The Purchasing Environment: Free Resources by 3dMq16


									International Supply Chain Management:
Free Resources
Solutions to the May 2003 examination
You can download the May 2003 examination paper from the CIPS website. The solutions below
have been prepared by Profex Publishing for the private use of individual students. They may not
be reproduced, stored in a retrieval system or transmitted, in any form or by any means, without
the prior permission of Profex Publishing. From the optional questions we have selected
Questions 2 and 3.

1(a)    When trading internationally it is crucial to be aware of the differences in all
        areas from the values and norms of the people you are doing business with, and
        the ways in which business is handled

        The socio-cultural environment consists of those physical, demographic and
        behavioural differences that influence business activities in different markets.
        The word that IBG’s purchasing strategy needs to appreciate is ‘different’. The
        markets you are dealing with are not inferior or superior, they are not doing
        things wrongly – they are doing things differently. These differences will impact
        on the areas of culture, customary practice and ethics.

        Success will come from a knowledge of the country and the people you are
        dealing with. Many differences will need to be considered such as language
        differences, levels of education, attitudes, religion and many others and how
        they impact on the organisation’s business.

        Each country has its own values and customs – the do’s and don’ts which make
        up the cultural pattern of the people. IBG need to be able to recognise the
        similarities which bring customers together but must be sensitive to understand
        and value cultural differences. To work effectively in a variety of markets they
        must appreciate the need to be aware of and show respect to other cultures, in
        both attitude and behaviour.

        Awareness of culture is an important element for any individual or organisation
        carrying out business overseas. The impact on IBG’s purchasing strategy will
        reflect in their desire to centralise parts of the purchasing operation while
        maintaining close contact with the market.

        IBG is considering several product opportunities. Food is core to the business but
        is also one of the most difficult to standardise within a branding strategy. (Even
        the flavour of Coca-Cola is changed to suit certain individual markets.) Each
        market has individual tastes and preferences that may mean adapting to local
        market needs while maintaining the consistency and quality necessary to
        underpin any successful branding strategy.
       Customary business practices vary from culture to culture and the proper
       protocol should be followed when operating overseas. Rules of etiquette are
       important: what is considered acceptable in your own country may be
       considered rude elsewhere. There are many social courtesies that accompany
       business and personal relationships and it is important to understand those that
       will apply in your business situation.

       IBG should develop policy and procedures in the areas of customary practice
       and ethics to ensure consistency throughout the group. Understanding and
       applying criteria on cultural, ethical and customary practice issues is crucial for
       the success of Co-Mart, not only within purchasing but across the business as a

1(b)   Co-Mart has made a strategic decision to change the nature and structure of its
       organisation to best meet the needs of the future. A change of this nature will
       require careful thought and management in order to lead to successful

       As with any change management scenario there will be uncertainty within the
       organisation and Co-Mart should plan to use the best practices of change
       management: effective and accurate communication, highlighting the future
       benefits, providing additional training where identified, as examples to ensure
       the organisation as a whole views the change in a positive light.

       The role of purchasing is pivotal to the successful outcome. The organisation is
       strategically developing the role of the purchasing operation in order to gain the
       benefit of economies of scale in purchasing and to ensure consistency of the
       product in order to underpin the branding strategy.

       It is useful to consider a four phase approach developed by Monczka and Trent.
       The role of purchasing within Co-Mart appears to be between Phase 2 (foreign
       buying based on need) and Phase 3 (foreign buying as part of a procurement
       strategy). The organisation uses both approaches to suit current needs: we are
       told that ‘purchasing is arranged nationally, with limited use of the group’s
       international purchasing power’.

       The organisation is now making a strategic commitment to Phase 4 (integration
       of a global procurement strategy). This will mean a steep learning curve for both
       the organisation and the role of purchasing within it.

       The need for organisational change has been recognised at a strategic level and
       Co-Mart would be looking at existing best practice when developing long-term
       strategic plans. A development of this scale and scope would not have been
       reached without considerable research and communication within the
       With the role of purchasing being given increased prominence there would be a
       move to increase the centralised control of the purchasing department. By doing
       this Co-Mart can achieve economies of scale in purchasing and foster a common
       attitude to quality.

       The danger of centralising the purchasing function would be a possible
       alienation of the national purchasing operations and dilution of their existing
       links with business.

       As the question states the need now is ‘to put in place a robust purchasing
       infrastructure’. A feature of this infrastructure will need to be the blend between
       centralising the purchasing function and the degree of autonomy to be left with
       the national purchasing organisations.

