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It's Imperative to Master the Three T's of Global Trade Management

Analyst Insight: Getting a grip on global trade management means mastering the three T's: taxes, tariffs and terms. These elements, which can easily amount to 20 percent of the final product cost in extreme cases, are more than capable of swamping everything we do with leaner inventories, optimised transportation and lower component costs. Despite this fact, many companies still approach this problem as a bit of an afterthought. – Kevin O'Marah, Chief Content Officer and Head of Research, SCM World

It's Imperative to Master the Three T's of Global Trade Management

News reports have covered Apple’s exploitation of tax rules, which have enabled the company to minimise its tax burden. In his testimony before the U.S. Senate last year, Apple CEO Tim Cook was unapologetic, saying that it is simply playing by the rules set by governments. “We don’t depend on tax gimmicks ... We don’t stash money on some Caribbean island. We don’t move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax,” he told the committee. Legal details aside, Apple clearly knows how to manage its supply chain in a tax-efficient manner, with a $150bn cash hoard to show for its troubles.

The thing to keep in mind from a supply chain perspective is that exactly where each value-adding step takes place has a big impact on how profitable the operation is in the end. Global sourcing, for instance, as managed out of Luxembourg by Vodafone, has delivered hundreds of millions of dollars in savings through consolidated purchasing, but has also avoided nearly a billion pounds in taxes by taking advantage of transfer pricing rules that legally flow tax losses to its UK unit.

In the area of tariffs or duties, companies like New Balance, which makes a portion of its shoes in the U.S., can legitimately elude part of the 12 percent duty on imported footwear that everybody else has to eat. And, of course, when big investments in new plants are under discussion with state or national governments, any number of preferential terms is up for grabs. Hyundai in Alabama is an example of successfully doing this.

Process and information are both essential to success SCM World field data shows that most companies are still managing the three Ts with a minimum of automation and process rigor around the rules governing global trade. Export compliance, for instance, is handled manually with spreadsheets by 26 percent of the 114 respondents to a recent survey.

Import compliance is little better, with 23 percent relying on spreadsheets. And in the case of free-trade agreement management, 43 percent do the job with no automation or systems of any kind. Given that the rules we’re all trying to follow are politically driven and are proliferating as once-poor countries develop some attitude, it should be little surprise that money gets left on the table when manual systems can’t keep up.

How would you rate your company’s performance in the following areas of global trade management? When asked for self-assessments of performance in global trade, respondents show confidence about sourcing from a lowest total landed cost perspective, but admit that keeping up with details like duties and country-of-origin regulations is a bit more challenging. Better process control and a mechanism for keeping tax, tariff and terms information up to date is needed.

                                                The Outlook

There is money to be made, or at least, money to be saved as 20 percent or more of a product's cost doesn't have to be lost. Going forward, shippers must take advantage not only of effective tax management but of trade management solutions that can help one through the regulatory thicket.

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