In a filing with the Securities and Exchange Commission (SEC), Weatherford International, an oilfield services and equipment company, disclosed that its trade practices are currently under investigation. The company said the DOJ and SEC “are investigating our compliance with the Foreign Corrupt Practices Act (FCPA) and other laws worldwide. “We have retained legal counsel, reporting to our audit committee, to investigate these matters and to cooperate fully with the DOJ and SEC.” Since September 2007, Weatherford has been suspending business in countries subject to US sanctions including Cuba, Iran, Syria and Sudan it said in its filing. “Through June 30, 2011, we have incurred $49 million for costs in connection with our exit from sanctioned countries and incurred $117 million for legal, professional and related fees in connection with complying with and conducting these ongoing investigations,” the company stated. It cautioned that its costs could go up. “To the extent we violated trade sanctions laws, the FCPA, or other laws or regulations, fines and other penalties may be imposed,” the SEC filing cautioned. “Because these matters are now pending before the indicated agencies, there can be no guarantee that actual fines or penalties, if any, will not have a material adverse effect on our business, financial condition, liquidity or results of operations,” it continued.
TAA-FTA Deal is Still up in the Air
An alleged deal between Senate Majority Leader Harry Reid (D-Nevada) and Minority Leader Mitch McConnell (R-Kentucky) to move legislation on renewing Trade Adjustment Assistance (TAA) and three pending free trade agreements (FTAs) still lacks information on how and when the Senate and House will vote on the measures. “None of the sequencing details has been worked out,” one congressional source said. Many of the statements offered by lawmakers and administration officials didn’t address anything new. A statement from Reid (D-Nevada) said that he believes that his conversations with McConnell “have provided a path forward in the Senate after we return for passage of the bipartisan compromise on the Trade Adjustment Assistance program, followed by passage of the three FTAs.”
He did not specify what that path is, but said he would “not support movement on the FTAs, which I have never supported, until TAA has passed.” A McConnell statement said he agreed that “we have a path forward on TAA and the Free Trade Agreements,” even though he would not support TAA. US Trade Representative (USTR) Ron Kirk issued a statement saying he was happy that Reid and McConnell have agreed on a “path forward,” but he didn’t say he was part of the deal or when President Obama would send the FTAs with Colombia, Panama and Korea to Congress for approval. Nor did he mention that both the House and Senate would have to pass TAA before the president sends the FTAs to Congress. House Democrats who remain divided over the FTAs, are not convinced that the deal will lead to passing of TAA. They weren’t satisfied by a statement from House Speaker John Boehner (R-Ohio), who stated that he looks forward “to the House passing the FTAs, in tandem with separate consideration of TAA legislation, as soon as possible.” The Democrats are uncertain what that means or whether Boehner will bring up TAA under regular rules of order for a House vote or under suspension rules that would necessitate a two-thirds majority that could end the bill. “The path forward in the House as well as the Senate must be ironclad in its assurance that TAA will be renewed, otherwise TAA should be attached to the Korea FTA as [we] urged many months ago,” said House Ways and Means Ranking Member Sander Levin (D-Michigan) and Rep. Jim McDermott (D-Washington) in a shared statement.
Defense firms that would like to employ the revised International Traffic in Arms Regulations (ITAR) rules for hiring dual nationals and third-country nationals will have to investigate deeply into the “substantive contacts” that those employees have with countries that fall under US arms embargoes. In a guidance that State’s Directorate of Defense Trade Controls (DDTC) posted on its website this last July, the agency offers a sample questionnaire with 17 questions that organizations should ask their dual and third-country nationals in order to decide if contacts they have with their country of birth bring forth issues that raise questions which stop them from having access to controlled technology under the new rules. The questions vary from “do you hold/use a passport from another country?” to more inquisitive and detailed questions like, “do you have contacts with any other individuals or groups involved in acquiring controlled defense articles, including technical data, illegally or otherwise circumventing export control laws? Please explain the nature of that contact.”
In addition to the guidance on application of the new rules which went into effect last month, the DDTC also posted guidance on filing for licenses under the modified regulations and also provided a sequence of frequently asked questions (FAQs). Although the compliance guidance offer thorough examples of behavior that may constitute “substantive contacts,” it still does not address all of the questions that exporters have been wondering about. For example, exporters want to know how often they need to update the records of their dual and third-country employees and do they need to ask the sample questions just once or periodically or every time an employee is back from vacation?
