Sourcing, business communications, supplier selection, contract management and supplier relationship management are among the most important activities in the procurement process.

Procurement specialists at SMEs usually learn the main skills of the job by trial and error, which often leads to unnecessary costs to organizations. It is obvious that knowing and avoiding these types of mistakes will help small enterprises save money and increase profit.

Here are eight of the most common global procurement mistakes made by SMEs.

1: Relying on internet searches for supplier selection

Everyone can go online and find a directory of hundreds of suppliers. But these lists often include fradulent and/or unreliable companies.

Conducting an online search for suppliers is a primary and required step for sourcing, but it is not sufficient for a final decision.

Many companies have made this procurement error and been subject to phishing and fraud because they placed their trust in suppliers based on what they found online.

It is essential to do your due diligence and investigate the credit worthiness and reliability of any supplier via a variety of methods including ‘in-country’ technical visits, consulting with embassies, consulates and trade and investment offices, contacting international purchasing offices, etc.

These vetting methods can require considerable budgets, but companies can find budget-accessible tactics that work for them, and the amount paid for due diligence should be considered a worthwhile long-term investment in procurement systems.

2: Accepting hidden risks with samples

Requesting samples and making supplier decisions based on sample quality is a common course of action in procurement, but many companies make these common procurement mistakes with samples. Firstly, they do not have a clear process in place to ensure the sender is the actual manufacturer of the sample, and it is not another company’s product.

Some less-than-ethical suppliers  may send samples to potential customers which were manufactured by a third party and claim them as their own product. Therefore, it is better to get a sample from the production line during a technical visit.

Secondly, samples may be touted as having been tested by technicians. Even if this testing seems reliable, it’s important to have the samples independently tested in a laboratory and attach the test results to the contract to ensure future products will maintain the same quality based on measurable criteria.

3: Accepting an extraordinarily low price

If it seems too good to be true, it probably is. Uncharacteristically low prices are the first sign of cheating in international procurement, and yet, many companies make this procurement mistake and become victims of this tactic used by below-board suppliers.

If the quoted price is unbelievably low, procurement specialists should understand that something is wrong.

Often the scam will see the suppliers receive a part of the payment before delivery – and then they disappear.

4: No plan for product modification

Some SMEs buy the same product for a long period of time without any improvement or modification. There is always room for product improvement, but the buyer’s  feedback is essential. Many improvements can be made without  requiring significant additional costs and investments.

Examples of possible modifications include: product redesign, modifying technical characteristics, changing packaging, omitting additional features, and finished cost reduction. Over time, failing to update and improve the product or input will undoubtedly reduce your market competitiveness.

5: No clear plan for quality control

When buying from a foreign supplier, it is crucial to evaluate the quality of the product at the right time and place  by your own team or third-party inspection bodies.

The time and place of inspection can be during production, before delivery, at the main port or airport of shipment, or at the destination in your own premises.

The inspection test plan and detailed criteria and standard features of the product must be clear and attached to the contract.

6: Neglecting packaging details

Packaging is of high importance in any purchase, especially in foreign procurement. Packaging is essential for the shipping, protecting, and marketing of your products, but in many cases, SMEs do not negotiate and determine the details of packaging and assume that the supplier will take care of it.

Five aspects of packaging must be agreed upon between the supplier and buyer:

1. Type of packaging
2. Material
3. Specifications
4. Labeling
5. Marking

Even though the supplier is responsible for packaging in all Incoterms rules, it is necessary to discuss and determine all the related details in the contract to avoid ambiguity.

7: Trusting verbal promises

A majority of the earliest stages of business communications happen through non-written negotiations. Talking in a face-to-face meeting, phone calls, and online sessions are common steps in the purchasing process. Although all these communications are important and details of the agreement often need to be worked out verbally first,  one should never rely solely on these verbal agreements.

It’s crucial that you clearly document what has been agreed upon to avoid future misunderstandings.

One clearly written clause in a contract is better than a hundred pages of interpretation and explanation in the court.

8:  Neglecting intellectual property rights in contracts

Different aspects of intellectual property are important, and should be discussed in detail in most purchasing, manufacturing, and long-term supply contracts. Most North American companies invest a lot of money in research and development, and after designing a product, due to cost efficiencies, they may decide to outsource the manufacturing process to suppliers in other countries.

This opens up the risk that the supplier will infringe or tamper with the intellectual property of the buyer and manufacture and sell the same product to other companies.

It is essential to define the intellectual property details and determine the consequences of breach and misconduct in this regard. Two important elements of intellectual property which are at risk are industrial design and trademark. It is recommended to register the trademark and industrial design in the country of the supplier and also protect them in the contract between the supplier and buyer.

Since many of us transitioned from the office to remote work during the pandemic, it seems here to stay, at least for a significant portion of the workforce. According to Forbes,  “25% of all professional jobs in North America will be remote by the end of 2022, and remote opportunities will continue to increase through 2023.”

With the transition to remote work comes the switch to largely “virtual” business meetings, and that means online negotiation is becoming a new normal that we need to study as a separate method of negotiation.

Obviously, online and face-to-face negotiations have a lot of similarities, but there are some crucial differences between them which require negotiators to adjust their processes and consider some additional strategies. For example, shifting from in-person to online meetings lowers costs significantly by removing the expenses of international travel.

However, the low cost of online negotiations shouldn’t stop experts from taking these virtual negotiations seriously.

The same amount of preparation and attention to detail should be taken for all online negotiation sessions, and a good place to start is to consider these 10 tips for how to conduct effective online negotiations.

1. Optimize and troubleshoot hardware and IT systems in advance

Assign an IT expert to take care of hardware, software, internet connection and security. All negotiation teams need to provide suitable hardware for negotiations. You specifically need to select high-quality web cameras, large and high-resolution monitors, and headsets. Negotiation teams need to send and receive high quality video and audio to transmit understandable verbal and non-verbal messages.

