Will 2005 Validate Global Trade Management and Unify Financial and Physical Supply Chains?




The Pain and Gain of Global Trade

The Internet has enabled a networked world creating a communication infrastructure and ensuing enterprise applications, all which have opened the door for global trade. This, in turn, demands multi-enterprise services and software to automate the transportation and Internet-based logistics management needs of a global trading network. As the global trade management (GTM) space continues consolidating, it is becoming clear that market leadership belongs to companies that understand that, to truly improve global trade, one must be able to manage both the physical and financial supply chains.

Communications and transportation networks have improved so dramatically over the last few decades, that even the most faraway regions and nations are within the reach through a mere Internet connection. As a result, many companies have jumped into international markets, and have outsourced their manufacturing or procurement operations to cheaper overseas manufacturers and suppliers, while some have established subsidiaries around the world. E-business promises to further shrink the world into a "global village" as people, collaboratively or not, research, offer, source, and procure products globally via the ubiquitous Web. They buy and sell through various e-commerce sites, storefronts, and marketplaces and manage international supply chains with interactive software and trading exchanges.

Logistics managers have long sought technology solutions that offer a secure Internet system for scheduling and planning and provide the maximum benefit for multi-carrier, multimode, and multi-leg shipments in an overriding business process system—one which can also handle domestic and international transactions within the logistics trading community. The Internet naturally acts as the means of communication between traders and customers, and they want these systems to deliver almost real-time information in a cost-effective manner, virtually anywhere in the world.

However, this kind of e-business has yet to surmount the challenge of global trade compliance and the diverse needs of international customers and trading partners. Simply put, most supply chain management (SCM), let alone enterprise resource planning (ERP) vendors still typically lack strong international trade logistics (ITL) and global trade management (GTM) capabilities. Simply put, while technology may render a world that appears a lot smaller, in reality, the world is a lot more complicated. There are many barriers that exist to conducting international business over the Internet, of which most businesses are ill-prepared.

Few applications really offer multi-enterprise services and software to automate the complex, multimodal transportation and Internet-based logistics management needs of a global trading network. Most modern, Web-based, buy- and sell-side applications fall well short of providing automated global trade management, and traditional international trade logistics.

As described in the article, International Trade or ITL Adoption, ITL and GTM are execution systems designed to automate the import/export business process. Their basic functional components are trade document generation and transmission, and regulatory compliance validation, and includes a complex exchange of information between multiple entities, including suppliers, carriers, freight forwarders, customs brokers, banking institutions, and other third-party transportation and storage providers. A true ITL/GTM system is an interenterprise resource management system, and requires a data model that can account for the breadth and depth of information that is exchanged between this multiplicity of interrelated entities. Thus, ITL and GTM systems should support export and import borders-crossing processes; documentation and compliance (which are incomprehensible to ordinary mortals); and accounting, and financial reporting in a multicurrency, multilingual and multi-units of measure (UOM) environment.

This is Part One of a six-part note.

Part Two will address tradeoffs.

Part Three will discuss managing global trade flows.

Part Four will note the GTM leaders.

Part Five will cover dealing with GTM complexity.

Part Six will present challenges and make user recommendations.

Complexities

While many have strong and divided opinions about globalization and outsourcing products and services, everyone will agree that these modes of business are here to stay. Some reports claim that nearly 30 percent of the world's gross domestic product currently crosses borders, thus global trade is becoming an integral and growing part of almost every business. Yet, exporters and importers continue to struggle to coordinate old-fashioned, international freight, financial, and regulatory processes, and although they might isolate production from inbound logistics to mitigate this conundrum, increasing market pressures continue to force better coordination. Help may come from adopting a new crop of Web-based applications aimed at improving and automating intricate multiparty coordination. As a result, businesses have created GTM to define the challenges and opportunities unique to the new, highly global business environment. There are some compelling trends that have made GTM (which has lately begun incorporating ITL) a topic of interest to avant-garde businesses, including the fact that global trade is substantial, and will only increase with time.

Nonetheless, while many may see the rationale for sourcing goods from far-flung locations with cheaper labor and costs, not many clearly realize the intricacies and costs associated with such trading activities—a cost which often may negate the initial benefits of cheaper, nominal prices of imported items. Although many enterprises have made progress in improving aspects of their financial supply chains by implementing ERP or financial applications such as accounts receivable (AR), general ledger (GL), and accounts payable (AP), global trade requires a number of additional, crucial functions that are frequently absent from domestic trade, including functions like letter of credit (LC) management, global trade financing, country and party risk assessment, and transaction reconciliation (settlement), to name a few. Proper management of these specialized functions require GTM-oriented financial management solutions that should give organizations greater visibility and control over their international business partners, receivables, payables, working capital needs, and overall financial position.

Importing and exporting have to be among the most labor-intensive, paper-heavy business activities, and the preparation of export, import, and border/duty clearance documents is no small feat for shippers and carriers. When one adds up all of the documentation that must be complied, including shipping and payment documents, advance shipment notices (ASN), licenses, certifications, and includes the inspections required by the exporter, importer, freight forwarder, customs broker, local and international carriers, banks, customs authorities (at both the origin and destination) and assorted government agencies, it is not surprising to see why a typical international trade transaction may involve several dozens or more steps. On the other hand, taxes, tariffs, regulations, and compliance issues can quickly translate into shipment delays, unclaimed products, and costly return if the prescribed processes are not followed to the letter.

