When drawing up a contract for a trade deal, it is best to work in a set of guarantees to ensure the deal meets the requirements of all invested parties. 

A guarantee is an instrument by which a guarantor, usually a bank, will agree to pay a sum of money, if the exporter doesn’t fulfill its obligations to the importer.

A guarantee is sometimes an unconditional instrument, meaning the beneficiary, usually the importer, can obtain payment from the guarantor on simple demand. Sometimes documentation outlining the reason for the claim is required. The bank doesn’t have the right to oppose the demand for payment unless the conditions haven’t been met, for example the required documentation, milestones, or expiry date. There are various types of guarantees that can be used to mitigate risk. Let’s explore four of these guarantees.

1) Bid Guarantee 

International public tenders often require all bidders provide cash deposits or an irrevocable guarantee for between two and 10 percent of the total contract amount. Issuing such tenders is a complex and costly process. As a result, the prospective importer only wants serious candidates to submit bids.

A bid guarantee is usually valid for the tender period which, on average, is up to six months.

By making a bid bond a condition of submitting a proposal, the importer ensures serious bids are made and each bidding company intends to carry through on its undertakings.

In the case of an international tender, the bid guarantee can only be called if the exporter fails to follow through after being awarded the contract. If that happens, the guarantee compensates the foreign importer for the costs of having to find another company to complete the contract. If the contract is awarded to another company, the bid guarantee is usually returned for cancellation.

In several countries, the contracting party will require the guarantee to be issued by a local bank. In this scenario, a bank from another country, usually the country of the bidding party, will issue a counter-guarantee in favour of a local bank, which will in turn issue the bid guarantee.

2) Performance Guarantee 

For larger, long-term international contracts, an importer will usually require a performance guarantee to be posted for about 10 percent, but sometimes up to 25 percent, of the total contract. A performance guarantee is a type of instrument that will undertake payment if the exporter (or applicant) fails to perform in accordance with the terms of the commercial contract or fails to perform to the satisfaction of the importer or beneficiary. Payment is usually effected against a certificate from the importer (or beneficiary) stating the exporter has failed to perform its contractual obligation under the contract.

In several countries, a statute of limitations will apply and the exporter (or beneficiary) will hold the guarantee for several years beyond the contract completion, in anticipation of later claims. In some cases, a longer-term expiry date will be required or a guarantee will be requested without a fixed expiry date. Some cases will utilize a guarantee with evergreen or auto-renewal clause.

These situations can result in longer exposure for the supplier than anticipated, and consequently, may use up credit capacity with their bankers. The local requirements should be investigated before entering into contracts. Unfortunately, matters such as bid guarantees and performance guarantees are often not given sufficient thought and attention until it’s too late.

3) Advance Payment and Progress Payment Guarantee

In large contracts, importers will sometimes make an advance payment to the exporter or contractor to enable them to begin acquiring or producing goods, or delivering services. An advance payment guarantee will undertake to refund all or part of this advance payment in the event that the exporter does not produce or deliver the goods as promised in the contractual agreement. The amount of the original guarantee will often be reduced as the exporter performs their obligations and earns the advance payments, reducing it to zero.

Exporters may be paid progress payments upon completion of various stages of a project.

Progress payment guarantees undertake repayment if a particular stage of the contract is not completed in accordance with the contract or within the required time frame.

4) Warranty/Retention Guarantee

At times referred to as a hold-back guarantee, a warranty or retention guarantee provides financial compensation if goods and/or services supplied under a completed contract don’t perform as required or are of inferior quality. Such guarantees are usually for a fixed period of time, but may be subject to a statute of limitations in certain countries.

In some contracts, there may be a payment hold-back of five to 25 percent of the contract amount. Such hold-backs serve the same function as warranties, to ensure the importer is satisfied with goods or work performed. They are often favoured when a significant amount of ongoing service and maintenance is involved, after the goods are supplied, or the project is in production.

Such hold-backs can extend for long periods and may create financial strain on the exporter. To enable the exporter to receive cash up front instead of waiting, a financial institution may issue a hold-back guarantee to the importer, providing the importer has agreed to pay the exporter the funds that would normally be held back. This may require the exporter provide some financial incentive to the importer and will depend on the willingness of the financial institution to assume the underlying risk, at a price, as they will be responsible for repaying funds, if any subsequent claims are made.

