CHAPTER 1:

FOREIGN TRADE
(INSTITUTIONAL
FRAMEWORKS
AND BASICS)
 LEARNING OBJECTIVES
After studying this chapter, students should be able to understand :

The implications of WTO

on foreign trade

How to export strategically

as an entrepreneur

The role of government and

semi government
organizations
 WTO AND TRADE LIBERALIZATION
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.

1 It was formed in 1995 with the General Agreement on

Trade and Tariffs (GATT) as its basis.

Ministerial conferences (held at least once in two

2 years) form the primary decision making body of the
WTO.

It has a general council, which is responsible for

3 overseeing the regulatory operations and for acting
as a body for the dispute settlement mechanism.

WTO agreements facilitate producers of goods

4 and services, exporters, and importers to conduct
their business in the global market.

WTO essentially aims to remove non tariff barriers in

5 the short run and reduce tariff rates on imports in
the long run.
 EXPORTING AS AN ENTREPRENEUR - STEPS
A first time exporter should be aware of the steps involved in export business. The steps involved are as follows :-

Step 03 : Opening a
Step 01 : Selecting the
bank account
right name
The firm needs to open an
Words like “international” account with a bank
or “overseas” in the name dealing in foreign exchange
of the firm convey the (designated branches). It is
message that the firm is advisable to open an
engaged in export/import. account with a branch
which directly undertakes
export import documents
and foreign currency
Step 02 : Registration exchange.

Registration of the
organization (partnership
Step 04 : Quoting the
or sole proprietorship) is Permanent Account Number
another important step. (PAN)
The firm has to be
registered under the The permanent account number (PAN) needs to be quoted
country’s prevalent law. to apply for the importer-exporter code (IEC) number and
to claim tax exemptions and deductions under the IT Act.

Step 05 : Registering with
the sales tax office
The exporter need not pay
sales tax while making
purchases for export. To avail
this benefit, the firm has to
be registered with the Sales
Tax Office. The exporter
needs to give the seller Form
H, along with a copy of the
import letter of credit or the
export order.
Step 06 : Obtaining the
IEC Number
The IEC number is the most
important registration
requirement for an
exporter/importer. No export
or import for commercial
purposes can be made by any
person without an IEC
number.
Step 07 : Registration
with Export Promotion
Councils
- Governments in many
countries have set up Export
Promotion Councils (EPCs) to
provide information and to
facilitate exports.
- The basic objective of EPCs
is to promote and develop
the exports of the country.
Step 08 : Registration
with the Export Credit
Guarantee Corporation
Exporters should register
with the Export Credit
Guarantee Corporation(ECGC)
to secure payment against
political and commercial
risks.
 Goods are subject to exemption from excise duty on
the final product meant for export. Where exemption
is not availed, the excise duty paid is refunded after
actual export.

It is desirable for a firm to become a

Step 09 : Central Excise
Step 10 : Registration with Chambers of
Commerce, Productivity Councils etc.
member of the local chamber of
commerce, productivity council, or trade
promotion organization recognized by
the Ministry of Commerce. This is helpful
in many ways, including obtaining a
Certificate of Origin.

Step 11 : Registration for Business

Identification Number It is important to obtain a PAN, based on
the Business Identification Number (Bin),
Step 12 : Export License, if required from the DGFT registration office prior to
filling for customs clearance of export
goods.

Many items are free for export, without any license, if they do
not fall in the negative list. The negative list can consist of items
that are :
• Prohibited (cannot be exported)
• Restricted (through license); or
• Canalized ( a license can be obtained for a short period
through a canalizing agency of the government)
ROLE OF GOVERNMENT/ SEMI GOVERNMENT AGENCIES IN EXPORT PROMOTION

The role of government & semi government agencies are mostly:

To establish and To develop

develop guidelines,
incentives/ policies and
schemes to enable principles
self sustenance in
the international To establish To help exporters
To stimulate and
market laws for the develop particular
support export
smooth products and
efforts in the
running of commodities for
country
international export
business
CHAPTER 2:
EXPORT IMPORT
DOCUMENTATION
 LEARNING OBJECTIVES

After studying this chapter, students should be able to :-

01 02 03 04

The step by step The process of The role of export The meaning of
procedures of starting an export promotion international
export import import (EXIM) councils commercial terms
business business (INCOTERMS)
 STEPS FOR SUCCESSFUL EXPORTING

Exporter will then arrange for

Apply for IEC code
(importer exporter code) to Exporter register Exporter manufacture quality control and will seek
Exporter procure goods or buy them from the inspector of quality
the regional office of the with export control a certificate certifying
Director General of orders from importer. from other
promotion council. manufacturers. the goods are conform to the
Foreign Trade (DGFT).
quality guidelines required.

Exporter contacts the

Goods ready for export
will be sent to ports or
airports for transit.
appointed clearing and
forwarding agent (C&F)
Exporter apply for
agent to store the goods in
marine /air insurance
warehouses. Forwarding
coverage.
agent will present the
Shipping Bill, as required by
the Customs Authority.
Captain of the ship will
issue mate’s receipt to
exporter once goods
loaded into the ship.
The C&F agent or exporter
can get the bill of lading or
airway bill from the shipping
company or the airline
company once port
payments are made.

The exporter now presents all the

Exporter applies to the
relevant Chamber of
Commerce for obtaining
Certificates of Origin (this is
not mandatory in all cases).
The exporter now presents all the
Exporter sends a set of important documents at his bank.
This has to be done within 21 days important documents at his bank. This has
documents to importer, to be done within 21 days after the
stating the date of after the shipment. The bank must
shipment. The bank must check the
shipment, name of check the documents against the
documents against the original letter of
vessel etc. original letter of credit/purchase
credit/purchase .
order.
 EXPORT IMPORT DOCUMENTATION

PRO FORMA INVOICE

As the name It is prepared by the When the buyer is

suggests, it is a exporter and sent ready to purchase
pro forma of the to the importer for the goods, he will
invoice. necessary request a pro
acceptance. forma invoice.
 EXPORT IMPORT DOCUMENTATION

PACKING LIST

Packing list is a very useful Packing list is a

document for customs at the
time of examination and for
the warehouse keeper of the
buyer to maintain a record of
inventory and to effect
delivery.
consolidated statement
in a prescribed format,
detailing how the goods
have been packed.
 EXPORT IMPORT DOCUMENTATION
COMMERCIAL INVOICE

01 02
An invoice is a It contains the names of
fundamental document of the exporter, importer
prime importance. and the consignee, and
the description of goods.

