International Supply Chain Management Implications Of New Contract

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Global supply chain management has fostered and developed with the rise of globalisation and realisation of international trade Supply Chain management involves planning (demand forecasting, product pricing, and inventory management), sourcing (procurement, finance and invoicing), making or manufacturing (product design, production management and facilities management), and delivery (handling customer orders and their delivery), (Holloway and Grace, 2010, page 34).

International supply chain is obviously one of the manifestations of international trade involving international actors. Broadly, international supply chain involves multi actors and multiples of processes to secure the movement of goods from its place of source as raw material to a designated final destination as a manufactured goods to a consumer through a multilayered processes and locations.

It is stated that "supply chain management focuses on how firms utilize their suppliers' processes, technology, and capability to enhance competitive advantage (Farley, 1997) and the coordination of the manufacturing, logistics, and materials management functions within an organization (Lee and Billington, 1992)" (cited in Tan K.C (2007, page 40). Conventionally, supply chain management was coined with purchasing and supply, and transportation and logistics that are more focused on economic aspects, manufacturing or productivity, customer satisfaction, sales increase, goods delivery or movement, warehousing, inventory etc. In contemporary thinking supply chain management is about the integration and coordination of the above elements coined with facilities, infrastructures, technologies and partnerships. Tan, C. K (2007) links supply chain management with integrated purchasing strategy, integrated logistics and physical distribution, supplier integration, buyer/supplier partnerships, supply base management, strategic supplier alliances, and supply chain synchronization concepts and business strategies.

The 9/11 terrorist attack in the US has exceptionally intensified the need for global supply chain security. As global supply chain infrastructure and the goods are the primary targets of terrorist attacks, as observed in the transport industry, the need for secured global supply chain is rationally justified as far as it does not hamper international trade flow (World Bank, 2003). In response to the demand, various security initiatives have been in place at global, regional and national levels. Security measures can only be successful if shared among actors - boarder and regulatory agencies, trading community and supply chain facilitators such as transporters, logistics providers, forwarders, ports and terminals etc.

Supply chain management security aims at a secured flow of goods and services from the supplier to the end consumer through multiple process and actors characterised with cost reduction, efficiency, regulatory compliance, value adding, expedited delivery, increase in sales of goods and services and customer satisfaction in integrated and coordinated effort of all involved including government (regulatory) and business.

The purpose of this paper is to demonstrate the impact of supply chain security initiatives of the US in particular on supply chain management decisions as applied to the Bright Sparks Pty Ltd current global sourcing model. The paper is structured to include brief introduction to supply chain management, contextualising global sourcing and the case of Bright Spark, analysis and impact of US supply chain security initiatives, implication of the new distribution contract of Bright Spark, and finally summary and recommendations.

I will review relevant literatures in the area of supply chain security and will attempt to analyse directly related US initiatives to identify the impacts on global supply chain in general and the implications of the current global sourcing model of Bright Spark. Therefore, the findings of this briefing report is to be limited to theoretical implications drawn from logical analysis of the existing supply chain security initiatives of the US.

Global Sourcing and the Case of Bright Spark Pty Ltd

General Background

It is practically observed that a specific product is manufactured from inputs sourced from different parts of the world distanced with thousands of miles for many reasons to include searching for cheap labour, speciality expertise, access to cheaper raw materials, tax incentives, lower tariff rates and other economic advantages. This network of supply where a company is sourced its raw materials or semi-finished components from different countries is called 'global sourcing'. In global sourcing multiple actors are involved to include raw material suppliers, raw material manufacturers, semi-finished components manufacturers and suppliers, logistics providers (transporters, warehouses), forwarders, clearing agents, regulatory agents etc supported by proper business process, documents and information, and human expertise and decision makings.

Global sourcing has its own advantages and disadvantages. As summarised in the study guide of this unit (Holloway and Grace, 2010), global sourcing has advantages of penetrating potential markets, tapping scarce resources, developing alternate supplier, increasing total supply capacity, lower production cost, learning new business culture, getting sources closer to markets, exploiting better technologies and infrastructures etc. On the other hand, global sourcing is exposed to varied risks to abuse intellectual property rights (trademark, patent, copyright, brand etc), exposure to interruption or disruption of supply, political instability in third world countries, unknown or uncertain regulatory measures, exchange rate fluctuations, possible of quality compromises, possible delays and other cross cultural difficulties.

