Reference no: EM132266030

Tuscany Leather Products

A medium size specialty leather goods designer and manufacturer, Tuscany Leather Products (TLP) has had success exporting their own line of gloves, handbags, clothing item and other accessories to the European Union (EU). Transactions have been facilitated by Documentary Collections (D/C) and Open Account (OA). TLP has experienced occasional delays in payment, but they are satisfied with the way they do business. Although their success has been attributed to their unique designs, it actually comes from the competitive advantage obtained from the specialized cutting and sewing machinery they have developed.

TLP was recently approached by a large leather manufacturing company in Korea called Seoul Leather Manufacturing (SLM). SLM wants to purchase one or more of TLPs specialized cutting and sewing machines. The contract will include installation of the equipment, implementation of the production processes and monitoring of the manufacturing process in Korea.

Reaction

TLP had never thought about selling machinery; but they were excited and flattered. The price of $1 million for the entire contract was also very attractive. Despite not knowing very much about SLM (other than the goods they produced), TLP decided to look into this more closely.

One of the first challenges for TLP was how to get the machinery produced within SLM’s timeframe of three months. TLP approached their bank, Bank of Central Ontario (BCO), for advice on how to finance the production of the new machinery and how to finance the sale to the Koreans. The bank manager had little experience in international transactions, but he assured TLP that BCO could facilitate the transaction.

After a visit to Korea by TLP’s senior management to meet their SLM counterparts and tour SLM’s factory, the companies agreed to do business and signed a Purchase Order.

The Deal

The Koreans wanted more than one machine, but TLP wanted to go slowly. They agreed to sell one machine for $720,000; plus installation and monitoring services for one year, for an additional $280,000. Terms were FOB Port of Vancouver. TLP required a Letter of Credit, issued by a Korean bank, in the amount of $1 million. The Letter of Credit was to be valid for the life of the transaction, and be divided into two payments of $720,000 for the machine; and $280,000 for the services. Both payments were to be made after the work was done by TLP.

The timeline for delivery of the machine was critical: SLM wanted that machine to be delivered three months after signing the PO or TLP would be in default. Since it took 24 days to ship the machine, TLP had barely 9 weeks to design and manufacture it.

Trouble

TLP got good news from BCO! Even though the L/C had not arrived yet, TLP was able to obtain a pre-export financing loan for 50% of the price of the machine using the PO as collateral. When the L/C arrived, BCO would use it as collateral to pay off the pre-export loan and cover any other costs related to the transaction.

Since time was tight, TLP began production of the machine and waited for the L/C to arrive.

SLM said it was coming and to keep working on the machine. After four weeks, SLM informed TLP they would have to issue a performance bond since this was the first time they were selling a machine! The provision of a performance bond had not been previously discussed, but SLM insisted one be issued before the L/C would be issued. The performance bond was to be valid for six months after the services portion of the contract was completed.

BCO was not pleased that TLP would need more money to issue the bond. BCO did not want to lend them more money. BCO informed TLP that any increase in the line of credit would reduce the size of the pre-export loan. BCO also said TLP would have to pay a management fee of 3% of the value of the $200,000 bond ($6,000).

A week after BCO issued the bond, an unconfirmed L/C, issued by a small Korean bank, was received at BCO. BCO asked the Korean Bank to confirm it and were told that a third bank, in Thailand, would confirm it. The L/C was confirmed, but, the higher country risk and bank risk, plus the need to involve two banks in the confirmation process, caused the bank fees to be twice as high as TLP had expected.

Moving ahead

All of this resulted in a longer production period. Shipment of the machine took place two months later than originally planned. During this period, TLP kept SLM informed of their progress so that SLM would not call the bond; nor think TLP was not working on the project.

SLM urged TLP to hurry. On the shipment date, all necessary documents were presented to BCO.

All the documents were checked carefully by BCO, and a number of discrepancies were found, including “late shipment”.

The bank refused to honour their confirmation because of the discrepancies. BCO could not pay TLP unless the issuing and confirming banks approved the discrepancies. TLP was certain, given the relationship they had developed with SLM, that the discrepancies would be waived and payment would be authorized. The next day TLP was contacted by SLM to express their disappointment with the delay in shipment and the other discrepancies. They insisted on a reduction in the price of $100,000 before they would waive the discrepancies and authorize payment.

TLP faced a serious problem. The project had consumed more time and resources than expected, and the cost of financing and other fees far exceeded expectations. The goods had been shipped, on FOB Port of Vancouver terms, and the buyer was threatening to withhold payment unless TLP agreed to a substantial reduction in the price.

Please answer the 3 questions:-

1-What would you do?

2-What are your options at this point?

3-What would you do differently if you were TLP and could go back in time?