03 04
It is a requisite for the The invoice prepared by
invoice to be signed by an the exporter is required
exporter or his agent. to be presented to
different authorities for
different purposes.
 EXPORT IMPORT DOCUMENTATION
CERTIFICATE ORIGIN

This certificate indicates The certificate is sent Certificate of origin is

that the goods, which are by exporter to the required by some
being exported, are actually importer countries only
manufactured in a specific
country mentioned therein.
 EXPORT IMPORT DOCUMENTATION
GENERALIZED SYSTEM OF PREFERENCE CERTIFICATE OF ORIGIN

The Generalized System of

Preference (GSP) certificate of
01 origin certifies that the goods
being exported have originated
/been manufactured in a particular
country.

It is mainly useful for

taking advantage of a
02 preferential duty
concession, if
available.
 EXPORT IMPORT DOCUMENTATION
SHIPPING BILL/BILL OF ENTRY

The shipping bill is a It contains a description of export Importer also has to

requisite for seeking goods, the number and kind of submit copies of a
the permission of packages, shipping marks and document called bill
customs to export numbers, value of goods, the name of entry for custom
goods by sea/air. of the vessel, the country of clearance.
destination and others.
 EXPORT IMPORT DOCUMENTATION
ARE-1 FORM

The ARE-1 Form is an application for the removal of excisable goods from the
factory premises, for export purpose.
 EXPORT IMPORT DOCUMENTATION
EXCHANGE DECLARATION FORM
(GR/SDF FORM)
Name and address of the
authorized dealer through Details of commission
whom proceeds of exports and discount due to
have been or will be realized. foreign agent or buyer.

The full export value,

Name and address of The Central Bank prescribed giving break up of
the exporter and the a GR Form (SDF), a PP form FOB, freight insurance,
and SOFTEX Form to declare
description of goods. the export transactions. The discount and
GR Form contains the commission etc.
following :
 EXPORT IMPORT DOCUMENTATION
STATUTORY DECLARATION FORM

01 02 03

Some office in To meet the requirements of The SDF is prepared

the customs electronic data interchange, in duplicate and
department are the GR form has been submitted to customs
now replaced online by a new at the time of
computerized. form known as Statutory shipment.
Declaration Form (SDF).
 EXPORT IMPORT DOCUMENTATION
POST PARCEL SOFTEX INSPECTION INSURANCE
FORM FORMS CERTIFICATE AIRWAY BILL CERTIFICATE

The declaration in Inspection certificate is Insurance certificate

When goods are The receipt issued by is to assure the
SOFTEX Form, in respect required by some
exported by post, the an airlines company or consignee that
of export of computer importers and
exporter has to fill its agent for carriage of insurance will cover
software and countries in order to
up a Post Parcel goods is called an the loss or damage
audio/video/television attest the
Form (Pp) Form in airway bill. to the cargo during
software, shall be specifications of the
triplicate. transit (marine/air
submitted in triplicate. goods shipped.
insurance)
 EXPORT IMPORT DOCUMENTATION
BILLS OF EXCHANGE
01 02
Commonly known It is an instrument in writing
as draft containing an order, signed by
the maker, directing a certain
person to pay a certificate sum
of money only to the order of a
person to the bearer of the
instrument.
03
There are two types of Bills
of Exchange that are :
 Sight Draft (Delivery
against Payment D/P)
 Usance Draft(Delivery
against Acceptance
D/A)-time draft
 EXPORT IMPORT DOCUMENTATION
BILL OF LADING

The Bill of Lading is a document issued by the

shipping company or its agent.

It acknowledged the receipt of the goods mentioned in the

bill for shipment on board of the vessel.

Information available in the bill of lading :

 The shipping company’s name and address.
 The consignee’s name and address
 The port of loading and the port of discharge
 Shipping marks and particulars
 Number of packages shipped on board with date-rubber stamp
 Description of packages and the goods
 Gross weight and net weight
 Freight details and name of the vessel
 Signature of the shipping company’s agent
 EXPORT IMPORT DOCUMENTATION

CONSULAR INVOICE

01 02 This invoice is an
important document
required to be submitted
Is a document required by for certification to the
certain countries embassy of the country
concerned
 CHAPTER 3:
METHODS AND
INSTRUMENTS
OF PAYMENTS
After learning this chapter, students should be able to :

1 Understand the methods and instruments of

payment in the export import business

2 The various methods by which exporters and

importers can arrange for finance

3 The various aspects of instruments of

payment such as the Letter of Credit
 METHODS OF PAYMENT
For export sales , the basic methods of payment in EXIM trade are :

1 3

Payment in Bill of
advance exchange

2 4

Letter of credit Open account

(LC)
 ADVANCE PAYMENT

An exporter usually would prefer payment in

I)
advance of the shipment.

A telegraph transfer is commonly used for

II)
international remittances.

For importer, advance payment tends to

III)
increase risks.

Buyers are often concerned that the items may

IV)
not be sent if payment is made in advance.

Exporters who insist on this method of payment as their

V) sole method of doing business may find themselves
losing out to competitors who offer other terms of
payment.
 LETTER OF CREDIT (IMPORT LC)

A letter of credit adds a bank’s

When importers do not
promise to pay the exporter on
prefer to pay in advance,
behalf of the importer, provided the
exporters may ask them to
exporter has complied with all the
get a letter of credit opened
terms and conditions of the LC.
by a well known bank.

