Supply chain finances and liabilities (CASSANDRA Compendium Chapter 3 – CORE2007b)


The third chapter of the CASSANDRA compendium clarifies financial and insurance concepts and techniques of international supply chain management. In cross-border trade, exporters and importers often insure themselves against a variety of risks, including loss or damage of goods in transit, currency fluctuations, and a business partner’s default. In particular, exchange of goods for money between sellers (exporters) and buyers (importers) is a great source risk and uncertainty in international logistics transactions. For example, advance payment is unfavorable for importers in terms of cost, cash-flow and risk of default. On the contrary, selling goods on consignment puts exporters at a risk. For risk mitigation, exporters commonly protect themselves against buyers that fail to pay for goods whereas importers protect themselves against exporters that fail to deliver goods. The chapter illustrates how financial transactions and conventions underpin physical flow of goods in international supply chains. The CASSANDRA compendium is available for download here.

Review by Toni Männistö (CBRA).

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Full review

International trading involves many risks. Exporters bear the risk that buyers fail to pay for goods in full or in time. On the other hand, if the exporter requires the importer to pay for goods before shipping them, the importer faces a risk of paying but not receiving the purchased goods in right time, quantity and condition. There are, fortunately, various financial instruments and insurances that both the exporters and importers may purchase to reduce or eliminate such risks. Perhaps the most common instrument is the letter of credit (LC), a guarantee from the buyers’ bank to pay the seller if the seller dispatch goods and meets the terms of delivery. Other common financial services, that allow exporters to hedge against non-payment of foreign buyers, include export credit insurance, export factoring and forfeiting (selling one’s receivable debts for cash). These financial products cost money, but they reduce or eliminate the risks involved in cross-border commerce. Prices and terms of these credit and insurance schemes depend on the creditworthiness of applying companies and riskiness of concerned logistics operations.

The CASSANDRA compendium chapter provides insights into the legal infrastructure – laws, conventions and standard business practices – that set the basis for trust between sellers and buyers in the cross-border commerce. For example, the Rotterdam Rules (“Convention of Contracts for the International Carrying of Goods Wholly or Partly by Sea”) and Hague-Visby determine much of the legal rules for carrying goods by sea. International contract schemes are not always straightforward, but fortunately there are Incoterms, standard trade terms, published by the International Chamber of Commerce (ICC), that determine when ownership of goods change, how costs of shipping are shared, and who is responsible for insuring cargo at different stages in the supply chain. Incoterms are defined in the contract between buyer and seller. The contracts between cargo owners (shipper or consignee) and freight forwarder, an agent organizing the transport, is a separate document, the same way than the agreement between the freight forwarders and carriers.

Supply chain finances is a crucial topic for trading companies, but how do the financial aspect relate to CORE, a supply chain security and optimization project? Related to security, if customs and other border control authorities had visibility over financial transactions, they could use this information for more accurate risk assessment of cross-border shipments. The authorities might be able to identify suspicious financial transactions that do not correspond physical flow of goods (e.g., routing or cargo description). With respect to the logistics optimization, CORE visibility solutions enable companies to monitor location and status of their consignments and help them to react faster to logistics contingencies and disruptions. If increased visibility lowers risk of supply chain glitches, it may also lower insurance premiums and interest rates for credits. Visibility also facilitates investigation of insurance claims, helps resolve liability disputes, and may lower related litigation costs. Track & trace data on cargo en route, for example, helps determine the location and time of unauthorized tampering of a container, with obvious benefit for resolving liability issues. The CORE’s demonstrations will likely benefit from this account of basic trade finances that the third chapter of the CASSANDRA compendium provides. The financial aspects should be considered also in CORE’s education and training material.


Hintsa, J. and Uronen, K. (Eds.) (2012), “Common assessment and analysis of risk in global supply chains “, Compendium of FP7-project CASSANDRA, Chapter 3



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