risk management of exporting 100,000 mt dragon fruits from phan rang to china by sea, ddp incoterms 2020

FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUS -*** MID-COURSE ASSIGNMENT Major: Risk Management and Insurance RISK MANAGEMENT OF EXPORTING 100,000 MT DRAGON FRUITS FROM PHAN RANG TO CHINA BY SEA, DDP INCOTERMS 2020 Group: Class: K58CLC4 Intake: 58 Lecturer: Vuong Thi Bich Nga Ho Chi Minh City, April 10, 202 TABLE OF CONTENT Natural risk 1.1 1.1.1 Risk topic 1.1.2 Evaluation 1.1.3 Associated strategy 1.2 Farm-related natural disasters: 1.2.1 Risk topic 1.2.2 Evaluation 10 1.2.3 Associated strategy 10 1.3 Sea-related natural disasters Covid-19 pandemic .10 1.3.1 Risk topic .10 1.3.2 Evaluation 11 1.3.3 Associated strategy 11 Technological risk .12 2.1 Infection 12 2.1.1 Risk topic .12 2.1.2 Evaluation 12 2.1.3 Associated strategy - Reduce strategy 12 2.2 Freezer breakage 13 2.2.1 Risk topic .13 2.2.2 Evaluation 13 2.2.3 Associated strategy 13 2.3 Long time perishing 14 2.3.1 Risk topic .14 2.3.2 Evaluation 14 2.3.3 Associated strategy – Reserve strategy 14 2.3.4 Associated strategy – Protect strategy 14 2.4 Container shortage 15 2.4.1 Risk topic .15 2.4.2 Evaluation 16 2.4.3 Associated strategy – Reserve strategy 16 2.4.4 Associated strategy – Reduce strategy 16 2.4.5 Associated strategy – Protect strategy 17 2.5 2.5.1 Risk topicd .18 2.5.2 Evaluation 19 2.5.3 Associated strategy – Reserve strategy 19 2.5.4 Associated strategy – Protect strategy 20 2.5.5 Associated strategy – Reduce strategy 20 2.5.6 Associated strategy – Avoid strategy 21 Daily risk .21 3.1 Fire Hazards 21 3.1.1 Risk Topic 21 3.1.2 Evaluation 22 3.1.3 Associated strategy 23 3.2 Risks of shipping vessels 25 3.2.1 Risk topic .25 3.2.2 Evaluation 26 3.2.3 Associated strategy 26 3.3 Risks of human resources .28 3.3.1 Risk topic .28 3.3.2 Evaluation 29 3.3.3 Associated strategy 29 3.4 Port congestion 18 Other risks .31 3.4.1 Risk topic .31 3.4.2 Evaluation 31 3.4.3 Associated strategy 31 Company risk 33 4.1 Capital Shortage and Budget Decreasing 33 4.1.1 Risk topic .33 4.1.2 Evaluation 34 4.1.3 Associated strategy – Reduce strategy 34 4.1.4 Associated strategy – Reserve strategy 34 4.2 Strike .35 4.2.1 Risk topic .35 4.2.2 Evaluation 35 4.2.3 Associated strategy – Reduce strategy 35 4.2.4 4.3 Risk topic .36 4.3.2 Evaluation 36 4.3.3 Associated strategy – Reduce strategy 36 Conflict risk 37 War and Civil war 37 5.1.1 Risk topic .37 5.1.2 Evaluation: .37 5.1.3 Associated Strategy – Reduce strategy 38 Economic risk .38 6.1 Currency risk: 38 6.1.1 Risk topic: 38 6.1.2 Evaluation 39 6.1.3 Associated strategy – Reduce strategy 39 6.1.4 Associated strategy – Avoid strategy 40 6.1.5 Associated strategy – Transfer strategy 40 6.2 Employee Turnover .36 4.3.1 5.1 Associated strategy – Reserve strategy 35 Rising prices in input and product 41 6.2.1 Risk topic .41 6.2.2 Evaluation 41 6.2.3 Associated Strategy – Reduce strategy 41 6.2.4 Associated Strategy – Transfer strategy 42 Legal risk .42 7.1 Unqualified products .42 7.1.1 Risk topic .42 7.1.2 Evaluation 43 7.1.3 Associated strategy – Protect strategy: 43 7.2 Inability to clear custom formalities .43 7.2.1 Risk topic .43 7.2.2 Evaluation 44 REFERENCE .45 Abstract RISK IDENTIFICATION Storming Lightening Flooding Tsunami Natural risk Water canon Typhoon Crop failure Insect infection Drought Covid-19 pandemic Infection Freezer breakage Technological risk Long time perishing Container shortage Post congestion Daily risk Warehouse fire Transshipment truck fire Port fire Aground vessels Collision Delayed vessels Absenteeism Work accidents Theft/fraud Non-payment/ Non-receipt Corruption/Bribery Capital Shortage and Budget Decreasing Company risk Strike Employee Turnover Conflict risk Economic risk Legal risk War Civil war Currency Risk Rising prices in input and product Unqualified products Inability to clear custom formalities Natural risk 1.1 Sea-related natural disasters 1.1.1 Risk topic - Title: Storm, Lightning, Flooding, Tsunami, Water cannon, Typhoon - Causes:  These natural disasters occur due to the Act of God  Besides, it may happen because of many business activities of humans such as building dams for water storage in the hydroelectric industry, or over-exploiting the forests for wood business - Consequences: It will affect negatively to the shipment, mainly the main carriage time and quality of the goods shipped Suffering from these natural disasters, ship vessels cannot go but find safe places to