Import and export are very essential components of international trade. On one hand, import involves bringing in goods or services from a foreign country to a domestic country. On the other hand, export involves shipping goods from one country to another for future sale or trade. This form of trade is particularly essential for the benefits it provides to the parties involved. However, the trade does not exist without risks. There are usually a myriad of risks, which if not adequately dealt with the benefits cannot be achieved. Besides the benefits and the underlying risks, there are usually other essential details involved and these include; the different quotation methods and the letter of credits. In this research, case study analysis was used as the sole method of analyzing the data collected. The findings were that through engaging in international trade usually presents such benefits as increased sales, increased profits, reduced risk balanced growth and lower unit costs. On risks, the most prevalent risks pertinent to this form of trade included credit risks, transfer risk, transport and logistics risks, exchange risks and operational risks. In addition to this, it was established that while there are several quoting methods used in exporting,
FOP is the most preferable especially when attempting to export to a first time customer. Further, it was established that a letter of credit plays a major role in this trade. However, this role can be inhibited by the disadvantages but on collect dealings, these disadvantages can be curbed successfully. The recommendations are that the company being studied should go ahead with the proposed dealing but ensure that it approaches it cautiously.
International Business Assessment
Introduction
Located in New Zealand, Kiwi Cheese Ltd has been the leading cheese manufacturer and exporter for approximately 13 years. The company exports to Fiji and Malaysia and has the intention to start exporting to India following the emergence of a market for cheese. Kiwi Cheese Ltd specializes particularly in the cheese manufacturing and exporting industry and has a turnover of $10,000,000 NZD. Inferring from its website, the export sales has a turnover of about 10%. Cheese is among the preferred food products not only in New Zealand but in various parts of the world, most particularly in Fiji and Malaysia. However, other upcoming markets such as India need a reliable source of cheese and considering these markets, the existence of Kiwi Cheese Ltd is very fundamental and critical.
Benefits to Kiwi Cheese for us to Export
Whether in an established market such as Fiji and Malaysia or in an emerging market such as India, exporting cheese is a particularly fundamental idea for Kiwi Cheese Ltd. To be precise, the export business that the company has engaged in presents an array of benefits to the company.
Increased Sales
Foremost, through export, Kiwi Cheese Ltd experiences increased sales. According to Rivera-Batiz and Oliva (2003), exporting is one of the core ways in which the sales potential is increased. Therefore, it expands the pie that a company usually earns its revenue from. In relation to the international markets, the New Zealand market for cheese is smaller, and owing to the fact that Kiwi Cheese Ltd is a relatively large company, the New Zealand cheese market may not be adequate. Therefore, to increase its sales, it is necessary that it targets international markets. Increased sales usually have a great impact on the profitability and the productivity of the Kiwi Cheese Ltd and, at the same time, result into increased perceived size and stature of the company (Kerr & Gaisford, 2008). Ultimately, the company's competitive position increases in relation to the similar sized organizations.
Increased Profits
Another benefit that Kiwi Cheese Ltd enjoys from engaging in export business is that its profits are enhanced. In his research, Lutz (1994) identified that orders placed on an international front are usually significantly larger as compared to those on the domestic one. The essence of this fact is that importers basically order by containers rather than pallet, and this has the potential to increase the profitability of Kiwi Cheese Ltd in a significant manner (Bishop, 2004).
Reduced Risk and Balanced Growth
Moreover, Kiwi Cheese Ltd experiences reduced risk and balanced growth by opting to import cheese. In their book, Kerr and Gaisford (2008) mentioned that it is extremely risky when an organization decides to operate domestically alone. On the other hand, exporting to a variety of diverse oversea markets can be very essential in reducing risks that Kiwi Cheese Ltd may be exposed to particularly considering fluctuations, both in the local and foreign business cycles. At any one time, some markets will be experiencing different rates of growth. By opting to export in all of these markets, the risk of low rate of growth in one of these markets will be offset by the high rate of growth in other markets. As a result, the overall portfolio of growth becomes balanced (Rivera-Batiz&Oliva, 2003).
Lower Unit Costs
A further benefit that the company experiences is lower unit costs. Exportation has allowed Kiwi Cheese Ltd to put the idle capacity to operation. When this is achieved, it implies that the company is utilizing its plant, machines, and staff in a more efficient manner. In addition, since Kiwi Cheese Ltd sell more products without necessarily having to increase the total costs to the same extent, the unit costs of the company are lowered, and this leads to increased overall productivity operation. According to Hinkelman and Putzi (2005), the presence of lower unit costs hand a product a competitive power both in the local and overseas market and, at the same time, contributes towards the increasing profitability of an organization.
