Content
1.0 Introduction ------------------------------------------ 1 3.0 The Factors Affecting Foreign Exchange Rates ------------------------------------------------------- 3 4.0 Evaluate the Financial Risk on Exchange Rate of IPD ----------------------------------------------- 5
4.1 The Influence of the Fluctuation on Exchange Rate to Payment ---------------------- 5
4.2 The Benefit of Forward Buying to an Importer ----------------------------------------------- 6 5.0 The Effect of Counter-Trade on Overseas Trading ---------------------------------------------------- 6 6.0 The Need For An IPD to Achieve Continuity and Security of Supply Requirements ------------- 7 7.0 Conclusion ------------------------------------------- 8 8.0 Reference -------------------------------------------- 9
1.0 Introduction
This report is requested by international purchasing and supply. It will evaluate the key challenges in overseas sourcing.
The report will assess the culture, language and communication of overseas procurement. At the same time, it analyzes the factors that affect exchange rate. In addition to this, in pd currency financial risk will also be mentioned. Of course, the report will discuss trade and need of IPD, in order to achieve the continuity of supply requirements and safety.
2.0 The Effects of Culture, Language and Communication
Because of differences in language and cultural exchanges with, leading to different body language and idiom of negotiations the two sides to use, it makes the negotiations more difficult. So for the IPD for entering the market must first investigate the differences of culture and language, and to overcome the impact of differences in language and cultural context brings.
To avoid problems caused by these differences, we can use Hofstede's five cultural dimensions (Hofstede, Geert, 1984) to measure the different countries and cultural differences. This five cultural dimensions including power distance, Individualism (IDV) vs. Collectivism, Uncertainty avoidance index, Masculinity (MAS), vs. Femininity, Long-term orientation (LTO), vs. short term orientation and Indulgence versus restraint (IVR) .
For example, to understand a country's management culture, you not only have knowledge of this country, but also its culture have a complete concept, can take the hint. BM make China's procurement and Europe are different. In China, the long-term direction is higher, so when IBM made the signing of contracts with Chinese suppliers, they have to make a long-term contract, because the Chinese suppliers concerned about the future, but it is another case in Europe. In addition to this, different countries have different languages and communication mode, it can cause some problems. For example, IBM and Chinese suppliers to communicate in English, but because of the language difference, suppliers need to hire a translator, it may lead to misunderstandings. Communication between China and the United States in the United States may wish to reach an agreement and signed a contract, while China may take more time for non-commercial activities, in the form of mini lectures and hospitable preference agreement to establish a relationship first. Therefore, these will affect the overseas procurement.
3.0 The Factors Affecting Foreign Exchange Rates
There are many factors that can affect the exchange rate, as inflation, interest rates, the current account deficit, public debt, trade and political stability and economic performance. These factors will affect the exchange rate in different ways.
Inflation (Ottawa: Jameson Books, 1990) implies a rise in the domestic price level, when a majority of the economy and labor commodity prices generally rose continuously over a period of time, it said that the economy has experienced significant inflation. Because the price is the value of a country's commodity currencies, inflation means that representatives of the country's currency Value decrease. In the case of domestic and international commodity markets are closely linked, in general, inflation and domestic prices would result in a decrease and increase exports of imported goods, thus an impact on supply and demand on the foreign exchange market, resulting in the country's exchange rate fluctuations . At the same time, a decline in the value of domestic currency will certainly affect its external value, weakening the country's credit standing in the international currency market, people will expect the exchange rate due to inflation and the country's weak currency will tend to hold the hands of the national currency converted into other currencies, causing the dollar to fall. In accordance with the law of one price and purchasing power parity theory, when the value of a country's inflation rate inflation rate in another country, that country's currency relative to another representative of the actual currency in reducing the country's currency will decline. On the contrary, it will rise.
For example, before the 1990s, the Japanese yen and the deutsche mark exchange rate is very strong original one important reason is that the inflation rate has been very low in both countries. Britain and Italy's inflation rate is often higher than the average of other Western countries, so that the two currencies at the exchange rate on a downtrend.
4.0 Evaluate the Financial Risk on Exchange Rate of IPD
4.1 The Influence of the Fluctuation on Exchange Rate to Payment
To exchange rate fluctuations could affect many aspects, such as procurement and cost control of the company. If the exchange rate fluctuations, buyers can pay more money to buy the same product, it will increase the purchase cost, is not conducive to cost control. Therefore, in the exchange rate volatility will affect pay and lead to financial risk.
For example, IBM hopes to purchase some electronic components from China, however, if the exchange rate is down, this means that the appreciation of the renminbi is, so the company need to pay more money to buy material, the cost will increase. Therefore, exchange rate fluctuations will influence the cost control, eventually lead to financial risks. Of course, there are several ways to reduce financial risk. IBM can use of hedging the futures market and the limitation of the set, it can be used in the current currency payment transactions, this will reduce the financial risks of currency fluctuations.
4.2 The Benefit of Forward Buying to an Importer
Hedge means for the international sale of goods in Matheson, import and export traders, as well as those engaged in international investment, if the expected future payment of a certain amount of foreign exchange, in order to avoid losses due to changes produced can be used long-term in order to avoid the risk of foreign exchange transactions, such hedging operation, known as long-term hedging or forward hedging. It is a still profitable at the same time to reduce the business risk in the investment practices.
