INTERNATIONAL PROCUREMENT:
TOPIC 4 :COMMERCIAL ASPECTS IN INTERNATIONAL CONTRACTING .
INCOTERMS.:
Incoterms
The Incoterms rules or International Commercial Terms are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC) that are
widely used in International commercial transactions or procurement processes. A series of
three-letter trade terms related to common contractual sales practices, the Incoterms rules are
intended primarily to clearly communicate the tasks, costs, and risks associated with the
transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and practitioners
worldwide for the interpretation of most commonly used terms in international trade. They
are intended to reduce or remove altogether uncertainties arising from different interpretation
of the rules in different countries. As such they are regularly incorporated into sales
contracts[1] worldwide.
First published in 1936, the Incoterms rules have been periodically updated, with the eighth
version- Incoterms® 2010 [2]‘-having been published on January 1, 2011. “Incoterms” is a
registered trademark of the ICC.
National Incoterms chambers.
Incoterms 2010.
The eighth published set of pre-defined terms, Incoterms 2010 defines 11 rules, reducing the
13 used in Incoterms 2000[3] by introducing two new rules (“Delivered at Terminal”, DAT;
“Delivered at Place”, DAP) that replace four rules of the prior version (“Delivered at
Frontier”, DAF; “Delivered Ex Ship”, DES; “Delivered Ex Quay”, DEQ; “Delivered Duty
Unpaid”, DDU).[4] In the prior version, the rules were divided into four categories, but the 11
pre-defined terms of Incoterms 2010 are subdivided into two categories based only on
method of delivery. The larger group of seven rules applies regardless of the method of
transport, with the smaller group of four being applicable only to sales that solely involve
transportation over water.
General Transport Terms
1. EXW – Ex Works (named place of delivery).
The Seller makes the goods available at his/her premises. This term places the maximum
obligation on the buyer and minimum obligations on the seller. The Ex Works term is often
used when making an initial quotation for the sale of goods without any costs included. EXW
means that a buyer incurs the risks for bringing the goods to their final destination. The seller
does not load the goods on collecting vehicles and does not clear them for export. If the seller
does load the goods, he does so at buyer’s risk and cost. If parties wish seller to be
responsible for the loading of the goods on departure and to bear the risk and all costs of such
loading, this must be made clear by adding explicit wording to this effect in the contract of
sale.
The buyer arranges the pickup of the freight from the supplier’s designated ship site, owns the
in-transit freight, and is responsible for clearing the goods through Customs. The buyer is
responsible for completing all the export documentation. Cost of goods sold transfers from
the seller to the buyer.
2. FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the
named place. It should be noted that the chosen place of delivery has an impact on the
obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s
premises, the seller is responsible for loading. If delivery occurs at any other place, the seller
is not responsible for unloading.
This term may be used irrespective of the mode of transport, including multimodal transport.
“Carrier” means any person who, in a contract of carriage, undertakes to perform or to
procure the performance of transport by rail, road, air, sea, inland waterway or by a
combination of such modes.
If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed
to have fulfilled his obligation to deliver the goods when they are delivered to that person.
3. CPT – Carriage Paid To (named place of destination)
The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first
carrier at place of shipment in the country of Export. The Shipper is responsible for origin
costs including export clearance and freight costs for carriage to named place (usually
destination port or airport). Shipper not responsible for buying Insurance.
This term is used for all kind of shipments.
4. CIP – Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and
insurance to the named destination point, but risk passes when the goods are handed over to
the first carrier. CIP is used for intermodal deliveries & CIF is used for Sea .
5. DAT – Delivered at Terminal (named terminal at port or place of destination)
This term means that the seller covers all the costs of transport (export fees, carriage,
insurance, and destination port charges) and assumes all risk until after the goods are import
duty/taxes/customs costs.
DAP – Delivered at Place (named place of destination)
Can be used for any transport mode, or where there is more than one transport mode. The
seller is responsible for arranging carriage and for delivering the goods, ready for unloading
from the arriving conveyance, at the named place. Duties are not paid by the seller under this
term (An important difference from Delivered At Terminal DAT, where the buyer is
responsible for unloading.)
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer,
and pays all costs in bringing the goods to the destination including import duties and taxes.
The seller is not responsible for unloading. This term is often used in place of the nonIncoterm “Free In Store (FIS)”. This term places the maximum obligations on the seller and
minimum obligations on the buyer. With the delivery at the named place of destination all the
risks and responsibilities are transferred to the buyer and it is considered that the seller has
completed his obligations
The challenge of using Incoterms 2010
Incoterms 2010 consists of 11 terms which are as follows:
• EXW (Ex-Works)
• FCA (Free Carrier)
• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CFR (Carriage and Freight)
• CIF (Carriage, Insurance and Freight)
• CPT (Carriage Paid to)
• CIP (Carriage and Insurance Paid to)
• DAT (Delivered to Terminal)
• DAP (Delivered to Place)
• DDP (Delivered Duty Paid)
Incoterms (International Commercial Terms) are a set of statements which clarify which
costs, risks and responsibilities relating to the shipment of goods belong to the shipper, and
which belong to the buyer. The International Chamber of Commerce published a new set of
rules – Incoterms 2010 – which came into use in January 2010. Their relevant publication
(No. 715E) is well written and anyone involved in International Trade should obtain a copy.
There are now 11 Incoterms – and which one to use depends on the type of transport required,
the rules of the importing and exporting countries and the needs of the parties involved.
Since Incoterms are issued by a private organisation, they have no legal standing in their own
right. However, once included in a contract, the Incoterm used becomes legally binding on
both parties. The challenge here is that sometimes the implications of using a particular
incoterm is not fully understood and, in recent years, this has caused a number of problems.
For example, using an inaccurate Incoterm as part of a contract (even if all parties have
accepted that Incoterm) can render a Goods in Transit Insurance cover invalid.
