INTERNATIONAL PROCUREMENT NOTES

INTERNATIONAL PROCUREMENT:


TOPIC 1 :INTRODUCTION TO INTERNATIONAL PURCHASING


Definition 1
: In a global economy, international procurement is a term used to describe the
process of allowing firms around the world to bid on contracts for goods and services. The
concept has gained popularity as shipping and transportation costs have decreased due to an
influx of cheap, readily available fuel. The globalization of large corporations has allowed
them to reap the benefits of lower labor and materials costs while still selling the same quality
and quantity of products.
There are three primary benefits to international procurement: lower costs, stimulation of a
global economy, and increased consumer base. The lower costs that can be achieved through
purchasing services or goods from other counties are derived from currency valuation and the
effects of product specialization. Both of which are core concepts in
economics.
In international procurement, industrialized nations purchase goods from countries with a
lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying
factor remains fairly static. The ability to purchase more with a dollar in another nation is one
of the primary driving factors behind the appeal of this type of procurement.
Global sourcing:
Definition 2:
Global sourcing refers to the integration and co-ordination of procurement
requirements across the worldwide business units of a single firm. It also implies that a
particular organisation has adopted a single sourcing strategy for its worldwide business
units and that this strategy is aimed at providing a competitive advantage to business units
on a global scale. In order to be competitive most firms across the globe participate in global
sourcing. Additional attributes in global sourcing include quality improvements, time-tomarket

reductions, availability improvements and synergy creation of company resources
and global partnership.
It is worthwhile to underscore the fact that the bottom line as far as global sourcing is
concerned is to meet or exceed product expectations while driving down production costs
and streamlining the supply chain. The proliferation of technology to some extent has
boosted this approach since transactions in the contemporary business environment are
done by just a click of a computers button.


Reasons for sourcing internationally:
1. Competitiveness of overseas sources e.g. lower prices, improved deliveries, better
quality etc


2. Need for manufacturing flexibility


3. Stringent quality standards


4. Ever changing technology


5. The buyer may prefer to buy from foreign source which offers products which have
features which are not available domestically.


6. Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing
to shortages or strikes


7. Reciprocal trading and counter trade owing to policy reasons


Successful elements in sourcing abroad:


1. Top management support
2. Development of efficient communication skills and
3. Information Communication system
4. Establishment of long term relationships with overseas suppliers
5. Vast knowledge of international opportunities
6. Good understanding of international rules under INCOTERMS
DIFFICULTIES IN BUYING ABROAD:


 Currency difficulties is experienced- fluctuations
Legal difficulties incase of a dispute
Delays in delivery
Time required for negotiation is greatly increased
Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
 Import duties, procedures and insurance
Communication problems


Benefits of international/global sourcing:
1. Better prices
2. Higher world class quality
3. Counter-trade
4. Improved customer service
5. Improved competition position
6. Increased availability of suitable suppliers
Factors to consider when planning international procurement:
The following factors generally hamper planning for international purchasing:


1)
International risks: These risks relate to:
(a) Financial factors such as currency uncertainty, financial policy uncertainty and financial
effect of economic performance


(b) Economic factors such as performers of economic indicators etc


(c) Political factors such as radical changes in government composition or policies


(d) Operational environmental factors such as the legal structure of the country of export,
the rules and procedures governing international trade.


2)
Logistical barriers: Long distances mean increased transport costs and long delivery
times, hampering the supplier in rendering a service
3)
Customs regulations and duties: Import duties can disrupt prepared cost estimates at
very short notice, political motives in the importing country can hamper purchases on
specific foreign markets etc


4)
Nationalism: Local source preference is a factor that influences the development of an
international purchasing policy and strategy.


Sources of information about overseas suppliers:


1) Professional contacts: Professional contact of the purchasing staff can facilitate an
evaluation of specific suppliers capability


2) Trade journals: Trade journals are published regularly by different industries in various
countries and provide vital information on suppliers


3) Directories: Directories are good sources of information and are often printed by an
organised industry in a particular country


4) Trading companies: Japan frequently uses this marketing channel which provides
advantages of convenience, efficiency and assurance of supply to international buyers.


5) Import brokers: They offer a buying and forwarding service in exporting country and
often become very knowledgeable about the products


6) Internet: This is global system of inter connected computer networks that use the
standard internet protocol suite (TCP/IP) to serve billions of users worldwide. They
enable business people to search relevant suppliers across the globe.


7) Online marketing and mobile marketing


In a global economy, international procurement is a term used to describe the process of
allowing firms around the world to bid on contracts for goods and services. The concept has
gained popularity as shipping and transportation costs have decreased due to an influx of
cheap, readily available fuel. The globalization of large corporations has allowed them to reap
the benefits of lower labor and materials costs while still selling the same quality and quantity
of products.


There are three primary benefits to international procurement: lower costs, stimulation of a
global economy, and increased consumer base. The lower costs that can be achieved through
purchasing services or goods from other counties are derived from currency valuation and the
effects of product specialization. Both of which are core concepts in
economics.

In international procurement, industrialized nations purchase goods from countries with a
lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying
factor remains fairly static. The ability to purchase more with a dollar in another nation is one
of the primary driving factors behind the appeal of this type of procurement.

Diferrences between global sourcing and international purchasing.


Difference #1: Firms that engage in global sourcing are larger and are more likely to have
competitors that are multi-regional or global compared with firms that engage in international
purchasing.
While this finding should come as no surprise, firms that pursue global sourcing initiatives
are clearly larger (average $3 billion in annual sales) compared with firms that engage in
international purchasing (average $900 million in annual sales). Larger firms are more Likely
to have worldwide production facilities, design centers, and marketing and sales activities. It
should be expected that the pursuit of global sourcing opportunities becomes a fundamental
extension of a larger firm’s sourcing philosophy given its worldwide scope in other areas.
The level of competition that a firm faces can also affect its sourcing response. The global
sourcing segment faces greater competition from companies that are multiregional or global
compared with firms in the international purchasing segment.


Difference #2: Firms that engage in global sourcing perceive their strategy implementation
progress to be further along compared with firms that engage in international purchasing.
Both segments recognize they have a long way to progress before they have a fully developed
global sourcing process in place, although Level IV and V firms know they have made
greater progress compared with Level II and III firms. The international purchasing segment
appears to understand that many sourcing opportunities are possible beyond what it is
currently pursuing.


Difference #3: Firms that engage in global sourcing perceive that performance improvement
and cost reduction opportunities are more widely available from theft sourcing efforts
compared with firms that engage in international purchasing.
An example from the field research provides another explanation for the difference between
the segments. One company that is rapidly gaining global sourcing experience has found that
local or site-based participants usually have a performance improvement expectation that is
formed (and limited) by what can be attained by local or regional practices. Site personnel
may perceive that a 5 percent price reduction is quite significant. The potential cost
improvements available from global sourcing far exceed what these participants are willing to


commit to or believe are available. However, participants begin to recognize the difference
between international purchasing and global sourcing outcomes once they become involved
with global projects. The international purchasing segment, on the other hand, has yet to
appreciate the dynamics of operating within a global context, which limits its perception
regarding potential performance improvement and cost reduction opportunities.


Difference #4: Firms that engage in global sourcing indicate that the development of global
strategies is more important to their executive management compared with firms that engage
in international purchasing.
After considering the differences between international purchasing and global sourcing
presented in an earlier section, one can easily conclude that international purchasing is best
described as a functional activity while global sourcing represents a strategic direction and
organizational process. Executive support and leadership are critical to a process as
organizationally complex and important as global sourcing.
Field research reveals that executive managers who stress the importance of global sourcing
back that belief with direct commitment–commitment that is not as necessary or as visible
with international purchasing. Examples of executive commitment include funding the
development of a global sourcing process, participating on an executive steering committee
that oversees global activities, and providing budget and staff to support global project teams.
Executive managers may also work to secure site- and plant-level buy-in to global processes
and agreements. Executive managers who recognize the importance of global sourcing must
be willing to support global initiatives, something that is not critical with international
purchasing.


Difference #5: Firms that engage in global sourcing indicate they face more rapid changes to
product and process technology compared with firms that engage in international purchasing.
Survey respondents assessed the annual rate of change they face across seven competitive
factors: quality improvement, product and process technology development, price/cost
reduction, new product development cycle times, responsiveness to customer improvement
requirements, on-time delivery improvement, and overall customer service improvement
requirements. The two segments rate each competitive factor, statistically the same except for
the rate of product and process technology. International purchasing firms indicate their rate
of product and process technology change is stable to moderate while global sourcing firms
indicate their rate of change is moderate to dynamic. Furthermore, the global sourcing
segment indicates it faces greater competitive and customer pressure to improve continuously
in the introduction of new product and process technology. While cost improvement will

remain a primary driver behind worldwide sourcing activities, the need for new sources of
technology will drive some firms to pursue higher sourcing levels.


Difference #6: Firms that engage in global sourcing realize greater and varied benefits
compared with firms that engage in international purchasing.
Perhaps one of the most revealing and interesting differences between the international
purchasing and global sourcing segments is the perception each has regarding the benefits it
realizes from its sourcing efforts. Table I presents these benefits sorted by the difference
between the averages for the two segments. Firms that engage in global sourcing indicate
they realize all 16 benefits at a statistically higher level than firms that engage in international
purchasing. In fact, the overall average across all benefit areas is 30 percent higher for global
sourcing firms compared with the overall average for international purchasing firms.
One benefit that both segments rate highly is the ability to achieve a lower purchase price or
cost through worldwide sourcing. It is concluded that the initial benefits from international
purchasing are price focused and are often available from basic international purchasing
activities. However, many non-price benefits are only realized once a firm has taken steps to
integrate its sourcing activities. In particular, this includes greater access to product and
process technology, an outcome that is particularly critical given the more dynamic
technology changes that global sourcing firms face. Also, better management of supply chain
inventory is a benefit that global sourcing firms enjoy at higher levels. This is critical given
the emphasis that many firms place on managing costs and inventory investment across the
supply chain.


Difference #7: Firms that engage in global sourcing rely on a wider array of communication
tools to support their efforts compared with firms that engage in international purchasing.
Global participants will presumably take advantage of evolving Web-based communication
tools in the future.
Examples of other communication and coordination approaches identified during the field
research include regular strategy review meetings between locations and joint training
sessions involving worldwide team members. Project updates reported through an intranet,
negotiation planning sessions, and collocation of functional personnel to facilitate face-toface

interaction were also identified as effective approaches.


Difference #8: Firms that engage in global sourcing have in place more organizational
features to support their sourcing efforts compared with firms that engage in international
purchasing.

Consider several items that show the highest difference between the segments and why these
differences are important. Global sourcing firms conduct regular strategy review and
coordination sessions with worldwide procurement and other functional managers on a
regular basis, a feature showing the largest average difference between the groups. Review
sessions promote consistency by creating a common sourcing language and approaches
coordinated at higher organizational levels.
Another differentiating feature is the greater likelihood that firms pursuing global sourcing
will have access to the services provided by international purchasing offices (IPOs). These
offices help identify potential suppliers, solicit quotations, support negotiations, obtain
product samples, conduct supplier site visits, and manage technical and commercial concerns.
These offices also support many of the operational issues that are part of global sourcing.


