CISCP Online New

Index
Modules Title Page No:
Fundamental principles of Logistics and Supply Chain

Module 1 3
Management
Module 2 Demand Planning and Forecasting 28
Module 3 Procurement in Supply Chain 67
Module 4 Transportation Planning and Management 97
Module 5 Warehousing Strategies 139
Module 6 Inventory Management 179
Module 7 Incoterms 2020 219
Module 8 Trade Payment Methods 269

Fundamental Principles
of Logistics and Supply Chain
Management
Module 1
Contents
01 Evolution of Supply Chain 03 Stakeholders in a Supply Chain

02 Logistics and Supply Chain 04 Objectives of Supply Chain Management
05 Challenges in Supply Chain Management
4
Definitions of Supply Chain
A supply chain is the alignment of firms that bring products or services to market
– Lambert, Stock, and Ellram.
A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer
request. The supply chain not only includes the manufacturer and suppliers, but also
transporters, warehouses, retailers, and customers themselves
– Chopra and Meindl
A supply chain is a network of facilities and distribution options that performs the functions
of procurement of materials, transformation of these materials into intermediate and
finished products, and the distribution of these finished products to customers
– Ganeshan and Harrison
5
Supply Chain Management
Supply Demand
Supply Chain Management is the
design and management of processes
across organizational boundaries with the
goal of matching supply and demand in
the most cost-effective way.
Mission impossible: Matching Supply

and Demand
6
Milestones in Supply Chain
1913 – Concept of moving assembly line introduced by Ford Motor Company

1913 – The concept of Economic Order Quantity (EOQ) established by Ford W. Harris.
The concept was developed further by R.H. Wilson and K. Andler.
1956 – Global trade flourishes after the invention of the shipping container by
Malcom McLean.
1964 – Material Requirements Planning (MRP) developed by Joseph Orlicky
1974 – The first barcode implemented in Marsh’s supermarket, Ohio, further developed
by George Laurer later.
7
Milestones in Supply Chain
1970s – 1980s :
i. Manufacturing Resource Planning (MRPII) and Distribution
Requirements Planning (DRP) introduced
ii. Tracking of consignments introduced by FedEx
1980s – 1990s :
i. ERP introduced
ii. The concept of Continuous Replenishment introduced
iii. Cross-docking introduced by Walmart
iv. The make-to-order fulfillment model introduced by Dell
1990s – 2000s :
i. Direct order fulfillment from manufacturers introduced by Amazon
ii. The Toyota Production System (TPS) introduced to the western world
in the form of LEAN
iii. Concept of third-party logistics providers introduced
8
Recent Developments in Supply Chain
2000 and beyond
i. Radio Frequency Identification(RFID) introduced in Supply Chain
ii. Warehouse automation/robotics redefine warehousing
iii. Cloud computing introduced
iv. Mobile wallets introduced for payment transfers
v. Social media revolutionize consumer behavior and marketing

communication /promotion
vi. Big data and Internet of Things gain prominence
vii. Artificial intelligence introduced in Supply Chain
9
Evolution of Supply Chain
i. Prior to 1960s, different activities related to planning, purchasing, transportation and

storage of materials were carried out in a fragmented manner.
ii. Such fragmentation had major drawbacks:
i. Lack of visibility regarding the total chain of materials flow
ii. Difficulties in co-ordination
iii. Conflicting objectives of ‘silo’ based functions
iv. No ownership of total materials cost
iii. To overcome these drawbacks, the fragmented activities were gradually integrated which
led to the formation of two major functions:
i. Materials Management
ii. Physical distribution
10
Evolution of Supply Chain
EVOLVING TOTAL
FRAGMENTATION
INTEGRATION INTEGRATION
Prior to 1960
1960 to 2000 2000+
Demand forecasting
Purchasing
Requirements planning
Production planning Materials Management
Manufacturing inventory
Warehousing Logistics
Materials handling
Industrial packaging
Finished goods inventory
Distribution planning Physical Distribution
Order processing
Transportation
Customer service
11
Materials Management
i. Materials Management involved all activities related to the supplies of all materials and
services into the organisation for consumption.
ii. Materials Management included the following:
i. Materials and inventory planning
ii. Procurement
iii. Transportation (in-bound)
iv. Storage
v. Inventory Management
vi. Production planning and control
iii. Materials management therefore, was primarily concerned with the input phase of the
supply chain
12
Physical Distribution
i. Physical distribution involved all activities related to the transfer of finished goods from
the producer to the end customer, typically through a set of intermediaries viz.
distributors, wholesalers and retailers.
ii. Physical distribution included the following:
a. Storage of finished goods
b. Inventory management of finished goods
c. Distribution planning
d. Transportation (out-bound)
iii. Physical distribution was therefore primarily concerned with the output phase of the
supply chain
13
Order fulfillment
i. The process from point of sales inquiry to delivery of a product to the

customer
ii. The steps in order fulfilment:
a. Order trigger
b. Order entry
c. Order processing
d. Prepare documentation
e. Order delivery
iii. Distribution is a very important part of the order fulfilment process
iv. It has a direct impact on supply chain costs and customer satisfaction
14
Logistics
Logistics
Materials Management Physical distribution
Sources of
supply Plants/operations Customers
i. In modern supply chain, the integration of Materials Management and Physical

distribution is referred to as Logistics.
ii. Logistics Management is defined as- “the process of planning, implementing, and
controlling the efficient, effective flow and storage of goods, services, and related
information from point of origin to point of consumption for the purpose of conforming to
customer requirements.” Council of Supply Chain Management Professionals (formerly
The Council of Logistics Management)
15
Supply Chain
i. When Logistics system of an organization is integrated with external partners like

suppliers , distributors, wholesalers, retailers etc. the overall entity thus formed is known
as Supply Chain.
ii. Supply Chain is thus, an integration of multiple enterprises.
Logistics management
Inbound flow of raw Outbound flow of

materials and parts finished products
Suppliers Producer Consumer
Supplier network Marketing channel
Supply chain management
16
Logistics vs. Supply Chain
Logistics refers to activities that occur within the boundaries of a single organization
and supply chains refer to networks of companies that work together and coordinate
their actions to deliver a product to market. In other words, Logistics is confined to a
single organization whereas Supply Chain Management encompasses multiple
organizations
Logistics is involved with the flow and storage of goods and services. The ambit of
Supply Chain Management is wider and involves procurement, conversion and delivery
to the end customers. Therefore, Logistics is a part of Supply Chain Management.
Supply Chain Management includes all of traditional logistics functions and also
covers activities such as marketing, new product development, finance and customer
service.
17
Supply Chain Stakeholders
Intermediate
Raw material End product
product
suppliers manufacturers
manufacturers
Distributors and Retailers Customers

wholesalers
18
Flows in a Supply Chain
Upstream
Suppliers’ Customers’
Supplier Fund Customer
Suppliers’ Customers’
Supplier Manufacturer Distributor Retailer Customer
Supplier Customer
Suppliers’ Goods, services Customers’

Supplier Customer
Downstream
Information (status, requests, orders)
19
Cost versus Responsiveness
The goal or mission of supply chain management can be defined as

increasing throughput while reducing both inventory and operating expenses.
(here throughput means sales to the end customer).
In some markets customers value and pay for high levels of service while in
others customers simply seek the lowest prices.
Therefore, the company has to optimize between efficiency (cost) and
responsiveness
20
Objectives of Supply Chain Management
Efficient customer Maximize the overall

Enhance
fulfillment by value generated (supply
competitive
balancing cost and chain surplus)
advantage of the
responsiveness Supply Chain Surplus =
business.
Customer Value –
Supply Chain Cost
21
Major Challenges in a Supply Chain
Co-ordination and collaboration

across multiple entities which
are often spread out globally
Inaccurate
forecasts and Poor end-to-end
uncertainties of visibility of the supply
demand and supply chain
Complexity due to Shorter product life-cycles

multiple networks of and ever-increasing
organizations often with customer expectations
conflicting objectives
leading to sub-optimal
behavior
22
Aligning Supply Chain with Business Strategy
Understand the
market
Develop that the company
needed serves
supply chain
capabilities
Define core
competencies
of the company
23
Evolving Structure of Supply Chains
Virtual Integration: companies now focus on their core

competencies, and partner with other companies to
create supply chains for fast moving markets.
Vertical Integration: slow moving mass markets of the

industrial age, it was common for successful
companies to own much of their supply chain.
24
Understanding markets
1. The quantity of the product

needed in each lot
2. The response time that customers
are willing to tolerate
3. The variety of products needed
4. The service level required
5. The price of the product
6. The desired rate of innovation in
the product.
25
Critical Considerations in a Supply Chain
Planning, implementing and

Managing risks controlling effective supply
in supply chain chain strategies
Managing Measuring and Ensuring
partnerships in monitoring supply sustainability in
supply chain chain performance supply chain

26
Demand Planning and
Forecasting
Module 2
Contents
i. Demand planning
ii. Dependent and independent demand systems
iii. MRP, MRP-II, ERP
iv. Demand patterns – random, trend and seasonality
components
v. Qualitative forecasting techniques
vi. Quantitative forecasting techniques
vii. Accuracy of forecasting models
29
Supply Chain Planning
Objective of Supply Chain Planning is to generate a demand plan and develop a supply plan to
meet that demand in the best possible manner
Supply Chain
Planning
Supply
Demand
Planning
Planning
30
Demand Planning
i. The objective of demand planning is to estimate the market demand and fulfil
the demand by producing and delivering the necessary goods and services
ii. The challenge is inherent variation and unpredictability of demand and

matching it with the organization’s production and delivery capabilities
iii. The planning horizon should be long-term (preferably 18 months or more)
iv. Demand has to be planned, prioritized and controlled.
31
Factors which influence demand
Marketing Business Sales

Demand Forecast strategies
activities goals
32
Prioritizing demand
Prioritizing production or
changing the product mix to
fulfil the demand
Prioritizing or altering
distribution to warehouses or
retailers
Prioritizing customers
based on profile and
segmentation
33
Integration of demand and supply plans
Strategic business
Demand plan
plans
Capacity
Sales and Operations
(Resource)
Plan (S & OP)
Plan
Production Plan
34
Synchronizing demand and supply plans
i. Once the demand plan is finalized, it serves as an input to Sales and Operational Plan
(S & OP).
ii. The S & OP is also influenced by the strategic business plans which relate to the
organizational goals
iii. The S & OP is a consensus reached between the demand and supply teams based on
the demand and the supply constraints
iv. The S & OP commits the sales team to sell and the production team to produce
according to the plan
v. The S & OP then triggers off Production Planning and Capacity Planning
35
Capacity Planning
i. Capacity planning is the process to determine the resource requirements

for production and making them available when required. This involves
advance resource augmentation plans
ii. Capacity planning at different levels are shown below:
a. Resource Requirements Planning(RRP) – long-term capacity

planning carried out at an aggregate level
b. Rough-cut Capacity Planning (RCCP) – carried out at the master

production scheduling level
c. Capacity Requirements Planning(CRP)- carried out at the Material

Requirements Planning level
36
Master Scheduling
i. The Master schedule is a format which takes into account the demand, the
production plan, backlogs, availability of material and capacity
ii. The Master Schedule is used to create the Master Production Schedule (MPS)
iii. The Master Production Schedule (MPS) is a weekly plan which details the
product mix to be produced with the quantities and dates
iv. The Master Production Schedule then acts as an input to Material

Requirements Plan (MRP)
37
Material Requirements Planning
i. Material Requirements Planning is a time-phased priority planning system.
ii. The system calculates the requirements of materials and schedules supply to
meet the demand
iii. It is a planning system consisting of a set of logically related procedures,

decision rules and records, designed to translate a Master Production Schedule
into net requirements and the planned coverage for such requirements, for each
component inventory item needed to implement the schedule
iv. Traditionally, MRP is used to calculate the requirements of items with

dependent demand
38
Dependent and Independent Demand
i. Independent demand
a. Demand for an item carried in inventory is independent of the demand for any
other item in inventory
b. Demand for finished goods and spares is independent
c. Demands are estimated from forecasts and/or customer orders
ii. Dependent demand

a. Items whose demand depends on the demands for other items
b. For example, the demand for raw materials and components can be calculated
from the demand for finished goods
c. Therefore the systems used to manage these inventories are different from those
used to manage independent demand items
39
i. Master Production Schedule (MPS) – The Master Production Schedule is the

overall plan of production. The span of time, the Master Plan Schedule covers,
called the Planning Horizon, relates to the cumulative procurement and
manufacturing lead time for the productions in question.
ii. Bill of Materials (BOM) – The BOM details the configuration of the product by
showing the relationship between the components and sub-assemblies.
iii. Inventory Records – The record of individual item-wise inventory
iv. The MPS, BOM and Inventory are the main components of the MRP system
40
The logic of MRP is as follows:
X = (A X B) – C where
A = MPS quantities
B = BOM quantities
C = Inventory quantities
X = Action needed
41
Master Production schedule

(MPS)
MRP system
‘explodes’ requirements
Bill of materials (BOM) Inventory data
Includes lead times
Produces net requirements
Management reports
What should be ordered
What should be expedited
Which orders should be cancelled
42
The outputs of MRP are :
i. Net requirement of materials
ii. Order release notices
iii. Rescheduling/cancellation notices
iv. Information related to item status like
a. Requirements
b. Coverage of requirements
c. Exceptions
43
Manufacturing Resource Planning (MRP-II)
i. The concept of MRP was further enhanced when Manufacturing