When drafting a contract, a guarantee should be in place to safeguard your business.  These four guarantees will help you safeguard your business when dealing with foreign markets.

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The aim with supply chain management is to provide maximum customer value while maximizing profits and managing costs. Several best practices have been developed that can help a company enhance its customer service offerings and reduce the costs associated with managing returns.

Here are the top 14 best practices to follow to ensure your reverse logistics don’t eat into your hard earned profits.

1. Provide clear returns instructions and policy

When dispatching goods, companies should include information about returns with the packaging. This information should be duplicated on the company website.

2. Generate smart serial numbers

Manufacturers are now producing products with smart serial numbers that have the date and location of manufacture coded into them. This serial number can help companies determine the age of a product, link performance problems from manufacturing locations, and assess the validity of warranty repairs.

3. Provide a warranty lookup service

For customers who are uncertain whether their product is still covered by a warranty, a warranty lookup service is invaluable. The customer can enter their product serial number on the company’s website to see if the warranty has expired. This service can also be provided by telephone.

4. Enable customers to register products

Most companies provide a method for customers to register ownership of a new product. This can be through the company website, by sending in a pre-paid postcard, or by phone. This registration means that customers can still obtain service even if they cannot find the original receipt. It also enables the company to send targeted marketing information to customers for other products or upgrades. 

5. Provide testing methods

Some products are returned unnecessarily because customers think they are malfunctioning when they are not. To avoid the costs associated with shipping and processing of unnecessary returns, some companies provide a method for customers to test their product before sending it back. Such testing methods include diagnostic software provided by computer manufacturers, instructions on websites, and step by step instructions provided in leaflets that are sent with the product.

Alternatively, larger companies can provide customer technical support helplines. Support personnel can make preliminary diagnoses, suggest troubleshooting fixes, and authorize returns only when it is certain that they are required.

6. Enable customers to create a return material authorization

One way in which smaller companies can save substantially is by permitting customers to create their own Return Material Authorizations (RMAs). Usually, this is performed by providing a web page with relevant instructions that will generate the appropriate form. Companies are often concerned that enabling customers to create their own returns authorizations will result in a large increase in product returns. If this is a concern, companies can validate the RMA and issue an approval before the customer ships the product.

7. Create standardized return processes

Many companies have several different methods that a customer can use to request a return authorization. Regular customers, especially if customers are retailers or distributors, quickly realize that there is more than one person that they can call to get a request authorized. In some cases, a return that is denied by one representative can be accepted by another. Best practices for returns management involves using an IT system to process all requests for returns and ensure that they are properly authorized.

8. Replace return for repair processes

Many computer and consumer electronic companies only offer Return for Repair for products that are within their warranty periods. This results in customers undergoing a lengthy wait while their product is shipped to a repair depot, processed through a repair, and shipped back to them again. The most customer friendly companies offer a replacement service to their customers, which includes immediate shipment of a replacement when a product is received for repair. This system creates large cost savings for the companies because product shipments and repairs can be organized in bulk instead of individually. However, it is not suitable for products that contain personal data or for companies that are unlikely to have sufficient inventory in stock to ship to customers as replacements.

9. Use bar codes

One of the most effective steps companies can take to manage returns is to generate pre-paid return labels that incorporate the customer’s order information and send them with dispatched orders. When customers need to return a product, the company can scan the bar code to obtain the customer return information automatically and quickly.

10. Use emails

Many business consumers and other customers now have access to the Internet and email. As soon as a return is processed, an email message can be automatically generated that reassures the customer that their returned product has been received and is being processed. In environments in which email is not a common form of communication, this automatic message generation can be transferred to creating printed letters that are processed for sending through the mail within days of the return being received.

11. Enable visibility of replacement stock

When customers call to request a return, a warranty might specify that a replacement product will be supplied. Many companies have IT systems in place that enable customer service representatives to view available inventory and planned shipment and delivery times.

12. Enable status lookup

Providing customers with the details of a website or a phone number that they can use to check the status of their return, repair, replacement or refund, will enhance customer service and reduce the incidence of inquiries.

