©African Institute of Research and Development Studies 2013

International Purchasing

STANDARD LECTURE NOTES

INTERNATIONAL PURCHASING

FOR

DIPLOMA IN SUPPLY CHAIN MANAGEMENT

MODULE III

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International Purchasing

INTERNATIONAL PURCHASING
Introduction
In today’s world, the economic order is rapidly evolving as players take the
field either as new participants or as older participants forging new
alliances. The European Common Market is on track to play a much larger
role in a United Europe that will have a combined Gross National Product
greater than the United States and a larger population to boot. Then there is
China, an emerging, yet powerful, economic force on the horizon, very intent
on building up its economic muscle. Countries making up the former Soviet
Union are emerging on the world scene as well as the reunification of
Germany, some with strategic materials.

Since firms export goods around the world, it would make sense to consider
buying from suppliers in those countries. In addition, it would be appropriate
to buy products from suppliers in the nation the many multinational firms
operation in, as a means of developing those nations as potential future
customers.

The big companies have been dealing with suppliers in leading industrial
nations of the world: Canada, England, France, West Germany, and Japan for
many years. Raw material imports such as metals, petroleum, agricultural
products, for example, have long been a big factor in industrial imports. A.
T. Kearney, Inc. in Boardroom Reports writes that in 1990, 80% of Fortune
1000 firms use international sourcing for components, a 50% increase from
five years earlier. There is no appearance that this trend will dramatically
reverse itself in the next century.

As lowest total cost of ownership becomes more of a competitive factor,

cost/competitive pressures make international sourcing a necessity for
survival. This relatively sudden development of a worldwide market has
important implications for purchasing managers.They now have greater
availability of supply and also a greater need for careful selection of sources,
some of which are thousands of miles away. That in turn calls for somewhat
different buying techniques and more knowledgeable and sophisticated
buyers. Dealing overseas requires a certain amount of cultural adaptation as
well as new financial skills. Although dealing in the international market
requires additional efforts due to the wide variability in quality, service, and
dependability, it can yield large rewards. The material which follows deal
with the opportunities and the challenges that face purchasing managers
entering the international market for suppliers.

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Raul Casilas in an article entitled "Foreign Sourcing: Is It for You?" suggests

the following questions be asked to determine if a part, product, or process is
a candidate for international sourcing:

 Does it quality as "high-volume" in your industry? Does it have a

long life (two to three years)?
 Does it lend itself to repetitive manufacturing or assembly?
 Is demand for the product fairly stable?
 Are specifications and drawings clear and well defined?
 Is technology not available domestically at a competitive price and
quality?
If the answers are yes, then buyers may want to evaluate the support
network within his or her firm to help with international buying.

Definitions:

International purchasing

International purchasing is the process of buying goods and services from

suppliers outside your firm or business unit’s country of operation

Global sourcing

Global sourcing refers to the proactive integration and coordination of

material and service requirements across worldwide business units, looking
at common items, processes, technologies, designs, sourcing practices, and
suppliers

Advantages of Having International Suppliers

Leenders and Fearon cite nine specific reasons to select a foreign supplier.
 Price

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 Quality

 Unavailability of Items Domestically

 Faster Delivery and Continuity of Supply

 Better Technical Service

 Technology’ Marketing Tool

 Tie-in with Offshore Subsidiaries

 Competitive Clout

Many of these concepts will be elaborated on below.

Cost/Price Benefits

Generally, offshore sources have been able to offer lower prices, particularly
on manufactured goods, because of lower labor, material, and overhead
costs. Total landed costs, including the cost of import taxes and
transportation for thousands of miles in some cases, and soft costs such as
communication, are often lower than those of U.S. suppliers of a wide range
of industrial supplies and equipment. Rising standards of living and pressure
from labor may eventually nullify that advantage in developed countries

Availability/Continuity of Supply

Increased worldwide demand for goods made it imperative that new sources
of supply be developed. Industry has become sharply aware of availability
particularly since the material shortages of 1973-75 and the oil embargoes of
the late 1970s. While key major shortages were not a problem during the
80s and 90s, there is potential for recurrence. In addition, many raw
materials are only available from foreign sources.

High Quality Technological Know How

For years, many people had the notion that foreign producers were
generally followers of international industry in quality standards and product
innovation. Purchasing managers consistently report the opposite in many
cases. Foreign vendors have displayed great flexibility in adapting their
manufacturing methods to special requirements; their products, particularly
machinery, are often far advanced over their competitors, and the quality of

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many products (e.g., stainless steel, high tolerance forging, precision ball
bearings) are often superior to that of higher priced domestic items. It has
often been stated that price is the initial motivator for offshore sourcing, and
high quality is a bonus that keeps them returning.

Greater Competition

The growth of commerce and industry in relatively underdeveloped or

politically isolated nations added to that of the already industrialized
countries has opened up new sources and new productive capacity.
Increased competition and availability have a powerful attraction for
professional buyers, particularly when they appear to be waning in their
normal markets.