       Any changes of this nature will be a phased process and only developed
       following discussion and consultation. Changes could be handled on a project
       basis using inputs from teams across the purchasing skills base of the
       organisation in order that changes are agreed and seen to be to ‘owned’ not only
       by the purchasing department but by the entire organisation. This can be
       achieved by using cross-functional teamwork,

       A key consideration with a change of this scope is the contribution that can be
       made by supply chain thinking. It takes many years to develop and refine supply
       chains. Co-Mart will need to evaluate their existing supply chain network and
       look for improvements or new suppliers that will meet not only their current but
       also their future needs. In the exam text it says that suppliers are welcome to
       submit ideas for joint development and this could be taken outside the product
       arena to include supply chain issues.

       The Purchasing Department will see a considerable change in its work and
       attitude but will also need to link more extensively with other departments
       within the organisation to gain the full benefits of this change.

1(c)   Co-Mart is a diverse retail group that operates over 29 countries and as such will
       be involved in numerous transactions involving many different currencies. The
       organisation is exposed to ‘currency risk’, ie the risk of one currency moving
       against another which may result in either an additional profit or unplanned

       Co-Mart is in the retail business, not the currency markets, and so should take
       steps to minimise any possible exchange risk areas. Currency management will
       be a key area of the organisation’s business with an ongoing requirement for
       operating capital in a number of currencies. This will require professional
       management to minimise risk and to attract interest in the short-term money
       Tools that can be used to reduce identified risks include the range of forward
       exchange contracts offered by banks.

       A forward rate is a rate of exchange which is fixed now for a deal that will take
       place at a fixed date, or between two dates, in the future.

       A forward exchange contract is a binding contract between a bank and its
       customer for a purchase or sale of a specified amount of a stated foreign currency
       at an agreed future date, the rate of exchange being fixed when the contract is

       There are two main types of forward exchange contracts:

             If the exact date of payment or receipt is known in advance the customer
              may enter into a fixed forward exchange contract. This type of contract is
              suitable when the precise date of the transaction is specified.

             If the date of payment is uncertain an option forward contract may be
              agreed between the customer and the bank. The customer undertakes to
              buy or sell currency from or to the bank between the two specified dates.
              The option means that the date of settlement is optional between the
              specified dates; the contract itself is not optional and must be fulfilled.

       An alternative is to use foreign currency options (not to be confused with option
       forward contracts) which offer a greater degree of flexibility to customers. They
       are agreements by which a customer can pay a premium (fee) to the bank for the
       right, but not the obligation, to buy from or sell to the bank a specified amount of
       money at an agreed rate of exchange.

       The option can be exercised at the customer’s discretion or can be allowed to
       lapse (eg if exchange rates have moved in the exporter’s favour) in which case
       the exporter loses the option premium paid.

       By using the appropriate contract to suit varied circumstances Co-Mart can
       reduce their exposure to possible exchange risk.

1(d)   With an operation of the scale and scope envisaged by IBG the area of contract
       management is one that needs to be considered fully. With a more centrally
       based structure the ability will be there to work on standardising many aspects
       of contract management and with a greater skills base amongst the staff to
       address issues.

       It will be of crucial importance that buyers undertake a contract risk assessment
       in order to gauge the level of protection required from any contract placed with
       an overseas buyer.
Research on the abilities of the supplier may prove more difficult because of
distance, language, access to impartial information and so on, so initially the
buyer needs to be sure of the suppliers and their ability to deliver.

The negotiation stage needs to be considered carefully. With the cultural and
customary practice issues discussed earlier both parties need to be clear on their
commitments and responsibilities. Keeping minutes and copies of
documentation should be an integral part of the process to ensure that any issues
that may cause dispute have an audit trail.

Clear procedures relating to evaluation of quotes and tenders should be adopted
to avoid any contractual disputes over offer and acceptance in the contract. Co-
Mart will have considerable buying power and should insist that the contract is
under English law in the case that any disputes reach the courts. This can usually
be avoided by using the alternatives to litigation (eg mediation, conciliation,
alternative dispute resolution, or arbitration) offered by the International
Chamber Of Commerce or the United Nations Commission on International
Trade Law (UNCITRAL). (For more detail on this, see page 119 of your study
text). The contract should clearly state the ICC route as first choice.

Methods of payment to be used should be fully discussed. These include open
account (where you trust the buyer to pay in full on the due date), bills of
exchange (a more secure method of payment where the buyer either makes
payment on sight of the documents or acknowledges the debt in their own
country under a term draft), and irrevocable letters of credit (that represent a
total guarantee of payment as long as the terms on the letter of credit are
complied with in full). Agreeing the appropriate method of payment is crucial in
the negotiation phase.

