Negotiating the Deal and Making Arrangements with Your Supplier

Negotiate an arrangement with the supplier.

As in the previous section, importers who experience problems often place their order before they have worked through all of the arrangements and agreements that support a strong export-import relationship. You, on the other hand, will work through this checklist of items to cover in discussions with your supplier.

This section discusses the information that needs to be exchanged and describes the agreement that should be in place between you and your supplier.

Product

You need to be sure that your supplier has the product that you want, in the quantity that you need at a price you can handle. In order to be certain that the product you are buying is exactly correct, first ask for a sample. Examine the sample yourself to be sure it works for you, and then send the sample to your in-country agent (we will discuss agents in further detail later in this course. Agents can cover a wide range of tasks for you, including factory audits, pre shipment inspections and more). The agent will compare the sample to the goods available at that company and be sure that they match. Make sure you inform your supplier that your agent will be inspecting your final order prior to shipment; this increases the likelihood that the supplier remains within the terms of your agreement.

If your product must meet specific labelling or standards compliance in your country, receive assurance that the supplier can meet the terms and that the supplier can provide evidence of meeting those terms. For example, if you are importing toys that have small parts into the U.S., be sure that the supplier has a label on each individual product stating that the product contains small parts and is hazardous for children under the age of three. (If you don’t, your shipment can be seized at customs for non-compliance.)

Assure that your supplier can provide an appropriate country of origin certificate, a detailed invoice that meets the needs of your customs service and has marked both products and packages in accordance with your customs service’s requirements. Go to the website of your country’s custom service for complete information on this topic. You can also find good information and resources in our country-specific importing courses.

Be sure you have given your supplier correct classification information, using your country’s system of coding.

Negotiate price with your supplier to the extent possible. You will be more likely to win price concessions if you can promise growing volume, predictable ordering, fast payment, etc.

Delivery Times

You know when you need the product. Be sure that your supplier can manufacture and send the product to meet your inventory needs. Delivery time is a combination of manufacturing and shipping. We’ll discuss shipping issues later.

Shipping and Payment

Shipping and payment issues are such a huge source of confusion that the International Chamber of Commerce has developed a system of codes called “Incoterms” to make these transactions easier. Incoterms are standard trade definitions that dictate the shipping and payment responsibilities of each party. The two companies involved negotiate Incoterms for each deal. The most commonly used incoterms are:

  • Ex-Works
    Buyer is responsible for all costs incurred from the seller’s door.
  • FOB (Free on Board)
    Seller pays for everything up to the Port/Airport of departure, including the export charges.
  • CIF (Cost, Insurance and Freight)
    The seller pays to send the goods to the port of destination and arranges the minimum cover marine insurance (see Insurance section).
  • DDU (Delivered Duty Unpaid)
    The seller delivers to the buyer’s door and pays all costs with the exception of Duty & VAT.
  • DDP/CARRIAGE PAID (Delivered Duty Paid)
    The seller delivers to the buyer’s door and pays all of the costs.

Take the time to become familiar with the terms. Otherwise you may sign a contract without really knowing “who’s on first” or more importantly, what your payment responsibilities will be. Go to https://iccwbo.org/resources-for-business/incoterms-rules/ for more information.

Payment Mechanisms

There are several ways to pay for your goods. We’ll mention them briefly then talk more about the most common, the letter of credit.

Telegraphic Transfer (T/T):

Before any product is shipped, payment is made to and received by the seller. Since with T/T the buyer assumes all the risk, we strongly recommend you use this option only if you are 100% sure about the legitimacy of the supplier you are dealing with. You could also use T/T to order samples, thus minimizing your risk while at the same time verifying the legitimacy of the supplier.

Open Account:

The open account is the opposite of the T/T, with the buyer receiving their shipment first and the seller assuming all of the risk. This allows the trader who is spending the money the opportunity to inspect and approve the shipment prior to making payment.

Escrow Account:

The escrow account, like the Letter of Credit, allows for risk to be shared equally. Purchasing products via this type of system involves the participation of a third party – an escrow agent – who holds the buyer’s payment until the goods are delivered and inspected. Upon approval of the shipment, the buyer instructs the escrow agent to release payment to the seller.

Document Against Payment (D/P):

This type of payment, which mainly favors the buyer with some protection for the seller, is usually used in B2B export/import trades. It involves using buyer’s and seller’s banks to manage the process of payment for goods.

Letter of Credit (L/C):

This type of payment involves a guarantee of payment made by the purchasing company’s bank once documents such as freight receipts or bills of lading have been presented to their financial institution.

Also known as Documentary Credit, the L/C specifies the steps that must be taken and completed in order for a supplier to be paid, while pledging that payment will be made in a timely manner. Usually a L/C cannot be altered unless both parties agree to the changes. This means that the seller is not at risk.

Although payment via L/C is assured in writing, the process can be slow due to the fact that proper documentation must be submitted to and approved by the financial entity. Because this entire process is based on the exchange of documents and not goods, it simultaneously protects both parties but also results in the transaction taking longer than a T/T or even an open account payment.

In general, try to negotiate an arrangement that allows you to pay a minimum upfront deposit, 20 to 30%, and pay the remainder upon receipt of a shipping tracking number that you can verify.

Contract

Contracts are both important and inherently confusing since you are working across two countries. At a minimum, here is the information that should be in your contract with a supplier:

  • who is party to the contract;
  • the contract’s validity conditions;
  • the goods to be provided;
  • the purchase price of the goods and the terms for payment, inspection and delivery of the goods;
  • where transfer of title to the goods takes place;
  • any warranty and/or maintenance terms and conditions;
  • who is responsible for obtaining import or export licenses;
  • who is responsible for paying taxes;
  • any contract performance security requirements, such as bank letters of guarantee;
  • what to do if seller fails to ship, goods are defective or buyer defaults or cancels;
  • the provisions for independent mediation or arbitration to resolve disputes, and where it would take place;
  • the contract completion date.

This ecourse can’t provide all of the information you may need to negotiate the contract since each situation is different and the course does not attempt to provide legal advice. Our best advice in this matter is to have your contract reviewed by an attorney familiar with international trade and/or ask your customs broker (you need one of these people!) to help you with the negotiations and review of terms.

A final bit of advice about international contracts – be sure that the parties to the contract actually sign it! It’s very easy for contracts to go unsigned or be incorrectly signed by someone other than the parties, such as a broker. (In some cases the broker may sign, if they have power of attorney for that purpose.)

Initial Orders

Don’t start with a large purchase; place a small order so that you can minimise any losses if things do go wrong. Place larger orders only after you feel comfortable with your supplier’s products and practices.

What have we learned?

By the end of this section, you should know:

  • Confirm the authenticity of your product by inspecting it and using an in-country agent to verify it.
  • Be sure that your exporter understands and can meet all of the compliance issues involved in importing into your country.
  • Pay attention to delivery times.
  • Establish a payment mechanism that works for both parties. Avoid paying more than 30% in advance.
  • Put a decent contract in place, i.e., includes all appropriate information, has been reviewed by someone competent to do so and has been properly signed.
  • Start with a small initial order as a test.

Next you need to determine how your goods will move from the country of origin to your country.

To our success working together,

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