TRADE IN GENERAL Mwakigobe & Miraji Katulagaza

TRADE

Trade is the buying and selling of goods and services for the aim of making profit. It involves distribution of commodities for price. The movement of goods from the place of production to the final consumers is possible through trade.

A trader is a person who performs buying and selling

-          A trader act as intermediary between producers and consumers and seek to derive profit from the process.

-          Trade as an exchange of goods and services can be carried out between trader of the same country (home trade) or traders of the different countries (foreign trade.)

-          Goods produced by the producers winds up the production until when they had rich the final consumers

-          These goods to arrive at the end of the production process they have to be distributed so as to satisfy unlimited human wants. In this case it needs a channel of distribution of goods and services.

DIVISION OF TRADE

There are two main division of trade which are Home (domestic) trade, and Foreign(international)Trade.

HOME TRADE.

This is the buying and selling  of goods or service within the National boundaries, consisting of wholesale and retail trade.

INTERNATIONAL TRADE.

This is the buying from and selling to overseas markets. It is therefore made up of import, export and import trade

CHANNEL OF DISTRIBUTION.

CHANNEL refers to the path linking to producer or manufacturer of a product with the consumers or users of the product.  The path consists of a set of business entities like retailors, whole sealers, industries, etc.  The term “Channel of distribution” may be defined as routes taken by the tittle to the product on its journey from the producers to the consumers.  Normally channel of distribution follows :-

1.       Wholesaler buys goods from manufacturers

2.       Retailers buys goods from wholesalers

3.       Consumer s buys goods from retailers

In some cases, the manufacturer establishes their own retail shop and the consumers can buy goods from these shops. Similarly large retailers can also buy goods direct from manufacturers. The chain or channel of distribution is concerned with different types of trade.  The following diagram explains the chain of distribution

 

CLASSIFICATION

Channel may be classified according to the members of stages in ownership as

1.       A one stage channel   (M                  C)

This is a channel through which the manufacturer of goods supplies the consumers direct

2.       A two stage channel     ( M                  R                   C )

It constitute where the manufacture supplies the retailer directly

3.        A three stage  channel ( M                   W                     R                 C)

It constitutes when the manufacturer supplies the wholesaler who supplies the retailer and retailer supply to the consumers.

4.       A  four stage channel    (M                  A OR  W1                      W2                 R                  C) 

It consistute when manufacturer supplies to his agent who then supplies to the wholesaler who supplies the retailer and supplies the consumer.

The  channel  of this type  may be illustrated by the diagram which follows.

 

ACTIVITIES PERFOMED IN CHANELS

a.       TRANSIT

Goods must be divided and moved physically from the point of origin to the point of destination

b.      SEARCH:

Buyers and sellers must be made aware of the goods and must brought into market relationship with one another.

c.       MAINTAINANCE OF INVENTORIES

The carrying of inventories in appropriate quantities is essential if distribution is to be swift and economical

d.      PERSUATION

Advertising campaigns and personal selling are required if goods are to be marketed so as to satisfy demand.

ACTIVITIES PERFOMED BY CHANNEL MEMBERS

I.        CONTACTUAL

Buyers and sellers contact each other to facilitate the flow of goods.

II.      MACHANDIZING:

Channel members order and receive goods with which are demanded by the final consumers.

III.    PROPERGANDA

Channel members have to persuade and influence customers to buy the products

IV.     PRICING

Channel members set prices that cover and ensure margin of profit.

V.      PHYSICAL DISTRIBUTION

It involves the arrangement of transport warehousing for the goods.

FUNCTION OF CHANNEL

I.        Routinisation of decision:

The well-established channels create the possibility of routine of decision and resulting transaction in lower cost

II.      Involvement in the pricing process such as to recommend retail price and operating margins.

III.    To provide general market intelligence

- A continuous flow of information along channel of distribution enables significant changes in fashion.

IV.    Finance of business

The carrying of stock and provision of trade credit.

