I interviewed Laurie Turnbull who discussed Risk Management - Reducing Liabilities with Contracts of Sale and Shipping Terms of Sale.
What are some current issues regarding risk management?
Great question. Especially today with the advent of globalization, so many companies are struggling with this issue of risk management. And one of the ones we commonly see is regarding the issues of contracts of sale between buyers and sellers. By that, I mean that quite frequently, you find buyers and sellers not doing contracts of sale. Very common for companies to launch a sales process with a purchase order, which in response, generates a purchase order acknowledgement. A lot of those are boilerplate documents where cut and paste companies have had them on file for a long time. And people don't always read them and update them for different sales transactions.
As a result, purchase orders and purchase order acknowledgements don't always cover many of the issues that would be in what we would call a contract of sale.
The companies that might be wondering if they fall into this area, a great place to start is to go to the website for the International Chamber of Commerce, for example. The International Chamber of Commerce publishes what they call a model contract of sale, which is a very basic document. It looks like a typical contract arrangement. It's not too formal, where a company indicates the buyer, the seller, signatures of the responsible people, describe the goods, any issues surrounding the sale, which might involve things like payment, ownership of the goods in an international transaction. Important things like Incoterms terms would be in the contract of sale.
The problem here is that many companies, if they do think of an Incoterm –for example, they are probably having an international transaction –they'll pick an Incoterm, and let's assume they do it correctly. As we know many companies don't do it correctly. But if they do pick the correct Incoterm, they supplement that with a purchase order and purchase order acknowledgement, but they still don't cover many of the other issues that can arise as liabilities in international trade, payment issues if product or goods don't arrive. What if the ship sinks? Do I still have to pay the supplier? What if there's damage in transit? When does ownership transfer? Is that an issue with the goods, for example?
And that's when you'd want to look at the contract of sale as an umbrella document. And from that contract of sale, you'd have a trickle down. From the terms and conditions, you'd specify the contract of sale, for example, you would then develop a purchase order, from which would flow the purchase order acknowledgements. And in those documents, you would nominate the Incoterm from the current Incoterms 2010 group of terms that would go with the transactions.
And that's a great opportunity to involve purchasing and logistics people. So, the issues of contracts of sale typically is one that the sourcing group looks at initially because they're typically the first people to reach the vendors and start looking at new products. And from that relationship, the purchasing arrangement flows. But there's a great opportunity here for procurement people to bring the logistics people into this group at that point in the transaction, and talk about things like loss, cargo insurance, Incoterms, and is there an opportunity, for example, for a contract of sale.
In what other areas do buyers and sellers overlook in the international sale of goods?
Another one that's often overlooked is on the legal side, and that's why it's overlooked, because many people involved in procurement and logistics would leave this is in the legal department in their company if they had one. Not every firm has a legal department.
But the legal issue, for example, of jurisdiction and venue. So, when companies engage in international sales, buyers and sellers do so, typically, with best intentions. They want the relationship to work. They want the order to be shipped on time. They want it to be received on time, and they have every intention of paying for the good within the stated terms of the sale.
But for whatever reason, with extended supply chains today, we see lots of opportunities for disruption. For example, typically, natural disasters today seem to be more common and goods don't arrive on time or arrive at all, or something else happens and the transaction, or the buyers and sellers end up in a dispute.
So, people don't start the relationship thinking about that. Buyers and sellers start the relationship thinking this is going to work. We're going to get the order. We're going to like the products, and we're going to pay for them. And if we're lucky, we'll be able to develop a longer-lasting relationship with this vendor.
But when things don't work out –and it's not that uncommon today, for whatever reason –often, the buyer and seller can end up in litigation. And that's an area where buyers and sellers don't think about that when they start the transaction process.
So, when something goes wrong, then that terrible specter of going to court arises, because one of the other parties, or both, are upset, and they can't resolve it. Then you have that group of people looking at the documents that they issued.
So, for example, the buyer starts to look at what they have on back of their purchase order. I'm in Canada at the moment, so let's assume we have a situation of a Canadian buyer, and they might have on the back of their purchase order something to the effect that if this doesn't work out and we end up in litigation, then we're going to go to court under the common law of Canada [inaudible 00:06:15] jurisdiction, and the venue will be in a court, for example, in the city of Ottawa, Ontario. And that's what they would expect the seller to agree to.
