Developing International Procurement Skills
Ernest Gabbard, J.D., C.P.M., CPCM
Ernest Gabbard, J.D., C.P.M., CPCM, Allegheny Teledyne Inc., Pittsburgh, PA, 412-394-2968
85th Annual International Conference Proceedings - 2000
The Issues. Today's global business economy has launched many procurement professionals into international procurement. Whether this is a new "adventure", or you are a seasoned veteran, the most significant challenges in this environment are preparation for, and documentation of such transactions. This paper and presentation will provide a summary of the differences between domestic and international transactions, and outline how to utilize a checklist for establishing a comprehensive international procurement contract.
The Similarities. The best approach to any subject is usually to go from the familiar aspects to the unfamiliar or new aspects. Therefore, I would propose that we first compare the domestic contracting environment to the international contracting environment. The task of purchasing a product or service in the domestic market is essentially to ensure we obtain:
- the right product (or service)
- at the right price
- at the right time
- in the right place
- with appropriate documentation
We accomplish this task through the use of a purchase order/contract which provides the terms and conditions that clearly establish the respective rights and obligations of both buyer and seller.
The international transaction is likewise accomplished through a purchase order/contract which establishes those rights and obligations, and ensures that the buyer obtains the right product (or service), at the right place, etc.
The Differences. As indicated above, the basic task is the same for the domestic buyer as it is for the international buyer; HOWEVER, most of us recognize that this task is significantly more complex for the international transaction. This is because the environment in which the international transaction is conducted is more complex. Consider, for example, the following aspects of an international transaction, as compared to its domestic equivalent:
Price. The domestic price contained in a P.O. usually includes all costs with the possible exception of sales tax and/or freight (unless FOB destination). There are generally no other costs to be outlined in the P.O., so the "price" is relatively straightforward. The international transaction has a few more "costs" to be considered, which must be properly allocated in the P.O.
The list in Exhibit A (below) provides a comparative summary of such costs which may be unique to the international procurement, or at least may be more significant in this environment.
- Supplier/Product Cost
- Export Licensing/Permits
- Export Packing/Packaging
- Freight to P.O.E.
- Customs Duties
- Port/Terminal Costs
- Brokerage Fees
- Freight to Desination
- Added Inventory (PAD)
- Cost of Quality
This list can serve as a baseline to assess the cost-drivers for this type of procurement. An example of this is the packaging and transportation elements. The cost for these elements in a domestic transaction is generally nominal, and is usually covered merely by designation of the F.O.B. point as either "origin" or "destination." The cost of this aspect for an international transaction can be significant, and may even exceed the cost of the product itself. This is easy to understand when you consider the complexity of packaging and shipping a product from a seller in Los Angeles to a buyer's facility in New York, as opposed to shipping from Seoul, Korea to New York. The latter product must be more carefully packaged, and will require movement from the factory in Seoul to the port of embarkation, then from that port to the U.S. (probably the west coast), and then from the U.S. port to the buyer's facility in New York. All of these elements must be carefully evaluated, and the cost/risk appropriately allocated in the P.O. issued by the buyer.
Payment. Almost all domestic transactions are conducted on terms, such as "net 30 days," which means that the seller is essentially extending credit to the buyer, and buyer must pay "within 30 days of invoice." However, most substantive international transactions are accomplished through use of a letter of credit (L/C). Such a method of payment means that seller is not extending credit to buyer, but rather requires buyer to obtain "credit" through a bank, so that seller gets paid by the buyer's bank, or by an intermediary bank. As may be concluded, this is considerably more complex than the domestic payment provision, and must be accomplished through careful drafting of the governing terms and conditions (T&C). Since the letter of credit is a separate contract, the provisions thereof must also be carefully drafted and administered. The inter-relationship between these two (2) documents is extremely important, and must receive an appropriate amount of attention.
Culture. This author's personal experience in 34 countries has punctuated the fact that every culture is unique. I have observed more transactional problems associated with failure of the American buyer or seller to understand the cultural perspective of his/her foreign counterpart, than with any other aspect of the international business transaction. The unfortunate part of this issue is that it is one of the most easily avoided! A successful approach to this aspect is twofold:
1. PREPARE for your business transaction by studying the culture of your host country. This will not only make your life easier, but will likely impress your foreign host, and may often mean the difference between success and failure.