Relative Ease of Communication

The development of almost instantaneous communication and rapid

transportation anywhere in the world has helped promote international
trade. A telephone call from New Orleans to Hong Kong, for example, takes
little more time than a call between New York and Chicago. FAX machines
and electronic data interchange (EDI) allow transmission of purchase orders
and drawings in minutes. Air shipments from Europe are made overnight. A
Nairobi purchasing manager wishing to visit the Paris plant of a supplier can
fly there on the Concorde in less time than it would take to drive to Boston.
It is not to say that there are not still communication problems that need to
be overcome such as language differences.

Market Entry

Virtually the whole world is a potential market for goods produced in the
United States, so it makes good economic and political sense to buy in that
market when it offers competitive advantages. For example, a computer
firm wishing to sell its products in Brazil must also buy from Brazil. Second,
most multinational corporations accept some responsibility for the economic
development of the nations in which they operate. Finally, a foreign country
may require a U.S. manufacturer that has a plant there to purchase a certain
amount of its product locally. This requirement is called local content and
was proposed by Congress in response to the flood of Japanese automobiles
in the 1980s.

Possible Problems

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Leenders and Fearon cite sixteen specific potential problem areas in dealing
with international suppliers Source Location and Evaluation
 Lead/Delivery Time
 Expediting

 Political and Labor Problems

 Hidden Costs

 Currency Fluctuations

 Payment Methods

 Quality

 Rejects

 Tariffs and Duties

 Paperwork Costs

 Legal Problems

 Transportation and Integrated Logistics

 Language

 Cultural and Social Customs

 Ethics

Many of these problems are elaborated on below.

Issuing a purchase order to a foreign supplier does not, however,

automatically guarantee irresistible prices, better service, high quality, bright
ideas, and so on. Suppliers must be as carefully researched and often more
so than domestic vendors are. Dealing with heretofore-unknown companies
in foreign markets present many difficulties and obstacles. Few are
insurmountable, however, and indeed present purchasing people with many
opportunities for improving their skills in negotiation, research, and finance.
These problems include such items as political stability, cultural and
language differences, currency fluctuations, lead times, inventory, and total
cost charges to name a few. Buyers must be aware and take steps to
protect against such obstacles if they are to be successful in offshore
procurement.

American Standard of Living

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Some economists believe that abandoning production to other countries will

not sustain high and rising wages under conditions of openness to
international competition leading to long-term impacts to the U.S. standard
of living. In additional to the loss of production capabilities, there are also
social and labor issues. Documentaries by the news media of working
conditions in some international plants have made Kenyan retailers sensitive
to working conditions (sweatshops) in other counties.

Production Issues

The United States is the only major nonmetric country in the world. This
frequently leads to manufacturing issues such as tolerance problems and
production specifications. Non-domestic suppliers also tend to be less
responsive to necessary design changes than do their domestic
counterparts. This could lead to potential rework or scrap costs which would
have to be added to the additional cost of doing business in the international
arena.

Political Issues

Any analysis prior to the establishment of a long-range overseas

procurement program should also include some consideration of political and
economic conditions in the country or region involved. Such a consideration
requires a thorough analysis of the country's history. Dimensions analyzed
should include government philosophy (i.e., totalitarian, communist,
democratic), stability of government, civil disorders, strikes, and war or
conflicts with neighboring countries. The importance of such research was
highlighted after the 1989 Tienaman Square massacre in the People's
Republic of China. Many U.S. firms had undertaken active trade with the
People's Republic of China, and there were signs of a more open China.
However, the suppression of individual rights by the Chinese army changed
the buying posture of certain U.S. firms. One director of purchasing stated:
"On a personal level I think it unethical to deal with people who act like that,"
he said, referring to the army's massacre of pro democracy agitators. "And
on a business level I feel that supplier assurance could have been
jeopardized.... The decision to halt purchasing will stand until something
changes over there." However, many others felt the need to try to maintain
relations. For example, General Electric's business was not disrupted in
China. GE sells its products in China and uses Chinese made plastic and
metal parts that it buys direct.

Cultural Differences

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Once the political history, philosophy, and trends are judged acceptable, the
culture is studied. Buyers must know and respect the culture and customs of
the nationals with whom they deal. A bit of valuable counsel is to know how
to communicate with foreign counterparts, preferably in their own language
but at least through skilled interpreters. The nature, customs, and ethics of
individuals and business organizations from different cultures can raise a
number of obstacles. Differences in culture, language, dialects, or
terminology may well result in miscommunication and cause problems.
Ignorance or disregard of these matters can lead to embarrassment at best
and harm to your own interests at worst. Examples of misunderstanding
abound:

1. In preparing Hertz Rent-a-Car advertisements for the German market, an

agency used the then widely known (in the U.S.) slogan, "Hertz Puts You in
the Driver's Seat." When rendered into German by an unskilled translator,
the idiomatic expression, intended to appeal to status conscious American
business people, came out as "Hertz Makes You the Chauffeur," which hardly
made it appealing to the even more status conscious German business
people.

