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ROLTA AUTOMATS LTD

Rolta Automats Ltd. placed an order for four automatic welders with New Equipment Manufacturing
Company, Mumbai for commissioning a new production line in January. The order was on a fixed
price basis of Rs. 40 lakhs per unit F.O.R. Supplier’s works (shipping point) for delivery by Dec. 10.
Rolta Automats Traffic Manager designated a carrier as Indian Railways (Direct wagonload) and New
Equipment Manufacturing acknowledge the order without change.

Within four months, the welders were completed and they were shipped by the supplier from
Mumbai. However, instead of shipping via Railways as the designated carrier, supplier shipped the
same through truck so as to give door delivery and avoid handling on the way. As was customary,
New Equipment Manufacturing invoiced Rolta immediately and sent the documents through courier
offering 5% discount if payment was released within seven days. Rolta Automats processed invoice
immediately on recommendations of Purchase Manager to take advantage of the cash discount.

En-route to Bangalore, the truck, a common carrier, collided with a tractor- trailer. The truck rolled
over an embankment causing total loss of the four automatic welders.

When the buyer contacted the supplier concerning the loss in transit he was told that the New
Equipment Manufacturing disclaimed all responsibilities. “The units were sold F.O.R. Mumbai and
title passed to Rolta Automats at that time”. When the buyer pointed out that New Equipment
Manufacturing Company did not ship via Rail, designated carrier, he was told “We saved Rolta
Automats transportation costs by shipping via a less expensive carrier. You approved of our method
of shipment by paying our invoice. The responsibility of filling a claim with the trucker clearly must
be yours”

Purchase Manager of Rolta started wondering as to what he should now doing by way of company’s
financial interest and the year’s budget completion dependent on installation of these welders in
January.

Case queries:

l. What is significance of F.O.R/F.O.B. point? What are the advantages and disadvantages of a)
FOR/ FOB point of delivery (despatch point) and b) FOR/ FOB shipping point (destination
station/port (CIF)?

2. What are various direct and other relevant issues required to be addressed by Stores &
Purchase Manager of Rolta?

3. Whose responsibility is it to file claim with the carrier? Depending on your views as
representative of buying firm, how will you approach the problem so that company’s interests
are properly taken care of?

4. In case there is a felt need for negotiation with New Equipment Manufacturing, how will you
prepare for the same? Give details
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Query No. 1 What is significance of F.O.R/F.O.B. point? What are the advantages and disadvantages
of a) FOR/ FOB point of delivery (despatch point) and b) FOR/ FOB shipping point (destination
station/port (CIF)?

FOR/ FOB place of despatch or FOR Destination/ CIF Shipping port of buyer are Incoterms
commonly know as price basis for the price being paid by the buyer against a specific purchase order
or contract

Commonly used price basis are as under


Inland Trade

- Ex-works
- FOR (Free on Railhead) Station of Despatch
- FOR Destination
- Door Delivery
- FOR Station of Despatch but freight upto destination born by supplier
International Trades
- F.A.S. (Free alongside ship/shore)
- F.O.B. (Free on Board)
- C.I.F. (Cost Insurance & Freight)
Following are the significances of FOR/FOB Point (Aspects implied)
- The point at which legal title passes from seller to buyer
- Who has to bear packing and forwarding charges?
- Who has to bear freight?
- Who has choice to select mode of transportation?
- Who is to bear the transit damages and if required arranging transit insurance.
- Who is to pursue claims with carriers/ underwriters?

Advantages of FOR Station of Despatch/ FOB Port of country of Origin (Sea-port or Airport)-
for International trade

i) Price is inclusive of packing and forwarding (handing over of consignment to the


designated carrier) also including cost of boarding on to a ship.
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ii) Buyers have the choice of nominating the most economical/ safe & fast mode of
transportation and also nominated a carrier of their choice. In the case of foreign trade we
may nominate a carrier of our own country like Air India or Shipping Corporation and
save foreign exchange.

iii) In case of imports we may also take the advantage of Freight Consolidation

iv) Since ownership is transferred from seller to buyer the movement goods are handed over
to a carrier and RR/ GR/ AWB/ Bill of Lading is issued, transit insurance is to be
arranged by the buyer which results in lot of saving in payment of premium. In case of
imports we may also have the choice of using the services of our own underwriters and
thud saving foreign exchange. May also take the advantage of warehouse to warehouse
policy (warehouse of supplier to our warehouse). In case CIF price we may again have to
procure a insurance policy for inland transportation from destination ports to our power
stations

Disadvantages of FOR Station of Despatch/ FOB Port of country of Origin (Sea-port or


Airport)-for International trade

i) Buyers have to take additional responsibility of arranging transit insurance and


transportation and in the event of any loss/ damage to materials lodge and pursue claims
with underwriter and arrange fresh supplies/replacement.

ii) Some delay in arranging replacement supplies due to formalities involved in place new
purchase order.