13. Provide regular status updates

Customers appreciate regular updates on the status of their returned goods if they are expecting a repair or a replacement. Barcoding enables automatically generated emails or printed notifications to be prepared when goods are received, shipped or credited.

14. Enable customer feedback

A very cost-effective method of making improvements to returns processes involves including a card with the shipment that asks for the customer’s feedback about the returns experience and performance.

The reversed flow of materials through the supply chain needs to be planned with as much care as the forward supply chain.

Recent mass product recalls have highlighted the problems that large returns can create, with goods having to be transported and stored in inventory awaiting disposal or recycling. Companies can ensure good customer service and cut the costs associated with product returns by establishing returns policies and strategies.

Effective gate keeping policies will cut down on the number of unnecessary product returns and associated handling and processing costs. Setting up separate inventory locations, or using 3PLs to manage returned products, will ensure that returned goods are handled quickly and categorized according to the action that must be taken with them.

The post Use these 14 best practices to avoid profit drain on product returns appeared first on Trade Ready.

A common and very effective model is the Supply Chain Operations Reference (SCOR) model, developed by the Supply Chain Council to enable managers to address, improve and communicate supply chain management practices effectively.

The SCOR model runs through 5 supply chain stages: Plan, Source, Make, Deliver, Return

The 5 supply chain stages

Stage 1: Plan

Planning involves a wide range of activities. Companies must first decide on their operations strategy. Whether to manufacture a product or component or buy it from a supplier is a major decision.

Companies must weigh the benefits and disadvantages of different options presented by international supply chains.

Options include:

• Manufacturing a product component domestically
• Manufacturing a component in a foreign market by setting up international production facilities
• Buying a component from a foreign supplier
• Buying a component from a domestic supplier

If companies are manufacturing products, they must decide how they will be produced.

Goods can be:

• Make to stock (produced and stored, awaiting customer orders);
• Make to order (constructed in response to a customer order);
• Configure to order (partially manufactured the product and completed it after a firm customer order is received); or
• Engineer to order (manufactured a product to unique specifications provided by a customer).

Sometimes, the combination of these methods can produce goods. Companies must also decide whether they will outsource manufacturing. This operations planning is essential because these decisions influence the supply chain.

Planning also involves mapping out the network of manufacturing facilities and warehouses, determining the levels of production and specifying transportation flows between sites. It also involves assessing how to improve the global supply chain and its management processes.

When planning, companies should ensure that their supply chain management strategies align to business strategies, that communication plans for the entire supply chain are decided and that methods of measuring performance and gathering data are established before planning begins.

Stage 2: Source

This aspect of supply chain management involves organizing the procurement of raw materials and components.

Procurement is the acquisition of goods and services at the best possible price, in the right quantity and at the right time.

Companies will negotiate contracts and schedule deliveries with the selected and vetted sources.

Supplier performance must be assessed and payments to the suppliers made when appropriate. In some cases, companies will be working with a network of suppliers. This will involve working with this network, managing inventory and company assets and ensuring that export and import requirements are met.

Stage 3: Make

This stage is concerned with scheduling of production activities, testing of products, packing and release. The company also manages rules for performance, data that must be stored, facilities and regulatory compliance.

Want to learn more about managing your company’s supply chain, logistics and how to mitigate risks? Check out the FITTskills Global Value Chain online course.

Stage 4: Deliver

The delivery stage encompasses all the steps from processing customer inquiries to selecting distribution strategies and transportation options. Companies must also manage warehousing and inventory or pay for a service provider to manage these tasks for them.

The delivery stage includes any trial or warranty period, and customers or retail sites must be invoiced, and payments received. Companies must also manage import and export requirements for the finished product.

Stage 5: Return

Return is associated with managing all returns of defective products, including identifying the product condition, authorizing returns, scheduling product shipments, replacing defective products and providing refunds.

Returns also include “end-of-life” products (those that are in the end of their product lifetime and a vendor will no longer be marketing, selling, or promoting a particular product and may also be limiting or ending support for the product).

Companies must establish rules for the following:

• Product returns
• Monitoring performance and costs
• Managing inventory of returned product

Do you think we covered all of the essential stages of supply chain development? If not, what would you add to the mix? 

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