INTERNATIONAL PURCHASING KNEC NOTES

INTERNATIONAL PURCHASING

Course introduction

Introduction; Commercial consideration leading to international purchasing; procedures involved in international purchasing; customs procedures, Scope of international procurement environment, Stakeholders and their roles, The legal framework, commercial terms, management of currency and instruments Skills in international

procurement documentation involved in international purchasing; factors affecting international purchasing; associations and institutions concerned with international trading; their purposes and procedures: the role of commercials organisations; their purposes and procedures

Course aim

The aim of the course is to examine in depth the characteristics of international purchasing, the economic, commercial and political factors influencing this process and associated procedures and documentation.

Learning outcomes

Upon completion of this course you should be able to;

  • Discuss the challenges of international purchasing and recommend solutions
  • Formulate international purchasing strategies
  • Describe the procedures involved in identifying, evaluating and selecting suppliers in the international market.
  • Demonstrate knowledge of the various documents and instruments used in for payment of goods and services from overseas suppliers.
  • Discuss the functions of various regional trading blocs and their effects in global purchasing.
  • Assess the role of commercial and Government / quasi Government organizations in promotion of international trade.

 

 

LESSON 1

         INTRODUCTION TO INTERNATIONAL PURCHASING

Lesson outcome

At the end of this lesson, the student should understand and differentiate between international purchasing and global. Additionally, the student should clearly point out the reasons, benefits as well as risks associated with international purchasing

1.1 Introduction

Purchasing refers to a process which an enterprise or organization attempts to acquire materials or products in order to attain their goals. In the process of purchasing

the ownership and possession of goods will be transferred from the seller to

the buyer. The activities of purchasing include enquiry, an order, tracking the order,

supervising and accounting for an order, receiving goods, and making payment

1.2 Nature of International Purchasing

International purchasing involves a commercial transaction between a buyer and a supplier located in different countries .A review of the literature indicates that there are a number of  terms used to describe the purchasing process from suppliers outside the buying firms country. For instance foreign sourcing, international sourcing, international, worldwide sourcing and global have all been referred to in the literature to date. International sourcing has been defined Johnson and Wood (1996) as buying components and inputs anywhere in the world in such a way that the manufacturer puts out a much broader net rather than relying only on local sources.  Spekman (1991) cites global sourcing as the efficient use of worldwide human, material, energy, and capital resources. Mol (2000) provides a more general definition of global sourcing as finding and managing sources for production of final products on a world-wide basis. Trent (1991) argue that international purchasing involves commercial transaction between a buyer and a supplier located in different countries . Conversely ,global sourcing differs from international buying in scope and complexity; it involves proactively integrating and coordinating common items materials, process, technologies, design and suppliers across worldwide buying, design and operational locations. Furthermore, global sourcing requires horizontal integration between product design and development groups as well as between supply and demand planning activities. Global sourcing is a term used to a describe a strategy for buying goods and services from countries other than your own so that you can access significant benefits. This is because different parts of the world will be at different stages in their development and so have cost structures .It can also be because may own raw materials that are not available in your own country or are in short supply.

 

1.3 Reasons for International Purchasing

  • Access to raw materials. If your company uses raw materials that are not abundant in your own country then you can lower your supply risk sourcing globally if availability of those materials is greater elsewhere. Economies of scale in extraction can also mean lower prices even with extra cost of transport and duties factored in.
  • Access to cheaper wages. Manufacturing processes that are labour-intensive can be sourced more cheaply from countries where wages are lower than in your own country.
  • Reciprocal trading. Global sourcing works both ways as it involves both a buying organisation and a selling organization. If your company sells its products to a country that can also provide products that you want to buy then there may be an opportunity for doing a deal that offsets your sales and purchases to give you a better overall economic benefit.
  • Learning how to do business in another country. Knowing the culture and ways of working of other countries can be significant benefit when you to sell to them.
  • Stimulating competition domestically. Sometimes suppliers in your own country can become complacent if they think that they have a major share of the local market. Finding alternatives overseas can be a good way of attracting new entrants (or just threatening to do so) and shaking up the local market.
  • Increasing supply capacity. If there is a current or potential shortage of a key material or component for your own manufacturing operation then you may have a serious supply risk.
  • Take advantage of having a global organisation. If your own organisation is a global one then sourcing via your subsidiaries can be an excellent way to access global sources that may be difficult to tap to your own.
  • Availability of new technology.
  • Superior quality. Many companies praise the quality of international sourced products compared to domestic products.

 

1.4 Benefits of international purchasing

(a) Better prices

(b) Higher world class quality

(C) Counter trade

(d) Improved customer service

(e) Improved competition position

(f) Increased availability of suitable suppliers

 

 

1.5 Challenges faced in International Purchasing

 

– Hidden costs might erode the net earnings from global sourcing.

– Since global sourcing can mean lower responsiveness, there is a risk of lost sales.

– Quality problems might occur due to long distance relationships .

– Supply disruption due to poor infrastructure, communication, etc

– Long lead times

– Poor quality

– Security issues ( political instability, potential terrorist activities etc)

-Hidden costs due to changes in tarrifs, duties, taxes, etc

– Too much document eg bill of lading, certificate of origin, sales contract, certificate of compliance.

-Timely for negotiation is greatly increased

– Currency difficulties is experienced

 1.5.1 Overcoming challenges in International Purchasing

  • Developing a uniform currency. Different currency systems are used in different countries therefore it is important to develop a standard currency to be used in all countries.
  • Appointment of agents. Agents to be appointed should creditworthy so as not to mislead the importers and exporters.
  • Communication style. Business executive from different countries can encounter several barriers to effective communication besides obvious language difference so executive from other country may place a higher value on things such as facial expression instead of just the words that are being said. This will help to overcome the challenge in international purchasing.
  • Reducing risk in transit. This can be done through having competent insurance firm to insure goods on transit. This will help the supplier to have confidence in imports and exports.
  • Reducing time log. This is reducing the number of intermediaries so as to reduce the long time gap between the dispatch of goods exporter and their receipt and payment the importer.
  • Identifying a true market need. Identifying the true needs of large numbers of people in a foreign country is not easy, so you must come up with a solution in a such an effective way that it is benefit and not difficult to communicate. That will help to identify a true market need and also overcome challenges that are faced in international purchasing.
  • Rules and regulations. When overcoming challenges in international purchasing rules regarding licenses are to be regulated in order to ensure fair rules regarding imports.

1.6 International Sourcing Costs

  1. Material costs – price, setup, tooling, transaction and other costs related to the actual product

or service delivered

  1. Transportation costs -transportation, drayage, fuel surcharges and other fees included in a

freight rate

  1. Inventory carrying costs -warehousing, handling, taxes, insurance, depreciation, shrinkage,

obsolescence, and other costs associated with maintaining inventories, including the cost of

money or opportunity costs

  1. Cross-border taxes, tariffs, and duty costs – often referred to as landed costs, which are the

sum of duties, shipping, insurance and other fees and taxes for door-to-door delivery

  1. Supply and operational performance – the cost of noncompliance or underperformance,

which, if not managed properly, can offset any price variance gains attained shifting to an

offshore source.