ensure the crew lives and goods quality Therefore, it will delay the transportation time, and even cause shipwrecks or goods sinking if it is unable to avoid calamities 1.1.2 Evaluation Risk Probability Impact Lead time RE Seriousness Storm 12 12.00 Tsunami 10 10 3.33 Typhoon 4.00 Water cannon 4 1.33 Lightning 6.00 Flooding 10 30 15.00 1.1.3 Associated strategy - Mitigation plan:  Always update forecasts related to weather and climate to take appropriate prevention or treatment measures to reduce the frequency and impact suffering from many serious natural disasters  Upgrade the ship's resistance and facilities, fully equipped with rescue tools and emergency communication lines in case of danger  Work with reputable shipping lines and choose reasonable and safe routes for the shipment - Contingency plan:  Always have back-up time for shipping, thus in the sales contract with the buyer, delivery time must be set reasonable to reduce the impact of delay time if these natural disasters happen If there are any issues, contact the buyer to present the incident and propose a solution to avoid as much damage as possible to your side  For emergency situations, always give priority to saving lives by throwing goods into the sea, or using emergency lifebuoys 1.2 Farm-related natural disasters: 1.2.1 Risk topic - Title: Crop failure, Insect infection, Drought - Causes:  Crop failure or insect infection and drought happen due to the strong impact of the Act of God Humid tropical weather in Vietnam always becomes an ideal environment for insect reproduction, occupied with inappropriate gardening procedures, will act as the main agent leading to crop failure  One another root is inadequate and low-quality gardening tools would also affect seriously to the crop harvest - Consequences: These risks will result in a serious crop failure of dragon fruit Because we have already signed the contract, we have to supply and deliver the 10 quantity and quality as stated Therefore, crop failure will impact detrimentally the requirement of the contracted shipment 1.2.2 Evaluation Risk Probability Impact Lead time RE Seriousness Crop failure 10 10 5.00 Insect infection 4.00 Drought 4.00 1.2.3 Associated strategy - Mitigation plan:  Crop failure and Insect infection: Apply standardized processes in crop care, selecting modern farming practices to increase crop yields; Use highly effective biological pest control measures and have a strict green prevention regime regularly; Survey the situation of the crop before making a business transaction with any partners  Drought: Select suppliers and growers in regions with abundant water reserves - Contingency plan:  Crop failure and Insect infection: Shortlist many different suppliers and alternative sources of goods in different places if the shortage situation suddenly occurs to deal with the urgent situation; Be careful in describing the goods in the contract and take advantage of the open contract  Drought: Contact with many water suppliers to conduct business with them if necessary 1.3 Covid-19 pandemic 1.3.1 Risk topic - Title: Covid-19 pandemic 32 failure - Loss of team in every link of the supply chain and ensure high morality during recruitment resources team - Logistics team goods package for human - Costs of resources acquiring - Recruitment & new supplier human resources or customers management costs - Possible legal costs - Premium/fee for Share risks to banks/insurers (e.g Non- using L/C) Logistics team receipt/ - Loss of banks or insurers goods - Sourcing & - Costs of documentation acquiring costs Non- Demand deposit or new - Opportunity cost payment control release of customers of losing a goods (e.g using to order of shipper Procurement - Possible team legal costs B/L) - “Oil” between two parties Contracting money when align the parties - Costs contract “Oil” money related with Develop Contracting relationships with parties authoritative - Money handling costs Corruption/ Share “oil” money Bribery customers delayed shipment & legal issues Cost of building relationship: meals, gifts, etc 33 officers - Mitigation plan:  Theft/fraud: Investigate and demand compensation from the culprit; Draw from goods safety stock to compensate for the buyer  Non-receipt/Non-payment: Find another customer to resell the shipment; Contact related parties (buyer’s headquarter, insurer, banks, etc.)  