Professors Hausman and Lee of Stanford University have written a paper titled How Enterprises and Trading Partners Gain from Global Trade Management: A New Process Model for the US-to-China Trade Lane. (Free registration required.) It’s been getting a lot of attention on the supply management blogs.
In the paper, they present a flow chart of 106 process steps needed to identify a potential supplier and to place, receive and pay for a cross-border order. One hundred and six! Wow! How can a two-day purchasing training program cover that? Well, I dug into their flowchart and here’s what I found:
- Six steps are ‘optional’ and are mainly error checking and correction
- Thirty-one are necessary for domestic transactions as well as international transactions. They cover issues such as issuing a PO, counting the goods and putting the goods into stock.
- Seventeen are only necessary if the buyer is using letters of credit. (Shame on those buyers.)
- Seven are only necessary if there is special “trade financing” arranged through a bank or other lender.
- Fourteen are very specific to China. The supplier executes all of those steps.
- One only applies to quota goods
- One only applies to specific consumer products
That leaves 29 steps that apply to all global transactions and wouldn’t be needed for a domestic transaction. The supplier executes seven of them, and the buyer or the buyer’s agent executes 22. The training aspects seem much more manageable than the 106 step statement implies. Actually, most of those process steps are executed by a freight forwarder and a customs broker. Training for buyers mainly consists of explaining what those companies do and what an appropriate standard of service is.
I also noticed that the chart completely neglects one very important issue: Exchange rate risk protection. That will require close coordination inside the buyer’s company. They probably left it out because the yuan is pegged to the US dollar. Overall, I wasn’t very impressed with the chart. The overall paper extolled the virtues of a Global Trade Management system. That’s a good idea for any company with significant international purchasing.