Terms of trade (Incoterms 2000) are also discussed in depth in the negotiation
phase. Incoterms define where risk and responsibility pass in the delivery of
goods and in some cases (eg CIF terms) define when and where documents
should be delivered. Incoterms are incorporated in the contract by specifying the
appropriate term and place of delivery and are widely accepted and understood
in international trade. Issued by the ICC they can offer the range of mediation
services etc in case of disputes.

Insurance is an issue covered in Incoterms but minimum cover is specified. It
may be necessary to specify Cargo Clause A instead of the minimum cover
(Cargo Clause C) for the type of goods Co-Mart are involved with. Areas such as
liabilities and exclusions should be reviewed for each contract. Consideration
should be given to inclusion of a Romalpa clause (retention of title) if supplying.

Co-Mart will increasingly be developing a supply chain philosophy in their
working relationship with suppliers and customers. As with any supply chain
structure driving out waste is crucial. Contracts and contract management
should be built on suiting the needs of both parties and the supply chain overall.
2(a)   (Question 2 is chosen because it offers easy marks for rote learning. Provided you have
       studied Incoterms 2000 you can pick up marks here simply for repeating what you have
       learned. That won’t be enough to get you full marks, but it will certainly move you very
       close to a comfortable pass mark.)

       Incoterms 2000 are a set of international terms of trade that define the risks and
       responsibilities of buyers and sellers in the sale of goods in international markets.
       They represent a set of internationally agreed and widely accepted trade terms
       that are used by the vast majority of trading nations.

       As the question states they are issued by the International Chamber of
       Commerce based in Paris. They do not form part of any nation’s law but are
       incorporated into the commercial contact by the inclusion of the agreed term and
       reference to Incoterms 2000. For example, the contract might specify ‘CIP Wilson
       Freight, London Heathrow Airport (Incoterms 2000)’.

       Incoterms are categorised under four main headings according to how the seller
       makes the goods available to the buyer.

       E terms (EXW) – on departure from the exporter’s premises

       F terms (FCA, FOB, FAS) – to a carrier or vessel nominated by the buyer

       C terms (CFR, CIF, CPT, CIP) – where the seller pays for carriage but without
       assuming the risk for loss or damage to the goods after shipment

       D terms (DAF, DES, DEQ, DDU, DDP) – where the seller bears all costs and risks
       to bring the goods to the country or premises of the buyer.

       Incoterms 2000 give a clear demarcation line between risk and responsibility in
       international trade. For example, they clarify who is responsible for import or
       export clearance, who is responsible for freight and handling charges and where
       risk passes between buyer and seller. When incorporating Incoterms 2000 into a
       contract both parties will then have a clear understanding of their obligations
       under these areas.

2(b)   Incoterms is short for International Commercial Terms. They are focused on the
       commercial issues of the contract involving risk and responsibility as described

       Incoterms clearly indicate areas of risk and responsibility to an agreed point and
       costs will be calculated to that point. For example, CIP will include cost of goods,
       freight, insurance (minimum cover unless agreed otherwise) and various
       ancillary costs (loading, packing etc) that may be applicable. They do not cover
       considerations regarding the method of payment such as open account, bills of
       exchange or letters of credit, which is a further commercial consideration based
       largely on the security required to ensure payment.
       Incoterms clearly define where risk passes. For example, with CPT risk passes on
       delivery to the nominated carrier but this applies only to the risks associated
       with international trade such as loss, damage etc. Incoterms do not cover the
       transfer of property rights in goods which can be defined in the contract, eg by
       the inclusion of a Romalpa Clause (retention of title) or by specific wording.

       In addition Incoterms are not designed to provide relief from obligations, or
       exemptions from liability in the case of unexpected or unforeseeable events, nor
       do they provide relief from the consequences of breach of contract, except those
       relating to the passing of risks and costs when the buyer is in breach of his
       obligation to accept the goods or to nominate the carrier under an F-term (refer
       to page 184 of your study text).

2(c)   (i)    CFR and CIF are among the C terms described in the answer to part (a)
              where the seller pays for carriage but without assuming the risk for loss
              or damage to the goods after shipment. CFR has the same point of
              delivery as for FOB, namely when the goods pass the ship’s rail in the
              named port of shipment.

              CFR requires the seller to pay the costs and freight necessary to bring the
              goods to the named port of destination. The risk of loss or damage to the
              goods, and other costs relating to events after the goods are delivered on
              the vessel, are transferred to the buyer when the goods pass over the
              ship’s rail at the port of shipment. In effect it becomes the buyer’s duty to
              take out the appropriate level of marine insurance.