Corruption/Bribery: share the extra costs between two parties Company risk 4.1 Capital Shortage and Budget Decreasing 4.1.1 Risk topic - Title: Capital Shortage and Budget Decreasing - Causes: Changing in global as well as local business conditions and economy, which leads to the increase in costs, unexpected events, planned activities change, and error, emission in budget estimation, is the main contributor to these risks.  - Consequences:   The capital shortage and budget variance will pose serious problems for the company’s supply chain management from the sourcing inputs to the final products To be specific, due to the lack of capital, the exporter cannot purchase enough inputs to prepare for cargo shipment which can result in issues related to laycan, late delivery, late payment, and even damage to the company's profits.   Moreover, the lack of capital shortage can further lead to redundancy if there is a need for cost reduction, which could also trigger labor disturbance or strikes.  4.1.2 Evaluation Risk Probability Impact Lead time RE Seriousness 34 Capital shortage 3 2.00 Budget decrease 3 2.00 4.1.3 Associated strategy – Reduce strategy - Mitigation Plan:   The financial department should meticulously research, collect and clean data, use the correct code or financial model to reduce any errors in budget estimation  Real-time tracking budget in a range of tasks such as labor, raw materials, etc  Communicate with other departments to keep them informed of the budget status  - Prepare reserves to cope with unexpected events.  Contingency Plan:  Adjust the budget by cutting costs.   Prepare the lists of other suppliers to source for dragon fruits at competitive prices.  4.1.4 Associated strategy – Reserve strategy - Mitigation Plan:   Calculate and reserve resources, capital in advance  Set up a reserve fund - Contingency Plan:  4.2 Draw on the reserve fund to support the business temporarily Strike 4.2.1 Risk topic - Title: Strike 35 - Causes: Due to the disagreement in economic conditions and labor practices or even political views, workers will place considerable pressure on the company by protesting for improving wages, working hours, benefits and working conditions.  - Consequences: This risk could halt the operation of the company In case of perishable goods like dragon fruits, such shortage in labor could overwhelm the company budget as the company could incur considerable costs including warehousing, preserving these fruits to ensure their quality - Strikes in the port could make the charterers/ liners unable to arrive, thus delaying the voyage and disrupting the supply chain.  4.2.2 Evaluation Risk Probability Impact Lead time RE Seriousness Strike 3 2.00 4.2.3 Associated strategy – Reduce strategy - Mitigation Plan:   Anticipate workers’ needs and concerns about wages, health benefits, safety working conditions  - Build a good relationship with the union Contingency Plan:   Seek support from the local authority to protect the property  Negotiate with the representatives of the strike.  4.2.4 Associated strategy – Reserve strategy - Mitigation Plan: Prepare funds, resources related to policy adjustment - Contingency Plan: Hire lawyers to protect the company’s rights 4.3 Employee Turnover 4.3.1 Risk topic - Title: Employee Turnover 36 - Causes: This risk is caused by the lack of professional growth, weak engagement with company vision and goal, toxic work culture and work-life imbalance or competitors’ employee poaching or when the staff is made redundant.  - Consequences: With a high rate of employee turnover, the company could suffer a huge loss in many aspects ranging from decreased productivity, increased recruitment and training costs, valuable expertise and experience as well as competence and belief in the team, thus negatively affecting the overall profits of the company.  4.3.2 Evaluation Risk Probability Impact Lead time RE Seriousness Turnover 6.00 4.3.3 Associated strategy – Reduce strategy - Mitigation Plan:  Hire the right people  Offer competitive salary and benefits  Allow flexible work schedule to guarantee work-life balance  Create an ideal working environment  Offer training and development program, consult career path - Contingency Plan:   Build a backup team to cover and replace leavers  Outsource employee Conflict risk 5.1 War and Civil war 5.1.1 Risk topic - Title: War, Civil war - Causes: 37  War is a creation of human nature It may happen because of competition over territory and resources, historical rivalries and grievances, and in selfdefense against an aggressor or a perceived potential aggressor  