V.      Minimization of number of transaction.

The role of intermediaries such as wholesalers results in reduction of transactions cost and transport charges

THE IMPORTANCE OF CHANNELS OF DISTRIBUTION

a.       The channels of distribution bridge the gap between the producers and the consumers.

b.      Buying decisions are made a routine matter  this lowers the marketing cost

c.       They save as the means of financing the entire process of moving goods from the producer to the consumer.

d.      They are the interchanging agency to the producer

e.      They play significant role in the determination of prices.

f.        They help in promoting the market.

g.       Minimization of transaction

DESIGNING THE DISTRIBUTION CHANNEL.

In designing manufacturer – consumers link there are a number of basic requirements must be kept in mind.

a.       The channel which provide the links must provide for the physical transfer of the goods to the consumer in minimum time

b.      The channel should allow for appropriate communication, it should permit the swift feedback of the market information to the manufacturers.

c.       The channel should be so designed that it can be adopted with relative easy to change market conditions.

There are three steps in designing distribution channel

1.       Channel objectives and constraints must be determined with accuracy. Example, - you must analyze the customer characteristics product properties  and features

-             Strength and weakness of middle men competition etc.

2.       Major visible channels alternatives must be distinguished. This necessitates a close examination eg

-       The type of business intermediaries likely to be involved

-       The member of intermediaries who will be required at each stage

-       The price policies of each stage

3.       Alternative channel  must be evaluated: the basic criteria of evaluation should  reflect economic value  ie, cost, return, related to various channels

-                      Central requirements

-                      Possible marketing, conflict ,flexibility etc

-                      A well-known measure used in estimating the economic return from

                channel is RETURN ON INVESTIMENT

                              

Where

Rx= return on investment associated with the use of channel x

Sx = estimated sales associated with the use of channel x

Cx = estimated costs associated with the use of channel x

                                                Other thing being equal the channel with highest Rx  will be the preferred

                                                        Alternative

EXAMPLE

The following is the information for product x and y.

Chanel x

Estimated sales associated with the use of channel x =  2,000,000

Estimated costs associated with the use of channel x= 400,000

Chanel y

Estimated sales associated with the use of channel y =  3,600,000

Estimated costs associated with the use of channel y= 760,000

Therefore :-

For channel X

Given

Sx =2000000,  cx = 400,000

Rx =   2000000 – 400000  =    4

                   400000

:. Rx = 4/=

For channel y

Ry =   3600000  - 760000 =  3.74

                    760000

:. Ry = 3.74

According to the above calculations, channel x is the one to be chosen because it has higher return on investment.

THE FACTORS INFLUENCING THE CHOICE CHANNEL OF DISTRIBUTION

a.       Is the production concentrated in one or limited number of small areas or is production widely dispensed?

b.      Does a commodity require to be processed? Eg oil had to be refined before it is sold  to the final consumer.

c.       Is a farming products like wheat or is it manufactured commodity like bicycle ?

d.      Will the commodity be sold under trade mark or brand name?

e.      Will it quickly deteriorates in quality if delay occurs in its distribution eg fruits or fish  

f.        Is it home products or is it imported from abroad of it is imported it is subject to customs duty

g.       Is it necessary to provide knowledge to the final user?

h.      What is the purpose for which a commodity is required?

i.         Does there exist a competition from other product?

MIDDLEMEN

These are the traders who operate between the procedure and final consumers. They link the producers and the consumers.

 There are several types of middlemen as follows:-

RETAILERS: they sell goods in small quantities to the final consumers

WHOLESALERS: they sell goods to the retailers or onto other wholesalers

AGENTS: these are retailers on wholesalers who represent suppliers (the principal)

BROKERS: these are traders who arrange for the purchase on sale of goods without themselves owning them

MERCHANTS: these are wholesalers who take title to goods that means they buy goods on their own account.

SPECULATORS: these are traders who study the market forces of supply and demand and buy when prices are low and sell when the prices are   high.

AGENT MIDDLEMEN:

Aare those who do not take title to the goods but du actively assist in the transfer of title from the producer to the consumers.