Bright and Spark Global Sourcing Model

Bright and Spark assembled their products from raw materials and semi-finished components supplied from several countries around the world. A key component used in the assembly of a product is supplied from a country that is labelled by the US government as 'security concern'. Here, it is clear that a 'security concern' means there is a potential security threat regardless of its level and priority that will entail tougher security measures on goods coming into the US. It is obvious that this country has significantly lower labour cost than other potential suppliers and the government is prepared to provide additional tax incentives availing economic benefits and competitive advantages. The clear issues here is security measures by the US Customs and Boarder protection may affect the economic and competitive advantages of the company.

Although the distributor, Flotsam and Jetsam Inc., is a member of the US C-TPAT Program, that can be entitled to the benefits declared such as "4 to 6 times less likely, to incur a security or compliance examination" (US Customs and Border Protection, page 1), this may not be applicable as the supply is to start yet with no prior risk assessment made by the authorities. That means the distributor or its supplier should be assessed according to the C-TPAT Five Step Risk Assessment Process Guide (2010). That means there is likelihood of relatively strict security or compliance interventions affecting the efficiency of supply chain management as will be discussed later.

Bright and Sparks Pty Ltd Global Sourcing and Supply Chain Model Based on New and Payne (1995) cited in Tan, K. C (2001, page 40)

Supply Logistics - Physical Distribution and warehousing

Tanjung Pelepas Port

US Boarder

Quality Inspection, Boarder & Regulatory Controls

into Malaysia

Raw material



Flotsam & Jetsam Inc

Bright Spark PTY Ltd (Malaysia

Semi-finished or Component manufacturer

Raw material manufacturer


/ - Information, document exchange

- Physical distribution - goods delivery, warehousing, forwarding, clearing etc

- Regulatory compliance measures, quality inspections etc

US Supply Chain Security Initiatives and Its Impact

Following the 9/11 horrible terrorist attack in America and the continued threats and hostilities, the US has put in place various supply chain security initiatives tending its centre position from trade facilitation to controlling. The initiatives include legal and structural responses as will be briefly discussed below in relation with the given scenario.

Consumer Product Safety Improvement Act (CPSIA) - This act deals with consumer product safety that particularly deals with cooperation and the exchange of information relating to consumer product safety. According to this act, suppliers are required to provide certification for their products destined to the US confirming compliance with all applicable consumer product safety and similar rules and standards. This means that Bright Spark should find out if the product is subject to the provision of consumer product safety certification and if so such document should be sought from competent authorities for the product and its components including the item supplied from the 'security concern' nation. This will incur additional cost of processing and documentation besides the bureaucratic inefficiencies that may face.

The US 9/11 Commission Act of 2007 - According to this act, Transportation Safety Administration (TSA) requires 100% screening for all cargo flights on passenger air craft, supported through a mechanism called a "Certified Cargo Screening Program" (supposed to be fully implemented on August 1, 2010) which is a voluntary program designed to move some of the screening process to shippers, third party logistics providers, and forwarders (Saphir, 2010, DHS, 2007). That means Bright Spark's products are subject to 100% screening unless the distributor has to waive such requirements as member of the C-TPAT after going through the risk assessment that has a direct impact on clearing time given the involvement of a component from a 'security concern' state that may pose a threat.

Customs - Trade Participation against Terrorism (C-TPAT) - is a joint compliance program between CBP and the trading community allowing participant's or member's own assessment that may help to avoid unnecessary interventions and non-compliance. (DHS, 2007) This initiative has an actual and potential benefits to participants including minimum cargo inspection, accelerated border crossing and training facilities. The distributor is C-TPAT program member and can enjoy the benefits subject to risk assessments and compliances, however, as the importation of the Bright Spark's product is new phenomenon, there is a process to be fulfilled (signing agreement, conducting self assessment, file security profile, certification and validation of tier1 and 2, etc)that will take considerable time. Here, the issue of the supply from the 'security concern' state should be assessed and cleared which is not simple to enjoy the special benefits. Here our company should work in close cooperation with the government and the distributor to build the trust; otherwise, it will bear the consequences of CBP cargo examinations. The impact here is again increased cost, serious challenge to convince CBP regarding the security of the key component. Strategically this can bring an advantage in a long term compliance records, self assessment and avoiding security risks as part of the initiative.

24 Hour Advanced Manifest Rule (AMR) (2003) - This instrument requires suppliers to submit cargo data to US Customs and Border Protection electronically at least 24 hours a head before the cargo is loaded on the ship. This means Bright Spark is required to "collect, process and transmit the data to CBP on time" (Holloway and Grace, 2010) in electronic means. . This further intensified by an improved act called advanced security filing not only includes extended data but also requires proper system set up to manage the data collection, processing and transmission to CBP from both supplier and importer. This demands the company extra efforts, electronic technology entailing additional cost, however, efficient use of this requirement can save it from unnecessary delay and non-compliance measures. The issues of country of origin is important here and the importer/supplier should make sure the right legislation or standard in this regard on how to treat the key component that comes from the 'security concern' state.

