Category Archives: Global Trade

Can You Endure the Exacerbated Euro?

Greece may be almost taken care of, but now Spain (and Portugal) are threatening to endanger the Euro’s future. Procurement’s problems with the Euro are far from over. But what can a Procurement Professional do?

Be cautions and ever vigilant. As explained by Julian Catchick in this recent article over on CPO Agenda on “How to Deal with the Troubled Euro”, about the only risk minimization strategies a buyer has available to her are to:

  • hedge,
  • spot buy in bulk to take advantage of a favourable exchange rate movement, and
  • fix the exchange rate with suppliers for a mutually agreed duration.

All of these strategies have their advantages and disadvantages.

  • Hedging on a different currency that tends to fluctuate in a manner opposite to the Euro (going up when the Euro goes down and vice versa) can mitigate the impact of a rapid Euro fluctuation if currency trades are made at appropriate times, but if the performance of the currency hedged in is not what is expected, losses can actually mount.
  • Spot buying can reduce acquisition costs significantly if done at the proper time, but if too much inventory is bought too early, inventory management costs will go up and eat into the savings.
  • A fixed exchange rate will mitigate currency fluctuation risk and allow for predictable purchase costs, but since the supplier will have to assume additional currency risk, a buffer will be built into their costs and the organization may end up paying more than it needs to.

Regardless, one strategy that should not be pursued is pulling out of the countries in question. Even though some banks are minimizing exposure to these countries, it is not the country that poses the risk to the buyer, but the supplier. As Julian states, it is not likely that buyers face a material risk as long as they look into the suppliers’ financials and credit ratings and also establish how balanced their portfolios are across other geographies. Plus, given that the buyer can get much credit better terms than the suppliers in these countries, the buyer has an opportunity to reduce costs further by pre-paying for goods and services (with a stable supplier) at a substantial discount. Suppliers need regular cash flow, and if their terms are 30%, and your terms are 5%, there’s no reason that your Procurement organization couldn’t extract a 20%+ discount due to their cost of capital. That’s a smart Procurement move!

And if there is concern about future risk, build additional break and termination clauses into the contract. If a major currency fluctuation (or collapse) would make the supplier potentially insolvent, give the buying organization the right to terminate the contract, just like you’d do with any insurance or hedging contract. But, as Julian advises, don’t forego long term (strategic) relationships just because there is a potential currency risk.

Trade Barrier Reductions

Late last year, as reported on World Trade 100 in “Reducing Barriers to Trade”, President Obama signed three new Free Trade Agreements with Colombia, Panama, and South Korea to eliminate tariffs and other barriers to U.S. exports, expand trade between the US and the respective country, and promote economic growth.

Columbia is the third largest economy in South and Central America and Panama is one of the fastest growing economies in the region, but it is the South Korea agreement that is of the most interest, especially considering the amount of electronics being imported by the US each year. And South Korea, which is the 15th largest economy in the world, does the most manufacturing in Information and Communication Technology (ICT) of all the OECD countries (Source: OECD ICT Outlook 2010) — almost 50%. And while 50% of global trade in manufactured ICT products takes place outside the OECD countries, dominated primarily by China, the fact that 50% takes place in OECD countries means that global buyers of ICT will soon have access to tariff-free trade on ICT products from the country producing almost 25% of the goods! (See the tariff schedules on the USTR page that reduces the tariffs on many products to 0.)

Under the FTA, nearly 95 percent of bilateral trade in consumer and industrial products will become duty-free within five years of the FTA’s entry into force, with most remaining tariffs eliminated within 10 years. And the almost unrestricted entry into the huge consumer market offered by South Korea will also benefit producers of ICT products, as demand there is almost as high as in Japan and parts of China. This is promising for globalizing ICT companies.

The Global Agenda — It’s Coming!

One of the key takeaways from Hackett’s 2012 Procurement Agenda is Globalization and Global Operating Models. Why? The Hackett Group 2011 Key Issue Study found that not only is globalization critical for enabling revenue growth but the level of planned transformation over the next two to three years is such that the respondents’ ambitious plans will nearly triple today’s level of globalization within two to three years. Wow!

Within three years, the percentages of organizations with the following key activities at the maximum global level achievable is expected to enter the double digits almost across the board. Specifically, Hackett expects to see the following improvements:

Activity Current Saturation Projected Saturation
Development/Management of Product/Service Lines 4% 11%
Go-to-Market Strategy 6% 13%
Supply Chain 6% 13%
Organizational Culture 4% 8%
Internal Operations 3% 11%
Average 4.60% 11.20%

So what does this mean to your (Supply Management) organization? First of all, it is going to be a tough fight if the organization’s goal is to be world class in Hackett’s rankings, as only 8% of organization’s make the cut and over 11% of organizations will be leading in the globalization of their core activities.

Second, the organization, and each professional in the organization, is going to have to brush up on its CQ (Cultural Quotient). Not an easy task, as chronicled in SI’s series on Overcoming Cultural Distances in International Trade and Cultural Intelligence, but a necessary one.

Third, as Hackett points out, supply chain flexibility is going to have to increase. Disruptions and disasters are pretty much guaranteed at least every 12 and 24 months, if not every 6 and 12 months, the changing regulatory landscape will throw a wrench into the organization’s best-laid plans, and demand surges will play havoc with traditional shipping lanes and practices.

Fourth, selling into a given country is going to be as important as buying from the given country as the need to be perceived as a truly global organization, and not just an American or British back-office, will be real for those organizations that want to attract the best talent.

Fifth, attracting and retaining top talent will be more critical than ever as the complexity of tomorrow’s global sourcing will be much more involved than the complexity of today’s.

Do You Have a Chain of Custody in Your Global Logistics Operations?