Another common misconception is to agree to an Incoterm and to then build the contract
around that Incoterm. This practice is not recommended. It’s much better to find the incoterm
which best matches the contract conditions and use that. However, if there is a concern that
the Incoterm on its own fails to fully explain the different parameters agreed, then there is
nothing to stop you stating in the contract which party carries which costs, risks and
responsibilities. This can help avoid future misunderstandings.
Please note that Incoterms cannot be used to determine ownership of goods. This is a detail
which must be clarified in the contract.
The consequences of not paying attention to such detail can be costly. Resolving any
disagreements may delay contract completion, or you could be liable for unexpected and
additional costs that dent your profit m
COMONDITY MARKETS
Definition of ‘Commodity Market’
A physical or virtual marketplace for buying, selling and trading raw or primary products. For
investors’ purposes there are currently about 50 major commodity markets worldwide that
facilitate investment trade in nearly 1000 primary commodities.
Commodities are split into two types: hard and soft commodities. Hard commodities are
typically natural resources that must be mined or extracted (gold, rubber, oil, etc.),
whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar,
soybeans, pork, etc.)
There are numerous ways to invest in commodities. An investor can purchase stock in
corporations whose business relies on commodities prices, or purchase mutual funds, index
funds or exchange-traded funds (ETFs) that have a focus on commodities-related
companies. The most direct way of investing in commodities is by buying into a futures
contract.
A commodity market is a market that trades in primary rather than manufactured products.
1. Soft commodities are agricultural products such as wheat, coffee, cocoa and sugar.
2. Hard commodities are mined, such as (gold, rubber and oil). Investors access about 50 major
commodity markets worldwide with purely financial transactions increasingly outnumbering
physical trades in which goods are delivered. Futures contracts are the oldest way of investing in
commodities. Futures are secured by physical assets.[2] Commodity markets can include
physical trading and derivatives trading using spot prices, forwards, futures, and options on futures.
Farmers have used a simple form of derivative trading in the commodity market for centuries
for price risk management.[3]
A financial derivative is a financial instrument whose value is derived from a commodity termed
an underlier.[2] Derivatives are either exchange-traded or over-the-counter (OTC). An increasing
number of derivatives are traded via clearing houses some with Central Counterparty Clearing, which
provide clearing and settlement services on a futures exchange, as well as off-exchange in the
OTC market.
Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded Commodities (ETC)
(2003-), forward contracts have become the primary trading instruments in commodity
markets. Futures are traded on regulated commodities exchanges. Over-the-counter (OTC)
contracts are “privately negotiated bilateral contracts entered into between the contracting
parties directly”.[4] [5]
Exchange-traded funds (ETFs) began to feature commodities in 2003. Gold ETFs are based on
“electronic gold” that does not entail the ownership of physical bullion, with its added costs
of
insurance and storage in repositories such as the London bullion market. According to the World
Gold Council, ETFs allow investors to be exposed to the gold market without the risk of price
volatility associated with gold as a physical commodity.[6][7]
What drives commodity markets?
The commodity markets help to ensure some stability in price, especially through futures
contracts. These allow suppliers to lock in the price they’ll receive for their produce at a
future date; so the price is also fixed for the buyer.
1. Prices of the commodity martket The commodity prices quoted in the market,
therefore, are often the futures price for each commodity; the fixed price at which a
commodity will be traded at a specified point in time. Below are some key factors
affecting these prices:
2. Supply and demand
3. Economic and political factors
Although commodities are normally traded on futures prices, economic events that happen
now will affect the levels of these prices. For example, political unrest in the Middle East
often causes the futures price of oil to fluctuate due to uncertainties on the supply side.
4. Weather
Agricultural commodities such as wheat or coffee will be heavily influenced by the weather,
as it controls the harvest. A poor harvest will result in low supply, causing rising prices.
5. The dollar
Commodities are normally priced in dollars, and generally move inversely to that currency. A
rising dollar is anti-inflationary, so it applies downward pressure on commodity prices.
Similarly, a falling dollar will usually apply upward pressure on commodity prices.
6. Inflation and commodity prices
Commodities can be used as a natural hedge against inflation. If rapid inflation seems
imminent, you may see commodity prices rising very quickly – they may even provide the
first sign of inflation. This is because people will be moving money out of investments that
don’t offer a hedge against inflation and into the commodity markets, to protect their assets.
7. Trading commodities
You can invest in commodities in different ways.
The spot market
Buying on the spot, or cash, market for commodities, means paying the commodity’s
producer for immediate delivery of the physical product. The spot price is the current market
price listed. Due to the large quantities traded, and the global range of these trades, set
standards are implemented and independently verified so that traders can exchange without
the need for a visual inspection.
Futures contracts
Delivery date
As commodities are physical goods, they will eventually need to be delivered (at least
theoretically) to fulfil their use. Commodities futures contracts therefore tend to have two or
more delivery dates per year, though the vast majority of trades will have closed in advance
of the delivery date.
Corn for example, has delivery dates in March, May, July, September and December each
year.
Futures investors tend to be speculators and are therefore unlikely to want to take physical
delivery of the product at the end of the trade; they’re more likely to sell it on to another
buyer before delivery is due.
Commodity price indices
A commodity price index is a weighted average of commodity prices, grouped to represent a
broad class of asset or a more specific subset. Depending on the index, the prices of the
constituent commodities may be spot or futures prices. Some examples of commodity indices
include:
The Continuous Commodity Index (CCI) comprises 17 commodity futures which are
continuously rebalanced to maintain an equal balance of 5.88% each. This gives a benchmark
of performance for commodities as an investment.
The S&P GSCI (formerly the Goldman Sachs Commodity Index) acts as a benchmark for
investment in the commodity markets, and its constituents are drawn from all commodity
sectors. This index is available to those invested in the Chicago Mercantile Exchange.
The Merrill Lynch Commodity Index (MLCX) contains commodities that are selected by
liquidity and then weighted according to the importance of each commodity in the global
economy.
To find out more about the purpose of indices and how they can be traded through
Negotiation:
Negotiation:
Definition: This is the process whereby two or more parties decide what each will give and
take in an exchange between them. Negotiation can also be defined as any form of verbal
communication in which the participants seek to exploit their relative competitive advantages
and needs to achieve explicit objectives within the overall purpose of seeking to resolve
problems which are barriers to agreement.