Resource Planning (MRP-II) was introduced.
ii. MRP-II plans for all resources of a manufacturing company

including capacity requirements and enables product costing. It
can integrate sales plan, capacity plan and material requirements
plan.
iii. MRP-II has ‘what-if’ scenario planning capabilities
44
Distribution Requirements Planning (DRP)
i. The process of planning finished goods inventory replenishment to an

organization’s distribution centers, in a time-phased manner.
ii. It manages the flow of materials between manufacturing centers,

warehouses and distribution centers.
iii. It links the physical distribution to manufacturing planning and control

system
45
Push and Pull Distribution Strategies
i. The distribution process follows either a Push strategy or a Pull strategy
ii. In the push system, the distribution is planned centrally and pushed to the
downstream warehouses. The volumes are worked out mainly based on
forecasts
iii. In the Pull system, the downstream partners place their orders upstream to
‘pull’ the volume
46
Distribution Requirements Planning (DRP)
i. The inputs to the DRP constitute demand forecasts from distribution

centers, inventory status at the distribution centers, the lead time and
safety stock to ensure a certain service level
ii. DRP also triggers off the transportation planning activities
iii. Once the distribution volume requirements are worked out, DRP provides
an input to the Master Schedule to plan for production
47
Enterprise Resource Planning (ERP)
i. Enterprise Resource Planning (ERP) – is the integrated management of core

business processes.
ii. ERP extends the capabilities of MRP and MRP-II to all functions of the enterprise
iii. ERP processes data on real-time and has a single-platform storage
iv. Extended ERP (ERP-II) is the integration/extension of a company’s ERP system to

its partners like the suppliers, distributors etc.
48
Forecasting
Forecasting
i. Forecasting is the method of estimating or predicting the future trend or a future event
ii. Forecasting provides critical inputs for demand planning
iii. Better the forecast, better is the plan
iv. However, forecasts are never accurate and are always associated with some errors.
v. We should be able to forecast the average within some given band of variation (with a
certain level of confidence)
vi. Forecasting is of the following types:

a. Qualitative
b. Quantitative
50
Qualitative Forecasting
i. Usually based on judgments about causal factors that affect the variable of
interest
ii. Do not require a demand history for the product or service, therefore such
methods are useful for new products/services
iii. Approaches vary in sophistication from scientifically conducted surveys to
intuitive hunches about future events
iv. Most common Qualitative Methods are:
a. Executive committee consensus
b. Survey of sales force
c. Survey of customers
d. Delphi method
51
Delphi Method
i. It is an interactive method of forecasting
ii. A panel of experts answers a questionnaire or makes a forecast
iii. A facilitator displays the forecasts. Anonymity is maintained to avoid ‘groupthink’
effect.
iv. The panel members revise their forecasts in each round (taking the logic of the
other members into cognizance)
v. Usually the forecast figure is expected to converge after a few rounds
vi. The process ends on convergence or after a certain number of rounds and the
median figure is taken as the final forecast
52
Quantitative Forecasting
i. Based on the assumption that the “forces” which generated the past demand
will also generate the future demand
ii. Analysis of the past demand pattern provides a good basis for forecasting
future demand
iii. Majority of quantitative approaches fall in the category of time series analysis
iv. Causal Models (Regression) are used when the future values of the data do
not depend on time but on some other factors
53
Time Series
i. A time series is a chronological sequence of numbers where the order or

sequence of the numbers is important, e.g., historical demand
ii. Analysis of the time series involves identifying patterns
iii. Once the patterns are identified, they can be used to develop a forecast
iv. Time series forecasting assumes:
a. past sales are a reliable guide to the future
b. changes and trends, if gradual, can be tracked
c. seasonal influences explainable and reliable
d. very short-term effects reproducible
54
Quantitative Forecasting Methods
i. Naïve Method
ii. Simple Average Method
iii. Moving Average Method
iv. Weighted Average Method
v. Exponential Smoothing Methods
vi. Regression Models
55
Random Demand Pattern
2350
Random Demand (No Trend or Seasonality)
2300
2250
2200
2150
2100
Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec
Demand Level
56
Random Pattern with Trend
700
Demand with Increasing Trend
600
500
400
300
200
100
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Demand Linear (Demand)
57
Demand Pattern – Random with
Trend and Seasonality
800
Demand with Trend and Seasonality
700
600
500
400
300
200
100
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Demand Linear (Demand)
58
Quantitative Methods
i. Naïve Method – In this method, the last period’s demand is projected as the
forecast for the next period.
ii. Simple Average – In this method, the simple average (sum of all the past data
divided by the number of data points) of the past data is used as an estimate of the
future.
iii. Moving Average – In this method, the moving average of the last ‘p’ periods is used
to forecast the future. Usually, the 3-month or 5-month moving averages are used.
The rationale in using this method is to consider only the recent data (last 3 or 5
months) and ignore the historical data.
iv. In Weighted Average Method, higher weights are attached to the recent-most data
and progressively lower and lower weights are attached to the data as we move
back into the past.
59
Simple Exponential Smoothing
i. Simple Exponential Smoothing is a special form of Weighted Average where the

weights decrease exponentially as we move backwards to the past data.
ii. It is an Exponentially Weighted Moving Average (EWMA) method
iii. Exponential Smoothing Method is explained below:
Ft = aYt-1 + (1-a)Ft-1
= Ft-1 + a(Yt-1 - Ft-1),
where Ft is the Forecast (Estimate) for the current period
Yt-1 is the demand (actual) for the previous period
and Ft-1 is the forecast for the previous period
a is the smoothing constant and 0 ≤ a ≤ 1
60
Choice of the Smoothing Constant
i. The value of the smoothing constant (a) varies between 0 and 1
ii. For new products or unstable markets, high values of a ( 0.7 or

0.8) may be chosen
iii. However, for stable markets, low values of a (0.1, 0.2 or max
0.25) are normally used
iv. MS Excel Solver may be used to find the optimal value of a in a

given situation
61
Forecasting with Trend and Seasonality
i. Simple Exponential Smoothing works well if the data does

not have trend or seasonality
ii. Double Exponential Smoothing (Brown’s or Holt’s method)

may be used to forecast data with trend
iii. Triple Exponential Smoothing (Holt-Winters’ method) may be

used when the data has both trend and seasonality
iv. Regression and auto-regressive models like ARMA/ ARIMA

may also be used in forecasting.
62
Outliers in Forecasting
Unusually high or unusually low demand should not be considered during forecasting as
these may be due to certain factors which are likely not to recur under normal circumstances
The corresponding data points should be eliminated from the time series
60 20
Exceptionally
40 High Demand
Demand
Demand
10
20
0
0 Unusually
1 5 9 131721 Low Demand
1 5 9 13 17 21
Period
Period
63
Forecast Error
i. Even with the highly sophisticated methods, forecasts are always associated
with some errors.
ii. Forecast error = Actual - Forecast
iii. Forecast error can be negative or positive
iv. When demand is stable, forecast is just as likely to be as high as it is to be low
v. Long-term forecasts are less accurate compared to short-term forecasts
64
Accuracy of Forecasting Models
i. Cumulative error is a measure of the accuracy of the forecasting model
ii. Three commonly used measures are:

a. MAD (Mean Absolute Deviation) – Average of the absolute values of the
errors in a given period
b. MSE (Mean Square Error) – Average of the squares of errors in a given
period
c. MAPE (Mean Absolute Percent Error) – Average of the absolute value of
the percent errors in a given period
iii. Any one of the above measures may be used to compare one or more models
iv. Lower the value of MAD, MSE or MAPE, better is the forecasting model
65
Procurement in Supply
Chain
Module 3
Contents
i. Principles of procurement
ii. Objectives of procurement
iii. The procurement process
iv. The sourcing strategy
v. Negotiation
vi. Total Cost of Ownership
68
Procurement
Purchasing is the process of acquisition of goods or

services from external sources.
Purchasing is transactional in nature and comprises

order placement, follow-up, receiving and inspection,
invoice processing and payment
Procurement is a broader term which includes both

strategic activities (sourcing) and the transactional
activities (purchasing)
69
Principles of Procurement
Right Quality Right Quantity Right Place Right Time Right Price Right Sources Right Process
70
Objectives of Procurement
A B C D
To ensure that the To minimize supply To ensure that there To deliver

needs of the risks and ensure is cross-functional value-addition
organization are continuity of supplies collaboration in the through collaborative
fulfilled in the most overall interest of the supplier relationships
economic, efficient organization
and effective manner
71
The Procurement Process
Identifying and
defining the
needs
Make or Buy
Contract / Analysis
Supplier
Management
Awarding the Developing the

contract /PO sourcing strategy
Negotiation
Supplier
Tendering and pre-qualification
tender
evaluation
72
Identification of the need and developing specifications
Once the need is identified, the specifications need to be developed –
i. Specifications may be based on ‘conformance’ or ‘performance’.
ii. For works and services detailed Statement of Work (SoW) need to be
framed.
iii. The specifications need to be weighed and considered and not just
accepted as-is
iv. Concepts of Early Buyer Involvement (EBI) and Early Supplier

Involvement (ESI) are critical in the process of developing
specifications
73
Make or Buy Analysis
i. Factors which favor a ‘Make’ decision:
a. If the product or service is core to the organization and there is a need for in-
house control
b. The organization has the competency and capability to make it in-house
c. When there is economic advantage in making
d. When there is no suitable supplier
ii. The benefits of ‘Make’ include higher control, improved quality control, workforce
remains stable, continuity of supply is assured, reduced risk, easier to amend
volumes/specification
74
Make or Buy Analysis
i. Factors which favor a ‘Buy’ decision:
a. Supplier has specialized knowledge
b. Technological advancements available
c. Volumes are small
d. Cheaper to buy
e. The organization does not have the competence, capacity or

machinery
f. Economies of scale available with the supplier
ii. Benefits include – lower inventory, reduced overheads.
75
The Sourcing Strategy
i. Sourcing – is a very critical and strategic component of the

procurement process which deals with identifying, selecting and
developing the sources of supply.
ii. Market analysis of demand, supply and risks provides useful sourcing
inputs.
iii. The sourcing strategy includes the following decisions:
a. Existing sources or new sources
b. Single source or multiple sources
c. Local sources or foreign sources
76
Supplier Pre-qualification
i. Supplier pre-qualification –Pre-qualification is the assessment of criteria

for supplier ‘suitability’, so that only pre-screened suppliers with certain
minimum standards of competency and capacity are invited or considered
for participation in a given sourcing process.
ii. Potential suppliers are evaluated and pre-qualified if they meet the desired
criteria
iii. The suppliers may be pre-qualified for a one-off purchase or may be
permanently enlisted for future supplies
iv. After enlistment, the performance of the suppliers need to be measured
and monitored on an ongoing basis.
77
Supplier Pre-qualification Process
i. Pre-qualification involves the development of objective evaluation

criteria and screening of potential suppliers against the defined criteria
ii. The steps for pre-qualification include:
a. Gathering supplier information with the help of a Pre-
Qualification Questionnaire(PQQ) or Request for Information
(RFI)
b. Verifying the information through due-diligence and/or
c. undertaking a Supplier audit (site visit or capability survey)
78
Supplier Pre-qualification Criteria
1 2 3 4 5
Competency Capacity Commitment Control Cash
6 7 8 9 10
Cost Consistency Culture Clean Communication
79
Tendering
The type, value and complexity of the procurement determine the nature of solicitation viz.-
i. Invitation to Tender (ITT) - this is a rather formal process used to solicit tenders from
suppliers and used mostly for projects, construction works or long-term contracts where
the value involved is high
ii. Request for Quotation (RFQ) – an informal process used to solicit price quotes (bids)
from potential suppliers mainly for low value purchases with well-defined specifications
or requirements
iii. Request for Proposal (RFP) – used to solicit proposals typically for performance type
specifications (technical, commercial or techno-commercial). The onus of defining the
scope of work is transferred to the supplier to a great degree.
80
Tendering types
Variations of tendering include:
i. Open Tendering – published in open media and any supplier can bid
ii. Closed Tendering – only selected and pre-qualified suppliers are invited to bid
iii. Negotiated Procedure – the buyer negotiates directly with one or more
suppliers when other tendering procedures have not yielded results, or there is
an extreme emergency, or these suppliers have specialized skills
81
Tender Evaluation
i. Tenders should be evaluated for best ‘value to price’

ratio
ii. The evaluation criteria should be well defined and
balanced to include both technical and commercial
aspects
iii. The evaluation criteria should be clearly mentioned to
the suppliers during the invitation to tender
82
Negotiation
i. Negotiation - ‘A process of back-and-forth

communication designed to reach an agreement
when both parties have some interests which are
shared and others that are opposed’- Fisher & Ury.
ii. Negotiation is not about price only. It may include

factors from any aspect of the business like
quality, delivery, warranty, payment terms or
broader/long-term arrangements in a supply chain
relationship.
iii. Negotiation is not about winning. It is about

solving problems and overcoming barriers to
agreement.
83
Phases of Negotiation
Pre-Negotiation Phase
Conference or Meeting
Phase
Post-Negotiation Phase
84
Planning Phase of Negotiation
Pre-Negotiation Phase is the planning stage and includes the following:
Data collection Identifying the key issues (variables) Setting targets
Analysis of alternatives (BATNA) Fixing up limits / resistance points
Planning strategy and tactics Selecting and aligning the team
Planning other resources
85
Negotiation approaches
Two broad negotiation approaches are:
i. Distributive :
a. Where each party tries to ‘claim’ maximum value of the ‘pie’ (tries to
claim a larger share of the fixed resources)
b. This is based on ‘positions’ where each party begins with a ‘position’

(mostly extreme) and tries to influence the other party to accept their
position without making any (or minimum) compromises
c. Hard-bargaining ‘ploys’ are used to polarise views and defend positions
d. This is usually adversarial in nature and the focus is short-term gain

rather than a long-term relationship.
e. The result is a win-lose situation.
86
Negotiation approaches
i. Integrative:
a. A collaborative approach where the parties try to ‘create’ additional value and
attempt to reach a mutually beneficial agreement.
b. Each party tries to understand the ‘interests’ of the other party
c. Through effective communication and integration, the parties try to come up

with innovative solutions which would not have been possible by any party
acting alone
d. The emphasis is on agreement rather than disagreement
e. The focus is on long-term relationship.
f. The result is win-win.
87
The Conference Phase of Negotiation
i. The Conference or Meeting Phase is the stage where the two parties exchange
communication to reach an agreement.
ii. The meeting begins with the introduction, during which rapport is developed.
iii. Thereafter, the parties try to test the validity of assumptions made during planning.
iv. In the distributive approach, the parties then engage in bargaining where concessions
are exchanged. In the integrative approach, the parties try to innovate solutions which
facilitate mutual agreement.
v. The final stage is agreement and closure.
88
The Post- Negotiation Phase
i. The Post-Negotiation Phase is the stage for final documentation and follow-up.
ii. This phase also helps to improve the relationship between the parties.
iii. Internal reviews are also held to share the learnings from the previous negotiation to
discuss which strategies worked and which did not.
89
Awarding
i. Once the price, terms and conditions are agreed upon and the purchase
authorized, the contract (or the purchase order as the case may be) is then
awarded.
ii. It is important that the purchase order is acknowledged by the supplier
iii. Purchase order could be for a one-off purchase or for a delivery against a
framework agreement
90
Supplier Management
i. Supplier Management – After the contract is awarded, it is essential to

measure, monitor and review supplier performance to ensure that the
suppliers strive their best to deliver and the organization continues to work
with the best suppliers.
ii. Supplier ratings are carried out periodically to evaluate their performance.
These are reviewed periodically and necessary help extended to suppliers
to improve on their performance.
iii. In the case of a long-term contract, managing the contract is a strategic
and critical activity which is essential to ensure that the contract is
performed to the desired level.
91
Total Cost of Ownership (TCO)
Purchase Cost
Installation
Maintenance Operation
The Price is only tip of the iceberg !
92
i. Total Cost of Ownership (TCO) involves a paradigm shift in the way assets are
procured (capital expenditure)
ii. The concept goes beyond price
iii. It involves determination of the total costs incurred throughout the life of the asset
or equipment. Hence, it is often referred to as Life Cycle Cost (LCC)
iv. It is estimated that the purchase price is only a small component of TCO ( often as
low as 25%). Hence, procurement decisions based on TCO are holistic and
economical in the long run
93
i. Components of TCO include:
a. Acquisition Cost (pre-acquisition costs + price + taxes/duties + cost of

inbound logistics + cost of installation & commissioning, cost of initial
training and so on)
b. Operating Cost (cost of fuel/electricity)
c. Maintenance Cost (includes routine maintenance, breakdown repairs,
planned overhaul etc.)
d. End-of-Life Cost (cost of de-commissioning and disposal less the salvage
value)
e. TCO is the Net Present Value of all the components of cost
94
Value-added role of Procurement
In addition to achieving the ‘Rights’, Procurement has to add value to the
organization through:
i. Cost Reduction
ii. Value-analysis and value engineering
iii. Reducing time-to-market (Early Supplier Involvement)
iv. Collaborative supplier relationships leading to value-addition to both parties
v. Innovation
vi. Waste reduction in the supply chain
vii. Minimizing supply risks
viii. Enhancing sustainability
95
Transportation Planning
and Management
Module 4
Contents
i. The role of transportation in

