INTERNATIONAL PURCHASING

INTERNATIONAL PURCHASING STUDY NOTES
CONTENTS
1. Introduction to international purchasing ………………………………………………. 1
2. Procedures and documentation in international purchasing………..……………………… 5
3. Sourcing strategies in international purchasing………………………………... 19
4. Commercial aspects in international contracting………..,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 28
5. Payment procedures and methods in international purchasing ……………………… 39
6. Institutions involved in promoting international purchasing………………………. 45
7. Emerging issues and trends in international purchasing .................................... 51




TOPIC ONE
INTRODUCTION TO INTERNATIONAL PURCHASING
DEFINATION
International purchasing is the practice of purchasing from the global market for goods and services across
geopolitical boundaries. It often aims to exploit global efficiencies in the delivery of a product or service. These
efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and
low trade tariffs. International purchasing refers to the utilization of global resources; searching for a bargain
with the highest quality from all over the world. From the aspect of supply-chain management, international
purchasing requires companies to set up a global manufacturing chain in order to make a rational purchasing
plan and acquire the high-quality goods with a rational price. Besides, it is an effective way to measure and
supervise the efficiency of purchasing processes so that it minimizes the total cost of purchasing
NATURE OF INTERNATIONAL PURCHASING
The main aspects of international purchasing are as follows:
1. Long term - international purchasing is complex and requires investment of time and money and
therefore, the main priority is to create a reliable system and relationship that will be able to handle it
over time - to make profit.
2. Cultural difference - people act differently in different places, according to their local values, ethics,
traditions, etc. It means that you and your international partner to purchasing, may have a completely
different perception regarding basic things.
3. Different countries - different laws. When working internationally, it is important to understand what
law is applicable law that governs your transaction. You cannot assume that whatever works in
Arizona or in France, will necessarily be the same as in Japan, Israel or Azerbaijan. This understanding
must be reflected in your contractual obligations so that the transaction will be performed as planned.
So - it si important to make sure that you clearly understand the law which will govern your
transaction.
4. Logistics - You may have the best prices, and you have found the perfect customer, but if you fail to
create a perfect supply chain, then you will either lose your, money, your goods or your customer -
most of the time you will lose it all. it is quite easy to move goods around the globe, but you need to
understand all the constraints and make sure that it is either taken care by you, by your purchasing
partner or by professionals who can take care of it. so do not underestimate the crucial role of logistics
in international purchasing and make sure it is handled correctly.



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, 5. Language - You may speak good English or Russian and your customer may have good command of
French and English - it will usually result that both of you will be communicating in a language that is
not your mother tongue. this also applies to your marketing collateral and your web presence. it can
lead to misunderstanding and lack of trust. Therefore, it is important to make sure that you are on the
same page (pun intended) and that you have invested resources to either translate/localize your
documents/web/etc, or that you have someone that has control of the language of your purchasing
partner. So - make sure that you are communicating correctly and agree on the language you use.
6. Time - when working globally, the time difference must be taken into account so that you will not
bother your purchasing partners during their weekends, or set conference calls in the middle of the
night. it will also allow you to set realistic expectations as to when to send and receive replies to emails,
have telemarketing, etc. when you understand the global time zones, you can work more efficiently,
say, by preparing and sending information to be visible for your partner, first thing when he start his
day, etc. So - don’t forget the time difference.
7. Distance - since you are doing purchasing in a different country, you need to take into account the
distance - it affects delivery time, logistics, taking into account expiration dates and most importantly -
what happens when something goes wrong and you will need to resolve it remotely. you cannot just
get a refund or ask them to send you something so it will be delivered to you within a day or so - they
are far away! So - don’t forget the distance between you and your purchasing partner and take it into
account when planning
8. Risk - international purchasing involves many parties and many factors - each of them may go wrong.
You may never see or meet your purchasing partner so true identity is also a challenge. Risk must be
taken into account when you are pricing and when you are planning the purchasing - deliveries,
international payments, etc. Local partner may reduce the risk but increase your costs and reduce your
net profit. So - try to reduce risk and make sure that you have a contingency plan in place.
REASONS FOR PURCHASING INTERNATIONALLY
1. Competitiveness of overseas sources e.g. lower prices, improved deliveries, better quality etc
2. Need for manufacturing flexibility
3. Stringent quality standards
4. Ever changing technology
5. The buyer may prefer to buy from foreign source which offers products which have features which are not
available domestically.
6. Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing to shortages or
strikes
7. Reciprocal trading and counter trade owing to policy reasons
8. Innovation or variety of style
FACTORS/ELEMENTS THAT FOSTER INTERNATIONAL PURCHASING
1. Top management support
2. Development of efficient communication skills and system
3. Establishment of long term relationships with overseas suppliers
4. Vast knowledge of diverse culture and opportunities across the globe
5. Good understanding of international rules under INCOTERMS
BENEFITS OF INTERNATIONAL/GLOBAL PURCHASING
1. Better prices
2. Higher world class quality
3. Counter-trade
4. Improved customer service
5. Improved competition position
6. Increased availability of suitable suppliers
DRIVING FORCES FOR INTERNATIONAL PURCHASING