A letter of credit (LC) is Thus, exporter gets an

often used to protect assurance of payment from
the interests of both the the LC opening bank, in the
buyer and the seller. eventuality of importer
defaulting the payment.
 DRAFTS / BILLS OF EXCHANGE

The exporter’s bank

will send the draft to
the importer’s bank.

Drafts or bills of exchange is

an instrument to be submitted
by the exporter along with
other document to his/her The importer will make the
bank.(exporter’s bank) payment on or before the
due date, depending upon
whether the Bill of
exchange is a sight bill or
usance bill.
 CONT…
USANCE BILL /TIME DRAFT

SIGHT BILL ● A usance bill is used when

the exporter extends credit
and the facility to use the
● A sight bill is used when the exporter
goods to the buyer.
wishes to get the payment before the
importer collects the goods from the
port.
● The draft states that
payment is due by a specific
time after the buyer accepts
● Sight bill is also known as Delivery
the time draft and receives
Against Payment (D/P)
the goods (e.g :30 days after
acceptance).
● In practice, the Bill of Lading is sent by
exporter via the exporter’s bank to the
buyer’s bank.
● Usance bill is also known as
Delivery against Acceptance
(D/A), that is the delivery of
● It is accompanied by the sight draft,
the transport document by
invoices and other supporting
the bank to the importer
documents specified by the buyer.
against acceptance to pay
after collecting the goods,
within a stipulated time.
 OPEN ACCOUNT

1 2 3

An open account can be a With an open account, the Some multinational firms
convenient method of exporter simply bills the make purchases only on an
payment if the importer is customer, who is expected to open account to save the
reputed and has a long and pay under agreed terms at a cost of opening an LC.
favorable payment record. future date.
 FINANCING EXPORTERS AND IMPORTERS
Financial assistance to exporters can be in the form of :

• Pre shipment finance

• Post shipment finance

Under the arrangement, a

bank, at the request of a
customer, undertakes to Importer knows that the
An LC is both an An LC is a commitment on
negotiating bank will not Seller is assured of getting
instrument for settling pay a third party by a the bank’s part to place an effect payment to the the payment as long as he
trade payments and an given date, according to agreed sum at the seller’s
seller unless until the latter presents the documents
arrangement for making agreed stipulations and disposal on behalf of the
tenders the documents as per LC terms to the
payment against against presentation of buyer, under precisely
strictly in accordance with negotiating bank.
documents documents, the counter defined conditions.
value of goods or services the terms of the LC.
shipped.
 PARTIES TO LC
Applicant : this is normally the buyer of
the goods.
Issuing bank or opening bank (importer’s
bank) : this is the bank that issues the LC. That
is the bank that opens the LC and undertakes
to make the payment.
Beneficiary (exporter) : this is the seller
of the goods, who has to receive
payment from the applicant.
Advising bank (exporter’s bank) : this is the bank
that advises LC to the beneficiary (exporter),
thereby assuring genuineness of the LC.
Confirming bank : this is the bank which adds
guarantee to the LC opened by another bank.
Reimbursing bank : this is the bank authorized to
honor the reimbursement claim in settlement of the
negotiation/ acceptance of payment lodged with it
by the paying, negotiating, or accepting bank. It is
normally the bank with which the issuing bank has
an account from which the payment is to be made.
 TYPES OF LC
Revolving LC : the amount under the revolving LC can
revolve in relation to time or value. This type of LC
provides for delivery of goods in instalments and at
intervals. Such a credit would stipulate a certain ceiling
amount in addition to the date of expiry.

3
Irrevocable LC : this is most commonly Transferable LC : In some cases the
used in foreign trade. An irrevocable LC seller or beneficiary may not be the
cannot be revoked or amended without actual producer of the goods. In such
2 4 cases, the seller may request the buyer
the consent of all parties thereto.* if the
LC is silent, it is considered as to open a transferable irrevocable LC.
irrevocable

Red clause LC : it contains a clause

Revocable LC : a revocable LC may be
cancelled or amended at any time
without prior notice to the beneficiary.
Such credits are rarely established.
1 5
providing for payment in advance for
purchasing raw materials/processing and/or
packing the goods. An LC with a clause
enabling the beneficiary to avail advance
(before affecting shipment) to the extent
stated in the clause is called Red Clause
L/C. It is called so because the referred
clause is normally incorporated in red ink.
CHAPTER 4:
FINANCING
EXPORTERS
 METHODS OF FINANCING EXPORTERS
After studying this chapter, you will be able to understand :

financing in
the basics of export
foreign and
finance (pre shipment
domestic
finance, post shipment
currency, and
finance)
factoring

business risk
coverage through
insurance and the
role of ECGC
 PRE SHIPMENT FINANCE

Financial assistance extended to the exporter

1 prior to the shipment of goods is termed pre
shipment finance.

An exporter can avail pre shipment finance

2 either in the form of :

• Packing credit in local currency

• Pre shipment credit for foreign currency

(PCFC)
 PACKING CREDIT IN DOMESTIC CURRENCY
When an exporter avails pre shipment finance in domestic currency, it is known as packing credit in domestic
currency.
PURPOSE OF PACKING CREDIT
● Purpose of packing credit is to enable the
exporter to purchase raw materials,
process or manufacture the same, and
make it ready for export.
● The credit granted by a bank to an
exporter enables him/ her to make the
goods ready for export. This is known as
short term working capital advance.
DOCUMENTS TO BE GIVEN TO BANK BY
EXPORTER
● Confirmed export order or pro forma invoice or
irrevocable letter of credit.
● The following person are eligible for packing
credit :
 All exporters submitting the above document to
the bank. Export houses with star status facility
on a running account basis.
 The supporting manufacturer of the export house
who has not received the export contract directly
but would be executing the contract through
the export house.
PACKING CREDIT IN DOMESTIC CURRENCY
FORMS OF FINANCE
The forms of finance can be classified into the following
two types that are :
 Fund based advance : it can be in the form of domestic
currency or a foreign currency.
 Non fund based advance : It is in the form of an LC, domestic
as well as import, for the purchase of raw materials, which an
exporter can avail if required.