2. After a few years of doing business with a Japanese company, an

American buyer sent the supplier's sales department a letter of cancellation,
only to receive a reply stating that they did not know the meaning of the
word "cancellation."

Currency Fluctuations
The absence of fixed exchange rates can be a problem. Currency
fluctuations can cause problems for overseas buyers. Much of the
increase/decrease in costs of buying abroad can be caused by the
depreciation/appreciation of the dollar in international markets. Currencies
are valued against one another, and the value of currency expressed in
terms of another currency is the exchange rate .

Currency rates do not remain constant but fluctuate in value against one
another based on relative supply and demand for its currency. This demand
is influenced by several economic factors including interest rates,
inflation/deflation, and relative trade balance. For example, if Kenya
drastically increased its exports, the dollar would eventually strengthen,
since offshore buyers would need to obtain Shillings to pay for Kenyan
exports received. Because drastic currency fluctuations would create havoc
in international trade, central banks intervene to buy or sell currency to
smooth out drastic fluctuations. These actions by central banks have led to
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the term "managed float" to describe the exchange rate system. Currencies
fluctuate freely but are managed by central banks.

Product prices can be divided into cost driven and market driven categories.
Cost driven prices are those where the supplier can set prices based on
his/her cost. Market driven prices are those where prices are set on a world
market, usually in U. S. dollars, and the supplier cannot sell at a higher
price. Some countries have currencies that are pegged to the U. S. dollar,
while other currencies float freely.

Experienced purchasers tend to move toward more active strategies to

manage exchange risks. These include risk sharing, using the forward or
futures market (hedging), negotiating currency fluctuation bands, and
consulting with financial specialists.

Terms, Insurance and Customs

Buyers always want to pay after receipt and inspection of the goods which is
normally found in our domestic market. However, in many countries
payment is made in advance. Payment for goods purchased overseas can be
made in a number of ways: payment in advance; payment after the seller
has delivered the purchased materials to the buyer's plant, as in regular
domestic buyer-seller transactions; and payment by letter of credit.

The latter method has for many years been the most common form of
settlement in the international market. Letters of credit are issued by the
purchaser's bank, and the supplier can draw against the credit upon
presentation of the required documents. With Letters of Credit, the
purchaser’s funds may be committed for a longer period of time than if a
domestic source were involved, and a cost is incurred in obtaining the letter
of credit.

There are two basic types:

(1)Irrevocable
(2)Revocable letter of credit.

A revocable letter of credit allows the buyer to change or cancel the letter
any time prior to execution without the seller's consent. For these
reasons it is seldom used. Irrevocable letters of credit may not be
changed or canceled without prior agreement of all parties involved in
the transaction. This feature offers great certainty to the seller, and such
letters can even be used as collateral.

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Letters of credit spell out the total amount of the purchase, the currency in
which payments are to be made, and what documents must accompany
each draft. Because the foreign supplier is generally responsible for
clearance of the shipment, the supplier must submit a bill of lading or airway
bill, a commercial invoice, a customs invoice, an insurance certificate, and
when required by U.S. Customs, inspection or analysis certificate.

When goods are dutiable, three types of rates may be assessed:

 Ad valorem is a percentage of the appraised value of the merchandise,

such as 5% ad valorem. This type of rate is the one most often
applied.
 Specific rate is a specified amount per unit of weight or other quantity
such as ten cents per dozen.
 Compound rate is a combination of both an ad valorem rate and a
specific rate, such as ten cents per pound plus 20% ad valorem.
Rates of duty for imported merchandise may also vary depending on the
country of origin. Certain rate concessions are reflected in the tariff
schedules for merchandise from least-developed countries. Most
merchandise is dutiable under the most favored national rates of the tariff
schedules. Free rates are also provided for many items in the tariff
schedules.

Transportation Issues

The quantity of additional inventory needed when purchasing from foreign

sources can be difficult to determine where transportation times are longer.
When comparing costs for domestic and international sourcing, the
differences in inventory-carrying costs should be added to the purchase
equation. The variability of shipping schedules, customs’ activities, and
potential for weather delays all add a level of risk in addition to cost.

Higher Costs of Doing Business

In addition to the problems defined above, there is also the need for
translators, communication problems, differences in business practices, the
distances involved in making site visits, time zone differences, ethics, all of
which add to the potential problems in dealing with international suppliers.

Countertrade Purchases

Countertrade occurs when the buyer is required to settle a purchase

transaction without paying in cash and usually links two normally unrelated

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transactions. Countertrade is primarily used in situations where a country

has a shortage of foreign exchange or a shortage of credit to finance their
desired trade flows. Typically the counterpurchase involves the sale of an
item to the foreign country and takes place where there are political or
balance-of-trade problems or where currency is not available. Forms of
countertrade, such as barter, have been used for centuries. Recently
countertrade has gained increasing attention, owing to several factors.
 Of the world's 171 countries, 141 or more demand countertrade
in some or all of their purchases.
 Countertrade represents over $150 billion in today's international
economy.

There are some advantages to countertrade as listed below:

 Avoids exchange controls.
 Enables selling to countries with inconvertible currencies.
 Opens marketing products in less-developed, cash-scrapped countries.
 Reduces some risk associated with unstable currency values.
 Enables company to enter new/closed markets, expand business
contacts and sales volume and dampen the impact of foreign
protectionism, expands use of plant capacity, larger production runs
and reduced per-unit expenses with greater sales volume.
 Opens new sources of attractive components and valuable outlets for
disposal of declining products.
 Engenders good will with foreign governments.
 However, there are also disadvantages as itemized below:
 Negotiations lengthier and more complex.
 Dealing with powerful government procurement agencies.
 Additional expenses (brokerage fees, transaction and procurement
costs).
 Difficulties with quality, availability and disposal of returning goods.
 Problem with assignment of values to exchanged products.
 Offsets entail further concern in the form of technology transfer
requirements, local procurement conditions that favor local suppliers
and rigidities that offsets introduce into the process. Offset customers
can become competitors later on.
 Countertrade agreements can be broken into four major categories:
 Barter/Swap;
 Offset/Counterpurchase;
 Buyback/Compensation; and
 Switch Trading.
Barter/Swap is the oldest and simplest form of countertrade and involves
the direct exchange of goods having offsetting values or an even swap
without any flow of money. Barter is an exchange of goods of equal value
whereas a swap is an exchange of like kind goods of equal value. A major
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problem with barter is that one party may receive goods it cannot use or it
receives less than the anticipated barter value. However, there have been
some innovative barter swaps, as when CBS provided the Chinese with sixty-
four hours of programming in return for thirty-two one-minute spots of
advertising which it sold to firms wishing to expand into the Chinese
markets.

Offset/counterpurchase refers to a percentage of the goods countertraded

in relation to the value of the product being sold. Counterpurchase
agreements require the initial exporter to purchase a specified value of
goods from the original importer during a specified time period. Cash is used
to make the individual purchases. Offset /counterpurchase is a form of
reciprocal buying. In order to sell in a particular country, the company
agrees to purchase a certain amount of product. For example, a major
aircraft manufacturer obtains a contract to sell planes to Spain and agrees to
purchase products worth 100 percent of the contract value in Spain. That is
an illustration of an offset purchase. It can be either direct were close
technologies exists between items sold and purchased or indirect where both
items are unrelated. Offsets are used as one part of the countertrade to
purchase governments and/or military-related exports.

Buyback/Compensation occurs when a firm supplies the technology,

equipment, and/or technical advice to build an operating plant in a country
and then takes a percentage of the output from the facility. The host
country assumes control of the facility after a number of years. To illustrate,
a car manufacturer builds a plant in Brazil and takes output as its payment.
Buybacks must include enough consideration for supervision and training of
the work force and management or the end product received may lack the
necessary quality, thus requiring significant additional investment by the
supplying company.

Switch trading involves the use of a third party to dispose of the goods
acquired in a countertrade transaction. One of the largest trade and barter
information bases is International Business Clearinghouse (IBC), which has a
worldwide network of businesses wishing to buy, sell, or trade goods and
services. Switch traders frequently receive substitute trade credits, which
can later be spent for cash on other products.

Costs involved in countertrade transactions consist of fees paid to agents,

such as trading companies, banks, and clearing houses. Additionally, there
is a discount from the perceived or negotiated fair market value of the goods
versus the value actually received. Purchasing departments are becoming a
more critical element in countertrade owing to their input on valuing the
products as well as on what products to buy. In most firms Purchasing tends
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to be the "resident expert" on disposing of surplus or unwanted material.

Generally, purchasing and marketing share responsibility for countertrade
programs, although recent trends point to more involvement of purchasing.
Creative countertrade can create future goods for new market niches,
greater flexibility and wider market possibilities and opens the door for
international investment and joint ventures for the future.

INTERNATIONAL INFORMATION SOURCES

Purchasing in foreign markets is a complex, sometimes very delicate, and

often frustrating process. Thus a good start toward success begins with
information gathering. There are many sources to which the buyer can turn.
Immediately at hand are the finance and traffic departments of the buyer's
company with which the purchasing department should closely coordinate its
overseas purchasing efforts. The foreign trade departments of major banks
are an excellent resource.

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Foreign embassies and Kenyan consulates abroad are also a source of help.
The Ministry of Trade and Industry publishes information on commodities by
country of origin. Publications from other sources that are quite helpful are
Foreign Commerce Handbook and An Introduction to Doing Import and
Export Business, Kenyan Chamber of Commerce; Banks list a number of
resources for locating international suppliers.