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, 1. Technology
2. Unavailability of goods and services domestically
3. Better and cheaper prices abroad
4. Unsatisfactory quality of domestic goods and services
CHALLENGES FACED IN INTERNATIONAL PURCHASING
1. Currency difficulties is experienced- fluctuations
2. Legal difficulties in case of a dispute
3. Delays in delivery
4. Time required for negotiation is greatly increased
5. Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
6. Import duties, procedures and insurance
7. Communication problems
OVERCOMING CHALLENGES IN INTERNATIONAL PURCHASING
Time differences. When your supplier is on the other side of the world—which means they're sleeping while
you're at work, and vice versa—you can lose precious days waiting for answers to questions. One solution is to
have "feet on the street": an in-country representative or employee who can anticipate questions and ensure
that communications with suppliers include all of the necessary details from the start.
Culture, language, religion-You need to learn about the culture, language, religion, body language and etiquette
of the foreign market you are interested in purchasing from.
Before you dive into an international market, you need to do some research and learn about its economy,
market trends, consumer behaviors, policies and trade agreements to help yourself plan.
laws and regulations -gaining a comprehensive understanding of the local laws and regulations governing your
target markets is key. From tax implications through to trading laws, navigating legal requirements is a central
function for any successful international purchasing. Eligibility to trade is a significant consideration, as are
potential tariffs and the legal costs associated with entering new markets.
Currency rate fluctuation-- While price setting and payment methods are major considerations, currency rate
fluctuation is one of the most challenging international purchasing problems to navigate. Monitoring exchange
rates must therefore be a central part of the strategy for all international purchasing. However, global economic
volatility can make forecasting profit especially difficult, particularly when rates fluctuate at unpredictable
levels. . Another option for mitigating the risk of unpredictable currency rates can be setting up a forward
contract and agreeing a price in advance for future sales. Of course, this potentially means missing out on
greater profit should rates shift in your favor. However, it can protect your sales from the risk presented by
unstable currency.
Payment methods challenge-The proliferation of international e-commerce websites has made selling goods
overseas easier and more affordable for businesses and consumers. However, payment methods that are
commonly accepted in your home market might be unavailable abroad. Determining acceptable payment
methods and ensuring secure processing must be a central consideration for businesses who seeks to trade
internationally.
Political Environment-Beyond laws and regulations, companies must also look at the political climate of a
country. Is it stable enough to support successful business operations? Instability can hamper business dealings.
Evaluate the environment and whether it can affect your partnerships and consumer purchasing behaviors.
Political changes could create new import restrictions, tax controls and labor issues. Consider these details
before investing in an international operation.
Customs, Duties & Taxes-Every country charges its own customs fees for importing and exporting goods. Seek
out competent legal advice to determine whether your customer is responsible for paying local fees, duties and
taxes. These costs add up. Companies looking to purchase from international markets must know just how
much financial burden they are putting on themselves.
RISKS IN INTERNATIONAL PURCHASING


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, 1. Buyer’s Insolvency/Credit Risk-Buyer’s insolvency or credit risk refers to the inability of the buyer to
honour full payment for goods or services rendered on due date. This is a risk on seller associated with
selling or supplying a product or service without collecting full payment or experienced late payment.
2. Buyer’s Acceptance Risk-Buyer’s acceptance risk refers to the buyer’s non-acceptance of goods
delivered or services rendered. Unaccepted goods or services may create difficulty for the seller to
dispose the goods to another buyer or encounter working capital problem.
3. Knowledge Inadequacy-A buyer or seller who intends to expand his business into another
product/service/industry/country may not have adequate knowledge on the risk of the new
product/service, local market situation or goods’ fashion. The lack of knowledge increases the chances
of business failure.
4. Seller’s Performance Risk-A seller may fail to carry out his obligations in a sales contract due to one or
more reasons, and such non-performance by the seller may have adverse consequential impacts on the
buyer’s business. It could be expensive for the buyer to take legal actions against the seller in his
country.
5. Documentation Risk-Documentation risk is the risk of non-conformance to specific documentation
requirements under a sales contract or documentary credit. Failure in fulfilling documentation
requirements may result in seller’s inability or delay in obtaining payment for goods delivered or
service rendered.
6. Economic Risk-Economic risk refers to unfavourable economic conditions in buyer or seller’s country
which may affect both parties in fulfilling their obligations. On the buyer side, economic risk may
result in buyer ‘insolvency or inability to accept the goods or services. On the other hand, the seller
may experience difficulty in producing or shipping the goods perse.
7. Cultural Risk-Different countries have their unique language and culture. The inability to
appreciate/accept cultural differences and/or language barrier may result in conflicts and non-
completion of the sales contract.
8. Legal Risk-Legal risk is the potential for financial loss arising from uncertainty of legal proceeding or
change in legislation, such as a foreign exchange control policy. A sales contract could be frustrated
due to changes in laws and regulations.
9. Foreign Exchange Risk-A buyer or seller may deal with foreign currencies in their daily course of
business. This implies that they are exposed to fluctuations in foreign exchange market which may
result in paying more (by the buyer) or receiving less (from the buyer) in terms of the local currency.
10. Interest Rate Risk-Interest rate risk is the risk borne by an interest-bearing asset, such as a floating rate
loan. An increase in interest rate will result in buyer or seller paying more interest for their floating
rate loan.
11. Political/Sovereign Risk-Political/sovereign risk refers to the complications that buyer or seller may
expose due to unfavourable political decisions or political changes that may vary the expected outcome
of an outstanding contract. Examples of political/sovereign risk are changes in fiscal/monetary policy,
war, riots, terrorism, trade embargoes, etc.
12. Transit Risk-Transit risk is the risk of goods being damaged during shipment from the place of origin to
the place of destination. Failure in addressing transit risk may result in heavy replacement cost or
performance
DISTINCTION BETWEEN GLOBAL SOURCING AND INTERNATIONAL SOURCING
A company that starts in a small-scale slowly becomes international. This means it spreads its operations to two
or more countries. But, it needs to expand, if it encounters saturated market in the existing countries. In such
circumstances, it starts handling a wide variety of projects. This is called global existence.
1. Global’ refers to the entire world. On the other hand, ‘international’ indicates to two or more nations.
2. As far as international purchasing is concerned, companies which procure a wide range of goods and
services from any nation in the world are referred to as global sourcing. However, some companies


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