Risks to Kiwi Cheese To Export and Risk Management Strategies Can Be Used To Eliminate, Minimize or Retain These Risks
While the company enjoys significant benefits from its cheese export business, there isa variety of risks encountered. These risks include credit, transport, exchange, operational and transfer risks. If an organization renders these risks as unimportant, the survival of the business in the export industry may be put in jeopardy and may ultimately succumb. Therefore, it is necessary to establish sufficient risk management measures to eliminate, mitigate or retain these risks.
Credit Risks
The credit risks mainly arise due to the larger distances as well as the alien environments that characterize export trade. Therefore, it is usually extremely difficult for Kiwi Cheese Ltd to verify the creditworthiness in addition to the reputation of the person or the group importing. In his research, Davis (2002) identified that where there is inadequate or negligible information regarding the creditworthiness of the importer, it follows that the non-payment, late payment, and straightforward risks escalate. Going into India, Kiwi Cheese Ltd may face this risk.
To mitigate this risk, Kiwi Cheese Ltd will have to consider adopting the use of documentary credit or adopting a "without recourse export financing". Alternatively, the company can decide to transfer the risk to a more acceptable party, who will assume the responsibility if the risk actually occurs.
Transfer Risk
A transfer risk is represented by the restriction of the government regulations to the ability of an exporter to receive payments or even exchange foreign currency. In almost every country, the transfer of money as well as the conversion of foreign currency receipt is a subject to regulation. There are usually tendencies of unexpected changes related to the transfer and conversion, especially between entering and settling a contract. Such a scenario cannot be prevented as Kiwi Cheese Ltd decides to provide goods for the needs of the importer in India. To manage this risk, Kiwi Cheese Ltd will be prompted to consult for specialist knowledge of India, and this basically comes from the New Zealand Trade Commission. Besides, Kiwi Cheese Ltd will be required to insure against this particular form of a risk, and the rational direction is to consult the export credit insurance agencies.
Transport and Logistic Risks
The export business entails the movement of goods from one point to a foreign one, and in the process, the goods are subjected to a variety of hazards. To be precise, the shipment can be stolen, damaged, and there is also a potential of the consignment not arriving at the destination (Hinkelman&Putzi, 2005). To ensure that this risk is reduced, it is necessary that Kiwi Cheese Ltd understands each and every aspect related to international logistics, and particularly the carriage contract. The company and the importer in India will have to understand their legal rights to claim against the companies to be handed the responsibility of carrying the cheese consignment.
Exchange Risks
This is a risk posed by an exposure to changes, which are unexpected in nature, in the exchange rate between the exporting and the importing currencies. In the case of Kiwi Cheese Ltd, it is the change in the exchange rate between the Indian Rupee and the New Zealand's Dollar. To ensure that the effect of the risk is minimized or eliminated completely, Kiwi Cheese Ltd will have to adopt currency option exchange risk mitigation strategy. The standard option will give Kiwi Cheese Ltd the right, however not the obligation, not only to use but also to sell foreign exchange in future at an exchange rate that has been pre-determined. This mitigation strategy will allow Kiwi Cheese Ltd to benefit from the favorable movements in the exchange rates between the two currencies.
Operational Risks
Operational risks usually define the risk of direct or indirect loss that arises from insufficient or failed internal procedures, systems, people or even from the external events. In particular, the operational risks characterizing export trade involves issues pertinent to processing, valuation, and pricing. Such issues originate from such situations as disasters or a change in the financial details of the trade among other causes.
To manage these risks, compliance is a key aspect. Therefore, Kiwi Cheese Ltd must ensure that it always undertakes the due diligence in order to guarantee that the company is meeting each and every regulatory obligation attached to the export trade. Bishop (2004) advocates for mandatory bank processes, anti-money laundering as well as Foreign Asset and Control as the most appropriate means by which transactions can be safeguarded from fraud and misappropriations.