If the company think the exchange rate will decline, and the company have the contract. In order to avoid exchange rate risk, the company can take advantage of the long-term purchase to reduce risk. There are several ways to avoid financial risk. Such as money market hedge, the options market hedge, the forward market hedge, hedge exposure, hedge repeated exposure, swaps, etc. Through the Invoice currency, hedging via lead and lag, exposure netting and cross - hedging minor currency exposure.
For example, in 1997, Soros's Quantum Fund sold a lot of baht to buy other currencies, the Thai stock market fell, the Thai government can no longer maintain the peg, the economic losses. And the fund is greatly profit. In addition to Thailand, Hong Kong, in order to maintain the currency peg prices are subject to national and regional challenges of hedge funds. Government to raise interest rates sharply, up 300 percent overnight interest rate, foreign exchange reserves of HK $ 120 billion more to spend large quantities of Hong Kong stocks. Finally repel speculators.
5.0 The Effect of Counter-Trade on Overseas Trading Counter trade (Verzariu, P., 1992) is a loose concept, there is not a standard definition and determination of the boundaries, it is out of the combination, including export and import trade reciprocal conditions for a variety of common characteristics of collectively.
Counter-trade is means that exchanging goods or services which are paid for, in
whole or part, with other goods or services, rather than with money. It has to choose the trade in some situation. For example, countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible. this is because such transactions do not need money, it can solve this problem. In some countries, other types of market trade is impossible, such as North Korea, as the country suffered a block, it can not use other transactions. Meanwhile, in some countries, very strict exchange controls, the buyer can use this transaction to buy some products. Finally, in some developing countries, they use to control the trade and commerce as the development of technology.
We can say that the cancellation of trade generally occurred in trade between the mature market economies and less developed market system. In this case, the cancellation of trade is generally believed there are several advantages: ⑴ conduct counter trade helps us deal with a national shortage of foreign exchange. ⑵ counter trade can promote exports. Trade protectionism is rampant in contemporary, through counter trade, help break the barriers to trade in Western countries for their products, especially manufactured goods from developing countries to open markets. ⑶ counter trade can be used to reduce the uncertainty of export revenue. ⑷ can avoid the use of counter-trade agreements in international prices, such as the Organization of Petroleum Exporting Countries (OPEC) price agreement. ⑸ counter trade can help heavily indebted countries continue to import goods and export revenues actually conceal fragrant creditors. Trade protectionism, however, counter trade could be very dangerous business. Due to conceal the real transaction prices and costs, on the sale and promotion of trade can cover a country with low long-term benefits in the market. Companies because they can not get rid of low-quality products will suffer. Finally, the cancellation of trade might be considered a form of trade protectionism. Extremely unfavorable factors are: (1) on the sale with a strong bilateral trade and closed, which is actually based on restrictive measures against protectionism, and the results actually increased trade protectionism atmosphere. (2) In the above model, price and quality of the main factors that determine the transaction is not a commodity, but rather depends on the repurchase commitment. This inevitably weaken the role of the market mechanism.
6.0 The Need For An IPD to Achieve Continuity and Security of Supply Requirements
To ensure the consistency and security of the supply chain is very important for IPD, this is because of many participants in the supply chain, it will affect the purchasing and there is a risk of internal and external risks, for example, the supplier's risk and distribution risk. If the company to achieve the requirement of continuity and security of supply, they must pay attention to these risks, and adopted some measures, such as, integrated information system, infrastructure, transport and distribution network, select the appropriate suppliers and others.
There are several measures in order to maintain continuity and security of supply
chain can be useful. For example, for the risk of supplier, the company can undertake agreement, suppliers and ensure the continuity of supply and security. At the same time, the company shall check and monitor the power supply. In addition to this, the integration and seamless logistics system also for this is very important. Sometimes, distribution of possible problem and huge logistics system to avoid this kind of risk, to promote the continuity of the supply chain, and security. IBM need huge material, they need to make sure that material to suit the domestic market, can be used in the domestic market at the same time, otherwise will suffer a huge loss.
7.0 Conclusion
In this report, it USES the IBM and a bit of others example as a case to evaluate the main challenge of overseas procurement. It refers to the culture and the impact of exchange rate, how to avoid financial risks, at the same time, it also mentions the trade and how to maintain the continuity and security of the power supply requirements. According to the report, it will help us to understand and analyze the international purchasing and supply.
8.0 Reference [1] Hofstede, Geert (1984). Culture's Consequences: International Differences in Work-Related Values (2nd ed.). Beverly Hills CA: SAGE Publications.
[2] George Reisman, Capitalism: A Treatise on Economics （Ottawa : Jameson Books, 1990）, 503-506 & Chapter 19
[3] Verzariu, P., (1992), "Trends and Developments in International Countertrade," Business America, (November 2), 2-6.
[4]Okaroafo, S., (1989) "Determinants of LDC Mandated Countertrade," International Management Review, (Winter), 1624