Module 5 Ch 19 Horror Story in Business

Summary

This true story illustrates the consequences of misunderstanding shipping contract terminology. A shipping manager at GE Sylvania misinterpreted the term 'FOB,' mistakenly believing that the risk of loss fell to the person at the destination city. After realizing the error, she discovered that this misunderstanding was widespread within the company, potentially leading to financial losses over many years. The story highlights the importance of grasping key legal concepts in business and the risks of failing to fully understand contract terms, even for seasoned professionals. It’s a cautionary tale about ensuring accuracy in logistics and legal interpretation.

Takeaways

• 😀 Understanding the correct interpretation of FOB (Free on Board) terms is crucial in shipping contracts to avoid liability issues.
• 😀 Misunderstandings in shipping practices, even by experienced professionals, can lead to significant legal and financial consequences.
• 😀 A Penn State student initially misunderstood the risk of loss under FOB terms, thinking it was the buyer's responsibility, not the seller's.
• 😀 Even large, well-established companies like GE Sylvania can make long-standing errors in their business practices, especially when it comes to legal terms in contracts.
• 😀 The importance of confirming your understanding of key concepts through research or consultation, especially when there's doubt or disagreement.
• 😀 Sylvania's shipping department had been using the wrong approach to risk of loss for at least 10 years due to incorrect training and contract wording.
• 😀 Despite the incorrect interpretation, GE Sylvania absorbed the costs of breakages and losses to keep their customers happy, but this was not a sustainable approach.
• 😀 The company eventually realized their mistake and began rewriting their shipping contracts to align with the correct legal standards.
• 😀 The student's error in understanding FOB terms was caught and corrected, preventing further complications and possible legal trouble.
• 😀 This story emphasizes the need for professionals to clearly understand the legal aspects of their work, as errors in foundational concepts can lead to years of incorrect practices.
• 😀 If a large company like Sylvania can make a fundamental mistake in interpreting contracts, smaller businesses or students may also make similar errors if not diligent.

Q & A

What mistake did the student initially make regarding the FOB terms?

The student misunderstood the concept of 'FOB Tacoma' and 'FOB Vancouver.' She believed that the person listed in the shipping contract (the seller or buyer) was responsible for the risk of loss, rather than the correct interpretation, where the location (Tacoma or Vancouver) determines who bears the risk of loss.

How did the student come to realize her mistake?

After discussing the issue outside of class, the student researched the concept, consulted with others, and confirmed that the instructor's explanation was correct. She then acknowledged her misunderstanding.

What role did the student have at GE Sylvania, and how did it contribute to her misunderstanding?

The student worked as a shipping manager at GE Sylvania. Her long-term experience at the company had led her to adopt an incorrect interpretation of shipping contracts, a mistake that was common throughout the company.

How long had the incorrect approach to risk of loss been going on at GE Sylvania?

The incorrect approach had been in place for at least 10 years, coinciding with the student's tenure, and likely even longer, as she was taught the wrong approach by her boss, who had been with the company for 15 years.

What was the consequence of GE Sylvania's incorrect shipping contract interpretation?

While the company had been incorrectly interpreting the contracts, they absorbed any potential financial loss caused by broken goods, choosing to keep customers happy rather than insisting on the buyer bearing the risk.

How did GE Sylvania begin to rectify the mistake in its shipping contracts?

After the student and her colleagues realized the error, GE Sylvania began to correct the wording of their contracts to reflect the proper legal understanding of risk of loss, ensuring future shipments were legally sound.

What was the instructor's reaction when the student acknowledged her mistake?

The instructor was understanding and supportive, asking how the student had learned the incorrect information and encouraging her to correct the mistake, emphasizing that it wasn't a problem and that mistakes are part of learning.

What lesson does the instructor want the students to take away from this story?

The instructor wants students to understand the importance of thoroughly learning and applying legal principles. The story emphasizes that even large, well-established companies can make mistakes, and students must be careful not to make similar errors, especially on tests.

Why is the example of GE Sylvania particularly impactful in this story?

The example of GE Sylvania highlights how a large, reputable company, despite its size and resources, can make significant errors due to misunderstandings of legal principles. This illustrates that anyone, regardless of their experience or company size, can make similar mistakes.

What did the student learn from the instructor's advice regarding risk of loss in shipping contracts?

The student learned that the responsibility for risk of loss in shipping contracts is determined by the shipping location (e.g., FOB Tacoma or FOB Vancouver), not by the party listed in the contract. This was a crucial piece of information that corrected years of misunderstanding.