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Accenture

High tech manufacturers can effectively manage the complexity and risk inherent inglobal supply chains with insightful planning.

As high-tech manufacturers continue their quest for high performance by seeking ever-lower costs and promising new markets for their products, cross-border trade accelerates in greater volumes. But while some companies are reaping strong benefits from their global businesses and are achieving high performance, many more are stumbling. In both cases, companies’ performance is directly related to the maturity and strength of their cross-border trade management capabilities.

Businesses that more effectively manage their global supply chain can drive down inventory requirements and logistics costs, while increasing the speed at which they move products from source to customer.

However, the breadth and complexity of a global supply chain also result in numerous challenges to the cost-effective movement of products. In general, high tech manufacturers’ spotty track record in building the capabilities to address these challenges threatens at best to make it difficult to realize the full promise of cross-border trade, and at worst to place companies and their executives at risk of incurring fines, penalties or prison time, or result in the suspension of permission to conduct business in critical markets.

What Is Cross-Border Trade?

In Accenture’s experience, cross-border trade is comprises the following five key elements:

• Physical movement of a product through multiple countries to its end-consumer location;
• Compliance with new and increasingly stringent requirements for import and export;
• Information flow (producing the right documentation at the right time to eliminate delays in the cross-border supply chain);
• Financial reporting (reconciling physical product movement and revenue recognition to meet reporting and legal requirements); and
• Management of the supply chain to ensure fast, efficient – and compliant – movement of goods.

Accenture’s research and experience shows that in order to scale competitive, time-sensitive, global business models while retaining trade privileges, high tech companies must significantly increase their investment in global trade management capabilities.

The Pressure Is on for High Tech Companies to Perform

In the hypercompetitive industry that is high tech, manufacturers are in a daily battle to keep costs down while finding new ways to boost revenue. This endeavor is difficult enough in the best of times, but it’s even more challenging to achieve high performance in a market that is increasingly hard to predict and showing signs of losing steam. In the semiconductor industry, for instance, Standard & Poor’s expects growth in the semiconductor industry to be 22 percent in both 2004 and 2005.[1] Yet UBS believes there is a growing risk of oversupply in the industry in the second half of 2005. Indeed, recent warnings from a number of leading high tech manufacturers reveal a potential slowdown in the industry.[2]

In response to performance pressures, many high tech companies continue to expand across international boundaries – often to nontraditional and remote locales – to reduce costs and speed delivery. Most of this cross-border activity is targeted at strategic sourcing and manufacturing operations to keep material and production costs as low as possible. An Aberdeen Group survey found that 37 percent of North American companies have half or more of their supply base located offshore, and that in five years that number is projected to rise to approximately 60 percent of companies.[3] Furthermore, a survey by the Fabless Semiconductor Association estimates that up to half of worldwide semiconductor revenue in 2010 – up from 12 to 15 percent in 2001 – may come from organizations that do not construct or maintain their own production facilities.[4]

However, manufacturers are not simply shopping for low-cost materials and labor. Increasingly, many seek to cultivate customer bases in these same emerging markets that are poised for strong growth in the coming years. The Aberdeen Group survey found that about 25 percent of respondents have half or more of their customer base offshore, while in five years, just under 40 percent will.[5]

Challenges in the Global Supply Chain Are Steep and Pervasive

More often than not, the nontraditional sources or suppliers with which high tech manufacturers are trading do not have robust international trade capabilities – which results in a strong dependence on the procuring enterprise to perform that function. In the case of many Asian suppliers, a procuring agent can assist in the trade management function, up to and including owning of the inventory being imported. However, with the additional responsibilities or entities involved in the supply chain, there can be a significant increase in the risk of delays, fines and penalties when the right level of trade content, transaction procedures and document management is not established up front.

As more manufacturing and distribution occurs overseas, the volume of global trade continues to rise – which adds greater complexity to the supply chain. A single global shipment can require approximately 35 documents, be touched by 15 parties and require 200 data elements to be keyed in multiple times, according to industry estimates.[6] Furthermore, discrete components typically ship through multiple points before being incorporated into the end product, a situation that further complicates the tracking and accounting for products across the supply chain. For instance, an enterprise that typically shipped 70 percent of product in domestic Japan and 30 percent in the United States - and has since expanded to an additional two Asian and two South American countries with only 50 percent domestic consumption – now has to contend with an additional four outbound regulatory combinations. Add to that any logistics center or reverse-logistics enablement in multiple countries, and the complexity quickly mounts.

