Sourcing and selling internationally is an alarmingly inefficient process today. That's the big 'take away' from our recent survey of more than 170 enterprises to identify how global trade management impacts corporate strategies, operations, and financial results. But the other side of the coin is that those companies that are achieving the largest global trade performance improvements and the best absolute performance in on-time, as-planned orders-best-in-class companies-are adopting different organizational structures, broader measurement systems, and new ways of interacting with trade partners.

Global sourcing is all about remaining price competitive in what has been a declining pricing environment for many industries. Free trade zones, trade agreements, and removal of quotas have created a stampede to lower sourcing. On the sales side, although international selling is not new, the rise of the Internet and the decline of the U.S. dollar against the euro have made U.S. companies more aggressive in expanding European sales. Many companies selling globally first use the Internet as their sales channel into a new country; this lets them verify market demand without setting up physical operations. This is true across both business-to-business and business-to-consumer companies, and across small and large companies.

Globalization is the pervasive challenge of the decade but cross-border supply chains are strapped together with inefficient manual processes and buffeted by unpredictability. Global trade leaders, however, are succeeding in automating and controlling this complex environment, driving out cost, time, and risk from their business.

How? Increasingly, they are setting up global trade competency centers and instituting corporate-wide performance measurements. Trade compliance departments, traditionally viewed as a tactical back office function, are increasingly being treated as strategic advisors in keeping supply chains moving and reducing total landed cost. The most advanced companies are also better synchronizing the flow of goods with the flow of money to improve cash flow and working capital management.

Dealing with unexpected complications

Enterprises with global supply chains are looking for speed and cost improvements. They're looking for solutions about how to keep the global supply chain moving without exploding the sourcing savings or sales opportunity that enticed them to go global in the first place. Fully 91% of respondents felt somewhat or highly pressured to make changes to their global trade process because lead times were inhibiting their ability to respond to market demands, and expected product cost savings were being eroded by unanticipated global supply chain costs. In fact, nearly two-thirds are feeling “highly pressured” to find ways to make their global supply chains more responsive to changes in market demand.

Tightening up lead times and reducing lead time variability was the top focus for a majority of companies across all four vertical groups studied: consumer products/retail, automotive/industrial manufacturing, high tech/telecom, and chemical/pharmaceuticals.

Companies are also seeking to minimize unanticipated costs that erode the expected savings from offshore sourcing; these unanticipated costs include unplanned expediting, an inability to use primary (low cost) carriers, miscalculated duties, customs fines, and demurrage charges. Fully 70% of automotive and industrial manufacturers said they need to improve their global trade process to combat cost-savings erosion.

Best-in-class companies are even more focused than their peers on combating delays and fines caused by compliance and documentation errors. They understand that fixing these issues drives quick wins in reducing lead-time variability and minimizing corporate risk exposure. These leaders are also more likely to be looking for ways to combat the slower cash flow and greater working capital requirements of global trade. High-tech companies also in particular are ahead of their peers in focusing on improving the financial supply chain, with 52% saying they want to improve their trade process to rein in working capital requirements and improve cash flow.

Adding business value

To achieve global trade management success, three-quarters of companies say it is most important to minimize total landed costs and reduce cycle times and variability. Best-in-class companies are much more effective than their peers in achieving these goals.

The greatest challenge, according to three-quarters of Best in Class and Industry Norm respondents, is the lack of visibility and metrics for managing overseas vendors and service providers. This is consistent with other benchmark research by Aberdeen showing that companies must gain better visibility into the material arrival and in-process steps at their overseas vendors. One respondent cited an order with a vendor that was now four weeks late-but the company had not known the order would be late until the ship date passed, limiting the degrees of flexibility it had for alternate sourcing.

Tellingly, best-in-class firms feel least challenged by a lack of timely shipment status information, while laggards feel it is their biggest challenge. Many of the best-in-class have integrated their systems with the tracking systems of their logistics providers to get automatic status and alert information, while laggards still rely on phone calls, emails, or manual web lookups to track down shipments.

The transition from the international to the domestic supply chain is a hot spot of problems for companies of all maturity levels; 54% of respondents say they need to improve their inland transportation management, which can include port processing, drayage/cartage moves, and the inland carrier. Most companies have little to no visibility into transitional activity because it is done by very small drayage and cartage operators with no technology. Because of port congestion and customs delays, these operators often have to reschedule appointments to pick up freight. Some companies report having to implement 48-hour lead-time buffers for these transitional movements as a result of this unpredictability.