The new regulations excuse certain dual and third-country nationals from export licensing requirements if they have obtained a security clearance from the host nation or if they have been screened for substantive contacts with their country of birth. Where these individuals are not eligible for the exemption, licenses must still be acquired from the DDTC. The guidelines state that when these individuals are included in a license application or agreement request, “DDTC does consider the country of origin or birth in addition to citizenship.”
In an effort to apply the proposed new definition of “specially designed” to their own products, some exporters are realizing that the proposed criteria do not necessarily apply in all situations, according to members of the Bureau of Industry and Security’s (BIS) Materials Technical Advisory Committee (MTAC). At a meeting held in August, MTAC members questioned the application of the definition to parts that are exclusively made for items that may be moved from the US Munitions List (USML) to the Commerce Control List (CCL) – but provide only safety or aesthetic functions and don’t add to the performance of the end item. Assistant Secretary of Commerce for Export Administration, Kevin Wolf, told the MTAC that he could not respond directly to those concerns but did advise members to raise these issues in the comments they filed on the regulations proposed in the July 15 Federal Register. Wolf, who has been regularly attending TAC meetings also has been hosting a weekly teleconference call with industry to address questions about proposed rules. Wolf acknowledged the time, costs and controversy surrounding “specially designed” in the past, but stated that BIS could not do away with the concept because it appears in several multilateral export control regimes, including the Missile Technology Control Regime (MTCR). “We have the inherent authority to define it, since none of the other regimes except for the MTCR has defined it,” Wolf stated. “Also, the amount of time it would take to go through and start revising category by category by category wouldn’t allow us to get much done in terms of some sort of reform in the next couple of years,” he noted.
The MTAC discussion brought up a possible hole in the proposed definition. The example involved safety guards used for machines that produce defense items. The parts are designed for these machines however, they don’t contribute to their performance. They are not interchangeable for civil applications, nor are they “peculiarly responsible” for the machines they are used on.
In spite of popular beliefs that everything US consumers buy is imported from China, a Federal Reserve Bank of San Francisco study released in August shows that these goods actually make up less than 3% of US personal consumption expenditures (PCE). The bank concluded that because of this small fraction, it is unlikely that recent increases in labor costs and inflation in China will produce broad-based inflationary pressures in the US. Additionally, less than half of the PCE that is spent on Chinese goods actually goes to China – most of the money staying within the US and providing funding for transportation, wholesaling and retailing. “A total of 88.5% of US consumer spending is on items made in the United States. This is largely because services, which make up about two-thirds of spending, are mainly produced locally,” it states. “The market share of foreign goods is highest in durables – including cars and electronics. Two-thirds of US durables consumption goes for goods labeled ‘Made in the USA,’ while the other one-third goes for goods made abroad,” the report explains. Of the remaining 11.5% of foreign share, Chinese goods account for 2.7% of US PCE, primarily in household goods, clothing and shoes. “In the clothing and shoes category, 35.6% of US consumer purchases in 2010 was of items with the ‘Made in China’ label,” the report states. From that 2.7%, only 1.2% actually reflects the cost of the imported goods because of domestic transportation and retail costs. “In other words, the US content of ‘Made in China’ is about 55%. The fact that the US content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services,” the bank states.