In addition to increased complexity, new governmental security initiatives have placed greater demands on cross-border traders – especially in high tech, where technology-sensitive products can be subject to special regulatory constraints. Furthermore, customs rules and regulations are continually evolving and vary significantly from country to country. Running afoul of regulations has its price – in market-penetration limitations, customer-service shortcomings, financial penalties or legal ramifications. And, as manufacturing expands beyond traditional locations into new regions and countries that often are more remote and potentially less formalized in their business practices, bureaucracy and political red tape can be major challenges. While some countries have worked recently to simplify their export procedures and paperwork requirements – including South Korea, which has adopted electronic data interchange to enable real-time processing of export transactions[7] – many major barriers to quick and easy exporting remain.

If these potential obstacles are not enough, consider the fact that high tech manufacturers also are subject to intense customer demands for service and delivery. In a survey of 115 executives conducted by Aberdeen Group, 65 percent of high tech respondents said their customers require a service response time of 24 hours or less, while 20 percent said they have to service products in fewer than four hours. Meeting such demands cost-effectively may not be a problem if the service parts are being shipped from Cleveland to San Jose, Calif. But when the parts are moving from the heart of China to Texas via Seoul and Mexico, a company must eliminate or minimize myriad potential obstacles to meet such stringent service times.

Paying the Price for Noncompliance

“The export control regime of the United States is one of the most complex in the world,” noted Barry Pupkin, a Delaware-based attorney. “It is important that U.S. exporters take seriously the enforcement of export control laws.”[8]

High tech companies – especially U.S.-based companies with foreign subsidiaries – would be wise to heed Pupkin’s warning. Actions taken by foreign units can have serious financial ramifications – such as fines reaching into the millions of dollars – as well as legal implications for officers or directors of the parent company if those actions are not sanctioned by the U.S. government. As a result, it's critical for companies to explicitly assign responsibility for managing such export decisions - for instance, appointing a "chief export officer" - to ensure that all of the company's subsidiaries are operating within the laws of not only their home countries, but also within those of the United States.

The risk is particularly high for companies involved with products that are or could be used in the production of military weapons. The U.S. government recently increased the budget for export enforcement to aid in the war on terrorism as well as in a general effort to put the brakes on corporate misdeeds. In such an environment, the importance of complying with regulations cannot be overstated.

All of the preceding challenges are magnified considerably for manufacturers with a highly diverse product portfolio or high rate of new product introductions. A diverse product mix results in similar diversity in the associated regulations that must be met for product manufacture and transport. Diverse products might include hazardous materials, technology- sensitive products and those with significant form, fit or function differences that drive special transportation requirements, regulatory chapter notes, rulings or licenses. Similarly, a company that is prolific in bringing a steady stream of new offerings to market will face the need to concurrently address the myriad regulatory issues associated with the new products. As product diversity and new product introduction rates increase, the effort necessary to maintain the content and transaction controls and transparency to reduce the risk of fines, penalties – and, in some cases of improper hazardous material shipments, and loss of human life – increases exponentially.

Executives Are Aware of the Challenges, but Unhappy With Their Performance

High tech manufacturers certainly are aware of these challenges, yet most are not happy with their ability to address them. In the Aberdeen Group’s Global Trade Management Survey, 65 percent of participants said they were neutral at best in their satisfaction with their current global trade management programs and processes. Just 7 percent reported being completely satisfied.[9] These figures are indicative of shortcomings in high tech manufacturers’ operations that, collectively and individually, have hampered companies’ ability to grow their business. In some instances, an organization has not been able to get key components to important customers, resulting in competing product substitutions – and the subsequent loss of the account. In other cases, manufacturers have missed opportunities to get in on the ground floor of an emerging market and, thus, now are relegated to second-tier status.

