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Subject: This is a look into the implications of the new distribution contract for the current global sourcing model and recommendations on the most cost-effective means of supplying the US market with the technological products.
Globalisation describes an ongoing process by which regional economics, societies and cultures have become integrated through a globe spanning network of communication and trade. The term is sometimes used to refer specifically to economic globalisation which refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, services and labour. Thus we could speak of globalisation and the international supply chain (the critical factors being that of distance; comparative advantage and integration) chain in the same breath. Business outsourcing has become very common in recent times and has become the core of globalisation.
This brief is to provide the implications for the new distribution contract which was signed with the distributers, Flotsam and Jetsam to distribute technological products in the United States of America. Recommendations would be made on the most cost effective means of supplying the US Government without much disruption.
Our fundamental objective as a company of the supply chain management would be to increase the sale of goods and distribution of the products in the most cost effective manner with minimal interference in the supply chain. An important part of securing the America homeland will include dealing with security threats not only when they reach the US boarders but should be handled as far away from the US i.e. its source. In this regard we need a multilayered approach as it would not be effective on one or two measures in ensuring security. It should be the implementation of a number of initiatives that support and are linked to each other. This will ensure that the breach of one layer can be detected or prevented by the next layer. There is also a need to establish partnerships with a variety of stakeholders to extend its security net and these include the private sector and other governments and international organisations and the regulatory agencies.
The Current Sourcing Model:
The company Bright Sparks as you are aware that it outsources for its technological products, raw materials and semi finished components from various countries internationally to assemble and produce the technological products which they export to the United States of America. Raw materials and semi finished components are imported from various countries around the world. A key component is imported from a country which is listed by the US as a security concern. All the imported products are assembled into the final product in Malaysia to Tanjung Pelepas, from where it is shipped to the US. The reason for the choice of the supplier for the key component is that the labour costs are lower that any other supplier and additional tax incentives are offered by the government. Ultimately it has an effect of reducing the costs of the final component. Our research division has completed a detailed feasibility study and the results reflect a cost savings in labour cost in comparison with other suppliers of the same component.
There are a total of six suppliers which were including in the feasibility study. It was found that supplier A has the lowest labour costs of US$ 1 for each component and offers tax benefits of 15%. Supplier B has labour costs of US$ 1.20 per component, but the Government does not offer any tax benefits. Other suppliers have labour costs of US$ 1.40 per component and there are no tax benefits offered by the government. In this study in comparison supplier A is offering the lowest labour costs with the additional tax benefit. However, company A is listed as a "security concern" which can have serious consequences. Ultimately, the supplier will be viewed as a weak link in the supply chain for the products.
"By analysing other models, this abovementioned model would categorically be in line with global sourcing which is described as "unbundling the supply chain" which eventually means that components may be manufactured in several countries and assembled into the final product in a different country" (Centre for Customs &Excise Study Guide 2010:page 38).
The use of the Tanjung Pelepas Port which is a CSI port poses a great advantage because it complies with the security requirements of the United States. The distributor in the US Flotsam and Jetsam is C-TPAT accredited which means that any delays in the United States will be eliminated is this would contribute to cost effectiveness, as accredited clients enjoy the benefits of the programme which is speed processing through customs and minimised stopping of import consignments in other words this would enhance the clearance process through customs. This provide a great advantage for pour products.
The Risks Associated with the Current Global Sourcing Model;
There is of course a biggest challenge on the importing of the raw materials and semi-finished products into Malaysia that should not be overlooked, from outsourced countries which provide the biggest challenge. One of the biggest risks that could be identified in the current global sourcing model is the importing of the key components from a country which may be considered as a security risk by the US. This could result in delays as the US risk profiles the consignment from the port of supplier to the final destination. There is the possibility that the consignment can go through risk profiling procedures and examined on export from Singapore to and then subject to examination when it is imported into the US is likely.
As a result of the above there is a need to realise the basic objectives of the company of supply chain efficiency and effectiveness. There should be an overall policy framework and risk based sourcing strategy that need to be designed and implemented.