If you have a significant global logistics operation, chances are that, by now, you have sophisticated tracking capabilities and can tell at any given time at least where your cargo was at one point during the last 24 hours. And this is good. But if you want to go beyond minimum import/export requirements that have emerged, and are continuing to emerge, in the US and EU, then you need more than continuous tracking and monitoring — you need chain of custody.

Chances are that, right now, you’re thinking this is nuts because “chain of custody”, thanks to CSI-like forensic cop dramas, is associated in your mind as a “police” or “forensics” requirement when a crime is being investigated and has nothing to do with your supply chain, but it’s a wrong association. And when one remembers that many of these laws were put in place to prevent terrorism and illegal goods (such as drugs), which regulators are expecting to occur in, or through, import/export operations, it starts to make sense. And it makes even more sense when one realizes that it’s (becoming) a requirement for C-TPAT, which is crucial for efficient import/export operations given the slowdowns that have resulted by all of the additional paperwork and inspections that have been added to the import/export process over the last decade.

So what is a chain of custody? It is a process that asserts:

  • the cargo is what it purports to be and in the quantity stated,
  • the cargo was in the continuous possession or control by the carrier who took charge of the cargo from the time it was loaded in the container at origin until the time it is delivered at final destination, and
  • there is evidence of the identify of each person or entity who had access to it during its movement and that the cargo remained in the same condition from the moment it was sealed in the container for transfer to the carrier who controlled possession until the moment that carrier released the cargo into the receipted custody of another.

This, in turn requires that the cargo is secured from the time it is packed, verified, and sealed at origin, as confirmed by an authorized agent, until the time it arrives at its final destination and is verified to have been secured the entire way. In addition, all information relating to the cargo, its container, its movement, the person(s) verifying and sealing the cargo, and the persons transporting it must be maintained securely in the container security control system.

This may require more work, and more certifications, but there are benefits to the shipper, consignee, carrier, and CBP, as discussed in this great article on Tracking and Chain of Custody: The Difference over on Maritime Executive Magazine. Select Benefits include the following

  • for the shipper
    • World-wide tracking and location of container for security and asset management
    • Lower insurance costs
    • Expedited entry of cargo by CBP and faster through-port time
  • for the consignee
    • Enhanced knowledge of shipper and carrier performance
    • Third-party verification of all supply chain data elements and reports
    • Increased or enhanced knowledge needed for 10+2 Program Importer Security Filings
  • for the carrier
    • Protection against claims by shippers that unauthorized contents were the results of carrier action
    • Automatic transmission to CBP of container data
    • Compliance with and protection within the new Rotterdam Rules impacting vessel carriers
  • for CBP
    • Knowledge of which containers need no inspection improving man-power efficiency
    • Elimination of third-party reporting of trade data
    • Evidentiary data for potential legal action

Risk Mitigation 2012: Geopolitical

In our last post, we covered some potential mitigations for each of the top three environmental risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three geopolitical risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Corruption

Corruption can take many forms — bid rigging, bribery, collusion, fraud, embezzlement, organized crime, price fixing, and thievery just to name a few. Each of these can be devastating to your supply chain. Bid rigging, collusion, and price fixing can significantly increase your costs. Bribery and thievery can result in a loss of your IP and product plans which could negate years and tens of millions to hundreds of millions of research and development. Embezzlement and fraud could drain your organization of necessary operating capital and organized crime could result in an entire warehouse of inventory disappearing overnight.

While big rigging, collusion, and price fixing by your suppliers can’t be prevented, if the organization suspects it might be occurring, it can always invite new, unexpected, but pre-qualified, suppliers to a bid to minimize the possibility, or at least provide it with other options if multiple suppliers appear to be colluding. This is the best defence since, even if collusion and price fixing can be detected and proven, by the time government intervention occurs, it can be much too late.

And while one cannot prevent thieves from trying to steal your IP and products, steps can be taken to keep your IP secure. All electronic copies can be encrypted and kept secure on the network behind password protected firewalls, printed copies can be restricted to secure areas, and all unnecessary copies can be destroyed by destructive shredding. And your shipping plans can be kept on a need to know basis, and valuable merchandise can be kept in guarded secure warehouses.

Bribery, fraud, and embezzlement can also be prevented against to different degrees. With respect to bribery, an organization can watch for signs of an employee who recently improved his lifestyle significantly with no obvious means to do so (i.e. no recent inheritance or lottery win), determine if such employee had access to sensitive data, and the chance to sell it. In this case, if such an action was deemed likely, the organization could assume the data fell into the wrong hands and take preventative measures. With respect to embezzlement, an organization should insure that all transactions are reviewed by a second individual, and all transactions above a considerable amount should be co-reviewed by the CFO and another executive officer within two business days. And external audits should be conducted regularly. Other types of fraud could be harder to detect, but regular financial reviews are an organization’s best chance of detecting fraud before too much damage occurs.

02: Terrorism

Not only is terrorism on the rise, but so are the number of terrorist and extremist groups and agendas — and it’s almost impossible to predict which group will form, and be “crossed” by your organization well in advance of when it happens. But if an organization keeps up with global intelligence, it can keep up with what organizations have commercial, and corporate agendas, identify if it produces any goods or services that might be targeted by such groups, and identify if it operates in any high risk areas. If it does, it can take steps to protect its operations and its goods.

01: Geopolitical Conflict

Fortunately, most conflicts that would threaten an operation escalate over time. Again, if an organization keeps up with political happenings in a region, it can identify those regions most likely to be at risk of geopolitical conflict and determine if such conflict could impact operations or cut off supply. If factories could be cut off, the organization can identify back-up facilities and create plans for bringing them on-line quickly. If warehouses could be cut off, critical goods can be relocated. Knowing allows plans to be created.