Advantages of FOR / FOB shipping point (destination station/port (CIF)

i) Price is inclusive 0f packing & fording, freight upto destination for transportation by
mode/ carrier nominated by supplier, ownership is transferred from seller to buyer only
when the delivery is taken from carrier at destination- transit risk is with supplier and they
may arrange transit insurance but in any case make good the losses/replacement for
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damages, if any free of cost to the buyer. CIF price in imports implies Cost of Goods,
Insurance and Freight.

ii) By simple notification to supplier, buyer is assured of trouble free replacement supplies in
the event of non-delivery/ part- delivery/ damages to the materials by simply completing
claim formalities with the carrier at destination so as to protect right of recovery of
supplier/ their underwriters.

Disadvantages of FOR/ FOB shipping point (destination station/port (CIF)

i) Opportunities in saving of insurance premium and fright are lost

ii) Opportunities in saving of foreign- exchange are last by paying CIF price

iii) Opportunity of patronizing our Indian carrier is lost

iv) Additional insurance premium for inland transportation

v) Advantages of freight consolidation are lost

Query No. 2 What are various direct and other relevant issues required to be addressed by Stores &
Purchase Manager of Rolta?

i) It is expected from the prudent Stores personnel that they must have arranged transit
insurance of the consignment well in time and paid the premium to underwriters as price
basis is F.O.R. Supplier’s works (shipping point) and obtained open delivery certificate from the
road carrier for the damages to the equipments. They shall immediately lodge a
preliminary claim with the carrier under Registered cover Acknowledgement Due (with a
copy to Insurance Co.) so as to protect right of recovery of Insurance Co. and also send a
letter to the supplier indicating damages to the Automatic Welders.

ii) They shall further lodge a monetary claim with the insurance Co. using their standard
claim format (duly filled in) enclosing with it a) copy of supplier’s invoice b) photo copy
of LR (Lorry Receipt), c) Open delivery certificate obtained from the carrier (damage
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certificate), e) copies of letter exchanged with the supplier notifying the damages and
their reply

iii) Stores personnel shall pursue with Insurance Co. for prompt settlement of claim for the
damages. The most important aspect here is prompt survey of damages by Surveyor
deputed by Insurance co.

iv) After settlement of claim, if need be, provide Letter of Subrogation to Insurance Co. to
enable them to initiate legal action against the carrier.

v) Purchase on their part shall make immediate arrangement for replacement supplies.

vi) Purchase people may also explore possibilities of hiring the Welders as time gape
arrangements.

Query No. 3 Whose responsibility is it to file claim with the carrier? Depending on your views as
representative of buying firm, how will you approach the problem so that company’s interests are
properly taken care of?

i) As per terms of the order on M/s New Equipment Manufacturing Company, Mumbai were
to despatch 4 Nos. Automatic Welders by Rail (full Wagon Load). As per the normal
commercial practice, supplier must obtained written confirmation from buyer if any
change in mode of transportation is to be made. However, in the present case, supplier in
their anxiety to arrange faster, safe and economical transportation preferred to use road
carrier. Since M/s Rolta Automats Ltd, Banglore have availed the discount and made the
payment to the supplier, it is a case of implied acceptance of changed mode of despatch.
If they had any reservation about this change they had every right to hold the payment, till
goods are received through a carrier chosen by supplier without their prior consent.

ii) As stated earlier and also advocated by supplier, price basis being FOR Mumbai, the
ownership in goods is transferred from seller to buyer the movement consignment is
handed over to the carrier and lorry Receipt (Goods Receipt) is issued by them. In view
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this, it is the responsibility of buyer to arrange transit insurance at their cost, file the claim
with transporter and Insurance C o. and pursue for settlement. It is responsibility of
buyer’s representative to ensure prompt settlement of claim providing the entire requisite
documents to insurance company without any loss of time, arrange prompt replacement
suppliers so that company’s interests are taken care.

Query No. 4 In case there is a felt need for negotiation with New Equipment Manufacturing, how will
you prepare for the same? Give details

i) Although contractually M//s New Equipment Manufacturing Company, Mumbai cannot


be held responsible for transit loss due to price basis being FOR, Mumbai and also due to
the fact that M/s Rolta Automats Ltd, Banglore having paid the invoice thereby accepting
change of mode of despatch, they can be made to realize that they did committed a
mistake by changing mode of transportation without prior consent of buyer.. Supplier
saved themselves of trouble of requisitioning railway wagon, possibility of paying
demurrage charges to railways for delay in loading the equipments and also expenses
involved in transportation of equipments to railway goods yard and loading on to wagon.
While transporting through road carrier, truck is placed directly at their works.

ii) With the above realization M//s New Equipment Manufacturing Company, Mumbai
could prevailed upon to offer some discount on replacement supplies or atleast hold the
price.

iii) During negotiation M//s New Equipment Manufacturing Company, Mumbai may further
be asked to improve delivery of replacement order and if possible divert supplies of some
other customers to meet their urgency.. Supplier may help the buyer to explore the
potential source for hiring welders

iv) Piece-meal wagon load probably is not the right mode of fast transportation.
Transportation by road trailer is the most reliable mode of despatch. For replacement
supplies, buyer has either to opt for road transportation or arrange escort for wagon load
by railways. If road, they may insist supplier for some discount due to saving to them.