Objectives of negotiation:
1. Certainty
The aim of contract negotiation is firstly to achieve certainty, to record what is being
supplied, when, in what quantities and to what standard, and what are the consequences of
delay or failure to meet the agreed requirements. Many disputes are caused by the failure of
the parties to define at the beginning of their relationship exactly what is going to happen in
case of a dispute.
2. The best deal
Seeking clarity does not conflict with the view that negotiations should achieve the best deal,
it merely points out that both parties to a negotiation have to understand what it is that they
have agreed to. Many disputes have their origins in a lack of clarity. Careful discussions of
each element of the deal also ensure that each party’s objectives are acknowledged and dealt
with. Negotiators should aim for a win-win solution which benefits both parties.
3. Achievement of an Organization’s objectives
The goal of every negotiation must be to achieve a result which, even if it falls short of the
original objective can be considered a satisfactory advancement towards it. Compromise is an
essential feature of most successful negotiations: each party needs to walk away afterwards
feeling that he or she has gained. Although most people, when asked, will say that money is
the most important element in negotiation in practice it may be only one of a number of
elements. In most markets, quality, reliability of supply, the transform of “know-how” and
the creation of a long-term relationship will be of equal or greater importance.
4. Creation of a long-term relationship between the parties
Whilst this is not always possible, and some cultures, such as the Japanese, place more
emphasis on this aspect of negotiation this is increasingly important as companies build
networks of alliance partners. Partnering in industries like aerospace and IT is essential, due
to the complexity of the products and related projects. As the supply chain evolves into a
virtual organization partnering is becoming increasingly important in all industries.
Other objectives of negotiation:
1. To exert some control over the manner in which the contract is performed
2. To persuade the supplier to give maximum cooperation to the buyer’s company
3. To develop a sound and continuing relationship with competent suppliers: Buyers must
maintain a proper balance between their concern for a supplier’s immediate interest and
long-run performance.
4. To obtain a fair and reasonable price.
Approaches to Negotiation:
Approaches to negotiation may be classified as adversarial and partnership
Adversarial negotiation:
Also referred to as distributive or win-lose negotiation, is an approach in which the focus is
on ‘positions’ staked out by the participants in which the assumption is that every time one
party wins the other loses. As a result the other party is regarded as an adversary. The
characteristics of adversarial negotiation entail:
a) Parties have competing goals
b) Involves use of threats
c) In case of deadlock, negotiation is terminated
d) The approach is rigid
e) The attitude is that of we must win, they must lose.
2. Partnership negotiation:
Also referred to as integrative or win-win negotiation, is an approach in which the focus is on
the merits of the issues identified by the participants in which the assumption is that through
creative problem solving one or both parties can gain without the other having to lose. Since
the other party is regarded as a partner rather than an adversary the participants may be more
willing to share concerns, ideas and expectations.
The characteristics of partnership
negotiation entail:
a) Common goals emphasized upon.
b) Negotiation is friendly and based on openness
c) In case of a deadlock, negotiation results to further problem solving
d) The approach is flexible
e) The attitude is we both must win.
Negotiation strategies
Negotiation is where these and numerous other questions should be answered. If the contract
does not address these questions, or is not clear, they will be answered by applying the law of
whatever country or international convention has been chosen to govern the contract.
Negotiation is the fulcrum of commercial transactions. When parties consider buying or
selling, importing or exporting goods, it is with the intention of gaining something that will
benefit their bottom line. These gains are often at the expense of other parties who have their
own gains in mind. The final agreement on what will be exchanged is often the result of
rounds of negotiations full of concessions: some voluntary and some based on foreign
legislation (for example, some countries dictate local owners must retain 51 percent of legal
ownership of a venture).
1) Hire a consultant If there is no in-house expertise skilled in the international negotiation
arena, retain one to help. If cost is an issue, purchase literature or search online to subscribe
to an accredited expert.
2) Choose your team wisely Consider a small, competent team to manage expenses,
schedules and communication more effectively, especially if travel is necessary. Also, if there
is a language or cultural barrier, be sure to include a translator and/or customary expert as
part of your team.
3) Gauge your counterpart’s bargaining power and negotiation style Usually one party has
substantially more to gain or lose from an international venture. Over or underestimating the
balance of bargaining power can result in unnecessary concessions or failed negotiations.
Similarly, if you approach negotiations too aggressively and your counterpart is more
passive, or if you are technically focused and they are financially focused, the business
venture will not seem like a good fit.
4) Meet them in person If at all possible, it is important to meet with prospective parties
face-to-face. Be conscientious of cultural norms. Be on time, dress in appropriate attire and
demonstrate proper manners and respect. First appearances go a long way in establishing the
tone and trust level for further negotiations. Similarly, choosing a neutral site or persuading
them to come to your home territory can help you overcome or address cultural biases.
5) Fix the agenda and keep detailed records In addition to being perceived as professional
and informed, an agenda (or a checklist) helps keep time, expenses and schedules in check,
limits the number of issues that can be overlooked, keeps further rounds on track, and
provides reference for future negotiations. This content is an excerpt from the Legal Aspects
of International Trade textbook. Enhance your knowledge and credibility with the leading
international trade training and certification experts.
Styles to negotiation:
Negotiation styles vary with the person, their beliefs and skills, as well as the general context
in which they occur. Here are a number of different styles considered from different
viewpoints.
a) Belief-based styles:
There is a common spectrum of negotiation that ranges from collaborative to competitive. The
approach taken is generally based on:
i. The spectrum of negotiation styles from concession to competition.
ii. Collaborative negotiation: Negotiating for win-win.
iii. Competitive negotiation Negotiating for win-lose.
iv. Balanced negotiation walking between collaborative and competitive.
b) Professional styles:
Professional styles are those used by people who have a significant element of negotiation in
their roles. Here is a selection of different contexts in which such negotiation takes place.
i. Industrial relations: Confrontational bargaining.
ii. Managing board: Together and competing.
iii. International: Diplomatic dancing.
iv. Political: Scheming horse-trading.
v. Selling and buying: Professional sellers and buyers.
vi. Hostage: Emotional big-stakes exchanges.
c) Contextual styles:
Negotiation often happens within non-professional contexts, where the people either do not
know that they are negotiating or they are not skilled at it.
i. Domestic: Discussions and arguments at home.
ii. Every day: Everybody, every day, negotiates.
