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Managing Global Trade Flows

Written By: Predrag Jakovljevic
Published On: June 16 2005

Global Trade Flows

There are a multitude of complex interactions between the global trade flows within a secure supply chain. Namely, across the few dozens pertinent processes, global trade requires managing the flow of goods, funds, and information. That is to say, the flow of information must support the tracking and management of the goods to enable the secure and compliant entry and exit to and from countries for the correct funds to flow to eligible business and trading partners.

Part Three of the Will 2005 Validate the Realm of GTM—Unifying Financial and Physical Supply Chains series.

Regarding the flow of goods, it is important to manage the processes around areas such as the original order and contract, product information, trade compliance, shipment tracking, and landed costs. For example

  • Order management requires the ability to track the business terms of the order correctly. As an order progresses, it is essential to reconcile all shipment activities against the order to ensure that the process is smooth from a transactional and security perspective.

  • Trade compliance requires the ability to manage import and export compliance processes. The proper management of these processes includes screening trading partners against governmental prohibition lists, determining that commodities can be shipped to the country of destination, managing outsourced service provider activity, such as a broker and auditing compliance activities, to ensure the correct flow of information and the accurate payment of taxes, duty, and fees.

  • Product information must manage the flow of goods related information relevant to the physical goods. For example, Harmonized Tariff Schedule (HTS) or the Export Control Classification Number (ECCN) numbers to assist trade compliance, weights for shipment booking, and documents for tracking.

  • Shipment tracking has to provide visibility for the location of the goods throughout the life of the trade, including entry and exit from ports, and title exchange through to proof of delivery, with status on when the goods reach the final destination.

As for the flow of funds, it is important to manage the way invoices are handled, international payments are made, and how these payments are reconciled. For example

  • Reconciliation should handle global trade requirements for n-dimensional matching to sort through the vast amount of information required to settle global transactions. Matching must be managed across trading documents, highlighting exceptions at the line-item level.

  • Invoice management has to manage commercial and customs invoice creation and presentation, and manage outstanding invoices.

  • Letter of credit (LC) management has to manage the flow of letters of credit from their creation through to their final presentment. The process needs to synchronize between LC data and critical supporting documents, including bill of lading (BOL), invoice, and packing list.

  • Dispute management has to flag issues and manage the resolution flows between multiple trading partners

  • Trade financing requires functions factoring trade receivables based on multiple trade characteristics such as shipping lane, currency, buyer supplier rating, or trade credit.

With regard to the flow of information, it is critical to track and manage information anomalies, documentation, and interaction with trading partners to create secure audit trails and settle transactions. For example

  • Pro-active information alerting provides the ability to act on exceptions and information anomalies between trading partners and service providers

  • Document creation and management is needed to ensure that documents are both accurate and compliant with business agreements and regulations to ensure the swift exchange of title of goods and payment

  • Trading partner integration has to manage the flow of information with all trading partners

  • Audit trails are required to provide clear document appraisals for all documentation, processes, and communication with partner interactions.

To recap, across the three major flows, user companies need to deploy tools that support the automation of standard workflow procedures, synchronize, and reconcile the exchange of data, automate document generation, provide for exception management, and provide for detailed and flexible visibility into orders and shipments. This all must be done while complying with security, compliance and other regulatory requirements.

This is Part Three of a six-part note.

Part One defined GTM.

Part Two discussed the Tradeoffs.

Part Four will note the GTM leaders.

Part Five will cover dealing with GTM complexity.

Part Six will present challenges and make user recommendations.

Managing The Process

To provide the big picture for global trade security, these important flows can also be evaluated in terms of where they apply regarding security initiatives and federal requirements. In fact, global trade participants would profit from a matrix, (see table 2), that provides a summary of flows and processes associated with goods, information, and funds that are applicable to current security initiatives and federal requirements for import and export.

Table 2: Global Trade Security Summary

Source: TradeBeam

For example, take the processes that need to be considered when applying technology to Customs-Trade Partnership Against Terrorism (C-TPAT). Based on the above matrix, consideration must be given to automated orders management, the conduct of trade compliance, and how product classification is performed, when it comes to the flow of goods. As for the flow of funds, attention needs to be given to how invoices and internal payments are conducted, in addition to ensuring that their reconciliation is accurate. Finally, flow of information elements are required to ensure compliance with C-TPAT.

With penalties for violating export control laws that can potentially reach $30 million dollars (USD), the reasons to build compliance checks into a company's business processes and to find software that can establish protocols for processing export orders and create transaction records are compelling. Also, the merging of federal agencies into huge organizations like the US Department of Home Security (DHS) will make software an important tool for complying with security mandates. Import and export administration, trade policy, and national security are all converging under a single bureaucratic umbrella, and that means importers and exporters will need to organize data in a similar fashion.

The other aspect to consider is the verification of financial data and business processes. Shippers that are involved in mergers and acquisitions, or undergoing customs and tax audits can use GTM software as an audit tool because it automatically records each step in every trade transaction. This capability also helps companies comply with the US Sarbanes-Oxley Act (SOX), which requires companies to certify that their business processes and financial statements meet specified standards (for more information, see Attributes of Sarbanes-Oxley Tool Sets). If there is sufficient reliance on export revenues that it would materially affect a company's financial performance if something went wrong, such as a denial order forbidding the company from exporting because of a violation, then the company's export control procedures would have to be certified.