Corporate responsibility and sustainability legal framework;
Policies and strategies need to be designed for the supply chain based on principles of equity and fairness to improve economics of scale, comparative advantage and market access;
An optimal global sourcing strategy and supply chain management strategies need to focus on network integration synchronisation, infrastructure and technology development;
When sourcing an important an important component which is basically an essential character of the finished product, it is advisable to source from more than one supplier. As much as Bright Sparks would benefit outsourcing their products, the fact that their operations are now based in another part of the world means that they are exposed to a number of new risks that should be managed. The benefits should be judged to be better than the risks. There are various challenges that can be experienced namely, delays in supply chain as both the documentation and the physical consignment will be subject to intense scrutiny by the customs, Regulatory and Security Departments. Manufacturers must at least ensure that they provide for more that one supplier of the essential components as the production line can grind to a halt if this essential component cannot be sourced or obtained. The risks also include product failures e.g. not meeting the required standard. The supplier may go out of business, unilaterally increasing the cost of the component and wilfully withholding the product.
In the global market, it is a well known fact that Malaysia is well known exporter of technological goods and the US is one of their biggest trading partners. The raw materials and semi finished components are regularly sourced globally. As stated by Hammels the use of imported inputs as a share of gross outputs in countries like Malaysia has increased drastically by 300%. This highlights the importance of outsourcing for components in Malaysia.(Centre for Customs &Excise Study Guide 2010: page 38)
Security Initiatives of the United States:
Since the September 11, 2001 terrorist attack on the US trade centre and attacks against transportations, at the national, regional and international level a lot of attention has been paid to securing supply chains against terrorists attacks: laws and regulations have been enacted, private initiatives have been founded, standards have been established, new technological approach have been developed, and security management has been approved.
The US has focused on homeland security after theses attacks of September 11, 2001. Security on importation into the US has increased substantially. In fact the US has implemented several measures whereby security has increased throughout the global supply chain and stringent methods have been employed to ensure that cargo entering the borders of the US is secure and free from any risks which could harm the country and the community at large.
These various security initiatives in the US are clearly defined and legislated. Governments and the international business community have had to progressively improve safety and security of the supply chain in their countries if they want to trade with the US. After the implementation of the various initiatives, trading partners had to align themselves with the US initiatives. This included ensuring that all participants to the supply chain have the necessary credentials; there is screening and validating of the contents of the cargo being shipped, advance notification of the contents of the country of destination, ensuring the security of the cargo while in transit via, the use of locks and temper proof seals and inspection of cargo in entry into the United States.
The goods are shipped from Singapore which is a CSI-Container Security Initiative port of the US. The significance of the CSI port implies that there is a close working relationship with the US which is an advantage which focuses on the screening of the cargo prior to their onward transmission to the US. The Customs representatives at the port will oversee the screening process which is conducted by Singapore Officials prior to departure to the US.
The 24 Hour advanced vessel Manifest Rule: This initiative requires the cargo carrier to submit detailed cargo information to the CBP electronically at least 24 hours prior to the loading of the containers on a US bound ship and if not done, the container will not be allowed into the US. This information would be required to pre-screen containers according to the risk criteria of the goods. If the containers are stopped there is an added risk of delays, and if information submitted is not adequate or incorrect, the delays would average at least three days which will result in huge costs. However, in January 2009, new rules were published requiring additional information - Carrier requirements and importer requirements. These include seller buyer manufacturer and a country of origin, amongst others (Centre for Customs &Excise Study Guide 2010: page 49-50).
The International Organisation for Standardisation has released a series of standards for the establishment and management of supply chain security. ISO/PAS 28000 - Specification for security management systems for the supply chain, offers public and private enterprises an international high level management standard that enables organisation to utilise a globally consistent management approach to applying supply chain security initiatives.
The security initiatives have impacted on every facet of the supply chain which includes amongst others shippers, companies, carriers, retailers, importers, distributers, manufacturers and their source materials. The C-TPAT elements of the CSI are very relevant in business as it aims to assist businesses to focus on their vulnerable areas and address them in the international supply chain. Importers in the US are expected to develop and implement policies to enhance security not only within their operations, but throughout the supply chain, from the source of the raw materials to the final destination. This means that they have to manage the information of the detail of the product from the stage of the supplier of the raw materials to the end of the supply chain - the end user details and destination.
