Barter: an alternative to traditional methods of purchasing.

An emerging trend in buyer-seller relations is the use of barter as a means to transact business within the United States. One writer, for example, has estimated that 220,000 companies did $4.5 billion in transactions in 1990, as compared with $2 billion in 1980.|1^ Similarly, another author puts the figure at 250,000 companies and $5.3 billion in transactions.|2^ In any case, the numbers are larger than most purchasing people would expect--and they are growing. Still, the majority of firms have yet to engage in any form of barter. As an illustration, out of 57 purchasing managers responding to regional economic surveys conducted by the authors in both Boston and Toledo, only 6 companies indicated that they were involved in any form of international barter or countertrade, and only 5 engaged in domestic barter.|3^ Moreover, while much has been written about international barter and countertrade in both the business magazines and the academic journals, articles and books specifically addressing the issues involved in domestic barter are virtually nonexistent.

Thus, a basic purpose of this article is to explore the use of barter as an alternative to the traditional methods of purchasing goods and services. In addition, the article also examines the use of barter as a means of cost containment. As is becoming increasingly evident in the purchasing literature, the development of cost containment strategies by purchasing personnel can be an important source of differential advantage for their companies.|4^ It is argued that the use of domestic barter in cost recovery initiatives can provide an aggressive and useful means for containing costs. This is achieved primarily through the recovery of excess inventory and the resulting reduction of a firm's total inventory costs. However, for this to occur, purchasing personnel need to take a proactive stance in rooting out costs by using the creative means at their disposal.

A case study of a large multinational firm is used to illustrate how barter can be incorporated into the purchasing activities of both large and small firms, and how it can function as a means of cost containment.

BARTER

Barter, in its simplest form, is merely one entity trading a product or service with another entity and receiving a good or service in return. Much international business is conducted through what is referred to as countertrade, with barter being one type of countertrade.|5^ Often the driving force in conducting business using countertrade is lack of cash or convertible currencies, or the actions of a government mandating that business be done in this manner.|6^

While a simple type of barter exists where a single contract is used, there are other more complicated forms of barter. One such example is counterpurchase, or parallel barter, which involves two contracts.|7^ Under this type of barter, the exchange frequently consists of both goods and money, since the goods being exchanged may not be of equal value. Of the various forms of barter, clearing account barter is perhaps the most complicated form. Under this form of barter, a third party, usually a barter agent or some other type of broker, creates clearing accounts that represent trade credits for the respective parties. Companies trade in and out as necessary. It should be noted that much of today's domestic barter arrangements involve the use of barter agents. These barter agents, known in the trade as commercial trade exchanges, now number approximately 400 in the United States.|8^ Today's trade exchanges, some of which are quite large in scope, have developed over the past 30 years from the concept of barter clubs. These organizations typically utilize extensive computerized data bases to locate and match demand and supply.

DOMESTIC BARTER

Domestic barter refers to battering arrangements entirely consummated within the United States. Barter …