Difference #9: Firms that engage in global sourcing rate key aspects of their sourcing process
as more similar across geographic locations and buying units compared with finns that
engage in international purchasing.
Survey respondents rated the degree of similarity or difference across their geographic
locations and buying units for twenty items. Eleven of the 20 items were rated as statistically
more similar across locations by the global sourcing segment, which Table III reports. The
remaining nine items demonstrated no statistical differences in their average rating between
the two segments. Items such as business culture, operating standards and procedures,
language, and social culture and laws received similar ratings in terms of similarity.
In the longer term, one of the most important outcomes from global sourcing may be the
sourcing consistency created by this process–a consistency that most firms now lack. Firms
engaged in international purchasing, which is typically an uncoordinated activity across
buying units or sites, are unlikely to ever achieve the sourcing consistency that global
sourcing firms achieve. Most of the items in Table III relate to sourcing approaches, practices,
and beliefs consistency, which in the final analysis may be the most powerful benefit that
firms realize from global integration.


Difference #10: Firms that engage in global sourcing rate certain factors as more critical to
their sourcing efforts compared with firms that engage in international purchasing.
An executive mandate or commitment to source globally along with the right organizational
structure that features central coordination, cross-functional teams, and plant-level
participation all show significant differences between the segments. The availability of
required information and data and the ability to identify common requirements, also
differentiating factors, reveals the importance of information as a success factor.

 

INTERNATIONAL PROCUREMENT:


TOPIC 2 : procedure and documentation in international purchasing
Methods of specifying requirements in international purchasing.
Specification:
A specification for an item has been defined as ‘a statement of the attributes
of a product or service. It is basically a description of an item, its dimensions, analysis,
performance or other relevant characteristics in sufficient detail to ensure that it will be
suitable in all aspects for the purpose for which it is intended.
There are two main approaches to specification that are performance and conformance.


1) The idea of performance specification is that a clear indication of the purpose, function,
application and performance expected of the supplied material or service is
communicated and the supplier is allowed or encouraged to provide an appropriate
product. In this case, the detailed specifications is in the hands of the supplier where
applicable, performance specifications are to be preferred in that they allow a wider
competition and enable suppliers to suggest new or improved ways of meeting the
requirements.


2) Design : Conformance specifications apply in situations where the buying organisation
lays down clear and unambiguous requirements that must be met (In this case the
specification is of the product, not the application). This type of specification is necessary
where for example items for incorporation in an assembly are required or where a
certain chemical product is to be acquired for a production process. It has been said that
specifications restrict innovation.
Additional methods of specification:
Can be done both manually and electronically.


Manual :
Use of brand or trade name: This will be applicable under the following circumstances:
When manufacturing process is secrete or covered by a patent
When manufacturing process of the vendor call a high degree of skill that cannot be
exactly defined in a specification
When only small quantities are bought so that the preparation of the specifications
by the buyer is impracticable
By sample: The sample can be provided either by buyer or seller and is useful method of
specification in relation to printing and some raw materials e.g. cloth. When sample
specifications are used:
The bulk must correspond with the sample in quality
The buyer must have a reasonable opportunity of comparing the bulky with the
sample
The goods must be free from any defect making their quality unsatisfactory which a
reasonable examination of the sample would not reveal.


The value of specifications:
Specification will ensure that


i.All commodities specified will be suitable for their intended purpose when put in place


ii.Materials is of a consistent quality at all times


iii.The inspection or testing to be applied to goods purchased is notified in advance to the
inspection section and to suppliers


iv.In respect of the purchase of the specified items, all suppliers will have the same date on
which to base the quotations


Guidelines to specifications:


i.Avoid over-specification: This may lead to goods becoming more expensive and also may be
difficult to find a manufacturer willing to quote


ii.Avoid under-specification since this may lead to inferior goods and services


iii.In order to be practicable, pay attention to convenience in handling and storage


iv.If there is to be inspection after delivery, the specifications ought to state what tests are to
be applied

v.If any special marking or packing is wanted, include the relevant instructions in the
specifications.


Procedures in international purchasing:


1. Identification of a need by the user(s) department


2. Send purchase order requisition to procurement department


3. Identification of overseas suppliers by the procurement function: This can be done by
use internet, import brokers, directories etc.


4. Send request for quotation to overseas suppliers


5. Receive proforma invoice (Commitment from Overseas suppliers to provide specified
goods to the buyer at specific prices).


6. Evaluate the suppliers


7. Select the supplier(s)


8. Write and place contracts


9. Obtain import declaration form (IDF)-This is an import control document provided by the
ministry of trade and industry to monitor imports into the country. It is mandatory for
importers to complete import declaration form at the time of placing import orders.


10. Receive bill of lading or airway bill from overseas supplier(s)


11. Notify the clearing agent at task of clearing the goods
12. Receive the goods from the transporting agent.
13. Pay the overseas supplier if the agreement is based on payment after receipt of the
goods.

Factors to consider when planning international purchasing:


The following factors generally hamper planning for international purchasing:


1)
International risks: These risks relate to


(a) Financial factors such as currency uncertainty, financial policy uncertainty and financial
effect of economic performance


(b) Economic factors such as performers of economic indicators etc


(c) Political factors such as radical changes in government composition or policies


(d) Operational environmental factors such as the legal structure of the country of export,
the rules and procedures governing international trade.


2)
Logistical barriers: Long distances mean increased transport costs and long delivery
times, hampering the supplier in rendering a service


3)
Customs regulations and duties: Import duties can disrupt prepared cost estimates at
very short notice, political motives in the importing country can hamper purchases on
specific foreign markets etc


4)
Nationalism: Local source preference is a factor that influences the development of an
international purchasing policy and strategy.


METHODS FOR CERTIFYING QAULITY OF GOODS IN INTERNATIONAL
PURCHASING


1. Inspection by KEBS
2. Exporter Iso certification
3. Export certification sticker
4. Goods declaration form
5. IDF control form


Criteria for deciding mode of transport for international purchasing:


1. Cost of the transport
2. The urgency of the material
3. Nature of the material
4. Distance covered
5. Availability of the means of transport5
6. Flexibility of the mode of transport
7. Reliability of the mode of transport
8.
Efficiency/effectiveness


Kenya Freight Clearance and Forwarding Procedures
1. Kenya Customs Clearance Procedure
Imports into Kenya undergo various tasks through Kenyan customs and Kenya Port Authority
during clearance of freights and cargo in Kenya. All this are procedures that freights and
cargo undergo and carried out by Kenya clearing ageants and Kenya Revenue Authority
(KRA) Customs officials.


1.1 Customs Declaration
All going well, prior to actual vessel arrival date in Mombasa, the shipping line lodges its
online manifest with customs (into Simba Tradex system) and the port authorities (port
KWATOS system). The manifest number pertaining to the concerned shipment on board of
the vessel is advised by the shipping line. Special attention has to be given to the place of
clearance (port / CFS (Container Freight Station) as this may differ depending on special
nature of the cargo (dangerous cargo) or special request from the importer as stated on the bill
of lading or granted by the ports authorities (see point 1.3 – Container Freight Station
consigning above).


Against the uploaded manifest, a customs entry is prepared on the Simba Tradex online
system by the importers clearing agent.
Parallel to this, once the manifest is uploaded by the shipping line, the original Bill of Lading
duly endorsed by the consignee (or the telex release) is submitted to the shipping line for
issuance and release of a delivery order. This is done after settlement of the local shipping
line charges. The shipping line has to ensure the delivery order is also uploaded online.
Uploaded entries are passed after either payment of duties or confirmation of exemption by
means of the exemption letter code in the customs system.


1.2 Customs Long Room Formalities
A customs folder is prepared by the clearing agents declaration team, and a set of documents
is


dispatched to customs long room in Mombasa where the documents are endorsed after being
checked by customs. Endorsed documents are dispatched to the point of final clearance, i.e.
Port of Mombasa (KPA) or nominated Container Freight Station to the resident customs
officers.
At the point of clearance the mode of verification is assigned by customs and executed i.e.
sight and release, direct release, normal verification, 100% verification, scanning, etc…


1.3 Customs Verification and / or Scanning
For scanning the container is loaded on a truck and passed through the scanning machines
either in the port or at the Container Freight Station. If the scanning image shows any
irregulaties, customs will usually proceed to do verification.


For customs verification containers have to be placed down, opened and stripped. If
verification is to be performed at a Container Freight Station, all cargo has to be transferred
to the respective Container Freight Station by the Container Freight Station operator.
A verification report, which must tally with the customs declaration, is inserted on the Tradex
– Simba system by the Customs Officer. If the results of the designated verification procedure
indicate any abnormalities then the customs will usually proceed for 100% verification. Any
discrepancies on value-quality-quantity or the finding of any undeclared items will lead to
customs raising an offence for which the outcomes are varied and guided by the customs
management act.


If cargo was not verified / scanned or if the results of this was a clean bill, customs can issue
a customs release order once it is confirmed that the delivery order obtained earlier is
reflecting online (indicating the clearing agent for which the cargo was checked by customs is
indeed to be released to this clearing agent).
1.4 KPA Pick Up Order or Container Freight Station Release order
A pick up order is generated via the Kwatos website, on line, for all consignments cleared
within the port of Mombasa. This pick up order is attached to the set of documents (which
includes the delivery order, passed customs entry, customs release order) and presented to
CDO (Customs Documentation Office) at Port.
Port Charges are then paid usually by deducting the clearing agents running account with the
port. Cargo can then be evacuated out of the port premises. Allocated truck and trailer must
be booked via kwatos for loading purposes.

Documentation in international purchasing
Introduction:
Documentation in international purchasing plays an important role in perfection of
commercial transactions. Both exporters and importers are duty bound to handle
documents properly. Documentation must be precise because slight discrepancies or
omissions may prevent merchandise from being exported, result in nonpayment, or even
result in the seizure of the shipment by customs. Collection documents are subject to
precise time limits and may not be honored by a bank if time has expired. Most


documentation are routinely handled by freight forwarders and customs brokers, but the
exporter is ultimately responsible for the accuracy of its contents.


1. Bills of exchange:


This is defined as ‘’unconditional order” in writing addressed by one person (the drawer) to
another (the drawee) signed by the person giving it (the drawer) requiring the person to
whom it is addressed to pay on demand, or at a fixed or determinable future time a sum
certain in money to or the order of a specified person or to the bearer (the payee). The bills
of exchange (often referred to as drafts) are used to establish a written legal undertaking to
pay a sum of money. Finance may be arranged in a number of ways using bills of exchange,
both for the buyer (drawee) and for the seller (drawer). The drawee signifies an agreement
to pay on the due date by writing an acceptance across the face of the bill. Bills of exchange
are widely used in international trade, partly since they are convenient tools for collecting
payment from traders abroad. After payment the discharged bill of exchange is retained by
the drawee as evidence of payment, in other words it becomes a receipt for money.