Supply Chain
ii. Modes of transportation
iii. Hybrid modes
iv. Transportation cost optimization
v. Freight forwarding
98
Transportation
Transportation, a key
supply chain driver, is
the backbone of
logistics !
99
Transportation
i. The movement of goods from one location to another is referred to as

transportation
ii. Transportation bridges various supply chain partners and links the
company with its suppliers and customers
iii. Transportation allows the flow of inventory in supply chain, both forward
and reverse
iv. Transportation provides place-utility by ensuring that the goods reach the
specific location timely and safely.
100
Parties involved in transportation
i. The Shipper – the party who wants to transport the product from one location to
another. The shipper wants to minimize the cost of transportation while providing a
certain level of responsiveness to customers
ii. The Carrier - the party or company which transports the product. The carrier makes
investment decisions regarding the transportation equipment (trucks, airplanes etc.) and
in some cases transportation infrastructure and then aims to maximize the return from
these assets.
iii. Besides the shipper and the carrier, the owners and operators of transportation
infrastructure such as roads, airports, ports etc. and the bodies that set transportation
policy worldwide are also important parties in transportation.
101
Modes of transportation
i. Road (Trucks)
ii. Railways
iii. Water
iv. Air
v. Pipeline
vi. Intermodal
vii. Package carriers
102
Trucks
A truck is a vehicle
used to transport
goods by road.
Trucks vary in size,
power and carrying
capacity
103
Trucks
i. Trucks use the wide network of roads and can therefore transport goods from virtually
any point of origin to any point of destination, thus providing high flexibility
ii. Trucks can carry loads of varying shape, size and weight, thus providing high versatility
iii. Trucks can be used for point-to-point shipment, without the help of any other mode of
transport
iv. Truck carriers compete with air carriers for smaller distances ( less than 500 kms) and
compete with railways for longer distances. However, railways are preferred for long
distances if the load is higher (more than 25 MT).
104
Trucks
i. Smaller shipments [ 150 lbs (approx. 68kgs) to 20,000 lbs (approx. 9070 kgs)]
transported by trucks are called less-than-truckload(LTL) shipments.
ii. Shipments larger than 20,000 lbs (approx. 9MT) and up to 45,000 lbs (approx. 20
MT) are referred to as truck-load (TL) shipments since the shipment is expected to fill
up a full truck. However, with different configurations of truck (multi –axle, or multi-
trailers), the TL shipment size can go as high as 50 MT or even more.
iii. Shipments smaller than 150 lbs usually do not quality as LTL and are treated as
parcels. However, the actual choice of the mode of transport, (parcel or LTL) depends
not only on the weight but also on the dimension of the cargo.
105
Railways
Railways are second only to trucks as the most dominant

mode of transportation.
106
Railways
i. In spite of having widespread networks, railways usually offer terminal-to-terminal

shipments and are not able to provide point-to-point service unless the point of origin
and the point of destination have captive railway sidings.
ii. Railways incur high fixed costs in terms of tracks, locomotives, cars and yards. Thus,
asset utilization is an important performance criteria for railways.
iii. Operational issues like scheduling and maintenance, disruptions and delays lead to
poor on-time performance. However, the cost is low per unit of load for long distance
hauls
iv. Therefore, railway transportation is preferred for heavy, low-value and bulk shipments
that are not time-sensitive
107
Air transport
Most airlines
worldwide provide
passenger as well as
cargo services
108
Air transport
i. Air transport is fast and reliable but expensive
ii. Airlines also have high fixed costs and important objectives are to maximize the utilization of
aircrafts and to maximize revenue generated per flight
iii. Air transport is most suited for high-value, lightweight and time-sensitive nature of goods. It is
the preferred mode only when response time is more important than price considerations.
iv. For shorter distances, the total transit time often increases due to delays/congestion in
terminals.
109
Water transport
Water transport comprises inland waterways (such as rivers, lakes and canals); coastal
and intercoastal oceans; and international deep sea
110
Water transport
i. Water transport is widely used for international long-distance hauls where speed is
not critical.
ii. It is the cheapest mode of transport for low-value, high-bulk commodities but the
voyage time is a limitation which is often worsened by delays in ports due to
congestion or other factors.
iii. In water transport, both container ships and bulk carriers operate. The introduction of
very large crude carriers (VLCCs) and ultra large crude carriers (ULCCs) has played an
important role in redefining the way crude oil is transported from oil producing to oil
consuming countries
iv. Water carriers often tie up with other ocean carriers to enhance their coverage. Such
networks operate through large intermodal hubs such as Rotterdam or Hamburg.
111
Pipeline
Pipelines are suitable for transportation of crude oil,

natural gas, petroleum products, chemicals and water.
112
Pipeline
i. Pipelines offer high dependability but can operate only in fixed routes
ii. They need high initial investment , but have low operating costs and are highly
economical when transporting large and constant volumes
iii. Pipelines are stationary carriers, that is, they don’t move. Instead, the cargo moves
iv. They can operate continuously 365 days a year and are not affected by seasons
v. They carry cargo only in one direction
vi. They offer high safety to the cargo carried
113
Intermodal Transportation
i. Majority of international and long-distance transportations are carried out using

intermodal transport (a combination of two or more different modes of transport)
e.g. truck-rail, truck-sea, air-rail, rail-sea and so on.
ii. Other than the basic modes of transport, a number of intermodal combinations are
available.
iii. Piggyback services – These are intermodal combinations. The common Piggyback
services include:
a. Trailer on Flatcar (TOFC) / Container on Flatcar (COFC)
b. Rolling Highway Train / Rolling Road Train (Accompanied Transport)
iv. Fishy back ( a truck trailer or railcar or container loaded on a ship) and Birdy back
services (containers carried on aircrafts)
114
TOFC COFC
Truck trailers or containers are placed on rail flatcars. Axles can be placed
under the containers so that they can be delivered by a truck
115
Double-stack railway wagons can

accommodate two containers one
stacked above the other. Such
stacking doubles the carrying
capacity and lowers the cost, but is
only possible when there is no
restriction of heights on the track
116
Rolling Road Trains combine truck and rail

transport. The truck with the trailer unit is
driven up a ramp and loaded on a low
railway wagon. At the terminal, the truck can
be unloaded and driven off without the help
of special unloading equipment. This
arrangement is fast but the deadweight of
the truck has to be carried on the rail
117
i. Land Bridge – land bridge is another form of intermodal transportation which uses a
combination of sea and rail/land transportation
ii. In the land bridge mode, containerized cargo is brought to a port, unloaded and
transported to another port by rail (or truck) and then loaded on to another vessel for
the second leg of sea transport.
iii. The advantages are:
a. The freight is carried in a single container for the whole journey
b. A single carrier (or freight forwarder) is responsible for the whole journey and
therefore a single bill of lading is used
c. The land leg of the journey reduces transit time compared to a continuous
voyage through the sea
118
Roll-on/Roll-off (RORO)– RORO ships are

vessels designed to carry wheeled cargo
such as cars, trucks, railroad cars etc. which
can be driven on and off the ship on their
own wheels. In contrast, lift-on/lift-off
(LoLo) vessels use a crane to load and
unload cargo.
119
The Intermodal Container
i. Intermodal transportation has been made possible

largely due to the invention of the intermodal container
since these containers can be used across different
modes of transport without unloading and reloading
their cargo.
ii. The intermodal container is a standardized shipping
container also known as the shipping container, sea
container, freight container, ISO container or simply
the ‘container’
120
i. The majority of intermodal containers is the “dry freight” or “general purpose”

containers, durable closed steel boxes
ii. Mostly these are 20-foot or 40-foot long (although other sizes like 45-foot, 48-foot and
53-foot are also in use)
iii. The standard containers are 8-foot wide and 8-ft 6 inches high. The ‘high cube” units are
taller and are 9-ft 6 inches in height
iv. The intermodal containers are standardized. The basic dimensions and permissible
gross weights are determined by two ISO standards (ISO 668: 2013 and ISO 1496 :
2013). This is why the intermodal containers are also referred to as ISO containers.
121
i. The intermodal containers use an identification system. ISO 6346 : 1995 is the
international standard which covers the coding, identification and marking used in these
containers. The standard is managed by International Container Bureau (BIC)
ii. The BIC coding system includes a combination of owner, country codes, size, type and
equipment category and a unique serial number with check digit.
iii. Other than general purpose containers, there are other types of containers like
temperature-controlled containers, insulated containers, ventilated containers, open top
and open side containers and platform-based containers.
122
i. The containers provide the following advantages:

a. Containers are suitable for intermodal use
b. The cargo is protected adequately and the loss or damage to cargo is reduced
c. Are amenable to the use of materials handling equipment and therefore the loading/
unloading time is very low
d. These are easily stored and transported which results in lower costs of
transportation and warehousing
e. These may act as temporary storage facilities
ii. However, containers need ports or terminals with container facilities which may not be
available in certain places. Sometimes, these facilities may be present but are
overburdened causing delays.
123
FCL, LCL, TEU and FEU
i. FCL stands for Full Container Load, which means the shipment occupies the full container
without the need to share container space with others
ii. LCL stands for Less than Container Load, refers to shipments that occupy only a portion of
the container load and is shipped with merchandise from other shippers in the same
container
iii. TEU stands for Twenty-foot equivalent unit. It refers to the volume of a standard container 20
feet long X 8 feet wide and 8 feet 6 inches in height. It has become a unit of cargo capacity
and is used to define the capacity of container ships and terminals. One TEU can
accommodate between 9 to 11 pallets depending on whether they are regular or EUR pallets
iv. FEU or Forty-foot equivalent unit is the measure of a 40 feet long container which can
accommodate between 20 to 24 pallets. One FEU is equivalent to 2 TEUs
124
Package carriers
i. Package carriers deliver parcels or high-value mails as a single shipment.
ii. Package carriers provide the last-mile delivery and are becoming increasingly
important due to growing e-commerce. They are suitable for transportation of
items like electronics, cosmetics, textbooks to the customer.
iii. Package carriers may deliver heavy loads ( usually less than 150 lbs) like furniture
or large appliances
iv. Small package carriers deliver smaller shipments which are time-sensitive.
v. The services are provided by postal services or companies like UPS, Federal
Express, DHL etc.
125
White-glove delivery
i. Package delivery of some heavy items

require special care and packaging.
ii. White-glove delivery service providers

specialize in delivery of such items with
utmost care. They deliver the consignment
to the customer’s residence, unpack and
assemble the appliance and dispose off any
excess packaging material or dunnage
126
Freight forwarding
i. Freight forwarders arrange to transport goods from a manufacturer to the market,

customer or final point of distribution using multiple modes of transportation
ii. They negotiate rates and contract with carriers on behalf of the shipper. In other
words, they act as intermediaries between the shipper and the carrier
iii. Freight forwarders achieve economies of scale by consolidating a number of small
shipments from different shippers to a single large shipment. Such freight
consolidation enables the freight forwarder to provide lower rates than that the shipper
could have obtained directly from the carrier.
iv. Freight forwarders issue their own House Bill of Lading
127
Freight forwarding
The International Federation of Freight Forwarders Associations or FIATA, is

a non-governmental organization representing approximately 40,000 forwarding
and logistics companies across the globe.
i. The recognized freight forwarders belong to FIATA and their liabilities are set out by
FIATA
ii. International Freight forwarders also prepare, and process documents related to
customs clearance and other formalities required for export/import
iii. Some large freight forwarders offer additional value-added services like warehousing
and logistics consultancy to their clients
128
Non vessel operating common carriers (NVOCCs)
i. A NVOCC may be defined as an entity that provides ocean freight services as a

“carrier” with or without own or operated vessels
ii. Both Ocean Freight Forwarders and NVOCCs are referred to as OTI (Ocean
Transport Intermediary)
iii. The NVOCC buys slots or space from a VOCC (Vessel Operating Common Carrier)
and re-sells the same to their customers who can be exporters or freight-
forwarders.
iv. The NVOCC acts as “shipper to the carrier and carrier to the shipper”. Thus, NVOCC
acts as the virtual carrier, issues its own House Bill of lading and undertakes
responsibilities as the carrier
v. Some big NVOCCs own and operate their own fleet of containers
129
Transportation Planning
Transportation capacity needs to be forecasted and planned. The following

constraints should be taken into consideration:
i. Volume - Higher the volume, lower is the per unit cost
ii. Distance – Higher the distance, lower is the per unit cost
iii. Density – Higher the density, lower is the cost
iv. Stowability – Items with odd shape that are not easily carried with other cargo, have
higher costs of transportation
v. Packaging and handling
vi. Nature of the goods – perishability, high value (jewellery etc.), fragile and susceptible
to damage. Such items require special protection and hence the transportation cost is
higher
130
Components of transportation cost
i. Line haul costs which include:

a. Cost of the vehicle
b. Driver /operator costs
c. Cost of operations including fuel costs
d. Cost of maintenance of the vehicles
e. Cost of insurance
ii. Cost of loading and unloading
iii. Cost of stop-offs (cost of taking specific stops between the origin and the
destination)
iv. Cost of terminal transfer
v. Cost of any pick-ups
131
Optimization of transportation cost
i. Transportation cost depends on several factors like the mode of transport used, the
weight or volume to be carried, the distance and the route depending on the design of
the network
ii. However, it must be noted that lower transportation costs do not necessarily lead to
lower overall supply chain costs.
iii. Cheaper modes of transport usually have longer lead times and larger minimum
shipment quantities, both of which lead to higher levels of inventory. Therefore, total
costs comprising transportation costs and inventory costs must be optimized
iv. The choice of the mode of transport should be made on the basis of its impact on
overall costs of supply chain and responsiveness to customer requirements.
132
Optimization of transportation cost
i. Using the optimum mode of transportation – trade-off between customer
responsiveness and cost
ii. Consolidation of shipments and demand aggregation to avoid small shipments
iii. Setting up warehouses at strategic locations
iv. Using backhaul (carrying back cargo when the vehicle returns)
v. Use of fewer carriers to obtain lower freight (economies of scale)
133
Transportation risks
i. Disruption – may occur due to natural disasters or man-made events. The risk can be
mitigated by designing alternative routings into the transportation network
ii. Delay – may happen due to congestion, limited availability of transportation or

infrastructure capacity. Delays due to congestion may be minimized by designing a
network with multiple routes and re-routing in real time. Delay due to limited availability
of transportation may be minimized by owning some transportation capacity or by
signing long-term contracts for transportation capacity with the asset owners
iii. Hazardous material – The objective is to minimize exposure and the impact, in the
event of exposure. Use of modified containers, use of low-risk transportation modes
and using routes which have less population can reduce the risk.
134
Impact of Transportation on the Environment
i. All forms of transportation cause environmental pollution by releasing greenhouse

