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The objective of this brief is to unpack some critical issues around the major distribution contract that we as Bright Spark Pty Ltd have just secured for the US market through our distributor Flotsam and Jetsam Inc.
In this document we will look at the implications of contract, what are the potential opportunities available and how do we tackle the challenges on the supply chain particularly in relation to security matters
According to the information before me this contract is for the distribution of our technology products to the United States and that we are going to make use of Flotsam and Jetsam Inc who is our current distributor. It is confirmed that Flotsam and Jetsam Inc is a member of the United States' C-TPAT Program, that is indeed interesting, why?, I will explain that during the course of my briefing.
Our current global sourcing model is that of buying various raw material as well as semi-finished components from different countries around the world and assemble them in Malaysia. Our finished and final product is therefore exported from Tanjung Pelepas which is the CSI Port.
One of the challenges we are faced with is that the product needed to make the final product is currently sourced from the country that is listed as security concern by the US Government hereinafter will be referred to as country X. The said country X has got significantly lower labour cost than other potential suppliers. What is most interesting about this contract is that the government is prepared to provide additional tax incentives for us to retain the business.
In this brief we will firstly look at the implications of the new contract within the context of the US supply chain security initiatives:
US Customs-Trade Partnership Against Terrorism ( T-PAT)
Container Security Initiative (CSI)
What are prospects and potential business opportunities with our current sourcing model?
We will also examine the best practice supply chain management principles (WCO Framework of Standards).
Finally the recommendation on the most cost-effective means of supplying US
The tragedy of 9/11 in the United State brought about an increased focus on security in the United States, European community and the world at large. It exposed the vulnerability of the security measures that were in place at the time especially in the supply chain. Thus the need arose for paradigm shift and the strategic focus that is based solely on securing the supply chain. It was for this reason therefore that led to the establishment of the several initiatives that seek to address the security concerns such initiatives include "inter alia" the Customs-Trade Partnership Against Terrorism (C-TPAT), Container Security Initiative (CSI) and the promotion of the SAFE Framework of standard. We will therefore look at these establishments with the view to weighing prospects and constraints in relation to the new contract awarded to Bright Spark.
What is meant by the US supply chain security initiatives?
C-TPAT is a voluntary government-business initiative to build cooperative relationships that strengthen and improve overall international supply chain and U.S. border security. C-TPAT recognizes that CBP and Border Protection (CBP) can provide the highest level of cargo security only through close cooperation with the ultimate owners of the international supply chain such as importers, carriers, consolidators, licensed customs brokers, and manufacturers. Through this initiative, CBP is asking businesses to ensure the integrity of their security practices and communicate and verify the security guidelines of their business partners within the supply chain (George Grace CC & ES Study Guide University of Canberra)
It is described by E.S. Smit as a joint effort between the United States government and businesses involved in importing goods into the United States he refers to C-TPAT as part of the ever evolving nature of the United States Customs, and recognizes that border security will be much more efficient if Customs involves businesses in the process of securing and inspecting cargo (E S Smit www.wise geek.com)
As indicated above the membership is open and voluntary the businesses who import goods into the United States including freight carriers, brokers, manufacturers, and importers
What benefits that member enjoy
Reduced physical inspections are definitely important. This could save an importer a lot of money that would have been spent on preparation and conducting the inspection per container or per shipment.
Entry priority is escalated therefore quicker turn around times
Reduced document review and non-intrusive inspections can save days in any supply chain.
Applicant is considered a C-TPAT Partner as soon as the application for certification has been submitted.
The more C-TPAT Partners who participate in supply chain, the lower the chances of cargo inspections.
C-TPAT membership is a mitigating factor in the case of potential fines or penalties.
C-TPAT membership will become a requirement for transportation service providers...
The cost of certification to importers will be, in most cases, less than the cost of not becoming certified. (http://www.c-tpat.com/)
The over arching objective is ultimately to join forces from both US and business in the fight against terrorism. As indicated above C-TPAT encourages the supply chain parties to improve security and rewards them with benefits. Firstly the willing company fills out an application which includes the information about its business, an agreement to participate, and a profile of their supply chain which includes an audit of the way in which goods are handled. What is also essential is that those that are members would be reluctant to do business with the non-member hence they want to remain clean and trusted and thus continue to reap the benefits of being a member.