QUANTUM OF FINANCE
90% of the export order or LC value is given as pre shipment.

PERIOD OF FINANCE AND INTEREST RATE

The interest rate for the first 90 days is the lowest, and
Increases therewith for every successive 90 day period.
 PACKING CREDIT IN DOMESTIC CURRENCY
The procedure to be followed by the exporter for availing the packing credit
limit by the bank is as follows :

1. Exporter has to submit a 3. For every export order, a

formal application along separate packing credit loan
with necessary account is opened for
documentary proof. appropriate monitoring.

3. While sanctioning a loan, the bank

2. He should be aware that the
credit may be sanctioned once
, or a regular packing credit
limit is set, based on the
assessment by the bank.
obtains an undertaking from the exporter
that the documents covering shipment of
goods, for which packing credit is
sanctioned, will be negotiated through the
concerned bank and the packing credit
account will be closed with the trade
proceeds.
PACKING CREDIT IN DOMESTIC CURRENCY
CLOSURE OF PACKING CREDIT LOAN

There are two important points an exporter should be

aware of, regarding the closure of packing credit loan.
The exporter can close the loan when :

1.Out of realization of sale proceeds of the

export order

2. If exporter is not able to export, for one reason

or another, the bank charges higher rate of interest
on such a loan.
PACKING CREDIT IN DOMESTIC CURRENCY
RUNNING ACCOUNT FACILITY

Banks have the autonomy to sanction running account

facility even in the absence of a confirmed purchase order
/LC subject to the following conditions :

A need for running account facility has to

1 be established by the exporter, to the
satisfaction of the bank.

Banks extends this facility only to those

2 exporters who have a good track record.

The concessional credit facility, available

3 to the exporter, should not exceed 180
days.
 PRE SHIPMENT CREDIT FOR FOREIGN CURRENCY

2
The exporter can
pay using the export
1 earnings in foreign
currency.
An exporter with
proven track record
can avail this type of
credit : pre shipment 3
credit for foreign
currency. Exporters compare
the interest rates on
domestic currency,
foreign currency
and decide on
which loan to avail.
The foreign currency loans granted to exporters by banks are known as PCFC. The
salient features of PCFC are given below :
PCFC is only available for cash exports, in foreign currency.

There is a cap on the interest rate that a bank can charge over
and above the LIBOR, in the case of PCFC.

For lending under the PCFC scheme, banks can use the
foreign currency balances available with them, in Exchange
Earners Foreign Currency (EEFC) account/ Resident Foreign
Currency (RFC) accounts and Foreign Currency Non Resident
(FCNR) deposits.

PCFC can be maintained as running accounts.

PCFC is self liquidating in nature and is liquidated by

purchasing /discounting of bills.
 POST SHIPMENT EXPORT ADVANCE
Banks give short term finance to exporters against the exports receivable up to 120 days.

The following are the primary type of advances :

Export bills negotiation 1

Export bills purchase 2

Export against bills 3

sent for collection
 EXPORT BILLS NEGOTIATION

01 02 03 04 05

Also known as Exporters are If an exporter Only when the Even if there is a
Negotiation of required to submit requests for an documents are in slight discrepancy in
export documents the bills and immediate credit, order and comply the documents, the
under letters of documents after the bank will absolutely with all the negotiating bank
credit. shipment to a scrutinize all the terms in the LC, does does not make
bank. documents the negotiating bank payment to the
required under LC. make payment to the exporter.
exporter.
 EXPORT BILLS PURCHASE
Also known as When exporter does not
Purchase/Discount possess LC from the importer,
of foreign bills he/she requests the bank to
purchase/discount documents
for receiving immediate
payment.
The bills may be drawn on
D/A (Documents against
acceptance) or D/P
(Documents against
payment) basis,
depending on the terms of
the export contract.
 EXPORT AGAINST BILLS SENT FOR COLLECTION
Exporters send bills
drawn on importers on
collection basis through a
bank when :
In the above
• The documents drawn circumstances, banks
under LC contain minor may finance a part of the
discrepancies, but the total bill amount as
bank is confident that advance.
buyer will retire
documents.
• The bill purchase limit
of the exporter is
exhausted and the
bank is not willing to
sanction additional
amount.
 ADVANCE AGAINST EXPORT INCENTIVES

Advance against export Advance under this category

incentives can be is sanctioned when the
sanctioned by the bank exporter has to receive the
duty drawback incentive
both at pre shipment
from the government and
and post shipment refunds from customs and
stages. excise duty.
 FACTORING

1. When an exporter ships 3. Exporter has to monitor closely

the entire proceedings. There are
goods before receiving
risk that importer/buyer may not
payment, he can consider make payment for the goods
“factoring” his export bill. imported.

2. The exporter is taking the 4. In this situation, exporter

risk of financing the entire may consider selling the
process, unless he/she has accounts receivable to a third
taken a loan from the bank. party, who is called the factor.
 FACTORING

7. In return, the factor

5. The factor then assumes all purchases the receivable at a
administrative responsibility of discount and collects
collecting the dues from the buyer processing fee as well – known
and the associated credit risk. as post shipment finance
without recourse.

8. The advantage to the exporter is that he

6. The factor conducts his/her
is relieved from the burden of collecting the
own investigation of the
receivables, verifying creditworthiness of
importer before purchasing the the importers and receives immediate
receivables. cash, which improves cash flow.
CLOSING
 CHAPTER 5:
BUSINESS RISK
MANAGEMENT
 Learning objectives
After studying this chapter, students should be able to understand :-

The types of risks involved

1 in international business

How to manage risks

2

The quality aspects in

3 international trade
 WHAT IS RISK?