Congress is expected to vote this fall on free trade agreements (FTAs) that organized labor opposes, while the Obama administration is trying to show it can be tough with regards to enforcing the labor provisions of trade accords. The US Trade Representative’s (USTR) office said last month that it has accelerated a dispute with Guatemala by requesting the formation of an arbitral panel to resolve US complaints that Guatemala has violated its Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) labor commitments by neglecting to enforce its labor laws. “With this case, we are sending a strong message that the Obama Administration will act firmly to ensure effective enforcement of labor laws by our trading partners,” voiced USTR Ron Kirk. The US presented its complaint against Guatemala in July 2010 in reply to a petition that the AFL-CIO first filed in 2008. The two governments held consultations in Guatemala in September and December 2010. After those consultations neglected to address complaints by the US, Washington asked the CAFTA-DR Free Trade Commission to step in. “The Commission met June 7, 2011. Intense work ensued to reach agreement on an adequate enforcement plan, but those efforts have not succeeded,” the USTR’s office said. Under CAFTA-DR rules, the arbitral panel will include three members. Together, the parties select the chairperson and each party selects one panelist. Both countries will present written and rebuttal submissions, after which there could be a hearing and post-hearing submissions. An initial panel report is expected to be circulated 120 days after the last panelist is selected, and a final report issued 30 days after the initial report is circulated. If the US succeeds in its claims, but the two sides cannot agree on a resolution within 45 days, the US may request that the panel to meet again to impose a monetary assessment of up to $15 million on Guatemala, adjusted for inflation. The assessment would be paid into a fund established by the Free Trade Commission and expended at the direction of the Commission for appropriate labor initiatives. While the US action isn’t expected to change the minds of FTA opponents, it did gain recognition from some critics. “Today’s announcement is an important milestone in the effort to enforce the obligations made in trade agreements and protect the rights of workers in the U.S. and overseas,” said AFL-CIO President Richard Trumka.
Managing Slow Moving Inventory
To be cost effective, companies must regularly consolidate or redistribute slow-selling products. Supply chain leaders face the same hurdles and challenges when it comes to managing and storing their inventory in an efficient way. Nearly all companies must face the challenge of storing “slow-moving” inventory that’s either too important or expensive to throw away. The marketing team pushes to hold onto the products for customers who will likely purchase in the future, the finance department wants for more write-offs and operations is devising a plan to reduce the number of SKUs. This is a dilemma that hits all industries. Consumer product manufacturers store older models of electronics and apparel once newer ones are introduced. Spare part manufacturers shelve items for the repair of obsolete equipment that is still in service. Pharmaceutical companies stock and distribute sales literature for drugs approved several years back.
The key to saving your organization time and money is finding efficient ways to manage the slow-moving products. Many companies, however, continue to store this inventory in high-turn warehouses, assuming that space is free if the product doesn’t move. In reality, the total logistics cost of storing any item includes the expense of space, people and equipment. As a result, the cost of warehousing a rarely ordered spare part roughly the same as a new computer, with the difference being that a computer is the only product with the potential to increase company revenues.
The most efficient way to handle slow-moving inventory is to examine distribution data on at least a yearly basis, implement a plan to either reduce SKUs or redistribute products, and stick to it. Ideally, the leader of the Operations division should lead this process by reviewing the total logistics cost of retaining slow-moving items and determining a suitable strategy to reduce these numbers. Some solutions for managing slow-moving inventory can include:
Devoting Private Warehouses to Slow Moving Products
Developing special warehousing facilities for seasonal and slow-moving items is becoming a more popular strategy within food chains. During seasons when products become fast- movers, food chains package and transport them in store-ready pallets to other distribution centers to be with the high-turnover items.
Offer Customer and Employee Discounts
Offering products to customers or employees at discount prices is a suitable solution for consumer products companies that are trying to sell obsolete items, including older model televisions, appliances, computers and apparel.
Third-Party Warehousing
Many third-party providers offer inexpensive space intended for to low-turn items. Like file storage houses, these facilities set prices based on inventory, allowing companies to store slow-moving products cost effectively. Such facilities offer an added value to customers that need a clean, safe space for items that simply are not in regular demand.
Charitable Donations
Companies can receive tax incentives by donating products to not-for-profit organizations like churches, schools and community centers.
Inventory Resellers
Selling inventory to resellers that offer it to discounters at a profit is a workable solution for organizations that do not have policies against marketing their products at discount stores. Internet auctions have allowed this process to become more efficient.
Disposal
While this is always an option, disposing of products is often a company’s last resort because certain items have financial and environmental concerns. Companies should, however, always understand the total logistics cost of keeping the products prior to ruling out disposal.
Finding the most suitable option for slow-moving inventory can be a timely process. But in the end, the financial benefits of having an efficient distribution process for both high-turn and slow-moving products are worth the effort.
Automating the Import Supply Chain
In the US, corporations import almost $2 trillion worth of products from more than 150 countries. This number is projected to triple by the year 2015, according to US Customs and Border Protection (CBP). Companies involved in the importation process need to consider several key factors that will shape their strategy, including:
Sourcing behavior – Product cost reductions accrue when source materials are obtained from the lowest cost provider, also accounting for landed costs.
