PRINCIPLES OF PROCUREMENT

INTERNATIONAL AND GLOBAL

PROCUREMENT
 INTRODUCTION
• The advent of internet is continuously
increasing interaction between procurement
and supplying organisations.
• The same value for money objectives are
pursued and much the same range of
methods and systems are employed in this
pursuit.
 OBJECTIVES OF THIS CHAPTER
• To define international and global sourcing
• To appreciate why it is necessary or preferable
to source internationally
• To consider the problems associated with
international sourcing
• To provide a briefing on ‘Incoterms’
• To explain countertrade as a form of barter
 GLOBAL SOURCING AND
INTERNATIONAL PROCUREMENT
• Global sourcing (sometimes called global
procurement) and international procurement
are similar concepts and can be distinguished
as follows:
 GLOBAL SOURCING
• Global sourcing is often used when what is meant
is international procurement/sourcing.
• Some textbooks whose titles include such
expressions as ‘global purchasing’ or ‘global
sourcing’ have subtitles which indicate that they
really mean international purchasing and that is
often the majority of the content.
• Global sourcing is more of an approach born of
the globalisation of large multinational
conglomerates within a range of industries and
services.
 GLOBAL SOURCING
• A clear definition comes from Stevens (1995):
‘Global Sourcing is the integration and
coordination of procurement requirements
across the worldwide business units, looking at
common items, processes, technologies and
suppliers.’
• It is only practised by large corporations as they
have the need and leverage to gain
competitiveness from global sourcing, and also
the facilities around the globe to enable them to
apply the process.
 INTERNATIONAL PROCUREMENT
• International procurement is the purchasing,
from another country, of the products and/or
services required for the organisation.
• Typically there is lack of coordination between
business units.
• In other words it is importing.
• What it does not require or involve is the global
integration and co-ordination of the buying
organisation’s demand with the supplier’s global
ability to supply.
 WHY SOURCE INTERNATIONALLY?
• The principle of comparative advantage is of
relevance here.
• The basic idea is that if one country has an
advantage, for whatever reason, as an
efficient producer of one good, and another
country has an advantage in a different good,
then it is in their interests to trade.
• Exchanging these goods leads to greater
efficiency for both.
 WHY SOURCE INTERNATIONALLY?
• As an example of this, consider the relationship
between the UK and Saudi Arabia. Saudi Arabia
produces oil at a lower cost than Britain can from the
North Sea. Britain has advanced manufacturing
capabilities; Saudi Arabia is developing in this area.
While both countries could pursue self-sufficiency, it is
beneficial to both to export those items for which they
are efficient producers, and import those where they
are less efficient.
• Reasons for the growth in international sourcing
include the following:
 WHY SOURCE INTERNATIONALLY?
1. The buyer may prefer to purchase from a foreign
source which offers features not available on
domestically produced goods of a similar type.
2. Although goods of the type required are
produced domestically, domestic capacity may
not be enough to meet demand, so the gap has
to be filled from abroad.
3. There may be strategic reasons for international
purchases, for instance, to improve supply
security by having a second source in another
country.
 PROBLEMS WITH INTERNATIONAL
SOURCING
• Problems include:
 COMMUNICATION PROBLEMS
• These arise not just because of language
difficulties, but also because of time differences
between countries, and differing meanings
attaching to trading terminology and technical
vocabulary.
• Even though both parties may be employing
English or some other shared language in
conducting their business, it is possible that if one
party is less familiar with the language than the
other, differing meanings may be attached to
words or contract terms.
 CULTURE
What is culture?
• Culture is ‘the collective programming of the
mind which distinguishes the members of one
category of people from another’.
• The category may be a nation or ethnic group, a
social class, a profession or an organisation: each
may have its distinctive way of thinking and doing
things.
• These are sometimes called ‘spheres’ of culture.
 CULTURE
• Culture operates on three levels.
• Behaviour: norms of conduct; customs and rules
about the kinds of behaviour that are acceptable
or unacceptable within the group.