gases. Approximately 25% of the global CO2 emission is attributed to the
transportation sector
ii. Use of alternate fuels / battery operated vehicles should be promoted
iii. Use of water or rail should be preferred over road transport
iv. Unnecessary transportation should be altogether avoided
v. Freight consolidation (combining cargos) would minimize transportation
vi. Setting up distribution centres at critical locations would also minimize the need
for transportation
135
Effective Transportation Strategy
i. Selection of the mode – The choice of mode should not be based on cost alone. It
should be aligned to the organization strategy balancing customer responsiveness and
total costs
ii. Combination of in-house and outsourced transportation – an organization should
consider owing in-house transportation capabilities for large shipments. However,
outsourcing is a better option if shipment sizes are small and customer responsiveness
is important
iii. Use of technology – Information technology should be used for transportation planning,
mode selection, route selection and scheduling deliveries. Technology should also be
used to get visibility of shipments, get information on any impending disruption in the
route and make real time decisions
136
Effective Transportation Strategy
i. Creating a strong partnership with external carriers – Such partnerships enable win-win
relationships
ii. Flexibility in transportation network – Incorporating flexibility into the transportation
network by considering alternative modes and alternative routes helps to cope with
demand uncertainties and crisis situations
iii. Minimize the environmental impact - Efforts should be made to make transportation as
sustainable as possible with minimum impact on the environment
iv. Performance measurement and continuous improvement – Key performance metrics
for transportation should be instituted, measured and monitored on a regular basis. Big
data analytics has proved useful in this regard.
137
Warehousing Strategies
Module 5
Contents
i. Warehouse design and layout

ii. Material handling equipment
iii. Warehouse functions
iv. Unitization
v. Distribution centers and cross docking
vi. Automation in warehousing
140
Warehousing
i. The warehouse is a planned space for the storage and handling of goods.
ii. Warehouses are large scale storage facilities and could be ‘stand alone’ or
‘integrated’
iii. Stores are smaller storage facilities for immediate local use items
iv. Stockyards are open or semi-covered areas that are used to store bulky items,
materials that require specialised loading and unloading or equipment suitable for
outside storage
141
Basic objectives of warehousing
i. To make stock available to internal and/or external

customers in alignment with the stocking decisions of
the organisation
ii. To maintain a safe environment for people in the
stores or warehouse
iii. To maintain a secure environment to avoid stock
losses
iv. To maintain a suitable environment for stock,
minimising losses from damage and deterioration
142
Types of Warehousing
i. Centralised
ii. Decentralised
iii. Private
iv. Public
v. Outsourced
143
Factors which influence storage locations
i. Cost of location
ii. Availability and suitability of the building
iii. Availability and suitability of staff
iv. Nature of items to be stored (items with low shelf life need to be stored close to usage
location)
v. Access to transport infrastructure
vi. Closeness to suppliers
vii. Closeness to customers
144
Warehouse design and layout
i. The design, layout and the space requirement should

be planned on the basis of demand forecast, lead time,
frequency of replenishment and the number of
customers to be served
ii. The layout should facilitate the easy flow of goods in
and out
iii. Single floor design promotes higher utilization of height
and maximum use of material handling equipment
iv. Multiple floor designs allow allocation of different floors
for storage of different items.
145
Objectives of Warehousing
i. Maximize service level to customers

ii. Minimize the overall effort and cost in receipt,
storage and issue of materials
iii. Maximum utilization of storage space
iv. Provide safe and secure storage of items
v. Provide for accuracy and ease of identification of
the stored items
vi. Minimize damage and loss of materials
vii. Provide accurate and timely information to both
upstream suppliers and downstream customers
146
The ‘Flow’
i. Flow consideration means identifying the potential for delays caused by bottlenecks.
ii. An effective flow will avoid congestion and is often linked to ‘one way’ system or
simply clarity in the direction of movement.
iii. A faster flow is achieved if the time to locate items is minimised.
iv. Proper labelling and rack identification systems can help.
v. Different functions like receiving, storage, picking, packaging and despatch should
not interfere with one another.
vi. Redesigning the warehouse layout or rack locations can improve flow.
vii. Picking routes with no returns can improve flow.
viii. Storage layouts in the form of I ( a through layout) or U (goods in and goods out at
the same end, lifting equipment that is used for receiving can be moved a short
distance to service despatch), have better flows.
147
U-shaped flow
Despatch Area Receiving Area
148
I-shaped flow
Receiving Despatch
Area Area
149
Different roles of warehouses
i. In-bound consolidation– Warehouses receive shipments from multiple

suppliers and consolidate these. The materials are then transferred to the
manufacturing area as and when needed
ii. Outbound consolidation – Warehouses receive shipments from multiple
manufacturing facilities and consolidate them for a single shipment to
customers
iii. Product Mixing– Warehouses receive shipments of different products from
different manufacturing facilities. The products are then mixed and
consolidated for shipment to customers
iv. Breakbulk warehouse– These warehouses receive large shipments from the
manufacturing plant and break down these into smaller shipments for multiple
customers
150
Consolidation (inbound)
Manufacturing Support (inbound logistics)
Carload or truckload shipments
Supplier A
Supplier B
Warehouse
Supplier C
Supplier D
151
Warehouse role – Consolidation (outbound)
Plant A
Customer
Plant B
Customer
Plant C Consolidation Warehouse
Customer
Plant D
152
Product Mixing
Mixing Warehouse (outbound logistics)
Customer X
1 2 3 4
Plant A, Product 1
Customer Y
Plant B, Product 2
1 2 3 4
Plant C, Product 3
Customer Z
Plant D, Product 4 Mixing Warehouse
1 2 3 4
153
Breakbulk
Plant
Breakbulk Warehouse
Customer 1 Customer 2 Customer 3
154
Cross-docking
i. Cross-docking is the practice of unloading materials from incoming transport

vehicles and directly loading these into outbound transport vehicles, with little or
no storage in between
ii. This is a special form of warehousing where the focus is on receiving and
distributing/shipping and eliminating storage and order picking
iii. This is becoming more popular among retailers who can order full truckload and
then remix the same and ship it to various store locations
155
Cross-docking
Stores
B • Receiving
• Staging (<24hr)
Suppliers • Shipping
156
Distribution Centers
i. A distribution center is a warehouse where the main objective is to re-distribute the

goods to retailers or end customers
ii. A distribution center is an integral part of the order-fulfillment process.
iii. They are mostly demand driven
iv. Unlike warehouses where the focus is long-term storage, the focus of distribution
centers is temporary storage and quick distribution.
v. Distribution centers are designed for fast in-warding and rapid shipping.
157
Warehouse functions
i. Receive goods
ii. Identify the goods
iii. Dispatch goods to storage
iv. Hold goods
v. Pick goods
vi. Dispatch shipment
vii. Operate an information system
158
Packaging
Packaging is the process of enclosing or protecting products for distribution, storage, sale
and use.
Packaging and labeling are important value-adding activities of a warehouse
159
Objectives of Packaging
i. Protect the product from damage in transit through to the final use
ii. Protect other products being damaged by the product itself
iii. Protect the handlers of the product from harm
iv. Comply with transport and/or legal requirements
v. Meet an organisation’s image and marketing objectives
vi. Meet an organisation’s environmental commitment
vii. Meet a cost target in order to maintain profitability
160
Void Filling
If there is void space left in a box after the products are filled, then the products
inside can move around and could be damaged. Hence, it is necessary to fill up
the voids. Common items used for filling voids include:
i. Polystyrene chips and beads (environmentally not good)
ii. Shredded paper or ‘wood wool’
iii. Cardboard chips and shredded cardboard
iv. Bubble wrap (polythene product with air pockets)
v. Air filled cushions
vi. Self-expanding foam
161
Material Handling
The function of moving goods or materials within short distances in a storage area or
between a building and a transportation vehicle, is known as material handling. This
may include loading, unloading, palletizing and de-palletizing etc.
Material handling includes consideration of the protection, storage, and control of

materials throughout their manufacturing, warehousing, distribution, consumption,
and disposal
Material handling equipment comprise a wide range of manual, semi-automated and

automated equipment.
162
Manual Material Handling Equipment
Dolly Tote trolley
Turntable truck Flatbed Trolley
163
Forklift Trucks
Reach truck with

Forklift Narrow-aisle trucks
pantograph arrangement
164
Block-grab, Drum lifter, Vacuum lifter
Block grab Drum lifter Vacuum lifter
165
Cranes and Conveyors
Jib Crane
Bridge Crane
Roller Conveyor
Belt Conveyor
166
Pallets and Palletization
i. The pallet itself is a key requirement to any palletised system
ii. Pallets are made of timber, plastic/resin, cardboard, composite materials or even
steel. All have maximum weight load ratings
iii. Common pallet types include Block pallets (4 way) and Stringer pallets (2 way)
iv. Skids: are pallets with no bottom-deck. They are useful as permanent foundation for
heavy machinery
167
Pallets and skids
4-way pallet
2-way pallet
Skid
168
Unitisation
Tote Box
Slip Sheets
i. Unitisation : Unit load is a term to describe the grouping of different items into a
convenient stack or stacks which make them easier to handle and store.
ii. Standardisation is an important theme of unit load system design.
iii. Use of tote boxes and slip sheets facilitate unitisation
169
Space utilization and flexibility
i. Space - Aisle width and rack heights are important considerations. Aisle width depends
on size of items stored and the material handling equipment used. Typical aisle widths –
Convention racking (2.5 to 4.5m), narrow-aisled ( 2m), Very narrow aisled (1.4m) and for
access to items that do not require material handling equipment (1 m). Double-deep
storage racks and carousels improve space utilisation.
ii. Flexibility of storage – Fixed, random or semi-random storage locations. Flexibility to meet
additional demand through temporary storage on site or other buildings, arrangements like
Consignment inventory etc.
170
Improving space utilization in warehouses
i. Reduction of non-moving inventory
ii. Reduction of aisle width just bare enough to accommodate safe material handling
iii. Increasing cube space utilization by increasing stack heights
iv. Use of mezzanine floors
v. Using pallet size/ rack slots close to actual product dimensions
vi. Increase in pallet storage density – use of double-deep storage, push-back rack,
drive-in racks , carton flow and pallet flow racks etc.
171
Use of automation in warehouses
i. Warehouse management system (WMS)

ii. Radio frequency identification (RFID)
iii. Bar codes
iv. Handheld devices
v. Smart glasses or interacting goggles
(Vision Picking)
vi. Automated guided vehicles (AGVs)
vii. Automatic operation vacuum lifters
viii. Automatic storage system with
stock to picker (AS/RS)
ix. Computer-controlled conveyors
x. Automatic packaging machines
172
Automated Guided Vehicles
Automated guided vehicles (AGV) are
battery powered driverless vehicles
(portable robots) that are used for
material movement and positioning.
These usually follow markers or wires
in the floor, or use vision, magnets, or
lasers for navigation.
173
Warehouse Automation
i. Put-to-Light – Put-to-Light systems are an

effective automated sortation method which
use light devices (LEDs) to direct operators to
‘put’ items into the respective locations.
ii. Pick-to-Light – In Pick-to-light systems

light-emitting diodes (LEDs) are used to
guide the operators to the right storage
location and also indicate the number of
items to be picked.
174
Warehouse Automation
A vertical Carousel
Warehouse automation includes Automated Storage

and Retrieval System (AS/RS), carousels, robots,
put-to-light and pick-to-light systems
Carousels are mechanical devices that house and

rotate items for order picking. These can be vertical
or horizontal
175
Strategic Warehousing
i. Warehouses perform a variety of value-added roles like in-bound and out-bound

consolidation, mixing, break-bulk, cross-docking etc.
ii. Modern warehouses often postpone final product configuration by completing functions
like kitting, labelling, specialty packaging etc. Such ‘postponement’ avoids customized
products or packaging in anticipation to customer orders. In addition, postponement
results in reduction in inventory because the base inventory can be used to support
multiple customer requirements.
iii. Warehouses also enable reverse logistics by supporting activities like returns
management, repair, recycling etc.
176
Strategic Warehousing
i. In modern supply chain management, warehousing plays an important strategic role

rather than a ‘passive storage role’.
ii. Warehouses are now more focused towards distribution and assortment. Strategically
located distribution centers are central to modern retailing.
iii. Strategic location of warehouses also offers the benefit of consolidated transportation.
iv. Warehouses are now equipped to respond to changing customer requirements.
177
Inventory Management
Module 6
Contents
i. Fundamentals of Inventory
Management
ii. Types of Inventory
iii. Costs Associated with Inventory
iv. Economic Order Quantity (EOQ)
v. Selective Inventory Control
Techniques like ABC, VED, FSN etc.
vi. Inventory costing techniques – FIFO,
LIFO, Weighted Average etc.
180
What is Inventory?
i. Inventory is the stock of goods and materials that a business holds for the
ultimate goal to have a purpose of resale (or repair)
ii. It is an idle resource of money awaiting future use, transformation or sale. Thus,
inventory includes raw materials, work-in-progress and finished goods
iii. Investment in inventories need to be managed well to improve cash flow and
maximize profits
iv. Inventory management involves optimization of the costs of inventory against
the benefits of inventory
181
Why inventory?
Balancing Supply and Demand –
a) To ensure availability of raw materials and components
for smooth production
b) To ensure availability of ready stock to support sales
c) To meet increased demand due to seasonality, fashion
trends , festivals, events or promotions.
Economies of Scale –
a) Improves economies of scale by enabling purchasing,
transportation and storage in bulk
Protection from uncertainties –
a) Provides a buffer against unanticipated variations in demand
b) Provides a buffer against delay in lead time (or time lag in any part of the supply chain)
c) By decoupling inter-dependent processes in manufacturing or assembly
182
Managing Conflicts
Sales & Marketing
(Full warehouse)
Production
(Surplus Finance
inventory) (Zero inventory)
Stock
Customers
(Timely fulfilment Purchase
of demand) (Trying to balance)
183
The Two Fundamental Inventory Decisions
How much quantity needs to be ordered every time
When to place the orders
184
Classification of Inventory
185
Types of Inventory
Inventory
Pipeline
(In Transit) In Stores
Work-in- Stock in
Production
Progress Trade
Raw Finished Goods for Packaging

