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Logistics Quarterly Magazine - Volume 16, Issue 2, 2010

The Latest System for the Toolkit

David J. Closs, PhD, LQ Executive Editor, Michigan State University

The increasing volume of international supply chain transactions, along with a combination of agreements to both motivate trade and impose restrictions on what can be traded, has heightened the value of technology capability to monitor and track these transactions. These regulations, restrictions and constraints have dramatically increased supply chain management opportunities and risks.

Over the past decade, firms have invested substantial resources in information technology (IT) system acquisition and enhancement. During the late nineties and the early years of this decade, many firms replaced their legacy systems with enterprise resource planning (ERP) systems to more efficiently and effectively complete their physical and financial transactions. The need for ERP systems was driven by the fear of potential Y2K problems as well as requirements for more system integration and consistency both across firm divisions as well as across the globe.

More recently, firms have directed their technology focus toward supply chain operations and advanced planning and scheduling (APS) systems. The supply chain operations systems include warehouse management and transportation management systems designed to guide, track, and measure the performance of supply chain warehouse and transportation environments. In this dimension, the recent focus has been on offering such operations systems with an Internet interface to provide regional flexibility and global access. Simultaneously, APS systems have come back into vogue to facilitate the development and optimization of integrated business plans. Such systems have begun to demonstrate their value through improved demand/supply balancing while simultaneously improving service and reducing inventory.

During the last few years of the decade, there is increasing interest on another IT application for supply chain professionals. Since most firms either source or market globally, if not both, there is increasing need to track transactions from a legal and security perspective as well as to facilitate adequate reporting to relevant governmental agencies. Supply chain compliance systems provide these capabilities so that firms can meet the reporting requirements of local governments and so that the firm doesn’t break any import or export laws. In some cases, failure to provide necessary information may result in civil or criminal charges against the firm or its key executives.

Supply chain compliance systems include some combination of the following capabilities: 1) global classification; 2) authorized economic operator automation; 3) advance security filing; 4) processing under customs control; 5) C-TPAT (Customs-Trade Partnership Against Terrorism) compliance; 6) free trade agreements; and 7) export compliance. Global classification defines the nature of the goods for global reporting. For monitoring and reporting purposes, it ensures that the same or essentially similar item from two different suppliers or countries is classified the same for reporting and customs purposes. The global classification system ensures that products sourced or produced by difference suppliers or in different countries will be categorized as the same from the customs, duty, and regulatory perspective.

The authorized economic operator (AEO) automation capability ensures that the firms involved in a transaction are authorized to engage in commercial exchanges. The major objective of AEO automation is to ensure that none of the firms involved have a history with illegal, black market, or gray market transactions.

Advance security filing capability provides the required shipment documentation to the relevant customs organization with the appropriate lead time. For example, U.S. Customs requires notification regarding shipment arrival at least two to 24 hours prior to arrival, depending on transit mode.

Processing under customs control provides the information support to track and monitor goods when supply chain value-added processes are completed under customs control. Firms sometimes complete final manufacturing or packing under customs control prior to formal arrival from an international source to reduce duty or to meet local content requirements.

C-TPAT compliance tracks the security authorizations of firms involved in a trade transaction. C-TPAT describes the requirement for firms involved in international trade to implement quality certification programs, audits, or more vigilance in tracking and monitoring of the manufacturing and/or distribution of their products.

Free trade agreement capability is to track and monitor international transactions between countries that have free trade agreements for the items involved. For example, for the North American Free Trade Act (NAFTA) and the European Union (EU) relationships, many transactions are treated as though they are domestic even though the goods cross international borders. A key requirement is the capability to identify and track where value-added activities occur in the supply chain so that firms can take advantage of tax and duty benefits.

Finally, the export compliance capability ensures that goods involved in a transaction can be traded between the countries involved. For example, for security reasons, there are many limitations on the trade of U.S. technology with firms in foreign countries. Failure to follow these restrictions could be embarrassing for the firm involved and in some cases even criminal for the firm’s officers.

The increasing volume of international supply chain transactions along with a combination of agreements to motivate trade and restrictions on what can be traded results in an increasing need for information technology capability to monitor and track such transactions. The maze of regulations, restrictions, and constraints dramatically increase supply chain management opportunities and risk. On the opportunity side, a keen awareness of customs and duty laws can allow a firm to take duty drawbacks and tax reductions for performing a specific supply chain activity in select countries or regions. On the risk side, even inadvertent failure to follow trade compliance laws can cost the firm significantly in civil or criminal penalties. As an example, a former student of mine who also obtained a law degree, cited examples of firms who had inadvertently shipped product to an unauthorized economic operator. For each instance, the firm was fined $250,000, resulting in severe financial hardship.

Although trade compliance has always been a consideration for supply chain executives, the increasing complexity and rate of change have substantially increased the risk. As a result, trade compliance has become one of the major considerations in a firm’s risk management system. Just as for any other dimension of risk, firms must decide whether trade compliance needs to be a core competency of the firm or whether it can be outsourced. In many cases, the decision trades off the perceived risk against the cost of acquiring and maintaining a trade compliance system. While supply chain compliance systems are evolving to meet that requirement, there is still not broad knowledge among supply chain managers regarding the risks associated with an incorrect trade compliance decision.


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