Companies increasingly are opting to reduce product costs through low-cost country sourcing or contract manufacturing, but unless done with care, much of the anticipated benefit from this shift can be eaten up by unanticipated supply chain costs.

"In the last couple of years we have seen a lot of executives put out rather arbitrary mandates to increase low-cost country sourcing by a substantial percentage," says Beth Enslow, vice president of enterprise research at Aberdeen Group, Boston, and author of several reports on this subject, including Grappling with Globalization: A Blueprint for Global Trade Management. "These companies are finding that their expected savings from shifting sourcing to countries like China don't always materialize because of higher logistics costs or customer service issues that lead to more chargebacks," she says. "The net-net is a far lower benefit than had been anticipated."

This development is reflected in results of a survey conducted by Aberdeen last year of more than 340 companies. In this survey, which is the basis of the above-mentioned report, respondents said that their biggest challenge in managing cross-border activity was "to keep the supply chain moving without exploding the sourcing savings or sales opportunity that enticed them to go global in the first place."

Unanticipated supply chain costs that can play havoc with the best-laid sourcing plans include emergency expediting, an inability to use primary (low cost) transportation carriers because of capacity constraints, miscalculated duties, customs fines, product rework costs, demurrage charges and customer chargebacks due to late or incomplete orders.

In addition, global supply chain disruptions have a direct impact on cash flow and working capital management. "What we are really talking about in international trade is working capital in motion," says Bernie Hart, vice president of global trade management services at JPMorgan Chase Vastera, New York. "When you think about it from that aspect, any interruption in the supply chain-whether due to a physical reason or because of compliance or financial issues-has a direct impact on the bottom line. It's your working capital that has been stopped."

The greater length and uncertainty inherent in global supply chains also contribute to longer cash-to-cash cycle times, increased safety stock, greater invoice reconciliation costs and potential Sarbanes-Oxley and business continuity risks, according to the Aberdeen report.

Sarbanes-Oxley compliance as well as compliance with government initiatives aimed at security are significant factors driving heightened concerns over global trade management. "If you come under audit by the government, one of the first things they want to see is what processes and procedures are in place to ensure that your supply chain is safe and secure," says Hart. "Businesses are now being expected to put controls in place to make sure that, if there is a failure or compromise in the supply chain, they have the ability to see that and to take corrective action and report as necessary."

Trend lines indicate that all of these issues will only increase. The companies in Aberdeen's survey source 21 percent of their total spend from low-cost countries today, but they plan to up that to 39 percent within three years.

As more companies begin sourcing in low-cost countries, the competitive advantage diminishes, notes Enslow. "This means that how a company manages its global trade becomes become more important," she says. "We are seeing companies focus on two areas: one, better understanding the cost structure of going international and, two, getting better at managing those cost structures and tradeoffs so they can run a lower-cost, more reliable supply chain."

	"We see this as a green field. It is an opportunity to go out there and automate something that hasn't been automated." - Jim Preuninger of Management Dynamics

In order to address both of these focal points companies are taking a more strategic, enterprise view of global trade management, she says. "It became clear from talking to the companies in our survey that where they used to view trade compliance as a tactical, necessary evil, they now view it as a strategic function," says Enslow. "International trade used to operate as a separate group working off spreadsheets, but companies are now realizing that these processes are way too manual and siloed. They are realizing that in order to manage business risk they need better technology and more cross-functional processes."

Vendors that provide global trade management software and services are responding to this shift by expanding the breadth and depth of their offerings. Much of this has occurred through acquisitions. A few of the more notable transactions are JPMorgan Chase's acquisition of Vastera, TradeBeam's purchase of Qiva and Open Harbor and the NextLinx acquisition by Management Dynamics. In addition ERP vendors like SAP and supply chain vendors like Blinco have developed their own capability, as have logistics providers like UPS and Expeditors.

This is good news for users, according to an Aberdeen buying guide. "Vendors are now integrating trade compliance software into broader solution portfolios that support cross-functional trade processes. The result should be wider spread value from trade compliance technology projects, as well as technology that's increasingly accessible to mid-market companies through an on-demand delivery model," the guide says.

Some leading companies are responding by creating centers of excellence for global trade. "This is what we are seeing among our customers," says Jim Preuninger, CEO of Management Dynamics, East Rutherford, N.J. "To get a handle around this whole area, they want to have a central location for the information systems and the tools they need to know exactly what is happening in their cross-border activities. They want to direct more of this centrally and to provide it as a value-added or shared service to other parts of the organization."