Meanwhile, let's say the seller is in Germany. The seller then turns over the back of their purchase order acknowledgement that they sent the Canadian buyer when they received the PO in Germany, and on the back of the PO acknowledgement, they put if this doesn't work out, we're going to go to the court under the laws of Germany and the venue will be in the court in the municipality of Berlin.
No one read those documents when they initially started the transaction. So, already, we have a problem. That's one of the issues, by the way, that would be resolved in a contract of sale, which addresses that fact by saying if the two parties have different legal systems and can't agree on where they're going to go to court if litigation ensues, then the International Chamber of Commerce points them towards the United Nations Contracts for the International Sale of Goods legislation, which also flows from the sample contract of sale, which basically says if the two companies, the buyer and seller, are in the contracting states of Canada and Germany, for example, then they would adopt CISG as the legal framework for settling their disputes rather than a dispute which would flow over where we should go to court, in Canada or in Germany.
You can just imagine the cost and expense of a Canadian company having to send people to Berlin to engage in litigation and hire a German lawyer or vice versa. A German company having to send people to Canada to conduct litigation in English and hire a Canadian legal firm.
So, the United Nation's Convention on the Contract for the International Sale of Goods, or CISG as it is called in the short form, is another area of jurisdiction and venue that companies rarely look at for the simple reason that nobody wants to think things are not going to work out. You want to obviously start the transaction with the best of intentions, and you hope that it will be a good relationship between the buyer and the seller.
Why do these issues occur and how can they be effectively addressed?
Mostly they occur because of lack of training, which seems to be a common element on both sides of the purchasing spectrum here, whether it's the buyer or the seller. It's very common for companies all over the world, regardless of what country we were in, what language we speak, it's common for businesses to start off small. If they're fortunate, they start to grow. And as they grow they add personnel as they need them. And of course, the initial focus is usually on sales. And then it becomes one of profitability, and then it becomes one of cost control.
Along the way, you start to acquire resources, including people, who can fulfill the various functions to help the company grow. But it's not the case where everybody in every company gets the same degree of training, but exposes them to concepts like International Chamber of Commerce, for example. Who would have that relationship in the company? It might be someone in the finance area or marketing and sales that goes to a chamber of commerce meeting.
It wouldn't typically be someone in purchasing and logistics. Who would be the person that would stumble across the UN Convention on the contracts for the international sale of goods, for example, had they not heard of it before? Typically, that would not be necessarily someone in logistics or procurement. And these are tactical people that carry out these transactions.
So training, making sure that you're bringing people into the organization, and logistics or procurement that are exposed to professional trade associations. There's a number worldwide. Every country, typically, has its own professional trade associations where people can get professional training. And along the way, they get exposed to these institutions and organizations, like chamber of commerce and the UN, and they specialize then in the kind of [inaudible 00:10:40] that can support them in the negotiating process.
It's critical today, especially with globalization. Since so many countries around the world joined the World Trade Organization when it was founded back in 1995, we're all dealing with issues of globalization. It represents wonderful opportunities for companies to extend their reach of sales around the world, and it also provides wonderful opportunities to reach out and meet new vendors and develop new supplier relationships.
But with extended supply chains go a fair amount of risk. And it's not just the simple risk of delay. People always think, "Oh gosh. I'm dealing with a supplier halfway around the world. When will my order get here?"
Transportation today has become fairly sophisticated. When it comes to ocean freight...for example, in North America, if you're dealing with vendors halfway around the world, if you put 30 days in a purchase order, give or take, you're going to be getting your good within a reasonable amount of time.
It's the other issues. It's what happens when the ship doesn't sail on time, or the container doesn't load because of the new cargo security programs that are being implemented around the world. Or a terrible situation where a ship sinks and the cargo is lost, and the buyer or the seller did or did not buy cargo insurance, for example.
Those are the issues that make it difficult to conduct trade. And the worst-case scenario, of course, is if you're unprepared for those, it spoils the relationship. And that's really at the heart of international trade for most companies, is finding vendors, finding customers, and building relationships that become long lasting.
You can spend six months to a year trying to develop a vendor, trying to develop a customer, and then, unfortunately, if you're lucky, you start the relationship off. You buy goods, materials, or you sell an order to a customer. And something unforeseen happens in global supply chain management that you're unprepared for, or that you hadn't thought through when you entered into the transaction, with the result that your customer, your vendor, or you become disenfranchised. You're very unhappy with the result. And it ends the relationship.