2. Letters of credit:


A letter of credit arrangement will be agreed upon in the contract of sale. The buyer
instructs a bank in his own country (the issuing bank) to open a credit with a bank in the
seller’s country (the advising bank) in favour of the seller, specifying the documents which
the seller has to deliver to the bank for him to receive payment. If the correct documents are
tendered by the seller during the currency of the letter of credit arrangement, the advising
bank pays him the purchase price or accepts his bill of exchange drawn on it, or negotiates
his bill of exchange, which is drawn on the buyer.
Types of letters of credit:
Letters of credit can be revocable or irrevocable, confirmed or unconfirmed. Whether the
credit is revocable or irrevocable depends on the commitment of the issuing bank. Whether
it is confirmed or unconfirmed depends on the commitment of the advising bank. These
commitments are undertaken to the seller, who is the beneficiary under the credit. There
are four main types of letters of credit, namely, the revocable, and unconfirmed letter of
credit, the irrevocable and unconfirmed letter of credit, the irrevocable and confirmed letter
of credit and the transferable letter of credit.


a) The revocable and unconfirmed letter of credit: Neither the issuing nor the advising is
committed to the seller nor as such the credit can be revoked at any time. This type of
credit affords little security to the seller that he will receive the purchase price through a
bank.


b) The irrevocable and unconfirmed letter of credit: In this case, the authority that the
buyer gives to the issuing bank is not revocable and the issuing bank is obliged to pay the
seller provided that he has tendered the correct document before the expiry of the
credit.


c) The irrevocable and confirmed letter of credit: In this type, the advising bank adds its
own confirmation of the credit to the seller. Thus, the seller has the certainty that a bank
in his own country will provide him the finance if the correct documents are tendered
within the time stipulated. The confirmation constitutes a conditional debt of the banker
i.e. a debt subject to the condition precedent that the seller tenders the specified
documents. A confirmed credit that has been notified cannot be cancelled by the bank
on the buyer’s instructions.


d) The transferable letter of credit: The parties to a contract of sale may agree that the
credit is transferable. The seller can use such credit to finance the supply transaction.
The buyer opens the credit in favour of the seller and the seller (who in the supply
transaction is the buyer) transfers the same credit to the supplier (who in the supply
transaction is the seller). This type of credit is used when a person buys goods for
immediate resale and wishes to use the proceeds of resale to pay the original seller.


3. Shipping documentation:


Numerous documents are required for shipping. The primary shipping documents entail:
1.
Air way bill: This is the consignment note used for carriage of goods by air. It is basically
a receipt for goods for dispatch and is prima facie evidence of the conditions of carriage.


2.
Bill of lading: This is a receipt for goods shipped on board a vessel, signed by the person
who contracts to carry them and stating the conditions in which the goods were
delivered to (and received by) the ship.


3.
Commercial invoice: This is a document used in foreign trade. It is used as a customs
declaration provided by the person or corporation that is exporting an item across
international borders.


4.
Certificate of origin:This is a declaration which states the country or countries of origin
of the goods. The certificate should include the name and address of the exporter, the
manufacturer, and importer, description of the goods as prescribed in invoice, signature
and seals of the authorizing organization.


5.
Insurance certificate: This is a document issued by insurance company/broker that is
used to verify the existence of insurance coverage under specific conditions granted to
litails of the packing of the goods. The documents are required by customs authorities to
enable them to make spot checks or more thorough checks on the contents of any
particularly content.


4. Customer documentation:
A customer (importer) is duty bound to submit to customs authorities import documents.
The prime Customer documentations comprise:
Import declaration form (IDF): This is an import control document provided by the
ministry of trade and industry to the importer.
Proforma invoice
Payment acknowledgement
Import license: This is a document issued by a national government to the importer
authorizing importation of certain special goods to its territory.
Custom import entry: This is a document that shows declaration of information on
imported goods.
Single administrative document (SAD) – C88: This is a document used to clear imports.
The C88 allows a legal declaration for the import of goods to be made on one form –
therefore the signatory takes responsibility for the import.
Clean report of findings (CRF): This is a report issued by an inspection firm, specifying
that the price has been verified and the goods have been inspected before shipment and
that both of these comply with the buyer’s specifications.


5. INCOTERMS:
Incoterms- which is an abbreviation for International Commercial Terms entail a set of rules
for interpreting trade terms in international trade. They were first published in the
international chamber of commerce (ICC) in 1936. They have been updated many times over
the years. The new incoterms 2010 became effective January 2011. The basic function of
Incoterms is to clarify how the
functions, costs and risks are divided between the buyer and
the seller in connection with delivery of the goods as required under a contract of sale. The
key issues relate to delivery, risks and costs. Each Incoterm clearly stipulates the
responsibilities of the seller and the buyer. Incoterms cover all types of transport systems,
including intermodal and multimodal. They only apply legally when both parties to the
contract agree. Incoterms are divided into four distinct groups.

 


INTERNATIONAL PROCUREMENT:

TOPIC 3 :SOURCING STRATEGIES IN INTERNATIONAL PURCHASING


Definition of sourcing
Sourcing is the process of identifying, selecting and developing suppliers.
The definition of sourcing can be simple or much more complex, the simple definition is “the
process involved in identifying potential vendors, conducting negotiations with them to and
then signing purchasing agreements with them to provide goods/or services that meet your
company’s needs”
Sourcing generally refers to those decisions determining how components will be supplied
for production and which production units will serve which particular markets. Multinational
firms have been pursuing integrated sourcing to a greater extent than before because such an
operation allows them to exploit their competitive advantages (Kotabe and Murray, 1990).
Sourcing can, next to the above, be defined as ‘the reorganization of tasks, functions and
services of an organization, whereby the more effective managing of organizational and
operational processes is the main issue (Huibers and Schut, 2006).
Huibers and Schut (2006) also state that ‘with sourcing, organizations can manage their
operational and organizational processes more effectively’. This can be done internally,
externally, national or international. Sourcing can be done by concentration of activities, by
transferring the execution of services or processes to an external party or by the transferring
business activities abroad. In other words sourcing can have many forms depending on the
organization it is applied to.


A. Counter trade:
This is a form of international cashless trade in which an order is placed by a purchaser to a supplier
in another country on condition that goods of equal proportions will be sold in the opposite
directions. The types of counter trade entail:


1.
Barter or Swap: This is a one off, direct, simultaneous exchange of goods or services between
trading partners without a cash transaction. The term ‘’swap” is used when goods are exchanged
to save transportation costs.


2.
Counter purchase: A country sells to a foreign country on the understanding that a set
percentage of the sale’s proceeds will be spent on importing goods produced in the country to
which goods are exported.


3.
Buy back or compensation: This occurs when the exporter agrees to accept, as full or partial
payment, products manufacturer the original exported product.


4.
Switch trade: This refers to the transfer of unused or unusable credit balances in one country to
overcome an imbalance of money by a trading partner in another country.


5. Offset trade: This is similar to counter purchase, except that the supplier can fulfil the
undertaking to import goods or services for a certain percentage value by dealing with any
company in the country to which the original goods were supplied.


Advantages of counter trade:


i.Acceptance of goods or services as payment can avoid exchange controls,


ii. promote trade with countries with nonconvertible currencies and


iii.reduce risks associated with unstable currencies


iv.It facilitates enterprise to enter into new or formerly closed markets;


v.expand business and sales volume and reduce the impact of foreign protectionism on overseas
business


vi.Countertrade has enabled participants to make fuller use of plant capacity, have longer production
runs, reduce unit expenses due to greater sales volume and find valuable outlets of declining
products.


Disadvantages of counter trade:


i.Negotiations tend to be longer and more complicated than conventional sales negotiations and must
sometimes be conducted with powerful government procurement agencies.


ii.Additional expenses, such as brokerage fees and other transaction costs, reduce the profitability of
countertrade


iii.Countertrade may give rise to pricing problems associated with the assignment of values to
products/commodities received in exchange


iv.Offset customer can, later become competitors


v.Commodity prices can vary widely during the lengthy periods of counter trade negotiation and
delivery.


B.
Reciprocal trading:


This is a mutual exchange of buyer’s and supplier’s products of advantages/privileges in commercial
relations. It is selling through the order book when a policy is adopted of giving preferences to those
suppliers who are also customers of the buying company. In order to perfect this form of transaction,
many countries across the globe agreed to form international reciprocal trade association (IRTA). This
is the global trade association for the modern trade and barter industry. IRTA promotes proper
accountability rules, equitable standards, ethics and governmental relations.


C.
Currency management:deration when buying abroad. This is because there is always a risk that
currencies will fluctuate and the buyer will end up
paying more than the original expectation.
The degree of involvement of the buyer in the management of currency will vary between one
organization and another. Large organizations e.g. multinational usually have a cooperate
treasury department that manages currency transactions.
Techniques of managing currency available to the buyer include:


1. Pay in own currency: A seller in foreign country may accept payment in the currency of the buyer.
This is possibly owing to the fact that the currency of the buyer is attractive at that market. The
disadvantage is that the seller may increase the price to protect the unfavorable involvement.


2. Paying in a mutually agreed currency that is not the currency of the country of the buyer nor the
seller


3. Inserting a clause in the contract e.g. this contract is subject to an exchange rate. If the exchange
rate exceeds this parameter, then the contract is re negotiated.


4. Inserting a clause in the contract that averages the sum of exchange rate at the time of signing
the contract and the time delivery.


5. Buying the currency and holding it until the time it is required.

4. Direct procurement:


A procuring entity may use direct procurement as allowed under subsection (2), (3) or (3) as long
as the purpose is not to avoid competition.


A procuring entity may use direct procurement if the following are satisfied:


i.
There is only one person who can supply the goods, works or services being procured


ii. There is no reasonable alternative or substitute for the goods, works or services


iii. There is an urgent need for the goods, works or services being procured


iv. Because of the urgency the other available methods are impractical


v. The circumstances that gave rise to the urgency were not foreseeable and were not the result of
dilatory conduct on the part of the procuring entity


The following procedure in line with direct procurement shall apply:


1. Need assessment


2. Sourcing supplier


3. The procuring entity may negotiate with a person for the supply of goods, works or services
being procured


4. Section 47 shall not apply to an amendment to a pre-existing contract if the amendment is for
the purpose of carrying out a direct procurement allowed under section 74(4)


5. The procuring entity shall not use direct procurement in a discriminatory manner


6. The resulting contract must be in writing and signed by both parties


5. Use of intermediaries
In in ternational business relationships there is often one more party, some kind of intermediary,
directly involved. Examples of intermediaries involved in international business relationships are the
manufacturer’s sales forte, distributors, agents and wholesalers (see e.g. Keegan, 1989, p. 443). The
usual way to explain the existence of an intermediary is to say that the intermediary is needed to
bridge over the gap between the seller and the buyer. The gap can tonsist of both place- and time


related factors, such as geographical distance and separation of production and consumption in time,
and of technological differences between the seller and 3
Thus, the fact that at least three parties are more or less involved in the
same business relationship
increases the complexity.