Components MRO
Materials Goods Resale Materials
Consumables Spares
186
Types of Inventory
i. Pipeline Inventory (Goods in Transit) - All materials which are in the company’s supply
chain but yet to reach their final destination. These include materials which have been
paid for but not yet received or finished goods shipped but not yet paid for by the
customers.
ii. In Stores Inventory – Includes all materials physically held in stores. These include
production inventories, work-in-progress inventories and stock-in-trade.
iii. Production Inventory – Includes all materials which are used directly in production and
go into making the final product. These are the raw materials, parts or bought-out
components.
187
Types of Inventory
i. Work-in-Progress (Work in Process) – materials in the various stages of the

production process which have been partly transformed
ii. Stock in Trade - All materials which are ready for sale. These include finished
goods held by a manufacturer for sale and goods purchased and stored by traders
(distributors or retailers) for resale. Packaging materials are usually stored in the
finished goods warehouse and hence grouped in this category. However, some
companies treat packaging materials as consumables.
iii. Maintenance Repair and Operating Supplies (MRO) – These include consumables
and spares which help in the production process but do not form part of the
finished product.
188
Economic Order Quantity (EOQ)
189
Costs Associated with Inventory
Ordering Costs – These are sum of all costs associated with ordering and
acquisition of the inventory items. These include
i. Cost of order-placement: All costs involved in procurement viz. indenting,
sourcing, tendering, negotiating, releasing purchase orders, follow-ups, releasing
payment etc.
ii. Cost of inbound logistics including transportation, receiving and inspection
iii. Set up Costs - include the costs incurred for machine set up during production
changeover. It is usually assumed that set up costs contribute to a fixed portion
of the ordering cost which is independent of the quantity ordered.
190
Holding Costs (Carrying Costs) – These are sum of all costs for storing inventory.
These include:
i. Capital Costs – The cost of lost opportunity due to investments tied up in inventory
ii. Inventory Service Costs – Costs of taxes paid on inventory and cost of insuring inventory
against theft, fire etc.
iii. Storage Costs – All costs associated with warehousing viz. rent, depreciation, maintenance,
illumination, air-conditioning, material handling, salaries and wages of stores staff etc.
iv. Cost of Inventory Risks- Cost of damage, obsolescence, shrinkage, pilferage and relocation
It is estimated that cost of carrying inventory in most industries varies between 25 to 30% of the
annual average inventory value
191
Shortage Costs (Under stocking Costs) – These are sum of all costs for not
storing adequate inventory. These include:
i. Loss of Production
ii. Loss of Sales
iii. Cost of emergency procurement/replenishment
iv. Cost of penalties
v. Loss of goodwill
192
1 The answer to ‘how much to order’ is the optimal

ordering policy or ordering according to the Economic
Order Quantity (EOQ).
2 EOQ is the number of units that a company should add

to inventory or order every time in order to optimize
the total inventory cost.
3 Graphically (as well as numerically) it may be shown

that the total inventory cost is minimum when total
ordering cost equals total inventory carrying cost.
193
194
EOQ
i. Let ‘D’ denote the annual demand of an item
ii. Let ‘Co’ denote the cost/order ( ordering cost / order)
iii. Let ‘Cc’ denote the inventory carrying cost (expressed as a percentage of
average annual inventory value)
iv. Let ‘p’ be the unit price of the item
v. Let ‘q’ denote the quantity per order
vi. Then, the EOQ can be expressed as
2 x D x Co
q* =
p x Cc
195
Limitations of EOQ
i. The EOQ formula does not take care of price changes and changes in
transportation costs due to changing volumes.
ii. The EOQ assumes that the demand is constant and uniform throughout the
year
iii. It is very difficult to precisely estimate the ordering and carrying costs.
iv. Often EOQ can not be strictly followed due to the following constraints:
a) Manufacturing requirements of fixed batch size
b) Packing size
c) Transportation capacity
d) Storage capacity
e) Shelf life
196
Selective Inventory Control
197
Selective Inventory Control
i. It is practically not possible to control each and individual item held in inventory nor
each item merits the same focus and control. Items are therefore categorized into
different groups based on various facets of the item and controlled selectively with
varying degrees of attention.
ii. Such selective inventory control helps in achieving the overall objective of inventory
management which is optimizing investment on inventory while minimizing stock-
outs.
iii. There are various ways of classifying materials for selective inventory control viz.
ABC, VED, FSN etc.
iv. At times, a combination of two or more such classifications are used simultaneously
to devise the control strategy. In MUSIC-3D (Multi Unit Selective Inventory Control –
the 3 dimensional approach) a grid is formed with a combination of three selective
techniques and strategy formulated for each cell of the grid.
198
ABC Analysis
i. ABC Analysis – This is based on Pareto’s Principle of ‘Vital Few’ and ‘Trivial Many’. It is
seen that only a small number of items account for a major portion of the total
expenditure (or revenue in case of finished goods). As a rule of thumb, about 10% of
the top items account for about 70% of the consumption value or expenditure. These
are called ‘A’ class items. The bottom 70% of items account for about 10% of the total
consumption value. These are called ‘C’ class items. The remaining are called ‘B’ class
items. It may be noted that ABC analysis is based on the annual usage value (or annual
consumption value) which is the total quantity consumed during the year multiplied by
unit price of the items.
ii. ‘A’ class items require constant monitoring and strict control while ‘C’ class items can
be reviewed only at periodic intervals. Procurement policy of A class items may include
‘small lots with frequent deliveries’ whereas that for ‘C’ class items may be ‘large lots
with infrequent deliveries’
199
ABC Analysis
200
VED Analysis
VED Analysis – This is based on the criticality of items.

i. The non availability of some items are very costly since they shut down production
completely or slow down production to a great extent. These are called ‘Vital’ or ‘V’
class items.
ii. Items which are not as critical as ‘V’ items but their stock outs are still expensive,
are categorized as ‘Essential’ or ‘E’ class items.
iii. Items which are not at all critical to production but the non availability of these
items may lead to inconvenience and hence better to avoid stock outs, are
classified as ‘Desirable’ or ‘D’ class items.
iv. VED analysis is particularly useful for classifying and managing spares. The
Insurance Spares are typical ‘V’ class items.
201
FSN Analysis
FSN Analysis – Items are classified as fast moving (F), slow moving (S) or non-moving (N)
based on the pattern of usage (frequency of issue from stores). Items which are consumed
regularly, say every week, are categorized as ‘F’. The items which have no consumption at all
during a particular year are categorized as ‘N’. The items which are consumed only once in a
while are termed ‘S’. The actual time frequencies for such classification vary from
organization to organization. FSN analysis helps in controlling obsolescence by monitoring
and controlling the non-moving items.
202
Reasons for Excess / Obsolete Inventory
Poor demand forecasting

A D Excess ordering
Changes in production
B structure/nature E Bullwhip effect
Technological changes -
C Original equipment obsolete
leading to obsolescence of F Expiry of shelf life
related spares
203
Managing Obsolescence
Holding on to excess or obsolete inventory uses up investments. The idea is to eliminate the excess
/ obsolete stocks promptly and use the freed up resources more gainfully. The following are useful
in managing excess/obsolete inventory:
i. Establish a system of identifying obsolescence
ii. Strict review on the top non-moving items
iii. Practicing First-in-First-out (FIFO) as far as practicable
iv. Sharing the list of non-moving items with relevant users highlighting the value of the stock
and periodic review with the users
v. Create accountability for usage
vi. Divert inventory to other plants
vii. Explore return to supplier for a credit
viii. Liquidate through sale / auction
ix. Put embargo on new purchases till the old stock is not used up/liquidated
x. Try Vendor Managed Inventory techniques like consignment inventory
204
Managing Uncertainties
205
Service Level
i. Service level may be defined as the ability to meet customer demand. In Inventory
Management, Service Level is defined in the following ways:
ii. Fill Rate- The percentage of demand fulfilled without backorders or lost sales. Fill rate is
again categorized as:
i. Product Fill Rate – Percentage of total demand met from existing inventory
(measured in terms of quantity)
ii. Order Fill Rate – It is defined as the percentage of orders fulfilled from available
inventory. In a single product scenario, there is no significant difference between
product fill rate and order fill rate. However, for multiproduct scenarios, the order
fill rate tends to be lower than product fill rate.
206
Service Level
Cycle Service Level- The percentage of replenishment cycles without any stock out. In
other words, Cycle Service Level defines the probability of not hitting a stock out during an
inventory replenishment cycle.
Higher the targeted service level, higher should be the stock. In fact, theoretically, a 100%
service level should require infinite stocks. It is also seen that the cost of increasing
service level is not linear, i.e. the cost of increasing service level from 98% to 99% is far
more costly than increasing it from 90% to 91%.
Achieving a target service level should therefore involve a trade off between inventory
investments and stock out costs.
207
Service Level Vs. Safety Stock
Cost of Safety Stock
Service Level
Cost of Increasing Safety Stock with Increase in Service Level
208
Re-order Level
i. The Re-order Level (ROL) or the Re-order Point (ROP) is defined as that level of
inventory which should trigger a replenishment action. When the stock level falls to
ROL, actions should be initiated for stock replenishment. In other words, ROL is the
answer to “When to Order?”
ii. The ROL has to take care of both the Demand Uncertainty as well as the Supply
Uncertainty. Therefore, it is essential to estimate the following:
a. Demand variability - Demand forecasts are always associated with errors. From
past data, estimates should be made for maximum demand and average
demand over a period of time.
b. Lead Time variability – Lead time may fluctuate due to uncertainties associated
with the supplier, the market or the supply chain. From past data, estimates
should be made regarding average lead time and maximum lead time.
209
Re-order Level
210
Inventory Accounting and Valuation
i. Inventory value = Number of items held X cost per unit
ii. Cost of Goods Sold (COGS) = Opening inventory + purchases (or value of goods
manufactured) – Closing inventory
iii. COGS has a direct bearing on the company’s profit calculations. Thus, inventory
valuations influence the company’s profits
iv. The four methods of inventory valuation include:

a. Specific Identification
b. LIFO
c. FIFO
d. Average Cost
v. Specific Identification Method – This involves identifying individual items and

issuing them at the prices at which they were procured. In this method, each
individual item has to be distinctly identified. This is possible only for large items like
cars, machines etc.
211
Inventory Accounting and Valuation - FIFO
First in First Out (FIFO) – In this method, the earliest or oldest inventories are to be issued
first and priced at the cost at which the consignments were received in stores.
i. Advantages:
a. Physical practice of FIFO would minimize expiry of materials
b. Easy to understand since it assumed that the goods are issued in order of receipt
c. Materials issued at purchase price
d. The closing stock closely reflects current market prices
ii. Disadvantages:
a. Costs at which goods are issued do not reflect current prices
b. Difficult to maintain records of prices of past purchases
c. During rising prices, this method would result in higher profits resulting in higher
tax burdens
212
Inventory Accounting and Valuation - LIFO
i. Last in First Out (LIFO) – In this method, the inventories from the latest consignments
are to be issued first and priced at the cost at which the latest consignments were
received in stores.
ii. Advantages:
a. Materials issued at current market prices
b. During increasing price trends, the cost of goods sold is increased thereby
lowering profits which helps to keep the tax burden low.
iii. Disadvantages:
a. It is unrealistic and counter intuitive
b. Physically some groups of items may remain unused (or unsold) for prolonged
periods leading to obsolescence
c. Accounting is difficult due to maintenance of several cost layers
d. Is not permitted many international Accounting Standards
213
Inventory Accounting and Valuation– Average Cost
Average Cost (AVCO) – In this method, the issue price is an average price. In some cases,
the simple average of the purchase prices of previous lots is used. However, the most
common practice is to use a weighted average price which is calculated by dividing the
total cost of stock by the total quantity in that stock.
i. Advantages:
a. Fluctuations in purchase prices are smoothed out and issue prices vary less
b. Does not increase or decrease profits like in FIFO or LIFO
c. Calculations are amenable to computerization
ii. Disadvantages:
a. After every receipt the new weighted average has to be calculated
b. Actual issue prices or inventory values may never match exact purchase prices
burdens
214
Stock Taking
i. Stock taking or stock verification is the physical verification of the quantities and condition
of the items held in a warehouse.
ii. It involves physical counting, measuring or weighing of items and comparing the physical
balance with the quantity in the records
iii. The objectives of stock verification are:

a. To verify the accuracy of inventory records
b. To identify stock discrepancies, investigate the reasons of such discrepancies and
reconcile the differences between physical balance and system balance
c. To support the value of inventory shown in the financial statements
215
Stock Taking
i. Two methods of stock taking include:
a. Periodic Count – This involves stock taking on a periodic basis where the
periodicity could be annual or half-yearly, quarterly etc. Annual stock taking is
usually undertaken at the end of the fiscal year which enables the valuation of the
closing inventory value which in turn helps the preparation of the financial
statements.
b. Cycle Count - This involves stock taking on a continual or perpetual basis
without disrupting daily operations. Cycle counts can be used for high-value or
critical items. Dedicated teams are deployed for cycle counts. Usually each item
is verified at least once a year in this method.
216
Managing discrepancies
i. Major reasons of stock discrepancies include:

a. Use of wrong SKU code
b. Wrong labeling on stocks
c. Storage in wrong location
d. Stock mistaken due to similarity in shape /size / color etc.
e. Wrong ‘unit of measure’ used
f. Wrong data entry
g. Missing paperwork or transaction not recorded
h. Pilferage
i. Wrong counting during physical stock taking
ii. Inventory stock verification must be carried out to unearth such discrepancies and
reconcile these at the earliest to improve inventory record accuracy, which is one of
the key performance metrics of a warehouse.
217
Incoterms 2020
Module 7
Contents
i. Role of the International Chamber
of Commerce
ii. What are Incoterms?
iii. INCOTERMS 2020
iv. The connotation of each
INCOTERMS rule
v. Multimodal versus Sea/Inland
Waterway Incoterms
220
International Chamber of Commerce (ICC)
ICC is a non-profit, private international organization that works to promote and support
global trade and globalization.
ICC has direct access to national governments worldwide through its national committees
among others.
The ICC International Court of Arbitration is a body which hears and resolves private
disputes between parties.
ICC was founded in 1919, head quartered in Paris
221
What are Incoterms ?
i. Incoterms or international commercial terms are a series of international trade terms,

published by the International Chamber of Commerce (ICC).
ii. A series of three-letter trade terms which are easily understood
iii. Applicable for both domestic and international trade
iv. Have legal recognition
v. Is not a contract, but it indicates what has been contractually agreed to into a contract!
vi. They closely correspond to the U.N. Convention on Contracts for the International Sale of
Goods(CISG)
222
What do Incoterms Convey?
Define the responsibilities

between Sellers and Buyers
under the contract of sale
with respect to:
Task Ownership
Cost Ownership
Risks and Liabilities
223
Evolution of Incoterms
i. First set of 6 Incoterms published in 1936 viz. FAS, FOB, C & F, CIF, Ex Ship and Ex
Quay.
ii. Revision in 1953 – Introduction of trade terms for non-maritime transport viz. DCP
(Delivered Costs Paid), FOR (Free on Rail) and FOT (Free on Truck) introduced.
iii. Revision in 1967 – Some misinterpretations of the previous version were addressed
and two new terms introduced viz. DAF (Delivery at Frontier) and DDP ( Delivery at
Destination)
iv. Revision in 1976 – FOB Airport (Free on Board Airport) introduced to keep pace with
increased air transportation and aimed to allay confusion around the term FOB (Free
on Board) by signifying the exact “vessel” used
224
i. Revision in 1980 – FRC (Free carrier….at named point) – which provided for goods not
received at ship’s side but at a reception point on shore, such as container yard . This
was necessary to keep pace with the increased use of containers.
ii. Revision in 1990 – Simplified the Free Carrier term. FOT, FOR, FOB Airport were replaced
by FCA
iii. Revision in 2000 – Changes introduced in FAS and DEQ Incoterms to facilitate
compliance to Customs Practices
iv. Revision in 2010- The D family of rules (DAF, DES, DEQ and DDU) were consolidated into
two terms viz. DAT and DAP. Other modifications included an increased obligation for
buyer and seller to cooperate on information sharing and changes to accommodate
“string sales.”
225
i. Revision in 2020 – The new revision was published in September 2019 and is effective
from 1st January 2020 . The new edition is available in 29 languages
ii. There are a total of 11 trade terms in 2020 with DAT (Delivered at Terminal) replaced
by DPU (Delivered at Place Unloaded)
iii. Other changes include:
a. Provision for Bill of ladings with on-board notification for the FCA rule even when
the delivery is made to a carrier before shipment.
b. Aligns different levels of insurance coverage for CIP and CIF rules
c. Arrangements for carriage with own means of transport in FCA, DAP, DPU and
DDP
d. Security-related requirements within carriage obligations and costs.
226
What the Incoterms do not do
i. They are not in themselves and no substitute for contract of sale.
ii. They are not specific to any particular type of goods
iii. They do not relate to :
a. The specification of the goods sold
b. The time, place, method or currency of payment
c. The remedies for breach of contract of sale or breaches in the performance of

contractual obligations
d. Transfer of property rights in the goods
e. Relief from obligations and exemptions from liability in case of force majeure
227
What Incoterms are not
The Incoterms 2020 are not themselves a contract of sale :

they only become part of that contract when they are
incorporated into a contract which already exists. Neither do
the Incoterms rules provide the law applicable to the contract.
228
INCOTERMS 2020 – how to incorporate
[ The chosen Incoterms rule],[named port, place or point]