2. Be FLEXIBLE, and recognize that all foreign sellers are not alike; just as all domestic sellers are not alike. We will discuss examples which illustrates this diversity. The key to adapting to the foreign culture is to understand it, and be flexible enough to function successfully in it. In fact, with preparation and flexibility, you can actually "enjoy" the experience.
Language. While I am not suggesting that you become a linguist in the host country language, I believe that we must recognize that language does impact our transactions. Even if the foreign counterpart speaks excellent English, and the documents are all prepared in English, the interpretation/understanding of our transaction is ultimately "filtered" through a totally different language. This language issue becomes even more significant when we work through translators and/or interpreters. While this is a subset of the cultural issue discussed above, it will impact different elements of our transaction. This impact should not be underestimated.
Other. There are many other factors such as those enumerated above which are more significant in the international environment. All of these should be considered in drafting the P.O./contract. Unfortunately, space limitations do not allow discussion of them all. However, following is a partial list of some of the more significant considerations:
- Foreign laws and regulations
- Foreign taxation
- Importation (to U.S.)
- Exportation (of U.S. technology)
- Political stability
- Economic instability
- Product lead times
- Supplier selection
The Legal Environment. For purposes of establishing P.O. terms and conditions, the most significant of the factors noted above is the legal environment in which we purchase (or sell). This will be different for virtually every country. It is therefore appropriate to review the laws which will likely apply to our transaction(s). The general bodies of law are: 1) U.S. law; 2) the law of the country from which the purchase is being made; and 3) international law.
Interestingly, my experience has been that the least obvious of these to the buyer is U.S. law. Since we are conducting our transaction abroad, there is often a misconception that we are not subject to U.S. law. While there are certain domestic laws which may not apply to our transaction, there are some which do apply, and with which we should be familiar. A partial list of the more substantive ones is as follows:
- Anti-boycotts legislation. This one is erroneously presumed to apply only to transactions occurring in the Middle-East (Arab-Israeli boycott). It also applies to "boycotts" in such other areas as India versus Pakistan and the Peoples' Republic of China (mainland) versus Republic of China (Taiwan). The issues are often subtle, and frequently occur in such innocuous-looking documents as letters of credit. There is a requirement to "report" requests to participate in a boycott, which is very frequently overlooked, and results in the majority of violations/prosecutions of buyers and sellers.
- Foreign Corrupt Practices Act. While this impacts the seller more frequently than the buyer, it should not be overlooked, especially if you are procuring through a foreign intermediary, such as an agent. Ask your legal counsel to review it with you, so you can recognize the issues which trigger its provisions.
- Customs Laws. This is the body of law which governs the importation of goods in to the U.S. Virtually all goods (and some services) will be impacted by these laws. They are quite complex, and will generally require assistance of a customs broker or other import specialist
- Export Administration Act. These laws are frequently overlooked by buyers, as we do not perceive ourselves as "exporting." In reality, whenever a specification, drawing, prototype, etc. is provided to a foreign person or entity, an "export" of technology occurs. While a majority of such exports are not restricted, some may be, and they are not always obvious. As is the case of importation, the key here is to obtain advice and/or assistance from an "expert." This may often be someone other than the expert on importation.
These are only a few of the U.S. laws which may apply to your international transaction. As noted above, these transactions will also be affected by laws and regulations for the other country or countries, from which your goods or services are purchased. This is an area about which volumes are written, and is too complex to cover in this forum. This is particularly significant when you consider that each country will have its own unique laws and regulations which will apply only in certain circumstances. This is naturally an area that will require consultation with an attorney who is familiar with the local country's legal system. Very few U.S. attorneys possess such expertise, so be cautious of whom you engage for such advice. You may need to engage a foreign attorney, but this is not always the case. Some areas of foreign law which should be considered are:
- Contract law. In some countries, certain contracts require approval of the local government. It would be important for you to know if this is a requirement.
- Export control. Just as the U.S. Government controls exportation of certain commodities or services, foreign governments may prohibit or control export of the item(s) you are procuring.
- Currency control. Not all countries allow transactions to be conducted in U.S. dollars or other non-local currencies. This may be a critical element to address in your T & C.
- Criminal law? Yes, your transaction could even subject you to criminal liability if structured in a certain manner. Criminal liability in some countries is a considerably different concept than in the U.S., with all of our due process protection of the individual. This is not something you want to find out "the hard way."