Locating a supplier once the determination to buy overseas has been made
can involve something as simple as a telephone call or as extensive as a
small research project. Just as with domestic suppliers, buyers can get
information on foreign products and producers from a number of sources.
Thorough evaluation of the supplier, however, is somewhat more difficult and
lengthy, as it may require consultation with other customers of a distant
supplier, obtaining and testing samples, or preferably, visiting overseas
plants if the producer's reputation is unknown.

Information sources include a variety of publications, from trade journals and

newspapers to directories of manufacturers and distributors to trade lists,
directory reports, and surveys from the Department of Commerce. One
guide to international purchasing procedures lists twenty major directories
on international trade. They include such volumes as The American Register
of Exporters and Importers, published in New York; Jane's Major Companies
of Europe, published in London; Dun and Bradstreet's World Marketing
Directory, published in New York; Directory of Swiss Manufacturers and
Products, published in Zurich; and the Bottin International Business Register,
published in France, which contains information on companies throughout
the world. These and other directories are available in World Trade Center
libraries which have been established in twenty-three major American cities.

Banks, airlines, and shipping companies have significant collections of data

on businesses in the countries they serve as well as information on local
customs and procedures.

Where there is no competitive advantage involved, purchasing managers of

other companies experienced in overseas buying are usually willing to help
newcomers to the field. Purchasers who are employed by companies with
offshore subsidiaries or licenses may find sourcing expertise in the desired
country.

Professional associations, such as the International Federation of Purchasing

and Materials Management (IFPMM) and the Institute for Supply Management
(formerly National Association of Purchasing Management) international
group can provide assistance. Both groups conduct sessions at their annual
conferences which discuss international purchasing.
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Direct and Indirect Buying

Whether to buy directly from overseas suppliers or indirectly through

intermediaries depends in large part on the volume and frequency of
purchases, the anticipated length of a relationship with a supplier, and the
availability of qualified buying personnel.

Small-volume or occasional purchasers most often use a variety of

middlemen: wholesalers, brokers, and selling agents for overseas
transactions. For a fee (which in the case of selling agents or
representatives is paid by the supplier), they will handle the basic details of a
purchase, including choice of a supplier when necessary.

These agents fall into four classes:

(1) Merchants

(2) Brokers

(3) Manufacturers' agents

(4) Independent agents

The buyer must realize that import merchants buy commodities from
abroad for their own accounts, assume financial risks, and carry inventory.
Thus goods purchased through the merchant are quite similar to a domestic
purchase. On the other hand, import brokers, acting as marriage brokers,
help buyers locate foreign sources but assume no financial risk and carry no
inventory.

Manufacturers' agents are representatives of foreign firms who are located in

the United States. They will handle all shipping and customs details but
assume no financial responsibility of the principals. Independent agents
located in foreign countries will act as agents for a fee. They typically have a
good working knowledge of the country and work on a commission basis.
The breadth of services varies widely among these intermediaries, so it is
important to know in advance whether their fees (which can run up to 25
percent of the value of the purchase) cover such important elements as
research on vendors, shipping costs, insurance, customs, administrative

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expenses, and degree of financial responsibility. Prudent buyers will also

make an effort to determine, preferably from their other customers, the
broker's or agent's performance record.

Trading Companies

Trading companies are larger organizations that offer even more

comprehensive services than do those of the specialists mentioned earlier.
They usually handle a broad spectrum of products from one or more
countries, ranging from small consumer goods on up to the most complex
types of machinery. Some, Mitsubishi of Japan for one, have offices all over
the world and maintain their own transportation and financial services.
Countries such as Hong Kong and South Korea have trading companies in
major U.S. cities. Many large U.S. firms that established trading companies
for export purposes as well as for purchases now offer their offshore
expertise to buyers outside their own companies. The Westinghouse Electric
Trading Company, located in Pittsburgh, offers this service.

Among the advantages cited for buying through trading companies are
greater efficiency and convenience, lower costs, shorter lead times, and
assurance of quality inasmuch as inspection is made before shipment and
the trading company remains responsible for unacceptable shipments. One
criticism is that the prices the companies obtain are seldom established on
the basis of costs. Instead, they are based on market levels at the time of
purchase, so that the buyer is deprived of the benefits of direct negotiation.
These different points of view underscore the need for extra care and
judgment in dealing with new and distant suppliers.

As transportation and communication improvements make the world market

even more compact and accessible, middlemen will assume a more
specialized role in international trade. Many American companies had well-
established networks for buying directly in Europe, Asia, Latin America, and
parts of Africa, after years of having sent purchasing personnel abroad on
individual buying trips. Some assigned responsibility for purchasing
requirements to existing buying departments in foreign subsidiaries; others
established separate buying offices that report directly to corporate
headquarters.

International manufacturers to facilitate internal sales in the United States

have established subsidiaries, such as NEC Americas and Hitachi Americas.
They are staffed with people who speak the local language. They serve to
buffer the buyer from both language and time zone problems.