Although negotiation styles can be classified as competitive or collaborative, in practice there are
a range of styles, based on the degree to which a person thinks about them self or thinks
about the other person.
d) Consideration for self:
Considering yourself in negotiation is natural and reasonable — after all, the main point is to
get something that you want. In particular, if you care little about the other person or the
relationship, then you will prioritize your needs actions above those of others.
Excessive consideration for self leads to a Machiavellian approach, where the end justifies
the means. Overt aggression, intimidation and coercive deception are considered normal and
necessary and destroying the other person in some way may be a symbol of your victory over
them.
e) Consideration for others
Consideration for others will depend on your values, which are often based on your beliefs about
people. In particular, if you put yourself down (for example if you have low self-esteem) or
you escalate the importance of others too highly, then you will think considerably more about
the other person and prioritize their needs well above your own.
Excessive consideration for others leads to relentless concession, where you create a lose-win
situation with you as the loser. You may even lose elements of the relationship as giving
away too much can just end up in you losing respect. Some people like being the victim, but it
is no way to conduct a negotiation.
f) A middle way
Between concession and competition lies balance, although in practice this may be more
dynamic and variable than may be expected. Thus, what should be a highly collaborative
negotiation may become a balanced negotiation even with competitive elements. Shared
values are commonly used, however, to protect the relationship and ensure fair play. At
worst, some third person is called in to ensure a reasonable balance.
Ploys of Negotiation:
A ploy is defined in the Oxford English Dictionary as ‘a cunning act performed to gain an
advantage’. A ploy can also be defined a manoeuvre in a negotiation aimed at achieving a
particular result. A number of standard ploys are often used in commercial negotiations. They
are worth knowing about – you may not wish to use such tactics yourself but you will
certainly wish to know you’re your opponent is using a ploy against you.
Here are some of the more common ploys:
1. The bogey: This is a buyer’s ploy. The buyer assures the seller that he or she loves the
product but has a very limited budget, so that in order for a sale to occur the seller must
reduce the price.
The idea is to test the credibility of the seller’s price. The seller might react positively by
revealing information about costing, so that you can force the price downwards. It may
also provoke the seller to look at your real needs.
2. Minimum order ploy:
This is a ploy used by the seller whereby the seller maximises the value of the order by
placing restrictions or conditions on the order the buyer has placed.
3. Over and under ploy:
This ploy is a handy response to a demand made by your opponent. For example, your
opponent might demand that you reduce your price by 5% if they pay your invoice within
seven days. You could respond with an ‘over and under’: ‘if you agree to a 5% premium
for late payment’.
4. Quivering quill:
This is a ploy used by buyers in which the buyer demands concessions at the very point of
closing the deal. At this point, the buyer is about to sign the contract and suddenly
demands, for example, 3% off the purchase price. When the seller expresses
unwillingness to agree, the buyer threatens not to sign the contract. A typical result is that
the seller is pressured into giving a 1.5% reduction on the purchase price.
5. Shock opening:
This is a negotiation ploy designed to pressure the opponent. The other negotiator starts
with a price that is much higher than you expected. If they back up their opening price
with a credible reason for it, one has to review his/her expectations.
Negotiation Cycle
This shows the cyclical nature of events in the process of negotiation ie Get the facts,
determine the bargaining strengths, set objectives, plan strategies/tactics, negotiate and
review performance.
Phases of Negotiation:
Negotiation falls into three distinct phases: pre-negotiation, the actual negotiation and postnegotiation.
1. Pre-negotiation: In this phase the matters to be determined are as follows:
Who is to negotiate, what is to be negotiated, determination of venue, gathering intelligence
and most importantly tactic and strategy.
2. The actual negotiation (meeting phase):
a) Stage one: Introductions, agreement of an agenda and rules of procedure
The major aim of this stage is to establish atmosphere conducive to agreement. This
may include an impression of wishing to work to a mutually advantageous goal, the
physical arrangement of venue, restating areas of agreement and so on.
b) Stage two: Ascertaining the negotiation range: This is the start of the debate stage
where the issues which the negotiation will attempt to resolve are ascertained. With
adversarial negotiations this may be a lengthy stage since the participants often
overstates their opening positions. However with partnership negotiation, there is
more openness that saves time.
c) Stage three: Agreement of common goals which must be met if the negotiation is to
reach a successful outcome: This will usually require some movement of both sides
from the original negotiating range but the movement will be less or unnecessary in
partnership negotiations.
d) Identification of and, when possible, removal of barriers that prevent attainment of
agreed common goals: At this stage there will be:
➢ Problem solving
➢ Consideration of solutions put forward by each
➢ Discertainment of what concessions can be made
It may be useful to: review what has been agreed, allow recess for each side to reconsider
Its position and make proposals or concessions which may enable further progress to
be made.
If no progress can be made it may be decided to:
➢ Refer the issue back to higher management
➢ Change the negotiators
➢ Abandon the negotiations with the least possible damage to relationships
e) Agreement and closure: Drafting of a statement setting out as clearly as possible the
agreement(s) reached and circulating it to all parties for comment and signature.
3. Post-negotiation:
Post-negotiation involves the following activities:
| i. | Drafting a statement detailing as clearly as possible the agreements reached and circulating it to all parties for comment and signature Selling the agreement to the constituents of both parties i.e. what has been agreed, why it is the best possible agreement, what benefits will accrue. Implementing the agreements, e.g. planning contracts, setting up joint implementation teams, etc Establishing procedures for monitoring the implementation of the agreements and dealing with any problems that may arise. |
Criteria for competitive and advantages and limitations (negotiating for prices):
Competitive criteria entail the analysis of how well a good or service meets the needs and
wants of its intended customers in comparison with competing goods or services.