• Artefacts: products of the culture such as its
music, writing and art; its myths, heroes and
symbols.
• Rituals: patterns of behaviour which have
symbolic or traditional value, such as social
formalities, ceremonies and rites of passage.
 CULTURE
Organisation culture
• Organisation culture is ‘a pattern of beliefs and
expectations, shared by the organisation’s
members, which produce norms which shape the
behaviour of individuals and groups’.

National culture
• Different countries (or world regions) have
different cultural norms, values and assumptions,
which influence how they do business and
manage people.
 CURRENCY DIFFERENCES
• The conversion of one currency into another does not,
of itself, pose any great difficulty if the currencies are
‘convertible’, but it does cost money for the conversion
to take place.
• More importantly, the extent to which exchange rates
fluctuate does cause considerable problems.
• The risk and uncertainty associated with the change in
relative values between the exporter’s and the
importer’s currencies have to be taken into account
and managed.
• Prices can also be stated in a third currency, acceptable
to both parties.
 PAYMENT
• The international transfer of funds poses its
own difficulties, and a third party, usually a
bank, will probably need to be involved to
facilitate this process.
• Of course, this service will cost money, a cost
not applicable in domestic sourcing.
 DIFFERING LEGAL SYSTEMS
• When purchasing internationally it is
important to establish whether the courts of
the exporter’s country, those of the
importer’s, or the courts of a third country
have jurisdiction in the event of a dispute.
• There remains, however, the question as to
which law is the proper law of the contract.
• If the law of another country is relevant, then
the applicable rules will have to be established
by an expert witness.
 INCOTERMS 2010
• The International Chamber of Commerce (ICC)
publishes International Commercial Terms
(Incoterms).
• Incoterms are a set of three-letter standard trade
terms most commonly used in international
contracts for the sale and procurement of goods.
• Incoterms are recognised by courts and other
authorities
• The terms are valuable aid to negotiators in that it
provides standard terminology, clarifying the
responsibilities of buyer and seller in international
and global trade.
 INCOTERMS 2010
• First published in 1936, Incoterms provide
internationally accepted definitions and rules
of interpretation for most common
commercial terms.
• The parties need to negotiate and agree which
term to use, of course, but their meanings are
clearly explained.
• Primarily intended for use where goods are
sold for delivery across national boundaries,
hence international commercial terms
 INCOTERMS 2010
• The revised rules, originally designated ‘Incoterms
2010’, contain a series of changes, such as a
reduction in the number of terms to 11 from 13.
• Revised 6 times before 2010
• Current revision (“Incoterms 2010”) to became
effective in January 2011
• Incoterms 2010 also attempt to better take into
account the roles that cargo security and electronic
data interchange now play in international trade.
• Updated regularly to keep pace with changes and
developments in international trade
 REVISED RULES
• Incoterms inform the sales contract by defining the
respective obligations, costs and risks involved in the
delivery of goods from the Seller to the Buyer, but by
themselves do not:
i. Cover for service contracts
i. Constitute a contract;
ii. Supersede the law governing the contract;
iii. Define where title transfers; nor,
iv. Address the price payable, currency or credit terms.
v. Deal with the consequences of breach of contract
vi. Protect parties from their own risk of loss
vii. Cover goods before or after delivery
 REVISED RULES
• Apply to contract of sale
– Not contract of carriage
– Not contract of insurance
– Not documents related to financing
 REVISED RULES
• Terms covered by Incoterms
– Warehousing
– Packing and loading
– Inland freight
– Terminal charges
– Freight forwarder’s fees
– Ocean/air freight
– Duty, taxes, & customs clearance
– Delivery
– Security Clearances (new to 2010)
 REVISED RULES
• Domestic-User-Friendly
– Now state that Rules can be used domestically
• Guidance Notes
– Explain fundamentals, usage, risk, costs, etc.