1 3
Risk is an aspect of any Risk is inherent in every
organization’s operation. business, more so in
international arena.

RISK

2 4
When it is recognized, Success in business
understood and depends largely on
managed, risk itself can careful evaluation of
set the stage for risks and their
sustainable growth. subsequent
minimization.
 TYPE OF RISKS

Risks arising out of

CREDIT RISK
foreign laws

Commercial Risk POLITICAL RISK

FOREIGN EXCHANGE
CARGO RISK
RISK
 COMMERCIAL RISK can be minimize by using forecasting techniques and by keeping careful watch on the
changing business scenario in the concerned country, in particular, and the world economy , in general.

1 5
Lack of knowledge Competition
about foreign markets

2 3 4
Inadaptability of the Varying situations
Longer transit time
product such as changes in
preferences and
fashion
 POLITICAL RISKS can be avoided to a certain extent by judicious selection of countries to which
goods are exported. Insurance companies can also agree to cover risks, if paid some additional
premiums.

1 3
Changes in political power and
Wars between countries
policies
The general
causes for
political risks
Coups, civil wars and rebellion are as follows : Capture of cargo during war

2 4
 RISKS ARISING OUT OF FOREIGN LAWS

1 2
Different laws operating Expensive and complex
in domestic country litigation.

Risks
arising out
of foreign
laws can
be due to :

These risks can be avoided by the appointment of an arbitrator at the time of contract.
 CARGO RISK

Most goods are

transported by sea. 1
The various types of
perils are :
4 • Marine perils
• Extraneous perils
Transit risks such as • War perils
storms, leakage, fire and
explosion can be
classified under cargo 2
risk.

Risks are termed as

perils in marine related 3
literature.

01
The following two issues are
important in relation to credit
risk that are :
• Exporters must have
sufficient funds to offer
credit to buyers abroad
• Exporters should be
prepared to take credit risks
CREDIT RISK
02
Meaning of credit risk :
o Once goods are sold on credit, risks arising in realizing the sale
proceeds are known as credit risks.
o Risks may arise due to the inability of the buyers to pay on the due
date.
o Or, even if the buyer makes the payment, situations may change in
the buyer’s country such as funds do not reach the exporter.
o An outbreak of civil war, war, a coup or an insurrection may block
or delay the payment for goods exported.
 FOREIGN EXCHANGE RISK
Foreign exchange risk occur when the invoice is prepared in
1 foreign currency.

If the foreign currency depreciates in terms of MYR, exporter will receive

2 lesser amount in MYR and vice versa.

If the export bill is purchased or negotiated under an LC and the foreign

3 currency undergoes fluctuation, the bank will bear the risk.

If there is an intervening difference in the exchange rate between the

4 date of giving the bill for collection and the date of realization, the
exporter stands to lose or gain, depending on the trend in fluctuation.

Foreign exchange risk can be hedged by using forward

5 contracts. The risk can also be avoided by invoicing in MYR.
QUALITY CONTROL (QC) is a set of
procedures intended to ensure that a
product or service adheres to defined
quality criteria or meets the
requirements of the client.
QUALITY AND PRE
SHIPMENT INSPECTION
As part of an effective program, an
enterprise must first decide the specific
standards that the product or service
must meet.
 PRE SHIPMENT INSPECTION

Pre shipment inspection is MercuryHowever, exporters with

carried out by specialized
agencies/councils as per
buyer’s specifications, and
quantity of exports.
good track record (e.g with export
house status) have been
empowered to carry out such
inspection on self certification
basis.

In many countries, government insist

that the exportable items (if the item
falls under the list of items placed for
compulsory inspection category) should
be subjected to pre shipment inspection
as part of attempts to ensure the quality
of the items that is originated in those
countries.
MECHANISM FOR ENFORCEMENT OF QUALITY

Enforcement of quality
promotes exports as per
I) international standards

It involves the inspection of

II) the majority of goods.

III) The Export Act 1965 deals

with quality control and
inspection.
Advantages of pre shipment inspection

1 2 3

It provides the
It ensures that government and act as
It helps facilitates an effective means of
transparency in goods conform to
contract overseeing and
trading activities. controlling foreign trade
specifications.
through accurate
statistics.
Methods of quality control and pre shipment inspection
There are primarily three (3) methods of quality control and pre shipment inspection that are :-

CONSIGNMENT WISE IN PROCESS QUALITY

SELF CERTIFICATION
INSPECTION CONTROL

• In process quality control • It is a recent

• Each actual consignment in
packed condition is
inspected by export
inspection agencies.
• The agencies conduct
inspection on the basis of
statistical sampling plans.
• Certificates are awarded
after passing quality
checks.
deals with continuous
process industries such as
paints, ceramics, printing
and so on.
• To become an approved
export worthy unit, a
company should possess
the requisite infrastructure.
• Export units get inspection
certificates based on self
declaration.
introduction to the
compulsory inspection
scheme.
• Manufacturing units
having in built
responsibility for
quality control have
the freedom to self
certify their products.
 Consignment wise inspection
The consignment wise inspection includes the following :

1) Application to
2) Deputation of 3) Inspection and 4) Packing and
Export Inspection
inspector testing sealing of goods
Agency (EIA)

5) Submission of
7) Appeal against 6) Issue of rejection report to EIA and
rejection note note issue of inspection
certificate
CHAPTER 6:
EXPORT CARGO
PACKAGING, STOWAGE,
MARKING AND
DANGEROUS CARGO
SHIPMENTS
 FACTORS INFLUENCING TYPE OF CARGO PACKAGING
Packaging techniques are becoming increasingly sophisticated and therefore many exporters nowadays seeks continuous
improvements in the following areas that are :