Cost Evaluation Criteria
The Offeror’s cost proposal will be evaluated for reasonableness, cost realism, clarity of
presentation and completeness, as well as to the relative cost benefit to the government.
Cost proposals must have sufficient detail for evaluation in accordance with Public
procurement regulations.
Cost analysis will be used to review and evaluate the separate cost elements and the profit
line in the Offeror’s proposal in order to help judge how well the proposal’s costs
represent what the cost of the Task Order should be. This process will look at:
a) The necessity for, and reasonableness of, proposed costs, including allowances
for contingencies;
b.)Projection of the Offeror’s cost trends, on the basis of current and historical
cost or pricing data;
c.)Reasonableness of estimates generated by appropriately calibrated and
validated parametric models or cost-estimating relationships; and
d.)The application of audited or negotiated indirect cost rates, labour rates and
cost of money or other factors.
Delivery schedule criteria:
The buyers will be evaluating Suppliers who promise to deliver goods at a minimal lead time
in most cases. The suppliers who guarantees minimal period have the upper hand to get the
tender since some materials are invariably needed urgently by prospective buyers.
Terms of payment criteria:
The companies which gives out a reasonable terms of payment for materials/services in most
cases gets the tender to supply goods or services to the buying company.
Capacity guarantee criteria:
In negotiation the issue of supplier’s capacity is factored in and to this extent the prospective
buyer looks at the capability of the supplier to meet the underlined buyer’s requirements in a
given time period.
Negotiating for Prices:
There are times when the bid process cannot be used. When this occurs, prices must be
negotiated. Negotiation should be used when:
i. The purchase involves a significant amount of money or requires an ongoing effort. In
these situations, negotiation may be used in conjunction with a bid.
ii. The number of suppliers available is too limited to create competition via a bid.
| iii. | New technologies or processes are required for which a selling price has yet to be determined. |
iv. The supplier is required to make a substantial financial investment or other resources.
v. There is no enough time available to seek competitive bids.
When negotiating a price, it is important to remember to do a thorough investigation. Find
out as much as possible about the company. Be sure you understand your requirements fully
and how these might affect prices. Investigate the costs associated with providing the service
or materials you are requiring. Develop your own strategy for the negotiation and try to
anticipate the strategy of the supplier. Make sure the person you are negotiating with has the
authority to make offers and commit the supplier. Finally, remember that a successful
negotiation is a win-win for both parties. You must allow the supplier enough leeway to make
supplying the goods or services attractive. Ideally, the general advantage based on these
attributes is value addition to the whole transaction. Conversely, a limitation can come in
situation whereby the company does not have enough personnel to facilitate this task.
Termination Clauses
A major sticking point in negotiations may be contract provisions that protect you against
losses in the event of contract termination. Since September 11, the threat of a terrorist attack
can scuttle travel plans to troubled destinations. You ought to be able to cancel your meeting
and terminate contracts without liability, and you ought to be able to get a refund on advance
deposits.
A force majeure clause spells out the circumstances – civil strife, terrorist attacks, and other
occurrences beyond the control of either party – that allow you to terminate the contract
without either party being liable. An Act of God clause covers hurricanes and other natural
disasters. A separate clause should specify when deposits are refundable.
“One thing that I put in any international contract is the provision that I reserve the right to
cancel the event, should that area be placed on the U.S. State Department Advisory List,”
says Jonathan T. Howe, Esq., president and senior partner, Howe and Hutton, Ltd., Chicago.
“I would be very reluctant, especially in the environment we’re in now, not to have that
provision in the contract.”
Should it be a deal breaker? That depends on how much risk you’re willing to assume. For
associations, the problem is attrition if attendees decide not to travel. They can avoid
penalties by requiring attendees to pay advance deposits. For corporations, the problem is
cancellation and loss of nonrefundable deposits. But because the planning time frame is
shorter, the risk is less.
If a property resists changing its contract – typically all of one page – it may be open to
including an addendum. Before signing, ask your insurer to review it. “In the end, it’s the
insurers who help you,” says Fitzgerald. “I want to know if they’re comfortable with it.” Also
you can explore getting extra coverage for terrorism.
“The topic of terrorism is a big issue right now – everyone is still grappling with how to deal
with it. Some of the big insurance companies in this industry have decided recently to cover
terrorism, but they limit the amount that they’ll cover, and it’s expensive,” Foster explains.
“So to a certain extent it’s still almost an uninsurable risk.…The cap on terrorism insurance
right now – what they’ll cover for losses – is $250,000. That may sound like a lot, but for an
association, the hope is that its meeting will make more money than that.”
Negotiating Meeting Requirements
Meeting facilities are convined in in many countries exporters and importers. Be specific
about your requirements. Provide sketches of your room setups and request room dimensions,
ceiling heights, and location of windows, mirrors, columns, and other obstructions.
Items that you’re accustomed to getting in the United States but have to negotiate hard to get
abroad include:
• Guarantee/minimum night stay, usually 100 percent, but negotiable
• Comp room ratio, as many as one per 25 per night, but not cumulative
• VIP/staff room upgrades, provided you demonstrate value
• Meal plan options, if you have food-and-beverage events
• Free meeting space, if the property can resell unused time blocks
• Comp move-in/move-out days, if you’re not incurring labor charges
“Just because I know that a certain property doesn’t negotiate on deposits, that doesn’t mean
I’m not going to ask them to do it,” says Foster. “I may be able to swap something else – give
them something that they want and get something that I want, which is a lower deposit.”
A good interpreter will help you understand the nuances of conversation with suppliers and
help ensure that you get what you ask for, when you asked for it. “Some people think that
‘mañana’ means tomorrow,” explains Howe. “But it really means “not today.” And in Japan,
if somebody says, ‘That may be difficult,’ you can take that as a no.”
Prices and Payment Policies
Foreign hotels may have limited meeting space, so it is customary to charge for rental, setup,
and turnover. Ask about what is included in price quotes and what additional charges you
may incur. Be aware of the value-added tax (VAT) rate – as much as 25 percent in some
countries – and how to obtain a refund. (See related article on VAT, page 26.)
