Improving import/export operations: How to hit a moving target
April 01, 2010
It’s a happy problem or a nagging conundrum, trade analysts say. Both perspectives have merit because they’re both based on an anticipated surge in export and import operations for U.S. shippers in the coming year.
A new industry report maintains that multinational corporations are the most aggressive adaptors to sudden change. This observation is also echoed in a recent industry white paper that warns shippers against deferring global trade management (GTM) strategies much longer. Finally, an academic study suggests that getting your GTM model together is just as important as setting a course of action.
What follows is an objective summary evaluation of the strategic vision shared in recent reports by several leading industry think tanks. Just how can global shippers hit all these moving targets? Well, there’s certainly no shortage of well-meaning advice.
Managing the new complexity
Growing global concern over environmental and safety issues is spinning a global web of trade and security programs that affect both importers and exporters, as well as both products and their movement.
But, of course, compliance with new regulations such as the EU REACH and U.S. Importer’s Security Filing 10+2 programs can be complex and costly. So, to better understand how companies are dealing with these issues, global logistics firm BDP International and its Centrx consulting unit surveyed 184 logistics executives from a wide range of industries to find out how today’s global organizations are handling the new pressures.
Nearly half (45 percent) of supply chain professionals surveyed by BDP and Centrx indicated that they are currently supporting their internal regulatory compliance departments with external resources—especially those with under $1 billion in annual revenues and doing business in emerging markets.
“It was not surprising to find that the larger companies with more resources were more inclined to handle compliance matters themselves, particularly on their home turf,” explains Michael Ford, BDP vice president of regulatory compliance. “Nor was it surprising to see that the bigger companies are relying on local expertise in places like Africa and Asia.”
But it is notable, adds Ford, that they all recognize the need to proactively manage the function to minimize often highly punitive penalties. That way, he says, they can maintain “desk-level productivity.”
It was found that the need for compliance services is most pronounced in emerging markets. Respondents conducting business in Asia-Pacific indicated that they outsource the entire compliance function. Moreover, 60 percent of the respondents trading in Asia-Pacific cited a growing need for such services over the next 12 to 18 months, compared with 53 percent in North America and 50 percent in Europe. Compare these results with the 80 percent of respondents who staff and administer the compliance function internally for North America.
The survey suggests that companies typically deal with product-related regulations such as registration and labeling themselves, while outsourcing compliance with those associated with its movement.
“With regard to use of outside compliance services, respondents split fairly evenly between those who retain the function fully in-house (43 percent) and those who outsource at least a portion of it (45 percent),” says Ford. “Only 12 percent indicated they outsource the entire function.”
More than half (51 percent) of respondents from companies with annual revenues up to $1 billion indicated that they outsource at least a portion of the compliance function, with a third (32 percent) retaining the function in-house, and just 17 percent outsourcing it entirely. This compares with 38 percent of respondents from billion-dollar-plus companies who reported outsourcing part of the compliance function; 58 percent who retain it fully in house; and just 4 percent who outsource it entirely.
“Over half of all respondents reported employing two to eight full-time staff in the compliance function,” says Ford. “Only 5 percent of the respondents with in-house compliance departments reported staff reductions over the past two years, whereas 45 percent reported additions.” During the same period, adds Ford, respondents outsourcing the entire function reported increased usage of these services, compared with 44 percent who use a combined in-house/outsourced model.
Understanding target costs
Everyone agrees that global sourcing has become an essential element of enterprise strategies to reduce the cost of acquiring, building, and selling products. Yet, extending supply lines overseas raises complex new commercial and operational challenges. These efforts expose the enterprise to an entirely new universe of investments, costs, partners, liabilities, resource acquisition issues, and management needs.
But a new white paper produced by a leading industry trade services company maintains that the result is often sourcing initiatives that do not deliver projected cost savings and profits. This, say researchers, is because the risks and costs of longer, more complex cross-border supply chains were not properly understood, tracked, and managed.
“Integrated global cost control systems present significant advantages and can be the source of qualitative as well as quantitative differentiation for a global enterprise,” says Greg Kefer, director of corporate marketing for GT Nexus.
One major opportunity area includes improving target costing. Accurately understanding target costs—the expected full cost to purchase goods from an overseas supplier and get them to market—is the key to profits says Kefer. Dynamically tracking actual costs against previously set targets quickly uncovers targets that are unrealistic or inaccurate.