Voluntary and required reporting – Customs organizations around the world are implementing programs and creating rules that focus on security, reporting and compliance.
Preferential trade agreements – Many countries have negotiated preferential trade agreements that provide significant incentives to importers.
Transportation costs – There is increased pressure to lower overall transportation costs even as fuel prices are rising.
In one study, 60% of the companies surveyed expressed the need to gain control over shipment status and cost of inbound volume as a key requirement for their business. In addition, 56% of companies surveyed noted that internal, top-management pressure to reduce transportation costs was their major concern.
Global Trade Management (GTM) technologies, including software and comprehensive trade content, are increasingly important to automate global operations and manage complex government regulations. A GTM platform can successfully streamline the procure-to-pay to process, track and automate dynamic preferential trade agreements and boost regulatory compliance.
Organizations are under regular pressure to grow product differentiation while also maintaining or reducing product costs. A number of companies have implemented strategic sourcing strategies to increase savings from their sourcing activities. Some strategic sourcing activities include leveraging e-sourcing solutions to increase savings and automate manual sourcing processes; utilizing spend analytics to grow transparency into corporate spending and forecast savings for future planning and budgeting and aligning overall sourcing activities and processes with the goals and objectives of the greater organization.
Customs organizations around the world are endorsing trade partnership programs to gain a safer supply chain through self-compliance. The United States’ Customs-Trade Partnership Against Terrorism (C-TPAT) and the European Union’s Authorised Economic Operators (AEO) initiatives offer more certainty and reduced inspections, but necessitate an investment in self-compliance. Importers of record must have established and proven controls and processes in place to ensure that the proper supply chain security and compliance requirements are met and can endure a comprehensive audit.
Key components of a self-compliance initiative consist of knowing precisely what is being purchased at what price from which supplier in a given country, when it will be delivered and by whom. The importance of many of these programs, such as C-TPAT and Importers Self Assessment (ISA), is to promote new processes and controls within the trade community in order to support supply chain security and “informed compliance.”
While there is a lot of focus on voluntary programs, there are also enhanced reporting requirements imposed on today’s global importers. In 2010, the US CBP mandated the Importer Security Filing (ISF). This requires the importer to compile and report on ten key data elements; many of which must be filed 24 hours before loading the goods in the foreign port for transit into the US and all must be filed and correct no later than 24 hours prior to arrival at the US port. Additionally, the corresponding ocean carrier or designated agents are required to report two additional data elements no later than 48 hours after the departure, or prior to the first US port arrival, whichever happens earlier. CBP may issue liquidated damages of $5,000 per violation for the submission of an inaccurate, incomplete or untimely filing.
These programs require that information flows faster than the physical movement of cargo being shipped. Simply reacting to what has been shipped days or minutes prior to the goods’ arrival at the port of entry is not sufficient. To evade violating Customs’ regulations, importers must proactively provide information before shipments leave the country of export. Automating this process with a GTM platform offers access to detailed purchasing, logistics and compliance information from sourcing to final destination to deliver on this objective.
The rewards for maintaining these compliance programs include reducing time and cost of getting cargo released by the respective Customs agencies; reduced time and frequency of secondary cargo inspections; improved predictability in moving goods across borders; and reduced penalties, because the importer is proactively observing its inbound shipments from a supply chain flow and compliance perspective.
With the expansion of Customs-Trade partnership programs around the world, and with legislation requiring supply chain data submission prior to the goods physically leaving the port of export, the “Sphere of Accountability” has grown to the point where importers must adopt GTM technologies in order to effectively manage their global supply chain.
The world’s economies have been rapidly negotiating preferential trade agreements (PTAs) – either at a country-specific level and more often, on a regional basis. Established programs like NAFTA are joined by others, including CAFTA (Central America), EU-MX (EU and Mexico) and AU-FTA (Australia). At the end of 2010, 278 PTAs have been ratified by the World Trade Organization (WTO) members and are currently in force. As organizations expand their sourcing strategies, choosing contract manufacturers based on preferential trade programs and demonstrated total cost of delivery will become the standard. However, as agreements grow, countries become members of several different agreements. This results in what has been referred to as “spaghetti bowls” of overlapping arrangements, with regularly different tariff schedules, implementation timeframes, and rules of origin, customs procedures, and more. Spreadsheets with a tendency for error and manual processes can no longer sustain these levels of complexity, planning and control.
