SOURCING STRATEGIES IN INTERNATIONAL PURCHASING STUDY NOTES
Content;
i. Sourcing strategy; counter trade and reciprocal trade
ii. Commercial aspects in international contracting
LESSON 1 Sourcing strategies used in International Purchasing
Introduction
Sourcing strategies gives a number of advantages in international purchasing i.e. 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.
Sourcing 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 of 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.
INTERNATIONAL PURCHASING NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, 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.
Enables entry to new or formerly closed markets
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:
Identifying low costs sources of supply that may be exploited on a countertrade basis
INTERNATIONAL PURCHASING NOTES PREPARED BY MR. ANTONY AMBIA Page 2
Content;
i. Sourcing strategy; counter trade and reciprocal trade
ii. Commercial aspects in international contracting
LESSON 1 Sourcing strategies used in International Purchasing
Introduction
Sourcing strategies gives a number of advantages in international purchasing i.e. 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.
Sourcing 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 of 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.
INTERNATIONAL PURCHASING NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, 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.
Enables entry to new or formerly closed markets
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:
Identifying low costs sources of supply that may be exploited on a countertrade basis
INTERNATIONAL PURCHASING NOTES PREPARED BY MR. ANTONY AMBIA Page 2