Your desktop window should be clean, and no additional files should be open during the meeting. Furthermore, in order to avoid background noises and send and receive good quality audio, you might require professional microphones or headsets. Most recent laptops and computers are suitable for online negotiations, but as mentioned, the quality of camera, monitor and microphone should be high enough quality to handle online sessions effectively.

All needed software should be installed and set up on your system. You also need to check the quality of Internet connectivity and consider its speed and reliability to avoid interruptions in communication.

Cyber security is an important consideration these days, and all negotiation teams need to take care of communication and systems’ security.

Select a suitable background for your screen and make any modifications needed to have a professional environment for anything that will appear on screen during your meeting. You can add some organizational and personal certificates, use your company’s  colours, logos and slogans. Your brand and company identity can be demonstrated well in your background.

Double-check all of the above the day before the negotiation session.

2. Prepare your digital documents and presentations

Take your time and prepare professional presentations for the meeting. All files which will be shared, demonstrated, or played in the meeting must be complete, polished and “presentation-ready”, as appropriate for communications outside of your organization. Slides, videos and online catalogues must be ready on the screen that you are going to share. Make sure that you are using the latest version of each file.

3. Consider time zones and time management

There are two main aspects related to time management in online negotiations. First, consider time zones and choose the right time slot that works for everyone. In many of my online negotiations we are meeting with multiple time zones between the teams and even in some situations, different members of the same team.

All attendees are expected to be flexible and accept early morning or late afternoon meetings if there is no other option. I keep a wide window open for meetings with international clients, from at least 7 am to 8 pm.

Second, it’s important to prepare a well-thought out agenda, agreed upon at the beginning of the meeting. Ensure you’ve planned enough time to cover all subjects, in an order that makes sense. I usually prefer to cover technical, commercial, financial, and legal issues in sequential order. This will help me save time and avoid doubling back to already-discussed topics.

4. Determine on-camera and “behind the scenes” roles

Determine the role of people in front and behind the camera. Some active members of the team, like analyzers and translators, might not be in front of the camera. Before the meeting, determine which members will be in front of the camera and what are the expectations from each person. There must be some arrangements between the people who have their cameras on for sending and receiving intra-group messages.

For those who are offering “behind the scenes” support and won’t be on camera, the role should be clear, and they should be trained to do their assigned job automatically.

For example, if an Internet search needs to be done during the session, these experts should know to initiate the search and deliver the results fast.

5. Wear appropriate business attire

You might think that it is not necessary to dress professionally when you are negotiating from the comfort of your home, or you might decide to just wear a formal shirt. I strongly recommend that you dress professionally from head to toe, even if you are negotiating from home.

Your entire outfit should be appropriately formal, even the aspects that you believe won’t be visible on camera.

Psychologically, it helps you to take the session seriously, focus on the job, and will avoid any unexpected embarrassment.

6. Join the meeting professionally

Punctuality is an important quality for any professional. Joining the meeting on time is a crucial part of making a good first-impression online or otherwise. All kinds of confusion and inconvenience can occur when someone is late to join. A late arrival also sends the message that you do not respect the other parties’ time. If you will be late for any unforeseen reason, advise the other parties as soon as possible.

The joining process on most platforms can take a minute or so, therefore, start the process a couple of minutes ahead of the set time. This is especially important for the organizer, who is expected to join the meeting first and admit other participants into the virtual meeting room. You don’t want to keep your colleagues waiting in the lobby. All members should ensure that their complete first and last name when joining the meeting.

It’s a good idea to pay attention to the background and environment of the other party at the beginning of the meeting and say something positive about it. This behavior shows that you pay attention to details, and can also be an effective ice breaking strategy.

7. Convey the correct body language

Correct posture is important, especially when you start the meeting. Sitting up straight and maintaining sufficient distance from the camera is another key element. This demonstrates experience and confidence and also provides the other party with a good view of your body language, including your hand movements. Keep the camera on and make any necessary adjustments during the meeting.

Make eye contact in all communications, and look at the camera instead of looking at your own image on the screen. Pay attention to non-verbal messages in your virtual negotiation environment. A practical application of body language is to show agreement or disagreement gestures while the other party is talking. In this way, you send your messages without interrupting the other party. And of course, mute the microphone when you are not talking, and ensure you have turned it back on when it’s your turn to speak.

8. Communicate effectively – both with your internal team and external parties

If your organization’s team members aren’t in the same place, prepare a side communication network for transmitting confidential messages. For example, you might want to create a group on an application such as WhatsApp. This will help you simultaneously send and receive confidential messages while being in the main online meeting.

Connect with one system if your team members are in the same room, or use a head set so that the sound doesn’t echo. The audio quality is critical in online negotiations and anything that compromises that must be avoided. Just as in an in-person meeting, it’s important to keep up a professional tone to all communication, being direct and to the point, and keep up energy levels and clarity throughout.

Negotiation is a difficult activity and requires a lot of physical energy and mental ability. It is highly recommended to build in a  15-minute break for every 90 minutes of continuous negotiation.

Multitasking is also difficult to manage during business negotiations, so be careful not to get distracted. Ensure you have supporting staff present to take care of any tasks during the meeting, such as conduct searches, bring up information, or send emails or other communications.

9. Keep detailed minutes

Negotiation teams need to take notes for future records and reporting purposes. As mentioned, multitasking is hard, therefore each team may want to assign someone as note-keeper in online negotiations. This person might not be in front of the camera but can view the meeting and support you with written memos and keep notes of the meeting.

