Risk Management in Export-Import Business Now since the world is all connected and globalization became normal in this century, many investors and traders turn into international trading. International trading opens a very likely chance of benefiting market to do successful business. International trading includes exporting and importing which allows the businessman to connect personally with all the necessary suppliers and manufacturers which will eventually lead to cost effectiveness. However, doing global business overseas has many risks that we need to keep in mind and be aware of.
Exchange rates are always in the risk of fluctuating which is clearly a risk that faces importers and Importers Importers should keep their goals as a priority which is to postpone paying for the merchandise for as long as they can. Also, managing the cash flow in the period during paying for the merchandise and being paid by the local customers who would buy the imports. They should also do this to reduce the risk of fraud from suppliers or doing business in unfamiliar environment.
Some examples of importing risks are the following: 1. currency risk, 2. non-delivery risk 3. redit risk, 4. transfer risk 5. country risk 6. transport risk Currency risk is when the local currency used to pay for the merchandise might be higher than the total amount to be calculated and used to enter the contract because of the fast changes of the currency market price. Exchange rates between most currencies have very high chances of fluctuation all the time, and there is a time difference and period between entering into a contract and making the payment. Importers should control for this risk and keep it in mind by using solutions for controlling currency risks.
Non-delivery is when the suppliers don’t follow the sales contract by making mistakes such as delivering the wrong items or not delivering by the time frame stated in the contract. This risk can be controlled by requesting an agency to check the merchandise before the time of shipping. Credit risk is when the suppliers don’t have enough finances to ship the importers’ merchandise after the importers submit the payment. This risk can be controlled by using methods of payment that involve conditions or checking credit and collecting document to make sure that the supplier will deliver the merchandise.
Transfer risk can be a result when the government puts new regulations and sets new laws on foreign currency exchange or amount of money transferred outside the country. This can be controlled by consulting trade experts in the country or area an importer wants to work at or invest in to get more knowledge and information about the rules and regulations of that country. Transport risk is a result when the merchandise are stolen or damaged or even lost on the way during shipping.
To manage this risk a consultation with an insurance agency should be made to insure the items involved in the process. . On the other hand, exporter’s goal to keep in mind is receiving the merchandise before paying for them to check if they meet all the requirements and standards and the quality they want. They also should be controlling the merchandise until they receive the payment. Managing the cash flow in the period of investing or buying the merchandise and getting paid in exchange for them is very important to manage the risk and avoid fraud by unserious buyers and also avoid debt.
There are many types of risks for exporters and it is very very important to study them closely in order to to be aware of them which will help the exporters to assess, prioritize and minimize them. Exporting risks include political and safety risk events just like when borders get closed in politically suffering places. Merchandise can also be damaged in transit. Compliance issues with foreign regulations and standards. Cultural and language differences might result in miscommunication and misunderstanding which will eventually lead to not meeting the standards.
Also, financial risks are an important issue such as customers who are not welling to pay and changes in foreign exchange rates. Also, interest rate risks are important when there is a delay between planning a project and final payment. Another risk is possible need to add and increase power and work to meet extra demands and orders. There also might be property ownership rights that might get in the way of doing business and cause an unpredicted risk. Also, intellectual property protection rules should be checked in each country of business.
Another area that might pose risk is human resources that will involve business with contractors, suppliers, distributers and agents overseas. There are also unforeseen or unpredicted risks that should be kept in mind for both importers and exporters. Unexpected risks include natural disasters, terror attacks in a certain country that might destroy the export import business relations for companies. Unexpected incidents like these can increase the cost of transportation causing loss to the traders equally exporters and importers.
Therefore, it is important to keep such measures in mind and try to control for those risks by using a force majeure clause in any international contract which will include solutions and protection for parties involved in such situations. One of the measures used by many project managers to manage risks is developing a tool called: A PROJECT MANAGEMENT PLAN. A Risk Management Plan is a document prepared by project managers to predict risks, estimate the effects of these risks and put solutions to each one of them in order to control them in case they happen.
This plan also must include a matrix to assess the risks. A risk as defined by PMBOK is “an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives. ” Risk is a must in any project, and people involved in a project should assess risks all the time as they go along with the project and develop plans to control those risks. The risk management plan includes an analysis the risks that are most likely to happen that either have high or low impact. It should also include strategies to control those risks.
By doing so, this will help the project to avoid being delayed or not being successfully accomplished due to unexpected events or “risks”. Risk management plans should be reviewed by the project team or employees all the time in order to avoid additional problems because of not considering project updates or new situations in the initial plan, then probably failure. As export and import business relies mostly on managing risks, it is very essential to use this tool in the projects of export or import which will lead to more effectiveness and accuracy of completing transactions, whether they are exported goods or imported merchandise.
The most important thing for risk management plans is to include a risk strategy. There are four potential strategies that are mostly used that are different and can be used for different purposes and to reach different outcomes. Projects may choose to: * Avoid risk — Change plans to avoid the problem; * Control risk; — Reduces effect through intermediate steps; * Accept risk — Take the chance of negative effect on the project and calculate the loss * Transfer risk — Outsource risk (or a portion of it) to a third party that can manage the outcome.
This can be accomplished financially by using insurance contracts or operationally through outsourcing an activity. As a conclusion, in any project, whether large or small, it is very important to manage the risks in order to have the solutions ready whenever needed. In order to make a transaction successful, equally import or export transactions, risks that might prevent success need to be calculated and controlled based on a system and regularly.
Getting help from different sources can help do that too, especially experts in the trading world, project managers, and other exporters/importers in the business. References: Goh, M. , Lim, J. , & Meng, F. (2007). A stochastic model for risk management in global supply chain networks. European Journal of Operational Research,182(1), 164-173. Cavinato, J. L. (2004). Supply chain logistics risks: from the back room to the board room. International Journal of Physical Distribution & Logistics Management, 34(5), 383-387. Caouette, J. B. , Altman, E. I. & Narayanan, P. (1998). Managing credit risk: the next great financial challenge (Vol. 2). Wiley. Sood, J. H. , & Adams, P. (1984). Model of management learning styles as a predictor of export behavior and performance. Journal of Business Research,12(2), 169-182. Blumental, D. (1998). Sources of Funds and Risk Management for International Energy Projects. Berkeley J. Int’l L. , 16, 267. Pressey, A. , & Tzokas, N. (2004). Lighting up the “dark side” of international export/import relationships: Evidence from UK exporters. Management Decision, 42(5), 694-708.
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