That’s not to say that there haven’t been successes. Many high tech leaders – most notably, Dell, Cisco and Intel – have created global trade operations that have served as a springboard for growth. However, most organizations still have a long way to go – particularly in the area of automation. High tech organizations typically lack the technology solutions necessary to effectively operationalize new and increasingly complex global supply chain networks (many of which are complicated further by the use of international tax havens and other such accounting practices). Manual processes, brute force – and a lot of luck – are being relied upon far too much; as a result, companies are essentially flying blind and exposing themselves to substantial operational risk, not to mention financial and legal liability.

In Accenture’s own research and consulting work, we’ve discovered that in many cases, high tech businesses are unsure even where they need to begin to resolve their shortcomings. One simple tool that executives can use to get at least an initial indication of the areas of opportunity is profiled in the sidebar, “Assessing Your Cross- Border Trade Capabilities.” Using this self-assessment as a starting point, decision makers can pinpoint which areas of their global trade operations could benefit from greater efficiency and lower-risk exposure – two keys to profitable cross-border trade.

Getting on the Road to Efficiency and Compliance

As the preceding sections reveal, cross-border trade requires capabilities far superior to those needed for domestic trade. But exactly what are those capabilities? What will help companies effectively manage the complexity and risk inherent in global supply chains while ensuring that their operations are as efficient and productive as possible?

There are three broad actions critical to building robust crossborder trade capabilities:

1. Clearly define corporate ownership and responsibility for trade compliance;
2. Develop a formal cross-border operational strategy and accompanying processes; and
3. Establish robust ERP and trade compliance solution support for physical product movement.

1. Establishing Corporate Ownership and Responsibility

The group of individuals responsible for trade compliance – whether an independent entity or a component of the logistics, finance or tax organization – carries an extreme burden. If it’s managed correctly, the trade compliance group is invisible; the supply chain functions smoothly and efficiently; and customer needs are met. If the group is managed incorrectly, however, cycle times and inventory increase with customs delays. Fines, penalties or even prison time for C-level executives (and all the associated media attention) also can result. Add to this the risk that much of the responsibility for managing trade is outsourced to a logistics provider that may have little knowledge of the manufacturer’s products and minimal integration with the procuring enterprise’s trade and shipping data, and it’s enough to keep any global executive awake at night.

Accenture has found that the most effective way for companies to deal with the complexity and security issues inherent in cross-border trade is to have a centralized trade compliance organization that has strong corporate oversight and direct access to C-level executives. Such organizations have proven successful in helping companies avoid fines, penalties and media attention through a combination of rigorous compliance programs, close controls on third-party logistics and chief executive communications to every level of the organization. In the case of a company with a significant presence and experience in destination countries, a physically decentralized organization (with local trade expertise) can be highly effective as long as the company maintains a centralized staff that has a high level of operational visibility and control. In either case, the size of the trade compliance organization will vary depending on the company’s cross-border trade business characteristics and the level of logistics operations outsourced to a third party.

An outsourced approach (using logistics providers or trademanagement services) can supplement an in-house model or replace the operational component. However, the outsourced model typically only works for manufacturers with less diverse or less complex products (for example, non-export-controlled products requiring less-diverse regulatory information), or companies with only a few source/destination combinations.

2. Instituting a Cross-Border Trade Operational Strategy and Accompanying Processes

The evaluation – in conjunction with an assessment of the level of integration and automation of current physical, financial and information flow processes – identifies the gaps that must be closed. Proactive processes should be clearly defined for events such as trade classification for product introductions (which otherwise could delay a product shipment waiting on the appropriate information) or updating classifications per annual regulatory changes (which, using outdated information, could cause a customs delay or penalty). Most important, transactional processes (international shipping) should be designed to include clear roles and responsibilities for all parties to the transaction; reference to the single points of entry for data sources that are carried through the supply chain; identification of the physical and financial flows for each delivery channel; and closed-loop feedback for in-transit, customs and final delivery.

Of the key transactional process elements just mentioned, perhaps the most critical is the identification of the physical and financial flows related to each delivery channel. This is especially true as more companies seek tax benefits, which often can result in product and information taking much different paths (a situation that is most typically understood as a physical drop-shipment with revenue recognized through one or more intermediate intercompany entities).