During online communication there are a lot of opportunities for misunderstandings, from technical snafus to misread body language. To combat these potential miscommunications, it’s a good idea to regularly summarize and capture crucial items that have been agreed upon in writing.

10. Avoid screen sharing snafus

To reiterate from tips 1 and 2, while sharing the screen, avoid having confidential information open on the computer. You might make a mistake for a moment and share the wrong window. One strategy might be to have two screens and always share screen number two and keep all confidential windows on screen number one. There might be some people on the other party’s team who know your local language, so avoid expressing any confidential intra-team messages in your native language in a way that is audible to the other party. Conversely, it might also be advantageous for your team to have someone present who understands the other party’s language.

At the end of the meeting, briefly express appreciation to everyone and send the minutes of the meeting to the other party immediately.

Remember to treat each online negotiation with the same  high importance you give in-person negotiations, and paying attention to technology, team support, time, and communication styles are critical to your success.

All exporters, international trade professionals, international sales experts, and business development professionals receive requests from new and current customers for discounts on a daily basis.

In fact, bargaining or requests for discounts are integrated parts of some cultures around the globe, and it is crucial to effectively manage this challenge. We have to keep the customers satisfied while selling the product without compromising a large proportion of our export benefits.

I have been involved in many face-to-face, online, and written negotiations that have included a request for a discount and have learned some excellent strategies over the years. Here are my 10 effective techniques for managing requests for discounts in international trade:

1. Do not accept and confirm requests for discounts immediately

When you receive a letter containing a request for a discount, reply to the letter quickly, but let your customer know that you will assess the possibility and inform them of the result at a later time. Even if you are willing to accept the request, do not announce your acceptance immediately. It’s better to answer the request at the end of the day and state that, having analyzed the current situation, or considering facts including the quantity, payment conditions, and history of your relationship, (or other reasons), you agree to accept the request. If you can’t answer at the end of the day, the following morning is equally acceptable. Those who do immediately accept and grant the requested discount run the risk of their customer requesting further discounts in the future.

2. Do not offer round numbers (like 5% or 10% / $500 or $1000) for your discount

Compare these two statements: 

• I agree to decrease the price by 5%.
• I agree to decrease the price by 4.7%. 

A round percentage or amount as a discount means that you are answering without exact analysis, so your customer may request even more. When you propose a non-rounded number with some decimals, it usually means that you have done some calculation and this suggestion is a firm and fixed one.  By using a non-rounded number, your prospect will understand that you’ve done the analysis and have calculated the best possible discount.

3.  Quick, large discounts can devalue your product brand and image 

A quick and high discount is detrimental to trust in professional negotiations, so offer a logical price from the get-go to avoid this situation.

If you offer a very high price and then decide to grant a considerable discount, your brand image will be devalued in the mind of your customer and may make them think that you are not reliable and trustworthy.

4.  Do not offer the same percentage or amount for all items if you have more than one

If you have more than one item on your quote, do not offer the same percentage or amount for all your items or a fixed amount of discount on the total value. You should offer a lower percentage for the item that has a higher price and, if it makes sense, a higher percentage for the item that has a lower price. This looks like you are giving a greater discount on the overall order but actually can work out to a cheaper price than a lump-sum discount for all the items. Take, for example, this scenario:

You sell two products: A and B. A’s unit price is FOB $27 and B’s unit price is FOB $4.5. Your quotation is for 10000 pieces of A and 1000 pieces of B. So, your total amount is equal to $270000 plus $4500 which is equal to $274,500. You can either accept a 3% discount on the whole quotation, or you can offer a 1.2% discount for the first item and a 6.5% discount for the second item. The total amount in the first scenario (a 3% discount on $274,500) would be equal to $8235. In the second scenario, (a 1.2% discount on $270,000 and 6.5% on $4,500) would be $3532.5 (3240+ 292.5). In the first scenario, the discount doesn’t sound like much (but it is quite substantial). In the second scenario, it sounds like you are offering a larger discount, but the actual discount is significantly lower.

5. Discount as a percentage or a given amount?

You can offer your discount in the form of a percentage on the value (for example 3.5%) or a given amount of money. Let’s assume that you have two customers and grant both of them a 3.5% discount. The first customer’s quotation is equal to $80,000 and the second is $1, 800 000. The amount of discount for the first customer is $2,800 and the amount of the second customer is equal to $63,000. The second customer will be more satisfied if you tell them that the discount is equal to $63, 000 because it is a larger number. However, the first customer might be more excited to hear that you will reduce the price by 3.5% because, in this case, the percentage sounds larger than the dollar amount. Think and select the method that elicits more excitement from your customer and always ask yourself, which number will be perceived as larger and more enticing by your customer.

6.  Involve a third party in difficult situations

Do you have customers who bargain a lot and tire you out? Just tell them that this is the maximum possible amount that you are authorized to grant, but you will talk to your manager (or any superior) and will inform them later of the decision. By using this technique, you can quickly decrease the resistance from your customers who usually will stop bargaining because they know that you did your best. 

7.  Remember, your discount is not just in the form of a financial concession

Be creative and increase value for the customer through other avenues instead of decreasing your price consistently. You can provide services that do not increase your costs, yet generate value for your customer.

For example, you can train the customer or modify the packaging based on their instructions without increasing your costs. Furthermore, you can send free-of-charge products for marketing or promotion. You can also provide them with some free spare parts to support their warranty and product quality for the end-user.

In some situations, you might be able to change the Incoterms® rule instead of granting a discount. For example, let’s say you issued a quotation on the base of FOB any departure port, and your customer asks for a $9000 discount. You can reject the request for a discount but offer a CFR port of destination price instead of FOB port of departure, as long as the cost of freight to the port of destination is less than the discount requested.  Or, you can offer CIF instead of CFR, you’ll just need to add insurance, but this creates better value in the mind of your customer and gives them peace of mind. You might even be able to modify the product based on the requirements of the customer instead of giving a financial discount. 