A civil war is a war between organized groups within the same state (or country) The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies - Consequences:  War: Military conflict between countries is often accompanied by the imposition of partial or total trade embargoes on the exchange of goods Conflict may also reduce trade flows by raising the costs to private agents of engaging in international business  Civil war: The occurrence of civil war will cause many consequences For civil war coming from the partner company's country, it will affect their delivery process Delays in the customs clearance process will affect the quality of goods, especially for agricultural products such as dragon fruit For civil war coming from a domestic country, the impact of conflict not only affects the export process, but also affects the crew, the preparation of goods, etc 5.1.2 Evaluation: Risk Probability Impact Lead time RE Seriousness War 10 30 10.00 Civil war 4 1.33 5.1.3 Associated Strategy – Reduce strategy - Mitigation Plan:   War: Observe the relationship between Vietnam and China with surrounding countries, especially the relationship between the two countries Assess the 38 factors that bring bad effects to the economic situation If the results of the assessment show that there is a high probability of war, we can speed up the delivery of goods to ensure a successful sale before a conflict occurs  Civil war: Use analytical models to assess a country's risk of civil war erupting In addition to factors related to state weakness, we can consider factors related to basic human rights to personal integrity – an important harbinger of wars to come – as an aspect of state behavior According to conclusions, make assessments on the appropriate time to occur trade between the two countries - Contingency Plan: If the occurrence of war affects the import and export of goods, we can consider selling dragon fruit to neighboring countries or bringing it back to the domestic market Economic risk 6.1 Currency risk: 6.1.1 Risk topic: - Title: Currency risk - Causes:  In international transactions, the choice of currency exposes the company to the risk of currency exchange rate fluctuation and exchange rate convertibility.   Such fluctuations are caused by the demand and supply of the currency exchange rate.   - Consequences:  If the transaction is quoted in the exporter's currency, the importer will carry the risk However, if the transaction is quoted in the importer's currency (CNY), the exporter (our company) will hold this risk In this case, our company will be responsible for the risk of converting from VND to CNY and the risk of exchange rate fluctuation.  39  As CNY is not a freely convertible currency, the convertibility of CNY to VND will face certain difficulties Moreover, if the CNY devalues before the payment is made, it will reduce the profit of the company  In the DDP, our company (seller) will be responsible for the delivery of the goods When using Liner ships, the carrier will have absolute control over the choice of currency as shipping terms and conditions are non-negotiable Using the foreign carrier’s currency will, therefore, expose our company shipper to the risk of currency fluctuations.  6.1.2 Evaluation Risk Probability Impact Lead time RE Seriousness Currency risk 4 16 6.1.3 Associated strategy – Reduce strategy - Mitigation Plan:  Improve the understanding of the exchange rate   Use a third country’s currency such as USD, YEN, which is less volatile and convertible It also shares the risk equally to exporter and importer For example, if both parties agree to use USD in international transactions, while the exporter will be responsible for the fluctuation of the VND against the USD, the importer will hold the responsibility for the fluctuation of the CNY against the USD.   Regarding maritime transport, shipper, carrier, and consignee can agree to choose an artificial currency such as the Special Drawing Rights (SDR) of the International Monetary Fund, which is mainly used in Liability Convention to reduce the exchange rate fluctuation.  6.1.4 Associated strategy – Avoid strategy - Mitigation Plan:   Use our domestic currency (VND), which will transfer the exchange rate risk to the importer.  40  To avoid the risk of the exchange rate in freight rate, the company can hire domestic liner service such as Vinalines, who quote in domestic currency.   