Early visibility into the delta between targets and actuals allows shippers to quickly adjust targets and modify plans for downstream product pricing and marketing campaigns. By reducing the lag in discovering unrealistic targets from months to weeks or even days, companies can save millions in lost margins.
According to researchers, this can be achieved by implementing a global platform that automates and centrally manages global logistics data collection and consolidation. Furthermore, they add, this can substantially reduce cost reporting delays. Researchers also argue that traditional reporting solutions suffer from latency problems and are good only for post-audit or “after the fact” analysis. Furthermore, issues that may be uncovered relate to logistics activity that’s long since been completed—retroactive resolution is not possible.
“With dynamic cost reporting, lead-time for actuals can be cut from days or weeks to hours,” says Kefer. “Supply chain issues are exposed early. Enterprises can take steps to respond quickly and correct problems before excessive costs are incurred.”
As globally sourced goods are manufactured and then start their journey to market, says Kefer, the enterprise incurs liabilities for payment for goods and services. With actual global cost tracking, financial managers can literally “watch the meter build” as sourcing and supply chain milestone activities are executed and costs are incurred. This intelligence can be used to better assess obligations, as well as to calculate current and future cash flow needs.
An integrated global cost control system also supports key financial management processes that underpin accurate total cost management. These include:
- Cost allocation: Costs can be automatically allocated in the proper proportion to the right shipment, order, product line item or SKU. No “orphan” costs are left out and the resulting global landed cost calculation is accurate.
- Cost audit: Costs can be automatically audited. For example, freight costs can be matched against transportation contracts, duties against item classifications, first costs against commercial invoices or original purchase orders.
- Cost timing: The time in which a certain liability (cost) was incurred can be audited or matched against a corresponding event in the physical supply chain. For example, transfer of title to goods (and resulting payment) can be associated with or triggered by related events in the physical supply chain, such as forwarder cargo receipt, vessel on-board or vessel arrival.
The Stanford Model emerges
Now that the global economy seems to be edging up from the crisis mode, will shippers start spending more on software as a service (SaaS) technology to solve more of their global logistics and trade compliance challenges? A new GTM study jointly conducted by TradeBeam and Stanford University suggests that that may indeed be the case.
“This report demonstrates that companies can gain substantially by automating their global supply chains, probably much more than they have estimated to date,” says Warren Hausman, professor of operations management in the Department of Management Science & Engineering at Stanford University. “By creating a new process model attuned to global trade, we hope to help companies make improvements that will let them thrive in the global economy not just with short-term gains, but over the long term as well.”
Experts from TradeBeam, a player in SaaS GTM technology, teamed with Hausman and Hau Lee of Stanford’s Graduate School of Business on the research project. The report, How Enterprises and their Trading Partners Gain from Global Trade Automation: A New Process Model for the China-U.S. Trade Lane, provides estimates in key benefit categories based on input from supply chain practitioners from the U.S. and China.
“To improve the level of understanding of GTM, and to help companies estimate and work to realize efficiency gains through skills, process, and technology investments, we’ve used these results to develop a new, detailed process model for global trade that we label the Stanford Trade Process Model, or STPM,” Lee says.
Based on more than a year of research, the results demonstrate that companies stand to gain dramatically by implementing global trade best practices and accompanying automation, enabling improvement in profitability from 10 percent to 40 percent or more, as well as delivering significant improvements in other benefit categories, such as cycle times.
In building the model, the Stanford professors defined the scope of pre-export steps needed to initiate the global trade process, including import screening, negotiation of price, contract and payment terms, creation of purchase/sales orders, and export screening.
So what are shippers doing to master these tricks these days? According to Lee, organizations have begun to address improvement in their global trade operations in a systematic manner. “The model contains sufficient detail on cross-border trade processes to allow users to estimate the benefits of IT-enabled GTM at the individual process level for over 100 separate process steps.”
As an example, Lee notes that the final steps would include international ocean or air transport of the goods, generation, and submission of import documents, and import customs clearance. And all that must be achieved while still paying attention to post-import Customs clearance and payment.
It’s a daunting prospect, certainly, but if there is one area of agreement among academics, industry analysts, and multinational shippers, it is about the ultimate GTM impact. While failure to adhere to the many rules and regulations governing imports and exports could have dire consequences, the upside to all of this is that transparency is leading to greater efficiency and more global opportunities for U.S. shippers.
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