Foreign Purchasing Offices

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When an organization’s purchases in a foreign country or region warrant

($10 to $20 million), consideration should be given to establishing a foreign
office. Foreign purchasing offices require a long-term commitment to
offshore buying. The major reasons are overall expense, foreign government
regulations and legal problems, and difficulties in local staffing. Logistic
problems also arise concerning location of the office. For example, possible
European sites would include London, Geneva, Frankfurt, and Paris. Foreign
restrictions further tighten the restrictions. In Tokyo, advance payment of
three to five years' rent may be required, while the Swiss limit the number of
work permits for foreign nationals. Employee motivation must be through
the local value system, and foreign titles and salary structures need to be
adopted. Dobler and Burt believe that there is a weakness of foreign offices,
in additional to cost, to represent the local supplier’s interests more than
those of the U.S. based purchasing firm.

Direct Purchasing

Dealing directly with the foreign supplier usually will result in the lowest
purchase price by eliminating the markups of international trade
intermediaries but it does require an investment in travel, communications,
logistics, and interpretation of costs.
Direct relations with the supplier should be undertaken only after carefully
conducting a cost/benefit analysis. The first step would to be identifying
potential suppliers. Potential direct international suppliers can be located
through a wide variety of sources mentioned above. Prior to investing
additional energy in dealing with a foreign supplier, country and regional
stability and potential supplier’s financial condition should be addressed. By
country and regional analysis, I am referring to the political and monetary
stability, currency transfer laws, and trade and product liability policies.
After you have selected the suppliers you want to deal with, step two
involves intercultural preparation, the hiring of a competent translator if one
does not exist in your firm, and an exhaustive technical and commercial
analysis. The intercultural preparation requires negotiation preparation over
and above that involved in domestic negotiations. In foreign dealings, the
negotiator needs to understand the needs and ways of thinking and acting,
of representatives of international firms. This will vary greatly from country
to country. The final preparation step would be to visit the potential
suppliers and review their facilities. The potential supplier may well be
judging the buying firm just as much as the buyer will be judging the
potential supplying firm.

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International Purchasing

STRATEGIC SOURCING
Strategic sourcing is an institutional procurement process that
continuously improves and re-evaluates the purchasing activities of a
company. In a production environment, it is often considered one component
of supply chain management. Strategic sourcing techniques are also applied
to nontraditional areas such as services or capital.

The steps in a strategic sourcing process are:

1. Assessment of a company's current spending (what is bought, where, at what

prices?).
2. Assessment of the supply market (who offers what?).

3. Total cost analyses (how much does it cost to provide those goods or
services?).

4. Identification of suitable suppliers.

5. Development of a sourcing strategy (where to purchase, considering demand

and supply situations, while minimizing risk and costs).

6. Negotiation with suppliers (products, service levels, prices, geographical

coverage, etc.).

7. Implementation of new supply structure.

8. Track results and restart assessment (continuous cycle).

9. Negotiate payment terms with vendors.

Sourcing plan

The sourcing plan is the result of all planning efforts on strategic sourcing.
Into this planning all sourcing events are organized and detailed with all
tactical and operational information such as, the sourcing team responsible
for each event, when is supposed to begin and end each RFX steps (RFI, RFP,
RFQ), the requirement, specifications of all services or materials and
negotiations/cost goals. The objective of sourcing plan is to manage time and
quality of the all sourcing events in the strategic sourcing program.

Sourcing optimization

Operations research is the discipline of applying advanced techniques to

help make better decisions. Optimization, in turn, utilizes mathematical

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International Purchasing

algorithms to rapidly solve a business problem by evaluating all possible

outcomes (or many outcomes) and selecting those ones that yield the best
solution.

When applied to sourcing and supply chain operations, optimization helps

the sourcing professional simultaneously evaluate thousands of different
procurement inputs. This evaluation can take into consideration the global
market, specific current supply chain conditions, and individual supplier
conditions, and offers alternatives to address the buyer’s sourcing goals.

Cooperative sourcing

Cooperative sourcing is a collaboration or negotiation of different companies,

which have similar business processes. To save costs, the competitors with
the best production function can insource the business process of the other
competitors. This is especially common in IT-oriented industries due to low to
no variable costs, e.g. banking. Since all of the negotiating parties can be
outsourcers or insourcers the main challenge in this collaboration is to find a
stable coalition and the company with the best production function. This is
difficult since the real production costs are hard to estimate and negotiators
might be tempted to portray their real cost much higher than they actually
are in order to demand higher fees for insourcing. High switching costs, costs
for searching potential cooperative sourcers, and negotiating often result in
inefficient solutions.

TERMS USED IN INTERNATIONAL PURCHASING

International commercial terms or Incoterms are a series of sales terms that
are used by businesses throughout the world. Incoterms are used to make
international trade easier. They are used to divide transaction costs and
responsibilities between buyer and seller. Incoterms were introduced in 1936
and they have been updated six times to reflect the developments in
international trade. The latest revisions are sometimes referred to as
Incoterms 2000. There are thirteen Incoterms that are used by businesses
and are used in four different areas.

