How can the concept of bartering be implemented in the field of procurement?

As procurement specialist bartering is one of 100 strategy or techniques in closing a deals.it is a negotiation techniques  form of goods exchanges, price wise negotiation in return of long term business service and contract +market monopoly.

 

Bartering:

 

There is always a case for any commercial instrument when managing purchasing departments involving big projects. Personally, I would not rule out such an option as it can come in as a useful method of exchange.

 

 

 

Perhaps, if a project involves construction in countries with very substantial natural resources like oil is involved and the region part of critical global energy system, and a company is undertaking construction in ‘very high risk’ areas and on completion if the Government encounters cash flow problems because of political sanctions why not receive payment in the form of a lease on an oil well and sale of oil for a duration, for instance years?!

 

 

 

Case by Case through MOU or Contract. it couldn't be implemented 100% in a system farm.

Bartering has obstacles  in international Business and not valid to all Kind of Goods.

 

To implement the concept of Bartering (Countertrade) in the field of procurement, the following must be done:

·         Bartering (Countertrade) must be integrated into the “Procurement Policy” of the organisation and the role of procurement department clearly spelt out without any ambiguity.

·         This Procurement Policy must be endorsed by the organisation CEO or MD for it to qualify as a working document in compliance with ISO (International Organization for Standardization) standard.

·         The organisation must also understand the international trade laws of the country they involved with in the countertrade deal.

·         Both marketing/sales and procurement department of the organisation must recognise the need to work together as a team for the interest and the maximum benefit of the organisation. When bartering (countertrade) is used to facilitate sales, procurement department of the organisation should be involved right from the onset, to review the list of items their company requires from importing country with the view to carrying out the costing, review the quality of such items, and its mode of shipment/delivery.

·         Procurement department must be fully involved in the negotiations.

For the benefit of knowledge sharing, I will like to further discuss countertrade in the following order.

What is bartering? Is a form of transaction where goods are exchange for other goods without the involvement of money. While Swap is whenever goods is exchange for services. Bartering is a form of countertrade.

Example of Bartering was Indo-Iraq Barter deal in year 2000.  India and Iraq agreed on an "oil for wheat and rice" barter deal, subject to UN approval under Article 50 of the UN Gulf War sanctions, that would facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to exchange (barter) 1.5 million tons of Iraqi crude under the oil-for-food program.

What is Countertrade? Refers to any transaction in which payment is made partially or fully with goods instead of money. Countertrade links two normally unrelated transactions, e.g. the sale of product into a foreign country and the sale of goods out of that country. Countertrade is in several forms, namely:

·         Bartering: Which has been defined above

·         Offset: which is a form of transaction where “some, all or more than 100 percent of the value of the sale is paid off (offset) by the purchase of goods produced in the buying country. Offset is in two categories, namely:

a.   Direct offset: involves close technological ties between the item sold and item purchased. Example is when the government of Australia purchased helicopters made by Boeing in the U.S, while Boeing also agree to buy “ailerons” from an Australia supplier for their 727 planes.

b.   Indirect Offset: Involves the purchase or the facilitation of sales of items that are unrelated to the purchasing country. Examples was when Switzerland purchased F-5 Jet fighters from the U.S, the manufacturer (Northrop) facilitated the sales of Switzerland elevators in North America.

·         Counterpurchase: is the agreement of an exporter to purchase an approximate quantity of unrelated goods or services from the importing country in exchange for the value of goods exported. It normally involves two separate but linked contracts. One contract for export (sale), the other for import (Counterpurchase) from the buying country. Example in 1977 Volkswagen exported 10,000 cars to the East Germany, and agreed to purchase goods from a list compiled by the East Germany up to the value of goods exported.

·         Buy-back (Compensation): is an arrangement by the seller of turnkey plants, machinery, or other capital equipment to accept as partial or full payment products produced in the plants or on the capital equipment. Example are:

a.   Was when Occidental Petroleum several plants in the former Union of Soviet Socialist Republic (USSR – Soviet Union) and receive partial payment in Ammonia over a period of 20 years.

b.   Also, Xerox Corporation sold plants and technology to the People’s Republic of China for the production of low-cost photocopying machines and contractually agreed to repurchase a large proportion of the machines produced in the China plant.

The differences between Buy-back and Counterpurchase are that, in buy-backs;

a.   The goods and services taken back are tied to the original goods exported. While this is not so with Counterpurchase.

b.   The transaction always extends over a longer period of time than Counterpurchase.