The Quoting Method That Kiwi Cheese Ltd Should Use For Shipping/Freight for the First Order
For a successful as well as an ongoing export business, Hinkelman and Putzi (2005) claims that the right pricing and the manner in which a person or a group of people provide quotes for the goods and services are essentially crucial. Usually, quoting methods are represented by the incoterms used. To determine which incoterm is the most appropriate for Kiwi Cheese Ltd to use for its new Indian customer, it is necessary to explore the various methods regarding their advantages and disadvantages. To be precise, the choice of the incoterm is based on the advantage and the disadvantage of each.
FOB
FOB represents Free On Board or Freight on Board depending on the particular usage. Under the incoterm standards, the FOB abbreviates "Free On Board" and should be used in conjunction with the port of loading. Therefore, as an incoterm, FOB implies that the exporter will pay the transportation costs of the products to the port of shipment as well as the loading fees. On the other hand, the importer will have to meet the marine freight costs, the insurance costs, and the transportation costs from the arrival at the port to the importer's decisions.
This method is essential and the best when exporting to a first time customer. According to Bishop (2004), this method superseded all other due to its two critical advantages. The seller usually has a better control of both the freight and the costs associated with the freight. The cost component is critically essential, and the exporter will be better placed in achieving more competitive freight rate. In addition, where the exporter uses his or her freight forwarder, more accurate information regarding the importer is obtained in a timely manner. Moreover, the personal forwarder can assist the exporter where a problem occurs. In this way, the exporter is assured that their freight partner is working in a way that satisfies the exporter's interests and not the interest of the suppliers.
CIF
In this method, the exporter clears the products past the rail of the ship at the port where shipment is done. Moreover, the exporter is usually placed with the responsibility of settling the costs of the transport to the named port of destination. However, where the goods have passed the rail of the ship at the shipment port, the responsibility for the risk of loss or any form of damage and additional transport costs shifts to the importer (Hinkelman&Putzi, 2005).
With an exception of FOB, this method is beneficial over the other methods. This is particularly so when the exporter is involved for the first time in the international trade, and they have little volume of shipment. Kiwi Cheese Ltd is not a first time case, and it would be illogical to assume this particular method (Bishop, 2004).
The main drawback of this method is that as an organization increases the number of oversea supplies as well as the overall volume of the freight, the CIF shipment grows to become difficult. Therefore, Kaynak and Kothavi (2004) indicate that the higher is the number of CIF shipments, the more problems of obtaining accurate shipment information occur. This further renders the method as inappropriate in relation to the FOB.
CIP
This abbreviates Carriage and Insurance Paid To. This term is usually applied where multimodal shipment is used. Owing to the fact that it relies on the insurance of the carrier, the exporter is only necessitated to purchase minimum coverage. When the agreement sets in force, the partners or the freight forwarders usually act as carriers, and the importer's insurance becomes effective (Kerr &Gaisford, 2008).
FOP is the most preferable especially when attempting to export to a first time customer. Further, it was established that a letter of credit plays a major role in this trade. However, this role can be inhibited by the disadvantages but on collect dealings, these disadvantages can be curbed successfully. The recommendations are that the company being studied should go ahead with the proposed dealing but ensure that it approaches it cautiously.
International Business Assessment
Introduction
Located in New Zealand, Kiwi Cheese Ltd has been the leading cheese manufacturer and exporter for approximately 13 years. The company exports to Fiji and Malaysia and has the intention to start exporting to India following the emergence of a market for cheese. Kiwi Cheese Ltd specializes particularly in the cheese manufacturing and exporting industry and has a turnover of $10,000,000 NZD. Inferring from its website, the export sales has a turnover of about 10%. Cheese is among the preferred food products not only in New Zealand but in various parts of the world, most particularly in Fiji and Malaysia. However, other upcoming markets such as India need a reliable source of cheese and considering these markets, the existence of Kiwi Cheese Ltd is very fundamental and critical.
Benefits to Kiwi Cheese for us to Export
Whether in an established market such as Fiji and Malaysia or in an emerging market such as India, exporting cheese is a particularly fundamental idea for Kiwi Cheese Ltd. To be precise, the export business that the company has engaged in presents an array of benefits to the company.
Increased Sales
Foremost, through export, Kiwi Cheese Ltd experiences increased sales. According to Rivera-Batiz and Oliva (2003), exporting is one of the core ways in which the sales potential is increased. Therefore, it expands the pie that a company usually earns its revenue from. In relation to the international markets, the New Zealand market for cheese is smaller, and owing to the fact that Kiwi Cheese Ltd is a relatively large company, the New Zealand cheese market may not be adequate. Therefore, to increase its sales, it is necessary that it targets international markets. Increased sales usually have a great impact on the profitability and the productivity of the Kiwi Cheese Ltd and, at the same time, result into increased perceived size and stature of the company (Kerr & Gaisford, 2008). Ultimately, the company's competitive position increases in relation to the similar sized organizations.