Many companies are doing redundant work and under-leveraging their learnings because of a decentralized and manual trade process. There has not been much improvement in automation: Some 63% of all respondents to our 2005 global trade study say they use spreadsheet or paper-based systems (the same percentage as reported using paper-based systems in our 2003 benchmark study). By comparison, high-tech style companies (which include high-tech, telecommunications, and medical equipment manufacturers) have operated global shop floors for decades and have automated processes to gain greater reliability and cost control, three quarters of them using an ERP system to manage part of the process.

Because of the complexities and costs involved in connecting to hundreds of suppliers, carriers, brokers, consolidators, and the like, companies are often hesitant to create the integration points needed to streamline and increase the transparency of the global trade process. Many companies instead leverage their primary logistics provider's system for documentation, total cost, and document and shipment tracking.

Only a third of chemicals, pharmaceuticals, and metals companies use their logistics provider's system to manage global trade, compared with nearly 60% of companies in all other industries. In addition, 61% of U.S. companies use their forwarder/broker/3PL's online system versus just 38% of non-U.S. companies.

A drawback of relying on a logistics provider's system is that it creates a greater barrier to switching providers. It also provides a view of only the freight moved by that provider and its subcontractors. For this reason, a number of companies choose to implement their own integration hub, multimodal transportation system, or visibility system. This lets them have a single system to monitor and control all supplier and logistics provider activity, including domestic activity.

Implications

Process Automation

A huge gap exists in process automation from the best-in-class-those companies with the highest performance improvements from global trade initiatives-and the rest of the industry. Best-in-class companies are seeking consistency of processes and consolidation of global trade activities across their divisions. Best-in-class companies look to improve their manual processes and then automate, automate, automate. Roughly 50% of industry average and laggard companies run their global trade activity off of disconnected, divisional, or facility-oriented processes supported by multiple, disconnected systems and lots of manual magic. By comparison, 44% of the Best in Class have automated processes across the company and across functions, operating with the same goals, systems, and data, including cross-functional workflow and alerts.

Metrics Strategies:

The enterprise-wide measurement imperative

Companies that improved their performance the most were nearly seven times more likely than their peers to measure global trade management performance on a corporate-wide basis. Shockingly, 61% of Industry Norm and 68% of laggard companies did not measure global trade performance on a consistent basis. These companies' reliance on disparate, unintegrated point systems and highly manual, inconsistent processes for global trade make it extremely cumbersome to measure performance.

Winning trade and security compliance strategies

A significant shift is occurring in the way companies view their trade compliance departments. Trade compliance departments increasingly are being treated as strategic advisors rather than tactical form fillers and product classifiers. In a number of companies, they are being transformed into a global trade competency center or a center of excellence in global trade management.

Overall, trade compliance departments say they are getting more budget to automate processes; this is freeing up staff for more strategic work in strategic sourcing planning, trade agreement management, and total land cost initiatives. Trade compliance departments that report up through finance are more likely to be viewed strategically compared to departments that report into the logistics function.

Winning logistics strategies

Managing international logistics is not like managing an extended domestic supply chain, as it is a fundamentally multi-party process fraught with greater unpredictability in quality, lead times, costs, and risks. According to respondents, the top business capabilities that would have the greatest positive impact on their global trade management are to increase freight consolidation, use lower-cost shipping options, and reduce expediting and detention charges (cited by 72%).

However, rather than create the absolute-lowest-cost fixed network, leaders are building into their logistics networks more points of flexibility. This helps them continually scan their environment for bottleneck symptoms or spikes in demand and take action. Actions include activating contingency plans if problems occur, re-routing goods to alternate ports to avoid congestion, moving goods in-bound to a bonded warehouse in Chicago to avoid recurring delays at East Coast airports, switching the domestic leg from rail to truck.

Winning procurement strategies

Supplier management is not about negotiating price one-off with each vendor. Leading companies realize they must look at such elements as fulfillment timeliness, product quality, raw material access, documentation quality, information availability, country of origin information, total landed cost, and vendor financial capabilities to select the right mix of the right vendors. But this is not easy. For instance, respondents rated the difficulty in making tradeoff decisions between supply chain velocity and landed cost as their third greatest challenge to improving global trade performance.