Cross-functional teams or centers of excellence drive closed-loop processes that synchronize the physical and financial supply chains. "This enables a company to close the loop by matching a commercial invoice for the goods against the original purchase order and the physical receipt of the goods," says Richard O'Meara, senior manager in the Cleveland office of Accenture consulting group. "Bringing together those pieces of information for a three-way match is not possible when the information all resides in separate systems, as is often the case. If you don't have some way of linking them together, how can you possibly know that you have actually received what you had ordered and that the invoice is correct? This need definitely is driving companies to look for an enterprise-spanning solution."

Centralized Data
Linking the physical and financial supply chains was the strategy behind JPMorgan Chase's decision to take over Vastera, a leader in global trade content and compliance technology. "Acquiring Vastera enabled us to offer a complete suite of applications that covers our clients whether they are concerned with financial aspects of the supply chain, physical aspects or compliance and risk aspects," says Hart. "We can now offer one-stop shopping." The company's latest TradeSphere software update "focuses more on the integrated environment, looking at an end-to-end view," he says. "Combining the physical and financial supply chains is all about managing information at one centralized repository and sharing it with people throughout the supply chain based on their role. Everyone has access to the data they need, but keeping it in one central location ensures that you stay compliant and consistent and it gives you control over that environment."

Companies also can leverage a central database to enhance sourcing decisions in a variety of ways, says Enslow. "They can improve how they design products to take better advantage of trade agreements and also do things like integrating directly to a customer service system so that denied-parties checks can be done when the order is taken."

While cross-functional coordination clearly leads to better performance in global trade management, getting there is a journey. "The reality is that today almost all companies are implementing improvement initiatives on a functional rather than an enterprise basis," says Enslow.

The number one functional area for global trade technology investment is import/export compliance and documentation technology. Given that 63 percent of Aberdeen respondents say they manage these functions using paper and spreadsheets, this is not surprising.

A third of these companies, however, report that they already have budgets allocated for adding or enhancing their trade documentation and compliance technology and 39 percent say they have future plans to invest in this area.

"We see this as a green field," says Preuninger. "It is an opportunity to go out there and automate something that hasn't been automated, to uplift the capability within an enterprise and enable these companies to see some pretty dramatic results within a quarter or two."

Management Dynamics added trade compliance software to its Rate Explorer suite of rating and contract management technology with its recent acquisition of NextLinx. It now offers a unified technology platform that automates import, export and trade agreement processes, optimizes global transportation and inventory costs, and ensures that a company's cross-border transactions are in compliance with all government regulations, says Preuninger.

"We are today maintaining content for 118 countries, which represents about 99 percent of world trade," he says. Keeping all this content up to date is a huge effort involving about 500 people across Management Dynamics as well as at contracted organizations. "We believe the quality and scope of our content is a key differentiator for us," Preuninger says.

Automating trade documentation and compliance checks reduces transaction costs, eliminates errors and frees up workers for more strategic jobs. But the biggest benefit is in eliminating supply chain delays, says Duncan Jackson, vice president of business development at TradeBeam, San Mateo, Calif. "If you look at what one or two days of working capital is to a large organization that has a growing amount of its working capital tied up in international trade, you can see that two to three days dealing with Customs issues or two to three days delay on documentation issues adds up to a huge opportunity. If we can go in and improve a company's operations and working capital, that drives significant value. That's why we see global trade as a large opportunity; there is a vast amount of working capital tied up in a complex process that is not highly automated."

One TradeBeam customer, apparel manufacturer Liz Claiborne, improved its payment cycle by six to seven days, after implementing the solution to help manage documentation, the physical movement of goods and information flows. "Ultimately, our goal is to take friction, working capital and costs out of relationships between trading partners," says Jackson.

Total Landed Costs
In addition to compliance, access to global trade content enables companies to accurately calculate the total cost of a sourced product and to make informed comparisons between sourcing options.

"One of the things that is coming through to us loud and clear is the issue of total cost management," says Ned Blinick, vice president of sales and marketing at Blinco Systems, Toronto. "Companies want to have the ability to predict accurately what their landed costs will be-not only the piece price and logistics cost, but also the cost of carrying additional inventory, and the duties, brokerage charges or demurrage charges that often get lumped into a bucket of 'other manufacturing costs.' If you don't understand the true cost of the products, from whatever source, then you cannot make the right buying decision."

It is important to be able to allocate these costs to individual SKUs, adds O'Meara. "You not only have to look at all the costs involved, but at how you can amortize those costs against specific products over the next three to five years, so that you know the true costs and the true profit margin for every product. Being able to allocate the cost of freight and other supply chain costs back to the original goods will help companies make better and more informed buying decisions."