Learn more about Incoterms® 2020 with the Incoterms® 2020 online course, presented by FITT and the Canadian Chamber of Commerce (CCC).

8.  Explain the reason, applicability, and limitations of the discount

Study and learn about the different types of discounts in international sales and procurement. Some kinds are quantity, cash, and seasonal discounts. Let your customer know why you are granting a discount, and in case it is a one-time concession for this specific transaction, tell them clearly not to expect it on their next order. You might need to say, “this discount is a seasonal one and is solely applicable to order number 123 when submitted before Oct 15th.” Make sure, if there are any deadlines or limitations, they are clear to your customer.

Learn how to market and sell your products and services with the online FITTskills International Sales & Marketing Course.

9. Manage expectations and keep something for a rainy day

Do not announce all your discount policies at the beginning of the negotiation or at the time that your customer asks for a discount. Keep something for closing the transaction. In most situations, you will need to be generous at the end of the meeting. 

10. Pay attention to your body language or the tone of your letter

You should be serious and firm at the time of accepting or rejecting a request for a discount. In a face-to-face meeting, your body language and vocal tone should assure your partner that this is the highest possible discount. On the other hand, when you communicate in writing, your written tone should be firm yet respectful. Your writing’s tone, structure, and expressions shouldn’t signal any hesitancy or room for flexibility in the future. When your customer reads the letter, she or he should believe that this is the final offer and there is no more room for a discount. Pay attention to the following sentences: 

• As a valued customer, I agree to at least a 5% discount on the price. Please let us know if it works for you. 
• As a valued customer, I have decided to grant you the maximum possible discount which is equal to 4.7%. Please confirm and send your advance payment to let us start the production process. 

Conclusion

Requests for discounts in international trade are great opportunities for closing lucrative partner and customer deals. Many international customers ask for discounts on different occasions and, by using the above techniques, you can manage their expectations well. This lets you continue business in a satisfactory manner for both parties. 

Customs duties, taxes, and other charges usually account for a considerable proportion of the finished cost of imported goods. These charges are paid to customs, tax organizations (in some countries, the customs and tax collecting organization are independent entities) customs brokers, terminal operators, and warehouse owners.  These costs can be reduced by looking at the 9 different factors that affect the total customs costs below. 

The total amount that the importer of record pays during the customs clearance process is dependent on different factors such as:

• Product nature
• HS tariff code
• Customs valuation for duty
• Tariff treatment
• Duty rate
• Packaging type
• Gross and net weight
• Volume of goods
• Duration of the clearance process
• Number of lines in each entry

Based on the above items, and considering the current COVID-19 situation, these nine solutions should be employed to reduce your customs costs.

1. Correct tariff classification

Correct tariff classification is vital in cost reduction at customs and border agencies.

At first sight, it might seem easy to find the correct HS code of a given product, but it requires expertise in both the product and classification regulations.

Expertise in the General Rules of Interpretation (GRIs) of the harmonized system is vital in this stage. Technical knowledge is crucial for correct classification in most HS chapters.

By using the correct tariff code, not only will the importer of records pay less customs duty, but also may avoid future audits and fines. I recommend that the importer create an expert team with members from its own organization and customs brokers agents to concentrate specifically on HS classification. A company might have been using a tariff for years, even though it was not the most suitable or correct one for the product.

The duty rate is partially dependent on this code. This duty rate may change annually, or for more extended periods in different countries, and are usually published in the form of electronic or printed books. Due to COVID-19, most states have made some modifications to the rates to decrease the finished cost of certain essential products for combating this virus. The customs brokerage companies are expected to proactively update the importers with the most recent information. Stay up to date on these changes in case they might apply to your shipments.

Learn how to keep your business running efficiently by recording, filing and storing everything you need to maintain efficient day-to-day operations

2. Correct tariff treatment and country of origin regulations

Most states have different bilateral and multilateral tariff treatments with other countries. In other words, the duty rate for a specific tariff code changes from one country to another. For example, if you import a product that is made in the U.S. into Canada, the product will be treated based on the United States Tarrif (UST), and the duty rate might be zero. Likewise, if the product is made in China, it will be treated based on most favoured nation clause (MFN), and the rate might be high.

Imagine that you import ice cream under HS tariff code 21.05.00.10.00. If the ice cream is made in the USA, it would be free of import duty, but if it is made in China, the duty would be 9.5%.

Selecting the right tariff treatment and preparing supporting documents, such as a certificate of origin and bill of material, is crucial in determining the correct tariff treatment.

Some countries might revise the tariff rates at this challenging time, despite the mutual tariff treatments, and the customs brokerage company is expected to apply these changes before declaring the products to customs.

3. Correct valuation for customs duty

The value of the product should be declared to customs for calculating the import duty and taxes. The customs in different countries have similar regulations and methods for determining the value of the products. But the reality is that the value for customs duty calculation is not always the same as the invoice that the importer of record presents to customs.

The value of some products may change from time to time in customs calculations. Some companies may try to reduce their total taxes by transfer pricing. The updated value of the product should be considered and analyzed by the customs broker and importer of record. If the customs officers do not approve the declared value, it may not only lead to an increase in customs duty but also incur fines and penalties. Due to COVID-19, the prices of many products have changed, and customs brokers and importers should actively monitor them to avoid additional costs.

Learn to master any costing implications related to Harmonized Commodity Description and Coding System

4. Selecting an experienced and reliable customs broker

Customs brokers have direct and indirect costs. The brokerage fee, which is the direct cost, will likely be the first and most important criterion for selecting a customs broker for your business. The importance of the brokerage fee is undeniable, but the indirect influence of brokers on the total cost is much more important than their direct fees.

