Trade knowledge / Time is Money: Analyzing the Movement of International Transactions
Date: 2013-08-05
Time is Money: Analyzing the Movement of International Transactions
One of the critical issues involved in the international trade in goods is the timely movement of cargo across international boundaries. This is an important aspect for any business, as time is money.
A slow delivery increases the price of the goods because it decreases stock turns. A slow delivery also means additional costs in relation to the running of the overall business. Let us consider the following:
I buy products from a foreign source, and it takes 90 days for the supplies to reach me.
Two questions come from this simple one line statement:
What is the payment period?
What is the impact on the physical business resource requirements and cash flows?
The answers to these questions are not easy, as we must consider various aspects of the business operations and its financing. More questions and answers need to be provided. The answers are also interrelated as we will see below.
The payment period offered from a seller to a buyer is commonly referred to as supplier credit. The seller essentially funds the transactions by giving the buyer some time to pay. The longer the payment period the greater the opportunity for cash flows. The buyer receives the stock from the foreign supplier and sells this on the domestic market on less generous terms than the seller offers, thereby getting payment from domestic customers before they have to pay the foreign supplier. This way the seller funds the activities of the buyer by virtue of the extended credit terms—the seller acts as a bank. The buyer may be expected to pay a premium for extended credit terms, but this may be better than seeking a loan from the bank. Of course, the seller has to be comfortable enough to offer extended payment terms to the buyer—a credit risk consideration for the seller. Credit risk and choice of payment methods discussions are beyond the scope of this article.
The cash flow situation described above will only work well when product flows are efficient. Taking the 90 day product supply example given above, a buyer would need to be trading on terms that are probably 150 days to achieve the cash flow described above and work exclusively on supplier credit. This has been calculated on the basis of 90 days transit, 30 days to sell stock and 30 days to get payment from local customers, just in time to pay the supplier. Of course, if transit times are shorter, then a quicker payment period will achieve the same result.
One of the big problems with transit times is that these eat into the cash flow, but this is not all. The other big problem is the need to keep larger inventory holdings because supply lines are slower, and buyers do not want to have a stock-out for fear that customers will go to the competition instead. Larger stockholdings increase the cost of doing business. This is because the more stock you have, the greater the chances of obsolescence, which is easy to imagine with electronic products such as computers and phones. However, other items also have a short lifespan. Fashion, for example, is a perishable item indeed. I have it on good authority that no self-respecting woman shops to buy last season's fashion!
Resourcing large inventory holdings is expensive because the stock has to be held somewhere. Does the buyer need a bigger warehouse? Or is the stockholding warehousing outsourced—a 3PL (3rd party logistics provider) perhaps? Are the goods stored in a customs controlled warehouse and only imported (entered for home consumption) as required, thus delaying the payment of duties and taxes until orders are in hand? This is another cash flow consideration. Warehousing is not cheap, and staffing warehouses is equally not cheap.
The whole point of the discussion so far has really been a focus on reducing transit times and how one might operate with a just-in-time approach to their business to reduce costs. This is not an easy task.
In a perfect world we may be able to have absolute precision on delivery times, but we all know we do not live in a perfect world, so how do we estimate delivery periods? Again this is not easy and it depends on the circumstances, but we can consider a number of issues, to get an idea.
Let's look at the Incoterms 2000—the international delivery terms. Although there are 13 terms, it seems that sellers and buyers only use about half of them. Basically, neither sellers nor buyers are interested in becoming involved in export and import customs clearance processes in a foreign country, so the use of EXW (Ex-Works) and DDP (Delivered Duty Paid) are not favoured. Other terms that have limited application include: DAF (Delivered at Frontier), because it cannot be used for air or ocean movements, and DES (Delivered Ex-Ship), as this is commonly used for bulk cargoes such as oil, minerals and grains.
The popular terms are FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost Insurance and Freight), but they are for sea carriage only and not suited to container traffic. Also popular are FCA (Free Carrier), CPT (Carriage Paid to), and CIP (Carriage and Insurance Paid To), and these may be used for any mode of transport including multimodal transport. Under these terms, the seller organises the movements of the goods and contracts for carriage (even in FOB this happens in practice regardless of what the Incoterms 2000 say). The buyer is advised of transport details and an estimation of vessel arrival date may be projected. But what happens when the material arrives at the buyer's shore, and it has to be customs cleared? How do we estimate the time taken for this critical step? How can we take a benchmark position to estimate the average clearance times? This may be important to identify bottlenecks and delays, and the more often these occur, the more time should be taken to analyse these with a view to finding solutions.
One way to get assistance in this area is to look at Time Release Study (TRS) data that is available from customs authorities for imported consignments. Not all countries have this information available, but it is available in a number of countries such as Australia, Japan and the United States. Actually, TRS is attributed to initiatives from Japan and the United States from the early 1990s, and we have to be thankful to those authorities for having devised this measurement. The TRS has been claimed to be one of the most important trade facilitation tools. So how does it work?
The customs authorities measure the time taken to release goods from their control from the time of arrival. The data is released so that each stage of the customs clearance process may be analysed. Usually this measurement is expressed in number of days or fractions thereof. Data from the TRS should be able to identify problematic issues. For example, in a recent TRS in Australia, there was a significant proportion of consignments that were delayed because customs formalities could not be completed. These formalities related to the lodgement and processing of an entry, and it is more than likely that the deficiencies were documentary, that is, the supplier neglected to provide certain information or documentation to allow the prompt and efficient discharge of the goods from customs control.
Once the buyer is able to ascertain the average border control processing time, a comparison can be made against the actual delivery time of the goods post arrival. For example, if the average customs clearance times are three days and the buyer only receives consignments five days later, the buyer would be entitled to ask, "Why the delay?" Is the service provider performing at a less than desirable level? Or was the consignment really held up in the process, maybe for a good reason.
The buyer should simply not accept or be happy with, "Oh look, you know what Customs is like." There should be no room for the blame game in your business. Consignments should reach the buyer more or less in accordance with the general average, and if they do not, there is cause for investigating the reasons and taking proactive action. If documentation is the problem, the solution may simply be to tell the supplier exactly what is required ahead of shipping. But, if the problem lies on the domestic side, a review of service providers may well be in order.
Its is recommended that the buyer familiarise themselves with the TRS data and develop and monitor service level agreements with barrier clearance service providers to ensure that product transfer times are as lean as possible and that stockholdings are kept to a minimum. This will reduce inventory holding costs and stock obsolescence, resulting in a lowering of costs and an increase in profitability.
( linda )11 Jan,2012
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