A key concern of transportation and supply chain managers is the control and optimization of transportation costs. Many organizations don’t have adequate processes to effectively adapt to rapid changes – like surging fuel costs. Volatility of freight costs and/or fuel cost surcharges are among the top reasons for improving transportation spend management. Many organizations have been working to achieve a stronger understanding of their transportation spend, but are limited by a lack of visibility into the true nature of those costs. Once importers gain insight into their spend, they can utilize that information to optimize their activities around sourcing and payment for transportation.
For a GTM platform to truly automate the supply chain, it must be supported by a timely, comprehensive and accurate source of global trade content. This includes product classifications, standard and preferential duty rates, applicable import/export controls and documentation requirements. For organizations importing a limited set of products from only a few countries, this information can be manually researched and preserved. However, for larger companies that import tens of thousands of products from various countries, the information requirements to support the import supply chain are overwhelming. To recognize the value from a GTM solution, it must be incorporated with a trade content service that specializes in monitoring, interpreting, validating and publishing information for all trading economies. With tightly-coupled process integration, trade content supports ‘straight-through’ processing and allows supply chain leaders to concentrate on more strategic activities.
GTM technologies are an advancement of traditional, domestically-focused supply chain management solutions. GTM solutions that automate the import procure-to-pay process will house these key trends in the global environment. While many ERP and legacy systems present the framework of an organization’s data for supporting global trade, often they do not track the product details to support multi-country sourcing. As a result, the information necessary to precisely determine valuation and duties, to efficiently file an entry or to accurately report on supply chain security, is absent. A GTM platform that is combined with global trade content provides the decision support infrastructure to make precise landed cost calculations, classify products and manage regulatory controls. It can also account for related anti-dumping and countervailing duties, and respond to increasing regulatory requirements linked to supply chain security.
In order to support emerging Customs-Trade partnership programs, the GTM platform must actively monitor supply chain partners against restricted party lists prior to initiating a purchase order transaction. The platform should also establish the appropriate procedures, controls and audit trails to demonstrate reasonable care and maintain the highest levels of compliance. Once an order is generated, the GTM platform should automate the global purchasing process by centralizing information and promoting collaboration with all supply chain partners. Brokers may access product information, including classification and other Customs compliance details that will reduce mistakes and accelerate entry preparation.
In addition, suppliers may log into a portal to receive a purchase order (PO), confirm PO details and delivery, generate the invoice and Advance Shipping Notice (ASN) and deliver many of the ISF data elements. GTM solutions should allow for collaboration with carriers, 3PLs, brokers and other trading partners to create a network that reliably delivers information with the highest levels of data quality. Advanced GTM platforms can also help coordinate logistics at origin and monitor delivery to the final destination. By incorporating logistics providers into the process, goods that are ready to ship from a factory can be scheduled for pick-up, value-add consolidation processes can be monitored, and carrier selection decisions can be optimized based on cost and service.
Once in-transit, with milestone planning and alerting functions, visibility to the shipment supports the proactive management of delivery issues. Comprehensive line-level information can also support advanced fulfillment strategies such as DC Bypass and diversions upon arrival. Once the goods have arrived, the GTM platform provides the required entry preparation and audits. Additionally it conducts post-entry management functions that organizations need to complement the efforts of brokers. Although brokers will continue to play an important role in the import supply chain, importers need the advanced capabilities of a GTM solution in order to reduce the risk of non-compliance and prevent supply chain disruptions in light of new, more rigorous security initiatives.
Perhaps the most significant benefit of automating with a GTM solution is to gather and interpret the data that is vital to drive continuous improvement programs. Metrics can be developed to measure the success of supply chain partners, as well as operating divisions or departments. Since the GTM platform manages the complete global trade transaction, it gives flexibility and relief of setting up these metrics and can become the foundation for senior management reporting and review with your supply chain partners.
Metrics are also used to measure the total landed cost and efficiency of sourcing decisions. Equipped with global trade content, historical data can further be compared with the current trade environment for more in-depth business analysis. The advantages of a comprehensive and current repository of all import supply chain data cannot be overstated for both senior management and operations staff. Determining processes, establishing tolerances and managing exceptions will establish the foundation of a continuous improvement program.