Departure (Group E)

 EXW – Ex Works

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International Purchasing

EXW means Ex Works and is followed by a named place, for example EXW
Dallas. EXW means the seller's responsibility is to make the goods available
at the seller's premises. The seller is not responsible for loading the goods on
the vehicle provided by the buyer, who then bears the full cost involved in
bringing the goods from there to the desired destination.

Main Carriage Not Paid By Seller (Group F)

 FCA – Free Carrier

FCA means Free Carrier and is followed by a named place, for example FCA
Brownsville. FCA means the seller fulfills its obligation to deliver when it has
handed over the goods, cleared for export, into the charge of the carrier
named by the buyer at the named place. If no precise point is indicated by
the buyer, the seller may choose within the place or range stipulated where
the carrier shall take the goods into its charge.

 FAS – Free Alongside Ship

FAS means Free Alongside Ship and is followed by a named port of shipment,
for example FAS New York. FAS means the seller is responsible for the cost of
transporting and delivering goods alongside a vessel in a port in his country.
As the buyer has responsibility for export clearance, it is not a practical
incoterm for U.S. exports. FAS should be used only for ocean shipments since
risk and responsibility shift from seller to buyer when the goods are placed
within the reach of the ship's crane.

 FOB – Free On Board

FOB means Free On Board and is followed by the named port of shipment,
for example FOB Baltimore. With FOB the goods are placed on board the ship
by the seller at a port of shipment named in the sales agreement. The risk of
loss of or damage to the goods is transferred to the buyer when the goods
pass the ship's rail, i.e. off the dock and placed on the ship. The seller pays
the cost of loading the goods.

Main Carriage Paid By Seller (Group C)

 CFR - Cost And Freight

CFR means Cost and Freight and is followed by a named port of

destination, for example CFR Sydney. CFR requires the seller to pay
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International Purchasing

the costs and freight necessary to bring the goods to the named
destination, but the risk of loss or damage to the goods, as well as any
cost increases, are transferred from the seller to the buyer when the
goods pass the ship's rail in the port of shipment. Insurance is the
buyer's responsibility.

 CIF - Cost, Insurance And Freight

CIF means Cost, Insurance and Freight and is followed by a named port
of destination, for example CIF Miami. CIF is similar to CFR with the
additional requirement that the seller purchases insurance against the
risk of loss or damage to goods. The seller must pay the premium.
Insurance is important in international shipping, more than domestic
US shipping, because U.S. laws generally hold a common carrier to be
liable for lost or damaged goods.

 CPT – Carriage Paid To

CPT means Carried Paid To and is followed by a named place of

destination, for example CPT Kansas City. CPT means that the seller
must pay the freight for the carriage of the goods to the named
destination. The risk of loss or damage to the goods and any cost
increases transfers from the seller to the buyer when the goods have
been delivered to the custody of the first carrier, and not at the ship's
rail.

 CIP - Carriage And Insurance Paid To

CIP means Carriage And Insurance Paid To and is followed by a named

place of destination, for example CIP Boston. CIP has the same
incoterm meaning as CPT, but in addition the seller pays for the
insurance against loss of damage.

Arrival (Group D)

 DAF – Delivered At Frontier

DAF means Delivered At Frontier and is followed by a named place, for

example DAF El Paso. DAF means that the seller’s responsibility is
complete when the goods have arrived at the frontier but before the
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International Purchasing

customs border of the country named in the sales contract. This buyer
is responsible for the cost of the goods to clear customs.

 DES - Delivered Ex Ship

DES means Delivered Ex Ship and is followed by a named port of

destination, for example DES Vancouver. DES means the seller shall
make the goods available to the buyer on board the ship at the place
named in the sales contract. The cost of unloading the goods and
associated customs duties are paid by the buyer.

 DEQ - Delivered Ex Quay

DEQ means Delivered Ex Quay and is followed by a named port of

destination, for example DEQ Los Angeles. DEQ means the seller has
agreed to make the goods available to the buyer on the quay at the
place named in the sales contract.

 DDU – Delivered Duty Unpaid

DDU means Delivered Duty Unpaid and is followed by a named place

of destination, for example DDU Topeka. The seller has to bear the
costs involved in shipping the goods as well as the costs and risks of
carrying out customs formalities. The buyer pays the duty and has to
pay any additional costs caused by its failure to clear the goods for
import in time.

 DDP - Delivered Duty Paid

DDP means Delivered Duty Paid and is followed by a named place of

destination, for example DDP Bakersfield. The seller has to pay the costs
involved in shipping the goods as well as the costs and risks of carrying out
customs formalities. The seller pays the duty and the buyer has to pay any
additional costs caused by its failure to clear the goods for import in time.
DDP should not be used if the seller is unable to obtain an import license.

