GTM Archives

One Company’s North American Near-Shore Supply Chain

Global Trade Management Solutions | By Steve Banker • 09/26/2011

I recently had a conversation with the Director of Logistics at a US-headquartered industrial manufacturing company that has several plants in Mexico, the US, and Canada. He had several interesting things to say about his company’s regional supply chain.

First, let’s talk about the basics of this integrated, regional supply chain that includes Mexico. Near-shoring in Mexico offers real labor arbitrage opportunities. In the case of this manufacturer, the cost of a fully-burdened worker in Mexico is only a fifth of the cost of a US worker. However, my source says these values vary greatly depending on the region, whether the workforce is unionized, and other factors.

Putting plants in Mexico is also facilitated by the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. This logistics director, however, says that there are substantial costs associated with avoiding these duties. If a manufacturer imports goods into Mexico, it must keep detailed records to show that those goods (often raw materials and other components) have been installed in the finished products and then exported out of Mexico within 36 months. If a company can’t show this, then it is subject to duties and value-added taxes. To lower its compliance costs and improve its documentation, this manufacturer recently implemented a Global Trade Management (GTM) system that the company projects will save it about $4 million over the next five years, after taking into account the cost of the software and implementation.

It is easy to underestimate the fully-landed costs of producing goods in Mexico. This executive used to manage some of the plants in Mexico and saw the business cases for near-shoring those factories. This company did get the projected savings from labor, but it underestimated the additional costs associated with inventory (because of longer lead times), trade compliance, and transportation.

On the logistics side, many trucks have to stop in Texas, unload, wait for the appropriate trade documents to be filed, and then reload goods into a Mexican truck before they can cross the border. Further, Mexico does not have a well-defined infrastructure for freight/logistics, such as less-than-truckload services. This results in more dedicated truck routes and milk-runs for regional pickups and deliveries.

This executive is hopeful those trucking inefficiencies can be gradually reduced. In July of this year, the US and Mexico signed an updated trucking agreement aimed at resolving a cross-border trucking dispute. Under the agreement, the US will reinstate a pilot program for Mexican truck certification. The accord requires all Mexican trucks operating in the US to comply with US DOT hours of operation and safety standards.

This logistician now thinks that between this agreement and his company’s’s new GTM, which will allow it to file the appropriate trade and entry documents prior to its trucks leaving cross-docking facilities in the Midwest, that his company will reduce inefficient transloading operations. American or Mexican drivers will be able to drive the same truck right through customs to their plants.

This brings us to another dimension to near-shoring in Mexico: drug cartels, transportation protection rackets, and violence. This director thinks US drivers will be willing to deliver to some of their plants right over the Mexican border, but they won’t be willing to risk their equipment, or their personal safety, by traveling to more distant plants.

In conclusion, the executive stressed that he would not want to discourage anyone from doing business in Mexico. But properly estimating total landed costs is a tricky business. This executive, as well as other C-Level executives at his company, think that they moved too many plants to Mexico. The plants producing products that required a good deal of manual labor clearly should have been moved. But more automated plants, with a lower proportion of labor costs to total costs, probably should not have moved. For example, they have two highly-automated plants producing very similar products. In these plants, having factory employees with the right technical skills is more important than labor savings. The US plant for these products is more profitable than the Mexican plant. Each business case is unique; a company should consider all the factors, including logistics costs, before making a decision to near-shore business to Mexico.

What’s New in Supply Chain Risk Management Software?

Global Trade Management Solutions | By Steve Banker • 06/15/2010

Supply chain risk management solutions must encompass process, content, and connectivity. Even before the economic downturn, large enterprise software vendors like SAP and Oracle had begun to introduce Governance, Risk, and Compliance (GRC) solutions in response to a growing customer requirement: the ability to respond to risks more efficiently.

Initially, these solutions were largely process based—i.e., they created process flows for dealing with specific compliance requirements. Companies would define tasks that needed to be completed by a certain time, by the pertinent company personnel. These tasks were monitored for completion and certain types of events could get escalated to high-level executives along with relevant information.

More recently, these solutions have become a lot more interesting. SAP, for example, has an end-to-end solution for food and beverage manufacturers to proactively manage food safety. It starts with recipe formulation and goes through raw material procurement, production, sales and distribution, and recall management. In short, it encompasses the entire end-to-end process and it embeds safety across the organization in order to minimize risk while reducing the cost of safety.

