Industrial Pre-shipment Inspection

The Industrial Pre-Shipment inspection (PSI) article provides you with information
about PSI services which are provided by third party inspection agencies.

Pre-shipment Inspection has two major applications as below:

First Application

The first application is used by buyers and sellers and when the commodities
funds are transferred through letter of credits (LC), in which buyers and sellers
banks are involved.

Then the commodities will be inspected before shipment by the independent third
party inspection companies to verify quality, quantity, packing, marking and
loading.

Several documents must be delivered to the seller's bank for receiving the
purchase value, such as the bill of lading, certificate of origin, packing list and
inspection certificate.

So the inspection certificate is a document that must be issued by Third Party

Inspection Company and delivered to the seller. The seller will refer to its bank to
receive the funds by delivering the Inspection certificate and other related
documents.

The placing of mandatory inspection requirements in the LC, depend on the

buyer's and seller's decision and might be ignored by mutual agreement.

The second application is used by the government to safeguard national financial

interests such as the prevention of capital flight through over invoicing and
customs duty evasion.

The core service in the second application is goods price verification. The PSI
companies have their own updated database for goods prices, and the prices
which are declared by importers will be compared with the values in their
database and will be reported to the governmental authorities, e.g. custom
authorities or banks.

In this case, the government's main aim is to prevent slippage of customs

revenue as a result of undervaluation or deliberate misclassification by traders of
goods to be imported under low-duty headings.

Review the following example to completely comprehend the pre-shipment

inspection applications:

An oil company wants to order for design, manufacturing, procurement and

installation of a gas turbine in its facility. The oil company makes a contract with
the engineering company for design, supplying and installation of the gas turbine.
The oil company opens a letter of credit with its bank for the engineering
company.

Subsequently, the engineering company makes contract with the gas turbine
manufacturer and requests from the bank for the "transfer LC."

So in this LC:

The applicant and consignee will be the Oil Company, the first beneficiary will be
the engineering company, and the second beneficiary will be the gas turbine
manufacturer.

The clause number 46.A in all LC’s designated for the listing of necessary
documents for any fund transfer between buyers and sellers. So for the above
purchase, one item in clause 46.A will be:

“ The Original Inspection Certificate issued not prior B/L (Bill of Lading) date by
M/S “name of third party inspection company” or its authorized agents on M/S
“name of third party inspection company agents” letter heads certifying that:

“The quality, quantity and the packing of the goods loaded/delivered are
strictly complying with specifications of the goods indicated in the related
proforma invoice, the terms of LC and any amendments made thereto as
presented to M/S “name of third party inspection company” by the buyer”

Please note in clause 46.A that there are lots of documents which must be
delivered to the bank for payment, and the inspection certificate is one of them.

So the above wording in “bold” must be exactly stated in the inspection

certificate. Even if there is a syntax error, it should be stated in same form.

Any change from the above wording will not be accepted by the bank and the
funds will not be paid.
For example, if the equipment manufacturer did not notify the inspection
company for the loading inspection and the commodity loaded without the
witness of thepreshipment inspection company, then what will happen?

The inspection company will issue an inspection certificate, but will remove the
word “loading” from the above statement. But the consequences are that when
the seller takes this certificate to the bank for receiving the payment, the bank will
announce a discrepancy and will not pay to the seller.

The scope of inspection must be agreed upon between the Oil Company,
engineering company and gas turbine manufacturer. The scope is normally
summarized in the Inspection and Test Plan document.

For more details, review the Inspection and Test Plan article.

The ITP details the quality part of the inspection scope. The inspection company
will make an inspection in each stage of manufacturing and will issue an
Inspection Visit Report (IVR).

The engineering company must issue and submit the packing and marking
procedure to the manufacturer or ask for a draft of the packing and marking
procedure from manufacturer for approval.

In both cases, the inspection company must make an inspection based on the
approved packing and marking procedures.

When the inspection company inspected the quality of the gas turbine, controlled
the quantity and made an inspection on the packing and marking, then they will
issue the inspection release note for shipment.

Then the gas turbine manufacturer can organize with the shipping company for
shipment of the gas turbine. The inspection company must be notified for loading
inspection.

The inspection company will witness the loading and will issue an Inspection visit
report for loading.

