Guest Column: Global Supply Chain - 2007 Risks and Rewards

December 22, 2006 — When considering the global trade environment in 2007 there are a number potential issues looming that can disrupt global supply chains, sourcing strategies and the flow of working capital. If not properly addressed, importers and exporters may face significant unexpected costs and increased disruptions to their supply chain. But the news for 2007 isn't all bad. A number of promising opportunities exist as well.

Risks

• 2007 Tariff Code Changes — Approximately every five years, the World Customs Organization updates the Harmonized Tariff System (HTS) nomenclature at the international (six-digit subheading) level to reflect changes in trade patterns and technology. Of the 97 HTS chapters, changes were made to 83. Accurate HTS code assignment is critical as it determines the manner in which a product is taxed when shipped across borders.
  
  The problem: Very few international governments have published their country-specific changes, leaving businesses in the lurch and at risk of facing unknown duty increases, possible sanctions and delays in processing transactions as the industry scrambles to comply. The solution: Assign dedicated personnel or outside trade experts to monitor international government publications for timing and detail changes, and be prepared to make adjustments to your product classifications as soon as changes become available.



• Reverse Logistics from Asia — We continue to see strong growth from manufacturers sourcing goods from the Asian marketplace. Businesses increasingly are looking for low cost country sourcing opportunities within and beyond China and India. As Vietnam and Thailand, for example, have potential to bring great cost benefits, a problem continues to cause concern — How will manufacturers effectively and efficiently manage reverse logistics from this region of the world? As more goods flow out of the region, what procedures, processes and infrastructure are in place to manage repairs, returns and warranties? On a country by country basis, businesses will succeed only if they can excel at managing a complex web of warehousing, distribution, personnel and government compliance issues.



• Global environmental regulations — Manufacturers of electrical and electronic equipment will continue to face additional environmental restrictions as 2007 progresses. Non-compliance with such directives can result in lost revenue, fines and damage to corporate reputation. Companies must be able to demonstrate compliance with these initiatives.
  
  In 2006 we saw the European Union's Restriction of Hazardous Substances (RoHS) directive go into effect on July 1, with manufacturers restricted from using lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ether in their products. The Japan RoHS, a similar directive, went into effect in Japan in July as well. By year's end, the European Union's Waste Electrical and Electronic Equipment Directive (WEEE) will go into effect, setting collection, recycling and recovery targets for broken or unwanted electrical goods and "electronic waste" — components of such equipment that are considered toxic and are not biodegradable.
  
  Pending restricted substances regulations include The Electronic Waste Recycling Act, California, United States (effective January 1, 2007); Article 11 (China RoHS), China (effective date: March 1, 2007); Registration, Evaluation and Authorization of Chemicals (REACH), European Union (effective date: spring 2007); The Act for Resource Recycling of Electrical/Electric Products and Automobiles (Korea RoHS), South Korea (effective date: July 1, 2007) and the Directive on the Eco-Design of Energy-Using Products (EUP), European Union (effective date: August 11, 2007). How do these impact your manufacturing operations?



• Security — More than five years after 9/11, security continues to be a bigger concern for businesses in order to keep products running safely and smoothly through the global supply chain while complying with increasing government regulations and restrictions. The approach to a secure supply chain must be more multi-pronged than ever, starting at the top of the chain of command with C-level executives responsible for implementing and executing a sound compliance plan, down to desk-level operations where the expectation is to "know your customer."
  
  At the most basic level, the responsibility is incumbent upon the person facilitating the shipment to know: Who is the shipper? Who is the consignee? What are the goods?
  
  Government initiatives such as the Container Security Initiative (CSI) require that businesses have the ability to quickly integrate new requirements into their supply chain. Close communication across supply chain parties, including manufacturer, service providers and consignee, is imperative to get accurate information prepared in a timely manner. A missed sailing could result in missed sales or increased charges downstream to make a targeted delivery date. The challenge of security is a balance between keeping the borders safe from the minority who would do harm, while encouraging a smooth flow of commerce and travel for the rest of us.



• Mandatory Automated Export System (AES) Filing — Though we expected this initiative to be finalized in 2006, it now looks like the mandatory filing of export shipment information will go into effect during the first quarter of 2007. The AES is an electronic, computerized system for tracking and controlling cargo export information and interfaces across many federal agencies. U.S. exporters must have effective compliance processes in place to address the new AES filing rules or risk facing significant civil and criminal penalties ranging from $1,000 per violation up to a maximum of $10,000. For additional information on AES filing, visit http://www.census.gov/foreign-trade/aes/index.html.