– Review and use them
• Electronic Communication
– Electronic means of communication now given same
effect as paper as long as parties agree or where
customary
• Security-Related Clearances
– Rules now allocate responsibility for these
 REVISED RULES
• Two groups of Incoterms Rules:
1. Rules for Any Mode of Transport
• EXW, FCA, CPT, CIP, DAT, DAP, DDP
2. Rules for Sea or marine and Inland Waterway
Transport
• FAS, FOB, CFR, CIF
RULES FOR ANY MODE OF TRANSPORT
• Ex Works (EXW)
• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)
• Delivered at Terminal (DAT)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)
 A. TERMS FOR ANY TRANSPORT
MODE
1. EXW – Ex Works
• The Seller’s only responsibility is to make the
goods available at the Seller’s premises
(named place of delivery) or another named
place (i.e. works, factory, warehouse, etc.)
• The Buyer: bears full costs and risks of moving
the goods from there to destination.
• The buyer: loads the goods on truck or
container at the seller’s premises, and takes
into account the subsequent costs and risks.
 A. TERMS FOR ANY TRANSPORT
MODE
• The seller is not responsible for loading the
goods on the vehicle provided by the buyer
• The seller is not responsible for clearing the
goods for export, unless agreed.
• The buyer bears all costs and risks involved in
taking the goods from the seller’s premises to
the desired destination.
 A. TERMS FOR ANY TRANSPORT
MODE
• Notes
– Seller has no obligation to load goods, even if
better-suited to do so
– If seller does load goods, it does so at buyer’s
expense and risk
– Better-suited to domestic transport (no obligation
that seller clear goods for export—only provide
assistance if necessary at buyer’s expense and
risk)
– Buyer bears all risk of loss from time seller places
goods at buyer’s disposal
A. TERMS FOR ANY TRANSPORT
MODE
EXW – Ex Works
 A. TERMS FOR ANY TRANSPORT
MODE
• 2. FCA – Free Carrier
– Seller delivers the goods to the carrier or another
person nominated by the buyer at the seller’s
premises or another named place.
– The parties are well advised to specify as clearly as
possible the point within the named place of
delivery, as the risk passes to the buyer at that
point.
A. TERMS FOR ANY TRANSPORT
MODE
Notes
– Seller does clear goods for export
– Import formalities are buyer’s responsibility
– Seller may contract for carriage at buyer’s expense
and risk
 A. TERMS FOR ANY TRANSPORT
MODE
• Seller’s delivery options
– If the named place is seller’s premises: seller must
load goods onto buyer’s means of transport
– If the named place is any other place: seller must
place the goods at buyer’s (or his carrier’s
disposal) on seller’s mode of transport (ready for
unloading)
 A. TERMS FOR ANY TRANSPORT
MODE
• Improvements over Ex Works
– Seller clears goods for export
– Can be used to require seller to load goods, when
seller is in a better position to do so
• But…
– Buyer may have little idea what delivery at seller’s
factory means
– Buyer has costs in addition to sales price that
must calculated
– Seller has no control over carrier, insurance, etc.
A. TERMS FOR ANY TRANSPORT
MODE
 A. TERMS FOR ANY TRANSPORT
MODE
• Carriage Paid To
– Seller delivers the goods to the carrier or another
person nominated by the seller at an agreed place
(if any place is agreed between the parties) and
the seller must contract for and pay the costs of
carriage necessary to bring the goods to the
named place of destination.
– Seller delivers the goods at the named place of
destination at his expense.
– The Seller pays for moving the goods to
destination (named place of delivery).
 A. TERMS FOR ANY TRANSPORT
MODE
• From the time the goods are transferred to the first
carrier, the Buyer bears the risks of loss or damage.
• Buyer assumes the cargo insurance, import customs
clearance, payment of customs duties and taxes, and
other costs and risks.