Increased Profits
Another benefit that Kiwi Cheese Ltd enjoys from engaging in export business is that its profits are enhanced. In his research, Lutz (1994) identified that orders placed on an international front are usually significantly larger as compared to those on the domestic one. The essence of this fact is that importers basically order by containers rather than pallet, and this has the potential to increase the profitability of Kiwi Cheese Ltd in a significant manner (Bishop, 2004).
Reduced Risk and Balanced Growth
Moreover, Kiwi Cheese Ltd experiences reduced risk and balanced growth by opting to import cheese. In their book, Kerr and Gaisford (2008) mentioned that it is extremely risky when an organization decides to operate domestically alone. On the other hand, exporting to a variety of diverse oversea markets can be very essential in reducing risks that Kiwi Cheese Ltd may be exposed to particularly considering fluctuations, both in the local and foreign business cycles. At any one time, some markets will be experiencing different rates of growth. By opting to export in all of these markets, the risk of low rate of growth in one of these markets will be offset by the high rate of growth in other markets. As a result, the overall portfolio of growth becomes balanced (Rivera-Batiz&Oliva, 2003).
Lower Unit Costs
A further benefit that the company experiences is lower unit costs. Exportation has allowed Kiwi Cheese Ltd to put the idle capacity to operation. When this is achieved, it implies that the company is utilizing its plant, machines, and staff in a more efficient manner. In addition, since Kiwi Cheese Ltd sell more products without necessarily having to increase the total costs to the same extent, the unit costs of the company are lowered, and this leads to increased overall productivity operation. According to Hinkelman and Putzi (2005), the presence of lower unit costs hand a product a competitive power both in the local and overseas market and, at the same time, contributes towards the increasing profitability of an organization.
Risks to Kiwi Cheese To Export and Risk Management Strategies Can Be Used To Eliminate, Minimize or Retain These Risks
While the company enjoys significant benefits from its cheese export business, there isa variety of risks encountered. These risks include credit, transport, exchange, operational and transfer risks. If an organization renders these risks as unimportant, the survival of the business in the export industry may be put in jeopardy and may ultimately succumb. Therefore, it is necessary to establish sufficient risk management measures to eliminate, mitigate or retain these risks.
Credit Risks
The credit risks mainly arise due to the larger distances as well as the alien environments that characterize export trade. Therefore, it is usually extremely difficult for Kiwi Cheese Ltd to verify the creditworthiness in addition to the reputation of the person or the group importing. In his research, Davis (2002) identified that where there is inadequate or negligible information regarding the creditworthiness of the importer, it follows that the non-payment, late payment, and straightforward risks escalate. Going into India, Kiwi Cheese Ltd may face this risk.
To mitigate this risk, Kiwi Cheese Ltd will have to consider adopting the use of documentary credit or adopting a "without recourse export financing". Alternatively, the company can decide to transfer the risk to a more acceptable party, who will assume the responsibility if the risk actually occurs.
Transfer Risk
A transfer risk is represented by the restriction of the government regulations to the ability of an exporter to receive payments or even exchange foreign currency. In almost every country, the transfer of money as well as the conversion of foreign currency receipt is a subject to regulation. There are usually tendencies of unexpected changes related to the transfer and conversion, especially between entering and settling a contract. Such a scenario cannot be prevented as Kiwi Cheese Ltd decides to provide goods for the needs of the importer in India. To manage this risk, Kiwi Cheese Ltd will be prompted to consult for specialist knowledge of India, and this basically comes from the New Zealand Trade Commission. Besides, Kiwi Cheese Ltd will be required to insure against this particular form of a risk, and the rational direction is to consult the export credit insurance agencies.
Transport and Logistic Risks
The export business entails the movement of goods from one point to a foreign one, and in the process, the goods are subjected to a variety of hazards. To be precise, the shipment can be stolen, damaged, and there is also a potential of the consignment not arriving at the destination (Hinkelman&Putzi, 2005). To ensure that this risk is reduced, it is necessary that Kiwi Cheese Ltd understands each and every aspect related to international logistics, and particularly the carriage contract. The company and the importer in India will have to understand their legal rights to claim against the companies to be handed the responsibility of carrying the cheese consignment.