The actual process of becoming a member
It is important to mention again that C-TPAT membership is not mandatory for any business, but many companies have opted to join because they are attracted by the advantages that come with being a member. More importantly any company can join it does not have to be US companies only. The process is as follows:
Sign Agreement with CBP to cooperate, assess & improve security
Self-assessment by applicant against Security Guidelines
Application (file Security Profile)
Certification after background investigation and document review - Tier 1
Validation after on-site assessments (including at foreign locations) - Tier 2
Compliance with additional guidelines - Tier 3
Periodic re-assessment and revalidation (every 4 years) (George Grace CC & ES Study Guide Canberra)
The Container Security Initiative
It is a series of measures adopted by U.S. Customs to move their container screening process outward (i.e. identifying high risk containers in foreign ports before they are loaded on vessels destined for the U.S
(Jamie Stranger http://www.seatransport.org/seaview_doc/Ed_61/Container%20Security%20Initiative%20(CSI).doc)
CSI addresses the threat to border security and global trade posed by the potential for terrorist use of a maritime container to deliver a weapon. CSI proposes a security regime to ensure all containers that pose a potential risk for terrorism are identified and inspected at foreign ports before they are placed on vessels destined for the United States. CBP has stationed multidisciplinary teams of U.S. officers from both CBP and Immigration and Customs Enforcement (ICE) to work together with our host foreign government counterparts. Their mission is to target and pre-screen containers and to develop additional investigative leads related to the terrorist threat to cargo destined to the United States.
It involves the following four core elements
Identifying high risk containers - US Customs requires more detailed cargo manifests to be provided. Particulars are required of the final seal number for each container, precise quantity of the cargo (pieces and weight), the identity of the shipper, the identity of the consignee and the container number. US Customs has advised that it will no longer accept general descriptions of cargo such as 'Freight all Kinds', 'General Cargo', 'STC' or even 'Chemicals' and 'Foodstuffs'
Pre-screening high risk containers before they arrive in U.S. Ports- U.S. Customs is expanding its pre-screening procedures to foreign ports. Previously this was done only upon discharge in the U.S. Under CSI U.S. Customs stations officers in foreign ports to pre-screen U.S. bound containers. Once a container is screened and approved in the foreign port it is not subjected to further inspection upon discharge in the U.S
Using detection technology to screen high risk containers- The U.S. Customs Service is expanding its use of the latest mobile x-ray and gamma ray inspection machines and radiation detectors. These machines can screen a 40' container in 90 seconds
Using more secure containers- U.S. Customs has developed more secure containers to ensure the integrity of containers screened in foreign ports. The features include electronic seals to detect tampering after the container is screened and motion and/or light detectors to warn of any attempt to penetrate the container
Robert C. Bonner in January 2002 said (The Container Security Initiative (CSI) is based on an idea that makes sense: extend our zone of security outward so that American borders are the last line of defence, not the first". The maritime containers that pose a risk for terrorism are identified and examined at foreign ports before they are shipped to the United States (http://www.globalsecurity.org/security/ops/csi.htm)
Requirements for CSI Expansion
In order to be eligible for CSI expansion a port must demonstrate the capability of six required standards.
The Customs Administration must be able to inspect cargo originating, transiting, exiting, or being trans-shipped through a country. Non-intrusive inspectional (NII) equipment (including gamma or X-ray imaging capabilities) and radiation detection equipment must be available and utilized for conducting such inspections. This equipment is necessary in order to meet the objective of quickly screening containers without disrupting the flow of legitimate trade.
The seaport must have regular, direct, and substantial container traffic to ports in the United States.
Commit to establishing a risk management system to identify potentially high-risk containers, and automating that system. This system should include a mechanism for validating threat assessments and targeting decisions and identifying best practices.
Commit to sharing critical data, intelligence, and risk management information with the United States Customs and Border Protection in order to do collaborative targeting, and developing an automated mechanism for these exchanges.
Conduct a thorough port assessment to ascertain vulnerable links in a port's infrastructure and commit to resolving those vulnerabilities.