Effects of globalization


Define:
The worldwide movement geared toward integrating economic, financial, trade,
technological, environmental, political, ecological and
communications integration in order to
streamline global supply chain. . Globalization implies the opening of local , nationalistic
and international
perspectives to a broader outlook of an interconnected and interdependent
world with
free transfer of capital, goods and services across national frontiers. However, it
does not include unhindered movement of
labor and, as suggested by some economists, may
hurt smaller or fragile
economies if applied indiscriminately.
forces and political and macroeconomic forces.


a) Global Market Forces
There is tremendous growth potential in the foreign developing markets which has resulted in
intensified foreign competition in local markets which forces the small – and medium-sized
companies to upgrade their operations and even consider expanding internationally. There has also
been growth in foreign demand which necessitates the development of a global network of
manufacturing bases and markets. When the markets are global, the production-planning task of the
manager becomes difficult on one hand and allows more efficient utilization of resources on the
other. Few industries remain today in which the international product life-cycle theory still applies.
Product markets, particularly in technologically intensive industries, are changing rapidly. Product –
cycles are shrinking as customers demand new products faster. In addition, the advances in
communication and transportation technology give customers around the world immediate access to
the latest available products and technologies. Thus, manufacturers hoping to capture global
demand must introduce their new products simultaneously to all major markets. Furthermore, the
integration of product design and the development of related manufacturing processes have become
the key success factors in many high-technology industries, where fast product introduction and
extensive customization determine market success. As a result, companies must maintain production
facilities, pilot production plants, engineering resources and even Research and Development (R & D)
facilities all over the world. Apple Computer, for example, has built a global manufacturing and
engineering infrastructure with facilities in California, Ireland and Singapore. This network allows
Apple to introduce new products simultaneously in the American, European and Asian markets.
Companies use the state-of-the-art markets as learning grounds for product development and
effective production management, and then transfer this knowledge to their other production
facilities worldwide. This rationale explains why Mercedes-Benz decided recently to locate a huge
manufacturing plant in Vance, Alabama. The company recognizes that the United States is the stateof-the-art

market for sport utility vehicles. It plans to produce those vehicles at the Vance plant and
introduce them worldwide by 1997.


b) Technological Forces
A peculiar trend which was prevalent in the last decade, besides globalization, was a limited number
of producers which emerged due to diversity among products and uniformity across national
markets. Product diversity has increased as products have grown more complex and differentiated
and product life cycles have shortened. The share of the US market for high-technology goods
supplied by imports from foreign-based companies rose from a negligible 5 per cent to more than 20
percent with the last decade. Moreover, the sources of such imports expanded beyond Europe to
include Japan and the newly industrialized countries of Hong Kong, Singapore, South Korea and
Taiwan. There has been diffusion of technological knowledge and global low-cost manufacturing
locations have emerged. In response to this diffusion of technological capability, multinational firms
need to improve their ability to tap multiple sources of technology located in various countries. They
also must be able to absorb quickly, and commercialize effectively, new technologies that, in many
cases, were invented outside the firm thus overcoming the destructive and pervasive ‘not-inventedhere’

attitude and resulting inertia. There has been technology sharing and inter firm collaborations.
The well-known joint ventures in the auto industry between US and Japanese firms (GM-Toyota,
Chrysler-Mitsubishi, Ford-Mazda) followed a similar pattern. US firms needed to obtain first-hand
knowledge of Japanese production methods and accelerated product development cycles, while the
Japanese producers were seeking ways to overcome US trade barriers and gain access to the vast
American auto market. As competitive priorities in global products markets shift more towards
product customization and fast new product development, firms are realizing the importance of colocation

of manufacturing and product design facilities abroad. In certain product categories, such as
Application Specific Integrated Circuits (ASICs), this was the main motivation for establishing design
centres in foreign countries. Other industries such as pharmaceuticals and consumer electronics also
have taken this approach.


c) Global Cost Forces
New competitive priorities in manufacturing industries, that is product and process conformance
quality, delivery reliability and speed, customization and responsiveness to customers, have forced
companies to reprioritize the cost factors that drive their global operations strategies. The Total
Quality Management (TQM) revolution brought with it a focus on total quality costs, rather than just
direct labour costs. Companies realized that early activities such as product design and worker
training substantially impact production costs. They began to emphasize prevention rather than
inspection. In addition, they quantified the costs of poor design, low input quality and poor
workmanship by calculating internal and external failure costs. All these realizations placed access to
skilled workers and quality suppliers high on the priority list for firms competing on quality. Similarly,
Just-in-time (JIT) manufacturing methods, which companies widely adopted for the management of
mass production systems, emphasized the importance of frequent deliveries by nearby suppliers. A
number of high-technology industries have experienced dramatic growth in the capital intensity of
production facilities. A state-of-the-art semiconductor factory, for instance, costs close to half a
billion dollars. When R & D costs are included, the cost of production facilities for a new generation
of electronic products can easily exceed $ 1 billion. Similarly, huge numbers apply for the
development and production of new drugs in the pharmaceutical industry. Such high costs drive
firms to adopt an economies-of-scale strategy that concentrates production in a single location,
typically in a country that has the required labour and supplier infrastructures. They then achieve
high-capacity utilization of the capital-intensive facility by aggressively pursuing the global market.
Besides this the host government subsidies also become an important consideration


d) Political and Macroeconomic Forces

Getting hit with unexpected or unreasonable currency devaluations in the foreign countries in which
they operate is a nightmare for global operations managers. Managing exposure to changes in
nominal and real exchange rates is a task which the global operations manager must master. If the
economics are favourable, the firm may even go so far as to establish a supplier in a foreign country
where one does not yet exist. For example, if the local currency is chronically undervalued, it is to the
firm’s advantage to shift most of its sourcing to local vendors. In any case, the firm may still want to
source a limited amount of its inputs from less favourable suppliers in other countries if it feels that
maintaining an ongoing relationship may help in the future when strategies need to be reversed.
Becton Dickinson has built a global manufacturing network for its disposable syringe business, with
production facilities in the United States, Ireland, Mexico and Brazil. When the Mexican peso was
devalued, the company quickly shifted its production to the Mexican plant, thereby gaining a cost
advantage over its competitors’ US factories. The emergence of trading blocks in Europe (Europe
1992), North America (NAFTA), and the Pacific Rim has serious implications for the way firms A?
structure or rationalize their global manufacturing/sourcing networks. These trends are clearly
apparent in many industries. For instance, before 1992, 3M’s European plants turned out different
versions of the same product for the various European countries. Today, 3M manufacturing plants
produce goods for all of Europe and, in the process, realize significant cost savings. Similarly, Philips,
Thomson, Electrolux and Ford are in the process of creating pan-European networks of factories
(producing both components and finished goods). The trade protection mechanisms which exist in
the form of tariff and non-tariff barriers effect the global operation strategy; but these are readily
losing importance in the new borderless trade regime.
Effect of a Global Integrated Economy on Global Operations
Operations and logistics are forced to adapt to environment. The logistic framework is forced to
integrate its activities to meet the challenges of an integrated economy.


a) Geographical Integration
Geographical boundaries are losing their importance. Companies view their network of worldwide
facilities as a single entity. Implementing worldwide sourcing, establishing production sites on each
continent and selling in multiple markets all imply the existence of an operations and logistics
approach designed with more than national considerations in mind. This geographical integration has
been exploited by the regional economic integration, a very good example being the European
Union. After the integration process was triggered off on 1 January 1 1993. At that time, customs
duties between European Economic Community countries were abolished. This elimination of
borders caused companies to rethink their physical flow structures for Europe as a whole. The usual
practice of setting up sales subsidiaries in each country and creating country-specific logistics support
and production systems was no longer appropriate. For companies the production and marketing is
not restricted to one country but is global. Geographical integration becomes possible not only
because of data processing and communication technologies, but also thanks to an excellent
worldwide new means of transport. Express delivery services such as Federal Express, DHL, UPS and
TNT, with their planes, hubs, systems of collection, tracking and final delivery, allow companies to
send articles long distances, in the shortest time possible, and at a much lower cost compared to the
cost of carrying inventory.


b) Functional Integration
The world is moving at such a fast pace that the various functional activities are no longer sequential
and compartmentalized. The responsibilities of the global logistics and operations manager is not
limited to coordinating the physical flows relating to production distribution, or after sales service;
they are also responsible for functions such as research, development and marketing. This functional

integration improves flow management considerably. When setting up projects for developing new
models, automobile manufacturers such as Renault in Europe have two teams working together: one
from the R&D department and the other from the logistics group. The teams’ assignment is to
simulate the flows required in the procurement and manufacturing stages according to the elements
prepared by the research unit. The logistics department, for instance, can affect the automobile
design stage by recommending modifications in order to create savings in logistics.
c) Sectorial Integration
In traditional supply chains, suppliers, manufacturers, distributors and customers each work to
optimize their own logistics and operations. They acted in isolation concerned only with their part of
the flow system which resulted in creating problems and inefficiencies for other players in the
channel hampering the smooth flow all of which add cost to the total system. Leading firms, realizing
this situation, are beginning to extend their view beyond their corporate boundaries and work
cooperatively with all channel parties in an effort to optimize the entire system. This cross-boundary
cooperation is referred to as Sectorial Integration.

 

INTERNATIONAL PROCUREMENT:


TOPIC 4 :COMMERCIAL ASPECTS IN INTERNATIONAL CONTRACTING .
INCOTERMS.:


Incoterms
The Incoterms rules or International Commercial Terms are a series of pre-defined
commercial terms published by the
International Chamber of Commerce (ICC) that are
widely used in International
commercial transactions or procurement processes. A series of
three-letter trade terms related to common contractual sales practices, the Incoterms rules are
intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and practitioners
worldwide for the interpretation of most commonly used terms in international trade. They
are intended to reduce or remove altogether uncertainties arising from different interpretation
of the rules in different countries. As such they are regularly incorporated into sales
contracts
[1] worldwide.
First published in 1936, the Incoterms rules have been periodically updated, with the eighth
version-
Incoterms® 2010 [2]‘-having been published on January 1, 2011. “Incoterms” is a
registered
trademark of the ICC.
National Incoterms chambers.


Incoterms 2010.
The eighth published set of pre-defined terms, Incoterms 2010 defines 11 rules, reducing the
13 used in
Incoterms 2000[3] by introducing two new rules (“Delivered at Terminal”, DAT;
“Delivered at Place”, DAP) that replace four rules of the prior version (“Delivered at
Frontier”, DAF; “Delivered Ex Ship”, DES; “Delivered Ex Quay”, DEQ; “Delivered Duty
Unpaid”, DDU).
[4] In the prior version, the rules were divided into four categories, but the 11
pre-defined terms of
Incoterms 2010 are subdivided into two categories based only on
method of delivery
. The larger group of seven rules applies regardless of the method of
transport, with the smaller group of four being applicable only to sales that solely involve
transportation over water.

General Transport Terms


1. EXW – Ex Works (named place of delivery).
The Seller makes the goods available at his/her premises. This term places the maximum
obligation on the buyer and minimum obligations on the seller. The Ex Works term is often
used when making an initial quotation for the sale of goods without any costs included. EXW
means that a buyer incurs the risks for bringing the goods to their final destination. The seller
does not load the goods on collecting vehicles and does not clear them for export. If the seller
does load the goods, he does so at buyer’s risk and cost. If parties wish seller to be
responsible for the loading of the goods on departure and to bear the risk and all costs of such
loading, this must be made clear by adding explicit wording to this effect in the contract of
sale.
The buyer arranges the pickup of the freight from the supplier’s designated ship site, owns the
in-transit freight, and is responsible for clearing the goods through Customs. The buyer is
responsible for completing all the export documentation. Cost of goods sold transfers from
the seller to the buyer.


2. FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the
named place. It should be noted that the chosen place of delivery has an impact on the
obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s
premises, the seller is responsible for loading. If delivery occurs at any other place, the seller
is not responsible for unloading.
This term may be used irrespective of the mode of transport, including multimodal transport.
“Carrier” means any person who, in a contract of carriage, undertakes to perform or to
procure the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes.
If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed
to have fulfilled his obligation to deliver the goods when they are delivered to that person.


3. CPT – Carriage Paid To (named place of destination)
The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first
carrier at place of shipment in the country of Export. The Shipper is responsible for origin
costs including export clearance and freight costs for carriage to named place (usually
destination port or airport). Shipper not responsible for buying Insurance.
This term is used for all kind of shipments.


4. CIP – Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and
insurance to the named destination point, but risk passes when the goods are handed over to
the first carrier. CIP is used for intermodal deliveries & CIF is used for Sea .


5. DAT – Delivered at Terminal (named terminal at port or place of destination)
This term means that the seller covers all the costs of transport (export fees, carriage,
insurance, and destination port charges) and assumes all risk until after the goods are import
duty/taxes/customs costs.
DAP – Delivered at Place (named place of destination)
Can be used for any transport mode, or where there is more than one transport mode. The
seller is responsible for arranging carriage and for delivering the goods, ready for unloading
from the arriving conveyance, at the named place. Duties are not paid by the seller under this
term (An important difference from Delivered At Terminal DAT, where the buyer is
responsible for unloading.)
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer,
and pays all costs in bringing the goods to the destination including import duties and taxes.
The seller is not responsible for unloading. This term is often used in place of the nonIncoterm “Free In Store (FIS)”. This term places the maximum obligations on the seller and
minimum obligations on the buyer. With the delivery at the named place of destination all the
risks and responsibilities are transferred to the buyer and it is considered that the seller has
completed his obligations

The challenge of using Incoterms 2010
Incoterms 2010 consists of 11 terms which are as follows:
EXW (Ex-Works)
FCA (Free Carrier)
FAS (Free Alongside Ship)
FOB (Free On Board)
CFR (Carriage and Freight)
CIF (Carriage, Insurance and Freight)
CPT (Carriage Paid to)
CIP (Carriage and Insurance Paid to)
DAT (Delivered to Terminal)
DAP (Delivered to Place)
DDP (Delivered Duty Paid)
Incoterms (International Commercial Terms) are a set of statements which clarify which
costs, risks and responsibilities relating to the shipment of goods belong to the shipper, and
which belong to the buyer. The International Chamber of Commerce published a new set of
rules – Incoterms 2010 – which came into use in January 2010. Their relevant publication
(No. 715E) is well written and anyone involved in International Trade should obtain a copy.
There are now 11 Incoterms – and which one to use depends on the type of transport required,
the rules of the importing and exporting countries and the needs of the parties involved.
Since Incoterms are issued by a private organisation, they have no legal standing in their own
right. However, once included in a contract, the Incoterm used becomes legally binding on
both parties. The challenge here is that sometimes the implications of using a particular
incoterm is not fully understood and, in recent years, this has caused a number of problems.
For example, using an inaccurate Incoterm as part of a contract (even if all parties have
accepted that Incoterm) can render a Goods in Transit Insurance cover invalid.


Another common misconception is to agree to an Incoterm and to then build the contract
around that Incoterm. This practice is not recommended. It’s much better to find the incoterm
which best matches the contract conditions and use that. However, if there is a concern that
the Incoterm on its own fails to fully explain the different parameters agreed, then there is
nothing to stop you stating in the
contract which party carries which costs, risks and
responsibilities. This can help avoid future misunderstandings.
Please note that Incoterms cannot be used to determine ownership of goods. This is a detail
which must be clarified in the contract.
The consequences of not paying attention to such detail can be costly. Resolving any
disagreements may delay contract completion, or you could be liable for unexpected and
additional costs that dent your profit m

COMONDITY MARKETS
Definition of ‘Commodity Market’
A physical or virtual marketplace for buying, selling and trading raw or primary products. For
investors’ purposes there are currently about 50 major commodity markets worldwide that
facilitate investment trade in nearly 1000 primary commodities.
Commodities are split into two types: hard and soft commodities. Hard commodities are
typically natural resources that must be mined or extracted (gold, rubber, oil, etc.),
whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar,
soybeans, pork, etc.)
There are numerous ways to invest in commodities. An investor can purchase stock in
corporations whose business relies on commodities prices, or purchase mutual funds, index
funds or exchange-traded funds (ETFs) that have a focus on commodities-related
companies. The most direct way of investing in commodities is by buying into a futures
contract.

A commodity market is a market that trades in primary rather than manufactured products.


1.
Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar.


2. Hard commodities are mined, such as (
gold, rubber and oil). Investors access about 50 major
commodity markets worldwide with purely financial transactions increasingly outnumbering
physical trades in which goods are delivered.
Futures contracts are the oldest way of investing in
commodities. Futures are secured by physical assets.
[2] Commodity markets can include
physical trading and derivatives trading using
spot prices, forwards, futures, and options on futures.
Farmers have used a simple form of derivative trading in the commodity market for centuries
for price risk management.
[3]
A financial derivative is a financial instrument whose value is derived from a commodity termed
an
underlier.[2] Derivatives are either exchange-traded or over-the-counter (OTC). An increasing
number of derivatives are traded via
clearing houses some with Central Counterparty Clearing, which
provide clearing and settlement services on a futures exchange, as well as off-exchange in the
OTC market.


Derivatives such as futures contracts,
Swaps (1970s-), Exchange-traded Commodities (ETC)
(2003-), forward contracts have become the primary trading instruments in commodity
markets. Futures are traded on regulated
commodities exchanges. Over-the-counter (OTC)
contracts are “privately negotiated bilateral contracts entered into between the contracting
parties directly”.
[4] [5]
Exchange-traded funds (ETFs) began to feature commodities in 2003. Gold ETFs are based on
“electronic gold” that does not entail the ownership of physical bullion, with its added costs
of
insurance and storage in repositories such as the
London bullion market. According to the World
Gold Council
, ETFs allow investors to be exposed to the gold market without the risk of price
volatility associated with gold as a physical commodity.[6][7]

What drives commodity markets?
The commodity markets help to ensure some stability in price, especially through futures
contracts. These allow suppliers to lock in the price they’ll receive for their produce at a
future date; so the price is also fixed for the buyer.


1. Prices of the commodity martket The commodity prices quoted in the market,
therefore, are often the futures price for each commodity; the fixed price at which a
commodity will be traded at a specified point in time. Below are some key factors
affecting these prices:


2.
Supply and demand


3. Economic and political factors
Although commodities are normally traded on futures prices, economic events that happen
now will affect the levels of these prices. For example, political unrest in the Middle East
often causes the futures price of oil to fluctuate due to uncertainties on the supply side.


4. Weather
Agricultural commodities such as wheat or coffee will be heavily influenced by the weather,
as it controls the harvest. A poor harvest will result in low supply, causing rising prices.


5. The dollar
Commodities are normally priced in dollars, and generally move inversely to that currency. A
rising dollar is anti-inflationary, so it applies downward pressure on commodity prices.
Similarly, a falling dollar will usually apply upward pressure on commodity prices.


6.
Inflation and commodity prices
Commodities can be used as a natural hedge against inflation. If rapid inflation seems
imminent, you may see commodity prices rising very quickly – they may even provide the
first sign of inflation. This is because people will be moving money out of investments that
don’t offer a hedge against inflation and into the commodity markets, to protect their assets.


7.
Trading commodities
You can invest in commodities in different ways.
The spot market
Buying on the spot, or cash, market for commodities, means paying the commodity’s
producer for immediate delivery of the physical product. The spot price is the current market
price listed. Due to the large quantities traded, and the global range of these trades, set
standards are implemented and independently verified so that traders can exchange without
the need for a visual inspection.
Futures contracts
Delivery date
As commodities are physical goods, they will eventually need to be delivered (at least
theoretically) to fulfil their use. Commodities futures contracts therefore tend to have two or

more delivery dates per year, though the vast majority of trades will have closed in advance
of the delivery date.
Corn for example, has delivery dates in March, May, July, September and December each
year.
Futures investors tend to be speculators and are therefore unlikely to want to take physical
delivery of the product at the end of the trade; they’re more likely to sell it on to another
buyer before delivery is due.
Commodity price indices
A commodity price index is a weighted average of commodity prices, grouped to represent a
broad class of asset or a more specific subset. Depending on the index, the prices of the
constituent commodities may be spot or futures prices. Some examples of commodity indices
include:
The Continuous Commodity Index (CCI) comprises 17 commodity futures which are
continuously rebalanced to maintain an equal balance of 5.88% each. This gives a benchmark
of performance for commodities as an investment.
The S&P GSCI (formerly the Goldman Sachs Commodity Index) acts as a benchmark for
investment in the commodity markets, and its constituents are drawn from all commodity
sectors. This index is available to those invested in the Chicago Mercantile Exchange.
The Merrill Lynch Commodity Index (MLCX) contains commodities that are selected by
liquidity and then weighted according to the importance of each commodity in the global
economy.


To find out more about the purpose of indices and how they can be traded through
Negotiation:
Negotiation:
Definition:
This is the process whereby two or more parties decide what each will give and
take in an exchange between them. Negotiation can also be defined as any form of verbal
communication in which the participants seek to exploit their relative competitive advantages
and needs to achieve explicit objectives within the overall purpose of seeking to resolve
problems which are barriers to agreement.


Objectives of negotiation:
1. Certainty
The aim of contract negotiation is firstly to achieve certainty, to record what is being
supplied, when, in what quantities and to what standard, and what are the consequences of
delay or failure to meet the agreed requirements. Many disputes are caused by the failure of
the parties to define at the beginning of their relationship exactly what is going to happen in
case of a dispute.


2. The best deal
Seeking clarity does not conflict with the view that negotiations should achieve the best deal,
it merely points out that both parties to a negotiation have to understand what it is that they
have agreed to. Many disputes have their origins in a lack of clarity. Careful discussions of
each element of the deal also ensure that each party’s objectives are acknowledged and dealt
with. Negotiators should aim for a win-win solution which benefits both parties.


3. Achievement of an Organization’s objectives
The goal of every negotiation must be to achieve a result which, even if it falls short of the
original objective can be considered a satisfactory advancement towards it. Compromise is an
essential feature of most successful negotiations: each party needs to walk away afterwards
feeling that he or she has gained. Although most people, when asked, will say that money is
the most important element in negotiation in practice it may be only one of a number of
elements. In most markets, quality, reliability of supply, the transform of “know-how” and
the creation of a long-term relationship will be of equal or greater importance.


4. Creation of a long-term relationship between the parties
Whilst this is not always possible, and some cultures, such as the Japanese, place more
emphasis on this aspect of negotiation this is increasingly important as companies build
networks of alliance partners. Partnering in industries like aerospace and IT is essential, due
to the complexity of the products and related projects. As the supply chain evolves into a
virtual organization partnering is becoming increasingly important in all industries.


Other objectives of negotiation:
1. To exert some control over the manner in which the contract is performed


2. To persuade the supplier to give maximum cooperation to the buyer’s company


3. To develop a sound and continuing relationship with competent suppliers: Buyers must
maintain a proper balance between their concern for a supplier’s immediate interest and
long-run performance.