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INTERNATIONAL PAYMENT PROCEDURES
Details of purchasing procedure
International Purchasing
The specifications and number/quantity and delivery of
equipment, devices and materials are determined by the
department(s) that will be using the product(s) or
materials. The Purchasing Department conducts purchase
activities based on purchase requests submitted by
the/these department(s).

The Purchasing Department, at its sole discretion, selects

companies from which estimates will be sought. Suppliers
are selected from the files of "Companies with Previously
Established Business Relationships", "Companies from
Which Estimates Can Be Requested" and "Products and
Suppliers". Selection is made by comprehensively
evaluating such factors as the quality and performance of
the equipment, device(s) or materials to be purchased,
compatibility with existing facilities, degree of reliability,
product requirements including safety, delivery time, the
scale of the order, after-sale service and the company's
previous business record. As a rule, Osaka Gas asks several
companies to submit estimates. However, only one
company may be specified for estimate submission in such
special cases as those concerned with industrial property
rights, those requiring maximum levels of safety that only
one specific supplier can ensure, cases where only one
specific supplier can assure compatibility with existing
facilities, or in case of urgency.

As a rule, when requesting an estimate from a company

that it has selected, Osaka Gas will set out a specification
from listing Osaka Gas's requirements in respects of
quality, performance standard, size, inspection and method
of inspection. The selected companies will be asked to
submit cost estimates and specifications to Osaka Gas prior
to a specified date.

Specification sheets submitted by potential suppliers at

their own expense are checked by the Purchasing
Department and the department(s) that will be using the
product(s), in order to determine whether the required
standards are met by the product(s). All products must
pass this examination. During this process, Osaka Gas may
request additions or changes to the specifications.

After valid cost estimates and specifications have been

comprehensively evaluated in respect of price, technical
requirements, etc. Osaka Gas will commence negotiation
with the company with the most attractive proposal to
discuss
23 All rights the
reserved amount
©African of the
Institute of contract and
Research and other terms
Development and2013
Studies
conditions. The selection of such a company shall be made
by Osaka Gas at its sole discretion. Contract terms and
conditions will be decided upon mutual agreement.

The business will be established upon conclusion of a

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International Purchasing

INTERNATIONAL PURCHASING PAYMENT METHODS

There are many ways to make and receive payment in international trade. Due to the physical distances
between buyer and seller, and the fact that the transaction may have taken place without the two
parties actually meeting, minimizing exposure to risk is on the minds of both parties. The buyer wants to
make sure they receive their order in acceptable condition and on time, and the seller needs to know
they will get paid for it. Below is a table of the most popular payment methods for trade, according to
Alibaba.com member research:

Allocatio
Payment Details
n of Risk
TT or Cash  T/T is the easiest payment from and is
Advance typically used when samples or small
quantity shipments are transported by air.
 T/T is also used between buyers and sellers
who have already established a mutual trust,
as this negates the risks associated with this,
the fastest and cheapest form of payment.
 Documents like air waybills, commercial 100%
invoices and packing lists will be sent to you buyer risk
along with the shipment in the same aircraft.
 As soon as the shipment arrives, you, with
documentation, can clear the customs and
pick up the goods. Shipping happens only
after money is safely in seller's ****.
 It usually takes 3-4 days for such a wire
transfer anywhere in the world.

Letter of  The L/C is a guarantee, given by the buyer's Evenly

Credit (L/C) bank, that they will pay for the goods shared
exported, provided that the exporter can
provide a given set of documents in
accordance with clauses specified in the L/C
and in a timely manner.
 The technical term for letter of credit is
"Documentary Credit."
 Letters of credit deal in documents, not
goods. Thus, the process works both in favor
of both the buyer and the seller.
 Simply put, a letter of credit is a letter
written by the importer's bank to the
exporter. It verifies that the payment will be
guaranteed when the bank is presented with
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International Purchasing

concrete documents (bills of lading and

freight documents).
 Most letters of credit are "irrevocable" once
the importer has had them sent, which
means it cannot be changed unless both the
buyer and seller agree.
Escrow &  Escrow is a legal arrangement (and most Evenly
Alibaba.com's commonly a payment arrangement) whereby shared
money is delivered to a third party (called an
Escrow
escrow agent) to be held in trust (“in
escrow”) pending the fulfillment of
condition(s) in a contract, whereupon the
escrow agent will deliver the payment to the
proper recipient. Typically, escrow is used
when the Buyer and Seller are unknown to
each other.
Document The exporter ships the goods, and then gives the
Against documents (including the bill of lading necessary
to claim the goods at the foreign port) to his bank,
Payment/Bill
which will forward them to a bank in the buyer's
of Exchange Mainly
country, along with instructions on how to collect
(D/P) with
the money from the buyer. supplier
When the foreign bank receives the documents,
they will contact the buyer and provide documents
to the buyer only when the buyer pays.
Open Account Opposite situation to T/T: The exporter receives
payment only after the buyer has received and 100%
inspected the goods. seller risk

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