Exchange Risks
This is a risk posed by an exposure to changes, which are unexpected in nature, in the exchange rate between the exporting and the importing currencies. In the case of Kiwi Cheese Ltd, it is the change in the exchange rate between the Indian Rupee and the New Zealand's Dollar. To ensure that the effect of the risk is minimized or eliminated completely, Kiwi Cheese Ltd will have to adopt currency option exchange risk mitigation strategy. The standard option will give Kiwi Cheese Ltd the right, however not the obligation, not only to use but also to sell foreign exchange in future at an exchange rate that has been pre-determined. This mitigation strategy will allow Kiwi Cheese Ltd to benefit from the favorable movements in the exchange rates between the two currencies.
Operational Risks
Operational risks usually define the risk of direct or indirect loss that arises from insufficient or failed internal procedures, systems, people or even from the external events. In particular, the operational risks characterizing export trade involves issues pertinent to processing, valuation, and pricing. Such issues originate from such situations as disasters or a change in the financial details of the trade among other causes.
To manage these risks, compliance is a key aspect. Therefore, Kiwi Cheese Ltd must ensure that it always undertakes the due diligence in order to guarantee that the company is meeting each and every regulatory obligation attached to the export trade. Bishop (2004) advocates for mandatory bank processes, anti-money laundering as well as Foreign Asset and Control as the most appropriate means by which transactions can be safeguarded from fraud and misappropriations.
The Quoting Method That Kiwi Cheese Ltd Should Use For Shipping/Freight for the First Order
For a successful as well as an ongoing export business, Hinkelman and Putzi (2005) claims that the right pricing and the manner in which a person or a group of people provide quotes for the goods and services are essentially crucial. Usually, quoting methods are represented by the incoterms used. To determine which incoterm is the most appropriate for Kiwi Cheese Ltd to use for its new Indian customer, it is necessary to explore the various methods regarding their advantages and disadvantages. To be precise, the choice of the incoterm is based on the advantage and the disadvantage of each.
FOB
FOB represents Free On Board or Freight on Board depending on the particular usage. Under the incoterm standards, the FOB abbreviates "Free On Board" and should be used in conjunction with the port of loading. Therefore, as an incoterm, FOB implies that the exporter will pay the transportation costs of the products to the port of shipment as well as the loading fees. On the other hand, the importer will have to meet the marine freight costs, the insurance costs, and the transportation costs from the arrival at the port to the importer's decisions.
This method is essential and the best when exporting to a first time customer. According to Bishop (2004), this method superseded all other due to its two critical advantages. The seller usually has a better control of both the freight and the costs associated with the freight. The cost component is critically essential, and the exporter will be better placed in achieving more competitive freight rate. In addition, where the exporter uses his or her freight forwarder, more accurate information regarding the importer is obtained in a timely manner. Moreover, the personal forwarder can assist the exporter where a problem occurs. In this way, the exporter is assured that their freight partner is working in a way that satisfies the exporter's interests and not the interest of the suppliers.
CIF
In this method, the exporter clears the products past the rail of the ship at the port where shipment is done. Moreover, the exporter is usually placed with the responsibility of settling the costs of the transport to the named port of destination. However, where the goods have passed the rail of the ship at the shipment port, the responsibility for the risk of loss or any form of damage and additional transport costs shifts to the importer (Hinkelman&Putzi, 2005).
With an exception of FOB, this method is beneficial over the other methods. This is particularly so when the exporter is involved for the first time in the international trade, and they have little volume of shipment. Kiwi Cheese Ltd is not a first time case, and it would be illogical to assume this particular method (Bishop, 2004).
The main drawback of this method is that as an organization increases the number of oversea supplies as well as the overall volume of the freight, the CIF shipment grows to become difficult. Therefore, Kaynak and Kothavi (2004) indicate that the higher is the number of CIF shipments, the more problems of obtaining accurate shipment information occur. This further renders the method as inappropriate in relation to the FOB.
CIP
This abbreviates Carriage and Insurance Paid To. This term is usually applied where multimodal shipment is used. Owing to the fact that it relies on the insurance of the carrier, the exporter is only necessitated to purchase minimum coverage. When the agreement sets in force, the partners or the freight forwarders usually act as carriers, and the importer's insurance becomes effective (Kerr &Gaisford, 2008).
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