Foster recommends protecting cash deposits against loss in the event that a property defaults.
There are three ways to do it: Send funds to the foreign hotel on the condition that the funds
are deposited in an interest-bearing escrow account; send the deposit to a U.S. affiliate of the
property to be held in escrow; or request a standby letter of credit for an amount equal to the
deposit. For any deposit, whether it’s local or overseas, try to negotiate a smaller amount that
can be paid closer to the event dates to avoid sending payment so far in advance.
Dispute Resolution
No matter how favorable the contract terms that you negotiate, disputes can still arise.
International arbitration is the method of choice for resolving these disputes. Stipulate where
the arbitration will take place (typically a neutral country) and what rules will apply. “It’s a
good way to go, because you don’t get tied up in the foreign country’s legal system,” advises
Foster.
Negotiation Basics
Do:
• Give yourself time
If U.S. negotiations normally take four to six months, it could take a year or more for
an international event.
• Do your homework
Research online and talk to others who have been to the destination.
• Understand the culture
Cultural differences can impact what you get, when you get it, and how much you pay
for it.
• Get local help
A tourism board, travel agent, customs broker, congress organizer, or your local
chapter/office can be your ally in negotiations.
• Know with whom you’re dealing
Check references and inquire about the quality of services rendered.
• Ask for English
Request English as the official language for negotiations and specify the English language contract as the prevailing document.
• Define the terminology
State your requirements in descriptive terms rather than industry jargon.
• Read the small print
Standard terms and conditions, rules and regulations may be referenced in the contract
but not attached. Review all referenced documents before signing.
• Obtain insurance
Make sure your organization is ensured for losses outside the United States.
Don’t:
• Assume it’s included
If what you need is not spelled out in the contract, it’s probably not included in the
price. The same is true for taxes, gratuities and service charges.
• Agree to something you don’t understand
Ask questions, gather information and, if you’re unclear about something, ask again.
• Sign a contract without examining a translation
Request copies of the contract in English and the language of the host country, then
compare the documents for consistency.
• Be the ugly American
Arrogance, disrespect for cultural differences, or a “bull-in-the-china-shop” approach
will only hinder negotiations.
ISSUES IN INTERNATIONAL CONTRACT NEGOTIATION
1. Timeline too long
2. Currency agreement
3. Single currency conversion
4. Exchange rates
5. Challenges in case of disputes
6. Incoterms
7. Trading blocks
8. Eligibility
9. Communication problem
FINANCIAL ARRANGENETS IN INTERNATIONAL PURCHASING
1. Currency exchange rate
2. Currency availability
3. Common currency agreement
4. Convertibility
5. Eligibility
6. Single currency conversion
7. Errors, commissions and discounts allowable
21
8. Applicable taxes
9. Terms of payment
10.Incoterms
Exchange Rate Systems
Keynes (1923) set out the basic problem of international monetary
arrangements. No country acting alone can achieve both price and exchange
rate stability. Acting alone, a country must choose one outcome or the other.
If it fixes its currency to the currency of another country, it loses control of
its price level and rate of inflation, and may experience real costs of
appreciation or depreciation, as in Chile in the 1970s and early 1980s or in
Argentina recently. If it chooses domestic price stability,
the market sets its nominal exchange rate. Some institutional arrangement or
international agreement such as the gold standard resolves this problem by
permitting countries to fix exchange rates and
import low inflation. A metallic or fixed exchange rate standard, however,
makes prices move procyclically.
Efforts to avoid either fully fixed or flexible exchange rates using some type
of fixed but adjustable peg contributed to major crises. As Fischer (2001)
noted, intermediate exchange rate systems-those that are neither fixed
permanently nor floating-lost much of their appeal in the 1990s. At the end of
the decade, only 34 percent of the countries reporting to the IMF had an
intermediate system, down
from 62 percent in 1991.1 Some type of floating, usually a managed float, is
now the
most common system.
Standard economic theory does not give explicit answer to the question: What
is the optimal exchange rate system? It depends on country size, degree of
openness, international capital mobility, and other factors. Many recent policy
discussions conclude that, with capital mobility, pegged exchange rates
(including adjustable pegs and adjustable bands) are not durable. Breakdown
has often occurred in a crisis, after large expenditure for defense of the peg,
as in Mexico, Korea, Thailand, Indonesia,
Russia, and elsewhere.
Three important caveats are in order. First, the remaining choices of
exchange rate systems are often described as corner solutions. That
overstates the choice problem.
Many countries that float intervene to adjust the exchange rate. Political
pressures to do so are real, often strong and continuing, even if undesirable.
Second, there are few freely floating currencies. Those that do are mainly
currencies of large economies like the dollar and the euro. Third, floating is
not a fully specified policy until there is a rule for money growth such as
inflation targeting, Taylor’s rule, or some other restriction on the actions of
the monetary authority.
The common policy rule, if adopted by many countries, would reverse the
early postwar error of creating scores of central banks. Many former colonies
wanted to create their own money as evidence of their independence. The
benefit of having a central bank proved illusory and costly for countries that
experienced high rates of inflation and enlarged public sectors financed by
printing money. In many countries, a central bank was far more likely to
create problems than to solve them.
• Role of the International Monetary Fund
What role would remain for the IMF? Countries that adopted the common
monetary system, either by fixing firmly to a major currency or adopting the
common inflation target, would be more stable. They would have to discipline
their fiscal policy to avoid excessive borrowing and to maintain the monetary
rule, if the IMF did not provide loans to sustain budget deficits. The
International Financial Institution Advisory Commission, which reported to the
U.S. Congress in March 2000, proposed major changes in international
financial institutions. In the commission’s view, the IMF’s two principal tasks
would be providing the public good of increased economic and financial
stability and greatly increasing the quantity, quality, and timeliness of
information about its member countries. The commission concluded that
most severe crises occurred in countries with weak banking systems and
adjustable pegged exchange rates. There are many reasons for the weakness
of banking systems in developing countries, but three are very common.
