A SIMPLE MICRO SIMULATION MODEL EXAMPLE: Cost chain and trading price formation for international exports Master Économie et Affaires Internationales Cours “Modèles de Simulation” Paris Dauphine –September 2010 Prof. Ramón Mahía Applied Economics Department

A SIMPLE MICRO SIMULATION MODEL EXAMPLE INTRODUCTION When a trader decides to export a good, lots of decisions must be taken, from “fundamentals” to minor details: How to pack, store and label the goods, where to export, which is the best port of origin, which route is the best for inland transport, which is the optimum route for international freight, which is the best insurance option and dealer, which transport company is the best (both inland and international), which INCOTERM is convenient and standard to reach an agreement…….

A SIMPLE MICRO SIMULATION MODEL EXAMPLE THE NEED OF A SIMULATION TOOL The amount of different choices in every matter produces lots of different eventual combinations that carry out different results (in terms of cost/price): we need a kind of evaluation tool. All these decisions are extremely inter – connected in a way that it is too complex to take isolate step by step decisions: we need a kind of optimization instrument. To many “agents” are involved in the process that may change the (their) trade conditions rapidly and frequently forcing us to re - thinking our decisions and re compute costs: we need a kind of technical and fast tool for handing out changes and new solutions. ….. MAY BE WE NEED A SIMULATION MODEL

A SIMPLE MICRO SIMULATION MODEL EXAMPLE DECISIONS AND COST CHAIN (I) Previous Manipulation Export arrangements Inland Transport Storage and loading International Transport Downloading and store at destination Inland Transport Import arrangements Packing Labeling Export agent, brokerage Permissions Certifications Custom arrangements Route Mean of transport Transport company Insurance conditions Surveillance Packing Loading conditions Carrier Insurance conditions Country Mean of transport Port of destination Route Surveillance Downloading conditions Custom clearance Tariffs / Duties Importer agent brokerage Route Mean of transport Transport company Insurance conditions

A SIMPLE MICRO SIMULATION MODEL EXAMPLE DECISIONS AND COST CHAIN (II) Previous Manipulation Export arrangements Inland Transport Storage and loading International Transport Downloading and store at destination Inland Transport Import arrangements Packing Labeling Export agent, brokerage Permissions Certifications Custom arrangements Route Surveillance Packing Loading conditions Insurance conditions Country Surveillance Downloading conditions Custom clearance Tariffs / Duties Importer agent brokerage Route Mean Port of destination Route Carrier Mean of transport Transport company Insurance conditions Mean of transport Transport company Insurance conditions

A SIMPLE MICRO SIMULATION MODEL EXAMPLE TRADE AGREEMENT: INCOTERMS (I) Incoterms (International Commercial Terms): Standard definitions of international trade terms widely used used in international commercial transactions to divide transaction costs and responsibilities between buyer and seller, reflecting state-of-the-art transportation practices INCOTERMS Group E – Departure: EXW Group F – (Main Carriage Unpaid By Seller):FCA, FAS, FOB Group C – (Main Carriage Paid By Seller): CFR, CIF, CPT, CIP Group D – Arrival: DAF, DES,DEQ, DDU, DDP

A SIMPLE MICRO SIMULATION MODEL EXAMPLE TRADE AGREEMENT: INCOTERMS (II)

A SIMPLE MICRO SIMULATION MODEL EXAMPLE TRADE AGREEMENT: INCOTERMS (III)

A SIMPLE MICRO SIMULATION MODEL EXAMPLE BASIC ELEMENTS OF A THE SIMPLE SIMULATION MODEL PURPOSE OF THE MODEL: To evaluate the total and unitary cost of exporting a given good to a given destination country for different choices of packing, routes, carriers, and INCOTERMS. And then, as a result, to support the pricing decision of the exported good and the estimation of margins available for different alternatives if an import price is previously negotiated. To observe in a detailed and relative way (comparing costs) the cost formation chain (markup of different agents) helping decisions in terms of negotiations and cost saving optimization.

A SIMPLE MICRO SIMULATION MODEL EXAMPLE BASIC ELEMENTS OF A THE SIMPLE SIMULATION MODEL Pure decision INPUTS: Factory Price Units to export Type of packaging and labeling Type of international freight (Plane, Ship) (Partially conditioned) Port of origin (Partially conditioned) Carrier for international freight Exogenous INPUTS: Cost of packaging for each of the types, warehouse storage and services cost, cost of loading charges at point of origin, export agent fees, cost of export documentation, cost of inland road transportation, distances to different ports of destination, forwarding fees for different ports, cost of loading in different ports, number of carriers available, cost of international freight for 4 different carriers, availability of carriers in different locations, cost of international insurance, import duties and tariffs, destination port forwarding costs and inland transport in destination country. Main final OUTPUTS: Total and per- unit cost of the product for the different stages of the price (cost) formation chain.

A SIMPLE MICRO SIMULATION MODEL EXAMPLE QUESTIONS THAT CAN BE ASWERED Which is the total, and per - unit cost connected to the main different stages to be accomplished in an export operation? Which are the relative importance of these the different costs chapters? Which are the sensibility of each of the cost chapters for different means of transport, points of origin, routes or carriers? Which is the cost - level price for the different INCOTERMS? Which is the minimum number of units to export for reaching the minimum fixed unit price? Which is the best choice of inland and international transport routes and carriers for a given INCOTERM?.

A SIMPLE MICRO SIMULATION MODEL EXAMPLE FROM SIMPLICITY TO REALISM Real decisions are evaluated in a “multilevel” basis: Different countries of destination, different types of products to export (eventually with common stages in the export process), transport can be multimodal, more alternatives for transport and insurance (points of origin, but overall, lots of companies)…. Lots of additional inputs (costs) should be considered: excess of supply or domestic demand, financial services costs and availability, market research costs, solvency studies of buyers,.. Final cost is not the only OUTPUT of real interest: TIME use to be crucial (as intermediate input and as a CRUCIAL final output) Lots of intermediate inputs and exogenous variables are much more difficult to measure. For example, there are lots of price alternatives depending on size, quantity, value and a high degree of negotiation. Some critical inputs or outputs are not measurable at all (expertise of a given trade channel, evaluation of the risk of failure, quality of exporting services)