Flotsam and Jetsam, the distributors of the technological products in the US is a member of the C-TPAT programme. The Customs Trade Partnership Against Terrorism is a voluntary compliance programme for companies to improve the security of their corporate supply chains Requirements to retain membership of this programme are very stringent and include very extensive cooperation with their partners in the supply chain. One of the strict rules is that the importers shall have documented routines for the selection of business partners.
There is great responsibility attached to the place where a product is packed or consigned from. An importing company must ensure that its business partners have satisfactory routines that prevent the cargo being changed or manipulated in anywhere when it is dispatched. Both processes and premises must be regularly checked for risk assessment and must fulfil the requirements stipulated by the importer. Furthermore the importer shall ensure that their business partners document any connections with the security programmes of other customs authorities, that the business partners have sufficiently sound finances that enable them to meet heightened security requirements, that they have the capacity to implement the measures, that they can identify shortcomings in security and then remedy the shortcomings.
The Cost Effective Ways of Supply:
As already stated above there has to be cost effective ways to supply the products timeously and not incurring any penalties and abiding by all the legislative and regulatory requirements throughout the supply chain. Ensuring the product is produced and transported and cleared timeously as per the terms and conditions of the contract. The process has to be managed throughout the supply chain and any mitigating factors that are risk associated being effective and efficient.
" The failure to understand or comply with the rules, regulations and requirements of customs and other regulatory authorities during importing and exporting of goods process can lead to significant costs and expenses, including border delays, increased inventory and inability to meet contractual obligations. Instances of non compliance can attract financial penalties or even criminal prosecution so regulatory compliance management is a very important component of efficient and effective management of the international supply chain"(Centre for Customs &Excise Study Guide 2010: The influence of customs on supply Chain Management: page 36).
In order to supply the market in a most cost effective way, it would be imperative that all customs formalities and regulatory requirements be met in order to eliminate costly delays and attraction of financial penalties.
By choosing a supplier on the basis of lowest cost only can create a dangerous precedent. There are various other factors including risk factors which must be taken into consideration when choosing suppliers as there need to be close co-operation and a very good relationship between the parties. Sourcing from one supplier only can be a dangerous practice as Ericsson discovered when a fire broke out in a microchip plant owned by Philips and destroyed stocks. Their competitor Nokia was able to be resourceful and managed to obtain necessary stocks. This clearly demonstrates the need to have more than one supplier to ensure risks are managed within the supply chain. (Centre for Customs &Excise Study Guide 2010: - Case Study - Supply Chain Disruptions page 32).
The weak links and vulnerabilities within the supply chain must be identified and action taken to strengthen the link. The weak link would be a supplier who is a security concern in the United States. Dealing with the supplier would have negative connotations for the reputation of the company. It is imperative that the reputation of the company is upheld as any dealings with the suppliers who are deemed to be a security concerns can have that effect of "guilty by association". As a result these can have far reaching implications for the company. However in order to supply the US in a cost effective way the reputational risks must be eliminated. This could entail dealing with suppliers whose reputation is not compromised. There various other cost effective ways of supplying the US markets and these include making use of trade agreements, becoming members of the AEOs programmes and ISO accredited, and being compliant with all regulations and legislative requirements, and to have a sound plan to effectively manage the supply chain to minimise risks effectively.
Global Sourcing in the Supply Chain:
Stephen Lane reiterates the fact that the, "Given the sourcing models in their respective strengths and limitation it is clear that no one sourcing model fits every set of business drivers. It follows, therefore, that the best approach is one of a balanced strategy in which two or more models are aligned to support different strategic business drivers. However, matching business drivers to models represents only half of the sourcing strategy equation" (StephenLane@Infosys.com.Build or Buy: Choosing the right Global Sourcing Model - Stephen Lane, Manish Subramanian and Balaji Yellavalli: page 6: April 2005)
They are companies that have erroneously looked at low labour costs and made their decisions to outsource based on mainly this factor. However, with the recent economic global slump and the rise of transportation and other costs, it has become important for manufactures to look at options that indicate a best practice, total cost model should be comprised of at least four key cost elements.
These are supplier price and terms, delivery costs including logistics, region or country specific costs, geographic, and the costs of quality validation as this could entail product failure , communications, performance impact, operational and quality costs, including in-plant inventory and handling, inventory maintained in the supply chain and satellite warehouse operations and overheard. Other costs, including such standard costs as risk and local tax initiatives, and situation costs such as procurement of staff, broker fees, infrastructure technology and facilities, exchange rate differentials, tooling and mold costs. All these elements must be considered holistically in order to make the best decision which will impact on the costs effective way of supplying the US.
There is a dire need to focus on the total landed cost and not on the low labour costs without taking all the other relevant costs into account. (Centre for Customs &Excise Study Guide 2010: Reading 7: page 39).
Choice of Partners in the Supply Chain:
"Foreign and in-country partners share management responsibility along with risks and rewards that are commensurate with their investment. A proper balance can enable the foreign partner to better manage investment risks than with the captive centre approach" A robust supply chain and supplier base management control system will provide fact based-insight is vital to all key arrears and includes sourcing, supplier qualification, contract compliance, supplier management and outsourcing decision making. The selection of appropriate partners in the supply chain is a process which should encompass all factors, not only selecting partners with a pure cost focus in mind. This can eventually lead to more costs than anticipated. StephenLane@Infosys.com.Build or Buy: Choosing the right Global Sourcing Model- Stephen Lane, Manish Subramanian and Balaji Yellavalli: page 4: April 2005).
It is also imperative that the country of origin, its location and production details of all the suppliers are known in recognising their susceptibility to security threats. Countries which are more vulnerable to security threats could affect the supplier's production and cause delays in the supply chain. Receiving components, raw materials and products from countries which are security concerns in the global market could compromise the products received. The shipment and delivery accuracy of the products would ensure that the suppliers can deliver consistently and on time which is key to assessing the risk they may pose. The shipment dates, choice of mode of transport, rerouting procedures when natural disasters which may occur should be in place. It is also extremely important to asses the physical security of the supplier's country as terrorism is a crucial factor. Enquiries should be made about arrears such as the materials used to manufacture the product, declaration to the effect and the physical security of the production location.
The information must be sourced about the supplier's internal process in the production of the product. This will provide most of the information about their security and control measures in place during the manufacturing process. Suppliers should be able to ensure that the entire production process and the staff they employed do not constitute a security risk. The other issue is that the supplier must be able to provide information that they abide by all the applicable United Nations Resolutions - for instance that no child labour is employed in the production of the products.
The AEOs Benefits for Bright Sparks:
For Bright Sparks to enjoy the benefits that come with AEOs, they must apply to become a member and become ISO accredited. The membership of a Customs authorised Economic Operator Scheme and membership of the International Standards Organisation will provide Bright Sparks with the necessary credentials and recognition. The AEO - Customs Golden Client is a scheme which offers green light facilities for accredited clients. They are several other benefits but the main benefit is reduced business costs through simplified and speedier customs processes and procedures. The certification programme offers benefits which include being an accredited and trusted client. This will enable Bright Sparks to continue operations unhindered during disruptive incidents. The other added benefits are better relationship with the regulatory and Customs authorities leading to a reduction in the number of controls and examination of cargo. Some of the controls which can be avoided through certification of the company are primarily security controls. Firstly, documents will be inspected in which a risk assessment will be made and mitigating factors devised. The assessment would constitute whether the customs authorities shall proceed with the checks of radioactivity or inspection with x-ray or gamma ray technology, Non-Intrusive Inspections. The possibly delays associated with these types of controls can be lengthy and costly in terms of the delays and affect the timeous delivery.
The brief basically provides the all relevant information on the implications of the new distribution contract which was signed with the distributors, Flotsam and Jetsam to distribute technological products in the US of America and recommendations were made on the most cost effective means of supplying the US market taking into consideration the various initiatives of the US. This means that to increase operational competiveness and be well positioned for the economic turnaround, Bright Sparks need to be able to leverage their global capability and source their back-office services from those countries and providers were they are performed most efficiently. The risks associated with the current global sourcing model need to be effectively and efficiently managed to optimise with policies and strategies designed for the supply chain based on principles of equity and fairness to improve economic scale and comparative advantage and market access. We need to put the US security initiatives to ensure that we have necessary credentials and comply with the regulatory requirements. Most importantly, the cost effective ways of the supply chain must be employed to ensure the product is produced, cleared and delivered timeously in a more cost effective way. Partnerships form part of globalisation and being a member of the AEOs scheme would benefit Bright Sparks to continue operations unhindered during disruptive incidents.