applies only to the risks associated with international trade such as loss, damage etc. Incoterms do not cover the transfer of property rights in goods which can be defined in the contract, eg by the inclusion of a Romalpa Clause (retention of title) or by specific wording. In addition Incoterms are not designed to provide relief from obligations, or exemptions from liability in the case of unexpected or unforeseeable events, nor do they provide relief from the consequences of breach of contract, except those relating to the passing of risks and costs when the buyer is in breach of his obligation to accept the goods or to nominate the carrier under an F-term (refer to page 184 of your study text). 2(c) (i) CFR and CIF are among the C terms described in the answer to part (a) where the seller pays for carriage but without assuming the risk for loss or damage to the goods after shipment. CFR has the same point of delivery as for FOB, namely when the goods pass the ship’s rail in the named port of shipment. CFR requires the seller to pay the costs and freight necessary to bring the goods to the named port of destination. The risk of loss or damage to the goods, and other costs relating to events after the goods are delivered on the vessel, are transferred to the buyer when the goods pass over the ship’s rail at the port of shipment. In effect it becomes the buyer’s duty to take out the appropriate level of marine insurance. With CIF the same rules apply as regards point of delivery and payment of costs and freight. The risk of loss or damage to the goods, together with additional costs due to events occurring after time of delivery, is transferred from the seller to the buyer. With CIF it remains the seller’s responsibility to purchase the marine insurance. The rules governing Incoterms state that only minimum cover is required (ie Lloyd’s Cargo Clause C). This is generally considered suitable for commodities so it is often advisable that a requirement for Cargo Clause A is included when the contract is signed to provide ‘all risks except’ cover. (ii) FAS means that the seller delivers when the goods are placed alongside the ship at the named port with the buyer bearing all costs and risks of loss or damage to the goods from that point. FAS was a term introduced under the 1990 revision of Incoterms, primarily as an alternative to FOB where the concept of the ‘ship’s rail’ was seen as unsuitable particularly for container transport. In a revision of the 1990 rules the 2000 amendment of Incoterms now requires the seller to clear the goods for export. FOB is where the seller delivers the goods when they cross the ship’s rail at the named port of shipment. The buyer bears all costs and risks of loss or damage to the goods at that point. The FOB term, as with FAS, requires the seller to clear the goods for export. The term is considered suitable for break-bulk and conventional traffic but is still in common usage for containerised traffic in certain parts of the world. 3 (Question 3 is chosen for much the same reason as Question 2 – provided you have studied the material on pages 74–75 of your study text you can construct a solution easily. As an aid to learning, we have incorporated additional detail in the solution below.) The concept of the International Monetary Fund (IMF) was developed in July 1944 at a United Nations conference held at Bretton Woods, New Hampshire, where representatives of 45 governments agreed on a framework for economic cooperation designed to avoid a repetition of the disastrous economic policies that had contributed to the Depression of the 1930s. The agreements reached on financial assistance and measures to stabilise exchange rates led to the creation of the International Bank for Reconstruction and Development and the IMF. The IMF is a specialised agency of the United Nations that was set up in 1945. With its headquarters in Washington DC it is governed by its almost global membership of 184 countries. Countries that joined the IMF between 1945 and 1971 had their exchange rates ‘pegged’ to the US dollar. Pegged rates could be adjusted but only to correct a ‘fundamental disequilibrium’, usually a balance of payments crisis. Since 1971 members have been free to float their currency as they wish (except pegging to gold). Some countries allow their currency to float freely, some peg to another currency (often the US dollar), others participate in currency blocs. Resources of the IMF come mainly from quota subscriptions applied to members. These quotas broadly reflect the member countries’ size in the world economy with the USA, the world’s largest economy, contributing 17.6% of total quotas and the Seychelles 0.004% (1999 figures). The IMF’s main objectives are as follows. To promote exchange rate stability To maintain orderly exchange rate arrangements To avoid competitive currency devaluations To establish a multilateral system of payments To eliminate exchange restrictions To create stability reserves To serve these objectives the IMF: Monitors economic and financial developments in member countries and puts forward policy advice where appropriate. Lends to member countries with balance of payments problems, not just to provide temporary financing but to assist repatriation of flight capital and to support adjustment and reform policies. The most recent example has been the Argentine government who have agreed in September 2003 to a new aid package allowing it to concentrate on economic recovery without paying back its debts and paying interest only over the next three years. Provides the governments and central banks of its member countries with technical assistance and training in its areas of expertise (an example being the development of treasury systems in Russia and the former Soviet economies). The IMF has been criticised over recent years for the ways its policies have been implemented (concentrate on export, develop import substitution, cut public spending), as being very harsh on the people they are seeking to help. The IMF has responded in a positive manner to its critics and has become more aware of its public perception by making itself more open to scrutiny and by becoming more involved in public debate. In its favour the IMF has presided over a considerable growth in world trade. In September 2000 the IMF set out its vision for the future in which the institution would: Strive to promote sustained non-inflationary economic growth that benefits all the peoples of the world. Be the centre of competence or the stability of the international financial system. Focus on its core macroeconomic and financial areas of responsibility, working in a complementary fashion with other institutions established to safeguard global public goods. Be an open institution, learning from experience and dialogue, and adapting continuously to changing circumstances. Its present day role is one of continuing to develop the financial aspects of the world economy while at the same time increasing its transparency and accountability to the public as a whole.
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