Demand variability plays an important role in determining which methods offer the greatest returns. For instance, companies with high demand variability or short life cycle or seasonal products can practice hybrid near sourcing/far sourcing. With this strategy, the initial purchase orders or baseline stock is sourced in the lowest-cost country such as China, while replenishment orders or upside demand orders are sourced closer to the point of sale (e.g., Romania for a U.K. company or Central America for a U.S. business).

Winning finance strategies

Large companies, best-in-class enterprises, and high-tech firms are turning their sights to optimizing the financial supply chain by better synchronizing the flow of goods and money:

• 45% of large companies and 70% of high-tech firms say they need to improve in synchronizing trade finance with the actual movement of goods.

• 39% of small companies say that they are inhibited from maximizing their global trade opportunities because financial settlement for imports/exports is too costly and complex or has too high a risk of financial fraud and defaults.

• 56% of best-in-class companies say their next step is to enhance technology for payment and cash flow management.

The leaders in physical and financial supply chain synchronization are metals, agricultural, and energy commodity managers. They have become masters of global risk management and financing strategies, leveraging their knowledge of the position, cost, and current market pricing of all material commitments. The commodity model will be closely studied by companies looking to reinvent financial supply chain processes.

Action strategies

For many companies today, global trade management is driving the business. A guiding principle for all companies selling or sourcing internationally should be to improve existing manual processes, implement corporate-wide measurement, and then automate, automate, automate. The more process automation and data integration you can achieve, the fewer documentation errors, and thus the fewer delays, logistics hiccups, and compliance violations you will have. The end goal for companies should be to automate across the physical and financial supply chain processes, so that the same goals and data are being used for global sourcing and selling, international logistics, compliance and documentation, and finance. Automation should also extend beyond the four walls of the enterprise to vendors, brokers, forwarders, carriers, and the like. wt

Sidebar 1:

Recommendations for Action

• Automate, automate, automate-but not until current manual processes have been reengineered and standardization enforced.

• Create institutional capacity for managing global trade cross-functionally and implement corporate-wide performance measurement.

• Eliminate complexity (of carriers, logistics providers, IT systems) wherever possible, but design for flexibility and plan for contingencies because things will break.

• Challenge logistics partners to provide you with the technology and information you need to manage the process.

Sidebar 2:

Issues at Hand

• The growth in going global outpaces even the media hype: 9 out of 10 midsize and large respondents say they now do business in China.

• Companies are most concerned about the longer and more unpredictable lead times of going global: These lead times are making them less responsive to market demands. The second biggest worry is unanticipated supply chain costs, often caused by documentation errors and logistics hiccups.

• Automation is the exception, not the rule: Error-prone paper and spreadsheet-based processes are used by 63% of respondents, including 59% of billion-dollar companies.

• Reining in global logistics costs is critical to corporate profitability. Logistics cost as a percentage of revenue is typically greater than 6% for products bought or sold offshore. More than a third of respondents spend 11% or more.

• Supply chain snafus are an everyday occurrence: More than 1 out of 10 international shipments are late, incomplete, or have to be expedited. Worse, 13% of large enterprises report that more than 1 out of 5 of their international shipments are out of compliance with order or routing instructions.

Sidebar 3:

What It Takes to be 'Best in Class'

1. Link visibility information to your

Six Sigma programs.

Understand where variability occurs and attack its root causes. Supply chain design and multi-echelon inventory optimization tools with scenario capabilities can help you determine which elements of variation will be the most worthwhile to address.

2. Synchronize the financial supply chain

with the physical supply chain.

Closed-loop decision processes between the physical and financial supply chains will help you with contingency planning and allow you to adjust your global procure-to-pay and order-to-cash processes to meet working capital and cash flow objectives and mitigate business risk. CFOs, controllers, supply chain executives, and trade compliance managers will need to increase their collaboration to enable this next step in global trade best practices.

3. Focus on trade agreement management.

Factor trade agreements into product design, sourcing, and logistics strategies. Trade agreement planning tools can help you minimize total landed cost by leveraging the best mix of tariff and tax opportunities and preferences from a global perspective. Also look at implementing a portal for suppliers to enter in classification numbers, countries of origin, and create and manage certificates. And if you have not started a duty drawback program, add it to the list.

4. Create straight-through processes with your forwarders, brokers, and 3PLs.

Rather than paying brokers, for instance, to create documentation by keying in data already in your system, create straight-through processes. With straight-through processing, all parties have appropriate electronic integration and access to view and amend data and documents as the transaction progresses. Solutions are emerging to support straight-through processing for both the financial and physical supply chain.