An error in tariff code, tariff treatment, or customs value could lead to a fine that outweighs several years’ worth of brokerage fees.

As previously mentioned, because of the current situation with COVID-19, the rules and procedures may change at any time, and therefore the knowledge, expertise, and experience of your customs broker is of high importance.

Your customs broker can help with cost reduction covered in the next five topics.

5. Reduction in brokerage fees

The brokerage fee is based on the agreement between the broker and importer of record. This fee is usually based on the number of entries, the nature of the product, and the number of lines at a given time. You can bargain with the brokers and ask for lower fees. Furthermore, the importers entitled to have an all-inclusive flat fee for the whole suite of customs clearance services. Therefore, the broker should be asked to quote a reasonable price and specify the cost of each item within the proposal.

Due to electronic data interchange and new technologies, the costs have changed in the past few years. Therefore, I would recommend that the importer continue to request for a proposal or quotation at regular intervals and compare prices. It is critical that the importer compare the total cost for the clearance package and not just the direct brokerage fees. For example, additional charges such as after-hour fees and hidden items should be defined or avoided.

6. Time-related costs reduction

Customs brokers can help importers reduce costs via time management. For example, some borders around the globe close at specific hours of the day or night. Imagine a truck delivering a cargo of fresh produce from the exporting country to the importing country. The usual transit time for the route is 20 hours. Sixteen hours out of that are within the seller’s country, and one hour at the border for customs formalities. Then, three hours after crossing the border, they arrive to deliver the products at the buyer’s warehouse for distribution.

The truckers plan to start their trip at 6 AM and plan to arrive at their destination at 2 AM. They’ll reach the border 16 hours later, at 10 PM, but the border’s closed from 9PM to 6AM. What happens? The products might be perishable, and the cargo won’t arrive for distribution at the right time in the retail store.

The financial loss is significant, but the damage to the credit of  the importer or retailer is much more critical.

Furthermore, consider the additional freight cost, after-hour charges, potential warehousing costs, and other risks as well. A good customs broker will know to account for the border closure times and plan accordingly.

7. Deferred payment or guarantees

Some countries are encouraging the importation of essential products by allowing a longer time for import duty payment. In other words, the importers of specific products in some states are enjoying deferred payment of customs duties. The brokers expected to inform the importer of the most recent regulations on this subject.

8. Tax and duty refund

In some circumstances, a refund of taxes and customs duties may apply to your shipment. For example, if a product is temporarily imported, the importer can be refunded the amount paid to customs. You and your customs broker should be aware of all applicable refund opportunities and ensure due diligence to receive them.

9. Cost reduction by facilitation in shipment documents

The customs brokers’ role is crucial in decreasing the cost or avoiding additional expenses from documentation. Some countries are omitting certain documents for clearance in order to facilitate the process of importation. Others may request new documents to check compliance with new regulations related to COVID-19. Generating additional documents may lead to higher charges, and not preparing required documents may cause additional fees. Without the required documents, your shipment may even get stuck at the border.

Customs brokers should support importers with the most recent information. They can also help importers by facilitating the creation of all documents and paperwork.

COVID-19 is continuing to influence international trade. The supply chains of small and medium-sized enterprises (SMEs) are facing all kinds of disruption due to the current fast-moving situation.

The reality is that many SMEs are struggling to continue their businesses, an element of which has been conflicts or disputes with their suppliers.

Here’s why, and here’s what you can do.

• Which SMEs characteristics make them more vulnerable in COVID-19 situation?
• Which probable problems will SMEs encounter in the next months due to COVID-19?
• What are the common mistakes of SMEs in drafting a purchase and sales contract?
• What are the short-term measures that SMEs can take to reduce disputes and problems with their international suppliers?

Characteristics of SMEs

SMEs’ have characteristics that make them more vulnerable  to encountering problems with their suppliers than large enterprises. Why?

Because, in general, SMEs:

• Are not critical customers of suppliers, and there are many of them
• Do not purchase a large portion of a supplier’s total output
• Purchases are not a significant portion of a supplier’s annual revenues
• Are not agile enough to switch to another product or supplier quickly
• Cannot take swift legal actions against suppliers
• Cannot be protected individually by governments in international trade disputes

Common problems SMEs are facing

As mentioned above, most SMEs are not the first priority of suppliers in difficult situations. Furthermore, they might not have a suitable contract to protect themselves. Therefore, suppliers may decide to deprioritize some SMEs or even become delinquent.

In the current situation, many suppliers are shutdown, working at lower capacity, encountering internal finance problems, or experiencing other issues with production and operations.

This may force them to:

1. Fail to deliver or cancel some orders
2. Delay orders
3. Partial delivery
4. Decrease the quality of the goods in different methods
5. Increase the price or change the currency of the transaction
6. Change the terms and method of payment to safer methods for themselves
7. Decrease the packaging quality
8. Change the delivery conditions
9. Change the country of origin or place of departure
10. Announce bankruptcy or insolvency

Due to a variety of factors such as low expertise, bargaining power, or financing capabilities, SMEs might not write and sign professional contracts in their international activities.

Common mistakes cause losses and increase their vulnerability. Identifying the errors can help to avoid them in future cooperation contracts and mitigate their adverse effects in the current situation.

Here are some common mistakes and related solutions during the current world health crisis:

1. Problem: Not having a written contract

Some companies prefer to cooperate solely based on trust and do not write a detailed, comprehensive contract.

Trust is good, but not enough. The contract is will work when trust has failed.

The details of the business relationship should be written and signed by authorized officers of all parties. A purchase order, proforma invoice, quotation, and other instruments are not usually capable of covering all crucial details.