Facilitating this whole process and making it transparent to buyers was the idea behind TradeStone Software, which was developed under the direction of CEO Sue Welch. "We wanted to create an environment for buyers who know what they need to buy, when and where they need it and the price they want to pay," she says. "They don't really care where they get it from. They just want to be able to look at all of the options and then choose the best one and to be able to do this so that it is all transparent."

TradeStone was designed to layer across existing enterprise systems to unify the buying process, she says. "We normalize the data and make it available so that the buyer has one experience, wherever the supplier is located." As an example, she hypothesizes a buyer who wants to buy 5,000 pens at $1 each for delivery on Dec. 15. "We broadcast that information to suppliers and ask if they want to bid, but we normalize the data for their view. If the supplier is located in China, we might give them a ship date of Nov. 8 and a price of 50 cents. If the vendor is domestic, we would give them a later ship date and a different price. So when the buyer looks at the quotes, they are comparing apples to apples-the total landed cost from each one."

Visibility
Another component critical to effective global trade management is visibility. "Blinco's Global Commerce Management solution, part of its 3rdWave suite, provides a real-time 360-degree view of shipments at the SKU level. Because it is built around a centralized database, "We go from the source through to delivery," says Blinick. Importantly, this includes the ability to look into suppliers to see whether they are executing on time, he says. "When a reliable carrier has picked up the goods from a supplier, it is going to deliver the shipment to within a few days of when you project, unless it falls off the boat. So, while visibility to transit is important, the real key is to be able to see into the supplier and to know what is going on there," he says. "Then you can adjust your supply chain to match the reality."

This is underscored by results from the Aberdeen survey. "Companies achieving the best overall performance gains are those that excel at monitoring supplier and logistics service provider events," says the report. "However, only a minority of companies track intermediate steps from their suppliers. The majority of companies take a 'place and pray' strategy, checking only that their supplier has acknowledged the order and hoping that the goods will arrive on their dock as promised. Only 20 percent of manufacturers and retailers report following the best practice of monitoring both that the advance shipment notice has been created on schedule and that it matches the purchase order."

Outsourcing
Some companies may choose to outsource this area. JPMorgan Chase Vastera provides a complete management service to companies. "We already have the infrastructure set up and we have a presence in most of the large trading regions of the world as well as in specific countries to keep us up to date with all the changes going on from a regulatory standpoint," says Hart. "A lot of companies see an attractive value proposition in being able to tap into that environment and pay on a transaction basis at a much lower cost than if they did all of the fixed-cost investment themselves."

United Parcel Service launched two global trade software solutions last year that can be used independently or in conjunction with a UPS managed service. In addition to TradeSense and TradeAbility technology solutions, UPS Trade Management Services Group offers educational seminars for customers and a consulting service to assess operations and develop compliance improvement plans, says Bill Ansley, vice president of UPS Trade Management Services, Atlanta. "Another thing we do is management services, so if a customer wants to outsource their import or export activity, in whole or in part, we will do that for them. We tie that into our Supply Chain Solutions operation for delivery of those transactions from the standpoint of logistics and supply chain management, as well as brokerage and transportation."

TradeAbility is a Web-based solution accessed through UPS.com to check compliance and estimate landed costs, mostly used by small or mid-sized package shippers. TradeSense is an enterprise-scale client/server software solution aimed at larger companies that want to automate their U.S. import and export processes. "Basically, we developed a single application and multiple methods of deployment," says Ansley. "License checking and denied-parties screening are things you need to do whether you are shipping a single package or large freight volumes."

Expeditors, Seattle, is another 3PL that offers a global trade consulting service, Tradewin, as well as an integrated software suite for global trade management, Tradeflow. The Tradeflow solution is modular and Web-based, so users can select the functions they need and easily share information with supply chain partners.

CSK Auto Inc., a retailer of automotive parts and accessories with more than 1,145 U.S. stores, recently partnered with Expeditors to help it more effectively manage its international purchase orders and to get a better handle on total landed costs. In addition to improving the efficiency and visibility of international transactions, CSK estimates that Expeditors' solution has enabled $2m in savings through better buying decisions.

"We are now working with Expeditors to create a more compliant logistics department through Tradeflow and Tradewin by using a parts database and having experts in the field creating our item classification," says Larry Ellis, senior vice president of logistics at CSK. "In addition to the margin, labor and transportation savings, Expeditors' real-time management tools have created a more sophisticated logistics program for CSK's international trade."