Require the buyer to use Cash in Advance payment method, which will prevent not only the exchange rate fluctuation risk but also the default payment risk 6.1.5 Associated strategy – Transfer strategy - Mitigation Plan: Hedging when using the importer’s currency (CNY) and the importer will make payments within a period of time  Forward-market hedge: The forward exchange rate is the exchange rate for a foreign currency to be delivered for some number of days in the future (30 days, 60 days, etc). When the forward exchange rate of VND to CNY is lower, which means the market expects there is a decrease in the value of CNY to VND The exporter could set up a contract with a bank in which the exporter agrees to sell a certain amount of CNY at the predetermined forward exchange rate of CNY to VND. In this case, the exporter knows how much it will collect with total certainty without concerning the spot exchange rate on the date it receives the payment.    Options-Market hedge: With this instrument, the exporter could purchase a put option - the right to sell a certain amount of CNY at a specified exchange rate within a time frame. At the expiry date, if the spot exchange rate is lower than the predetermined exchange rate, the exporter can exercise its option and sell the currency at the predetermined price to protect its profits However, if the spot exchange rate is higher than the predetermined exchange rate, the exporter can let the option lapse and sell the CNY it received at the spot exchange rate to gain more profits.  - Contingency Plan:   Prepare the required document and forward exchange/ foreign currency contract to exercise the option 41 6.2 Rising prices in input and product 6.2.1 Risk topic - Title: Causes: Rising prices in input and product - Causes: The higher demand for dragon fruits and maritime transport, disruption in the economy and supply chain will shift the bargaining power to the suppliers Certain events such as Russia’s invasion of Ukraine resulting in the loss of oil supply from Russia will cause price hikes in oil, which will cause a domino effect on various sectors, especially in the transportation industry.   - Consequences: Rising prices in inputs such as petrol, labor will lead to an increase in logistics costs The carrier will increase the freight rate to compensate for these changes The higher bargaining power of suppliers will also provide the supplier with more control on the price of inputs Therefore, these changes will reduce the profitability of the company.  6.2.2 Evaluation Risk Probability Impact Lead time RE Seriousness Rising input prices 4 16 2 Rising prices of products 6.2.3 Associated Strategy – Reduce strategy  - Mitigation Plan:   Backward vertical integration including developing a dragon fruit farm and logistics, thus allowing the company absolute control on the price of dragon fruits and logistics costs.   Avoid the dragon fruits price fluctuation in the Chinese market by using fixed prices in the sales contract, which makes the price unadjustable after signing.   42 - Contingency Plan: Find other suppliers instead of depending on several suppliers.  6.2.4 Associated Strategy – Transfer strategy - Mitigation Plan: Using future contracts to make sure it can purchase a certain quantity of dragon fruit on a specified date at a set price to hedge the commodity price fluctuation  - Contingency Plan: Prepare required documents and commodity contracts  Legal risk 7.1 Unqualified products 7.1.1 Risk topic - Title: Unqualified products - Causes:  China continuously strengthens the application of standards on origin, origin and label quarantine, and at the same time strictly controls goods quality standards, food hygiene and safety Only those businesses that are provided Production Unit Code (PUC) are able to export fresh fruits to the Chinese market.  On the other hand, all food products, agricultural products imported from Vietnam must be inspected for quality-control reasons  Meanwhile, in Vietnam, the fruits exported to foreign markets, including dragon fruit, are mainly grown in small-scale farming, and then tránported by trucks to the border, or sold to collectors and traders for exporting Therefore, the quality of dragon fruit is not controlled synchronously - Consequences:  Due to the strict inspection and phytosanitary process, it takes a long time to clear customs formalities and leads to an increase in congestion, especially during the harvest season Eventually, dragon fruits perish, which causes a considerable loss to the seller.  