It is undeniable that when you do not write a contract, you are silent about most aspects of your business relationship, and details of the business will be ambiguous. Therefore, they will be up for interpretation and construction.  Never exit a successful meeting without a written text. It is crucial to write down what you have agreed to.

One clear written sentence is more valuable than ten pages of explanation in a petition to the court or arbitration centre.

Some companies that do not have a written contract are now struggling with their suppliers due to the effects of COVID-19, such as delays and non-delivery. Some businesses don’t even know which mechanism should be used to settle the disputes because they have not been specified in the details of an agreement.

Solutions:

If you are experiencing conflicts in a business relationship without a contract, finding the best operational solution depends on many factors, including:

• Type of conflict (number 1 to 10 mentioned above)
• Method of payment (open account, advance payment, documentary credit, etc.)
• The importance of continuing the business relationship for the parties, and level of trust
• Incoterms rule used
• Level of ambiguity in current business settings between the parties
• The importance of timely delivery of the product in the supply chain
• Ability to quickly find a substitute supplier
• Previous customary procedures between parties

Learn how to Ensure your company adheres to legal and ethical best practices as you discover what proactive and reactive measures you should take.

If you are experiencing conflicts with your supplier and you do not have a written contract, try to solve your problems via amicable solutions. In the meantime, consult with an experienced international trade lawyer to avoid more mistakes, analyze the above factors, and decide on your next steps based on international trade rules, your previous agreements, business settings, and your bargaining power.

All of your emails, phone calls, communications, and typical business actions matter in this type of situation.

So, analyze and confirm your decisions with experts before actioning them.  You need to be aware of the positive and/or negative effects of your messages. Keep an archive of all your correspondence and your partner’s acknowledgment of their receipt. Instead of phone calls, send emails or mail communications to the formal contact channels or the legal and registered domicile of your partner. Send emails to official business addresses under your partner’s formal website domain to ensure that the message arrived in the right place.

Giving proper notices at the right time and with the correct media is vital. You might need to analyze this situation and craft your messaging to partners with a multi-skill team, including commercial and legal experts. The following subjects should be the most critical priorities in your analyses:

• Global presence of your partner (the countries that your partner has a type of property)
• Governing law
• Dispute settlement
• Force majeure
• Termination
• Consequences of termination
• Terms of payment
• Delivery and Incoterms rule
• Price and currency
• Specifications of the goods
• Usual time of delivery

You should also consider several possible scenarios of how to proceed to resolve the challenge and do a full analysis of the pros and cons of each option.

2. Problem: Inaccurate description of goods

Parties do not usually describe the goods with as much detail as needed. The essential details that should be indicated in the contract of different products are not all the same. Buyers should define the exact details of the goods in an article or an attachment to the contract. Some companies may use qualitative expressions such as “standard, first-class, suitable, in a good state,” or others to describe goods.

Avoid using imprecise phrases and instead define each quality using measurable criteria.

You must decide which of the following items should be utilized for your particular product:

• HS code
• Packaging type
• Material
• Marking and labelling
• Weight
• Size
• Exact quantity of goods shipped
• Country of origin
• Product code
• Product analysis
• Standard type
• Year of production or crop year
• Performance
• Guaranteed figures

Solutions:

If you have not precisely defined the specifications of the goods in your contract, refer to your previous cargoes and send approved documents and notices to your partner to remind them of the quality standards.

You may also decide to employ an independent testing or inspection agency to evaluate the goods before shipment. For a list of credible companies, you can check  https://www.tic-council.org/.

3. Problem: Writing ambiguous obligations

A common problem in international contracts is writing commitments without sufficient clarity. When writing outstanding obligations, you should define these aspects of the duties:

• When should the obligation be fulfilled?
• What are the consequences of a delay?
• What are the consequences of non-performance (the obligation has not been met)?

Because the contract is written in good faith and an amicable situation, the parties usually do not clarify the above issues in the contract. SMEs are more vulnerable and should be more cautious with this subject. Imagine that an SME has ordered some products and paid a 15% advance payment. The balance should be paid within 90 days, and the delivery term is “FOB a port in departure”. Now, can anyone answer the following questions?

• When should the product be delivered?
• What if the seller delivers the product with delay?
• What happens if the seller does not deliver the product? What about the 15% advance payment?
• When should the 85% balance be paid? Ninety days is the period, but when is the commencement date of that period?
• What happens if the shipping company delays in getting delivery of the cargo?

Solutions:

Have your contracts investigated by a professional multi-skill team including a lawyer, a logistics expert, technicians, and a financial expert, and check for the aspects that need clarity.

Inform your supplier and redefine your agreements in writing. You might need to add an addendum or amendment to your contract. At least try to redefine and add transparency to the material conditions of your contract. These modifications should be in writing and signed by authorized officers of all parties.

Send some notices to your partner on letterhead to remind them of your customary and reasonable actions in previous transactions.

In case you agree to waive a default in the current situation, make it clear that this waiver will apply solely to that particular default and will not be a continuing waiver, nor will it excuse any later defaults.

If you are going to pay or have paid a considerable amount as an advance payment, and the product will not be delivered for a long time, you should request a receipt for the advance payment as proof it has been accepted by the partner. You might also need to ask your partner to provide you with a standby letter of credit or advance payment bank guarantee.

4. Problem: Writing conflicting conditions

You can find this problem in many contracts. This is usually because the contract text has been drafted by one individual who cannot analyze all four aspects (technical, financial, legal, and commercial) of an international business contract. Look at the following condition as an example:

• The delivery is on the base of “FOB port”
• The seller will deliver full set clean on board B/L, indicating freight prepaid

If the terms of delivery are on the base of FOB, the freight condition in B/L shall be “collect” and not “prepaid.” This is a conflicting condition and may cause disputes and require interpretation.

Solutions:

If you identify that your contract contains conflicting conditions, have it investigated by a professional multi-skill team.

To prevent major issues, write to your partner to solve the conflicting conditions quickly and prevent future problems. First, try to solve this type of problem through amicable communication. Write to your supplier and redefine your agreements in writing. You might need to add an addendum or amendment to your contract. At least try to redefine and add transparency to the material conditions of your contract.

Send proper notices to your partner on your letterhead to remind them of your customary course of action in previous transactions.

5. Problem: Unsuitable governing law and dispute settlement method

Try to select the rules of a third party country as the governing law. When you select the rules of your partner’s country, the possibility of fair settlement will decrease. You should also consult with local lawyers to investigate the effects of governing law on your contract. The next point is selecting the dispute settlement mechanism. Arbitration is one of the best methods for solving international commercial disputes.

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Solutions:

Consult with a professional law firm or expert to analyze this subject for the worst-case scenarios.

For future contracts, try to select the rules of a neutral state. Furthermore, the text of arbitration clause should at least include the following items:

• Scope of arbitration
• Type of arbitration
• Number of arbitrators
• Proceedings of arbitration
• Venue
• Costs
• Severability of the arbitration clause

What are the short-term measures that SMEs can take to reduce disputes and problems with their international suppliers?

• Avoid legal actions as the first step.
• Try to solve disputes via amicable or expert team negotiations.
• Make a written archive and write and sign all new agreements and modifications to your contract with your partner.
• Employ an independent testing or inspection agency to check the quantity, quality, and/or packaging of goods before shipment.
• After consultation with experienced lawyers, send official and informative notices to your partners regarding your agreements, expectations, and consequences for breach of conditions. In this step, avoid using aggressive and offensive tones.
• In case the price was fixed in your contract, do not accept the changes in price and consult with your legal team or law firm about “hardship” and/or “price revision conditions”.
• If you received a Force majeure notice or statement, immediately consult with your legal team or law firm. Judicial courts or arbitration centres do not accept some statements.
• Inform your supplier immediately if you face new rules, regulations, and restrictions in your national trade system.
• Study the standard international rules mentioned in your contract and analyze their effects on your agreement. Incoterms, UCP600, URDG758, URC522 are some samples.
• Look for new suppliers in case you are experiencing severe issues with your current supplier, but try your best to have a comprehensive, clearly written contract before starting your new relationship.
• Beware of scam suppliers on the net or on some B2B websites. If you find sources on the internet, verify their credit before engaging with them. It’s a good time for phishing.

From a business perspective, and global economic perspective, we are dealing with unprecedented and unpredictable times. It has never been more crucial to ensure we are all staying informed through credible sources. FITT has collected COVID-19 global business resources from world-leading organizations collected in one place. 

We usually write contracts based on good faith and mutual understanding, but we read the contract just two times, once, when we sign it, and the second time, when we encounter a dispute.

The contract should help us settle our disputes cases where amicable negotiation does not work. Unfortunately, COVID-19 will increase trade disputes around the globe.

General effects of COVID-19 on international trade and supply chains

Coronavirus will continue to be a proximate cause for delay and non-delivery of goods and services from previous months to the next few months.

The delays in the supply chain are mainly because of:

• Factory shutdowns and production with low capacity
• Governmental prohibitions and restrictions on export and import
• Drastically increased prices for certain goods
• Transportation and logistics companies’ limitations; and
• Order cancellations by the customers

Companies have responsibility toward societies, employees, suppliers, and customers while still being profitable. This is an exceedingly difficult balance for business owners to handle all of these issues together.

Since the first main consequence of COVID-19 to businesses worldwide is delays in the supply chain, how will these delays effect international trade processes?

Delays in sales and purchase contract

COVID-19 seems to be a case of “Force Majeure”. Force Majeure generally means unavoidable, uncontrollable, and unforeseeable events. And much like some travel insurance providers, insurance companies have the ability to alter the dates around known and unknown hazards. This is why it is so important for companies to fully understand the details of their contracts and coverage.

When a party is encountered with a Force Majeure case, it should be deemed relieved of its duties and obligations, and, therefore, the contract may become suspended or, in some situations, terminated when the Force Majeure case endures over weeks and months, rather than a more limited time period.

Parties should have defined the consequences of termination and suspension in the contracts. What happens to advance payments, consignments, delays, and non-deliveries?

Some parties may abuse the current situation and increase the prices or not deliver the sold goods. In a situation where  a party claims that has encountered a Force Majeure, it is expected to mitigate the consequences, notify the counterparty, and provide proving documents indicating that its business is affected by the case.

Delays and Incoterms

Based on the EXW rule, the Seller is not responsible for export and import clearance, but the Seller is expected to deliver the product at the named place. In DDP rule, the Seller is responsible for both export and import clearance. In the other rules, the Seller is just accountable for export clearance. What happens if a government prohibits the exportation of a product, which is highly crucial for a supply chain in the Buyer’s country? What if the Seller is not able to deliver because of the factory shutdown?

Delays and cargo shipping insurance

If the delay is because of the seller’s activity and the product is not delivered to the shipping company or has not left the warehouse or place of storage that is named in the insurance policy, the underwriter or insurance company has no obligation because the insurance contract is not effective yet. See Section 8 Duration of the Maritime Cargo Clauses.

In case the delay occurs after starting the transportation, and such delay is the proximate cause of loss, it might not be covered by the insurer based on the Exclusions section.

Delays and international transport

Many international conventions govern carriage contracts, which are usually mentioned on the Bill of Lading. We can name Hague-Visby, Hamburg, Rotterdam (for marine transport), Warsaw and Guadalajara (for air transport), CMR, and Vienna convention (for road transport), COTIF and OTIF (for rail transport).