4. To obtain a fair and reasonable price.
Approaches to Negotiation:
Approaches to negotiation may be classified as adversarial and partnership


 
Adversarial negotiation:
Also referred to as distributive or win-lose negotiation, is an approach in which the focus is
on ‘positions’ staked out by the participants in which the assumption is that every time one
party wins the other loses. As a result the other party is regarded as an adversary. The
characteristics of adversarial negotiation entail:


a) Parties have competing goals
b) Involves use of threats

c) In case of deadlock, negotiation is terminated
d) The approach is rigid
e) The attitude is that of we must win, they must lose.
2.
Partnership negotiation:
Also referred to as integrative or win-win negotiation, is an approach in which the focus is on
the merits of the issues identified by the participants in which the assumption is that through
creative problem solving one or both parties can gain without the other having to lose. Since
the other party is regarded as a partner rather than an adversary the participants may be more
willing to share concerns, ideas and expectations.

The characteristics of partnership
negotiation entail:


a) Common goals emphasized upon.
b) Negotiation is friendly and based on openness
c) In case of a deadlock, negotiation results to further problem solving
d) The approach is flexible
e) The attitude is we both must win.

Negotiation strategies
Negotiation is where these and numerous other questions should be answered. If the contract
does not address these questions, or is not clear, they will be answered by applying the law of
whatever country or international convention has been chosen to govern the contract.
Negotiation is the fulcrum of commercial transactions. When parties consider buying or
selling, importing or exporting goods, it is with the intention of gaining something that will
benefit their bottom line. These gains are often at the expense of other parties who have their
own gains in mind. The final agreement on what will be exchanged is often the result of
rounds of negotiations full of concessions: some voluntary and some based on foreign
legislation (for example, some countries dictate local owners must retain 51 percent of legal
ownership of a venture).


1)
Hire a consultant If there is no in-house expertise skilled in the international negotiation
arena, retain one to help. If cost is an issue, purchase literature or search online to subscribe
to an accredited expert.


2)
Choose your team wisely Consider a small, competent team to manage expenses,
schedules and communication more effectively, especially if travel is necessary. Also, if there
is a language or cultural barrier, be sure to include a translator and/or customary expert as
part of your team.


3) Gauge your counterpart’s bargaining power and negotiation style Usually one party has
substantially more to gain or lose from an international venture. Over or underestimating the
balance of bargaining power can result in unnecessary concessions or failed negotiations.
Similarly, if you approach negotiations too aggressively and your counterpart is more
passive, or if you are technically focused and they are financially focused, the business
venture will not seem like a good fit.


4)
Meet them in person If at all possible, it is important to meet with prospective parties
face-to-face. Be conscientious of cultural norms. Be on time, dress in appropriate attire and
demonstrate proper manners and respect. First appearances go a long way in establishing the
tone and trust level for further negotiations. Similarly, choosing a neutral site or persuading
them to come to your home territory can help you overcome or address cultural biases.


5)
Fix the agenda and keep detailed records In addition to being perceived as professional
and informed, an agenda (or a checklist) helps keep time, expenses and schedules in check,
limits the number of issues that can be overlooked, keeps further rounds on track, and
provides reference for future negotiations. This content is an excerpt from the Legal Aspects
of International Trade textbook. Enhance your knowledge and credibility with the leading
international trade training and certification experts.

Styles to negotiation:
Negotiation styles vary with the person, their beliefs and skills, as well as the general context
in which they occur. Here are a number of different styles considered from different
viewpoints.


a) Belief-based styles:
There is a common spectrum of negotiation that ranges from collaborative to competitive. The
approach taken is generally based on:


i. The spectrum of negotiation styles from concession to competition.
ii. Collaborative negotiation: Negotiating for win-win.
iii. Competitive negotiation Negotiating for win-lose.
iv. Balanced negotiation walking between collaborative and competitive.


b) Professional styles:
Professional styles are those used by people who have a significant element of negotiation in
their roles. Here is a selection of different contexts in which such negotiation takes place.
i. Industrial relations: Confrontational bargaining.


ii.
Managing board: Together and competing.


iii. International: Diplomatic dancing.


iv. Political: Scheming horse-trading.


v. Selling and buying: Professional sellers and buyers.


vi. Hostage: Emotional big-stakes exchanges.


c) Contextual styles:
Negotiation often happens within non-professional contexts, where the people either do not
know that they are negotiating or they are not skilled at it.


i. Domestic: Discussions and arguments at home.
ii. Every day: Everybody, every day, negotiates.
Although negotiation styles can be classified as
competitive or collaborative, in practice there are
a range of styles, based on the degree to which a person thinks about them self or thinks
about the other person.


d) Consideration for self:
Considering yourself in negotiation is natural and reasonable — after all, the main point is to
get something that you want. In particular, if you care little about the other person or the
relationship, then you will prioritize your needs actions above those of others.
Excessive consideration for self leads to a Machiavellian approach, where the end justifies
the means. Overt aggression, intimidation and coercive deception are considered normal and

necessary and destroying the other person in some way may be a symbol of your victory over
them.


e) Consideration for others
Consideration for others will depend on your values, which are often based on your beliefs about
people
. In particular, if you put yourself down (for example if you have low self-esteem) or
you escalate the importance of others too highly, then you will think considerably more about
the other person and prioritize their needs well above your own.
Excessive consideration for others leads to relentless concession, where you create a lose-win
situation with you as the loser. You may even lose elements of the relationship as giving
away too much can just end up in you losing respect. Some people like being the
victim, but it
is no way to conduct a negotiation.


f) A middle way
Between concession and competition lies balance, although in practice this may be more
dynamic and variable than may be expected. Thus, what should be a highly collaborative
negotiation may become a balanced negotiation even with
competitive elements. Shared
values are commonly used, however, to protect the relationship and ensure fair play. At
worst, some
third person is called in to ensure a reasonable balance.


Ploys of Negotiation:
A ploy is defined in the Oxford English Dictionary as ‘a cunning act performed to gain an
advantage’. A ploy can also be defined a manoeuvre in a negotiation aimed at achieving a
particular result. A number of standard ploys are often used in commercial negotiations. They
are worth knowing about – you may not wish to use such tactics yourself but you will
certainly wish to know you’re your opponent is using a ploy against you.
Here are some of the more common ploys:


1.
The bogey: This is a buyer’s ploy. The buyer assures the seller that he or she loves the
product but has a very limited budget, so that in order for a sale to occur the seller must
reduce the price.
The idea is to test the credibility of the seller’s price. The seller might react positively by
revealing information about costing, so that you can force the price downwards. It may
also provoke the seller to look at your real needs.


2. Minimum order ploy:
This is a ploy used by the seller whereby the seller maximises the value of the order by
placing restrictions or conditions on the order the buyer has placed.


3. Over and under ploy:
This ploy is a handy response to a demand made by your opponent. For example, your
opponent might demand that you reduce your price by 5% if they pay your invoice within

seven days. You could respond with an ‘over and under’: ‘if you agree to a 5% premium
for late payment’.


4. Quivering quill:
This is a ploy used by buyers in which the buyer demands concessions at the very point of
closing the deal. At this point, the buyer is about to sign the contract and suddenly
demands, for example, 3% off the purchase price. When the seller expresses
unwillingness to agree, the buyer threatens not to sign the contract. A typical result is that
the seller is pressured into giving a 1.5% reduction on the purchase price.


5. Shock opening:
This is a negotiation ploy designed to pressure the opponent. The other negotiator starts
with a price that is much higher than you expected. If they back up their opening price
with a credible reason for it, one has to review his/her expectations.


Negotiation Cycle
This shows the cyclical nature of events in the process of negotiation ie Get the facts,
determine the bargaining strengths, set objectives, plan strategies/tactics, negotiate and
review performance.


Phases of Negotiation:
Negotiation falls into three distinct phases: pre-negotiation, the actual negotiation and postnegotiation.
1.
Pre-negotiation: In this phase the matters to be determined are as follows:


Who is to negotiate, what is to be negotiated, determination of venue, gathering intelligence
and most importantly tactic and strategy.
2. The actual negotiation (meeting phase):


a) Stage one: Introductions, agreement of an agenda and rules of procedure
The major aim of this stage is to establish atmosphere conducive to agreement. This
may include an impression of wishing to work to a mutually advantageous goal, the
physical arrangement of venue, restating areas of agreement and so on.


b) Stage two: Ascertaining the negotiation range: This is the start of the debate stage
where the issues which the negotiation will attempt to resolve are ascertained. With
adversarial negotiations this may be a lengthy stage since the participants often
overstates their opening positions. However with partnership negotiation, there is
more openness that saves time.


c) Stage three: Agreement of common goals which must be met if the negotiation is to
reach a successful outcome: This will usually require some movement of both sides
from the original negotiating range but the movement will be less or unnecessary in
partnership negotiations.


d) Identification of and, when possible, removal of barriers that prevent attainment of
agreed common goals: At this stage there will be:
Problem solving
Consideration of solutions put forward by each
Discertainment of what concessions can be made
It may be useful to: review what has been agreed, allow recess for each side to reconsider
Its position and make proposals or concessions which may enable further progress to
be made.
If no progress can be made it may be decided to:
Refer the issue back to higher management
Change the negotiators
Abandon the negotiations with the least possible damage to relationships


e) Agreement and closure: Drafting of a statement setting out as clearly as possible the
agreement(s) reached and circulating it to all parties for comment and signature.
3.
Post-negotiation:
Post-negotiation involves the following activities:

i. Drafting a statement detailing as clearly as possible the agreements reached and
circulating it to all parties for comment and signature
Selling the agreement to the constituents of both parties i.e. what has been agreed, why it
is the best possible agreement, what benefits will accrue.
Implementing the agreements, e.g. planning contracts, setting up joint implementation
teams, etc
Establishing procedures for monitoring the implementation of the agreements and dealing
with any problems that may arise.

Criteria for competitive and advantages and limitations (negotiating for prices):
Competitive criteria entail the analysis of how well a good or service meets the needs and
wants of its intended customers in comparison with competing goods or services.
Cost Evaluation Criteria
The Offeror’s cost proposal will be evaluated for reasonableness, cost realism, clarity of
presentation and completeness, as well as to the relative cost benefit to the government.
Cost proposals must have sufficient detail for evaluation in accordance with Public
procurement regulations.
Cost analysis will be used to review and evaluate the separate cost elements and the profit
line in the Offeror’s proposal in order to help judge how well the proposal’s costs
represent what the cost of the Task Order should be. This process will look at:


a) The necessity for, and reasonableness of, proposed costs, including allowances
for contingencies;


b.)Projection of the Offeror’s cost trends, on the basis of current and historical
cost or pricing data;


c.)Reasonableness of estimates generated by appropriately calibrated and
validated parametric models or cost-estimating relationships; and


d.)The application of audited or negotiated indirect cost rates, labour rates and
cost of money or other factors.


Delivery schedule criteria:
The buyers will be evaluating Suppliers who promise to deliver goods at a minimal lead time
in most cases. The suppliers who guarantees minimal period have the upper hand to get the
tender since some materials are invariably needed urgently by prospective buyers.