Commit to maintaining integrity programs to prevent lapses in employee integrity and to identify and combat breaches in integrity IRRELEVANT
What are prospects and potential business opportunities with our current sourcing model?
Our sourcing model is bases on cost -effective expenditure principle which in essence means that we spend as little as possible in manufacturing or production. Therefore our model is that of offshoring.
Offshoring is described as "the situation where a company elects to source goods and services from locations in different countries most often from a lower cost location and often in emerging market economies" (George Grace CC &ES Study Guide )
It is said that it is generally undertaken through an offshore subsidiary or outsourcing to an external and lower cost suppliers. Now with reference to Bright Spark the modus operandi for Bright Spark is the so called "unbundling the supply chain" this refers to the situation where components are manufactured in several countries and assembled into the final product in a different country which in Bright Spark case is in Malaysia.
Some of the benefits of offshoring
Outsourcing your non-core activities will give you more time to concentrate on your core business processes
Offshoring can give you access to professional, expert and high-quality services
With outsourcing your organization can experience increased efficiency and productivity in non-core business processes
Outsourcing can help you streamline your business operations
Offshore outsourcing can help you save on time, effort, manpower, operating costs and training costs amongst others
Outsourcing can make your organization more flexible to change
You can experience an increased control of your business with outsourcing
Your organization can save on investing in the latest technology, software and infrastructure as your outsourcing partner would be investing in these
Outsourcing can give you assurance that your business processes are being carried out efficiently, proficiently and within a fast turnaround time
Offshoring can help your organization save on capital expenditures
By outsourcing, your company can save on management problems as your offshore partner will be managing the team who does your work
By outsourcing, you can cater to the new and challenging demands of your customers
Outsourcing can help your organization to free up its cash flow
Sharing your business risks is possible with outsourcing
Outsourcing can give your business a competitive advantage as you will be able to increase productivity in all the areas of your business
Outsourcing can help your organization to cut is operational costs to more than halt
In closing it is said that "If you want your organization to stay ahead of competition, concentrate on core competencies and make use of the latest technologies, then outsourcing can help your organization achieve all this and more. In outsourcing, the advantages of outsourcing are more than the disadvantages of outsourcing. The pros of outsourcing have driven more organization to step into offshoring and experience the benefits that it has to offer"
In the light of the above I am confident that Bright Spark model will yield the objectives of developing this company to continue to grow and be the one of the leading and most competitive in the global arena in the supply chain. I would recommend that we continue to embark on this strategy.
The best practice supply chain management principles (WCO SAFE Framework of standards)
WCO SAFE Framework was adopted in 2005 during the annual Council Session in Brussels. This is the international instrument which is aim at unifying all the SAFE and AEO provisions in a single comprehensive document. The reason why I decided to include this document in my brief is that it contains international best practice and is therefore relevant to the case on hand. The SAFE Framework sets forth the principles and the standards and presents them for adoption as a minimal threshold of what must be done by WCO Members. It was adopted due to the fact that the global trading system was seen to be vulnerable to terrorist exploitation that would severely damage the entire global economy.
Objectives and principles of the SAFE Framework
The SAFE Framework aims to:
Establish standards that provide supply chain security and facilitation at a global level to promote certainty and predictability.
Enable integrated supply chain management for all modes of transport.
Enhance the role, functions and capabilities of Customs to meet the challenges and opportunities of the 21st Century.
Strengthen co-operation between Customs administrations to improve their capability to detect high-risk consignments.
Strengthen Customs/Business co-operation.
Promote the seamless movement of goods through secure international trade supply chains.
There are Four Core Elements of the SAFE Framework
The harmonization of the advance electronic cargo information requirements on inbound, outbound and transit shipments.
Each country that joins the SAFE Framework commits to employing a consistent risk management approach to address security threats.
The SEFE Framework requires that at the reasonable request of the receiving nation, based upon a comparable risk targeting methodology, the sending nation's Customs administration will perform an outbound inspection of high-risk containers and cargo, preferably using non-intrusive detection equipment such as large-scale X-ray machines and radiation detectors.
The SAFE Framework defines benefits that Customs will provide to businesses that meet minimal supply chain security standards and best practices.
The above elements are self explanatory they draw to fact of the essence of security and facilitation of trade within the supply chain.