  1. Supply and operational risks -including geopolitical factors, such as changes in country

leadership; tariff and policy changes; and instability caused war and/or terrorism or natural

disasters (e.g., typhoons, earthquakes) and disease, as in Severe Acute Respiratory Syndrome

(SARS), all of which may disrupt supply lines

1.7 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 different industries in various countries and provide vital information on suppliers

3) Directories: Directories are good sources of information and are often printed 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

 

1.8 Distinction between global sourcing and international sourcing

International purchasing involves a commercial transaction between a buyer and a supplier located in

different countries. A review of the literature indicates that there are a number of terms used to describe the purchasing process from suppliers outside the buying firm’s country. For instance foreign sourcing international sourcing, international purchasing worldwide sourcing and global sourcing have all been referred to in the literature to date. International sourcing has been defined Johnson and Wood (1996) as buying components and inputs anywhere in the world in such a way that the manufacturer puts out a much broader net rather than relying only on local sources.

Trent (1991) argue that international purchasing involves a commercial transaction between a buyer and a supplier located in different countries. Spekman (1991) cites global sourcing as the efficient sourcing as the efficient use of worldwide human , material, energy, and capital resources. Mol (2000) provides a more general definition of global sourcing as provides a more general definition of global sourcing as ‘ finding and managing sources for production for final products on a world-wide basis. Conversely,global sourcing differs from international buying in scope and complexity; it involves proactively integrating and coordinating common items, materials, processes, technologies, designs and suppliers across worldwide buying , design and operational locations. Furthermore ,global sourcing requires horizontal integration between product design and development groups as well as between supply and demand planning activities. Global sourcing is a term used to describe a strategy for buying goods and services from countries other than your own so that you access significant benefits . Global sourcing can help companies reduce their costs 10% to 35%. But sourcing decisions require companies to balance the tradeoffs of cost , performance and risk many of which are hidden.

Global sourcing entails identifying, evaluating, negotiating and configuring supply across multiple

geographies to reduce costs, maximize performance and mitigate risks. Sourcing is also a cornerstone

of total cost management (TCM), a technological and process framework for the optimal alignment,

management and control of the total cost of ownership (TCO) of supply relationship

 

Revision Questions

Example : Differentiate between international procurement and international purchase

Solution: International procurement, differs from international purchasing in scope and complexity, involves proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering, and operating locations. International procurement is not only

a starting point of logistical activities, but is also a set of managerial activities. The object of said activities is to accomplish the goals of manufacture or sale, which includes the choice of suppliers, confirming the quality and quantity, negotiating the price, and so on. The process of International procurement is a long-term strategy,

which includes the evaluation and selection of foreign potential suppliers, while international purchasing involves daily activities supporting manufacturing and services departments. In order to advance from the international purchasing stage to International procurement, the purchasing department must be elevated to a position where it can make more strategic decisions for the business.

 

EXERCISE 1. _what is international purchasing?

EXERCISE 2. _ Identify the major reason why more and more Kenyan organization

are sourcing for raw materials abroad even when material are locally available

EXERCISE 3. _ Identify and describe the major benefits of adopting an international sourcing procurement strategy

Further reading

Christopher M 1998 Logistics and Supply Chain Management 2nd Ed. Financial

Times, Pitman Publishing Current issues and news documents.

 

 

LESSON 2

PROCEDURES AND DOCUMENTATION IN INTERNATIONAL PURCHASING

Upon completing this topic, you should be able to:

  • Acquire knowledge of basic import process, documentation and the customs clearance procedure that organizations undergo when purchasing from overseas sources into Kenya.

 

2.1 INTRODUCTION

Exporting and importing are two sides of the same coin; both supply customers with products manufactured outside the country.

Exporting and importing requires an enormous amount of thought and attention to detail, especially documentation. If documents are missing or wrongly filled out then the transaction will be void.

 

2.2 Methods of specifying requirements in International Purchasing

  1. Performance specification -Defines the purpose of the goods or services in terms of how effectively it will perform.
  2. Technical specification –Are specifications that define the technical and physical characteristics and or measurement of a product such as physical aspects.
  3. Functional specification- Define the function, duty or role of the goods or services. Nominates what the goods or services or broadly required to do.

 

2.3 Procedures involved in International Purchasing

 

 2.3.1 Import/Export Process

The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an importer who is based in the country of import whereas the overseas based seller is referred to as an exporter. Thus an import is any good e.g. a commodity

or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale.

Import goods or services are provided to domestic consumers foreign producers.

An import in the receiving country is an export to the sending country.

 

The following is the procedure for the importation process

 

1.Obtaining Market Information

Before embarking an import business one need to obtain import information which can be obtained from:-

  • Kenya national chamber of commerce and industry
  • Export processing zone authority (EPZA)
  • Commercial attaché at the local bases embassies and high commissions
  • Joint Kenya Arab chamber of commerce
  • Established importers
  • Internet
  • Visiting potential markets and exhibitions

After deciding on goods to be bought and identifying the supplier, the importer follows the following procedure of importation

     2.Place an order with supplier.

Before placing an order for goods, an importer should ensure that

  • She/he has a trading license.
  • She/he has an import licence if required which can be obtained from KRA.
  • If it is food, drugs or chemical substance obtain permit, where necessary. This

can be obtained for Port Health Office or Pharmacy and Poisons Board.

  • If agricultural products, obtain plant import permit.
  • Determine the goods you need to import in respect of; description, quality,

specifications and quantity.

Finally, send out information to the identified supplier clearly stating the following:

  • Description of the goods.
  • Technical specifications
  • Quantity
  • Price
  • Delivery period
  • Regulatory requirements e.g quality standards, health and safety standards.
  1. Supplier arranges to meet the order, this stage entails;
  • Discussing with the importer and agree on terms and enter into a contract.
  • The importer advises the supplier on the bank s/he will use.
  • The importer makes payment arrangements according to the contract.
  1. The supplier prepares commercial invoice bill of lading, packing list and certificate

of compliance and sends to the importer.

Once the suppliers has complied with relevant regulations above then, Appoint clearing agent and forwards documents to them, the clearing agent does the following;

  1. Computes customs duty, port charges and transport charges and advises the importer,
  1. Makes arrangements for transport of the goods to the importer’s premises.
  2. Prepares custom declaration after obtaining all the necessary documents and lodges them with customs:

-This clearing documents are:- Electronic declaration form ( Form C – 52), commercial

-Invoice, bill of lading ,packing list, certificate of compliance and bank deposit.

-The clearing agent the self assessment taxes at the bank.

-The prepared documents are sent to the customs. Custom check the documents  and release the document for verification. Goods are verified custom and other interested regulatory bodies e.g KEBS. Goods are finally released to the buyer or agent.

