CPSM Global & International Supply Management — Questions and Answers
Question 1: Under Incoterms 2020, which term places the MAXIMUM responsibility on the seller by requiring delivery to the buyer's named destination with all duties and taxes paid?
- EXW (Ex Works)
- FOB (Free on Board)
- CIF (Cost, Insurance and Freight)
- DDP (Delivered Duty Paid) (Correct answer)
Correct answer: DDP (Delivered Duty Paid)
DDP (Delivered Duty Paid) obligates the seller to bear all costs and risks, including import duties and taxes, until the goods are delivered to the named destination. EXW is the opposite extreme, placing maximum burden on the buyer from the seller's premises.
Question 2: A U.S. company sourcing components from a foreign supplier is MOST exposed to transaction currency risk when:
- The contract is denominated in U.S. dollars and payment is immediate
- The contract is denominated in the supplier's local currency with 90-day payment terms (Correct answer)
- The buyer uses a letter of credit in U.S. dollars
- The contract includes a fixed exchange rate clause
Correct answer: The contract is denominated in the supplier's local currency with 90-day payment terms
Transaction currency risk arises when a contract is in a foreign currency and settlement occurs in the future. If the foreign currency appreciates against the dollar over 90 days, the buyer pays more in dollar terms. A fixed exchange rate clause or USD-denominated contract eliminates this exposure.
Question 3: A Harmonized System (HS) code is used in international trade PRIMARILY to:
- Calculate the landed cost of goods including freight and insurance
- Classify traded goods for customs duties, tariffs, and trade statistics (Correct answer)
- Identify the country of origin for preferential trade agreements
- Determine the credit terms offered by foreign suppliers
Correct answer: Classify traded goods for customs duties, tariffs, and trade statistics
The Harmonized System is an internationally standardized nomenclature for classifying traded products. Customs authorities use HS codes to apply the correct duty rates and enforce trade regulations. Country of origin is a separate determination that may interact with HS codes but is not defined by them.
Question 4: When selecting a foreign supplier, a supply manager conducting a total landed cost analysis should include all of the following EXCEPT:
- Import duties and customs brokerage fees
- Ocean or air freight charges
- The supplier's internal marketing and advertising budget (Correct answer)
- Port handling and warehousing costs at the destination
Correct answer: The supplier's internal marketing and advertising budget
Total landed cost encompasses all expenses incurred to bring goods to the buyer's facility: product price, freight, insurance, duties, brokerage, port handling, and local delivery. The supplier's internal marketing budget is not a cost borne by the buyer and is irrelevant to landed cost.
Question 5: The U.S. Export Administration Regulations (EAR) and Export Control Classification Numbers (ECCN) are MOST relevant to a supply manager when:
- Negotiating payment terms with domestic suppliers
- Assessing whether goods or technology being purchased abroad require an export license to return to the U.S.
- Determining whether technology or goods being exported from the U.S. require a license (Correct answer)
- Calculating import tariffs on goods entering the United States
Correct answer: Determining whether technology or goods being exported from the U.S. require a license
EAR and ECCNs govern the export of U.S.-origin goods, software, and technology to foreign destinations, requiring licenses for controlled items destined for restricted countries or end-uses. Import tariffs fall under U.S. Customs and Border Protection regulations, not EAR.
Question 6: A key advantage of using a Letter of Credit (L/C) in international transactions compared to open-account terms is that it:
- Eliminates all currency exchange risk for both parties
- Guarantees payment to the seller provided documentary conditions are met, reducing seller risk (Correct answer)
- Allows the buyer to inspect goods before any payment obligation arises
- Removes the need for shipping insurance on international shipments
Correct answer: Guarantees payment to the seller provided documentary conditions are met, reducing seller risk
An L/C is a bank's conditional payment guarantee: the issuing bank pays the seller once conforming documents are presented. This shifts credit risk from the seller relying on the buyer's promise to reliance on a bank, making it especially valuable when buyer creditworthiness is uncertain. It does not eliminate currency risk or insurance requirements.
CPSM Global & International Supply Management
Under Incoterms 2020, which term places the MAXIMUM responsibility on the seller by requiring delivery to the buyer's named destination with all duties and taxes paid?