Seven Supply Chain Subjects to Monitor in 2010

Feb. 4, 2010
A number of potential issues loom that can disrupt global supply chains, sourcing strategies and the flow of working capital. If not properly addressed, importers and exporters may face significant unexpected costs and increased disruptions to their supply chain. But the news for 2010 isn’t all bad. A number of promising opportunities exist as well

When considering the global trade environment in 2010, there are a number of potential issues looming that can disrupt global supply chains, sourcing strategies and the flow of working capital. If not properly addressed, importers and exporters may face significant unexpected costs and increased disruptions to their supply chain. But the news for 2010 isn’t all bad. A number of promising opportunities exist as well.

1. Security Remains Top Concern Worldwide
The fight against terrorism will remain a priority worldwide. Security changes and requirements will continue to effect international trade for the foreseeable future with an emphasis on advance data and self-reporting. Numerous programs already have been established around the world. The United States 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 programs, such as the European Union’s Authorized Economic Operator (AEO) program and Canada’s Partner in Protection (PIP). Interestingly, China is in the process of implementing the AEO program to streamline trade with Europe. Additional programs are on the docket to be launched sometime this year in the United States and internationally.

Just as in the United States, 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 authorizing processes and policy. These security programs recognize that government resources cannot do the whole job. The onus will continue to be placed on the trade community.

2. New Import Challenge #1: Importer Security Filing
The Importer Security Filing program or 10+2, sponsored by U.S. Customs and Border Protection (CBP), is scheduled for full enforcement on January 26, 2010. Importer Security Filing is a tactical program 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 United States. The overarching goal of the program 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 $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.

3. New Import Challenge #2: PREDICT
The U.S. Food and Drug Administration (FDA) is expected to soon launch the PREDICT (Predictive Risk-Based Evaluation for Dynamic Import Compliance Targeting) 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 U.S. 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 be given a higher risk score automatically. 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 U.S. Government Accountability Office (GAO) oversight. Also expect delays as customs brokers and importer agents commit user errors as they become familiar with the system.

4. Promoting Trade and Enforcement
The pending U.S. Customs Facilitation and Trade Enforcement Bill is expected to pass this year, 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 U.S. Immigration and Customs Enforcement Agency (ICE) to coordinate with other federal agencies to enforce U.S. trade laws at the border and prevent unsafe or infringing goods from crossing U.S. borders. The legislation also directs CBP to provide additional trade benefits to participants in voluntary trade compliance and supply chain security programs in order to facilitate the flow of legitimate goods across our borders.

Industry officials have generally backed the bill. One potential sticking point is a provision that import data required under the Import Security Filing program 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.

5. Sustainability in Focus
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 emphasize sustainability in making global sourcing and fulfillment 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 supplier and customer financial risk; volatility in global commodity, energy and labor costs; regulatory compliance, security and safety risks; and shifting patterns in a tug-of-war between protectionism and free trade agreements. 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?”

6. Gauging Risk in Challenging Times
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 sunny 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 unauthorized end user or for unauthorized 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 realized 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.

7. Stay Flexible, Stay in Control
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 among supply 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 programs, 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.

Bernie Hart is an executive director for the logistics management product suite at J.P. Morgan, where he is responsible for global sales of risk management solutions.

This article originally appeared in the Logistics Today digital magazine. To read other articles from that issue, click here: