Methods for managing foreign exchange and shipping risks in international trade

Exchange Rate Risk

There are a variety of methods that can be used to reduce foreign exchange risk. Companies have been known to use hedging and reciprocal trading deals in order to offset the risk of foreign currency rates. Hedging entails signing a forward contract with a bank that entitles the business to buy foreign currency at an exchange rate agreed upon on the day when the contract is signed. In this way, the risk of possible loss from future exchange rate fluctuations is reduced. This also means that there is no possibility to profit from favorable exchange rate changes.

When seeking to reduce possible future risks, it is vitally important that a company has an established foreign exchange policy, according to which it plans against risk. All the involved parties, including banks and partners, need to be included in strategies to hedge risks.

Open Cover Marine Cargo Policy

An open cover marine cargo policy is a feature that is set up on a permanent basis in order to automatically insure every shipment. This insurance is available within pre-defined parameters. Features such as premium rates, valuation of goods to be shipped and other information is decided between the company and the insurer. When a shipment then needs to be insured, it is declared to the insurer and an insurance certificate is issued. A premium is determined according to the value of the specific shipment that is automatically insured.

This type of insurance is specifically beneficial for marine shipments, as a wide variety of goods are shipped and received in this way. It is also particularly beneficial where a company operates on the basis of a shipping service rather than shipping a specific item. Thus, as long as the parameters are adhered to, this type of insurance helps to protect a large amount of different goods that are shipped on a regular basis.

Inventory Techniques

The uncertainty of demand often result in an imbalance between product availability and customer needs. To minimize this imbalance, there are a variety of inventory management methods that can be used. One way of doing this is reviewing the inventory level at periodic intervals in order to determine a base stock up to which orders can be placed. This is known as Policy of Periodic Review, Order-Up-To Base Stock. A variable quantity of goods are ordered at a fixed period of time to maintain a certain quantity of inventory. The base stock level is determined by working out the quantity that is needed between the time of order placement and the time when the stock for the next period arrives. The base stock is then also safeguarded by adding a certain amount of safety stock in order to deal with additional demand fluctuations. The issue may be complicated by elements such as variable lead times, non-stationary demand, multiple inventory sites, multiple customer classes, and multi-item order fill rates. The last mentioned issue entails orders where multiple components are needed to fill an order. When one of these components are not there, the order cannot be filled. Once again, this can be remedied by adjusted review times, and ordering additional components of which the fill rates are higher.

Poorly utilized storage space is usually caused by steady growth in a company, that results in changing requirements for storage. The changing nature of the business and its market furthermore changes the product mix, and often there is an over-supply of non-demand items while the demand items are increasingly added, and space becomes a problem. Furthermore, low vertical space utilization, wide isles and multiple products in single bin locations also result in poor utilization of space and possible breakage. The physical layout of stock storage should then be considered in order to reduce the problem. Out of date stock should also be removed, and vertical space should be utilized for items that are not subject to breaking. A related problem is the inadequacy of available space within a warehouse.

Warehouse space becomes a problem when a company grows rapidly, experiences seasonal peaks, and buys large amounts of stock at discounts. Three types of space shortage occur: when there is too much of the right inventory, too much of the wrong merchandise, and thirdly the above-mentioned poor utilization of space.

When a warehouse contains too much of the right inventory, it is easy to meet customer demands, but the problem is that safety and productivity standards are not met. This could also lead to problems such as breakage and even injury of warehouse personnel.

Usually a warehouse overstocked in this way contains products stored in aisles, stacked in dock areas and placed on rack end caps. Overstocked items are usually also stored in a very disorganized way, increasing the possibility of the above-mentioned dangers. The lack of visibility could also result in difficulty locating inventory and decreased labor productivity. Since the items are needed, conditions usually improve as orders are filled. The easiest strategy to follow here is thus to simply wait for the busy season to pass.

Too much of the wrong product usually results from inadequate planning and sales projections. The warehouse is thus not adequately managing inventory levels. Obsolete products do not leave the warehouse at a steady rate as the above-mentioned needed products do, which means the problem needs direct attention. If this attention is not given, the unneeded stock remains in the warehouse, untouched and taking up space for a large amount of time. This could be managed by taking a one-time fall of the bottom line. Because the inventory has little or no value, it is vitally important to identify the problem as early as possible. The more time elapses, the greater will be the damage to the bottom line. When the obsolete stock has been removed, better space utilization will also result in better working conditions and ultimately better business.

Often, when more space is required, relocation or expansion are not options. Other strategies that may be followed include leveraging outside storage, internal warehouse redesign and improving inventory management.

Outside or temporary storage is an adequate option for seasonal stock that is ordered in anticipation of season peaks, such as winter garments. Temporary storage could then be obtained by using third party warehousing. There are fairly high costs related to this, and often companies form alliances in to share temporary warehousing options.

Products could also be stored outside of the premise, on trailers or similar structures.

In addition to the security risk however, this method is extremely costly. Once again, a deal can be negotiated with the carrier in order to reduce these costs.

Warehouse redesign is another option to obtain more efficient warehouse space. For this, the specific storage needs of the company need to be taken into account. The existing stock should also be carefully reviewed to ensure that no obsolete stock is left. When the warehouse is then redesigned, the most effective use of space can be created. Other options are movable racks and bulk storage. The most important measure is to determine how much space is available, what fixed obstacles are to be worked around, and how to store sensitive and non-sensitive stock.

Just in time delivery has several benefits for a company. A uniform load is created on all work stations; setup times and lot sizes are considerably reduced; lead times of production and delivery are also reduced. Risks associated with this include the fact that workers need to be adequately trained to handle machine breakdowns. All workers should also be trained to work on more than one machine, as illness could result in non-delivery.

Negotiating Skills

The negotiating skills I would use would focus on the customer. I would first listen to the exact nature of the problem, and ensure the customer that his or her dissatisfaction is a serious issue for the company. I would also make sure that the customer is somewhat pacified, as the dissatisfaction might give rise to an emotional exchange. Furthermore I would recognize the need to stay calm throughout the exchange, and do so until the customer's need is met. I would also find and focus on a common ground and a variety of possible solutions for the customer as set out in the company policy. These could include a refund or a replacement of the damaged product.