The value of world exports has increased by nearly five times in the 18 years from 1993 to 2011, according to the World Trade Organization. Exports in 1993 were $ 3,676 billion; rising to $17,816 billion in 2011. There are many factors driving this dramatic rise in exporting. They include lower sourcing and production costs in some developing countries and rising consumption in growing economies. This leads supply chain executives to consider new sourcing and distribution models and then to reexamine and optimize those network models on a more regular basis to balance cost and opportunity.
The rise in the number of destination markets and sourcing regions adds further complexity to managing an extended supply chain. According to the 2014 Third-Party Logistics Study – The State of Logistics Outsourcing, companies developing strategies for these extended supply chains need more information like consumerism, lead time constraints, risk management/continuity planning, and portfolio differentiation.
Consumerism looks at the rise of various markets, including the development or expansion of a middle class. Portfolio differentiation is described by the study’s authors as customizing products for local or regional tastes.
The story on sourcing is well documented. On the exporting side of the supply chain, the dramatic growth reflected in aggregated data, such as the WTO numbers, masks the complexity developing at a more granular level in many supply chains. In a study of mid-market exporters, Amber Road, a leading provider of global trade management solutions, documented a 90 percent increase from 2012 to 2013 in the number of companies reporting they exported to more than 20 countries (from 18 percent in 2012 to 34 percent in 2013). “The largest increase,” says Amber Road, “was with the number of companies shipping to 21 to 50 countries.”
With exports rising not only in volume but in the number of destinations, the complexity of trade compliance also rises exponentially. While free trade agreements (FTAs) and preferential trade agreements (PTAs) might be seen as a prime opportunity, they actually add complexity to the network optimization decisions. The WTO reports there were nearly 300 PTAs in force in 2010 and yet only 16 percent of global merchandise trade is subject to preferential treatment.
The authors of the 2014 Third-Party Logistics Study point out that, for the supply chain, PTAs add complexity in determining eligibility, maintaining visibility of compliance information, obtaining necessary information from trade partners, and collecting from the programs on the duty savings. This includes the tasks of keeping track of variances in tariff schedules, rules of origin, customs procedures, implementation timeframes, etc.
On top of that, say the study’s authors, the terms of preferential trade agreements tend to change “rapidly and arbitrarily.”
Two Approaches
The 2014 Third-Party Logistics Study highlights two approaches to global trade management. In the basic approach, companies are typically optimizing costs and risks during the physical movement of the goods. The focus is on duties, freight costs, and documentation. In this basic model, production and distribution channels tend to be established and remain somewhat fixed.
An advanced approach, says the study, seeks to optimize decisions at each point in the supply chain. This takes into account the complexity of moving finished goods and workin-process goods across country and regional borders. This approach will optimize paths early in the supply chain to minimize these costs and risks throughout the supply chain, the study continues. Sourcing/production and distribution decisions are made early in the process to align country of origin and destination country to take advantage of PTAs.
In a mature approach to global trade management, an integrated, cross functional team makes sourcing and routing decisions and shares data.
The Amber Road study explores the export compliance process in more detail. Of the 361 mid-market exporters Amber Road surveyed, 53 percent said they have a documented export compliance process. That’s a significant rise from the 41 percent who reported having a documented process in 2012. The drop from 39 percent to 28 percent in the number of companies who have partially documented export compliance processes would suggest the progress has been from partial to full documentation of the processes. This is reinforced by the fact that the number of companies reporting they have not documented their compliance processes dropped only 1 percent in the same period.
As noted, companies are seeing a rise in the number of countries they export to, which adds complexity to their supply chains as well as to their compliance needs. Unfortunately, with the importance of trade compliance on the rise, nearly half (49 percent) of those responding to the Amber Road survey said senior management was either not aware or not involved in compliance.
The increasing number of U.S. export regulations and enforcement of these rules by Export Control Reform (ECR) is slowly raising the awareness of the issue at senior levels.
Another telling statistic from the Amber Road survey is the fact that 25 percent of respondents are unsure whether a “denied party” has ever tried to engage in business relations with their company.
Denied parties are individuals and entities that have been denied export privileges. According to the government website www.export.gov, any dealings with a party on a denied party list would violate the terms of the denial order and are prohibited. The website includes a consolidated list of denied parties from export screening lists of the U.S. Departments of Commerce, State, and Treasury.
Based on the responses indicating only a little over half of the companies have a documented compliance process and senior management at nearly half of the companies has little or no awareness or involvement in compliance, it is difficult to interpret answers that no denied party has ever tried to engage in business relations with the respondent’s company. What may be more telling is that the number responding “no” to the question about denied parties dropped from 61 percent in 2012 to 52 percent in 2013 and the number responding “yes” rose from 15 percent to 23 percent. This could be a result of increased activity of denied parties or a greater awareness that has allowed the responding companies to identify the denied parties.
Asked how they perform restricted party screening, one fifth of the companies said they do not do restricted party screening. Another 36 percent perform screening manually. Only 31 percent use software to manage denied party screening.
Product Classification
Another important and complex element of compliance is the proper classification of products for export. Most mid-market companies responded that they classify products manually. Only 15 percent use a software solution for product classification even though one third manage more than 1,000 SKUs (stock keeping units) and 7 percent manage more than 50,000 SKUs.
Amber Road comments that, “With classification changes coming down the pike soon under Export Control Reform, organizations trying to re-classify products manually could face a daunting task.”
Keeping in mind the number of countries respondents are exporting to and the multitude of origin-destination trade pairs that are possible in an extended supply chain, Amber Road asked if companies were classifying parts with Harmonized Schedule (HS) numbers, and 45 percent said they do.
Amber Road concluded that supply chain and compliance professionals at most midmarket companies recognize the value of compliance and are implementing strategies to improve their compliance operations as their export markets grow. They continue to face obstacles, including a need for greater senior management involvement and increased process automation. The situation, says Amber Road, is slowly changing with the expansion of world trade, heightened enforcement, the proliferation of trade regulations worldwide, and an increased focus on streamlining operations and reducing costs.
You may be interested in these posts on Trade Compliance:
- 10 General Prohibitions for Trade Compliance
- Benchmark Your Trade Compliance Training Program
- 'End-Use Manager' Helps Companies Reduce Trade Compliance Risks