• Risk transferred at the delivery of goods
 A. TERMS FOR ANY TRANSPORT
MODE
• 2 points of importance
– Place of delivery of goods to carrier
• Seller’s delivery obligation is complete
• Risk of loss passes
– Place of destination
• Seller contracts for and pays for carriage to the place of
destination
 A. TERMS FOR ANY TRANSPORT
MODE
• Notes
– Seller clears goods for export and pays for
transport through any country necessary to
delivery
– Seller has no obligation to pay for insurance but
must provide buyer information to buy insurance
at buyer’s risk and expense
– Buyer obtains import licenses and carries out
customs formalities
– Seller pays for both loading and unloading if
covered by contract of carriage
A. TERMS FOR ANY TRANSPORT
MODE
 A. TERMS FOR ANY TRANSPORT
MODE
CIP – Carriage and Insurance Paid to
• The Seller pays for moving the goods to
destination (named place of destination).
• From the time the goods are transferred to
the first carrier, the Buyer bears the risks of
loss or damage.
• The Seller, however, purchases the cargo
insurance
 A. TERMS FOR ANY TRANSPORT
MODE
DAT – Delivered At Terminal
• The Seller delivers the goods, once unloaded from
the arriving means of transport, are placed at the
Buyer’s disposal at a named terminal at the named
port or place of destination.
• ‘Terminal’ includes any place, whether covered or
not, such as a quay, warehouse, container yard or
road, rail or air cargo terminal.
• The Seller bears all risks involved in bringing the
goods to and unloading them at the terminal at the
named port or place of destination.
 A. TERMS FOR ANY TRANSPORT
MODE
• Notes
– Seller’s obligation is fulfilled and risk of loss passes
at same time: when the goods are unloaded at the
arriving terminal and placed at buyer’s disposal
– Can specify a point within the terminal at which
time the obligation is complete
– Seller clears goods for export but not for import
– No requirement of insurance
– If the intention is to carry seller’s obligation
further into buyer’s country, use DAP or DDP
 A. TERMS FOR ANY TRANSPORT
MODE
DAP – Delivered At Place
• The Seller delivers when the goods are placed
at the Buyer’s disposal on the arriving means
of transport ready for unloading at the named
place of destination.
• The Seller bears all risks involved in bringing
the goods to the named place.
 A. TERMS FOR ANY TRANSPORT
MODE
• Notes
– Much like DAT, but with additional obligation by
seller into country of delivery
– Goods are placed at buyer’s disposal at named
location ready for unloading; risk passes at that
point
– Seller clears goods for export but not import (use
DDP if intent is to require seller to clear goods for
import also).
– No obligation on seller to purchase insurance
 A. TERMS FOR ANY TRANSPORT
MODE
• Delivered Duty Paid
– Seller delivers the goods when the goods are
placed at the disposal of the buyer, cleared for
import on the arriving means of transport ready
for unloading at the named place of destination.
– The seller bears all the costs and risks involved in
bringing the goods to the place of destination and
has an obligation to clear the goods not only for
export but also for import, to pay any duty for
both export and import and to carry out all
customs formalities.
 A. TERMS FOR ANY TRANSPORT
MODE
• Notes
– Like DAP, but including seller’s obligation to clear
goods for import—pay for any necessary licenses
– Maximum obligation for seller
– If seller is not well-suited to clear goods for
import, DAP should be used
– No obligation to pay for insurance
 RULES FOR SEA AND INLAND WATERWAY
TRANSPORT
i. Free Alongside Ship (FAS)
ii. Free On Board (FOB)
iii. Cost and Freight (CFR)
iv. Cost Insurance and Freight (CIF)
 B. MARITIME-ONLY TERMS
FAS – Free Alongside Ship
• Seller delivers when the goods are placed alongside
the vessel (e.g., on a quay or a barge) nominated by
the buyer at the named port of shipment.
• Seller places the goods alongside the ship at the
named port, loaded at his expense.
• From that point, the Buyer bears all costs and risks of
loss or damage.
• Buyer pays main carriage/freight, cargo insurance
and other costs risks.