The recent economic downturn forced many companies to provide financial support to their key suppliers. As a result, solutions that can help companies detect potential supply disruptions have gained added attention, and new types of web-based content solutions have emerged in this area. For example, Panjiva provides a central database of supplier data gathered from credit reports, black lists, and customs data that companies can search. Why customs information? If customs entries from a foreign supplier decline sharply, this could indicate the supplier has a greater risk of bankruptcy.

For companies that import and export goods, Global Trade Management (GTM) solutions fall under the GRC umbrella. Here the large enterprise suppliers have process-based solutions like those described above, but ARC is particularly interested in best-of-breed solutions that combine process, content, and connectivity (see “Beyond Software: The Role of Content and Connectivity in Global Trade Management”).

Management Dynamics’ GTM solutions, for example, are powered by its Global Trade Content database. The company claims that it has the industry’s most comprehensive and up-to-date database of global trade content, based partly on the number of people it has focused in this area. The database contains content for tariff and contract rates, preferential duties and taxes for calculating total landed cost, import and export controls, restricted parties lists, and all trade documents required for cross-border commerce. And the content is created in a hierarchy that mimics the process trade lawyers go through to classify goods. In short, Management Dynamics excels in the content portion of GTM.

Descartes Systems Group, on the other hand, excels at connectivity. How does connectivity come into play? Connectivity is necessary because many different parties are involved in global trade—e.g., carriers, customs agencies, freight forwarders, logistics service providers, and regulatory agencies—that need to communicate and collaborate with each other. In addition, information entered by one entity often needs to be leveraged my multiple parties in the end-to-end process. For example, a waybill is necessary for an air freight shipment. But customs also needs advance notice before a shipment can be loaded for departure. The pertinent data should flow to customs without rekeying. Having to rekey information is not only time consuming, but can also introduce errors. Descartes’ connectivity solutions have data quality capabilities to help ensure the required data is entered and in the correct format.

When it comes to GTM, there is still no perfect solution. The content required is so vast that no single vendor can provide it all. And although Descartes has a very large global logistics network, the company concedes that its work is not done and more acquisitions are possible. Descartes recently completed its acquisition of Porthus, which increases its connectivity to several European customs agencies.

In short, there are both new solutions in supply chain risk management, as well as solutions that are maturing in their breadth and depth.

(Note: Descartes, Oracle, and SAP are ARC clients)

Leggett & Platt: Trade Compliance Lifecycle Management

Global Trade Management Solutions | By Steve Banker • 10/20/2009

What would a Global Trade Management (GTM) solution that took a lifecycle approach to trade compliance look like? John Wainwright, the Vice President of Customs Compliance at Leggett & Platt, has an insightful answer to this question: Trade compliance processes should mirror a customs audit.

Leggett & Platt (L&P) is a global, diversified manufacturer of engineered components made mostly from steel. Even if you are not familiar with L&P, chances are you are sleeping on a bed made with L&P components (box spring, innerspring, etc.), or relaxing on a recliner with an L&P motion mechanism inside, or shopping in stores with shelving made by L&P.

Full-blown customs audits are conducted about once every ten years, if there are no red flags, but a number of spot audits can occur in the interim. Customs auditors seek to verify all the information surrounding customs entries. They will review, for example, proof of payments and compare warehouse receipts with the information included in customs entries. John argues that many companies have trouble responding to these audits because their data resides in disparate systems, and the main users of these systems reside in various corporate operating groups, including purchasing, accounting, warehousing, and customs.

In many organizations, the customs compliance group is part of the global logistics or finance group. At L&P, customs compliance is part of the purchasing organization. The company’s trade process begins when one of its 20 business units issues a purchase order to one of its overseas manufacturing facilities to ship goods to a particular country (L&P has 160 factories in 18 countries and about three quarters of its shipments are to the United States).

The trade compliance group at L&P does not issue purchase orders, but its systems check that the POs correspond to the downstream customs declarations that result from the POs. The group’s systems and people also verify that the product descriptions on the PO match the descriptions on the customs declaration. The trade compliance group also reviews payments because if there was an audit, customs would want proof of payment, and it checks to make sure that warehouse receipts match what the broker reported to customs.

From a systems perspective, L&P’s process automation is built off a specially-configured PeopleSoft procurement solution. Layered on top of PeopleSoft is a trade solution, Trade Collaborator, from Management Dynamics. The company’s goal in implementing these two solutions was to achieve customs and purchasing efficiencies simultaneously. It took L&P about two years to implement the PeopleSoft solution in a way that reflected the its “to be” process. The system includes exception reporting that flags, for example, when a branch PO does not match what the customs entry should be (or is perhaps missing a field). In this situation, the exception is highlighted and a person looks at the information. If there are no exceptions, the checks are completely automated.