CHARACTERISTICS

I.     They do not take title to goods

II.   They work on commission based on % on the volume of sales or purchases negotiated by them

III. They are used by  the manufactures in the place of their sales in other markets located in jurisdiction of their own salesman

IV. They serve the interest both sellers and buyers.

KINDS OF AGENTS.

Agents differs from themselves in their operational techniques and services rendered. There are several different kinds.

·         MANUFACTURING AGENT

-          Is an independent  person engaged by the manufacturer to sell part of his entire product in specific territory

-          He is not an employee of the manufacture

-          The manufacturer fixes the price and terms of sales.

·         SELLING AENT

-          Is an agent who is employed by the manufacture to undertake the entire marketing functions of all his output for the entire market.

-          He can exercise much greater authority in marketing than the manufacturer agent.

-          He does not need to consult his principal while determining prices and term of sale

·         DEL – CREDERE AGENT

Is an agent of any kind who arrange with his principal that he will him selves liable for the deficit of the customer (bad depts.) introduced by himself.

-          He is paid extra commission for undertaking this risk in additional to carrying out the normal business of an agent.

·         THE FACTOR

-          Is an agent employed to sell good in a merchandised or delivered to him or his principal for a compensation

-          He deals in his own name rather than the name of the principal.

The power rested to him:-

a.       To sell on his  own name

b.      To sell at such time and price he thinks best for his principal

c.       To sell on the usual term of credit

d.      To receive payment  of the price and give the valid receipt

e.      To keep a lien on the goods in his possession for the changes due to him.

·         THE BROKERS

Is an agent employed to make bargaining and contract in matters of trade, commerce between two parties for the compensation called BROKERAGE.  They are specialized in a particular branch of commerce as

I.     Stock and share brokers who purchase and sell government securities who operate in stock exchange.

II.   Ship brokers who are employed to transact business connected with sea transport.

-                      They negotiate for charter of a ship

-                      Procuring of cargo

-                      Buying and selling of ships etc.

III. Insurance brokers are those agents who are mainly occupied in the negotiation of different type of insurance.

-                They affect insurance on behalf of the owner

IV.          The court brokers are those agents who seize and sell properties of persons according to the order given by the court.

Different between the broker and the factor

broker

factor

-          Does not take the possession of goods -          Has no authority to sell goods in his own name -          Broker cannot receive payment -          Has no insurable interest in the goods to be transacted -          Has no right of lien on the goods -          Cannot sue or be  sued on the contract he engaged -          He is a special  mercantile agent

-          They take the possession of goods -          Has authority to sell goods on their own name -          They receive payment and give valid receipt -          Has insurable interest in the goods to be transacted -          Has the right of the goods in his possession for the unpaid charges -          Can sue or be sued on the contract made by his own name. -          He is a general mercantile agent

·         AUCTIONEERS.

-          Is a special mercantile agent authorized to sell goods or property at auction .

-          He is legally the agent of the seller until the goods are “knocked down” to the highest bidders

-          He is responsible for trying to obtain the maximum price for the goods or property that entrusted to them for auction sale.

-          He has an authority to sell by auction only  and cannot  sale the goods or property entrusted to them for public auction for private contract even if higher prices is offered.

·         CLEARING AND FORWARDING AGENT

Are those persons employed to collect deliveries and forward goods on behalf of other

-    Forwarding agents receives goods from exporter and arranges for shipment to their destination.

-    Clearing agents receives goods from abroad on behalf of the importers at the part of destination.

I.     They examine for their quality and their quantity

II.   They make arrangement for their delivery to their importers.

THE IMPORTANCE FOR EXISTANCE OF MIDDLEMEN

(i)            To assists the customers who cannot buy from the producers in bulk.

(ii)          To assist consumers who cannot travel long distance for their provisions

(iii)         Reduces the cost of production by grading, sorting, packing and branding of goods received.

(iv)        Provision for storage which provide for time place and ownership utilities

(v)          It provides and facilitates the implementation of distribution policy among the middlemen themselves.