 2.4 Methods of certifying quality of goods for International Markets   

(a) Issue of certification documents related material symbols

(b) Communications

©Review payment

(d) Advertising

(e) Warranty

(f) Opportunities for rating (raising) review on preferential terms

(g) Bonuses for engaging other review customers

(h) Organisation of an actual review and creation of working condition

 2.5 Factors considered in selecting International modes of transport

Selection of mode of transport largely depends on the following important factors

  • Cost of transport. Depends on place, time and type of transport to be used.
  • Value of the commodity is the first factor, which largely influences the cost of transportation and hence is the fundamental determinant so far as the selection of the mode of transport is concerned.
  • Size of the shipment. Depending upon the size of the shipment, the cost of transport is determined. The larger is the shipment the lesser the cost. Transport cost here increases at the decreasing rate.
  • Distance covered. Though transport cost shows variations depending on the distance covered the shipment but the transport cost increases at lower rate with the increase in the distance to be covered.
  • Speed and time go hand to hand. Consignment must reach in time and delivered to the consignee when needs it most. Speed may influence the selection of mode as well as determine the cost to a greater extent if the goods transported are to reach the destination at it is eariest.
  • Type of transport. There is direct relation between speed, transport cost and choice of mode of transport. Flexibility and serviceability of the form of transportation is also directly linked with the both the choice as well as cost. Air transport is the costliest. One usually does not go in for air transport unless the goods are necessary for the immediate life saving or they are not in the nature of highly perishable items. As compared to air transport, road transport is cheaper but if it is compared to rail and inland water transport it is costlier. Relatively rail transportation and thus will affect the selection of mode.
  • Flexibility and serviceability . Flexibility and serviceability of the form of transportation is also directly linked with both the choice as well as cost.

2.6 Method used to disputes in international purchasing

  • Negotiation- It is back and forth communication between the parties of the conflict with the goal of trying to find a solution.

Characteristics of Negotiation

(a) Voluntary

(b) Private and confidential

© Quick and expensive

(d) Informal and unstructured

(f) Parties control the process, make their own decisions and reach their own agreements (no third party decision maker)

(g) Negotiated agreements can be enforceable

(h) Can result in a win- win solution

  • Mediation- Is a voluntary process in which an impartial persons ( the mediator) helps with communication and promotes reconciliation between the parties which will allow them to reach a mutually acceptable agreement.

Characteristics of mediation

(a) Promotes communication and cooperation

(b) Provides a basis for you to resolve disputes on your own

©Voluntary, informal and flexible

(d) Private and confidential, avoiding public disclosure of personal or business problems

(f) Can result in a win- win solution

  • Arbitration- Is the submission of a disputed matter to an impartial person ( the arbitrator) for decision

Characteristics of Arbitration

(a) Can be used voluntary

(b) Private

© Usually quicker and less expensive than going to court, depending on applicable arbitration  rules.

(d) Each party will have opportunity to present evidence and make payment

  • Litigation (Going to court) – Is the use of the courts and civil justice system to result legal controversies. Litigation can be used to compel opposing party to participate in the solution.

Characteristics of Litigation

(a) Involuntary –a defendant must participate (no choice)

(b) Formal and structured rules of evidence and procedure

© Public – court proceedings and records are open

(d) The decision is based on the law

(e) The decision can be final and binding

(f) Right of appeal exists

(g) Losing party may pay cost

2.6.1 Factors to consider when selecting the appropriate method to settle dispute

  • Private and confidential or in a public court settling
  • Time
  • Informal settling and a more flexible process or one that is more format and has specific rules to follow
  • Personal control or decision made a judge or arbitrator
  • Costs
  • Maintaining relationships
  • Disputes decided on questions of law, resolved with business principles or a solution found through other fair yet practical means.
  • Binding( an agreement or promise) and easily enforceable ( An action which can be made effective)

   2.7 Procedures for clearing and forwarding goods from overseas suppliers

The supplier prepares commercial invoice bill of lading, packing list and certificate

of compliance and sends to the importer.

Once the suppliers has complied with relevant regulations above then, Appoint

clearing agent and forwards documents to them, the clearing agent does the following;

  1. Computes customs duty, port charges and transport charges and advises the importer,
  1. Makes arrangements for transport of the goods to the importer’s premises.
  2. Prepares custom declaration after obtaining all the necessary documents and lodges them with customs.

This clearing documents are:- Electronic declaration form ( Form C – 52), Commercial

Invoice, bill of lading , packing list, certificate of compliance and bank deposit.

The clearing agent the self assessment taxes at the bank.

The prepared documents are sent to the customs. Custom check the documents

and release the document for verification. Goods are verified custom and other interested regulatory bodies e.g KEBS. Goods are finally released to buyer or agent.

 

2.8 Documents used in international purchasing

  • Trade License – all importers should have trade licensed District trade development officer under ministry of trade and industry.
  • Code number – every importer should have a code member
  • Import license
  • Only need incase of a few items that are restricted for security , health or environment reasons
  • Product specification permits and certificates some products require special permits and certificate before they can be imported e.g. plants and plants products, drugs and pharmaceuticals live animals, used motor vehicles.
  • An invoice
  • Bill of lading – Document evidencing a contract of carriage of goods. The supplier sends the document to the buyer after he/she has passed goods into the carrier for shipping and they have acknowledged the receipt.
  • Bill of covering freight change.
  • Certificate of origin- Document indicating the country of origin of goods been imported usually issued exported countries official authority or other agencies designated the government where goods originate from.
  • CET- (Common External Tariff)- An identical rate of tariff imposed on good imported from countries outside the regional trade agreement area. E.g. East African community,  COMESA  e.t.c.
  • Import declaration form (IDF) – A form that is prepared clearing agent required for all imports.
  • It contains a summary of the information contained in the supporting documentation such as invoice, packing list, certificate of origin, sellers and importers names, addresses and related details
  • Letter of credit (L/C)- A specialist instrument of international trade designed to facilitate trade between the exporter and the importer. It’s issued the bank to the seller at the request of the buyer. It guarantees payment to the seller if the terms and conditions specified in the L/C are fulfilled.
  • Manifest- The detailed list of cargo been carried on bond a carrier. It contains quality, identity marks, consigner and consignee of each item.
  • Sales contract- Cater for different laws of languages of buyer and seller in different countries. Sets out the terms of sales transactions and guards against misunderstanding that could be costly in business. Includes of parties involved, description of goods involved, price , delivery terms, payment terms, duration of contract, obligation of sellers and buyers, dispute settlement procedures, definitions and interpretations within the contract.
  • Certificate of compliance- Processed different authorities such as KEBS and KEPHIS. Include certificate of conformity of analysis and phytosanitary certificate. Issued supplier country qualified personnel after inspecting goods and sends it to receiving country to prove compliance.
  • Release order- Issued port authority. Allow goods to be released to the importer or through clearing agent.
  • Pre shipment inspection Certificate. The mechanism involves audit of the quality of the goods, quantity being exported and prices; proposed and market prices; comparison and comparison of time of shipment. The inspection is undertaken SGS ( Societe’ Generale de Surveillance “ and other companies.

The process involves the following steps : SGS Representative examines the goods at the place of manufacture or assembly prior o dispatch to ensure compliance with description in sales contract and export documents.

Examination of goods as are being loaded into the ship or container. Issue of Clean Report of Findings ( CRF ) SGS to their principals if everything is in order, which with other export documents facilities payment. and customs

clearance. Issue of a Non – Negotiable Report of Findings (NNRF) when goods are shipped prior to inspection

ensure compliance with description in sales contract and export documents.