01
Improved standards
to reduce risk of
damage and pilferage 04
Packaging costs that
are more
02 competitive among
A better utilization of manufacturers
transport capacity to
lower distribution 05
cost Legislation stated
by European
03 Packaging Waste
Improved cargo Legislation
handling
 FACTORS INFLUENCING NATURE OF PACKAGING

01 02 02
Ease of handling and
stowage 01 Nature of the transit

03 04 04
03 The general
Resale value consignment delivery
terms of sale
(Incoterms 2000)
 FACTORS INFLUENCING NATURE OF PACKAGING

05 06 06
Compliance with
Nature of the cargo
05 customs or statutory
requirements

07 08 08
07 Variation of
General fragility of temperature during
cargo transit
 FACTORS INFLUENCING NATURE OF PACKAGING

Value of the goods Size of the cargo and its

weight

Insurance acceptance Marketing

conditions considerations
 FACTORS INFLUENCING NATURE OF PACKAGING

Facilities available at Marking of cargo

the terminal packaging

Type and size of Cost of packaging

container
 BALING BARRELS, HOGSHEADS
• Is a form of packing AND DRUMS
consisting of a canvas cover • used for the conveyance of
often cross looped by metal liquid or greasy cargoes.
or rope binding. • The disadvantage with this
• Basically, it is a cheap and type of packing are the
effective form of packing likelihood of leakage if the
which aids handling. unit is not properly sealed,
• It affords limited protection and the possibility of the
to the packaging. drums to become rusty
during transit.
TYPES OF • Acids can also be carried in
PACKAGING plastic, drums and bottles.

BAGS
Bags used for packaging can be
made of jute, cotton, plastic or
paper are a cheap form of
container and are ideal for a
wide variety of products
including cement, fertilizer, flour,
oil cakes, animal feeding
products, chemicals and many
consumer products.
BOXES, CASES AND
METAL LINED CASES
• are used extensively particularly in
break bulk and LCL cargoes.
• It is and expensive form of packaging
but it has some resale values in certain
countries overseas.
• This type of packing gives complete
protection and lessens the risk of
pilferage plus it is an aid to handling.
 CARBOYS
• Carboys or also known as
glass containers are
enclosed in metal baskets.
• It has limited use and are
primarily employed for the
carriage of acids and other
dangerous liquids
transported in small
quantities.
• It is a packing form found
primarily
PACKAGING
CARTONS
• A common form of packing
in all modes of
international distribution
involving in particular
consumer products.
• They may be constructed
of cardboard, strawboard
or fibreboard.
CRATES OR SKELETON
CASES
• used for the conveyance of
liquid or greasy cargoes.
• The disadvantage with this
type of packing are the
likelihood of leakage if the
unit is not properly sealed,
and the possibility of the
drums to become rusty
during transit.
TYPES OF • Acids can also be carried in
plastic, drums and bottles.
ALUMINIUM TRANSPORT
AND STORAGE CONTAINERS
• Aluminium transport and
containers are globally used.
• Contructed of aluminium are
lightweight and can be both
stacked and interstacked.
 NEW PACKING TECHNIQUES

FLAT WRAPPING
• This enable, for example, furniture such as kitchen
SHRINK WRAPPING and chairs to be flat wrapped.
• This enables the wooden component units to be laid
Is very popular with air freight
on top of one another and permits the furniture to be
consignments and consolidated
assembled in the customer’s home
consignments whether conveyed
by air or surface transport.

EUROPEAN PACKAGING
BULK LIQUID BAG OR
WASTE LEGISLATION 2001
CONTAINER
• The regulations cover
• It can store various
one trip packaging but
kinds of liquid cargo.
• When not in use, the importers must absorb
bag can be folded to 2 the rolled up
percent of its volume. obligations of their
suppliers.

Stowage of cargo refers to placement of cargo in an aircraft or ship. Basically, there are four (4) main factors to consider in the
• The best possible use
should be
• made of the available
dead weight or cubic
capacity.
• It may be a container,
road vehicle, ship or
aircraft.
Cargo which is fragile, taints
very easily, liable to leakage,
scratches easily, has strong
odors, or is liable to sweats
requires proper segregation,
otherwise the carrier will be
faced with heavy claims and
possible loss of goodwill
among shippers.
STOWAGE OF CARGO
stowage of cargo that are :
• The need to prevent
damage to the ship,
01 02 road vehicle, aircraft or
container.
• Not only must there be a
proper distribution of
cargo to ensure
adequate stability and
trim, but it must also be
properly secured to
prevent shifting.
A proper segregation of
03 04 different containers for
various destinations,
areas, ports and
countries must be
made to prevent delay
in distribution and
avoid double handling.
PRINCIPLES OF CARGO STOWAGE

01
The container must be stowed tightly so that lateral and
longitudinal movement of the cargo within is impossible.

The cargo must be effectively restrained within the

02 container

The consignment must be adequately secured using

techniques such as :

03 • Shoring
• Lashing
• Wedging
• Locking
 MARKING OF CARGO

● The export shipping mark and number is vital in the correct identification of the shipment
irrespective of the transport mode. Marking has to be simple, easily identifiable and not masked
with irrelevant information or old markings.
● When goods are packed, they are marked on the outside in a manner which will remain legible for
the whole of the transit.
 Consignee’s name
 Order No
 Final delivery point
 Port of entry
 Package numbers
 DANGEROUS CARGO
Dangerous cargo have been defined as those substances so classified in any acts, rules or by-laws or having any
similar properties or hazards. Thus requiring all packaged goods to be :

1
Classified and declared by
4
the shipper to the Master Properly stowed and
effectively segregated
from others which may
2 dangerously intact.
Packaged in a manner to
withstand the ordinary risk of
handling and transport by sea,
having regard to their 5
properties.
Listed in a manifest or
stowage plan giving
3 stowage details. This
must be aboard the
Marked with proper shipping ship.
name and indication of the
danger
DANGEROUS GOODS CLASSIFICATION
CHAPTER 7:
CONTAINERIZATION
CONTAINERIZATION AND LEASING PRACTICES
After studying this chapter, you will be able to understand :

the different
types of
the concept of
containers
containerization

the history of the benefits of

containerization containerization
container leasing inland consumer
practices depots