Because L&P is C-TPAT certified, and because it has a robust trade audit processes in place, the company can participate in the Importer Self-Assessment (ISA) program. In particular, the ISA program asks how trade data is being shared by various stakeholders in the organization and what sorts of checks are in place. ISA is a voluntary program that has several benefits, including exemption from comprehensive compliance audits (Focused Assessment Audits can take a year or more to perform) and, in theory, a reduction in shipment inspections and delays.

John finished our conversation by commenting that many trade professionals believe that the customs compliance group should be part of the logistics or legal departments. He strongly disagrees. Customs does not care about the timeliness of a shipment, which is the key concern of the logistics department. Similarly, legal does not focus on day-to-day activities; it cares about preventing or responding to a legal problem. Trade compliance should really reside in purchasing, where the customs process starts and where one of its key systems, procurement, resides.

IBM’s Solution for Global Trade Management

Global Trade Management Solutions | By Steve Banker • 08/25/2009

IBM’s global trade operations are massive in scale and scope. The company conducts business in 170 countries and moves about $25 billion worth of goods across borders. It ships about 2 billion pounds of goods per year globally (78,000 products with 2 million configurations) which translates into 500,000 customs declarations annually. IBM also conducts cross border consulting which can be subject to export regulations, including denied party screening, regulations focused on insuring that advanced technology does not fall into the wrong hands.

Overseeing trade compliance in North America is Sally Meier, Foreign Trade Compliance Manager for the Americas. Global trade is part of IBM’s Integrated Supply Chain organization, although two governance offices which report to Legal—the Import Compliance Office and the Export Regulations Office—provide essential checks and balances.

A key task for IBM is keeping up with new regulations, like the new Import Security Filing (ISF) regulations. ISF, also known as “10+2”, requires importers to submit 10 data elements, and ocean carriers 2 data elements, to U.S. Customs electronically no later than 24 hours prior to the loading of cargo onto a vessel destined to the U.S. These regulations went into effect on January 26, 2009, with a twelve month delayed compliance period to allow the industry to comply with the new requirements.

The trade press has written a lot about how complying with ISF will be difficult for many companies, and how many businesses will need to implement a Global Trade Management (GTM) solution or outsource global trade compliance to brokers and forwarders that have good systems in place.

So, it was a bit surprising when Sally didn’t seem fazed by IFS compliance. She is confident that within two months IBM will have successfully modified its internally-developed systems to facilitate complete automation. Further, IBM will have done it in a cost efficient manner that also takes a global approach to compliance. The global strategy recognizes that other nations will likely follow the U.S.’s lead and implement similar requirements, so IBM’s systems will be capable of providing this data in a timely manner to all customs organizations around the world!

According to Sally, while many companies shy away from internally-developed solutions, IBM, as a technology company, has a unique advantage in this department—“building these kinds of solutions is in our DNA.” The trade organization believes that even their legacy trade applications exceed the capabilities of best-of-breed GTM software.

IBM’s internally-developed solutions, which are used by all IBM trade people around the world, include:

An Electronic Invoicing System: This system passes electronic invoices to brokers and carriers. It also gives IBM control and visibility and it is the key solution for “10+2” compliance. This system, along with many others in the IBM landscape, makes use of IBM’s middleware gateway that acts as the focal point for the exchange of all electronic data with IBM’s trading partners (brokers, carriers, vendors, etc.).
A global classification database: IBM keeps this database up to date itself. While in the global process a broker may have a “one off” classification that needs to be done, IBM has workflows and processes to verify the classification before putting it in its database. Thus, even though IBM calls this a database, it is also an application. The application also has logic, particularly around parametric data, to help guide users to a correct classification.
A Shipping Procedure Instructions application: A web based solution that contains the appropriate procedures, documentation, and labeling to ship anything to any nation in the world.

Sally made the point that in trade compliance, as opposed to operations, the focus is not the physical movement of goods; it is the accurate and timely movement of data. This is why “10 + 2” is not keeping her up at night. The IBM systems were developed from the beginning to support the transmission of this type of data. (For more on the role of data and 10+2, see “10+2: A Beacon of Hope for Software Vendors and Freight Forwarders”).

