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Customer Perspectives on Outsourcing Global Trade Management
Many C-Level executives have not grasped the value of Global Trade Management relative to their strategic objectives. This review of a study of seven companies gives compelling evidence that this perspective is changing.
Managing the flow of goods, information, and money across borders is a highly complex, regulated, and dynamic process. All companies, large and small, eventually reach a decision point with regards to Global Trade Management (GTM); Is this a core competency that justifies a continuous investment in people, technology, and resources or is it a process best managed by a partner whose primary focus and business is achieving operational excellence in GTM?
ARC interviewed seven companies - plus received information about an eighth company - who are outsourcing all or part of their Global Trade Management operations. These interviews included only JPMorgan Chase Vastera clients and, as a result, there is an inherent bias readers should be mindful of. The objective of this research was to understand the driving forces behind their decision to outsource and to determine the benefits achieved to date.
Balancing Cost, Risk, and Performance
According to the World Trade Organization (WTO), the value of world merchandise trade more than doubled from 1993 to 2003 (from U.S. $7.4 trillion to $14.8 trillion) and it continues to grow. A variety of factors are fueling this growth, including:
Conducting business on a global scale comes with a price, namely, increased complexity and risk. Instead of reducing costs, companies may incur more costs (particularly in labor) as they try to scale their GTM operations to address the ever-changing requirements and regulations of global trade.
A cross-border shipment typically involves accurately completing and filing approximately 35 documents; interfacing with about 25 parties including customs agencies, carriers, freight forwarders, brokers, and banks; and complying with more than 600 laws and 500 trade agreements, which are constantly changing.
Classifying products with the correct Harmonized Tariff Schedule (HTS) - a hierarchical structure for describing goods in trade for duty, quota, and statistical purposes - is a challenge for many companies, particularly those with dynamic product portfolios or products with complex Bills of Materials. The fact that product classifications vary by country adds yet another layer of complexity.
Similarly, calculating Regional Value Content and executing the many other process steps required to qualify finished products for preferential treatment is also highly-complex and time consuming. And of course, each Free Trade Agreement has its own set of unique formulas and rules.
Managing the flow of information and documentation with customs brokers is another challenge many companies face, especially companies who, over time (or via acquisitions), have amassed a large, fragmented network of brokers.
As supply chains become more fragmented and dispersed, the risk for terrorism, theft, smuggling, counterfeiting and other issues also increases. In the aftermath of the 9/11 terrorist attacks, several security-related initiatives were launched including Customs-Trade Partnership Against Terrorism (C-TPAT), the Container Security Initiative (CSI), and the Advanced Manifest Rule. Although the underlying objective of these programs is to streamline global trade processes and reduce risk, they also place new requirements and constraints on companies, all of which adds additional cost to the supply chain.
Companies that trade globally also face an increased level of financial risk. Duties, taxes, transportation charges, and currency exchange rates are contributing factors; but there are other, less-tangible factors that also influence the bottom line such as the cost of increased inventory and longer cash-to-cash cycles due to customs clearance delays.
Also, achieving compliance with the Sarbanes-Oxley Act of 2002 - a law aimed at improving the accuracy and reliability of corporate financial statements - is dependent on having access to timely, accurate and complete information, and establishing process controls, the same success factors required to create more secure and efficient global trade operations.
Many companies engage in global trade to reduce costs, particularly to find less-expensive sources of raw materials, finished goods, or labor. But when viewed from a holistic perspective, total costs may actually increase by going global.
Additional cost factors such as duties and taxes have to be taken into account when evaluating sourcing options; it's the total "landed cost" of a material or product that matters most, not its unit cost. Other cost factors that many companies fail to consider include:
Measuring Role & Performance of GTM
Historically, many C-level executives (CEOs, CFOs, etc.) have failed to grasp the role and importance of Global Trade Management relative to financial performance and strategic objectives. GTM was simply viewed as "paperwork" and a cost center.
But this perspective is beginning to change. The 9/11 terrorist attacks, for example, taught many executives a lesson on how disrupting the flow of global trade can have significant financial consequences. Briefly stated, corporate executives must have a clear understanding of the link between financial performance and global trade management, as well as the associated risks. The following metrics provide a good baseline:
Obviously, as the percentages for each metric increase, achieving operational excellence in Global Trade Management becomes more critical. By itself, establishing metrics and collecting data does not translate into operational excellence. The latter is only achieved when information is continuously analyzed and leveraged to change and improve processes.
Customer Perspectives on Outsourcing
Challenges and Driving Forces
Despite their different backgrounds and circumstances, virtually all of the companies interviewed share similar challenges and driving forces.
In an effort to reduce costs and/or penetrate new markets quickly, companies are shifting their manufacturing operations and vendor base to low-cost countries such as China and Mexico. For example, Black & Decker transferred production capacity from the U.S. to Mexico in 2002-2003. A leading automotive manufacturer is increasing its supply base in Asia - particularly China - as a way to reduce material costs, which account for almost 60 percent of an automobile's cost.
Simply stated, supply chains are becoming much more fragmented and dynamic than they were a decade ago. The more countries involved in a supply chain, the more difficult it becomes to understand and manage the multitude of trade regulations and constraints involved (especially if you have limited resources).
Product classification is another challenge many companies face, especially as the size and complexity of their product portfolio increases. For example, International Truck and Engine Corporation (ITEC) manages over 300,000 components and it has to classify as many as 5,000 products per month, a task that was overwhelming its limited resources.
In some cases, companies are introducing new, highly-complex products that even the government has a difficult time classifying them. In the telecommunications industry, for example, companies are introducing new products with encryption technology which require special licenses and are strictly regulated.
Product classification is also a limiting factor in international e-commerce and order fulfillment. The United States Postal Service developed a "landed cost" engine for international shipments, but it lacked the ability to classify products with the appropriate HTS code which ultimately determines duties and taxes.
Managing the solicitation and qualification processes for the various Preferential Trade Agreements around the world is another daunting task for most companies. For example, this became a challenge for Black & Decker's limited GTM resources when it transferred production to Mexico.
In the worst-case scenario, companies are losing millions of dollars by paying duties and taxes for goods that qualify for preferential treatment. Other companies are negatively impacting their cash flow by not qualifying products at the time of entry, i.e. they pay the duties and taxes at entry and then have to wait months to reclaim these payments. For example, ITEC's NAFTA "First Time Through" yield was only 55 percent before it began outsourcing its GTM operations.
Managing a large and distributed broker network is another challenge, especially with regards to maintaining communication links and resolving process exceptions. In addition to the time required to manage these interactions, companies are leaving money on the table by not rationalizing their broker network, i.e. they're spreading out their import transactions across a very large number of brokers instead of consolidating their volume across an "optimized" number of partners.
The most significant driving force for outsourcing, however, is a desire to focus on core competencies, to focus and invest in business functions that are unique and proprietary, create a competitive advantage, and/or cannot be duplicated. For example, a leading automotive manufacturer views market research, design and engineering, and manufacturing as its core competencies. Many telecommunications companies, including Lucent Technologies, view research and development as their most important core competency and they're outsourcing functions like manufacturing to third parties.
Despite the recognized importance of Global Trade Management, many companies don't view it as a core competency and prefer to outsource the function to a partner whose primary focus and business is achieving operational excellence in GTM.
Most of the companies interviewed chose not to disclose specific financial benefits. In many cases, it was difficult to quantify the benefits achieved because cost avoidance, for example, is not always easy to measure. Nonetheless, the following categories best summarize the benefits achieved via outsourcing: