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"Voluntary" programs have a funny way of becoming mandatory. Take the U.S. security initiative known as the Customs-Trade Partnership Against Terrorism (C-TPAT). Ostensibly, participation in this program by shippers, carriers, brokers, forwarders and related parties is entirely optional. But failure to meet its requirements can expose companies to severe competitive disadvantage, such as delays in clearing shipments through Customs. And trade experts predict that C-TPAT will eventually become law anyway.
The same sort of evolution is occurring elsewhere in the world of global trade management (GTM). As a result, what might otherwise be viewed as a "best practice" in this area is really an adjustment to regulatory and supply chain realities. In other words, companies may have no choice but to become the "best" when complying with international trade regulations, expediting the movement of physical goods, documents and money across borders, or coping with the built-in complexities of modern day supply chains.
Multinational shippers are driven to start GTM projects by several trends, including the globalization and harmonization of customs rules and processes, according to Roy Lenders, a vice president with Capgemini in the Netherlands. In Europe, the concept of Authorized Economic Operator (AEO) will give preferential treatment to participants, much like C-TPAT in the U.S. Companies that jump through the necessary hoops to become AEOs can speed their goods through "green lanes," with minimal or no physical inspections. The program is set to take effect on January 1, 2008.
Still, Lenders suggests, most companies have a long way to go before adjusting to the requirements of global trade management. Obstacles include an excessive reliance on brokers to mitigate compliance risk, persistent trade documentation errors, limited visibility to import and export transactions, and the failure to share critical information with supply chain partners.
Companies need to prepare for procedural changes that will finally make the European Union what it was always intended to be: a coherent trading bloc with one set of rules for customs clearance. Importers will only need to clear their EU shipments at the initial point of entry; from there, the goods will be able to travel anywhere in the region without the need for additional checks. Shippers must standardize their own systems and business processes, which tend to differ greatly from country to country, in order to reflect the regulatory harmonization across the EU.
The benefits of such an approach extend well beyond meeting government regulations, says Lenders. Businesses that harmonize their global trade activities can gain a bigger picture of the total supply chain. In the process, they can shift sourcing, manufacturing and distribution in line with countries where duties and taxes are lower, or where local trade restrictions are less onerous.
Agilent Technologies is one company to have gone the route of internal harmonization. The maker of electronic and biological measurement tools had 13 information systems spread around the globe, controlling what was shipped and to whom. Reform was triggered by compliance issues, but soon found a compelling business case, according to Jim Preuninger, chief executive officer of East Rutherford, N.J.-based Amber Road Agilent's goal was to create a system whereby the same data generated by one transaction could be used for other aspects of GTM. Data related to an export, for example, could become the basis for a pre-customs import clearance.
Creating one system for managing import and export data was no easy task. Agilent manages some 725,000 imports and 1.7 million exports annually, Preuninger stays. Amber Road, provider of the necessary software, had to support 1,300 registered users. It drew from a knowledge database of 11,000 licensing rules, 8,000 additional rules on how to route an invoice, and 45,000 Harmonized System classifications that applied to Agilent shipments.
How a company is organized globally will affect its ability to access the trade data it needs to ensure compliance with government regulations, says Graham Napier, president and chief executive officer of San Mateo, Calif.-based TradeBeam. The best practice is to reconcile data and message formats on a global basis, he says. Short of that, a company might source data by division or country, then struggle to reconcile it. Worst of all, information might be generated by local representatives at the factory or business-unit level.
It's Good for Business
In any event, says Napier, companies shouldn't optimize their GTM processes merely to comply with bureaucratic rules and regulations. "That's a reactive situation," he says. "Leading companies are using this to enable competitive advantage." For example, Renault is employing the principles of GTM to reduce the total landed cost of finished vehicles. The Renault Logan is being marketed globally, with a target price of 5,000 euros ($6,800). To make that economically possible, the automaker has had to optimize both its labor costs and the tariffs it pays on components, which are sourced in multiple countries.
Renault's approach to GTM not only accounts for where the car was sourced, but where it is being sold. The automaker must determine whether it is equipping its vehicles with the right components for a given destination, Napier says. Renault has already implemented the system for a factory in Romania, and is rolling it out in Brazil, Thailand, India, Colombia and Vietnam. In addition, the company has set up a trade engineering group which will train all of its 600 purchasing agents in the principles of GTM.
The tough task of meeting new security requirements also can yield big payoffs for importers and exporters. Participants in C-TPAT find they have a wealth of detailed data which can be used to expedite deliveries. With fewer physical inspections by Customs, goods are guaranteed to reach the sales floor in line with tightly scheduled promotional campaigns. "Any snags [in logistics] create a ripple effect of destruction," says Holly Allison, vice president of business development and marketing for Gloucester, Mass.-based TradeStone Software. "You can't sell sweaters in spring."