In the area of global logistics, IBM made news in December of last year when it announced that it had sold its internal global logistics operation to Geodis (see “Geodis and IBM: A New Strategy in Logistics Outsourcing?”). In turn, Geodis became IBM’s lead logistics provider. IBM’s internally-developed GTM solutions also offer new business opportunities. The company is exploring the possibility of commercializing this technology.

Is it possible to accurately calculate Total Landed Costs?

Cloud/Software-as-a-Service | By Steve Banker • 02/02/2009

There was a terrific article in this month’s Supply Chain Management Review by John Ferreira and Len Prokopets from Archstone Consulting (“Does offshoring still make sense?”). The article highlights some key findings from a survey Archstone and SCMR conducted with thirty-nine senior executives from U.S. and European manufacturing companies. Among the interesting points highlighted in the article:

North American manufacturers sourcing from China perceived that their savings would be in the 25 to 40 percent range. The true savings may never have been more than 15 percent, and were probably as little as 5 percent for some products.
Off-shore labor and commodity costs are growing by more than 10 percent a year, key foreign currencies are gaining value against the dollar, and ocean freight costs have increased by 135 percent over the last three years. Thus, offshore manufacturing is becoming even less attractive.
Consequently, North American manufacturing stands to grow 5 percent over local market demand, with Mexico and low-wage states like Alabama and Arkansas being the big winners.

For me, the most interesting portion of the article was a chart that showed all the cost buckets that companies need to consider when calculating an “all-in” total landed cost. Most of the manufacturers surveyed have landed cost models that take into account component and material prices, transportation costs, and exchange rate differentials. But only 41 percent have cost models that also take into account inventory costs, the cost of quality, and country specific costs like VAT and customs fees. Further, less than a third of the companies surveyed take into account six other cost factors, such as customer service costs and packaging costs, that also contribute to total landed costs.

Companies need granular costing models in order to determine true landed costs. As I looked at the various cost buckets, however, I wondered if it was even possible to accurately calculate a company’s true landed costs. Let’s just look at two of these areas: inventory costs and global trade costs.

As average lead times and lead time variability increase, the amount of inventory companies must hold to maintain a specific service level needs to increase. A 25 day average lead time is not necessarily better than a 30 day lead time from the perspective of how much inventory is needed. If the first supplier attains the 25 day average by having half of their deliveries occur on the 15^th day and the other half on the 35^th day, while the second supplier’s shipments are always delivered between 28 and 32 days, the math that determines how much inventory should be carried may well favor the “longer” lead time supplier.

To maintain desired service levels and accurately track inventory carrying costs, companies need good Supply Chain Event Management and Global Visibility solutions and they need to update the input variables of their inventory planning engines, specifically lead times and lead time variability, on an ongoing basis. In other words, in order to accurately determine the inventory component of a total landed cost calculation, companies have to integrate their visibility and inventory planning systems, as well as automate (or even semi-automate) the process of updating lead times and lead time variability. Do you know of any companies doing this? I don’t.

Last year, I completed a market study of Global Trade Management (GTM) solutions. GTM is a complicated solution space because these suites must support the “3 Cs” of global trade: compliance, content, and connectivity. The different platform choices – i.e., in-house implementation versus software-as-a-service (SaaS)-have different strengths and weaknesses when it comes to supporting the “3 Cs”.

SaaS solutions, as my colleague Adrian highlighted last week (“More questions about Software-as-a-Service“), are superior when it comes to global trade visibility and event management because they have a prebuilt network of connections to customs, carriers, logistics service providers (LSPs), suppliers, and other trading partners. As a result, they tend to have better data quality management surrounding communications with external parties, and on-boarding new trading partners that are already part of the network tends to be much quicker.

GTM solutions must also require up-to-date trade content. While some suppliers claim that they have trade content for nations representing 95 to 98 percent of global trade, they don’t claim to have all of the relevant content from the nations they cover. In other words, they may cover import and export compliance content, but not content related to free trade agreements like NAFTA (which is a particular weakness of several leading solutions).

Further, local expertise and presence is important. Trade regulations can change quickly. Without sources on the ground working with local authorities, GTM solutions can lag regulatory changes. In general, GTM solutions with a global scope lack depth in trade content. Also, it is not clear that the process for updating their content occurs easily or in a timely manner. Several solutions have depth in terms of regional or country-specific content, but lack the global scope.

In short, as I look at the cost buckets needed to calculate total landed costs, I have real doubts, based on current software solutions, that we can accurately calculate these costs. The question is: How close can we get to a true landed cost? And how would we know if we’re close?

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