THE DISTRIBUTION POLICY.

Distribution policy refers to the decision by a manufacturer or the number of middlemen to be used on the intensity of distribution.

In other words it is decision on market coverage for product.

There are three policy options which are:-

(i)                  INTE NSIVE OR MASS DISTRIBUTION.

-          Under this strategy , a manufacturer tries to sell his product through every possible outlet in order to obtain maximum exposure

-          This policy is usually employed for the marketing of consumers products of everyday use eg, toothpaste, cosmetics, food products, soap etc.

-          The strategy can be successful when the manufacturer obtains cooperation from all middlemen and advertise his products on a large scale.

(ii)                SELECTIVE DISTRIBUTION

-          This policy involve the use of few middlemen selected in each sales territory

-          It may be employed at both wholesale are retail levels

-          It is appropriate in the case of specialty goods and accession

-          It is more economical and provides the manufacturer sufficient control over distribution of his product.

-          With limited member of middlemen dealers are likely to take greater investment in the display and promotes of the products.

(iii)               EXCLUSIVE DISTRIBUTION

-          This involves the use of one dealer in each sales territory

-          The dealer is  granted exclusive right to the product in the specific territory  through an agreement with the manufacturer

-          The dealer is prohibited from dealing in the competitive products

-          The policy is adopted in case of shopping and specialty goods enjoying brand loyalty.

-          However this policy is less flexible and does not permit wide distribution of the production

COMMERCIAL TRANSACTIONS

-          As any  process which involve the transfer of title of the goods or services between two parties from one of them to the other for consideration (money or monetary worth)

-          Commercial transaction may be between the wholesaler and the retailer or the manufacturer and the final consumers.

-          The commercial transaction can be either made on cash or made in credit.

(i)                 CASH TRANSACTION

-          Is a transaction whereby cash is paid immediately in exchange of either goods or services

-          In cash transaction there is execution of two things ie, payment and delivery whereas the buyer pays cash when goods are delivered.

(ii)               CREDIT TRANSACTION

-          This is the transaction whereby goods or services are delivered to the buyer but payments is made letter.

-          In this case cash is paid after a specific duration stipulated on the terms of sale

PROCEDURES AND DOCUMENTS USED IN CREDIT TRANSACTION

 Is the record of summary of the transaction which has taken place between the buyer and the seller

1.       AN ENQUIRY LETTER (1^ST  STAGE)

Is a letter written by a prospective buyer  to the seller seeking an information to weather a a certain variety of goods or services can be supplied for sale, the price and the term of sale.

 

 

2.       REPLY TO AN ENQUIRY   (2^ND STAGE)

`       A supplier may reply an enquiry letter in either of the following:-

(i)                  CATALOQUES.

-          Is a document which contain the detail of goods offered for sale and they may sometimes be illustrated

-          The items of a catalogues  are usually numbered for easy location

-          Prices are shown along with  the description of items or else, a separate price list is enclosed showing the prices of the items

(ii)                PRICE LIST

-          Is the document which contains the prices of the goods listed at the time it was made out

-          However the price list does not constitute a promise to sell the goods at the price stated.

(iii)               QUOTATIONS

-          Is an offer to supply goods according to the terms and conditions stated

-          Quotations are of two types:-

a)      These which are given by the manufacturer or producers to traders or consumers directly known as  FIRST HAND QUOTATIONS

b)      Those which are given by traders  to traders a consumers known as SECOND HAND eg

“subject to being unsold at receipt of order”

- subject to acceptance within three weeks”

- A proforma invoice may sometimes serve the purposes of a quotation

3.       THE ORDER (3^RD STAGE)

-          After studying catalogues and price list sent to them the prospective customers will make up their mind whether to buy the goods or not.

-          The acceptance of the quotation is affected in the form of order.

-          When delivery of the goods is urgently required  acceptance may be oral but it should be confirmed in writings by a letter or the firms official order form

BOUGHT NOTE:

Is a contract made sent by a buyer stating the terms and conditions of sales arranged only.

