Securing your supply chain
Iqubal Pannu, Senior Solutions Consultant, AEB, considers the impact of Union Customs Code (UCC) and Authorised Economic Operator (AEO) requirements, and how IT can support trade security and supply chain efficiency.
Managing supply chain risks is a complex topic, which affects the entire supply chain from procurement to fulfilment. The introduction of the Authorised Economic Operator (AEO) by the World Customs Organisation (WCO) focused on securing the supply chain against terrorism and on demonstrating this security to customs authorities and business partners.
Companies holding AEO status were going to benefit from faster movement of goods across borders and from mutually recognised programmes such as the US C-TPAT. However, due to a perceived lack of benefits and the high cost of implementation, AEO applications in the United Kingdom are well behind those of other EU member states.
The introduction of the new Union Customs Code (UCC) on 30th October 2013, however, might change the trend for AEO certification in the UK. The UCC represents a major modernisation of the European Customs legislation, which dates back to 1992, and aims to achieve greater legal certainty for businesses and increased clarity for customs officials throughout the EU. It also seeks to improve and simplify customs rules and procedures, further harmonise decision-making procedures, and lead to more efficient customs transactions. Amongst the fundamental changes is the introduction of mandatory guarantees for customs procedures, which could increase operating costs for trading businesses and significantly affect cash flows. Businesses with AEO status will be in a position to obtain guarantee waivers or guarantee reductions.
AEO business impacts
Should holding an AEO certification be viewed as a major part of managing supply chain risks, and does it give companies a competitive edge by demonstrating their commitment to risk management? While AEO status isn’t compulsory, businesses that ignore it are likely to see significant increases in associated import and export costs. So, the UCC seems to present an opportunity for companies to gain a competitive advantage by being AEO certified: businesses holding AEO status will have a number of advantages over businesses that don’t, and will also be able to use a simplified fast track application process for other EU customs procedures. HMRC’s policy on AEO status following the introduction of the UCC is clear: importers and exporters using, or intending to use, simplified customs procedures – e.g. inward processing relief (IPR), customs warehousing, temporary storage, temporary admission or community transit - will have to fulfil AEO criteria or face the prospect of having to provide financial guarantees to cover duties suspended under those schemes.
Securing your supply chain and identifying risks
Global authorities are introducing ever more stringent security requirements in the battle against terrorism and money laundering. Many aspects must be considered when implementing supply chain security programmes: ensuring all business transactions from procurement to fulfilment are in compliance with national and international customs and global trade regulations; following all mandatory export control steps such as restricted-party address screenings of all business partners; providing full transparency on goods in stock, in transit and out for delivery; operating effective event management tools to avoid supply chain disruptions and manage business contingency plans; and maintaining and archiving full records of global trade goods’ history throughout their lifecycles and in accordance with applicable reporting and license requirements.
But global supply chains don’t just carry physical risks. There is also a huge potential for financial risks, such as cancelled orders, non-payment for delayed inventory or immediate shortfalls in cash flow. In some industries, e.g. in retail, supply chain costs are the single largest expense to the business, so naturally, managing and mitigating as many risks as possible is a top priority. Companies need to have processes in place to ensure visibility throughout their entire supply chain, including auditing quality, quantity and financials. There is no point buying or selling to a company that either can’t perform or is on a financial tightrope and may collapse mid-contract. Questions such as “Can we trade with this company?” don’t just involve a currently robust financial status of a potential business partner, but also, e.g., a comprehensive two year trading history. This is normal due diligence of course, but what about questions such as “Who do they trade with?” and “Are we at risk?” These are questions that are frequently overlooked. Over 70% of companies engaged in the global supply chain as either buyers or vendors don’t have an automated and comprehensive flow of information from procurement to fulfilment.
Global trade: managing a moving target
Changing technology, demographics, consumer demand and infrastructure have led to unprecedented growth in global trade. Global exports have nearly tripled to $18.3 trillion in 2012, according to the white paper “The Changing World of Trade” by Cushman & Wakefield . Even in 2010 and 2011, as economies faced challenges in recovering from the recession, global exports grew by over 20% per year – an increase which, paired with rising fuel costs, is putting pressure on resources. A recent report by the World Economic Forum in collaboration with Bain & Co. and the World Bank concluded that an ambitious improvement in just two sources of supply chain cost - border administration procedures and transport and communications infrastructure services - could increase global GDP by 4.7%.
The key to success: technology
To efficiently master these global trade challenges and to capitalise on the phenomenal growth we’ve witnessed over recent years, businesses require a truly end-to-end supply chain management (SCM) solution, combining both logistics and global trade aspects in one suite. Special attention should be paid to three areas:
- Automation: International transactions can involve over 20 parties and over 30 documents that need processing for various stakeholders. An integrated SCM solution automatically creates picking orders and shipping and customs documentation, and ensures compliance with license requirements. It performs restricted party address screening and other mandatory export control checks in the background, enabling logistics departments to focus on their core business.
- Supply chain visibility remains the holy grail of global supply chain management. Technological progress has made real-time visibility of shipments in transit, inventory levels, customs clearance results and overall status progress a reality, allowing better cost control and supply chain performance. A recent survey by Gartner established that over 30% of supply chain executives consider supply chain visibility and event management their top priority, followed closely by strategic sourcing.
- Data analytics allows businesses to gain a better understanding of themselves as well as the markets they operate in. In future, businesses will increasingly extrapolate data from their SCM solution to facilitate better planning, and to form statistical models to carry out scenario analyses, e.g. the implications of closing a large distribution centre in country A and opening two smaller distribution centres in countries B and C, or the advantages of working with carrier A instead of carrier B.
More and more companies are recognising that by introducing comprehensive solutions with automated processes and information exchanges throughout the supply chain, they can add significant value to their business, increase operational efficiency, reduce costs and mitigate risks – and, ultimately, secure their supply chain.The right SCM solution provides a platform for smart and agile decision making in order to reach new markets as fast and successfully as possible and also be agile enough to make key supply chain decisions as problems are identified. This ability will be critical in seeing which businesses are most successful global trade leaders of the future.