Container Security Initiative (CSI) Port Program (2006 - 2011 Strategic Plan) - CSI is built on the principle of partnerships between the US and other countries and the trading community with a goal of inspecting high risk containers destined to the US before they are loaded in other country's port (CBP, 2006) such as Malaysia's Tanjung Pelepas port. Saphir (2010) however, denied that CSI is a government -to - government partnership and does not involve private business. As stated by Commissioner Basham W. Ralph in his introductory remark to the CSI strategy (CBP, 2006: ii) CSI program initiative

1). Identify high risk cargo containers at Tanjung Pelepas port before they are shipped ensuring advance information and intelligence

2). Pre-screen and evaluating containers at Tanjung Pelepas before they are shipped,

3). Use technology to pre-screen high-risk containers to ensure accelerated screening, and

4). Use smarter, more secure containers, which will allow CBP officers to identify any attempt to mess about during transportation and transit.

This is part of the US intervention from abroad and can give better confidence on goods coming from Tanjung Pelepas, which can allow less intervention to our products or interfere in the origin avoiding further complications, costs and non-compliance consequences abroad.

Other implementation strategies and 100% Cargo Scanning Initiatives - The US has other instruments that apply 100% cargo scanning, when feasible, and strategic plans notably Strategy to Enhance International Supply Chain Security (DHS, 2007) have significantly fortified the security and compliance measures on international cargo and goods imported into the US.

In general, the security initiatives have significant negative impact in terms of increased cost of operations and inventories, delay in crossing border, consequences of non-compliance, inability to increase sales, customer dissatisfaction, inefficiency in the management of the supply chain and damaging customer trust and brand to mention some of the most common expected ones. But equally, maintenance of supply chain security is a felt interest globally as security threats and trade non-compliances can affect citizens of the world, supply chain infrastructures and the international trade itself.

Disrupting a supply chain can create a serious havoc over the flow of international trade and stability. What is hoped with respect to the US position is that, technological facilities and efficient and effective systems can facilitate trade without critically compromising security in collaboration with other nations (customs-to-customs) and the business itself (in both customs-to-business, and business-to-business) applying the WCO SAFE framework standards because supply chain security cannot be achieved by a single actor. As clearly stated in the DHS strategy document (2007, page i) "Many parts of the supply chain are outside the jurisdiction of the United States, and only through strong partnerships can supply chain security be achieved."

Implication of the New Contract to Distribute Bright Spark Products to the US

The new distribution contract, as discussed above, will have significant implications negatively and positively to Bright Spark. The supply of our technological products to the US market, the biggest consumer nation, is obviously expected to increase sales volume and market opportunity. The distributor's membership to C-TPAT is another potential advantage that will in principle enable the importation easier, efficient and effective provided that the risk assessment if promising and accepted by US Customs Boarder Protection while enjoying most effective supply chain to the US because of the cheap labour cost and the intended tax incentives for the key component. This demands our company and the distributor to ensure compliance and avoid related risks continually. The relative successful implementation is a promising for us too.

The port of export (departure's), Tanjung Pelepas port, being CSI can help to reduce the level of intervention by CBP because the pre-screening and evaluation of a container before it is shipped, CBP identification of high risk containers through the advance information and intelligence exchange, use of more secure and smart containers and application of high-tech technologies to ensuring rapid screening. This is believed to ease security and compliance measures by CBP allowing our product to enter the US relatively with limited interventions. This initiative prevents illegitimate trade or security threats and helps to facilitate legitimate trade flow as high risk are identified in advance and other CSI and C-TPAT schemes discussed above. (CBP, 2006)

However, the contract can also entail some possible negative implications simply because of the key component sourced from the 'security concern' country to America. As far as the component from this state is significantly key, it affects the production and supply. As a new import item, C-TPAT membership cannot bring immediate benefits; rather it comes with a range of time of successful engagements in the supply chain management. It is also the policy of the US that security including 100% inspection of cargo and other compliance inspections for high risk consignments will limit the efficiency, effectiveness and delivery of our product. Therefore, the following specific implications are forecasted.

Risks of intensive intervention and non-compliance: There is likelihood of risk of non-compliance of security, quality and other legal standards and requirements and such risk can entail:

delay in crossing boarders - inability to meet contract deadlines for lack of on time delivery, and additional costs for warehouses and inventory

Financial penalties and/or criminal prosecution

Distrust and poor loyalty of consumers/customers damaging brand and causing financial loses

Distrust of regulatory agencies entailing tight control, increased intervention

Increased Cost - It is evidenced that tight security measures, intensive interventions can cause an increase in cost of the management of international supply chain including transportation, warehousing, inventory, and inefficiencies and other operational expenses including CSI and other requirements' cost.