Companies must keep pace with an ever-changing regulatory landscape. U.S. Customs & Border Protection recently tightened the screws with its "10 Plus 2" initiative, requiring 10 additional data elements from U.S. importers 24 hours prior to a vessel loading at non-U.S. ports, and two more from carriers.
Other rules to watch include the U.S. State Department's reporting requirements for any commercial item that might also have a military application. Violators of State's International Traffic in Arms Regulations (ITAR) face heavy fines. Cara Fascione, executive vice president of sales and marketing with London-based Kewill Systems plc, says exporters of sensitive technology must review more than 50 government lists, in order to ferret out any "denied parties" among potential buyers. Such a practice must become part of the standard order-fulfillment process, she says.
Enterprise resource planning (ERP) software lacks the level of detail that can ensure compliance with government restrictions at the parts level, Fascione says. The ERP backbone needs to be supplemented by software that can store the additional information, consult applicable lists and calculate all duties, fees and taxes. In such cases, "best-practice efforts are mostly going on behind the scenes," she says.
National Instruments sells testing and measurement systems to some 25,000 companies in 90 countries. It was struggling with international order fulfillment, especially with regard to the screening of denied-party lists. Manual processes were leading to numerous "phantom holds," causing shipment delays. The company ended up implementing export-compliance software from Kewill, linking it to its Oracle IIi ERP application. As a result, it was able to review all compliance requirements within a matter of seconds, and generate needed documents.
A good GTM program can help companies to offset some of the disadvantages of sourcing overseas. Manufacturers have rushed to take advantage of low-cost labor in China and other Asian countries. But a half-baked strategy can incur costs that wipe out much of the savings from offshoring production. "People are finding that there are many more inherent complexities, risks and costs associated with managing global supply chains than perhaps they had first thought," says Derek Gittoes, senior director of logistics products strategy with Oracle Corp. in Redwood Shores, Calif.
Inadequate documentation and poor communications with suppliers are just two of the problems that can undermine longer supply lines. To combat those tendencies, the apparel retailer American Eagle maintains one software system from TradeStone which brings together trading partners, agents, factories and logistics professionals, accounting for multiple languages and time zones. Information is handled "seamlessly," Allison says, adding that American Eagle "is able to equalize the playing field."
Global parts management can be especially tricky. Fascione says big manufacturers often don't link their parts classification schemes to what's required for international movements. But a good information system can create commercial invoices that rate shipments at the parts level, in order to estimate proper duties and taxes. The process can avoid trouble down the line as well. "Auditing is a very expensive proposition if you don't have the systems and capacity to prove you were doing due diligence," says Fascione.
Tearing Down Silos
Some companies are using GTM to dismantle old-style organizational structures. For years, managers have complained of the "silos" within their organizations, an arrangement that prevents various departments from cooperating in the interest of forging a truly unified supply chain. As a result, critical information takes too long to reach the parties who need it most. Customer service-the key to long-term competitiveness-suffers accordingly.
Honeywell International Inc. bucked the trend by making freight rates directly available to its customer service reps. Previously, they would field a customer request for a rate quotation, then pass it on to the logistics department, which would run the numbers on a spreadsheet, consult a list of carriers under contract, possibly contact the chosen carrier about shipment details, then get back to customer service with an answer. "The scenario took a lot of time and labor," says Preuninger. "There was lots of opportunity for error to creep in."
Now, a Honeywell customer service rep can access an automated system, plug in the details of a request, and get an immediate quote. "The system will, within a minute, identify for the user all of the routing options, carriers, costs, transit time and schedules," says Preuninger. "Honeywell's customer service is quoting faster and winning more business."
Partner collaboration, especially with regard to the workflow generated by global production and trade, can cut down sharply on lead times for product development, says Allison. Sampling, production and last-minute alterations are all made easier by tight integration among suppliers, carriers and producers. An automated, Web-based system allows participants to discuss such issues as product details and mode of transportation, without the back-and-forth of e-mail or phone calls.
"We would like to see our customers take a six-month lead time and turn it into six weeks," Allison says. "The only way is through open communications with partners."
Oracle's Gittoes says some companies are introducing GTM principles earlier in their supply chains, all the way back to initial product design. Sourcing decisions take into account all relevant considerations, including lead-time variations and risks associated with each option. "By introducing GTM aspects into these up-front business processes," he says, "we can have a more meaningful impact on overall cost and revenue performance-rather than simply making sure you're producing the right documents when you go to ship the product."
GTM can speed up the physical movement of product as well. Neiman Marcus, the upscale apparel retailer, is using the concept to hasten the transit of clothing from factory to store. Just one day saved can have a big impact on the company's competitive position, says Napier. By integrating business processes across the supply chain, Neiman can put off decisions on a shipment's final destination until the last possible moment. It can even alter routing while goods are on the water. Meanwhile, Neiman is pre-filing Customs import documents to cut down on delays at the port of entry. The effort extends to such activities as freight insurance, where certification can be handled electronically, thereby eliminating another potential sticking point.