Other Risks of Global Trade

Though less dramatic, there are also other financial risks. Where imports attract tariffs or duties, items purchased from overseas may turn out to be more expensive if, for example, the wrong tariff code is applied. Importers can pay more than necessary if the paperwork omits mention of any one of dozens of "preferential programs" under which tariffs are cut, or waived altogether, owing to a slew of free trade agreements. Moreover, even more expensively, tariffs for some goods vary throughout the year, as low-tariff special quotas expire, with the end result being that what seemed a bargain when the purchase order was placed, could turn out to be an expensive mistake when goods enter customs.

In addition to language barriers, and different formats for weights, units of measurements (UOM), dates, telephone numbers, addresses, etc., global trade management (GTM) and international trade logistics (ITL) compliance issues are other hurdles for e-business. Collaborative e-business applications must be able to comply with a variety of complex regulations to engage in global trade, and companies that cannot handle these regulations will end up leaving "a lot of money on the table" and walking away with very little profit.

There are some indications that almost half of the international orders to US via e-commerce remain unfulfilled because companies cannot handle the necessary customs and duty procedures. On the other hand, billions in US import duty refunds go unclaimed each year by companies that do not understand the trade laws. For example, under the US government's "duty drawback" scheme, importers that subsequently re-export what they import can be refunded up to 99 percent of the duties they paid; however, this is on the condition that they can prove that, for example, the widgets they are exporting are the same widgets they imported. This can be especially difficult to prove when the widgets in question are parts that are built into a complex assembly, and are regularly sourced from more than one supplier across the globe.

Further, customs requires that all imports be coded and categorized, and, because these codes vary among countries, they must also be harmonized from country to country, while restricted-party screening regulations may apply to products that cannot be imported or exported between specific countries for national security, health, and environmental reasons. All imports, for example, must specify a Harmonized Tariff Schedule (HTS) identification code to US Customs—a code which is found within the Harmonized Trade Schedule of the US, a two-volume catalog almost eight inches thick. Moreover, one must read it carefully, since previously acceptable descriptions like "general industrial goods" are no longer permitted. Even worse, the same type of product, made from different material will fall under different tariff laws. To illustrate, leather gloves attract one tariff, wool gloves another, and lined gloves still another.

To that end, many GTM solutions providers offer products that will extract data from a supplier's advance shipment notification (ASN) to create a US Customs Form 7501, which is used to collect duties and other fees, and which must declare exactly what is in a shipment coming to the US port. The system can even forward this electronic document to the user company's customs broker, ensuring that the shipment is ready to clear customs before it leaves the country of origin. Additionally, besides classifying each item in the shipment in line with official tariff codes, such as the HTS, the solution should also flag merchandise that is regulated by government agencies other than Customs.

For example, a retailer may import many items that incorporate animal products such as furs, feathers, skins, and bone, which are all regulated by the US Fish and Wildlife Service. Thus, a shipment that includes even one of these products must wait while the importer files the necessary documents, and, lo and behold, many shippers, and even their suppliers, do not realize that an item such as a shirt with mother-of-pearl buttons requires special treatment. A GTM application should automatically identify and separate items that need to be processed through Fish and Wildlife or other agencies, and allow other non-Fish and Wildlife merchandise, to be cleared and moved. It should be able to create a separate entry for the Fish and Wildlife and only delay that portion of the shipment one day. Furthermore, once the system has assigned a code to a product, it will automatically attach the same code every time the company brings that item into the US, which will result with future saves in time-consuming chores.

Countries and localities also have different licensing requirements and charge different duties. For example, customs duties may nearly double the cost of music compact disc (CD) for buyers in countries like Brazil, while a bottle of nutritional supplement pills can increase 25 percent on shipments to countries like Germany. This with value-added taxes (VAT), and other fees, can altogether amount to a major content management challenge. Different custom offices even in the same country sometimes classify products in different ways, which means multiple tariff rates could be applied to a single product, depending on where it enters the country.

Beyond these regulations, there might be many other financial and logistical considerations, since GTM has complex, processes for financing, risk management, and financial settlement, prompting financial institutions and software vendors to continue ironing out the applications and services e-businesses require for automating international payments. Suppliers will want integration with their order management systems, whereas retailers will want integration with their sourcing and procurement systems. Alternatively, many of these functions may be embedded in a broader GTM/ITL solution.

Although global trade requires the multimodal shipping of goods across borders, many international shippers that want to automate their global supply chains do not yet have e-logistics software that provides the necessary visibility and flexibility needed to conduct e-businesses. They also do not have e-procurement software that can analyze the total landed cost, such as the costs of sourcing and shipping a product internationally, including customs management, tariffs, transportation, cost of goods, etc. However, there have been a number of Internet-based logistics tools that are helping companies analyze and reduce costs by automating the processes of booking shipments, keeping customers informed, and making sure goods arrive on time (for more information, see Understanding the True Cost of Sourcing).

Savvy customers have been increasingly asking for help in researching costs for importing from different countries. By using software to check duties, taxes, and trade regulations in the potential countries of origin, GTM experts should be able to create "what if" scenarios that will help importers make the right decision.

This concludes Part Three of a six-part note.

Part One defined GTM.

Part Two discussed the Tradeoffs.

Part Four will note the GTM leaders.

Part Five will cover dealing with GTM complexity.

Part Six will present challenges and make user recommendations.

 
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