These conventions govern the transportation relations between the Shipper, Consignee, and Carrier. Each convention indicates unique responsibilities and liabilities for delay, and in most situations, carriers assume limited liability based on the weight or quantity of packages.

The important point that many companies neglect, is that the carriers’ liability is limited and not always equal to the actual value of the product in most situations.

There are too many articles in different conventions about delay and its consequences. This issue should be investigated based on the nature of the consignment, the governing convention, and the specific agreement of transportation. For example, in article 5.7, 6.1.b and 19.5 of Hamburg convention, it is mentioned:

5.7. Where fault or neglect on the part of the carrier, his servants or agents combines with another cause to produce loss, damage or delay in delivery the carrier is liable only to the extent that the loss, damage or delay in delivery is attributable to such fault or neglect, provided that the carrier proves the amount of the loss, damage or delay in delivery not attributable thereto.

6.1.b The limit of liability of the carriers for the delay in delivery, according to the provisions of article 5, is limited to an amount equivalent to two and a half times the freight payable for the goods delayed, but not exceeding the total freight payable under the contract of carriage of goods by sea.

19.5 No compensation shall be payable for loss resulting from delay in delivery unless a notice has been given in writing to the carrier within 60 consecutive days after the day when the goods were handed over to the consignee.

In some situations, like bulk cargoes and charter contracts, the delay may occur due to quarantine regulations at departure and destination. This issue may cause demurrage charges in charter contracts when the carrier has properly issued the NOR (Notice of Readiness), and the port authorities may not allow berthing.

In case the laytime is over a certain period, the importer may be liable for demurrage and any related charges. The details of the demurrage and dispatch (DEM/DES) article of the charter contract are essential for analyzing this issue. We should also pay attention to the 4W acronyms in the DEM/DES article (WIPON, WIBON, WIFPON, WICCON).

Delays and international payment

Based on Incoterms 2020, the first primary obligation of the buyer is the payment of the price as provided in the contract of sale. Considering the current situation, delay in payment may happen because of problems on the Buyers’ end, banks working days, country of origin or limitations in governmental departments.

The payment terms article in the sales agreement and Force Majeure should be accurately analysed and investigated.

Delay and customs clearance

Governments and customs administrations may take special measures for health and sanitary controls at the border. This issue may be more affected by the country of origin and departure. On the one hand, the controls may decrease to make the delivery process faster for some necessary products, such as food and produce. On the other hand, some products may get stuck at the border for customs care for necessary products. Therefore, warehousing charges in border/port holding facilities and freight surcharges may increase.

Customs administrations and other government departments may start to request health or quarantine certificates for the products that has never previously required this type of documentation. In some bulk cargoes, fumigation, health, sanitary, and phytosanitary certificates may be added to necessary shipment documents.

Resources and advisors who can help

We are experiencing a Force Majeure and emergency for all players in the supply chain, especially for exporters and importers. The first and most applicable solution is mutual understanding of exact and on-time coordination of shipping and delivery.

Understandably, companies try to make a profit for their owners and shareholders while respecting the interests of society, employees, suppliers, and customers.

For a while, the goal of business owners should change from singularly making a profit to broader social purposes such as survival.

And higher levels of mutual understanding should be established between importers and exporters to avoid disputes. More prominent companies are expected to protect their suppliers and customers as much as possible.

We interact based on the good faith principle, but business owners should be prepared for disputes. Consultation and cooperation with professional teams in the following areas help to mitigate the effect of this specific situation:

Government trade agencies

These experts can provide insight and advice on the ever-changing landscape regarding any country restrictions/bans.

In house legal, trade, and finance compliance team

This team is responsible for taking protective measures and foreseeing probable issues in the company’s supply chain.

Insurance companies

Consult with your insurer and check for all the solutions they may offer you. It’s not just about cargo transportation insurance.

Transport and shipping companies

Transport companies do not necessarily have control over the process. Most of them are a type of intermediary. Study your contracts carefully and consult with your shipping company for the right time, route, and shipping details such as stuffing, packaging, and documentation.

Banks and Financial institutions

Consult with your bank’s experts. When we encounter discrepancy in a documentary credit, the applicant (Buyer) and banks may treat it on an approval or collection basis. In some situations, there are national restricting rules by central banks or other government departments in which the buyer is not permitted to approve the discrepancy. In other words, the buyer may decide to accept delays or other discrepancies, but the governmental organizations do not respect such a decision.

Get a customs broker to help with customs clearance process

The final and most important governmental physical controls on the product happens during the customs clearance process. Companies should hire professional, experienced, and knowledgeable customs brokers.

The first contact with the customs broker should be before finalizing the order, and brokers should search and transmit the most updated information to their customers. This information includes rules and regulations about prohibitions, quotas, documents, HS codes, valuation, and in one phrase, comprehensive trade compliance.

Customs brokers are expected to act proactively and inform traders about the most recent decisions of governmental departments. As a customer, companies deserve to have dedicated teams to support their business and products which are responsive to the unique needs and questions whenever required.

24/7 service is crucial because of time differences between countries and customer service expectations.

Most companies love win-win cooperation, but we might not win too much in the current situation. Survive-survive is a more reasonable and logical strategy for some businesses these days. Those companies who like to gain more by employing the Win-lose strategy will be accused by society for neglecting social and corporate responsibilities. It’s not a good time to pursue profit over social well-being.

It is a good time to position your company as a pioneer in respecting human values.

Sources:

https://iccwbo.org/

https://www.admiraltylaw.com/statutes/hamburg.php

https://www.letterofcredit.biz/index.php/2018/10/05/mt-700-swift-message-field-specifications/

https://www.marrisk.com/pdf/clauses/INSTITUTE%20CARGO%20CLAUSES.pdf