Potential Risk of US Impositions - Another far chance implication is that if the key component poses serious risk, the US may impose further sanctions affecting the supply that can entail to cutting or disrupting the supply either directly or through partner country/government (Malysia). This is regardless of the supply to the use is successful or not.

Summary and Recommendations

"Increased supply chain security initiatives lead by the U.S. Government and unprecedented global sourcing has led to new challenges for supply chain managers."(Saphir, 2010, page 1). As to my understanding and opinion, the existence of many security initiatives is not merely an obstacle by itself to our case; rather the problem of Bright Spark is that its key component is sourced by a state trouble with the US that can easily be targeted. It is very clear that terrorist and other security threat is solidly prevalent and in the same token, the need for trade facilitation is similarly vivid. In fact, these seemingly competing interests are not mutually exclusive.

This means that excessive security measures can hamper international supply chain efficiency and effectiveness, and similarly poor security measures can easily expose our security and the global supply itself will be threatened. Therefore, it is theoretically, right to say that a balance should be reached by applying risk management, providing high-tech technology and facility, enhancing collaboration between regulatory bodies within and between States and partnerships with the business in coordinated and integrated manner. As a customs officer, I pretty understand this easy saying than doing but that seems the only solution at global level where there are competing interests between security conscious and trade flow conscious states and other actors.

Effectively implemented risk based compliance management can promote voluntary compliance and thereby facilitating trade in a coordinated approach with all involved actors in the supply chain.

To conclude, the most cost effective means of supplying our products to the US will lay into two alternatives. The first and recommended one is strongly monitoring and controlling the existing supply satisfying the demands and requirements of the US deploying various mechanisms depicted below. This is the most cost effective considering the competitive advantage of the cheap labour and intended tax incentives. The second option is if the US is resistant and we are not able to satisfy the security requirements, there is possibility for alternative sources subject to profitability.

I would recommend the first alternative because some of the US supply chain security initiatives, specifically CSI (Tanjung Pelepas port) and C-TPAT (through the distributor) programmes can help to avoid the US concern coined with well designed and supervised supply chain management by Our company. In this regard, I would suggest the following actions to be taken to implement the recommended supply chain of our product to the US within the existing frameworks of security initiatives.

Extensively research and understand the US and local supply chain security initiatives requirements, standards and develop proper responsive strategies to fulfil the demands.

Design and implementing enhanced supply chain security policies, strategies and verification mechanisms to identify and avoid any security threats. These should include the all aspects of supply chain management such as purchasing, supply, inventory, warehousing, logistics, information management etc with special attention to global sourcing and the associated risks and challenges discussed.

It is not always simple to objectively know reliability of the supplier and actors involved and therefore, continuous self assessment of the current supply chain of the key component including any sub-supplier (if any), other actors involved (transporters, exporting agent, financer, warehouses etc) and identifying any related risks and non-compliances.

Avoiding the risks and non-compliances in collaboration with the supplier to the mutual benefit of both companies.

Develop and implement partnerships with Tanjung Pelepas port authorities, CSI (as applicable) promoting voluntary participation and compliance including subscription to secure trade partnerships,

Subscribing to the Malaysian import/export Authorised Economic Operator aligning with the US C-TPAT programme import AEO scheme as a foreign manufacturer.

Adoption of and compliance to the initiatives fulfilling the requirements and strategies .

Negotiating with the government of the supplier and the supplier itself to set and implement common security standards (directly the US initiatives or at least WCO SAFE Framework standards).

Providing all necessary information including the self assessment of risks to the distributor to use it to process an agreement with CBP to subscribe this specific supply chain to the C-TPAT programme and get certification and validation to enjoy easy border crossing and minimised interventions. C-TPAT membership of the distributor and use of the CSI port are important initiatives.

In building relative confidence and trust towards the supply chain of our products, exclusively supervising the supplier in terms of security threats.

In doing so, searching for alternative supplier from safer countries to avoid continued risks is recommendable as a safety valve, analysing the advantages and disadvantages discussed above.

As supply chain security manager, I would like to point out at this stage that this briefing report shall be enriched through discussion and we need to act immediately to avoid unnecessary negative implications and to take advantage of the current cost effective supply chain model in the US market.

Berhane Yimer Desta

Supply Chain Manager

Bright Spark Pty, Ltd