Examination of goods as are being loaded into the ship or container. Issue of Clean Report of Findings ( CRF ) SGS to their principals if everything is in order, which with other export documents facilities payment. and customs

clearance. Issue of a Non – Negotiable Report of Findings (NNRF) when goods are shipped prior to inspection

Revision question

Discuss the conditions to be met before issuing delivery order

Delivery Order (D/O) is issued upon the satisfaction of the following conditions:

-Payment of Freight Charges if not Pre-Paid

-Payment of Container Deposit and/or Demurrages if FCL

– Signing of a Container Guarantee

Payment of Other Charges e.g. Stripping of LCL

The Delivery Order then forms a part of the Cargo Clearance Documents including

the Approved Customs Entry and the Mombasa Port Release Order

Solution: … _

EXERCISE 1. _ Identify and describe the documents necessary to facilitate customs

clearance

EXERCISE 2. _Describe the concept of pre-shipment inspection of imports

EXERCISE 3. _Describe clearly the customs clearance procedure

 

 

Further reading

. Handbook On Importing And Exporting In Kenya (2011) government printers

 

 

 

 

LESSON 3

 

 SOURCING STRATEGIES IN INTERNATIONAL PURCHASING

 

Upon completing this topic, you should be able to:

  • Acquire knowledge to apply the sourcing strategies used in international purchasing and effects of globalization in international purchasing

 

 

3.1  Introduction

Sourcing strategies gives a number of advantages in international purchasing ie gives rise to systematic thinking ,helps coordinate activities ,helps prepare for exigencies, gives activity continuity, integrates functions and activities and helps in a continues review of operations and all this  helps international purchasing to run smoothly.

 

 3.2Sourcing strategies used in International Purchasing

The sourcing strategies used in international purchasing they are as following:

 

  1. Counter trade

Countertrade is quite simply the exchange of goods for goods, but it is also a barrier to free trade.

The simplest form of countertrade – barter – dates from ancient times, but more recently various other forms of countertrade have been used in trade between rich and not so rich countries. Due to shortages of foreign exchange and lack of markets for their products , many nations have engaged in countertrade.

For example, Iraq obtained warships from Italy in exchange for oil; Spain obtained Colombian coffee

in exchange for Spanish buses. Countertrade is a barrier to free trade because the sellers are obliged

to   take goods they would not otherwise buy, and in doing so, they close off a market from free and

open competition. It is estimated that countertrade presently accounts for about a quarter of all world trade.

Types Of Countertrade

  • barter
  • counter purchase
  • offset trading
  • switch trading
  • Buyback or compensation trading.

Barter

Barter is the direct exchange of goods between two parties. The advantage of barter is its simplicity.

One disadvantage is that unless goods are swapped simultaneously, one party is financing the other

until the exchange is complete. A second is that the goods exchanged may not be goods one or both

parties really want, or may be ones that are difficult to convert into cash.

 

Counter purchase or parallel barter

Counter purchase is a reciprocal buying agreement (not a direct exchange of goods). For example, the former Soviet Union purchased construction machinery from Japanese firm  Komatsu in return for Komatsu’s agreement to buy Siberian timber. The advantage is that both parties get goods they can use or sell.

The disadvantage, however, arises when one or both parties has to engage in a further transaction to

dispose of the goods to obtain more useful goods.

Offset trading

Offset trading is an obligation imposed on exporters governments which requires local industry to

be given the role of producing goods to offset the purchase price of expensive products.

Offset trading can be done through co-production, sub-contracting, joint ventures, licensing or turnkey arrangements.

Buyback or compensation trading

 

This is probably the most common form of countertrade. It usually consists of the export of a

technology package, the construction of an entire project or the provision of services a firm. The

buyer in return pays back the supplier delivering a share of the output of the project in the future.

For example, in 1980 the German, French, Italian and British governments subsidised companies to

construct a $US4 billion natural gas pipeline in the former Soviet Union . The former Soviet Union       paid for the project with natural gas.

Switching trading

Practice in which one company sells to another its obligation to make a purchase in a given country.

 

Advantages of counter trade

(a) Avoid exchange controls

(b) Promotes trade with countries with inconvertible currencies

© Reduces exchange risks of unstable currencies

(d) Enables entry to new or formerly closed markets

(e) Reduces foreign protectionism

Disadvantages of counter trade

(a)Quality is not of international standard so costly to the customer and trader

(b)Variety is low so marketing of what is limited

©Difficult to set prices and service quality

(d)Inconsistency of delivery and specification

©Difficult to revert to currency trading – so quality may decline further and therefore product is harder to market.

 

Purchasing contribution to countertrade

  • Purchasing can play a major role in counter trade by:
  • Identifying low costs sources of supply that may be exploited on a countertrade basis
  • Providing negotiation expertise when discussing countertrade agreement with oversees suppliers
  • Ensuring that payment in kind products are properly inspected before the counter trade agreement is signed thus guarding against the receipt of poor quality gods
  • Developing long term CT partnerships

2.Reciprocal trade

This is trade between two countries, usually based on an agreement that benefits both countries. This is trade between two parties wheretheir roles as seller and are interchangeable : each buys from and sells to the other

General: Exchange of equal or identical advantages or privileges, such as removal of travelling restriction between two countries.

Advantages of reciprocal trade

  1. Both the supplier and buyer may benefit from exchange of orders
  2. Both suppliers and buyers may obtain a greater understanding of problems, thus increasing goodwill
  3. More direct communication between suppliers and buyers may eliminate bad relations between them

Disadvantages of reciprocal trade

(a) All purchasing  factors such as lifecycle may not be considered.

(b) Marketing effort may slacken

©Disputes may arise where the respective values of purchases and sales become substantially different

(d) The opportunity to buy cheaper, better quality alternatives may be denied to buyers if they are tied a reciprocal agreement

(e) Difficulties may arise in finding alternative supplies is an emergency

(f) The morale of the buying staff may be adversely affected

 

  1. Direct purchase

Is a method which individuals can buy stock in a company directly from that company

 

Advantages of Direct purchasing

(a) No need to pay any broker fees or commissions

(b) There is reduced prices given the absence of additional

cost for transport, warehousing, handling, packaging, retail display and market

© Employment of less staff members

(d) Purchases are done in absence of quotations

 

Disadvantages of Direct purchasing

(a) The firm may spend money when making its small purchases

(b) There is no reasonable alternative for the goods, so the goods ends to be of good quality

© Because of the urgency the other available methods of procurements are impractical

 

  1. Use of Intermediaries ( Agents, wholesalers, distributors and retailers)

They make it possible for a company to deliver its product at the end user without needing to own the whole supply chain.

– Some business need the middlemen to deliver goods to the public.

