Sourcing Strategies in International Purchasing
- Sourcing strategies used in international purchasing
- Effects of globalization in international purchasing
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 continuos 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:
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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 by 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 by a firm. The buyer in return pays back the supplier by 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
(c) 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
(c) Difficult to set prices and service quality
(d)Inconsistency of delivery and specification
(e) 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:
- Indentifying 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 agaist the receipt of poor quality gods
- Developing long term CT partnerships
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Reciprocal trade
This is trade between two countries, usually based on an agreement that benefits both countries. This is trade between two parties whereby their 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
- Both the supplier and buyer may benefit from exchange of orders
- Both suppliers and buyers may obtain a greater understanding of problems, thus increasing goodwill
- 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 slaken
(c) 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 by 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
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Direct purchase
Is a method by 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
(c) 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
(c) Because of the urgency the other available methods of procurements are impractical
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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
(c) 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.
(c) 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
- Saunders, J. Quoted in P. Smith, “International Marketing”, MBA notes, 1990, Hull University,