SOLD NOTE

-          Is a note sent by a seller to a buyer stating the terms and conditions  of sale arrange orally

-          It is similar to bought note except it states “sold to” instead of “bought of”

LOCAL PURCHASE ORDER (LPO)

-          Is a document only used in home trade to make an order.

-          It is a document which forms a basis for a contract of sale between a buyer and seller.

4.       DELIVERY OF GOODS (4^TH STAGE)

-          After receiving  the order from the buyer the seller make arrangements to deliver those goods

The following documents  are involved in the process.

(i)                  DELIVERY NOTE

Is the document showing a list of goods without showing prices which is sent to the buyer.

It is used for checking the goods without the use of invoice.

When goods are delivered to the buyer he is supposed to retain one copy and return the other copy to the seller duly signed by him.

It is a proof that the buyer had received the goods

(ii)                PACKING NOTE/LIST

Is the list/ note which show list of item packed in a particular box.

(iii)               CONSIGNMENT NOTE

-          Is the document provided by the carrier in which the sender fills in the details of the goods to be dispatched.

Name and address of the seller and the buyer consigner and consignee are shown

-          It indicate whether the freight is already paid, whether the buyer  has to pay it at  the destination when the goods are delivered by the carrier

-          The consignee has to sign it as a proof that the goods have been delivered to him

5.       INVOICING

-          After goods have been delivered to the buyer the seller sends an invoice to the buyer.

-          An invoice is the document which setout the description of the goods dispatched and state the amount which is being debited to the buyer .

-          When goods have been received the buyers check them against the invoice to make sure the quantity and quality are in order.

-          It is abbreviated  E.&O.E means “error and  omission Excepted means that the seller receives the right to correct any error on omission on the invoice but not the buyer /consignee

THE  PRO- FORMA INVOICE

-          Is the invoice which does not debit the buyers. It saves to show what the buyer would have to pay if he boght.

-          It may be simply a special form of quotation or it may accompany goods sent on approval so that if they are kept payment may be made in accordance with the pro-forma invoice.

-          It is also used when a seller is unwilling to grant credit so it act as polite way of asking payment before delivery of goods

-          It saves for customs purposes when goods are sent abroad as to help calculation of duty payable.

-          It is used when goods are sold on consignment basis

6.       STATEMENT OF ACCOUNTS

-          These are statements sent at periodical interval  normally every month showing the transaction which have taken place since the date of the last payment

-          Is sent by a seller to the buyer

7.       PAYMENTS

-          This is the final stage of credit transaction

-          On receipt of the statement the buyer checks amount due to the seller

-          If he find that the amount owing to the seller is correct arrangement of remittance of money is made to the seller.

OTHER  DOCUMENTS

CREDIT NOTE

-          Is the document shows the decease  on claim of money by the seller as a correction of invoice  issued if he overcharged the buyer or if some of the goods purchased  have been returned back by the buyer

DEBIT NOTE

-          This is the document sent by the seller to a buyer to correct for the undercharged on the original invoice.

-          It is also issued when the buyer fails to return containers or packing cases not charged for the invoice.

ADVICE NOTE

-          Is the document issued by the seller to a buyer to inform him coming of goods.

RETURN NOTE

Is the document issued by the seller to buyer when goods supplied are returned back to the supplier  for any reasons.

TERMS OF PAYMENTS

1.       C. W. O.  cash with order

This means that cash must be paid when the order is sent

2.       C. O. D. – cash on delivery

-          Payments must be made at the time goods are actually handed to the buyer by the carrier.

3.       SPOT CASH.

This means that cash must be paid when the buyer takes over the title to goods or properly in the goods.

4.       PROMPT CASH

Means that payments must be coming in few days when reasonable time has been given for examining the goods and checking of the invoice.

5.       TRADE DISCOUNT

Is the amount allowed off the list price of goods to traders who buy goods for resale (to sale again)

“THAX MR KATULAGAZA…”