So, you can spoil that relationship in one order, which is a terrible situation to have happen, when it's the right company, the right vendor, the right customer, the right products, the right price, but we didn't know enough to think about cargo insurance. We didn't know enough to hire someone who could direct us in terms of picking the right Incoterm. We didn't think about a contract of sale to govern our transactions to make sure the interests of both parties were protected and moving forward.
So, those are the things that a lot of companies overlook. And lack of training, really, I think, is one of the most common reasons for that.
My last question is where have you seen success?
I work in the logistics industry for a third party, a logistics company, as you know. And we do a lot of work with customers, and not only our own employees but employees of other customers. And I'm involved in various educational, outreach programs, both in the field of education and also and the field of professional trade association.
So, where we often see success is when we're working with companies that have been a student, I have to realize that these are pitfalls in international trade. Globalization presents wonderful opportunities for organizations all over the world for growth. But it also presents tremendous opportunities for risk.
In order to adequately prepare for those elements of risk, you really have to not only recruit sourcing and logistics personnel with the right skill set, but you have to actively promote training as those departments grow, and even as those employees grow.
So, where we have seen success is where we see buyers and sellers that are not afraid to reach out and work closely and development good, working relationships with their intermediaries in the logistics industry. Not just rely on their own purchase order or their vendor's purchase order terms and conditions, but actively reach out and make sure that they have themselves the proper training. They stay abreast of the changes in the industry and make sure they're connected to the proper sources and information to monitor changing in the business, and develop strong working relationships with the freight borders and customs brokers.
And freight borders and customs brokers are, in some cases, unfortunately, looked upon as a classed element. These are the companies that cost us money as suppliers. That's unfortunate, because when it comes to international trade, freight borders and customs brokers all over the world typically represent... It's like every industry, there are better brokers or forwarders than others, and each have their own area of expertise in some cases. But generally speaking, these are the experts in the field, and these are the people that can steer buyers and sellers down the proper path in terms of how to prepare for every eventuality when it comes to international trade, particularly risk.
Companies are usually experts on their own, when it comes to buying and selling good that they manufacture or that they import or export. They've done that. They've become successful at it. They know how to make a widget, and they know how to convert that widget into another product.
But shipping that widget from Asia to North America to the United States through the port of Oakland, inland to Chicago [inaudible 00:16:41] midwest, that is not typically their area of expertise.
So, dealing with the compliance program, security programs, customs, freight or forwarding delays, the handling issues at the ports, transits times involved, dredge operations, getting containers in and up [inaudible 00:17:01]. These are also the areas that typically most companies are unfamiliar with the don't have a good appreciation for what the complexities are in terms of delay and cost.
A common situation after all of that, when you see all that play out, is the customer gets his or her goods, and unfortunately, they also get an invoice which has a lot of unforeseen charges.
And there's the proof in the pudding, if you will, that someone didn't really understand all the pieces of the process. When they get the invoice, and the person is looking at it saying, "My goodness. That's a lot more than I thought I was going to have to pay," which is not an indication that they can overcharge, necessarily, as much as it may be an indication that, "Gee, I really didn't understand all the pieces of this process, and if I had, I might have negotiated the price differently with my customer and my vendor. And I might have had different paperwork governing the transaction," which takes us back to where we started today with our conversation with documents like a contract of sale, for example.
Well, thanks, Laurie, for sharing today.
My pleasure, Dustin. A pleasure as always. Thank you very much for taking the time. I appreciated being with you.
About Laurie Turnbull
Laurie Turnbull is a supply chain consultant with Cole International Inc, specializing in supply chain management consulting and employee training and development. Cole International has been a leading provider of customs brokerage, transportation and warehousing services in Canada for over fifty years.
Laurie’s extensive background in supply chain management includes experience in both manufacturing and the transportation industry. He is actively involved in supply chain management education with the Supply Chain Management Association and the Schulich School of Business at York University in Toronto.
Laurie has been awarded the CCLP designation as a logistics professional by the Canadian Institute of Traffic and Transportation, and the professional materials management designation by the Materials Handling and Management Society of Ontario. He is a frequent speaker at industry events across Canada and a contributing columnist for Canadian Shipper magazine on supply chain issues.
Supply Chain Consultant at Cole International Inc.