Incoterms 2020
Example: CIF Port of Jabel Ali, Dubai, Incoterms 2020
229
The Articles of Incoterms 2020
i. The sequence of the obligations of the seller and buyer have been radically
changed in the new revision 2020.
a. Sections A1/B1: General obligations
b. Sections A2/B2: Delivery/taking delivery
c. Sections A3/B3 : Transfer of risks
d. Sections A4/B4 : Carriage
e. Sections A5/B5 : Insurance
f. Sections A6/B6 : Delivery / transport document
g. Sections A7/B7 : Export / import clearance
h. Sections A8/B8 : Checking / packaging / marking
i. Sections A9/B9 : Allocation of costs
j. Sections A10/B10 : Notices
ii. Delivery and transfer of risks have been prominently placed in sections 2 and 3.
Sections 4 and 5 relate to ancillary contracts
230
Focus of the Incoterms 2020
The most important initiative behind the Incoterms 2020 rules has been the
focus on the correct usage through:
i. Better presentation to steer the users towards the right rule
ii. Clearer explanation of the demarcation between the sale contract and
ancillary contracts
iii. Re-ordering of the rules giving delivery and risk more prominence
231
The importance of ‘Delivery’
i. Delivery – The place/point where the seller is supposed to

“deliver” the goods to the buyer. The point of delivery may or may
not be the point of destination
ii. The point of delivery is critical since it acts as a basis for

allocation of costs and risks
iii. Premature transfer of risk : In some cases, the risk can be

transferred from the seller to the buyer even before the seller has
fulfilled his delivery obligation. This could happen as a result of
either the buyer’s failure to do what is required of him to enable
the seller to deliver the goods to him, or the buyer’s failure to take
delivery of the goods.
232
Reasons for premature transfer of risks
If the buyer fails to give

notice in accordance with
B10, then the buyer bears all If the buyer fails to nominate If the buyer fails to fulfill
risks of loss or damage to the a carrier or another person to obligations in accordance
goods from the agreed date take delivery or the carrier / with B7 i.e. the buyer fails to
or the end of the agreed nominated person fails to arrange import clearance or
period for delivery/shipment, take delivery (FCA) fails to assist the seller with
provided that the goods have export / transit clearance
been clearly identified as the
contract goods
233
The traditional grouping
Buyer obligation
E EXW increasing
F FCA, FAS, FOB
C CPT, CIP, CFR, CIF
Seller obligation D DAP, DPU, DDP

increasing
234
Incoterms 2020 Rules based on Mode of Transport
Sea / Inland
Multimodal
waterway
EXW FAS
FCA FOB
CPT CFR
CIP CIF
DAP
DPU
DDP
235
Multimodal Incoterms
“The Multimodal Incoterms may be chosen for maritime

transport and should be chosen for wholly or partly non-
maritime transport”
236
EXW – Ex Works
i. EXW (named place of delivery) Incoterms 2020
ii. Delivery: The seller delivers when it places the goods at the disposal of the buyer at
a named place, which may or may not be the seller’s premises. For delivery to occur,
the seller has no obligation to load or clear the goods for export.
iii. Loading: The seller has no obligation to load. However, even if the seller loads the
goods (which is a common trade practice) the risk lies with the buyer unless
mutually agreed otherwise.
iv. Export/ Import clearance: The buyer has the obligation to clear both for export and
import, however, the seller must fulfill obligations in accordance with A7.
237
FCA – Free Carrier
i. FCA (named place of delivery) Incoterms 2020

ii. Delivery: The seller delivers in either of the two ways:
a. If the named place is the seller’s premises, then the goods are delivered once
they are loaded on the means of transport arranged by the buyer
b. When the named place is another place, the goods are delivered when they are
loaded on the seller’s means of transport and it reaches the named other place
and are ready for unloading and are at the disposal of the buyer or another
person nominated by the buyer
iii. The risk transfers at the place or point of delivery. The risk may transfer prematurely
when the buyer fails to provide notice or nominate a carrier or fails to take delivery.
238
i. Place or point of delivery : The parties are advised to specify as clearly as possible the
precise point within the named place of delivery. This precise point makes allocation of
costs and risks clear to both parties. If no precise point is specified, then the seller has the
right to select the point that best suits its purpose. The buyer should therefore avoid this
loose end by precisely specifying the point of delivery.
ii. The seller may deliver by procuring the goods. The reference to ‘procure’ caters to
multiple sales down a chain (string sales), particularly common in commodity sales
iii. Export clearance is the obligation of the seller
239
i. Bills of lading with an on-board notation – The seller may sometimes need a bill of lading with
an on-board notation typically because of a bank collection or letter of credit. However, the
carrier (which may be the buyer’s road hauler) is not obliged to issue a B/L with on-board
notation since the place where the carrier receives the goods is different from the port of
shipment and the on-board notation implies that the goods have been loaded on board the
vessel. The Incoterms 2020 rules provide an option that the buyer may instruct the carrier to
issue a B/L with on-board notation to the seller. If and when the B/L with on-board notation is
issued to the seller by the carrier at the buyer’s cost and risk, the seller must provide the
document to the buyer to enable the buyer to obtain discharge of the goods from the carrier.
The seller, however, is under no obligation to the buyer as to the terms of the carriage. When
this option is adopted, then the dates of inland delivery and loading on board may be different
which may create difficulties for the seller under a letter of credit.
240
CPT – Carriage Paid To
i. CPT (named place of destination) Incoterms 2020
ii. Delivery:
a. The seller delivers by handling them over to the carrier contracted by the seller
or by procuring the goods so delivered. The seller may do so by giving the
carrier physical possession of the goods in the manner and at the place
appropriate to the means of transport used.
b. Once the goods have been delivered to the buyer in this way, the seller does not
guarantee that the goods will reach the place of destination in sound condition,
in the stated quantity or indeed at all.
241
i. Transfer of risk : The risk transfers to the buyer from the point of delivery in the place
of origin. The parties are advised to precisely agree on the point of delivery especially
when several carriers are engaged each for different legs of transport from delivery to
destination. When this happens and the parties do not agree on a specific place or
point of delivery, the default position is that risk transfers when the goods have been
delivered to the first carrier at a point entirely of the seller’s choosing and over which
the buyer has no control.
ii. Should the parties wish the risk to transfer at some later stage (or earlier), then the
parties should specify this in the contract of sale after considering the consequences
of doing so especially in case the goods are lost or damaged.
242
i. Costs to be paid by the seller: All costs including the costs of goods for packing,
checking, weighing etc. required for delivery, costs of loading, transport-related security
costs and carriage till the point of destination including any costs of transit that were
for the seller’s account under the contract of carriage.
ii. Costs of unloading at destination: If the seller incurs costs under its carriage related to
unloading at the named place of destination, the seller is not entitled to recover such
costs from the buyer unless otherwise agreed between the parties.
iii. Contract of carriage: The seller must contract (or procure a contract) for carriage from
the agreed point of delivery to the named place of destination. The contract must be
made by the usual route in a customary manner of the type normally used for the type
of goods sold. If the point of delivery in the destination is not precisely agreed, the seller
may select the point that best suits its purpose
243
i. The buyer must pay :

a. all costs relating to the goods from the time they have been delivered
b. all costs and charges relating to the goods while in transit until their arrival at
the agreed place of destination, unless such costs and charges were for the
seller’s account under the contract of carriage
c. unloading costs, unless such costs were for the seller’s account under the
contract of carriage
d. any additional costs incurred if the buyer fails to give notice to the seller
ii. The buyer must, whenever it is entitled to determine the time for dispatching the
goods and/or the named place of destination or the point of receiving the goods
within that place, give the seller sufficient notice thereof.
244
CIP– Carriage and Insurance Paid To
i. CIP (named place of destination) Incoterms 2020

ii. Delivery:
a. The seller delivers by handling them over to the carrier
contracted by the seller or by procuring the goods so
delivered. The seller may do so by giving the carrier
physical possession of the goods in the manner and at
the place appropriate to the means of transport used.
b. Once the goods have been delivered to the buyer in this
way, the seller does not guarantee that the goods will
reach the place of destination in sound condition, in
the stated quantity or indeed at all.
245
i. Obligations of the seller are same as those of the CPT Incoterm except for the seller
also has to contract for insurance against the buyer’s risk of loss or damage to the
goods. However, if the destination country requires insurance to be procured locally,
then the parties should consider using the CPT rule instead of CIP.
ii. The seller must obtain at its own expense, extensive cargo insurance complying with
Institute Cargo Clauses (A) or similar clause, rather than with the more limited cover
under the Institute Cargo Clauses (C). However, it is still open to the parties to agree
on a lower level of cover.
iii. The insurance shall cover, at a minimum, the price provided in the contract plus 10%
(i.e., 110%) and shall be in the currency of the contract.
246
i. The seller will also arrange for additional insurance at the request and expense of the
buyer, provided such additional insurance cover is procurable
ii. The insurance shall cover the goods from the point of delivery to at least the named
place of destination.
iii. The seller must provide the buyer with the insurance policy or other evidence of
insurance cover.
iv. Moreover, the seller must provide the buyer, at the buyer’s request, risk, and expense (if
any), with information that the buyer needs to procure any additional insurance.
247
DAP – Delivered at Place
i. DAP (named place of destination) Incoterms 2020
ii. Delivery:
a. The seller delivers the goods and transfers the risk to the buyer when the goods
are placed at the disposal of the buyer on the arriving means of transport ready
for unloading at the named place of destination or at the agreed point within that
place, if any such point is agreed
b. The seller bears all risks involved in bringing the goods to the named place of
destination or to the agreed point within that place. Delivery and arrival at
destination are the same.
248
i. The point of delivery/destination should be as clearly specified as possible to avoid any

confusion related to transfer of risk or allocation of costs
ii. The seller must arrange for export clearance
iii. The seller must contract at its own expense for the carriage of the goods to the named
place of destination.
iv. Unloading charges at the point of destination required to take delivery of the goods are to
borne by the buyer unless those were for the seller’s account under the contract of carriage
or agreed otherwise between the parties
v. The seller has no obligation to the buyer to make a contract of insurance. However, the
seller must provide the buyer, at the buyer’s request, risk, and expense (if any), with
information that the buyer needs for obtaining insurance.
249
i. The buyer must arrange for import clearance
ii. The buyer has no obligation to the seller to make a contract of carriage
iii. The buyer has no obligation to the seller to make a contract of insurance. However,
the buyer must provide the seller, upon request, with the necessary information for
obtaining insurance
iv. The buyer must take delivery of the goods when they have been delivered
v. The buyer must, whenever it is entitled to determine the time within an agreed period
and/or the point of taking delivery at the named terminal, give the seller sufficient
notice thereof.
250
i. The buyer must accept the delivery document provided
ii. The buyer must pay for all costs from the time they have been delivered
iii. The buyer must also pay for any additional costs that the seller had to incur due to
failure on part of the buyer to fulfill obligations related to import clearance or failure
to provide notice, provided the goods have been identified as the contract goods
iv. Risk may be transferred pre-maturely to the buyer if the buyer fails to fulfill
obligations related to import clearance or when the seller is unable to fulfill its
obligations for delivery due to failure on part of the buyer to provide notice to the
seller regarding time or place of delivery
251
DPU – Delivered at Place Unloaded
i. DPU (named place of destination) Incoterms 2020

ii. Delivery:
a. The seller delivers the goods and transfers the risk to the buyer when the goods
are unloaded from the arriving means of transport and are placed at the disposal
of the buyer at a named place of destination or at the agreed point within that
place, if any such point is agreed
b. The seller bears all risks involved in bringing the goods to and unloading them to
the named place of destination or to the agreed point within that place. Delivery
and arrival at destination are the same.
252
DPU – Delivered at Place Unloaded
i. Obligations of the seller and those of the buyer are the

same as in DAP except the seller has the obligation to
unload the goods at the destination
ii. This is the only Incoterms rule that requires the seller to
unload goods at destination. The seller should therefore
ensure that it is in a position to organize unloading at the
named place. Should the parties intend the seller not to
bear the risk and cost of unloading, the DPU rule should be
avoided and DAP rule should be used instead
253
DDP – Delivered Duty Paid
i. DDP (named place of destination) Incoterms 2020
ii. Delivery:
a) The seller delivers the goods when the goods are placed at the disposal of the buyer,
cleared for import on the arriving means of transport ready for unloading at the
named place of destination, or at the agreed point within that place, if any such point
is agreed.
b) The seller bears all risks involved in bringing the goods to the named place of
destination or to the agreed point within that place. Delivery and arrival at destination
are the same.
254
DDP – Delivered Duty Paid
i. The obligations of the buyer and those of the seller are similar to those of
the DAP Incoterm except for the major difference that the seller has to clear
the goods for import as well
ii. The seller has to arrange both export and import clearances and complete
customs formalities at its own risk and cost
iii. If the seller is unable to obtain import clearance and would rather leave it to
the buyer, then the seller should consider choosing DAP or DPU.
255
Sea/Inland Waterway Incoterms
“The Sea/ Inland waterway transport Incoterms should only be chosen

for maritime transport”
256
FAS – Free Alongside Ship
i. FAS (named port of shipment) Incoterms 2020
ii. Delivery:
a. The seller must deliver the goods either by placing them alongside the ship
nominated by the buyer at the loading point, if any, indicated by the buyer at the
named port of shipment or by procuring the goods so delivered.
b. The risk of loss or damage to the goods transfers when the goods are alongside the
ship and the buyer bears all costs from that moment onwards.
iii. The FAS rule is not appropriate where goods are handed over to the carrier before they are
alongside the vessel, for example, where the goods are handed over to a carrier at a
container terminal. In such cases, parties should consider using the FCA rule rather than
the FAS rule.
257
i. The seller must arrange for export clearance