43  Fruits that not satisfy quality standards in phytosanitary or are damaged during transportation will be sold to Chinese partners at a lower price, or sold to other partners with lower standards, or returned to Vietnam In general, the seller must bear the costs incurred such as shipping fees, customs fees and loss 7.1.2 Evaluation Risk Probability Impact Lead time RE Seriousness Unqualified 12 products 7.1.3 Associated strategy – Protect strategy: - Applying new technology, standard, traceability systems into production, using geographical indications to adapt foreign markets’ requirements.  - Using large-scale transportation methods such as sea and rail to optimize costs Transporting by sea, combined with a cold storage system and preliminarily process ensures favorable conditions to preserve fresh fruits.  7.2 Inability to clear custom formalities 7.2.1 Risk topic - Title: Inability to clear custom formalities - Causes:  Document loss/ invalidity:  The set of documents must be based on and match the sales contract in terms of the shipment and mode of transportation, payment mode, and other information Information that does not match in the documents, especially in the L/C and B/L such as typographical errors, the quantity of goods, weight of goods, incoterms, etc., makes the documents invalid, and therefore cannot be used for customs clearance  Chinese policy: China is implementing a strict zero-Covid policy, requiring isolation and restricting travel within the country and with other countries to 44 control the epidemic Those restrictions have affected shipping in general and the export process to China in particular Accordingly, China implements more stringent inspection and customs clearance procedures 7.2.2 Evaluation Risk Probability Impact Lead time RE Seriousness Inability to clear 12 custom formalities 7.2.3 Associated strategy – Protect strategy - Strengthening documents checking procedures - Negotiating shipping terms, delivery time (using delivery period instead of the fixed day of delivery, adding grace period) 7.2.4 Associated strategy – Reduce strategy - Preparing for unfavorable scenarios when clearing customs, timely supplement documents when required - Building a good relationship with partners to be jointly responsible for supplementing necessary documents for timely and fast customs clearance - Finding backup customers and applying preferential price policies in case the consignee refuses to receive the goods 45 REFERENCE Bao Long Insurance, 2018, BẢO HIỂM HƯ HỎNG HÀNG HÓA TRONG KHO LẠNH, Retrieved from https://baolonginsurance.com.vn/tin-tuc/chi-tiet?bao-hiem-ky-thuat-hu-hong-hang-hoatrong-kho-lanh Best Logistics, Bảng giá nhập hàng Trung Quốc Việt Nam, Retrieved from https://bestlogistics.vn/bang-gia-hang-nhap-hang-trung-quoc-ve-viet-nam/ http://dienlanhfocviet.com/quy-trinh-bao-quan-thanh-long/ Day nghe so 1, Nguyên nhân cách khắc phục cố kho lạnh, Retrieved from https://dayngheso1.edu.vn/kien-thuc-chuyen-nganh/nguyen-nhan-va-cach-khac-phuc-suco-kho-lanh/#:~:text=Kho%20l%E1%BA%A1nh%20g%E1%BA%B7p%20hi%E1 Dinh Chau, 2014, Thanh long bị đổ bỏ nhiễm bệnh, Retrieved from https://nhandan.vn/chuyen-lam-an/thanh-long-bi-do-bo-vi-nhiem-benh-210609/ Joboko, 2019, Thu nhập nhân viên đóng gói có cao khơng?, Retrieved from https://vn.joboko.com/blog/thu-nhap-cua-nhan-vien-dong-goi-co-cao-khong-nsi419 Luu Hiep, 2021, Lo ngại tắc nghẽn hàng hóa cảng Cát Lái lan sang cảng Cái Mép, Retrieved from https://cand.com.vn/Thi-truong/lo-ngai-tac-nghen-hang-hoa-tai-cang-cat-lai-lan-sangcang-cai-mep-i623284/ Phong Nguyen, 2021, Giải tình trạng kẹt cảng, thiếu container để gia tăng xuất khẩu, Retrieved from 46 https://laodong.vn/kinh-te/giai-quyet-tinh-trang-ket-cang-thieu-container-de-gia-tangxuat-khau-963690.ldo Thuy Thuy, 2021, Nan giải toán thiếu vỏ container, Retrieved from https://nhandan.vn/baothoinay-kinhte/nan-giai-bai-toan-thieu-vo-container-632264/ ... inherent vice of dragon fruit is perishable, if dragon fruits are not stored properly, the quality of the dragon fruit being stored in cold storage is reduced, causing a huge loss to the Seller... is not affected by the disease, the Seller could pick out these unaffected dragon fruits to bring back to resell to a number of small retail stores, selling them at a low price to break even,... requirements of dragon fruit when exporting to China to choose a shipment that meets the standards - Contingency plan:  If the goods are not in conformity with regulations of China' s import customs