Terms of payment criteria:
The companies which gives out a reasonable terms of payment for materials/services in most
cases gets the tender to supply goods or services to the buying company.


Capacity guarantee criteria:
In negotiation the issue of supplier’s capacity is factored in and to this extent the prospective
buyer looks at the capability of the supplier to meet the underlined buyer’s requirements in a
given time period.


Negotiating for Prices:
There are times when the bid process cannot be used. When this occurs, prices must be
negotiated. Negotiation should be used when:


i. The purchase involves a significant amount of money or requires an ongoing effort. In
these situations, negotiation may be used in conjunction with a bid.
ii. The number of suppliers available is too limited to create competition via a bid.

iii. New technologies or processes are required for which a selling price has yet to be
determined.

iv. The supplier is required to make a substantial financial investment or other resources.
v. There is no enough time available to seek competitive bids.

When negotiating a price, it is important to remember to do a thorough investigation. Find
out as much as possible about the company. Be sure you understand your requirements fully
and how these might affect prices. Investigate the costs associated with providing the service
or materials you are requiring. Develop your own strategy for the negotiation and try to
anticipate the strategy of the supplier. Make sure the person you are negotiating with has the
authority to make offers and commit the supplier. Finally, remember that a successful
negotiation is a win-win for both parties. You must allow the supplier enough leeway to make
supplying the goods or services attractive. Ideally, the general advantage based on these
attributes is value addition to the whole transaction. Conversely, a limitation can come in
situation whereby the company does not have enough personnel to facilitate this task.


Termination Clauses
A major sticking point in negotiations may be contract provisions that protect you against
losses in the event of contract termination. Since September 11, the threat of a terrorist attack
can scuttle travel plans to troubled destinations. You ought to be able to cancel your meeting
and terminate
contracts without liability, and you ought to be able to get a refund on advance
deposits.
A
force majeure clause spells out the circumstances – civil strife, terrorist attacks, and other
occurrences beyond the control of either party – that allow you to terminate the contract
without either party being liable. An Act of God clause covers hurricanes and other natural
disasters. A separate clause should specify when deposits are refundable.
“One thing that I put in any international contract is the provision that I reserve the right to
cancel the event, should that area be placed on the U.S. State Department Advisory List,”
says Jonathan T. Howe, Esq., president and senior partner, Howe and Hutton, Ltd., Chicago.
“I would be very reluctant, especially in the environment we’re in now, not to have that
provision in the contract.”
Should it be a deal breaker? That depends on how much risk you’re willing to assume. For
associations, the problem is
attrition if attendees decide not to travel. They can avoid
penalties by requiring attendees to pay advance deposits. For corporations, the problem is
cancellation and loss of nonrefundable deposits. But because the planning time frame is
shorter, the risk is less.
If a property resists changing its contract – typically all of one page – it may be open to
including an addendum. Before signing, ask your insurer to review it. “In the end, it’s the
insurers who help you,” says Fitzgerald. “I want to know if they’re comfortable with it.” Also
you can explore getting extra coverage for terrorism.
“The topic of terrorism is a big issue right now – everyone is still grappling with how to deal
with it. Some of the big insurance companies in this industry have decided recently to cover
terrorism, but they limit the amount that they’ll cover, and it’s expensive,” Foster explains.
“So to a certain extent it’s still almost an uninsurable risk.…The cap on terrorism insurance
right now – what they’ll cover for losses – is $250,000. That may sound like a lot, but for an
association, the hope is that its meeting will make more money than that.”
Negotiating Meeting Requirements
Meeting facilities are convined in in many countries exporters and importers. Be specific
about your requirements. Provide sketches of your room setups and request room dimensions,
ceiling heights, and location of windows, mirrors, columns, and other obstructions.

Items that you’re accustomed to getting in the United States but have to negotiate hard to get
abroad include:


Guarantee/minimum night stay, usually 100 percent, but negotiable
Comp room ratio, as many as one per 25 per night, but not cumulative
VIP/staff room upgrades, provided you demonstrate value
Meal plan options, if you have food-and-beverage events
Free meeting space, if the property can resell unused time blocks
Comp move-in/move-out days, if you’re not incurring labor charges
“Just because I know that a certain property doesn’t negotiate on deposits, that doesn’t mean
I’m not going to ask them to do it,” says Foster. “I may be able to swap something else – give
them something that they want and get something that I want, which is a lower deposit.”
A good interpreter will help you understand the nuances of conversation with suppliers and
help ensure that you get what you ask for, when you asked for it. “Some people think that
‘mañana’ means tomorrow,” explains Howe. “But it really means “not today.” And in Japan,
if somebody says, ‘That may be difficult,’ you can take that as a no.”
Prices and Payment Policies
Foreign hotels may have limited meeting space, so it is customary to charge for rental, setup,
and turnover. Ask about what is included in price quotes and what additional charges you
may incur. Be aware of the value-added tax (VAT) rate – as much as 25 percent in some
countries – and how to obtain a refund. (See related article on VAT, page 26.)
Foster recommends protecting cash deposits against loss in the event that a property defaults.
There are three ways to do it: Send funds to the foreign hotel on the condition that the funds
are deposited in an interest-bearing escrow account; send the deposit to a U.S. affiliate of the
property to be held in escrow; or request a standby letter of credit for an amount equal to the
deposit. For any deposit, whether it’s local or overseas, try to negotiate a smaller amount that
can be paid closer to the event dates to avoid sending payment so far in advance.
Dispute Resolution
No matter how favorable the contract terms that you negotiate, disputes can still arise.
International arbitration is the method of choice for resolving these disputes. Stipulate where
the arbitration will take place (typically a neutral country) and what rules will apply. “It’s a
good way to go, because you don’t get tied up in the foreign country’s legal system,” advises
Foster.
Negotiation Basics
Do:
Give yourself time
If U.S. negotiations normally take four to six months, it could take a year or more for
an international event.

Do your homework
Research online and talk to others who have been to the destination.
Understand the culture
Cultural differences can impact what you get, when you get it, and how much you pay
for it.
Get local help
A tourism board, travel agent, customs broker, congress organizer, or your local
chapter/office can be your ally in negotiations.
Know with whom you’re dealing
Check references and inquire about the quality of services rendered.
Ask for English
Request English as the official language for negotiations and specify the English language contract as the prevailing document.
Define the terminology
State your requirements in descriptive terms rather than industry jargon.
Read the small print
Standard terms and conditions, rules and regulations may be referenced in the contract
but not attached. Review all referenced documents before signing.
Obtain insurance
Make sure your organization is ensured for losses outside the United States.
Don’t:
Assume it’s included
If what you need is not spelled out in the contract, it’s probably not included in the
price. The same is true for taxes, gratuities and service charges.
Agree to something you don’t understand
Ask questions, gather information and, if you’re unclear about something, ask again.
Sign a contract without examining a translation
Request copies of the contract in English and the language of the host country, then
compare the documents for consistency.
Be the ugly American
Arrogance, disrespect for cultural differences, or a “bull-in-the-china-shop” approach
will only hinder negotiations.

ISSUES IN INTERNATIONAL CONTRACT NEGOTIATION


1. Timeline too long
2. Currency agreement
3. Single currency conversion
4. Exchange rates
5. Challenges in case of disputes
6. Incoterms
7. Trading blocks
8. Eligibility
9. Communication problem

FINANCIAL ARRANGENETS IN INTERNATIONAL PURCHASING


1. Currency exchange rate
2. Currency availability
3. Common currency agreement
4. Convertibility
5. Eligibility
6. Single currency conversion
7. Errors, commissions and discounts allowable

21
8. Applicable taxes
9. Terms of payment
10.Incoterms


Exchange Rate Systems
Keynes (1923) set out the basic problem of international monetary
arrangements. No country acting alone can achieve both price and exchange
rate stability. Acting alone, a country must choose one outcome or the other.
If it fixes its currency to the currency of another country, it loses control of
its price level and rate of inflation, and may experience real costs of
appreciation or depreciation, as in Chile in the 1970s and early 1980s or in
Argentina recently. If it chooses domestic price stability,
the market sets its nominal exchange rate. Some institutional arrangement or
international agreement such as the gold standard resolves this problem by
permitting countries to fix exchange rates and
import low inflation. A metallic or fixed exchange rate standard, however,
makes prices move procyclically.
Efforts to avoid either fully fixed or flexible exchange rates using some type
of fixed but adjustable peg contributed to major crises. As Fischer (2001)
noted, intermediate exchange rate systems-those that are neither fixed
permanently nor floating-lost much of their appeal in the 1990s. At the end of
the decade, only 34 percent of the countries reporting to the IMF had an
intermediate system, down

from 62 percent in 1991.1 Some type of floating, usually a managed float, is
now the
most common system.


Standard economic theory does not give explicit answer to the question: What
is the optimal exchange rate system? It depends on country size, degree of
openness, international capital mobility, and other factors. Many recent policy
discussions conclude that, with capital mobility, pegged exchange rates
(including adjustable pegs and adjustable bands) are not durable. Breakdown
has often occurred in a crisis, after large expenditure for defense of the peg,
as in Mexico, Korea, Thailand, Indonesia,
Russia, and elsewhere.
Three important caveats are in order. First, the remaining choices of
exchange rate systems are often described as corner solutions. That
overstates the choice problem.
Many countries that float intervene to adjust the exchange rate. Political
pressures to do so are real, often strong and continuing, even if undesirable.
Second, there are few freely floating currencies. Those that do are mainly
currencies of large economies like the dollar and the euro. Third, floating is
not a fully specified policy until there is a rule for money growth such as
inflation targeting, Taylor’s rule, or some other restriction on the actions of
the monetary authority.


The common policy rule, if adopted by many countries, would reverse the
early postwar error of creating scores of central banks. Many former colonies
wanted to create their own money as evidence of their independence. The
benefit of having a central bank proved illusory and costly for countries that
experienced high rates of inflation and enlarged public sectors financed by

printing money. In many countries, a central bank was far more likely to
create problems than to solve them.


Role of the International Monetary Fund
What role would remain for the IMF? Countries that adopted the common
monetary system, either by fixing firmly to a major currency or adopting the
common inflation target, would be more stable. They would have to discipline
their fiscal policy to avoid excessive borrowing and to maintain the monetary
rule, if the IMF did not provide loans to sustain budget deficits. The
International Financial Institution Advisory Commission, which reported to the
U.S. Congress in March 2000, proposed major changes in international
financial institutions. In the commission’s view, the IMF’s two principal tasks
would be providing the public good of increased economic and financial
stability and greatly increasing the quantity, quality, and timeliness of
information about its member countries. The commission concluded that
most severe crises occurred in countries with weak banking systems and
adjustable pegged exchange rates. There are many reasons for the weakness
of banking systems in developing countries, but three are very common.
First, the banking or financial system is often used to support a development
plan, a subsidy system, and social transfers by lending at below market
interest rates to favored sectors or firms. China is currently an example, but
there are many others such as Korea or Indonesia. Second, many developing
countries are too small to offer local banks broadly diversified loan portfolios,
if banks lend only to domestic borrowers. Korea is the world’s 11th largest
economy, but its GDP is about the same of banking failures that insufficient
diversification is a major reason for bank failures.