              With CIF the same rules apply as regards point of delivery and payment
              of costs and freight. The risk of loss or damage to the goods, together
              with additional costs due to events occurring after time of delivery, is
              transferred from the seller to the buyer. With CIF it remains the seller’s
              responsibility to purchase the marine insurance.

              The rules governing Incoterms state that only minimum cover is required
              (ie Lloyd’s Cargo Clause C). This is generally considered suitable for
              commodities so it is often advisable that a requirement for Cargo Clause
              A is included when the contract is signed to provide ‘all risks except’

       (ii)   FAS means that the seller delivers when the goods are placed alongside
              the ship at the named port with the buyer bearing all costs and risks of
              loss or damage to the goods from that point.

              FAS was a term introduced under the 1990 revision of Incoterms,
              primarily as an alternative to FOB where the concept of the ‘ship’s rail’
              was seen as unsuitable particularly for container transport. In a revision
              of the 1990 rules the 2000 amendment of Incoterms now requires the
              seller to clear the goods for export.
FOB is where the seller delivers the goods when they cross the ship’s rail
at the named port of shipment. The buyer bears all costs and risks of loss
or damage to the goods at that point. The FOB term, as with FAS, requires
the seller to clear the goods for export. The term is considered suitable for
break-bulk and conventional traffic but is still in common usage for
containerised traffic in certain parts of the world.
3   (Question 3 is chosen for much the same reason as Question 2 – provided you have
    studied the material on pages 74–75 of your study text you can construct a solution
    easily. As an aid to learning, we have incorporated additional detail in the solution

    The concept of the International Monetary Fund (IMF) was developed in July
    1944 at a United Nations conference held at Bretton Woods, New Hampshire,
    where representatives of 45 governments agreed on a framework for economic
    cooperation designed to avoid a repetition of the disastrous economic policies
    that had contributed to the Depression of the 1930s. The agreements reached on
    financial assistance and measures to stabilise exchange rates led to the creation of
    the International Bank for Reconstruction and Development and the IMF.

    The IMF is a specialised agency of the United Nations that was set up in 1945.
    With its headquarters in Washington DC it is governed by its almost global
    membership of 184 countries.

    Countries that joined the IMF between 1945 and 1971 had their exchange rates
    ‘pegged’ to the US dollar. Pegged rates could be adjusted but only to correct a
    ‘fundamental disequilibrium’, usually a balance of payments crisis. Since 1971
    members have been free to float their currency as they wish (except pegging to
    gold). Some countries allow their currency to float freely, some peg to another
    currency (often the US dollar), others participate in currency blocs.

    Resources of the IMF come mainly from quota subscriptions applied to members.
    These quotas broadly reflect the member countries’ size in the world economy
    with the USA, the world’s largest economy, contributing 17.6% of total quotas
    and the Seychelles 0.004% (1999 figures).

    The IMF’s main objectives are as follows.
          To promote exchange rate stability
          To maintain orderly exchange rate arrangements
          To avoid competitive currency devaluations
          To establish a multilateral system of payments
          To eliminate exchange restrictions
          To create stability reserves
To serve these objectives the IMF:

      Monitors economic and financial developments in member countries and
       puts forward policy advice where appropriate.

      Lends to member countries with balance of payments problems, not just
       to provide temporary financing but to assist repatriation of flight capital
       and to support adjustment and reform policies. The most recent example
       has been the Argentine government who have agreed in September 2003
       to a new aid package allowing it to concentrate on economic recovery
       without paying back its debts and paying interest only over the next three

      Provides the governments and central banks of its member countries with
       technical assistance and training in its areas of expertise (an example
       being the development of treasury systems in Russia and the former
       Soviet economies).

The IMF has been criticised over recent years for the ways its policies have been
implemented (concentrate on export, develop import substitution, cut public
spending), as being very harsh on the people they are seeking to help.

The IMF has responded in a positive manner to its critics and has become more
aware of its public perception by making itself more open to scrutiny and by
becoming more involved in public debate.

In its favour the IMF has presided over a considerable growth in world trade. In
September 2000 the IMF set out its vision for the future in which the institution

      Strive to promote sustained non-inflationary economic growth that
       benefits all the peoples of the world.

      Be the centre of competence or the stability of the international financial

      Focus on its core macroeconomic and financial areas of responsibility,
       working in a complementary fashion with other institutions established
       to safeguard global public goods.

      Be an open institution, learning from experience and dialogue, and
       adapting continuously to changing circumstances.

Its present day role is one of continuing to develop the financial aspects of the
world economy while at the same time increasing its transparency and
accountability to the public as a whole.

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