For many global traders, finance takes a back seat to the higher-profile areas of physical freight and documentation. Again, corporate silos are a primary reason why these three elements rarely blend into a unified supply chain, says Bernie Hart, global product head with New York City-based JPMorgan Chase Vastera. Typically, when a company needs to buy product in Asia, its finance organization is given the task of setting up a letter of credit. Meanwhile, logistics is separately plotting the movement of components to the factory, and finished product to market. Yet each hand-off within the supply chain creates an account payable and account receivable. So the various parties might lack access to all of the data elements that are needed to execute proper transactions. The re-keying of information becomes the least of a company's problems; the worst is a fractured supply chain that delays shipments and creates havoc with customers.
Gittoes says global traders are moving away from traditional financing programs based on letters of credit. They are turning to open accounts, or other options where the buyer uses its credit to support the supplier's financing. "People are looking for innovative ways of reducing overall costs of financing these international transactions," he says. Such efforts speed up the movement of money as well as goods and documents.
Increasingly, the world is being divided up into trade blocs that might seem restrictive at first glance, but offer substantial opportunities for agile companies. Another Management Dynamics client, the office furniture seller Haworth, used the vendor's Trade Agreements module to take advantage of duty-saving provisions under the North American Free Trade Agreement (NAFTA). A three-inch-thick book lays out the rules of origin under which companies can avoid duties. It takes automation to sort through the requirements and certify vendors in an efficient manner, Preuninger says. Haworth had attempted to implement NAFTA practices through manual vendor solicitations, utilizing mostly e-mail and paper spreadsheets, "but it just wasn't scaling." A single bill of materials can incorporate parts from many countries, making intelligent sourcing decisions extremely difficult.
Software applications, such as those developed by Management Dynamics and others, can automatically calculate whether an importer qualifies for NAFTA privileges. Haworth got 80 percent of its suppliers on board with the program in a matter of months, then reduced its duty payments by $1.2m in the first year, according to Preuninger. In all, the company has some 16,000 products and 1,000 suppliers, each of which had to be certified to meet NAFTA qualifications. That information must be reflected on every purchase order, and complete records must be kept in the event of an audit by Customs.
Good records also increase a company's ability to obtain duty refunds, or drawback, when it has met certain Customs requirements. Refunds become virtually automatic when importers have the right systems and the proper data on hand, says Napier. As a former provider of duty-refund services, he used to charge clients up to $35 per claim to go through a highly manual process. Automation has brought the cost down to one or two dollars, he says.
"A free trade agreement is anything but free, for anyone who's trying to take advantage of it," says Hart. Still, the potential benefits of FTAs extend well beyond NAFTA. There are 160 such agreements now in place worldwide, Hart says, with more than 300 under consideration. "You need the right people, processes and technology to take advantage of those programs."
Importers and exporters can benefit greatly from FTAs that don't often make the headlines. Black & Decker saw gains of around $3m a year by adhering to rules of origin under the bilateral U.S.-Australia trade agreement, says Hart. For a large automaker shipping vehicles to Australia, the duty rate has gone from 5 percent to zero. But the bigger the organization, the harder it is to keep tabs on FTAs and how they affect sourcing and sales around the world. A new product might alter a company's position and expose it to duties without warning. Vendors such as JPMorgan Chase offer clients help in adjusting to change, both inside and outside the company.
An efficient duty-drawback program shouldn't be the ultimate goal. The real best practice is avoiding the payment of duties in the first place. International Truck & Engine, a JPMorgan Chase client, wasn't doing a good job of minimizing duty obligations under applicable FTAs. When product crossed the border, it had the right data available only about half the time, Hart says. Today, its compliance rate for documentation is above 95 percent, meaning that International Truck doesn't pay unnecessary duties most of the time. Duty refunds have plunged from $2m a year to less than $100,000. Says Hart: "You never want to have that money out of your pocket."
Global Trade Management: A Best Practices Checklist
Go for the green lane: get current with customs regulations for the expedited treatment of approved importers
Harmonize information systems and business processes on a global basis, in line with similar efforts by trading blocs
View bureaucratic trade requirements not as a necessary evil, but as an opportunity to gain competitive advantage
Know the rules of trading for "dual-use" products, which have both commercial and military applications
Supplement the ERP backbone with specialized systems that can calculate all duties, taxes and other fees involved in importing and exporting
Work proactively to offset the additional headaches, including longer supply lines and miscommunications with suppliers, that stem from outsourcing production to overseas locations
Maintain a detailed record of all transactions, including the justification for estimated duties, in the event of an audit by U.S. Customs
Tear down organizational silos; give customer service direct access to crucial data on logistics costs, to facilitate fast and accurate quotations
Cut down on lead-times by deploying a Web-based system that permits close collaboration among suppliers, producers and logistics providers
Apply GTM principles at the very beginning of the supply chain, including initial product design
Look for innovative ways to cut the cost and processing time of trade financing
Exploit the provisions of free-trade agreements to reduce or eliminate import duties
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