Complete Baths and Kitchen Inc (CBK) is a large 15 year old company with about 250 retail stores across Canada the US. CBK purchases finished home dcor items from Asia, Latin America and Eastern Europe. CBK uses a standard sight, confirmed Letter of Credit (CL/C), on each transaction, to pay for about 90% of its supplies. CBK has worked hard to create and maintain a reputation for fairness and reliability with their suppliers and customers. However, since CBK sells products that are non-essentials for many people, the company has seen sales drop during the past few years. Lower revenues have affected cash-flow and short-term debt.

CBKs survival since the beginning of the recession has been due to careful management of costs, especially on back-office functions and supply chain operations. Now, CBKs management needs to solve a trade finance dilemma:

A CL/C is an effective way to pay its suppliers; the suppliers confidence that they will be paid is very high and CBK knows some of its suppliers use the Documentary Credit to finance their own operations

A CL/C is also an excellent way to ensure CBK gets the products it wants; this has become particularly important during the recession as some suppliers have attempted to cut corners to reduce their own costs, and have produced sub-standard and/or poorer quality product.

However, the costs of doing business this way is high; bank fees for this kind of Letter of Credit will increase in the near future. Going to another bank is not an option, as all banks charge similar fees.

Management has decided to review CBKs arrangements; they are willing to consider any other payment options that could be viable.

1.Describe the Letter of Credit payment process. Explain what a standard sight, confirmed Letter of Credit is. (5 marks)

2.Discuss the advantages and disadvantages of using a L/C for each party in the process (5 marks)

3.Identify and discuss the pros and cons of two (2) other payment methods CBK could use that are appropriate to their business and situation. (5 marks)

4. If CBK made the decision to change to a lower cost supplier in another country what are some of the possible risks associated with that decision. Are there any other ways CBK can save money other than changing payment methods? (5 marks).

5. Referring to the payment methods you discussed in question 3 choose the one you think is best suited for CB situation and support your decision with reference to the Case, course materials and discussions weve had in class. (10 marks).