ii. The seller has no obligation to the buyer to make a contract of carriage. However, if
requested by the buyer or if it is commercial practice and the buyer does not give an
instruction to the contrary in due time, the seller may contract for carriage on usual
terms at the buyer’s risk and expense. In either case, the seller may decline to make
the contract of carriage and, if it does, shall promptly notify the buyer.
iii. The seller has no obligation to the buyer to make a contract of insurance. However,
the seller must provide the buyer, at the buyer’s request, risk, and expense (if any),
with information that the buyer needs for obtaining insurance.
iv. The seller must, at the buyer’s risk and expense, give the buyer sufficient notice
either that the goods have been delivered or that the vessel has failed to take the
goods within the time agreed.
258
i. The buyer has to arrange for import clearance

ii. The buyer must contract, at its own expense for the carriage of the goods from the
named port of shipment, except where the contract of carriage is made by the seller on
the request of the buyer
iii. The buyer has no obligation to the seller to make a contract of insurance
iv. The buyer must take delivery of the goods when they have been delivered
v. The buyer must pay all costs from the time the goods have been delivered. In addition,
the buyer has to pay any additional costs that were incurred because the buyer failed to
provide notice to the seller or the vessel nominated by the buyer fails to arrive on time,
unable to take the goods or closes for cargo earlier than the time notified. In such cases,
the risk passes to the buyer pre-maturely, provided the goods are identified as the
contract goods.
259
FOB – Free on Board
i. FOB (named port of shipment) Incoterms 2020

ii. Delivery:
a. The seller delivers the goods on board the vessel nominated by the buyer at the
named port of shipment or procures the goods already so delivered
b. The risk of loss or damage to the goods transfers when the goods are on-board the
vessel, and the buyer bears all costs from that moment onwards.
iii. The FOB rule is not appropriate where goods are handed over to the carrier before they are
on board the vessel, for example, where the goods are handed over to a carrier at a
container terminal. In such cases, parties should consider using the FCA rule rather than the
FOB rule.
iv. The obligations of the seller and those of the buyer are otherwise similar to those in the FAS
Incoterm.
260
FOB – Free on Board
Loading and Risk Transfer Point : Under Incoterms 2000 rules, the risk of goods would pass
to the buyer when the goods crossed the ship’s rail . However, it was not practical to imagine
that a hypothetical line exists to demarcate as to when the goods would pass the ship’s rail.
In the 2010 revision, however, it was clarified that the risk passes when the goods are ‘on
board’ the vessel. However, problem still remains with respect to the exact point for the
division of the risk, which depends on the type of goods and the method used to bring the
goods on board the ship.
Moreover, it has been mentioned that the goods are to be delivered “as per customary
practices in the port”. However, the commercial practices are not consistent across all ports.
Usually the task of loading is performed by stevedoring companies, and the practical
problem normally lies in deciding who should bear the costs of their services.
261
CFR – Cost and Freight
i. CFR (named port of destination) Incoterms 2020

ii. Delivery:
a. The seller delivers the goods on board the vessel or procures the goods
already so delivered.
b. The risk or loss of damage to goods transfers when the goods are on board
the vessel, such that the seller is taken to have performed its obligation to
deliver the goods whether or not the goods actually arrive at the destination in
sound condition, in the stated quantity, or indeed, at all.
c. If multiple carriers are used ( e.g. a feeder vessel and an ocean vessel), then by
default the risk passes when the goods are delivered to the first carrier unless
agreed otherwise in the contract of sale.
262
i. While the contract will always specify a destination port, it might not specify the port
of shipment, which is where the risk passes to the buyer. If the shipment port is of
particular interest to the buyer, the parties should identify it as precisely as possible
in the contract
ii. The seller must contract or procure a contract for the carriage of the goods from the
agreed point of delivery, if any, at the place of delivery and bear costs of carriage to
the named port of destination or, if agreed, any point at that port. The contract of
carriage must be made on usual terms at the seller’s expense and provide for
carriage by the usual route in a vessel of the type normally used for the transport of
the type of goods sold.
iii. The seller has to bear the costs of loading on the vessel.
263
i. The seller owes no obligation to the buyer to purchase insurance cover. The buyer should
purchase its own insurance cover.
ii. The unloading cost (including lighterage and wharfage charges) at the port of destination
is usually on the buyer. If the seller incurs costs under its contract of carriage related to
unloading at the specified point at the port of destination, the seller is not entitled to
recover such costs from the buyer unless otherwise agreed between the parties.
iii. The buyer has to bear all costs and charges relating to the goods while in transit until their
arrival at the port of destination, unless such costs and charges were for the seller’s
account under the contract of carriage.
iv. The CFR may not be appropriate where goods are handed over to the carrier before they
are on board the vessel. In such circumstances, the CPT rule should be used.
264
CIF – Cost, Insurance and Freight
i. CIF (named port of destination) Incoterms 2020
ii. Delivery:
a. The seller delivers the goods on board the vessel or procures the goods already
so delivered. The seller must contract for and pay the costs and freight necessary
to bring the goods to the named port of destination.
b. The risk or loss of damage to goods transfers when the goods are on board the
vessel, such that the seller is taken to have performed its obligation to deliver the
goods whether or not the goods actually arrive at the destination in sound
condition, in the stated quantity, or indeed, at all.
c. If multiple carriers are used ( e.g. a feeder vessel and an ocean vessel), then by
default the risk passes when the goods are delivered to the first carrier unless
agreed otherwise in the contract of sale.
265
CIF – Cost, Insurance and Freight
i. The obligations of the buyer and those of the seller are similar to those of the CFR rule
except for the seller must contract for insurance cover against the buyer’s risk of loss or
damage to the goods from the point of delivery to at least the point of destination. If the
destination country requires insurance to be procured locally, then the parties should
consider using the CFR rule instead of CIF.
ii. The rules for contract of insurance cover are same as those in the CIP rule except the
seller is required to obtain limited insurance cover complying with Institute Cargo Clauses
(C) instead of the more extensive cover under the Institute Cargo Clauses (A). However,
the parties can mutually agree on a higher level of cover.
iii. CIF may not be appropriate where goods are handed over to the carrier before they are on
board the vessel In such circumstances, the CIP rule should be used.
266
Guidelines on Using Incoterms
i. When completing documents we should ensure that we are using the correct format
of a term (CFR / C+F)
ii. We should draw up a check list of our duties and rights under the selected term and
check that every intended or completed transaction conforms to this list, and that
nothing is omitted. We should request our trading partner to do same and exchange
information.
iii. We should never instruct the carriers or any third party to do or omit anything on the
basis of the Incoterms which do not apply to them at all
iv. We should inform our bank and insurance company which Incoterm(s) have been
selected for our business, so that they can determine exactly what our duties and
rights are with regard to a transaction in which they may have a role to play.
267
Trade Payment
Methods
Module 8
Contents
i. International trade payments

ii. Clean Payments
iii. Documentary Payments
iv. UCP 600 and Letter of Credit
v. LC opening and working cycles
vi. Types of LC
vii. Trade documents – Bill of
Exchange, Commercial Invoice, Bill
of Lading etc.
270
International Payment Methods
Clean Payments
Each of the above

methods has its Documentary
own set of Collections
advantages and
disadvantages
to the buyer and to
the seller
Letters of Credit
271
Clean Payments
i. Clean Payments are characterized by trust. Either the exporter ships the goods and
trusts the Importer to pay once the goods have been received, or the Importer
trusts the exporter to dispatch the goods after payment is effected
ii. There are two types of Clean Payments: Open Account & Payment in Advance
a) Open Account : The Importer is trusted to pay the exporter after receipt of the
goods
b) Payment in Advance : An arrangement whereby the exporter is trusted to ship

the goods after receiving payment from the Importer
272
Payment through Documentary Collections
i. A method of payment used in international trade whereby the Exporter entrusts

the handling of commercial and financial documents to banks and gives the
banks instructions concerning the release of these documents to the Importer
ii. Banks involved do not provide any guarantee of payment
iii. Collections are subject to the Uniform Rules for Collections published by the
International Chamber of Commerce. The last revision of these rules came into
effect on January 1, 1996 and is referred to as the URC 522
273
Types of Documentary Collections
i. Documents Against Payment (D/P) : Documents are released to the importer only
against payment. Also known as a Sight Collection or Cash Against Documents
(CAD)
ii. Documents Against Acceptance (D/A) : Documents are released to the importer
only against acceptance of a draft. Also known as a Term Collection
iii. The mechanics of a Documentary Collection are easily understood when

separated into the following three steps:
a) Flow of Goods
b) Flow of Documents
c) Flow of Payment
274
Documentary Collection- Flow of Goods
i. After the Importer and the Exporter have established a sales contract and agree on a
Documentary Collection as the method of payment, the exporter ships the goods
ii. In a Documentary Collection, the importer is known as the “drawee” and the exporter
as the “drawer”.
Exporter/ Importer/
Goods
Drawer Drawee
275
Documentary Collection – Flow of Documents
Documents
Exporter/ Remitting
2
Drawer bank
Documents
Goods
3
1
Importer/ Collecting/
4
Drawee Presenting Bank
Documents
276
Documentary Collection – Flow of Documents
i. After the goods are shipped, documents originating with the exporter (e.g.,
commercial invoice) and the transport company (e.g., bill of lading) are delivered to
a bank, called the Remitting Bank in the collection process
ii. The role of the Remitting Bank is to send these documents accompanied by a
collection instruction giving complete and precise instructions to a bank in the
importer’s country, referred to as the Collecting/ Presenting Bank in the collection
process.
iii. The Collecting/ Presenting Bank acts in accordance with the instructions given in
the collection instruction and releases the documents to the Importer against
payment or acceptance, according to the Remitting Bank’s collection instructions.
277
Documentary Collection- Flow of Payment
Exporter/ Remitting
3
Drawer Goods bank
Importer/ Collecting/
1
Drawee Presenting Bank
Documents
Payment is forwarded to the Remitting Bank for the exporter’s account. The importer can now
present the transport document to the carrier in exchange for the goods.
278
UCP 600
ICC Uniform Customs and Practice for Documentary Credits (UCP 600)
i. The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC
Publication no. 600 ("UCP") are rules that apply to any documentary credit when the text
of the credit expressly indicates that it is subject to these rules.
ii. The last revision was effective from 1st July 2007
iii. The 39 articles of UCP 600 are a comprehensive and practical working aid to bankers,
lawyers, importers, and exporters, transport executives, educators, and everyone involved
in letter of credit transactions worldwide.
iv. UCP 600 has to be clearly mentioned in the Letter of Credit in order to be applicable
279
Letter of Credit
i. A Commercial Letter of Credit or simply a Letter of Credit is a contractual agreement

(signed undertaking) by the banker of the buyer (Issuing Bank) to pay the seller a
certain sum of money in accordance with the stipulated conditions and within a
specified time frame
ii. LC is the preferred mode of settlement when the transacting parties are not known to
one another or when the seller is not sure about the credit worthiness of the buyer
iii. The issuing bank, on the request of its customer, opens the letter of credit. The issuing
bank makes a commitment to honour drawings made under the credit. The beneficiary
is normally the provider of goods and/or services.
280
Elements of a Letter of Credit
A payment undertaking given by a bank (issuing bank)
On behalf of a buyer (applicant)
To pay a seller (beneficiary) for a given amount of money
On presentation of specified documents representing the supply of goods
Within specified time limits
Documents must conform to terms and conditions set out in the letter of credit
Documents to be presented at a specified place
281
Fundamental Principles of Letter of Credit
i. A Letter of Credit is a separate transaction in itself independent of the sale contract
ii. Banks are not bound by the Sale Contract even if the Letter of Credit bears reference
to the Contract
iii. The concerned parties deal with documents and not in goods, services or
performances to which the documents relate
iv. Banks bear no responsibility of the genuineness of the documents, for the goods or
services described in the documents or performance of the seller of the goods
282
Entities in a Letter of Credit
i. Applicant - the party on whose request the credit is issued
ii. Beneficiary - the party in whose favor a credit is issued
iii. Issuing Bank – the bank that issues a credit at the request of an applicant or on its
own behalf
iv. Advising Bank – the Issuing Bank normally sends the LC through a bank located in
the country of the beneficiary. This bank is known as the Advising Bank since its
role is limited to checking the authenticity of the LC and advise the beneficiary that
the LC has been opened.
v. Confirming Bank - the bank that adds its own undertaking to pay the LC
beneficiary if all terms and conditions of the credit are complied with. Such
undertaking is in addition to that given by the Issuing Bank at the request of the
Issuing Bank.
283
Entities in a Letter of Credit
i. Nominated Bank - a bank authorised by the Issuing bank to pay, negotiate, issue a
deferred payment undertaking or accept drafts under the LC. If the LC does not
specify a Nominated Bank, the LC is deemed as freely negotiable and any bank that
receive documents from the LC beneficiary is qualified to be a Nominated Bank
ii. Negotiating Bank - the bank that examines the drafts and/or documents presented
by the LC beneficiary and gives values to such drafts and/or documents.
Negotiation could be in the form of purchasing or agreeing to purchase the drafts
and/or documents presented.
iii. Reimbursing Bank - is the paying agent appointed by the Issuing Bank to honour
claims submitted by the nominated or negotiating bank.
284
Important Terms Related to Letter of Credit
i. Credit- means any arrangement, however named or described, that is irrevocable and
thereby constitutes a definite undertaking of the issuing bank to honor a complying
presentation
ii. Honor - to pay at sight or to incur a deferred payment according to credit availability
iii. Confirmation - means a definite undertaking of the confirming bank, in addition to that
of the issuing bank, to honor or negotiate a complying presentation
iv. Presentation - means either the delivery of documents under a credit to the issuing
bank or nominated bank or the documents so delivered
v. Negotiation - means the purchase by the nominated bank of drafts (drawn on a bank
other than the nominated bank) and/or documents under a complying presentation, by
advancing or agreeing to advance funds to the beneficiary on or before the banking
day on which reimbursement is due to the nominated bank
285
Letter of Credit - Issuance
Advice/
Confirmation of the
Letter of Credit
4
Exporter/ Advising/
Beneficiary Confirming
Bank
Request to advise
1 Contract 3 & possibly confirm
Negotiations the Letter of Credit
Importer applies for