·         Switch trading: refers to the transfer of unused or unusable credit balances in one country to overcome an imbalance of money by a trading partner in another country. It involves at least three parties. This means a country may barter goods from another country which may be of no use to it so it sells off the goods to another country for hard cash.

Example of Switch Trading: Was when Brazil exported corn to East Germany (before Unification) and received products in return. East Germany doesn’t use corn, so it sold the corn to other countries to earn hard cash.

Why the Need for Countertrade? Companies that consider countertrade typically want to expand into a foreign market, increase sales, build customer and supplier relationships and overcome liquidity challenges. It is driven by the following factors:

·         It is imposed by foreign government to gain foreign exchange and solve liquidity problem. Because many countries cannot obtain the trade credit or financial assistance to pay for their imports. While the IMF and World Bank are increasingly restrictive in the way they allow governments to operate their monetary policies.

·         It is imposed by foreign government to gain technology

·         It is driven by the quest to develop new market. The party receiving the goods may become a new distributor, opening up new international marketing channels and ultimately expanding the market

·         It is also meant to stimulate job creation and protect/develop domestic industries, such as agriculture and mineral extraction. and to help find new export markets"

·         To balance overseas trade deficit (imbalance). Countries are increasingly returning to the notion of bilateralism as a way to reduce trade imbalances.

·         To Gain foreign contracts for future sales (Counterpurchase).

·         It helps the seller to gain competitive edge over other suppliers by differentiating its products from those of competitors and  to find new export markets

·         It also driven by unstable national currencies.

 

Advantages of Countertrade are:

·         Avoidance of exchange controls

·         Promotion of trade with countries inconvertible currencies

·         Reduces risk associated with unstable currencies

·         Create opportunity to enter new market of formerly closed markets

·         Expand business and sales volume

·         Reduces the impact of foreign protectionism on overseas business

·         It enhances full use of plant capacity

·         Create opportunity for longer production runs

·         Reduction in the unit prices of product due to increase in sales volume

·         Find valuable sales outlet for declining products.

 

Disadvantage of Countertrade are:

·         The value of a deal, the goods being exchanged for, may be uncertain, causing significant price volatility.

·         The negotiation is complex and time consuming, as there would be bargaining over the goods to be traded by both parties, leading to long,-drawn negotiation until all parties are satisfied and agreed.

·         Sometimes it lead to indecision on the part of the exporter (Seller)  on the what to do with goods being offered by the importer (Buying Country)

·         Cost of transaction could be high due to the additional cost of commission to brokers and middle men who may be assisting to source for buyers for the goods offered by the importing country (Buyer), which the exporter does not need.

·         Inherent logistical issues, especially if commodities are involved.

·         Greater uncertainty on the value (actual price, i.e. pricing problem) and the quality of goods being traded.

·         Offset customer can later become a competitor

·         Due to the lengthy time of negotiation, commodity price (which are sometime volatile and unstable) could have varied leading to further delay in the conclusion of negotiation.

·         It can also be used to offload product that cannot be sold elsewhere

·         Product received may be unrelated to normal product lines and not easily fits into normal distribution channels

 

·         Exchanged goods may find their way back into the original market at a discount rate. 

Agreed with expert opinions ---------------------------

I believe that Barter System reduces the scope of choices a procurement task, thus forcing the buyer to be content with less than optimal choices. It is because of limitations of Barter that man invented money and translated value of Goods and Services in terms of money. So I do not see any advantage in rolling back the wheel.

Entire idea of negotiations is basically a quid pro quo - this for that - hopefully an exchange of something highly valuable to you for something highly valuable to your counterpart (and not so much to you). This or that in negotiations can be really anything. You can say we pretty much barter issues every day ;)

Bartering can be implemented base on reciprocal trading relationship between the seller and the buyer. At this times it is very difficult to be applicable. Most of the goods requirements are ordering specifically for each project so in this case type of the goods and the specifications are most deterministic and effective causes .

 

 

 

As a procurement professional, you are tasked with ensuring your ... innovative opportunity: bartering of your goods and services to reduce costs.

As a procurement officer, you are tasked to ensure that your organization receives the best possible value for all expenses. Price , discounts, and looking at the total cost of procurement are all approaches that have brought procurement to the forefront of Corporate cost-management.

trade takes an old practice that presents a new, innovative opportunity: bartering of your goods and services to reduce costs in other areas of the business.

Bartering can be implemented in the Procurement field and it is purely depend up on the seller and buyer. It is a mutual agreement between seller and buyer. If buyer is buying any item from seller, buyer can offer any other alternative things such as it can be goods, services or etc. ..