Compliance in a Complex Global Supply Chain World

Feb. 3, 2012
Manufacturers should shift compliance activities as far forward in the process as possible.

The shift to global sourcing to reduce costs and grow markets has become strategic to an increasing number of companies in the last five years. While there is a tremendous upside in this, the challenge and risk in managing longer, more complex supply chains has mounted in parallel. An area of particular concern is the proliferation of international regulatory trade requirements. Trade agreements between countries are constantly under review and change due to fluid geopolitical and economic reasons.

Managing compliance is anything but static. The consequences of noncompliance can have major impact on a companys operating performance, reverberating deeply into an organization as well as broadly across collaborative supply lines.

Ignorance of requirements and restrictions is no defense in the event of violations. Fines can be substantial and executives can go to jail. 60 Minutes aired a segment last year spotlighting the challenges of compliance signaling the growing dangers of noncompliance to both corporations and national security. Compliance enforcement is destined only to grow.

This all is serving to make compliance mission critical to the strategic success of most enterprises.

Due to growth in trade regulations and the fluidity of product classification and restricted party lists, managing risk is paramount to successfully managing global trade. This is putting more areas of the enterprise under scrutiny to avoid penalties when audited. The complexity of navigating periodic changes in regulations is increasing. The growing frequency and scope of changes present huge challenges to corporate compliance officers. If youre not screening against the most current, up-to-date lists, you might as well not be screening at all.

Changes to restricted party lists and to the classification of goods occur daily. And major new trade regulations are scheduled to take effect early in 2012. These changes will require companies to review and potentially reclassify as much as 40 percent of the components, materials and finished goods that they import or export globally. Other major tariff reviews will follow as a matter of routine.

ERP systems typically provide few if any features for tracking source origin or destination attributes of items in their master data file to the degree required to ensure global trade compliance. Many systems used by compliance personnel arent integrated with other key enterprise systems. The result is little visibility to what manufacturing needs, or where orders are being placed or accepted for shipment. Some trade management systems provide you the tools for improving visibility, but dont integrate daily updates to lists as a standard feature to the core solution. This greatly compounds efforts and the risk of noncompliance.

It is inevitable that every enterprise involved in global trade will be audited, either by U.S. or European officials. Compliance departments are under pressure to accommodate the growing demands that will be put on their resources and personnel. They need to begin to collaborate more closely with both the manufacturing and supply chain/logistics functions in their companies. It will be important to reach even deeper to work with product design and development. Trade regulation compliance has not been a central concern for many of these other areas. Establishing greater cooperation with and visibility into these departments should be a top priority of compliance risk management.

In order to be effective and efficient, compliance awareness and cooperation needs to be shifted from the tail end of goods movement to the front end where designers and product planners specify materials and components. It should be expanded to include manufacturing, purchasing and supply chain/logistics. It should embrace sales and order management where shipment commitments are made.

We have recently witnessed major disruptions of global supply chains. The earthquake that rocked Japan in 2011 and caused the disastrous tsunami and resulting nuclear accident all but halted exports of automotive and high-tech components used around the world. Two years ago, the volcanic eruption in Iceland stopped air shipment of components and finished goods between American and Europe two of the worlds largest, most vital trading partners. Shipment time grew from less than 24 hours to days in some cases, weeks as supply managers worked to shift departures and arrivals southward, away from the volcanic plume that spread across Europe. Both of these natural disasters vividly showcased the vulnerabilities of longer, global supply chains.

Shifting the movement of goods south, however, revealed additional problems. Goods had to be reclassified according to regulations covering new ports of departure and arrival. Some items that were permitted to be moved between the United States and Europe could not be moved through North Africa. Problems mounted; delays and costs increased.

Enterprise systems that werent integrated with trade management systems required massive manual efforts, increasing redundancy and errors. These only compounded problems on the ground and further lengthened delays. These problems powerfully made the case for integrated global trade management solutions.

Integrated global trade management solutions provide the ability to set thresholds for triggering notification of quota status. They manage and track documentation and licensing. They provide the kinds of collaborative and visibility tools necessary to manage compliance risk in advance of problems arising in the first place.

A new set of metrics for evaluating supply chain and trade compliance performance are beginning to be used by some leading enterprises. Tracking transit time has long been a measure worth watching, but the cause and reason for delays is become more important to monitor. Was it in licensing? Or loading for export due to missing documentation? Or failure to register for importing to the U.S. that held up inspection? Full-featured global trade management solutions provide greater granularity, enabling the ability to drill deeper into the causes for unplanned events.

Another set of metrics involve the match rate of parties on your restricted party lists. Global trade management solutions offer daily automated updates to goods classification and to restricted party screening lists, so scheduled shipments are always validated and screened against the most current, relevant data. Additionally, these solutions can broadly track and monitor the performance of industry best performance practices, helping to determine what qualifies as best-in-class performance. Being able to benchmark your own performance against industry best practices is a function available to cloud solutions. This enables you to drill deeply down into your own performance matrix to clearly determine root cause of problems empowering organizations to steadily work to eliminate them and improve overall compliance.

In broad terms, all enterprises should implement programs to achieve three essential best practices. These include:

1) The shifting of compliance activities as far forward in the process as possible.

2) Viewing compliance as a collaborative managed service to multiple areas of the organization.

3) Constant monitoring of non-compliance match rates against industry best-practice indicators to drive improvements.

The potential for regulatory noncompliance has grown significantly in the last five years. It will only continue to grow. And while risk is inevitable, it is also manageable. The evolution of global trade management solutions is already well advanced. Whats key is selecting the solution that most broadly meets your needs today and that can grow with you as your compliance initiatives and requirements expand.

About the Author

Jason Childers is director, product engineering, with CDC Software, a global enterprise software provider of on-premise and cloud deployments.

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