Logistics experts had been trying
for a very long time to devise a
unit load of cargo. A variety of
methods to devise unit loads
were tried which would improve
the efficiency of transport
operation
HISTORY OF CONTAINERIZATION
Malcom McLean, often called the
father of containerization, first
conceived the idea of using the
entire truck trailer to load onto
and off the ship.
Port authorities are also
increasing container handling
facilities by increasing the
number of container berths,
installing suitable material
handling equipment, and state of
the art technology.
In 1956, McLean adopted a ship
McLean later established a very
for carrying containers. His first
successful multi modal
attempts to directly transfer
transportation company called
containerization cargo from
Sea Land Inc.
trucks to ships were successful.
To cope up with the
containerization cargo traffic,
ports all around the world are By 1961, regular container
being modernized. Container services were in operation
berths are being deepened to between New York, Los Angeles
maintain a draft of about 52 feet, and San Francisco.
which is required to receive 8000
TEUs or bigger ships.
 TYPES OF CONTAINERIZATION
Open top containers Flat rack containers
• Suitable for cargo with extra height,
• These containers are suitable for heavy
which can be loaded from the top with
loads and extra wide cargo
crane • The bottom has strong construction
• The top can be covered with tarpaulin • Fixed end walls allow bracing, lashing and
if required stacking.
• Suitable forklift pockets, lashing
devices and corner posts are provided

Refrigerated containers
Platform containers
• Suitable for cargo that constantly needs
temperature above and below freezing point.
• Platforms are most suitable for heavy
• It is possible to get fresh air supply within the
loads and oversized cargo.
containers in the quantity required to keep the
• The bottom has strong construction
product inside safe.
• The insulating material, polyurethane foam is
sandwiched between two walls of the container.
• The temperatures can be set between + 25 degree
C and -25 degree C.
 OTHER TYPES OF CONTAINERS
Half height containers
• These are quite similar to open top
containers but are only half the height.
• They are mainly used for extremely heavy
and dense cargo such as steel beams or
coils of tinplate.
Ventilated containers
• These containers are suitable for cargo that
needs ventilation such as coffee or cocoa.
• They have small openings at each corner that let
fresh air into/out of the container, but block the
entry of rain and seawater.
Side door containers
• These containers have side doors.
• They are particularly suited for cargo
which fits the inner dimensions of the
container, but still is too wide to fit
through the end door.
Bulk containers
• Ideally suitable for the carriage of dry
bulk cargo.
• Three equivalent manholes are provided
for top loading.
• Forklift pockets and lashing devices are
provided.
 Insulated containers Collapsible containers

• These are normal box containers with
insulating material in the walls, top and
bottom.
• As a result, there is minimum temperature
fluctuation inside.
• These are like normal box containers, but
the box can be collapsed completely.
• These containers are used on routes
where there is very little return cargo and
containers routinely return empty.

Tank containers
• These containers are suitable for chemical
products such as inflammables, oxidizing agents,
toxic substances and corrosives.
• These are also suitable for food products such as
alcohols, fruit juices, edible oils and food
additives.
 CONCEPT OF CONTAINERIZATION

: is a shipping system Characteristics of a fright

based on large (up to 48 container are:
feet long) cargo carrying
• Strong enough for
containers that can be
repeated use.
easily interchanged • Specifically designed to
between trucks, trains facilitate the carriage of
and ships without goods by one or more
modes of transport
rehandling the
without intermediate
contents. reloading.
• Fitted with device
Containerization permitting its ready
handling, particularly in
transferring from one
transport to another.
• Designed for easy filling
and emptying
A container is a single , • Has an internal volume of
rigidly sealed, reusable at least 1m3 or more.
metal box in which
merchandise is shipped
by a vessel, truck or rail.
BENEFITS OF CONTAINERIZATION
 CONTAINER LEASING PRACTICES
4. Sometimes the trade volumes in the
world markets are very low. During such
1. Containers are largely owned by times, the containers remain idle in
shipping lines and by some of the different parts of the world. During other
leading freight forwarding periods, there is an upsurge in the
organizations around the world. shipping volumes and a corresponding
shortage of containers.

2. Additionally, some companies

owning containers lease them out
to shipowners , forwarders or 5. Containers being
sometimes even directly to expensive, the shipping lines
shippers for certain time periods. do not own many of them.

3. The practice of leasing 6. In case of need, shipping

containers is important because lines would lease from leasing
there is a constant fluctuation in companies to meet the
the shipping business temporary demand.
 TYPES OF LEASES

ONE WAY LEASE MASTER LEASE

TYPE OF
LEASES

ROUND TRIP LEASE LONG LEASE

SHORT LEASE
 ADVANTAGES OF LEASING
The following are
the advantages of
leasing:

1 3

It is possible to lease a container at a

Leasing saves shipping lines from
short notice in case of a sudden surge Containers can be blocking their capital. Most shipping
in demand for containers. returned to the leasing lines have a policy regarding the
company as soon as the percentage of containers owned
demand of the shipping against percentage leased.
lone is over.
 ADVANTAGES OF LEASING
The following are
the advantages of
leasing:

4 6

The newly formed shipping lines

can start off with leased containers
, without investing their capital in
the ownership of containers.
The entire business of NVOCC
At many places, the leasing is built on leased equipment.
companies waive off drop off
and pick up charges when
there is a slump in the
demand for containers.
 INLAND CONTAINER DEPOTS
An inland port is a site located
away from traditional land, air
and coastal borders.
It facilitates and processes
international trade through
strategic investments in multi
modal transportation assets
and by promoting value added
services as goods move
through the supply chain.
Functions of inland container depots
are :
• Provide transportation logistics
services for export import as well
as domestic cargo in containers.
• Facilitate trade to and from the
industries based in the hinterland
( that is areas separated from the
seaports and international
airports).
• Reduce the bottlenecks at
seaports by freeing up storage
space in container yards.
• Create employment opportunities
and development in rural areas.
 DUTIES AND RESPONSIBILITIES OF AN ICD