Third, many developing countries permit their banks to borrow on short-term
loans from money center banks in the developed countries. When several of
these loans are not renewed, the banking system is forced to shrink and the
exchange rate depreciates and may collapse.
Crisis prevention or mitigation without subsidizing risk or introducing moral
hazard is one of its major duties. Reliance in the Commission Report was on
incentives both within the IMF and in the IMF’s dealings with its clients.
Improvements in the quantity, quality, and timeliness of information are
another type of public good. Given the IMF’s active role in surveillance and
the competence of its staff, publication of its reports strengthens markets.


Crisis and Default Resolution
The third topic in the proposed revision of international financial
arrangements is the resolution of financial crises and restructuring of
defaulted sovereign debt.
To facilitate the recycling of oil revenues in the 1970s, the U.S. Congress and
the British Parliament passed sovereign immunities legislation that
encouraged foreign governments to borrow using the contractual provisions
of U.S. or British law.
critics of the IMF proposal came from many quarters-banks and investment
funds, economists and legal experts, emerging nations, and the U.S. Treasury.
One common feature of the protests was opposition to an expanded role for
the IMF, whether by the institution itself or by the courts and committees it
might control.
And the critics claimed the proposal would increase the uncertainty that leads
to volatility in markets and result in less lending at higher costs for emerging

economies. Some feared that the policy objectives of dominant IMF members
would influence decisions. Some anticipated a conflict of interest, since the
IMF and other multilateral agencies are large creditors that may not be
forever immune to sharing in
A likely effect of debt restructuring, whether under IMF rules or not, is that
the price of the debt falls far below its price prior to the default. Many
institutional investors must sell the bonds once default occurs. These sales
and any panic selling drive down bond prices and may influence the
restructuring negotiations and the perceived risk in sovereign debt. Other
reasons for selling include debt that is held on margin and investment funds
that sell to pay off customers. A small volume of sales
in an illiquid market can cause a large price change.


This problem can be avoided if, at the time of default, the government
announces


(1) a minimum restructured value (or maximum write-down) at which it offers
to
restructure its debt and


(2) that the IMF has agreed to purchase for cash all debt offered during the
restructuring period at a price equal to 80 or 85 percent of the minimum
restructured value. The IMF’s offer expires when the restructuring ends The
IMF’s announcement would have two benefits. It would put a floor under the
price to which the debt would fall and, more importantly, it would increase the
demand for defaulted debt. The reason is that, given the IMF’s guarantee of a
floor, the bonds become the highest-grade collateral for a loan at 90 or 95
percent of the guarantee.

Speculators could earn attractive annualized returns by buying the bonds,
using them as collateral for a bank loan and exchanging them for the
restructured debt.
4


The two principal objections to the proposed floor price are
(1) the difficulty of deciding on the minimum restructured value at a time of
default and


(2) the risk of adverse or irresponsible behavior by the debtor, or political
instability, once the
IMF issues its guarantee. Both events would require the IMF to purchase debt
The second risk cannot be excluded, because the possibility of political
upheaval is always present. The debtor country may act to reduce the bonds’
price to the floor guarantee. This is a costly long-run tactic that arises only if
a country plays a one-time game.
In a default, the IMF must always project the growth rate, inflation rate,
interest rate, and other determinants of the minimum restructured value. It
does not lend without projecting, formally or informally, the possibility that
the program will fail.
The IMF is perhaps at lower risk if a program fails, because it pays out the
loan in a series of steps (tranches) and can stop payment. In fact, it usually
resumes payment after several months.

Ethical issue
Ethics(also known as moral philosophy) is a branch of philosophy which seeks to address
questions about morality; that is, about concepts such as good and bad, right and wrong,


justice, and virtue. Ethics can also be defined as rules or standards governing the conduct of
a person or the members
of a profession e.g. procurement function.
The following
guidelines ensure the ethics management program is operated in a
meaningful fashion:


1.
Recognize that managing ethics is a process: Ethics is a matter of values and associated
behaviours. Values are discerned through the process of ongoing reflection. Therefore,
ethics programs may seem more process-oriented than most management practices.
Managers tend to be sceptical of process-oriented activities, and instead prefer
processes focused on deliverables with measurements. However, experienced managers
realize that the deliverables of standard management practices (planning, organizing,
motivating, controlling) are only tangible representations of very process-oriented
practices. For example, the process of strategic planning is much more important than
the plan produced by the process. The same is true for ethics management. Ethics
programs do produce deliverables, e.g., codes, policies and procedures, budget items,
meeting minutes, authorization forms, newsletters, etc. However, the most important
aspect from an ethics management program is the process of reflection and dialogue
that produces these deliverables.


2.
The bottom line of an ethics program is accomplishing preferred behaviours in the
business.
As with any management practice, the most important outcome is behaviours preferred
by the organization. The best of ethical values and intentions are relatively meaningless
unless they generate fair and just behaviours in the workplace. That’s why practices that
generate lists of ethical values, or codes of ethics, must also generate policies,
procedures and training that translate those values to appropriate behaviours.


3.
The best way to handle ethical dilemmas is to avoid their occurrence in the first place.
That’s why practices such as developing codes of ethics and codes of conduct are so
important. Their development sensitizes employees to ethical considerations and
minimizes the chances of unethical behaviour occurring in the first place.


4. Make ethics decisions in groups, and make decisions public, as appropriate.
This usually produces better quality decisions by including diverse interests and
perspectives, and increases the credibility of the decision process and outcome by
reducing suspicion of unfair bias.


5.
Integrate ethics management with other management practices.
When developing the value s statement during strategic planning, include ethical values
preferred in the workplace. When developing personnel policies, reflect on what ethical
values you’d like to be most prominent in the organization’s culture and then design
policies to produce these behaviours.


6.
Use cross-functional teams when developing and implementing the ethics
management program.
It’s vital that the organization’s employees feel a sense of participation and ownership in
the program if they are to adhere to its ethical values. Therefore, include employees in
developing and operating the program.
Ethics(also known as moral philosophy) is a branch of
philosophy which seeks to address
questions about
morality; that is, about concepts such as good and bad, right and wrong,
justice, and virtue. Ethics can also be defined as rules or standards governing the conduct of
a person or the members of a profession e.g. procurement function.
Principles and standards:
Principles of Professional Ethics
Individuals acting in a professional capacity take on an additional burden of ethical
responsibility. For example, professional associations have codes of ethics that
prescribe required behaviour within the context of a professional practice such as
procurement, medicine, law, accounting, or engineering. These written codes
provide rules of conduct and standards of behaviour based on the principles of
Professional Ethics which include:

Impartiality; objectivity
Openness; full disclosure

 

Confidentiality
Due diligence / duty of care
Fidelity to professional responsibilities
Avoiding potential or apparent conflict of interest
Business gifts
Hospitality
Fair competition

Ethical standards:
The Code of Ethics and standard of Professional Conduct are the ethical cornerstone of
many companies across the globe. They are essential to company’s mission to lead the
global investment profession and critical to maintaining the public’s trust in the financial
markets.


The procurement ethical standards are:
1. all business must be conducted in the best interests of the State, avoiding any
situation which may impinge, or might be deemed to impinge, on impartiality;
2. public money must be spent efficiently and effectively and in accordance with
Government policies;
3. Agencies must purchase without favour or prejudice and maximise value in all
transactions;
4. Agencies must maintain confidentiality in all dealings; and
5. Government buyers involved in procurement must decline gifts, gratuities, or
any other benefits which may influence, or might be deemed to influence,
equity or impartiality.


Ethical practises in supply chain management:
1. Develop open, transparent and direct long-term stable relationships with suppliers
rather than relying on ‘arms length’ contracting and licensing agreements.
2. Avoid the attraction of searching for the cheapest labour and goods at the expense
of social and environmental responsibility.
3. Avoid frequently changing suppliers- this undermines their commitment to long term
progress on labour standards.
4. Develop a reasonable and agreed time frame for suppliers to meet standards as
specified in the company’s ethical purchasing strategy or code.
5. Avoid ‘cutting and running’ from high risk suppliers-engage suppliers to improve
conditions on an incremental basis.
Managing ethical issues in an organisation:


The following guidelines ensure the ethics management program is operated in a
meaningful fashion:
1.
Recognize that managing ethics is a process.
Ethics is a matter of values and associated behaviours. Values are discerned through the
process of ongoing reflection. Therefore, ethics programs may seem more process-oriented
than most management practices. Managers tend to be sceptical of process-oriented
activities, and instead prefer processes focused on deliverables with measurements.
However, experienced managers realize that the deliverables of standard management
practices (planning, organizing, motivating, controlling) are only tangible representations of
very process-oriented practices. For example, the process of strategic planning is much
more important than the plan produced by the process. The same is true for ethics
management. Ethics programs do produce deliverables, e.g., codes, policies and procedures,
budget items, meeting minutes, authorization forms, newsletters, etc. However, the most
important aspect from an ethics management program is the process of reflection and
dialogue that produces these deliverables.


2.
The bottom line of an ethics program is accomplishing preferred behaviours in the
workplace.
As with any management practice, the most important outcome is behaviours preferred by
the organization. The best of ethical values and intentions are relatively meaningless unless
they generate fair and just behaviours in the workplace. That’s why practices that generate
lists of ethical values, or codes of ethics, must also generate policies, procedures and
training that translate those values to appropriate behaviours.


3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place.
That’s why practices such as developing codes of ethics and codes of conduct are so
important. Their development sensitizes employees to ethical considerations and minimize
the chances of unethical behaviour occurring in the first place.


4.
Make ethics decisions in groups, and make decisions public, as appropriate.
This usually produces better quality decisions by including diverse interests and
perspectives, and increases the credibility of the decision process and outcome by reducing
suspicion of unfair bias.


5.
Integrate ethics management with other management practices.
When developing the values statement during strategic planning, include ethical values
preferred in the workplace. When developing personnel policies, reflect on what ethical
values you’d like to be most prominent in the organization’s culture and then design policies
to produce these behaviours.


6.
Use cross-functional teams when developing and implementing the ethics management
program.
It’s vital that the organization’s employees feel a sense of participation and ownership in the
program if they are to adhere to its ethical values. Therefore, include employees in
developing and operating the program.


7.
Note that trying to operate ethically and making a few mistakes is better than not trying
at all.
Some organizations have become widely known as operating in a highly ethical manner.
Unfortunately, it seems that when an organization achieves this strong public image, it’s
placed on a pedestal by some business ethics writers. All organizations are comprised of
people and people are not perfect. However, when a mistake is made by any of these
organizations, the organization has a long way to fall. In our increasingly critical society,
these organizations are accused of being hypocritical and they are soon pilloried by social
critics. Consequently, some leaders may fear sticking their necks out publicly to announce
an ethics management program. This is extremely unfortunate. It’s the trying that counts
and brings peace of mind not achieving an heroic status in society.
Ethical Issues in International purchasing


1. Trust
2.
Honesty
3. Lead Time
4. Products conformance
5. Eligibilty
6. Incoterms adherence
7. Conflict of interest

 

Impartiality; objectivity
Openness; full disclosure
Confidentiality
Due diligence / duty of care
Fidelity to professional responsibilities
Avoiding potential or apparent conflict of interest
Business gifts
Hospitality
Fair competition
7.

 

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