First, the banking or financial system is often used to support a development
plan, a subsidy system, and social transfers by lending at below market
interest rates to favored sectors or firms. China is currently an example, but
there are many others such as Korea or Indonesia. Second, many developing
countries are too small to offer local banks broadly diversified loan portfolios,
if banks lend only to domestic borrowers. Korea is the world’s 11th largest
economy, but its GDP is about the same of banking failures that insufficient
diversification is a major reason for bank failures.
Third, many developing countries permit their banks to borrow on short-term
loans from money center banks in the developed countries. When several of
these loans are not renewed, the banking system is forced to shrink and the
exchange rate depreciates and may collapse.
Crisis prevention or mitigation without subsidizing risk or introducing moral
hazard is one of its major duties. Reliance in the Commission Report was on
incentives both within the IMF and in the IMF’s dealings with its clients.
Improvements in the quantity, quality, and timeliness of information are
another type of public good. Given the IMF’s active role in surveillance and
the competence of its staff, publication of its reports strengthens markets.
• Crisis and Default Resolution
The third topic in the proposed revision of international financial
arrangements is the resolution of financial crises and restructuring of
defaulted sovereign debt.
To facilitate the recycling of oil revenues in the 1970s, the U.S. Congress and
the British Parliament passed sovereign immunities legislation that
encouraged foreign governments to borrow using the contractual provisions
of U.S. or British law.
critics of the IMF proposal came from many quarters-banks and investment
funds, economists and legal experts, emerging nations, and the U.S. Treasury.
One common feature of the protests was opposition to an expanded role for
the IMF, whether by the institution itself or by the courts and committees it
might control.
And the critics claimed the proposal would increase the uncertainty that leads
to volatility in markets and result in less lending at higher costs for emerging
economies. Some feared that the policy objectives of dominant IMF members
would influence decisions. Some anticipated a conflict of interest, since the
IMF and other multilateral agencies are large creditors that may not be
forever immune to sharing in
A likely effect of debt restructuring, whether under IMF rules or not, is that
the price of the debt falls far below its price prior to the default. Many
institutional investors must sell the bonds once default occurs. These sales
and any panic selling drive down bond prices and may influence the
restructuring negotiations and the perceived risk in sovereign debt. Other
reasons for selling include debt that is held on margin and investment funds
that sell to pay off customers. A small volume of sales
in an illiquid market can cause a large price change.
This problem can be avoided if, at the time of default, the government
announces
(1) a minimum restructured value (or maximum write-down) at which it offers
to
restructure its debt and
(2) that the IMF has agreed to purchase for cash all debt offered during the
restructuring period at a price equal to 80 or 85 percent of the minimum
restructured value. The IMF’s offer expires when the restructuring ends The
IMF’s announcement would have two benefits. It would put a floor under the
price to which the debt would fall and, more importantly, it would increase the
demand for defaulted debt. The reason is that, given the IMF’s guarantee of a
floor, the bonds become the highest-grade collateral for a loan at 90 or 95
percent of the guarantee.
Speculators could earn attractive annualized returns by buying the bonds,
using them as collateral for a bank loan and exchanging them for the
restructured debt.4
The two principal objections to the proposed floor price are
(1) the difficulty of deciding on the minimum restructured value at a time of
default and
(2) the risk of adverse or irresponsible behavior by the debtor, or political
instability, once the
IMF issues its guarantee. Both events would require the IMF to purchase debt
The second risk cannot be excluded, because the possibility of political
upheaval is always present. The debtor country may act to reduce the bonds’
price to the floor guarantee. This is a costly long-run tactic that arises only if
a country plays a one-time game.
In a default, the IMF must always project the growth rate, inflation rate,
interest rate, and other determinants of the minimum restructured value. It
does not lend without projecting, formally or informally, the possibility that
the program will fail.
The IMF is perhaps at lower risk if a program fails, because it pays out the
loan in a series of steps (tranches) and can stop payment. In fact, it usually
resumes payment after several months.
• Ethical issue
Ethics(also known as moral philosophy) is a branch of philosophy which seeks to address
questions about morality; that is, about concepts such as good and bad, right and wrong,
justice, and virtue. Ethics can also be defined as rules or standards governing the conduct of
a person or the members of a profession e.g. procurement function.
The following guidelines ensure the ethics management program is operated in a
meaningful fashion:
1. Recognize that managing ethics is a process: Ethics is a matter of values and associated
behaviours. Values are discerned through the process of ongoing reflection. Therefore,
ethics programs may seem more process-oriented than most management practices.
Managers tend to be sceptical of process-oriented activities, and instead prefer
processes focused on deliverables with measurements. However, experienced managers
realize that the deliverables of standard management practices (planning, organizing,
motivating, controlling) are only tangible representations of very process-oriented
practices. For example, the process of strategic planning is much more important than
the plan produced by the process. The same is true for ethics management. Ethics
programs do produce deliverables, e.g., codes, policies and procedures, budget items,
meeting minutes, authorization forms, newsletters, etc. However, the most important
aspect from an ethics management program is the process of reflection and dialogue
that produces these deliverables.
2. The bottom line of an ethics program is accomplishing preferred behaviours in the
business.
As with any management practice, the most important outcome is behaviours preferred
by the organization. The best of ethical values and intentions are relatively meaningless
unless they generate fair and just behaviours in the workplace. That’s why practices that
generate lists of ethical values, or codes of ethics, must also generate policies,
procedures and training that translate those values to appropriate behaviours.
3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place.
That’s why practices such as developing codes of ethics and codes of conduct are so
important. Their development sensitizes employees to ethical considerations and
minimizes the chances of unethical behaviour occurring in the first place.
4. Make ethics decisions in groups, and make decisions public, as appropriate.
This usually produces better quality decisions by including diverse interests and
perspectives, and increases the credibility of the decision process and outcome by
reducing suspicion of unfair bias.
