Rutgers Newark University Colossal Management Discussion

Finally, one of Colossal’s suppliers in the country of Edfin no longer wants to supply needed rawmaterials for Colossal’s factories in the United States, unless Colossal agrees to pay them by opening a
letter of credit. Up to now, the company has paid them after delivery to the United States, which has
allowed Colossal to inspect the quality of the shipments before sending payment. What are the
ramifications of granting Edfin’s request?
The recommendation would be for Colossal to open the letter of credit to continue the arrangement
with Edfin based on the information provided. It is safe to assume based on the information provided
that the transaction history between the two entities has been acceptable to this point. In the current
arrangement, it Colossal has the ability to inspect the shipments before issuing payments. While it
would be good to know what the defect rate of shipments from Edfin is currently, the fact that Colossal
continues to transact with Edfin implies that the quality must be to some degree acceptable. It would
also serve the analysis well to know what the current market is for the raw materials being purchased in
the arrangement. Is there an extensive market with multiple competitors that can supply the same
materials at or around the same cost? Without this information present, it would be hard to advise
against the pursing an option that might jeopardize Colossal’ s ability to secure the new materials. It is
natural for Edfin—if in fact they have been delivering quality materials in a timeline manner—to want to
pursue an arrangement more conducive to the seller in this case, so that they will receive payment
earlier.
Although, as any buyer would want to inspect the goods before issuing payment, the Letter of credit
(L/C) process doesn’t expose Colossal to an excessive amount of risk. There is an organization, the
Uniform Customs and Practice for Documentary Credits (UCP), that provides oversight to the nature of
documentary transactions. All parties that enter into a documentary agreement accept the rules and
regulations put fourth by the organization. The rules, “are comprehensive and cover most, if not all, of
the types of circumstances that can arise in a documentary credit transaction” (ICC, 2006). With
measures in place to protect the buyer such as the A bill of lading (B/L) which is designed to act as, “both
a receipt and a contract for carriage,” Colossal can rest at ease knowing that the documentation process
for the transfer is thorough and there are several checkpoints in the process that would reduce risk in
the transaction. The Captain of the shipment transfer is ultimately responsible for the quality of the
goods shipped. It is their responsibility to check the shipment before accepting it from the seller. As far
as the actual purchase is concerned, there are options to schedule payments rather than pay their bulk
of the price up front; this process also reduces some of the financial risk involved in the process.
References
Goodwin, Robert C. (2020). International Contracts. University of Maryland University College. Retrieved
from https://leocontent.umuc.edu/content/umuc/tgs/mba/mba630/2201/learning-topiclist/international-contracts.html?ou=441085
ICC (International Chamber of Commerce). (2006). ICC uniform customs and practice for documentary
credits – UCP 600. Paris: ICC.