The SAFE Framework rests on two pillars these are:
Customs-to-Customs network arrangements and Customs-to-Business partnerships. The pillars involve a set of standards that are consolidated to guarantee ease of understanding and rapid international implementation.
What are the benefits of SAFE Framework?
This SAFE Framework provides a new and consolidated platform which will enhance
World trade, ensure better security against terrorism, and increase the contribution of
Customs and trade partners to the economic and social well-being of the nations.
It will improve the ability of Customs to detect and deal with high-risk consignments and increase efficiencies in the administration of goods, thereby expediting the clearance and release of goods. The SAFE Framework brings benefits for nations/governments, Customs administrations and the business community.
Benefits to the governments
One of the main objectives of the SAFE Framework is to secure and facilitate global
Trade. This will enable international trade to contribute to economic growth and development. This will help to secure trade against the threat of global terrorism and, at the same time, the SAFE Framework will enable Customs administrations to facilitate the movement of legitimate trade and improve and modernize Customs operations. This will, in turn, improve revenue collection and also the proper application of national laws and regulations. This instrument therefore supports economic and social protection, and will enable foreign direct investment. The SAFE Framework also encourages the establishment of co-operative arrangements between Customs and other government agencies. There should be recognition of other already existing international standards. This will assist governments to ensure integrated border management and control. By putting the necessary measures in place, the SAFE Framework also empowers governments to expand the mandate and responsibilities of Customs administrations in this area.
Benefits to Customs
One of the main thrusts of the SAFE Framework is to establish Customs-to-Customs
network arrangements to promote the seamless movement of goods through secure international trade supply chains. These network arrangements will result, inter alia, in the exchange of timely and accurate information that will place Customs administrations in the position of managing risk on a more effective basis. Not only will this improve the ability of Customs to detect high-risk consignments, it will also enable Customs administrations to improve their controls along the international trade supply chain and make for better and more efficient allocation of Customs resources. The Customs-to-Customs network arrangements will strengthen co-operation between Customs administrations and enable administrations to carry out controls earlier in the supply chain, e.g. where the administration of an importing country requests the administration of the exporting country to undertake an examination on its behalf. The SAFE Framework also provides for the mutual recognition of controls under certain circumstances. The application of this instrument will enable Customs administrations to adopt a broader and more comprehensive view of the global supply chain and create the opportunity to eliminate duplication and multiple reporting requirements.
As stated above, the SAFE Framework will enable Customs administrations to cope with the challenges of the new international trading environment by putting the building blocks in place to undertake Customs reform and modernization. The SAFE Framework has also been structured in a flexible manner to enable Customs administrations to move at different speeds. This will enable Customs administrations to implement it in line with their own unique levels of development, conditions and requirements.
Benefits to business
The SAFE Framework creates, amongst other things, the conditions for securing international trade, but also facilitates and promotes international trade. This encourages and makes it easier for buyers and sellers to move goods between countries. The SAFE Framework takes account of, and is based on, modern international production and distribution models Authorized Economic Operators (AEOs)1 will reap benefits, such as faster processing of goods by Customs, e.g. through reduced examination rates. This, in turn, translates into savings in time and costs. One of the main tenets of the SAFE Framework is to create one set of international standards and this establishes uniformity and predictability. It also reduces multiple and complex reporting requirements. These processes will ensure that AEOs see a benefit to their investment in good security systems and practices, including reduced risk-targeting assessments and inspections, and expedited processing of their goods.
Having looked at different initiatives and instruments developed over the years in an attempt to deal with terrorist threat in the international supply chain it is my submission/recommendation that the first step that we need to take is to establish the project team that will run the campaign aimed at encouraging our business partners especially the company we are dealing with in "country X" which is listed by US as security concern. What is interesting is that for these companies to join these initiatives they do not need the authority from their governments. It is also my submission that some project team members if possible visit these countries during campaign and research on their method of operation so that we understand their processes and be able to identify and quantify the level of threat with the aim of allaying fears to our business partners in the US. I further submit that our current strategic focus in terms of sourcing model remains the same we have highlighted the advantages above and concluded that it is indeed cost-effective thus we need to strengthen the relationship between our trade partners and suggested campaign will focus on that and will have to report periodically on the developments.