5. Integrate ethics management with other management practices.
When developing the value s statement during strategic planning, include ethical values
preferred in the workplace. When developing personnel policies, reflect on what ethical
values you’d like to be most prominent in the organization’s culture and then design
policies to produce these behaviours.
6. Use cross-functional teams when developing and implementing the ethics
management program.
It’s vital that the organization’s employees feel a sense of participation and ownership in
the program if they are to adhere to its ethical values. Therefore, include employees in
developing and operating the program.
Ethics(also known as moral philosophy) is a branch of philosophy which seeks to address
questions about morality; that is, about concepts such as good and bad, right and wrong,
justice, and virtue. Ethics can also be defined as rules or standards governing the conduct of
a person or the members of a profession e.g. procurement function.
Principles and standards:
Principles of Professional Ethics
Individuals acting in a professional capacity take on an additional burden of ethical
responsibility. For example, professional associations have codes of ethics that
prescribe required behaviour within the context of a professional practice such as
procurement, medicine, law, accounting, or engineering. These written codes
provide rules of conduct and standards of behaviour based on the principles of
Professional Ethics which include:
| ❖ | Impartiality; objectivity |
| ❖ | Openness; full disclosure |
| ❖ | Confidentiality |
| ❖ | Due diligence / duty of care |
| ❖ | Fidelity to professional responsibilities |
| ❖ | Avoiding potential or apparent conflict of interest ❖ Business gifts ❖ Hospitality ❖ Fair competition |
Ethical standards:
The Code of Ethics and standard of Professional Conduct are the ethical cornerstone of
many companies across the globe. They are essential to company’s mission to lead the
global investment profession and critical to maintaining the public’s trust in the financial
markets.
The procurement ethical standards are:
1. all business must be conducted in the best interests of the State, avoiding any
situation which may impinge, or might be deemed to impinge, on impartiality;
2. public money must be spent efficiently and effectively and in accordance with
Government policies;
3. Agencies must purchase without favour or prejudice and maximise value in all
transactions;
4. Agencies must maintain confidentiality in all dealings; and
5. Government buyers involved in procurement must decline gifts, gratuities, or
any other benefits which may influence, or might be deemed to influence,
equity or impartiality.
Ethical practises in supply chain management:
1. Develop open, transparent and direct long-term stable relationships with suppliers
rather than relying on ‘arms length’ contracting and licensing agreements.
2. Avoid the attraction of searching for the cheapest labour and goods at the expense
of social and environmental responsibility.
3. Avoid frequently changing suppliers- this undermines their commitment to long term
progress on labour standards.
4. Develop a reasonable and agreed time frame for suppliers to meet standards as
specified in the company’s ethical purchasing strategy or code.
5. Avoid ‘cutting and running’ from high risk suppliers-engage suppliers to improve
conditions on an incremental basis.
Managing ethical issues in an organisation:
The following guidelines ensure the ethics management program is operated in a
meaningful fashion:
1.Recognize that managing ethics is a process.
Ethics is a matter of values and associated behaviours. Values are discerned through the
process of ongoing reflection. Therefore, ethics programs may seem more process-oriented
than most management practices. Managers tend to be sceptical of process-oriented
activities, and instead prefer processes focused on deliverables with measurements.
However, experienced managers realize that the deliverables of standard management
practices (planning, organizing, motivating, controlling) are only tangible representations of
very process-oriented practices. For example, the process of strategic planning is much
more important than the plan produced by the process. The same is true for ethics
management. Ethics programs do produce deliverables, e.g., codes, policies and procedures,
budget items, meeting minutes, authorization forms, newsletters, etc. However, the most
important aspect from an ethics management program is the process of reflection and
dialogue that produces these deliverables.
2. The bottom line of an ethics program is accomplishing preferred behaviours in the
workplace.
As with any management practice, the most important outcome is behaviours preferred by
the organization. The best of ethical values and intentions are relatively meaningless unless
they generate fair and just behaviours in the workplace. That’s why practices that generate
lists of ethical values, or codes of ethics, must also generate policies, procedures and
training that translate those values to appropriate behaviours.
3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place.
That’s why practices such as developing codes of ethics and codes of conduct are so
important. Their development sensitizes employees to ethical considerations and minimize
the chances of unethical behaviour occurring in the first place.
4. Make ethics decisions in groups, and make decisions public, as appropriate.
This usually produces better quality decisions by including diverse interests and
perspectives, and increases the credibility of the decision process and outcome by reducing
suspicion of unfair bias.
5. Integrate ethics management with other management practices.
When developing the values statement during strategic planning, include ethical values
preferred in the workplace. When developing personnel policies, reflect on what ethical
values you’d like to be most prominent in the organization’s culture and then design policies
to produce these behaviours.
6. Use cross-functional teams when developing and implementing the ethics management
program.
It’s vital that the organization’s employees feel a sense of participation and ownership in the
program if they are to adhere to its ethical values. Therefore, include employees in
developing and operating the program.
7. Note that trying to operate ethically and making a few mistakes is better than not trying
at all.
Some organizations have become widely known as operating in a highly ethical manner.
Unfortunately, it seems that when an organization achieves this strong public image, it’s
placed on a pedestal by some business ethics writers. All organizations are comprised of
people and people are not perfect. However, when a mistake is made by any of these
organizations, the organization has a long way to fall. In our increasingly critical society,
these organizations are accused of being hypocritical and they are soon pilloried by social
critics. Consequently, some leaders may fear sticking their necks out publicly to announce
an ethics management program. This is extremely unfortunate. It’s the trying that counts
and brings peace of mind not achieving an heroic status in society.
Ethical Issues in International purchasing
1. Trust
2. Honesty
3. Lead Time
4. Products conformance
5. Eligibilty
6. Incoterms adherence
7. Conflict of interest
| ❖ | Impartiality; objectivity |
| ❖ | Openness; full disclosure |
| ❖ | Confidentiality |
| ❖ | Due diligence / duty of care |
| ❖ | Fidelity to professional responsibilities |
| ❖ | Avoiding potential or apparent conflict of interest ❖ Business gifts ❖ Hospitality ❖ Fair competition 7. |