 MARITIME-ONLY TERMS
• Notes
– Seller is obligated to clear goods for export but
not import
– Seller has no obligation to pay for contracts of
carriage or insurance but may contract for carriage
and must assist buyer by providing necessary
information for insurance
B. MARITIME-ONLY TERMS
 B. MARITIME-ONLY TERMS
FOB – Free On Board
• The Seller delivers the goods on board the ship
(named port of shipment) and clears the goods for
export.
• From that point, the Buyer bears all costs and risks of
loss or damage
• The risk of loss of or damage to the goods passes
when the goods are on board the vessel, and the
buyer bears all costs from that moment onwards.
B. MARITIME-ONLY TERMS
 B. MARITIME-ONLY TERMS
CFR – Cost and Freight
• Seller delivers the goods on board the vessel or
procures the goods already so delivered.
• The Seller clears the goods for export and pays the
costs of moving the goods to the named port of
destination.
• Risk: transferred once the goods have crossed the
ship’s rail.
• The Buyer bears all risks of loss or damage
 B. MARITIME-ONLY TERMS
• 2 places of importance
– Place of delivery of goods
• Seller’s delivery obligation is fulfilled when goods are
on board the vessel
• Risk of loss passes when the goods are on board the
vessel
– Port of destination
• Seller pays for carriage to port of destination
 B. MARITIME-ONLY TERMS
• Notes
– Seller pays for unloading if the contract of carriage
covers unloading
– Seller clears goods for export but not import
– Seller has no obligation to obtain insurance
– If intent to ship in containers and delivery is to
carrier other than vessel, use CPT
B. MARITIME-ONLY TERMS
 B. MARITIME-ONLY TERMS
CIF – Cost, Insurance and Freight
– Seller delivers the goods on board the vessel or
procures the goods already so delivered.
– The risk of loss of damage to the goods passes
when the goods are on board the vessel.
– The seller must contract for and pay the costs and
freight necessary to bring the goods to the named
port of destination.
 B. MARITIME-ONLY TERMS
• Used exactly the same way as CFR except that
Seller: must in addition procure and pay for
insurance for the cargo insurance and delivery
of goods to the port of destination
• Buyer: responsible for the import customs
clearance & other costs and risks
• The Buyer bears all risks of loss or damage.
 Final Advice
• 2000 division of rules by seller’s obligation
– E (Make goods available at own premises)
– F (Deliver goods to a carrier appointed by buyer)
– C (Contract for carriage without assuming risk of
loss during shipment)
– D (Bear all costs and risks needed to bring goods
to place of destination)
But remember rules are split by mode of
transport
 Final Advice
• Usage—use the phrase “Incoterms 2010” after
the rule and named place
– Clarifies that 2000 version does not apply
• Usage—ensure you are naming the right
location
– EXW, FCA, FAS, FOB, DAT, DAP, DDU=place of
delivery
– CPT, CIP, CFR, CIF=place of destination
 INCOTERMS 2010
• Incoterms cannot be applied by themselves to
a variety of situations, of medium of
transports, technologies....
• They must be supplemented by additional
details adapted to these particular case.
• Define the geographical points where the
transfers of risks and expenses will take place.
 DISPUTE RESOLUTION
• Litigation between buyer and seller is generally a
complicated and expensive business, and is to be
avoided if at all possible.
• This is particularly true in the case of international
transactions.
• Fortunately, there is an alternative in the form of
Arbitration.
• This is relatively inexpensive and much quicker, and
• involves a panel of independent arbitrators
examining the case with a view
• to finding a solution that reflects the rights and
interests of both parties.
 DISPUTE RESOLUTION
• The International Chamber of Commerce in Paris is
the leading body for the provision of arbitration
services in connection with international trade, and
has a set of rules for conciliation and arbitration.
• Arbitrators can be appointed for any country by the
court of arbitration in Paris.
• The London Court of Arbitration of the London
Chamber of Commerce and Industry also offers
arbitration services, as do some other chambers of
commerce.