Importer/ Letter of Credit Issuing
Applicant Bank
286
Letter of Credit - Issuance
i. After the trading parties agree on a sale of goods where payment is made by
Letter of Credit, the Importer requests that its bank (the Issuing Bank) issue a
Letter of Credit in favor of the Exporter (Beneficiary).
ii. The Issuing Bank then sends the Letter of Credit to the Advising Bank. A request
may be included for the Advising Bank to add its confirmation. The Advising Bank
is usually located in the country where the exporter does business and may be the
exporter’s bank but does not have to be.
iii. Next, the Advising/Confirming Bank verifies the Letter of Credit for authenticity
and sends it to the exporter.
287
LC -Confirmation
i. If the beneficiary of the credit has some doubt about the ability of the LC-Opening bank
to arrange reimbursement, then he may request the opener to arrange for the LC to be
‘confirmed ‘ by the advising bank.
ii. If the opener agrees, the opening bank will ask the advising bank to add its ‘confirmation’
to the LC.
iii. Confirmation of an LC constitutes a definite undertaking by the advising bank to assume
the obligations and liabilities of the opening bank under the credit.
iv. Branches should restrict all negotiations to the confirming bank.
v. If negotiations are effected through another bank the beneficiary will lose the rights and
benefits of having a confirmed LC.
288
Letter of Credit – Flow of Documents and Payment
Advising/
Exporter/ 2 Confirming
Beneficiary
Bank
Documents
Documents
3 6
Goods
Documents
4
5
Importer/ Issuing Bank
Applicant
289
Letter of Credit – Flow of Documents and Payment
i. After the goods are shipped, the exporter presents the documents specified in the
Letter of Credit to the Advising/ Confirming Bank
ii. Once the documents are checked and found to comply with the Letter of Credit (i.e.,
without discrepancies), the Advising/ Confirming Bank forwards these documents to
the Issuing Bank. The drawing is negotiated, paid or accepted as the case may be.
iii. In turn, the Issuing Bank examines the documents to ensure they comply with the
Letter of Credit. If the documents are in order, the Issuing Bank will obtain payment
from the Importer for payment already made to the Confirming Bank
iv. Documents are delivered to the importer to allow it to take possession of the goods
290
Types of Letters of Credit
i. Irrevocable Letter of Credit - cannot be canceled or amended without the consent of all
parties including the exporter. All Letters of Credit are Irrevocable in UCP600
ii. Sight and Term Letters of Credit – If payment is to be made at the time that documents are
presented, this is referred to as a Sight Letter of Credit. If payment is to be made at a future
fixed time from the presentation of documents, this is referred to as a Term Letter of Credit.
iii. Confirmed Letter of Credit - Under a Confirmed Letter of Credit, a bank, called the
Confirming Bank, adds its commitment to that of the Issuing Bank to pay the exporter under
the Letter of Credit provided all terms and conditions of the Letter of Credit are met. The
Confirming Bank is usually located in the same country as the Exporter. An Exporter would
request a Confirmed Letter of Credit if it does not consider the financial strength of the
Issuing Bank or the country in which it is located to be acceptable risks.
291
i. Revolving Letter of Credit - the amount available on the credit is reinstated usually without
any specific amendment. The amount of credit revolves upon shipment and/or presentation
of documents.
ii. Transferable Letter of Credit - The credit issued in favor of a trader (beneficiary) can be
used as a means of paying the sources from which the trader obtains goods. A Transferable
L/C allows transfer of the credit undertaking to another beneficiary.
iii. Red Clause Letter of Credit - Under this arrangement the buyer agrees to make a part of the
purchase price available to the seller as a pre-shipment advance and further agree that such
advance should be made from with the credit issued. The arrangement provides for the
amount of the advance to be deducted from the amount to be paid to the seller upon
presentation of documents
292
i. Green Clause Letter of Credit – It is an extension of the Red Clause in that it envisages grant
of further facilities for storage and insurance at the port in addition to pre-shipment payment
to beneficiary. This enables the shipper to warehouse and insure goods when immediate
shipping space is not available.
ii. Standby Letter of Credit- A Standby Letter of Credit operates in a manner similar to a bank
guarantee. When the buyer fails to pay or the contract is not performed to the satisfaction of
the seller then the beneficiary (seller) may invoke the terms of the credit and make the claim
on the Issuing Bank with supporting documents as per the terms of the Letter of Credit. The
rules of the Standby Letter of Credit are furnished in the ICC Publication number ISP98.
293
Common Discrepancies in LC
The Beneficiary has the following options if

the documents are not in order:
Late Credit
i. Correct documents shipment Expired
ii. Cable for authority to honor on approval
basis
iii. Request payment under
reserve/guarantee
Credit Missing
Overdrawn Documents
294
International Payment Risk Spectrum
Highest risk to Least risk to

exporter importer
1. Open Account
2. Documentary Collections
a) Documents Against
Acceptance
b) Documents Against
Payment
3. Letters of Credit
a) Unconfirmed
b) Confirmed
4. Payment in Advance
Least risk to Highest risk to
exporter importer
295
Documents in International Trade- Financial
i. Draft- All letters of credit require the beneficiary to present a draft and specified
documents in order to receive payment. A draft is a written order by which the party
creating it, orders another party to pay money to a third party. A draft is also called a bill of
exchange.
ii. The Draft is the “Financial Claim”. It is a negotiable instrument similar to cheque.
iii. Generally The Draft Is:

a. Drawn on the bank that issued the L/C
b. Payable at Sight or at Maturity (Time Draft)
c. In the currency specified in the L/C
iv. A sight draft is payable as soon as it is presented for payment. The bank is allowed a
reasonable time to review the documents before making payment. A time draft is not
payable until the lapse of a particular time period stated on the draft.
296
Documents in International Trade- Commercial
i. Commercial Invoice- A commercial invoice is document used in foreign trade. It is

used as a customs declaration provided by the person or corporation that is
exporting an item across international borders.
ii. A commercial invoice:
a. must appear to have been issued by the beneficiary
b. must be made out in the name of the applicant
c. must be made out in the same currency as the credit
iii. The description of the goods, services or performance in a commercial invoice must
correspond with that appearing in the credit.
iv. A commercial invoice must contain precise product description, Incoterms, shipping
information, customary information, details of any payment made by exporter, details
of any deposit made by importer and Harmonized System Number (if applicable)
297
i. Proforma Invoice - A pro forma invoice is presented in the place of a commercial invoice
when there is no sale yet between the sender and the importer, or if the terms of the sale
between the seller and the buyer are such that a commercial invoice is not available at
that time.
ii. A pro forma invoice is required to state the same facts that the commercial invoice
would specially if it is to be used to obtain a Letter of Credit.
iii. Export License -Export license is the express authorization by a country’s government to
export a specific product before it is shipped
298
i. Certificate of Origin – It is a document certifying the country in which the product was
manufactured, and in certain cases may include such information as the local material
and labor contents of the product. The manufactured goods must have been
substantially transformed in the exporting country as the country of origin, to their
present form ready for export. Certain operations such as packaging, splitting and
sorting may not be considered as sufficient operations to confer origin. It is often used
by importing country to determine tariff of goods
ii. Import License - A document issued by the importing country and designed to prevent
import of non-essential or overly luxurious products in developing countries short of
foreign currency supply.
iii. Certificate of Insurance - Some Incoterms (CIF, CIP) require that the exporter provide
insurance. A certificate of insurance offers proof of coverage
299
i. Certificate of Inspection - A document provided by an independent inspection company

that attests that the goods conform to the description contained in the invoice provided by
the exporter.
ii. A Certificate of Inspection also attests that the value of the goods is reflected accurately
on the invoice
iii. A Certificate of Inspection protects the importer using a Letter of Credit or Documentary
Collection since these methods are based on the documentation for payment; the
inspection makes sure that the goods are conforming
iv. The Certificate of Inspection is the result of a Pre-Shipment Inspection (PSI) which is
often is conducted at the request of the importing country’s government to ensure that the
invoice reflects accurately the type of goods shipped by the exporter and their value
300
Documents in International Trade- Transport
i. Bill of Lading
ii. A generic term used to describe a document issued by the carrier to the shipper
iii. A bill of lading is

a. A contract between the carrier and the shipper
o The carrier agrees to transport the goods from point of origin to point of
destination for a given amount
b. A receipt for the goods
o The carrier certifies that the goods were received in good condition at the
point of origin
c. A Certificate of Title
o The carrier will only deliver the goods to the party that has the original bill of
lading
301
A standard form of a bill of lading will contain the following details

on its face:
i. Bill of lading No.
ii. Name of the shipper
iii. Name of the consignee
iv. Notify party (ies)
v. Name of the vessel (and voyage)
vi. Port of loading
vii. Port of discharge
302
viii. Description of goods (as declared by the shipper in a containerized shipment)
ix. Date of goods received by the carrier (or by the agent)
x. On board date
xi. Details of freight payment
xii Number of Originals issued
xiii Name of the carrier /agent
xiv Container number (where goods are shipped in a container)
303
Importance of Bill of Lading

i. Normally, a bill of lading is a negotiable document and the ownership of the
goods is transferred by endorsements by one party to another.
ii. In an international trade, importers and exporters require financing for their
business activities. When the goods are exported (shipped) the exporters may
obtain financing from their banks by transferring the title by endorsements and
banks consider the goods shipped under the bill of lading as a security for their
financing
304
Clean Bill of Lading
i. A bill of lading that certifies that the goods were received by the carrier in good
condition
ii. No annotation are made on the BOL, other than a signature for receipt of the
goods
iii. All Letters of Credit and Documentary Collections require a clean BOL
Soiled (or Fouled) Bill of Lading
i. A bill of lading that reflects the fact that the carrier received the goods in
anything other than good condition
ii. It is characterized by the presence of additional comments or notes in addition

to the signature of the carrier’s representative
305
Types of Bill of Lading
i. Negotiable- Ownership of the goods being transferred by endorsement.
ii. Non-negotiable- Ownership cannot be transferred and the consignee need to clear the
goods on arrival.
iii. Forwarder’s bill of lading- Bill of lading issued by freight forwarder
iv. Chartered Party- Bill of Lading issued by a charter party
v. NVOCC B/L – B/L issued by a Non-vessel owning common carrier.
vi. Stale B/L – A bill of lading presented after 21 days after the date of shipment.
306
Non-Negotiable Sea Waybill

i. The Non-negotiable Sea Waybill is a document which does not give title to the
holder other than to a named consignee. Hence, banks cannot assume the title for
financing against shipment.
ii. Goods shipped under Sea Waybill is delivered to the consignee without production
of original documents as it requires only an identification of the consignee.
iii. Though the Sea Waybill is not normally used in paper-based LC transactions, this
has gained importance due to applications of electronic B/Ls
307
Packing List
i. It documents what each shipment contains: how the goods are packaged, marked, what
merchandise is in each container, and their respective weight and dimensions
Shipper's Letter of Instruction
i. Delivered to shipping company if shipper wants specific directions followed during

transport. It can be critical in livestock shipments
Manifest
i. Shipping document that is internal to the carrier, but is often examined by government
entities
ii. A list of the entire cargo that a vessel, aircraft or container transports, as well as the
ownership, port of origin, port of destination, specific handling instructions of that cargo
308
Dangerous Goods
The shipment of dangerous goods is regulated by a number of organizations and rules
i. International Maritime Organization's International Maritime Dangerous Goods Code
ii. International Air Transport Association's Dangerous Goods Regulations
iii. Local shipment codes, such as the United States' Code of Federal Regulations, Title 49
(abbreviated 49CFR)
Notify Party (ies) The notify party is the party that the carrier must notify when the goods arrive
at the port of destination. The carrier issues an Arrival Notice informing the notify party about
the cargo discharge point, number of packages and other information. The letter of credit (L/C)
may require that the carrier notifies a party in addition to the notify party, usually using the
words "also notify".
309
Letter of Credit – Buyers Beware !
i. The Letter of Credit is skewed towards the seller in the sense that it offers high degree
of protection to the seller
ii. The Buyer must gather as much information about the seller as possible before
opening the Letter of Credit
iii. The Letter of Credit application form must be filled up with utmost care and must
contain clear and unambiguous description of goods/services, rate, quantity etc. As
far as practicable, minimum reference to the Sale Contract should be made
iv. The Letter of Credit does not offer any protection to the buyer from Quality point of
view. Hence, it is advisable to have a recognized, mutually acceptable third-party
agency to have the goods inspected and certified.
310
Write A Google Review
Visit the below URL (Make sure you are logged into
your Google account).
https://g.page/BlueOceanAcademy/review
Rate the business from 1 to 5 stars

(the greater numbers indicate a positive experience),
Write about your experience, and click “POST” when
you’re done.
Or
1. Log into your Google account, and search for Blue

Ocean Academy in Google.
2. Find the reviews area (next to the star rating in your

search results, or under Blue Ocean Academy’s name
in the sidebar in Google search) and click on the blue
box that says “WRITE A REVIEW.”
3. Rate the business from 1 to 5 stars (the greater

numbers indicate a positive experience), Write about
your experience, and click “POST” when you’re done.
That’s it !!

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Index

Modules Title Page No:

Fundamental principles of Logistics and Supply Chain

Module 2 Demand Planning and Forecasting 28

Module 3 Procurement in Supply Chain 67

Module 4 Transportation Planning and Management 97

Module 5 Warehousing Strategies 139

Module 6 Inventory Management 179

Module 7 Incoterms 2020 219

Module 8 Trade Payment Methods 269

01 Evolution of Supply Chain 03 Stakeholders in a Supply Chain

Mission impossible: Matching Supply

1913 – Concept of moving assembly line introduced by Ford Motor Company

2000 and beyond

i. Radio Frequency Identification(RFID) introduced in Supply Chain

ii. Warehouse automation/robotics redefine warehousing

iii. Cloud computing introduced

iv. Mobile wallets introduced for payment transfers

v. Social media revolutionize consumer behavior and marketing

vi. Big data and Internet of Things gain prominence

vii. Artificial intelligence introduced in Supply Chain

i. Prior to 1960s, different activities related to planning, purchasing, transportation and

i. The process from point of sales inquiry to delivery of a product to the

Materials Management Physical distribution

i. In modern supply chain, the integration of Materials Management and Physical

i. When Logistics system of an organization is integrated with external partners like

Inbound flow of raw Outbound flow of

Suppliers Producer Consumer

Supplier network Marketing channel

Supply chain management

Distributors and Retailers Customers

Suppliers’ Goods, services Customers’

Information (status, requests, orders)

The goal or mission of supply chain management can be defined as

Efficient customer Maximize the overall

Co-ordination and collaboration

Complexity due to Shorter product life-cycles

Virtual Integration: companies now focus on their core

Vertical Integration: slow moving mass markets of the

1. The quantity of the product

Planning, implementing and

Managing Measuring and Ensuring

partnerships in monitoring supply sustainability in

supply chain chain performance supply chain

ii. The challenge is inherent variation and unpredictability of demand and

iii. The planning horizon should be long-term (preferably 18 months or more)

iv. Demand has to be planned, prioritized and controlled.

Marketing Business Sales

the demand and the supply constraints

according to the plan

i. Capacity planning is the process to determine the resource requirements

ii. Capacity planning at different levels are shown below:

a. Resource Requirements Planning(RRP) – long-term capacity

b. Rough-cut Capacity Planning (RCCP) – carried out at the master

c. Capacity Requirements Planning(CRP)- carried out at the Material

iv. The Master Production Schedule then acts as an input to Material

i. Material Requirements Planning is a time-phased priority planning system.

iii. It is a planning system consisting of a set of logically related procedures,

iv. Traditionally, MRP is used to calculate the requirements of items with

ii. Dependent demand

i. Master Production Schedule (MPS) – The Master Production Schedule is the

iii. Inventory Records – The record of individual item-wise inventory

The logic of MRP is as follows:

Master Production schedule