Although global trade volumes will decline this year due to the weak economy, the costs, complexities and risks of moving goods across borders will continue to grow. Customs agencies around the world are moving away from paper-based filings to electronic-based communications, preferential trade agreements are on the rise, and trade initiatives, such as '10+2' in the United States, are presenting importers and exporters with a whole new set of challenges.
Simply stated, companies can no longer rely on manual processes to manage their global trade operations, which is why the Global Trade Management (GTM) systems market is one of the fastest growing segments of the software industry.
Software functionality, however, is only one component of a complete GTM solution. Companies often overlook (or underestimate) the importance of global trade content, particularly the role it plays in extending the value of GTM across the enterprise to areas such as global sourcing, network design, product development and strategic planning. The same is true for connectivity. Global trade processes are inherently network-centric, involving the exchange of information between many external parties, including customs agencies, freight forwarders, customs brokers, and suppliers. Establishing and maintaining connectivity with a dynamic set of trading partners is an integral component of GTM, but one that many companies fail to consider when evaluating solutions.
The World Trade Organization (WTO) forecasts that world merchandise trade will decline 10% in 2009 in response to the global economic crisis. Although this news is troublesome, it is important to keep the long-term trends in perspective. According to WTO statistics, the value of world merchandise imports and exports (in current prices) totaled more than $32.5 trillion last year, a 52% increase from 2005, and almost double the value from 1998! In volume terms, world merchandise trade grew an average of 5.7% annually from 1998-2008.
A variety of factors have fueled this growth, including:
- Global Sourcing
Companies are continuously seeking new sources of raw materials, components, and finished products-in every region of the world-as they seek to reduce the cost of goods, and establish manufacturing plants and sales operations in new geographies.
- Preferential Trade Agreements
These agreements, such as the North American Free Trade Agreement (NAFTA) and the Central European Free Trade Agreement (CEFTA), serve as a catalyst for trade by reducing or eliminating duties between participating countries (among other benefits and incentives).
In addition, many companies continue to leave money on the table by (among many other things) failing to take advantage of preferential trade agreements and by misclassifying products and paying too much in duties and taxes. While these missed opportunities are sometimes worth millions of dollars, they are also the most difficult to track unless you have the right knowledge, experience and metrics.
Simply put, managing the flow of goods, information, and money across borders is a highly complex, regulated, and dynamic process-and becoming more so every day! Therefore, companies can no longer rely on manual processes to manage their global trade operations, which is why the Global Trade Management (GTM) systems market is one of the fastest growing segments of the software industry.
Compliance is what most people associate with a GTM solution. These capabilities focus on automating customs and regulatory compliance activities, including:
- Facilitate product classification
- Perform restricted party screenings and embargo checks
- Create and file trade documents
- Determine total landed costs
- Assign export and import licenses
- Communicate electronically with legal authorities
- Manage customs processes and transit procedures
- Determine preferential trade eligibility
Compliance, however, is only one component of a best-in-class global trade management solution. There are two other critical components of a GTM solution, which many companies overlook, are content and connectivity.
Companies must have accurate and complete trade content for every country they operate in and trade with in order to successfully comply with trade regulations and prevent customs clearance delays. A GTM solution without a comprehensive and continuously updated trade content database is only marginally useful.
Trade content should include information regarding (among other things):
- Denied parties
- Embargoed countries
- Harmonized system chapters and descriptions
- License codes, descriptions, and requirements
- Document templates
- Duty, value added tax, excise taxes, seasonal taxes
Not all GTM vendors, however, provide their own trade content. Many vendors partner with content providers, while others, like Integration Point, aggregate and supply trade content themselves. Establishing a trade content group is not a trivial task. It requires a commitment to having trade experts on staff, as well as a network of in-country sources, who can interpret, normalize, and digitize the information collected, as well as track and process ongoing changes.
Briefly stated, trade content is the foundation of a GTM solution. A book without words is just sheets of paper bound together. Similarly, a GTM solution without accurate, complete, and up-to-date trade content is just a collection of software code with limited applicability.
The value of trade content, however, is not only limited to importing and exporting processes. For example, consider the role of trade content in making sourcing decisions.
At many companies, sourcing decisions are driven primarily by unit cost, but this silo perspective could have serious and costly consequences. At a minimum, purchasing managers must evaluate sourcing options from a "total landed cost" perspective, taking into account other cost factors such as duties, taxes, and transportation costs. In addition, purchasing managers must consider the impact of country of origin. Duties and taxes can be minimized or eliminated by sourcing from a country participating in a preferential trade agreement, such as the North Atlantic Free Trade Agreement (NAFTA). Country of origin can also limit a product's exportability.
Connectivity is perhaps the most underrated aspect of global trade management, but its importance cannot be overstated. Simply put, global trade processes do not occur in a vacuum. A cross-border shipment typically involves the exchange of information with about 25 external parties, including customs agencies, freight forwarders, brokers, banks, regulatory agencies, transportation providers, and suppliers. Establishing and maintaining connectivity with a dynamic set of trading partners, as well as keeping up with customs modernization efforts around the world, is a challenging task that few companies would call a core competency. This is why poor data quality (late, inaccurate, and/or incomplete) is the Achilles' heel of global trade management, a problem that results in higher supply chain costs and lower productivity.
Adrian Gonzalez is Director of Logistics Viewpoints at ARC Advisory Group. ARC Advisory Group is a thought leader in manufacturing, logistics, and supply chain solutions. http://www.arcweb.com
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