Then the inspection company will issue the inspection certificate when they have
received following documents from gas turbine manufacturer:

 Bill of Lading
 Certificate of Origin
 Packing List

The inspection company already received the Letter of Credit, Proforma Invoice
and Purchase Order, so based on all of the collected documents; it will issue the
pre-shipment inspection certificate and will deliver to the gas turbine
manufacturer.
Then, the gas turbine manufacturer, with the inspection certificate and other
required documents, will refer to its bank and receive the payment.

As stated in the opening of this article, sometimes the governments might use
some services from pre-shiment inspection companies.

Second Application

In the above gas turbine example, it might be necessary that the gas turbine
manufacturer's proforma invoice to be approved by the pre-shipment inspection
company (before issuing the purchase order by the engineering company) and
make sure the price is not more than the value which is on the market.

Some government authorities try to avoid capital flight through this mechanism so
safeguard national financial interest.

Pre-shipment inspection companies also are used to avoid customs duty evasion.

In the above example, the engineering company or gas turbine manufacturer's

local agent in the destination country is the importer and must submit a customs
declaration document to clear the gas turbine from customs.

So a pre-shipment inspection company might be hired to make a price verification

and determine the gas turbine custom duty.

Pre-shipment Inspection Related Articles:

Pre-shipment Inspection Services - This article provides you supplementary

information about this content.

Commodity Inspection - This article provides you information about commodity

inspection. The scope of work for commodity inspection is very similar to the pre-
shipment inspection.

Preshipment inspection must be done before shipment, but in commodity

inspection, the buyer and seller might agree to inspect the commodity in the
destination country. When commodity inspection is not accompanied by vendor
inspection, then precise attention must be paid to the document review. These
documents are: quality control records, test reports, test procedures, material
certificates, etc.

Goods Inspection - Goods inspection and commodity inspection have the same
meaning and same definition and refer to the inspection of specific goods that a
buyer purchases from a seller.

Finished Goods Inspection - The scope of work for finished goods inspection is
very similar to the goods and commodity inspection. But shop or vendor
inspections are never included in this scope of work.

Inspection of Packing - This article provides you information about inspection of

packing, which is done in industrial goods before shipment and it is in the scope
of the pre-shipment inspection.

Seaworthy Packing Procedure - This article provides you information about

seaworthy packing procedure. The term seaworthy packaging is intended to
indicate that the packaging must additionally strengthen and withstand the
conditions of maritime transport and resist more severe stresses.

BS STD Packing Procedure - This article provides you information about BS STD
Packing Procedure. The BS 1133-8:2011 Packaging code, Guidance on wooden
boxes, cases and crates is most well-known and describes the comprehensive
construction standards for boxes, cases and crates, which widely are used for
packaging and shipment of industrial goods.

Quality Control in Packaging - This article provides you information about quality
control in the packaging process of industrial goods before shipment. The quality
control in packing process is the responsibility of the equipment and material
manufacturer.

Container Shipping Seals -This article provides you basic information about
container shipping seals. The objective in using these seals is to minimize the
risk of unauthorized access into the container, which reduces the risk of cargo
pilferage and the introduction of contraband.

Establishment Inspection Report - This article provides you information about the
establishment inspection report.

When the third party or second party inspector carried out the inspection, then
he/she must provide an inspection visit report to its customer. The inspection visit
report must have some characteristics, which are explained here.

Certificate of Inspection - This article provides you information about the

Certificate of Inspection (COI).

The third party inspection service provider company must issue an inspection
certificate after finding satisfactory results during the inspection and when they
have received the shipping documents from the seller.
This certificate has more commercial value than technical value and is a very
important document in commercial transactions. This article explains the detailed
content of the certificate.

Document Review is very important item in pre-shipment inspection assignment

specifically when this inspection is not accompanied by vendor inspection.

In other word the purchaser order to the third party inspection agency is for doing
pre-shipment inspection and there is no inspection during manufacturing process.
In this case TPI inspector must pay more attention to control the quality control
records.

As minimum the TPI inspector must check following documents for mechanical
equipment Pre-Shipment Inspection assignment:

 Manufacturers Data Reports

 Material Certificates
 Dimensional Inspection Records
 Welding and NDE Maps
 WPS and PQR
 Welders Qualification Records
 NDE Reports
 Post Weld Heat Treatment Records
 Hydro-static Test reports
 Mechanical Running Test Reports (Rotary Equipment)
 Performance Test Reports (Rotary Equipment)
 NPSH Reports (for Pumps)
 Strip Down Test reports

When specified by purchase order, the TPI inspector must sign and stamp the
above documents by special "Document Reviewed" stamp