GATE IN GATE OUT CHECK DOCUMENTATION REPORTING

CHECK

o All containers o All containers are o An Equipment o All the movements

entering the ICDs are checked for their Interchange Receipt of containers in and
checked for damage condition on their (EIR) is issued every out of an ICD is
or contamination. way out of the ICDs. time equipment is notified to the owner
o Empty containers of the containers.
interchanged
are examined both o The communication
o Damaged empty between two parties.
internally as well as is carried out
externally. containers are not o The EIR contains through e-mail, fax
o Damages are sent for stuffing. In details such as the and where ever it is
reported to the such a case, the names of the parties available through
container owner, so owner is informed involved, container EDI.
that repairs can be and his/her number, seal number
carried out either at instructions are (for stuffed
the ICD or any other sought. containers), name of
repair facility of the the transporter,
owner’s choice vehicle number and
so on.
 DUTIES AND RESPONSIBILITIES OF AN ICD
MISCELLANEOUS
REPAIRS AND
STORAGE DESPATCH DUTIES AND
MAINTENANCE
RESPONSIBILITIES

o Any repair work o ICDs have to o ICDs arrange for road

undertaken at an ICD make suitable and rail transportation o These include
must conform to the arrangements for of the cargo to the sealing the
customs approval safe storage of ports. containers,
standards.
containers. o They also undertake lashing, securing
o The International and bracing odd
o Empty containers stuffing and de
Institute of Container size cargo, and
Leasers (IICL), which are stacked one on stuffing operations, if
top of the other. required. conducting
is based in the US, container
has developed these o ICDs must have
suitable material conditioning
standards, which are
best known handling equipment surveys
standards in the for moving the
industry. containers within the
premises.
 CHAPTER 8:
LOGISTICS AND
CHARACTERISTICS OF MODES OF
TRANSPORTATION
 LEARNING OBJECTIVES
After studying this chapter, students should be able to understand :
● the importance of physical distribution system

● the benefits of an efficient logistics system

● the critical elements of a logistics system

● the international transport system

● how to choose the best mode of transportation

 EVOLUTION OF LOGISTICS SYSTEM
Evolution of logistics system can be divided into three (3) stages :

1. In the 1960s and 1970s, the concept of logistics was confined to the physical distribution of goods or
outbound logistics. Related activities included transportation, distribution, warehousing, packaging,
material handling and so on. The logistics manager had to deal only with outbound traffic.

2. In the 1980s, the concept of integrated logistics management was developed. This concept combined
outbound logistics (physical distribution) with inbound logistics(material management).Companies
leveraged their inbound and outbound traffic with transport companies, warehouses and others. Logistics
manager also was responsible for efficiency in materials management as well as physical distribution of
finished goods.

3. From the late 1980s onwards, organizations started thinking beyond the efficiency of their own logistics
operations and expanded the concept of logistics to include all the firms involved- suppliers and sub
suppliers on the one hand and customers on the other. Globalization and advancement in IT have added
new dimensions to logistics operations.
 PLANNING PHYSICAL DISTRIBUTION

An effective physical In order to plan, the objectives

01 02
distribution system needs of the distribution system
careful planning. should be clearly defined.

Once the objectives are

The objective also could be
defined, important decisions

03 04
to bring down the total
regarding inventory levels,
distribution cost or to ensure
mode of transportation,
minimum damage or loss of
warehousing and number of
goods.
distributors can be taken.
 PLANNING PROCESS
STEP 1.
Customer’s needs and expectations
from the products and services must
be determined.
STEP 4.
An assessment of the competitor’s quality of
service vis a vis the cost is necessary. Keeping
an eye on the best practices adopted by
competitors can help the organization to
redefine its distribution strategy.
STEP 2. STEP 3.
Improved customer service comes at
A balance needs to be struck
a cost .The next step is to determine
between improved service and
the cost at which the company can
additional cost.
fulfill the customer’s expectations.
STEP 5.
There should be a regular evaluation of the physical
distribution system, keeping in mind the change in
technology in the areas of production, promotion and
distribution. The system should always be in line with the
available technology.
 BENEFITS OF AN EFFICIENT LOGISTICS SYSTEM
Increased operational
efficiency
• The primary objective of any
logistics system is to make
optimum use of resources
available so that in bound raw
materials , components and
sub assemblies , as well as
finished products are
delivered in the right quantity,
at the right place and at the
right time.
Channelization of resources Improved customer Inventory control
service
• A company invests its resources
for providing service to the • A company must be able to
customer. control the inflow and the
• While devising a logistics system,
• In every organization,
depending on individual outflow of their inventory.
the company assess the value of
this service to the customer. functions, each department
• In other words, how much the has its own priorities in
consumer could be willing to pay improving their customer
determines the efficiency of the service.
logistics system.
• For example : the frequency of
visit of a delivery van to a small
town will depend on the product
sale and profit margins.
 MARKETING LOGISTICS SYSTEM : THE CONCEPT
The various steps involved in setting up an effective logistics system are discussed as
follows :

Planning Controlling

01 02 03

Implementing
 CRITICAL ELEMENTS OF A LOGISTICS SYSTEM

Availability of infrastructure
Nature of product such as roads, ports, airports
and material handling system

01 02 03

Location of
manufacturing plant
 Availability of
different modes of
transportation

04 05

Dealer / distribution
network
Government
policies

06 07

Location of warehouse
 INTERNATIONAL TRANSPORT SYSTEM

Air transport Ocean transport

RAIL transport ROAD transport
Thank you