Effective synchronization of physical, financial and information flows is crucial for three principal reasons. Synchronization fuels growth by:

• Making the supply chain more efficient. By reducing or eliminating the need to resolve gaps and discrepancies in the supply chain, a company lowers its cost of doing business because less inventory and effort to reconcile information are required. This, in turn, shores up the balance sheets and makes it easier to meet investor expectations.
• Providing a foundation to effectively meet customers’ needs and, thus, rapidly ramp up new opportunities in new markets.
• Helping an organization to avoid penalties, fines and possible disruptions to the business caused by noncompliance with international trade regulations.

3. Establish Robust ERP and Trade-Compliance Solution Support for Physical Product Movement

Despite the critical nature of cross-border trade operations, few companies have invested in the appropriate technology tools that could drive more effective global trade management. In fact, most companies still manage a large portion of their cross-border trade operations manually, which seriously impedes their ability to keep tabs on important aspects of the hundreds or thousands of shipments flowing through their supply chains at any given time. Furthermore, such manual operation serves as an obstacle to building tighter information linkages with trading partners.

High tech manufacturers can benefit from two technology solutions that address the problem of manual management of global trade operations: one solution that automates much of the transactional trade management function; and a workflow management solution that integrates the physical, financial and information flows. The need for such solutions is especially great among enterprises with large international volumes (to automate customs document generation), a highly diverse product mix (to support faster data assignment and license checking) or a high rate of new product introduction (to simplify product classification).

Assessing Your Cross-Border Trade Capabilities

Companies that dramatically improve their capabilities spanning the many disciplines of cross-border trade stand to reap significant benefits – both in the form of additional costs savings as well as increased revenue and customer satisfaction. But the question becomes: should companies invest to overcome all of their shortcomings? Arguably, the solution that addresses all of their needs could be incredibly complex, costly and time-consuming. Therefore, we believe the first steps are to determine how mature one’s cross-border trade capabilities are and to identify and close the capability gaps. We’ve developed a simplified version of the assessment that Accenture typically uses with clients. Using this tool, executives can get a better picture of their company’s current level of trade compliance and operational efficiency in five critical areas relating to global trade: product mix, supply chain complexity profile, trade profile, existing global trade organization and technology infrastructure and decision support tools.To complete this assessment, rate your level of efficiency in each of the five areas (on a scale where 1 = low efficiency and 4 = high efficiency), as well as your level of risk in each area (on a scale where 1 = low risk and 4 = high risk). After rating the risk and efficiency for each area, add up the figures in both columns to arrive at a risk total and efficiency total. Using the quadrant example, plot the risk total on the X axis and the efficiency total on the Y axis to determine the quadrant in which your current operations fall. The results of this exercise will indicate where a company is performing well and where it needs to improve. For instance, an organization that both has risk and efficiency totals of 11 to 20 falls into quadrant 1: highly efficient operations but also great risk of not being able to consistently comply with trade regulations. Conversely, a company with risk and efficiency totals of less than 10 falls into quadrant 2: low risk but highly inefficient operations. And, an enterprise with a risk total of 11 to 20 and an efficiency total of less than 10 falls into quadrant 3: doubly plagued by both low efficiency and high exposure to risk. Companies falling into quadrant 4 – those with a risk total of less than 10 and an efficiency total of 11 to 20 – have made great progress in addressing their global trade organization’s efficiency and compliance issues. However, they certainly are far from finished. Most probably will fall somewhere in the lower-left portion of quadrant 4, signaling that there’s still room for improvement in their operations. Furthermore, given the changing nature of regulations and customer demands, no business can afford to stand still and hope to remain competitive. Therefore, quadrant 4 companies must continue to explore ways to incrementally improve their business.

Automating compliance checking and document generation can increase efficiency dramatically by eliminating the manual activities associated with 200 data elements and 35 documents for multiple languages mentioned in a prior section. Efficiency can be further increased by leveraging automated document generation with the physical, financial and information workflow solution to accurately reflect entity ownership and financial information based on complex transactions with multiple intercompany or third-party partners at each step in the logistics supply chain (see “Synchronizing Flows to Improve Business Performance”).