 

3.3 Effects of Globalization in International Purchasing

They are positive and negative effects of globalization in international purchasing as follows:

 

3.3.1 Positive effects of globalization

(a)  Global competition encourages creativity and innovation and keeps prices for commodities / services in check

(b) Developing countries are able to reap the benefits of current technology without undergoing many of the growing pains associated with the development of these technologies

© There is greater access to foreign culture in the form of movies, music, food ,clothing and more

(d)Governments are able to better work together towards common goals now that there is an advantage in cooperation , an improved ability to interact and coordinate and a global awareness of issues

(e) Increase in media coverage draws the attention of the world to human right violations. This leads to improvement in human rights

 

3.3.2  Negative effects of globalization

The benefits of globalization is not universal. The rich are getting richer and the poor are becoming poorer

(a) Outsourcing while it provides jobs to a population in one country, take away those jobs from another country, leaving many without opportunities.

(b) Although different cultures are able to interact and share there ideas and innovations, everything is beginning to meld and their becomes a loss of tradition and culture.

© There is a greater chance a disease spreading.

(d) There is little international regulation

 

EXERCISE 1.  what is  counter trade?

EXERCISE 2.  Identify the major effects of globalisation in international purchasing

EXERCISE 3.  Identify and describe the types of counter trade

 

Further reading

  1. Saunders, J. Quoted in P. Smith, “International Marketing”, MBA notes, 1990, Hull

University,

 

 

 

LESSON 4:

 

   COMMERCIAL ASPECTS IN INTERNATIONAL CONTRACTING

 

Learning outcomes

Upon completing this topic, you should be able to:

  • identify the use of INCOTERMS in international trade as well as the different rules under INCOTERMS 2010.

 

4.1 Introduction

The Incoterms 2010 rules (International Commercial Terms) were developed the International Chamber of Commerce (ICC) as a uniform set of rules to clarify the costs, risks and obligations of buyers and sellers in international commercial transactions. Because they address issues relating to import and export, Incoterms

2010 rules are most appropriate for use in international shipping.

Incoterms 2010 rules are periodically revised and multiple versions are available for use contracting parties. The Incoterms 2010 rules became effective January 1, 2000, and remain in effect. The Incoterms 2010 rules are effective as of January

 

4.2 International Commercial terms (INCOTERMS)

The INCOTERMS rules were developed International chamber of commerce (ICC) as inform set of rules to clarify the costs ,risks and obligation of buyers and sellers in international commercial transactions. Because they address issues relating to import and export.

The terms are structured to increase incrementally the obligations (control, risk and cost) one  party while decreasing the obligations of the depending on the specific term chosen. Each term clarified which party is responsible for:

-Inland freight (transportation within the organization country

– Forwarder selection

– Export clearance

– Carrier selection and scheduling

-International freight

-Import clearance

-On-carriage (transportation within the destination country)

 

4.3 Terms used in INCOTERM of any mode of transport

  • EXW(Ex-warehouse /ex-store)-named place of loading

The seller makes the goods available at their premises. This term places the maximum obligation on the buyers and minimizes obligation on the seller.

Exw means that a buyer incurs the risks of bringing the good to the final distribution

  • FCA(free carrier)-named place of delivery

The seller delivers the goods, cleared for export at a named place

  • CIP (carriage and insurance paid)

The seller is required to obtain insurance for the goods in transit

  • DAT (delivered at terminal)

Named terminal at part or place of destination. This means that the seller covers all the cost of transport i.e (export fees, carriage etc) from mail carrier at the destination port

  • DDP (Delivered duty paid)-Named place of destination)

Seller is responsible for delivering the goods to the named place in the country and pay all costs for goods

4.4 Rules of sea and Inland water transport

 (a) FAS (free alongside ship)

The seller delivers when the goods are placed alongside the buyer vessel at the named part of

Shipment. This means that the buyer has to bear all costs and risks of loss or damage to the

       goods from that moment. This term allows the seller to clear the goods from export on the b

(b)FOB (free on board)

Means that the seller pays the delivery of goods to the vessel including loading. The seller

     must also arrange for export clearance

©CFR(cost and freight)

The seller pays for the carriage of the goods up to the named part of destination. Risk transfers

to buyers  when goods have been loaded on board the ship in the country of export.

(d)CIF(cost, insurance and freight ) The seller is required to obtain insurance for the goods while

in transit to the named part of destination

 

4.4.1 The responsibility of the supplier the current EXW (Ex-works)

-He or she makes the goods available to their premise

-He or she is responsible for off-loading the goods to their premise

– He or she is in-charge of the transport charges when ship is approved

 

4.4.2 The responsibilities of buyer under the current EXW Incoterm

Buyer is the one to incur the risk of bringing the goods at final destination

-The buyer arranges the pick- up of freight from the supplier designated ship site

-Buyer is responsible for clearing goods through customs

– Buyer is responsible for completing all the export documentation

 

4.4.3 The responsibility of the supplier if the goods were DDP (delivered duty paid)

Supplier to distribute the good to the port of destination

-Pay all the cost in bringing the goods to the destination eg transportation

– Pay taxes and import duties for bringing the goods to the named place of destination

-Pay risk for off-loading the good to the place of destination

 

4.5 Commodity Markets

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.

The commodity trade can be conveniently categorized commodity type as:

 food products from agriculture and fisheries (e.g. grains, tea, meat, fish);

 agricultural non-food products (e.g. cotton, rubber, tobacco);

 ferrous metals (iron, steel, etc);

 non-ferrous metals (e.g. tin, gold);

 industrial raw materials (e.g. non-metallic chemicals); and

 energy (e.g. coal, oil).

 4.5.1 Aspects to be considered in commodity markets

(a)Nature of the commodity

(b) Type of the market

© Technological advancement

(d) Distance or nearness to market

(f) Price

(g) Purpose of the commodity

(h) Urgency of the need.

 

4.6 Issues involved in international contract negotiation

Government regulation

– Quantity and quality of goods

-Method of delivery e.g road, rail etc

– Carriage charge cost

– Delivery time and lead time

– Terms of payment e.g extended payment

 

4.7 Financial arrangements in international purchasing

 

  4.7.1   Financial and financing documents

The financial documents, bills of exchange and promissory notes are listed below. A short description then follow:

 

(a) Bills of exchange

The legal definition (Bills of Exchange Act 1882, Section 3) of a bill of exchange is an unconditional order in writing, addressing one  person (drawer ) to another (drawee),signed the person giving it (drawer) , requiring the person to whom it is addressed (drawer),requiring the person to whom it is addressed (drawee) to pay on demand, or fixed or determinable future time , a certain sum in money to, or to the order of , a specified person (payee) or to bearer.

 

 (b)Promissory notes

Whilst not bills of exchange, these are largely subject to the same rules and are used for a somewhat similar purpose, the settlement of indebtness. Instead of being drawn like a bill of exchange the person expecting to be paid, they are made the person who owes the money, in favor of the beneficiary.

 

© Inspection and sampling order

Prospective buyers frequently need to inspect and sometimes sample the goods before buying them, and it is necessary to be able to authorize a warehouse to permit this to take place.

 (d)Delivery order

This is an order on a warehouse instructing it to deliver goods to the bearer or a party named in the order. Banks issue such orders when goods stored in their name are to be delivered to a buyer or are to be reshipped and have to leave a warehouse.

 (e) Warehouse receipt

This is a receipt for goods issued a warehouse. The document is not negotiable and no rights in the goods can be transferred under it. Delivery orders may be issued against the receipt for the goods which relate to it.