As if dealing with the U.S. and foreign laws does not sufficiently complicate your transaction, such procurements will also be affected by international laws (not the laws of either buyer's country or seller's country). Although this forum does not provide the space to address such laws, it is imperative that we consider the impact of such international laws as maritime laws. These laws govern the rights and obligations of the parties for such issues as title and risk of loss of goods during air or surface transport. You will need to engage legal counsel who is familiar with such laws.
There are other bodies of law such as this which ultimately should be considered by your attorney; however; I would recommend that the procurement professional be familiar with at least the following documents which are relevant to establishing T & C for your international transactions:
- The United Nations Convention for International Sale of Goods (UNCISG). This is a set of uniform "rules" which many countries (including the U.S.) have accepted to apply to their international transactions. They are similar to the UCC in the U.S., since they are not "laws", but provide an excellent foundation for conducting international business transactions. The provisions parallel the UCC, and are generally favorable to the buyer. The UNCISG also provides an excellent vehicle to resolve the often sticky issues of "applicable law" and "conflicts of law". We will elaborate on this during the workshop.
- International Contracting Terms (INCOTERMS). These are standard "terms" for allocating the costs and risks of shipping goods in international trade. Terms such as "FOB origin" and "FOB destination" are adequate for domestic contracts, but are entirely inadequate for international transactions. Every buyer and seller should have a set of these terms to consult when establishing T&C. They are available from the International Chamber of Commerce in New York, at a nominal cost. Some large commercial banks may also provide them to their customers. As will be noted, these are significantly different than standard, domestic terms.
The Contractual Terms and Conditions. All of the foregoing was essential to addressing what is ultimately our toughest task -- establishing the contract for the international purchase. As with establishing any contract, the buyer and seller must: 1) understand the environment in which they are operating; 2) recognize the risks associated with the transaction in this environment; and 3) properly allocate these risks by clearly defining the rights and obligations in the T & C.
There should be no doubt that the environment in which we conduct the international transaction is considerably more complex; therefore, we may conclude that the terms and conditions for such transactions may be equally complex. The complexity will naturally be influenced by many factors, such as:
1) the country with which you are contracting;
2) the size of the transaction;
3) the type and technical complexity of the goods or services you are purchasing;
4) any previous relationship between the parties; and
5) consideration of the issues inherent with the international transaction which are outlined above.
Considering the multitude of transactionally unique issues to be addressed, there is no "standard" set of terms and conditions which are appropriate for all international transactions. In fact, I would emphasize that your company's "boilerplate" approach to P.O. terms and conditions will be especially inappropriate for international transactions. This is an area that will require "customization" for each transaction. I would therefore propose that the best approach to the task of drafting such T&C is to utilize a checklist to ensure that all significant issues are addressed. Such checklists are available to the purchasing professional from many sources. The most comprehensive one I have utilized is published by Business Laws, Inc. in their "Legal Aspects of International Sourcing." A list of "minimums" should also be developed to replace or supplement your domestic P.O./Contract. There are many clauses, which may be appropriate only for specific circumstances, but unnecessary or inappropriate for other circumstances. Consequently, even the seasoned professional should utilize a checklist to ensure that all issues are considered and adequately addressed in the T&C.
Other Resources. Given the complexity of the environment and the multitude of issues we must address in our international transactions. I would be negligent if I left you with nothing more than this basic foundation upon which to construct your terms and conditions. In the interest of continuity, a list of other resources is provided as Exhibit B. Perhaps the most frequently overlooked of these resources is other purchasing professionals. While such a professional contact is valuable for domestic transactions, it is my experience that it is imperative for international transactions. The information available on country-specific experience or even vendor-specific experience of your peers can be invaluable in the overseas environment. The other resources are equally valuable for other aspects of your international transaction.
Conclusion. If you are not totally intimidated by this environment, and you properly prepare for these transactions, the international procurement environment offers professional challenges and rewards which are not available in the domestic market. ENJOY the experience -- it can be profitable for you and your employer!
Morrison, Conway and Border. Kiss, Bow or Shake Hands.
Business Laws, Inc. Legal Aspects of International Sourcing.
Copeland & Briggs. Going International.
NAPM International Committee. International Supplier Evaluation Checklist.