Seven Supply Chain Subjects to Monitor in 2010
The fight against terrorism will remain a priority worldwide. Security changes and requirements will continue to affect international trade for the foreseeable future, with an emphasis on advance data and self-reporting. Numerous programmemes already have been established around the world. The US has been the most prolific by creating the Automated Commercial Environment (ACE), the Consumer Product Safety Improvement Act, the Lacey Act and 100% Cargo Screening. Other countries or trading blocs have similar programmes, such as the EU’s Authorised Economic Operator (AEO) programme and Canada’s Partner in Protection (PIP).
Interestingly, China is in the process of implementing the AEO programme to streamline trade with Europe. Additional programmes are on the docket to be launched sometime this year in the US and internationally. Just as in the US, other nations, such as many EU member states, have placed the oversight of security within their customs agency – not only in policing but also in authorising processes and policy. These security programmes recognise that government resources cannot do the whole job. The onus will continue to be placed on the trade community.
The Importer Security Filing programme or ‘10+2’, sponsored by US Customs and Border Protection (CBP), is scheduled for full enforcement on 26January, 2010. Importer Security Filing is a tactical programme requiring 10 data elements from the importer and 2 data elements from the carrier (hence ‘10+2’) be electronically filed 24 hours prior to loading cargo onto a shipping vessel ultimately bound for the US. The overarching goal of the programme is to improve the accuracy of cargo descriptions, target high-risk cargo for examination prior to port departure from overseas and facilitate the movement of low-risk cargo through the import clearance process. To help avoid liquidated damage penalties, which are equal to the value of the shipment for failure to file, or US$5,000 per transaction for missing or inaccurate data, the trade community has dedicated an extensive amount of human and financial capital to implement the processes and procedures necessary to comply with the associated requirements. Import manufacturers and retailers will require their supply base to do the same and evidence to this effect will be necessary when being considered for current and future product procurement.
The US Food and Drug Administration (FDA) is expected to soon launch the Predictive Risk-Based Evaluation for Dynamic Import Compliance Targeting (PREDICT) system to oversee imported food safety. The FDA’s goal is to focus its import inspections and sampling, and allow a greater percentage of ‘low risk’ products to enter US commerce without further FDA intervention – but that will only occur if the system can find accurate and complete data in the correct fields. Firms for which the system does not have historical data, such as new suppliers or importers, will automatically be given a higher risk score. Imported shipments with risk scores below a given PREDICT threshold will receive an electronic ‘may proceed’ message. The new system also will randomly select a number of shipments for examination. Food importers should expect new rules and regulations as this system gets tweaked to satisfy US Government Accountability Office (GAO) oversight. Also expect delays as customs brokers and importer agents commit user errors as they become familiar with the system.
The pending US Customs Facilitation and Trade Enforcement Bill is expected to pass in 2010, providing CBP with more resources to promote trade and enforce compliance. The bill creates new high-level positions, including a principal deputy commissioner and an assistant commissioner of trade, devoted exclusively to CBP’s customs facilitation and trade enforcement efforts. It requires CBP and the US Immigration and Customs Enforcement Agency (ICE) to coordinate with other federal agencies to enforce US trade laws at the border and prevent unsafe or infringing goods from crossing US borders. The legislation also directs CBP to provide additional trade benefits to participants in voluntary trade compliance and supply chain security programmes in order to facilitate the flow of legitimate goods across US borders. Industry officials have generally backed the bill. One potential sticking point is a provision that import data required under the Import Security Filing programme could also be used for commercial enforcement, such as compliance with applicable tariffs and regulations. The fear is that commercial data, viewed as proprietary information, could be leaked to trading partners or international competitors.
With many global economists predicting flat or very slow growth for several years as major economies recover from severe recessions, large multinational corporations will start to focus on strategic, longer-term projects to achieve competitive advantage. Leading companies will emphasise sustainability in making global sourcing and fulfilment decisions. While sustainability in terms of greenhouse gases will be an important factor, the concern for global companies will be much broader and incorporate risk factors, such as:
Decisions made previously based solely on cost will be held accountable to a whole new set of additional questions by executives, board of directors and shareholders. The conversation and questions will shift from: “Can we?” to: “Should we?” and “How long can this last?”
Should tougher economic conditions persist, some exporters may be more open to pursuing revenue in higher risk environments than they normally would. Higher risk environments would include pursuing sales to countries subject to significant export controls or other trade sanctions, as well as those countries with significant political risk
Just because there aren’t legal restrictions on making the export to a given country, you need to ask if the company should make the export given the associated risks. In good economic times, would a company pursue such business? While business with some countries may be prohibited due to sanctions, when sales are down exporters may look for ways to conduct business with such countries via foreign subsidiaries or other intermediaries. The business may be perfectly legal, but such business still poses risk as manufactured goods may be diverted to an unauthorised end user or for unauthorised use.
Managing such business compliantly is a much more significant challenge and it is easy for companies to get tripped up by the regulations, even when well-intentioned. The same countries that are a risk for export control reasons also are typically risky for other reasons, such as bribery, which can put an exporter on the wrong side of compliance with the Foreign Corrupt Practices Act. As a guideline, you should ask yourself: “What is the net margin for this high risk project or export?” A low net margin can too easily get eaten up by unanticipated risks in dealing with a particular market. These costs may not be realised in the initial sale, but could rack up in after-sales support. This would be in addition to potential fees or penalties associated with the violation of export controls; the legal fees to get out of such a mess can also far exceed government imposed fines. Consult with trade compliance experts before making such a decision and risking the reputation of your company.
Given the dynamic nature of economic conditions around the world, companies are expected to continue to focus on supply chains that offer the greatest flexibility. Companies will continue to manufacture or source in low cost regions such as China, India and eastern Europe, providing them with the flexibility to increase or decrease production in various regions in response to market conditions and pricing. But as companies cast a wider net in low-cost countries, the need for integrated decision-making amongst chain partners could become more challenging. While some companies will choose to build in-country expertise themselves, more will opt to outsource their supply chains in 2010. As a result of increased outsourcing, businesses will need to increase auditing and compliance programmes, as well as enhance information-sharing and governing processes that not only manage the goods movement cycle time but also ensure safety, quality and security.
This article originally appeared in JPMorgan’s client newsletter.
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