 (f) Trust receipt

When a bank wishes to release documents of title, or the goods themselves, to a customer of undoubted integrity, whilst still retaining its security rights in those goods and / or the proceeds of their sale, it may obtain a complete trust receipt from its customer to whom a loan has been made.

 

 

4.7.2 Export financing

There are various methods used in the international sale of goods to pay the purchase price. These are as follows

(a) Drafts covering exports

These may be on sight basis for immediate payment or drawn to be accepted for payment 30, 60 or 90 days after sight.

 (b)Sales against cost advances

These are used where credit is doubtful, exchange restrictions difficult, or unusual delays may be

accepted. They are very little used today

 

© Sales on a consignment basis

No tangible obligation is created consignment sales. In countries with free port or free trade zones, it can be arranged to have consigned merchandise placed under bonded warehouse control in the name of a foreign bank. Sales can then be arranged the selling agent and arrangements made to release partial lots out of the consigned stock against regular payment terms. The merchandise is not cleared through customs until after the sale has been completed.

 

(d) Collection arrangements

Where a collection arrangement is organised the seller hands the shipping documents including the bill of lading to his own bank, the remitting bank, which passes them on to a bank at the buyers place, the collecting bank. The collecting bank then presents the bill of exchange to the buyer and requests him to pay to accept the bill.

                                     

(e) Letters of credit

These are of particular importance. 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, the specifying the documents which the the seller has to deliver to the bank for him to receive payment.

 

(f) The doctrine of strict compliance

Under this doctrine, the seller, to obtain payment, must tender documents which strictly comply with specifications the buyer, otherwise the correspondent bank will refuse to honour the credit. The banks which operate the documentary credit act as agents for the buyer, who is the principal and as such they should not pay against documents that are different from the specified.

 

4.8 Ethical issues in international purchasing

Ethic is the moral principles governing or influencing conduct. It is the branch of knowledge concerned with moral principles

 

4.8.1 Some ethical concept and principles that relate to procurement are

(a)Conflict of interest

(b)Fraud

© Corruption i.e direct and direct

(d)Coercion

(e)Collusion (scheme or arrangement of two or more suppliers without or with knowledge of an organization

(f) Illegal /Immoral activities in the host country such as pollution the environment

(g)Pricing e.g unfair differential pricing

(h)  Products /technology

 

4.8.2The four common fraud scenarios in procurement include:

  • A person with responsibility for buying defrauds his / her employed
  • Supplier defraud their customers
  • Buyer makes personal gain at the expense of the supplier
  • Suppliers buyers work together to defraud the buyers employers

 

4.8.3Indicators of frauds in international purchasing

  • Excessive supplier hospitality in selected staff
  • A buyer life-style changing dramatically
  • Pricing schedules being completed in pencil
  • Supplier payments going unchallenged
  • Suppliers and contractors being very familiar with senior staff
  • Budget holders pressurizing buyers to place work with named suppliers
  • No supplier visits or audits
  • Specifications favouring or particular supplier
  • The absence of supplier approval data

 

4.8.4 Measures to control fraud

  • Separate the purchasing department from the user department
  • Separate recording from storekeeping duties
  • Purchasing authority should be based on seniority
  • Have an ethical code of conduct in place
  • Carry out internal and external spot auditing
  • Develop a company culture of honesty leadership example

 

Revision Questions

Example_. INCOTERMS 2010 clarify the responsibilities of parties. Elaborate.

Solution: The terms are structured to increase incrementally the obligations (control, risk and cost) on one party while decreasing the obligations of the other, depending on the specific term chosen. Each term clarifies which party is responsible for:

  • Inland freight (transportation within the origination country)
  • Forwarder selection
  • Export clearance
  • Carrier selection and scheduling
  • International freight
  • Import clearance
  • On-carriage (transportation within the destination country) Delivery occurs (and risk of loss transfers) at the point designated the term selected. Transfer of title is NOT covered any of the Incoterms 2010 rules and must be separately specified parties

 

EXERCISE 1. Define the term INCOTERMS and describe the history and origin of  INCOTERMS

EXERCISE 2. Describe clearly the role of INCOTERMS in international trade

EXERCISE 3. Define the 4 rules of incoterms 2010 for inland and water transport only

 

 

Further reading

1.International Chamber of Commerce (1999), Incoterms 2010, ICC Publication No 560

 

 

LESSON 5:

 

 PAYMENT PROCEDURES AND METHODS IN INTERNATIONAL PURCHASING

 

Learning outcomes

Upon completing this topic, you should be able to:

  • Identify the various terms of payment used in international trade based on the risk spectrum

 

5.1 Introduction

To succeed in today’s global marketplace and win sales against foreign competitors, exporters must offer their customers attractive sales terms supported appropriate payment methods. Because getting paid in full and on time is the ultimate goal for each export sale, an appropriate payment method must be chosen carefully to

minimize the payment risk while also accommodating the needs of the buyer. As shown in figure below, there are four primary methods of payment for international transactions. During or before contract negotiations, you should consider which method in the figure is mutually desirable for both you and your customer.

 

5.2 Factors to consider in processing payment in international purchasing

  • Your cash flow availability and needs.
  • Your relationship with your supplier.
  • The economic conditions in the country to which you are importing.
  • Interest rates and currency adjustment factors.
  • Type of product.
  • Your supplier’s creditworthiness.
  • The terms your competitors are offering.
  • Your supplier’s demands.
  • Type of payment
  • The urgency of the transaction – are you under time constraints?

 

5.2.1 Methods of settling payments in international purchasing

 

The following are methods of settling payments in international purchasing:

 

  1. Cash-in-Advance

With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters.

 

  1. Letters of Credit

Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised

  1. Documentary Collections

A documentary collection (D/C) is a transaction wherethe exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment.

Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents required for the transfer of title to the goods.

 

  1. Open Account

An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash f low and cost, but it is consequently the highest risk option for an exporter

5.2.3 Whatever terms of payment you negotiated you must always:

  1. Make sure they are understand two parties
  2. Have your supplier sign a document that indicates acceptance, such as the proforma invoice

5.2.4 Payment procedure in international payment

(a) Determine the amount of your international payment

If your paying for goods remember to check whether you need to ad shipping costs to the

total, as well as which party is responsible for the costs of international money transaction

     –If you are paying for services contact the provider of the services to decide who will pay for

the costs of the international payment

(b) Inquire about making an international payment with your bank

©Choose the international payment method that works best for you and the recipient

(d) Make the international payment and notify the recipient that will receive it within the

Specified time frame document.

5.3  Conveyance documents in international purchasing

The following documents are required for international purchasing

  1. Original Commercial Invoice
  2. Packing List
  3. Original Bills of Lading – Two Original
  4. Original Certificate of Conformity
  5. Original Test Result/Report/Analysis
  6. Original Certificate of Origin for Preferential Trade Area Partners e.g. COMESA.
  7. Import Declaration Form and the Receipt
  8. Insurance Debit Note
  9. Importers Declaration(C52)

Revision questions

Example_. Describe the factors to consider in choosing a method of payment

Solution: One of the most important things to negotiate before closing on an import sale is how payment will be made. Many circumstances and priorities will influence your choice of payment method. A lot will depend on how much you know about financing a sale and how willing your supplier is to accept your terms and conditions. Other factors include:

  • Your cash flow availability and needs.
  • Your relationship with your supplier.
  • The economic conditions in the country to which you are importing.
  • Interest rates and currency adjustment factors.
  • Type of product.
  • Your supplier’s creditworthiness.
  • The terms your competitors are offering.
  • Your supplier’s demands.
  • The urgency of the transaction

Exercise1. Describe the risk spectrum for sellers and buyers in international trade

EXERCISE 2. _Describe clearly the use of the letter of credit

EXERCISE 3. _Describe the demerit of the documentary collections method

 

Further reading

Monczka, R. M., & Giunipero, L. C. (1984, Fall). International Purchasing:

  •  Characteristics and Implementation. Journal of Purchasing and Materials Management , pp. 2-10.

 

 

LESSON 6:

INSTITUTIONS INVOLVED IN PROMOTING INTERNATIONAL PURCHASING

 

Lesson outcome:

At the end of this lesson, the student should understand the institutions involved in promoting international and their functions

 

6.1 Introduction

There are various institutions involved in international finance transactions, such as financial institutions, government entities and central banks. Other organizations include microfinance and development institutions, such as the World Bank and the International Monetary Fund.

 

6.2 Institutions involved in promoting international purchasing

The following are institutions involved in promoting international purchasing

  1. International monetary funds

– It is a global organization founded in 1944

– It aim was to help to stabilize exchange rates and provide loans to countries in need

Functions of  IMF

(a)International monetary co-operation

(b)Promote exchange rate stability

© Help deal with balance of payment adjustment

(d)Help deal with members countries on economic monetary and technical matters

(e) Heal deal with economic crisis providing international co-ordination

  1. World Trade organization

-Is an international body designed to play the role of watching of trade in goods, services and foreign investment.

Functions of World  Trade Organisation

(a) Administering the WTO trade agreement

(b) Forum of trade organization

©Co-operation with other international organization

(d) Administering the mechanism for settling trade disputes among members

(e) Assisting developing countries with training and technical assistance

  1. World Bank

Is an international supported bank that provides financial and technical assistance to developing countries for developing progress e.g bridges, roads, schools etc

Role of the world bank

(a) Granting construction loans to war devastated countries

(b) To provide loans to governments for agriculture, power, transport, water supply, education , health etc

© Promoting foreign investments granteeing loans provided other organizations

(d) Encouraging industrials development of under developed countries promoting economic reforms

(f) Providing technical economic and monetary advice to member countries for specific projects

  1. European Union

Functions of European Union

(a) To maintain and build on the peace established between its members state

(b)Bring European countries together in practical co-operation

© Ensure European citizens can live in security

(d)Promote economic and social solidarity

(e) Preserve European identity and diversity in globalised world

6.3 Regional blocks involved in international purchasing

(a) ECOWAS (Economic Community Of  West African State)

The main of the community to promote economic co-operation between all the state with the goal of raising living standard among the population as well as raising economic strength of each member state

Objectives of ECOWAS

  • Creation of a common market between member state
  • Elimination of custom duties and other similar changes in respect of importation and exportation of goods among member state
  • Greater economic competitiveness though economic market
  • Implementation of schedules in the joint development of transport communication energy and other infrastructural facilities
  • The harmonization of fiscal policies

Challenges of ECOWAS

  • Political instability and bad governance that have affected many countries
  • Insufficient political will exhibited some member state
  • Irregularity in the payment of financial contribution to the budgets in the institutions
  • The failure to involve civil society, private sector and mass market in the process of integration

(b) EAC (East African Corporation)

The role objective of the EAC common market is to widen and deeper co-operation among the partner state in the economic and social fields for the benefit of the partner state and their citizen

   Objectives of EAC

  • Enhance research and technology advancement to accerelate economic and social development
  • Sustain the expansion and integration of economic within the community
  • Promote common understanding and co-operation among the nationals of their partner state their economic and social development
  • Strengthen, coordinate and regulate the economic and trade relating among the partner state in order to promote accerelated, harmonious and balanced development
  • Accerelate economic growth and development growth and development of the partner state

(d) EU (European Union)

(e) COMESA (Common Market for Eastern and Southern Africa)

 

Objectives of COMESA

  • To promote development in all field of economic activity
  • Promote policies and programs to raise the standard of living of its people
  • To co-operate in the promotion of peace stability and security among the members state in order to enhance economic development in the region
  • To co-operate in the strengthening the relation between the common market and the rest of the world

Challenges of COMESA

  • Potential loss of revenue
  • There many countries boarders that encourages illegal imports
  • Given the bureaucratic custom procedure at the board poin there has been delays in clearing goods
  • Costly and inefficient, infrastructure utilities
  • Certain countries impose tarrifs and no tarrif barriers to their COMESA and trading partners eg exercise duty

6.4 Regional Economic Grouping

Refers also as economic integration. It is an economic arrangement between different regions  marked the reduction or elimination of trade barriers and the co-ordination of monetary and physical policy. The aim of economic integration is to reduce cost for both consumers and producers as well as trade between the countries taking  part in the agreement

6.4.1 Importance of Regional Economic Grouping

  • There is a wider selection of goods and services
  • Members of the country population is able to serve job due to their free mobility within a wider area
  • Promote peace among people of the country involved as their interact and co-operate with each other
  • To create a wider market for countries products
  • Specialisation member country is possible ( is where you major in specific thing)

Demerits of Regional Economic Grouping

  • Creation of trading blocks. It can impose trade barriers against members countries
  • National sovereignty .Requires members countries to give some degree of control over key policies like trade monetary and fiscal policies
  • Many countries develop / produce similar commodities therelimiting the scope of the trade
  • Benefits of regional integration have been unequally distributed among the different countries
  • Political instability within the countries has limited the success of integration efforts

      6.4.2 Levels of Economic integration  (Regional Economic Grouping)

(a)Free Trade Area .Removes tariffs among members. Tarrifs are taxes imposed an imported goods

(b) Customs Unions .This involves development of a common trade policy towards others

© Common Markets. Seeks to eliminate intra- market factors of product market

6.4.3 Features of Regional Trading Blocks

  • Less or no restrictions – free access to each others market
  • More goods available for selection
  • They have similar types of goods
  • No tarrifs

6.4.4 Factors accounting for the poor performance of trading blocks

-Lack of complementary of members countries productions structures

-Weak national and regional institutions

-Lack of co-ordination and harmonization of economic policies

-Inadequate finding of regional integration process and related institutions

-Poor design and inadequate sequencing of regional integration arrangement

-Lack of involvement of other stakeholders , the private etc

-Inadequate infrastructure

Advantages of Trading Block

(a) Foreign direct investment

(b) Economics of scale

© Market efficiency

(d) Access trade with producers outside the trading block

 

6.5 Reasons  for National Grouping

(a)Trade .Several trading blocks such as COMESA and ECOWAS comes together for trading

(b) Global governance (Economic) eg world bank. Proving finance and research to developing nations aids their economic developments

© Defence . There are defence grouping

(d) Social , Political  and Economic Unions .Aspects of political law society and the economy of member state are governed the group of nations

Revision Exercise

Example:  What is Regional Economic grouping? Refers also as economic integration. It is an economic arrangement between different regions  marked the reduction or elimination of trade barriers and the co-ordination of monetary and physical policy

Exercise 1. State disadvantages of Regional Economic grouping

Exercise 2. State reasons for National grouping

Exercise 3. Highlights objectives of ECOWAS

 

Further reading

  1. Monczka, R. M., & Giunipero, L. C. (1984, Fall). International Purchasing:

2.Characteristics and Implementation. Journal of Purchasing and Materials Management

 

 

LESSON 7:

       EMERGING ISSUES AND TRENDS

Lesson outcome:

At the end of this lesson, the student should understand the emerging issues and trends in    international purchasing

 7.1 Introduction

The emerging issues and trends in international purchasing are those things which normally changes in our daily activities which occurs during international purchasing process.