The benefits of these technology solutions are enhanced further when the solutions are integrated with those of an entity’s trading partners. By more tightly integrating trade management capabilities with suppliers and logistics services providers, a company can realize a better flow of information that eliminates multiple re-entries of the same data into different nonintegrated systems and minimizes discrepancies and the need for reconciliation. Integration with logistics providers also is key to retaining transparency and visibility to both the physical shipment and associated trade data and documents for both customs clearance and later auditing purposes.

For companies with an automated trade solution, data and process integration also allow third parties to take advantage of the automated trade capabilities on behalf of the high-tech manufacturer. Logistics partners may use the manufacturer’s trade system to automatically generate consolidated shipment documents with the required trade and financial data. In addition, product classification rulings at the time of product entry into a country can be reflected in real time to avoid delays on the next shipment arrival.

Synchronizing Flows to Improve Business Performance

One high-tech manufacturer/distributor saw firsthand how a streamlined financial, physical and information flow could result in significant business benefits. Working with Accenture, the company developed new process and solution support tools to integrate its operations with its logistics providers to create a transparent and systematic workflow for reinvoicing timed to coincide with revenue-recognition requirements among the company’s multiple global legal entities.

The company’s products typically are shipped from assembly directly to international customers and distribution centers. The physical flow of goods is based on product and segment channels, and each product/channel could have multiple revenue-recognition points that differed from the physical flow but had to be reflected on the commercial paperwork for the destination country. Thus, the company needed to address two major issues: 1) reinvoicing between multiple intercompany legal entities; and 2) the timing of revenue recognition between these legal entities.

Accenture helped the company develop a workflow application – integrated with the existing ERP system that supported the company’s global legal entities – that used predefined revenuerecognition channels to trigger the appropriate revenue-recognition transactions upon logistics provider in-transit point notifications. The solution reduced trade delays by eliminating manually generated, error-prone commercial paperwork; eliminating intercompany accounts receivable/accounts payable mismatches; and reducing the global closing of financial books from four days to one day.

The Global Challenge

The global search for new sources of low-cost labor and materials, as well as for new markets for high tech products, will continue to accelerate as competitive, economic and investor pressures force manufacturers to improve their margins. Yet, unless they are able to build the capabilities necessary to more effectively manage their global trade operations – including those that synchronize the flow of products and related information – enterprises will find it difficult to generate the kinds of benefits they seek from cross-border trade and, consequently, to achieve high performance.

High tech manufacturers that take the necessary steps to establish corporate ownership of and responsibility for trade compliance; develop an appropriate global trade strategy and accompanying business processes; and adopt technology solutions that enable them to automate key areas of global trade management and achieve tighter integration with trading partners will find themselves well-positioned to achieve high performance. Companies that continue to conduct business as usual are likely to be left behind in the global economy, crushed under the weight of complexity, risk and inefficiency that they are unable to tame.

Endnotes

1. Standard & Poor’s Comprehensive Semiconductor Industry Survey (Jan. 2004). www.businessweek.com/investor/content/dec2003/ pi2003128_2068_pi044.htm
2. McWilliams, Gary and Tam, Pui-Wing, “Shakeout Hits Tech Sector Amid a Tepid Recovery,” The Wall Street Journal (Aug. 13, 2004).
3. “The Global Trade Management Benchmark Report,” Aberdeen Group and Logistics Management (July 2003). www.aberdeen.com/summary/ report/benchmark/globaltrade_bakup.asp.
4. Standard & Poor’s (Jan 2004). See www.future-fab.com/ document.asp?d_id=1299.
5. Aberdeen Group and Logistics Management (July 2003). Available from www.aberdeen.com/summary/report/benchmark/globaltrade_bakup.asp.
6. Bednarz, Ann, “Start-ups Automate Global Trade Functions,” Network World (July 12, 2004).
7. “Service Parts Management: Unlocking Value and Profits in the Service Chain,” Aberdeen Group and IndustryWeek report (Sept. 2003). www.aberdeen.com/summary/report/benchmark/serviceparts.asp.
8. Hansen, Fay, “Export Regulations and Compliance,” Economist Intelligence Unit (June 1, 2004).
9. Aberdeen Group and Logistics Management (July 2003). Available from www.aberdeen.com/summary/report/benchmark/globaltrade_bakup.asp.