It is thus no surprise that nearly 10 percent of world trade is spent on administrative costs, with most of that money directed toward document preparation, handling, and transmission. A typical air-freight shipment takes eight to twelve days. Of this, the cargo is en route only 5 percent of the time. The rest is spent sitting in warehouses waiting for the required documents and compliance checks.

To manage such complexity, more and more shippers rely on import/export software, which has evolved into a more comprehensive GTM category. When this software first came on the scene, vendors focused on automating the repetitive creation of trade documents, and later expanded their products' capabilities to include tariff classification, landed-cost calculations, customs regulations, denied-party screening, and order tracking, etc. Today, exporters and importers still have a choice to purchase from low-cost solutions that handle a single task, such as document creation, to more expensive, nearly all-encompassing GTM solutions that control and track trade transactions from purchase order to final delivery.

Appeal of GTM Solutions

Importers, exporters, forwarders, banks, and similar institutions increasingly see the appeal of GTM solutions. Gains from the top- and bottom-lines, derived from a corporate infrastructure that takes advantage of globalization, might far exceed any domestic-focused projects, (except in the case of new product development for those who do not outsource). Benefits include increased revenues through new global sales markets; decreased operating costs through lower cost materials sourcing, business process outsourcing (BPO), and globally distributed organizations; lower costs through improved working capital management; new business strategies, such as open account mechanisms linked to trade financing; and greater visibility and control of international receivables and payables.

Further, unlike several years ago, when the only option for deploying enterprise software was with multimillion dollar, multiyear customized implementation projects, the current, more mature software market gives companies a number of deployment options (for more information, see Trends in Delivery and Pricing Models for Enterprise Applications). Enterprises can now pursue pilot projects, deploy point solutions before expanding to broad-based solutions, and choose between hosted or behind-the-firewall, on-premise solutions.

However, while there are dramatic operational and cash flow benefits to be gained from implementing and efficiently executing global trade, as will be explained later in this series, global trade is a significantly more complex and risky business than domestic trade, . Further, despite the potential gains, there are organizational obstacles preventing many companies from taking advantage of GTM solutions. Namely, companies are still structured in functional silos, which impact decision-making, given that only a few companies have their corporate organization, technology, and processes properly aligned for global business.

Most large companies still run their businesses internationally rather than globally. In other words, large companies usually have an assortment of foreign subsidiaries that are self-contained businesses running their own systems that are out of sync with each other. Throughout the enterprise, functional silos further aggravate a seamless approach to global logistics management. For instance, compliance departments report to legal, whereas purchasing drives import; export is driven by sales, while transportation departments focus on getting the best rates. No one really questions whether or not the company is shipping efficiently throughout the system, given that the these silos often, inadvertently make gains or losses against each other.

Supply chain planning (SCP), trade compliance, strategic sourcing, and other strategic tasks cannot be managed on a global scale when key data is inconsistent and is not easily shared. Goods, in every step from raw material until delivery, might run logistics costs close to half of the total cost, and accounting can hardly assign these to the individual items. An example is a company that had seemingly, based solely on the unit price, saved dozens of million by expanding its global supplier base only to subsequently realize it had increased total logistics costs by twice the amount of their savings due to many non-economical less-than-truckload (LTL) shipments.

Successful implementation of GTM solutions requires companies to integrate their physical and financial supply chains in varying degrees and elements. To do this, companies must share data and collaborate across their functional silos and external business partners. Of course, making different solutions work seamlessly is a challenge for every aspect of SCM. Global logistics is perhaps the most difficult discipline to manage through one platform, because the universe of users is large and spread around the world, whereby systems- and user-capabilities vary widely. On the other hand, mandates for more functionality continue to grow, such as the recent trade security regulations from US Customs, as will be explained later in this series.

To prosper in a highly competitive global economy, where competition can come from Arkansas or Argentina, enterprises have to take advantage of the cost advantages afforded by the global availability of goods and services. At least, if one does not taking advantage of the international availability of reasonably high-quality goods, low-cost labor rates and efficient, reliable transportation, then the competition likely will.

When we talk about the risks of globalization, many are usually referring to the threat of domestic jobs moving overseas. Global trade compliance is rarely discussed, even though it poses a risk that may affect almost every manufacturer that either imports or exports. Namely, getting these goods and parts shipped from one country to another is a daunting task and needs the support of GTM software and a service provider with a combination of global trade domain knowledge, proven processes and international trade best practices.

All of the nearly 200 countries in the world have individual governmental requirements for importing and exporting goods, where one has to account for factors like tariffs and duties, country-to-country preferences, and anti-dumping laws, with the danger of incurring hidden costs at every step. If that is not complex enough, the events of September 11, 2001 have increased the scrutiny countries place on global trade, which also impacts costs adversely. According to the Brookings Institution, the cost of slowing the delivery of imported goods by just one day because of additional security checks may amount to $7 billion (USD) per year. Stringent new documentation and homeland security requirements are placing serious legal and financial consequences on importers and exporters for violating these constantly changing trade regulations. The burden is on the importer/exporter to know exactly what the regulations are and how to comply with them.

This concludes Part One of a six-part note.

Part Two will address tradeoffs.

Part Three will discuss managing global trade flows.

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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