   7.2 Emerging issues and trends in international purchasing

  • Use of advanced technology – computers , Ict advancement
  • Emergencies of customer care service development to handle financial matters only
  • Pollution
  • Corruption
  • HIV / AIDS and drug abuse
  • Social media grow up
  • Mergers and joint ventures of institutions so as to increase the institutions capital
  • Digital wallet- electronic payment and couponing systems with electronic payment systems coming up eg mpesa, airtel money and equitel
  • TV talks – interactive tv advertising use of satellite and cable companies fritted with set-top boxes
  • Globalization – This is a process wheredifferent systems and parts of are related trade, function as a closely – knit system at the international level
  • Changing customer basis and needs
  • Emergence of fraudsters producing counter fake products
  • Emergence of new product life cycle stages ie fashion and style products
  • New government policies ie medial bill
  • Competitors coming up with new improved product
  • Adoption for new international purchasing strategies eg E-purchasing to search for more customers
  • Cloud computing
  • Emergence of environmental movements –This is an organized movement of citizens and government agencies to improve the rights and power of buyers in relation to sellers

7.3 Challenges posed this trends

  • Some trends and issues require more resources in order to meet the new trends and issues eg more funding
  • Government policy which might really affect the new trend / issue
  • New / more competitors coming into international purchasing
  • Changing international purchasing needs and wants
  • Coverage of wide international purchasing area due to globalization aspect
  • Changing the approach to get more customers or maintain the existing ones

 7.4 Ways of coping up with challenges

  • Adopting new international purchasing strategies
  • Employing more resources in international purchasing teams
  • Coming up with legal measure to deal with fraudsters
  • Reaching a wide international purchasing to stay relevant
  • Coming up with model or design that would move customers
  • Using update technology to reach wide international purchasing to make purchasing efficient

 

 

 KNEC PASTPAPERS REVISION

  1. (a) Explain the reasons that may prompt an organization to purchase its material requirements from foreign sources  (12 marks)  -2015

(b) Highlight four benefits that may accrue to an organization that purchases its material requirements through overseas agents  (8 marks) -2015

  1. (a) Explain six factors that a buyer would consider when specifying products to be purchased from the  international market (12 marks)- 2015

(b) Explain the role played Incoterms in the international purchasing (8 marks)-2015

  1. ( a) Successful purchasing from international markets require use of an effective strategy

.Explain five aspects that an organization would consider while developing the International purchasing strategy (10 marks)-2015

  1. (a) International purchasing usually entails negotiations between the buyer and overseas

Supplier. Explain five aspects of the completed contract that should be covered during such negotiations. (12 marks) -2015

(b)  Explain four difficulties involved in using counter trade such as a method of settling Payments in international purchasing  (8 marks) – 2015

  1. (a) Explain six factors which may influence exchange rates in international market (10 marks)

-2015

(b) Explain four measures that a buyer would take to minimize the adverse effects of price instability in international purchasing ( 8marks)- 2015

  1. (a) Explain the role played the International Monetary Fund (IMF) in international trade

(10 marks)-2015

(b) Explain five factors that a buyer should consider in selecting a third party transporter in

international  purchasing (10 marks)-2015

  1. (a) Many countries from regional trading blocks to facilitate trading among member states.

Explain five features of such trading blocks (10 marks) – 2015

(b) Explain five ethical issues which a buyer should observe while undertaking international

purchasing activities (10 marks)-2015

  1. (a) Explain six challenges facing international purchasing (12 marks)-2016

(b) Explain the following documents used in international trade.

(i) Performance bond

(ii) Carriage paid to

(iii) Free- on- board

(iv) Cost Insurance Freight (8 marks) -2016

  1. (a) Describe five indicators of fraud in international purchasing (10marks)-2016

(b) Explain five factors that may influence the method of payment in an international

purchasing contract (10 marks)-2016

  1. (a) Describe the current trends in global procurement that should be of concern to

International procurement officers (10 marks)-2016

(b) Explain five reasons why producer cartels grow in international trade ( 10 marks)-2016

  1. (a) Discuss five roles of regional economic blocks in international purchasing ( 10marks)

-2016

(b) Explain five procedures used in specifying materials requirements in international

purchasing (10 marks) -2016

  1. (a) Kavu Company Limited is involved in a dispute with an overseas supplier. Explain five

methods which the Company can use to settle the dispute. (10 marks) -2016

(b) Explain the roles of International Organization For Standardization (ISO) in procurement

Management (10 marks)-2016

  1. (a) Outline any four differences between global sourcing and international sourcing (8marks)

– 2016

(b) Describe six features of an effective commodity market (12marks) -2016

  1. (a) Explain five advantages of globalization in purchasing (10 marks) – 2016

(b) Discuss five roles of the World Trade Organisation(WTO) in international purchasing

Management ( 10 marks)-2016

  1. (a) Differentiate between international procurement and international purchase (10marks)

-2014

(b) Identify and describe the major benefits of adopting an international sourcing

Procurement (10 marks)-2014

  1. (a) Identify the major reason why more and more Kenyan organization are sourcing for

raw materials abroad even when material are locally available (10marks)-2014

  1. (a) Identify and describe the documents necessary to facilitate customs clearance (10marks)

-2014

(b) Identify the major effects of globalization in international purchasing (10 marks)-2014

  1. (a) State and explain the disadvantages of Regional Economic grouping (10marks)-2014

(b) Explain five advantages of counter trade (10 marks)-2014

  1. (a)Explaining the following documents used in international purchasing

(i) Carriage and insurance paid

(ii) Free alongside ship

(iii) Cost and freight

(iv) Delivered duty paid (10 marks) -2014

(b) Explain the role played the World Trade Organisation (WTO) in international trade (10 marks) -2014

  1. (a) Explain five measures to control fraud which a buyer should observe while undertaking international purchasing activities (10marks)-2014

(b)Explain five difficulties involved in using reciprocal trade as a method of settling payments in international purchasing (10marks) -2014

21.Explain the functions played European Union (EU) in promoting international purchasing (10marks) -2014

 

 

 

 

 

 

 

 

 

 

 

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