This brief will provide the implications of the new distribution contract which was signed with the distributors, Flotsam and Jetsam to distribute technological products in the United States of America. Recommendations will be made on the most cost-effective means of supplying the US market taking into consideration the various security initiatives of the US Government.
The fudamental objective of supply chain management is to increase the sale of goods, in the most cost effective manner.
Current Sourcing Model:
Bright Sparks outsources for its technological products, raw materials and semi-finished component 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 component 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 which is exported from Malaysia to Singapore, 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 than any other supplier and additional tax incentives are offered by the Government. Ultimately it has an effect of reducing the cost of the final component. The research Division have completed feasibility studies and the results relect a cost savings in labour cost in comparison with other suppliers of the same component.
A total of six suppliers were included in the study. Supplier A has the lowest labour cost of US Dollar 1 for each component and offers tax benefits of 10%. Supplier B has labour costs of US Dollar 1.10 per component, but the Government does not offer any tax benefits. Other suppliers have labour costs of US Dollar 1.25 per component and there are no tax benefits offered by the Government. In comparision 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.
The comparisons are reflected in the table below.
Labour Costs Tax Benefits Decision
Supplier A US$1 10% Yes
Supplier B US$1.10 None No
Various Suppliers US$1.25 None No
This model is in line with global sourcing which is described as "unbundling the supply chain" which ultimately means that components may be manufactured in several countries and assembled into the final product in a different country. (Study Guide:38).
The use of the port of Singapore which is a CSI port is advantageous because it complies with the security requirements of the United States. The distributor in the United States Flotsam and Jetsam is C-TPAT accredited which means that any delays in the United States will be eliminated as accredited clients enjoy the benefits of the programme which is speed processing through custom and minimised stopping of import consignments.
Risks associated with current global sourcing model:
The importing of the raw materials and the semi-finished products into Malaysia from outsourced countries provide the biggest challenge. The greatest risk identified in the current global sourcing model is the importing of the key component from a country which may be considered as a security risk. This will result in delays as the United States risk profiles the consignment from the port of exit to the final destination. The possibility that the consignment can be risk profiled and examined at export from Singapore to and then subject to examination when it is imported into the United States is very likely. Being linked with a country which is considered a security risk can also have serious implications for Bright Sparks in terms of international trade.
When sourcing an important component which is basically an essential character of the finished product, it is advisable to source from more than one supplier. Various challenges can be experienced namely, delays in the supply chain as both the documentation and the physical consignment will be subject to intense scrunity by the Customs, Regulatory and Security Departments. Manufacturers must ensure that they provide for more than one supplier of the essential component as the production line can grind to a halt if this essential component cannot be sourced or obtained. Risks include the supplier going out of business, unilateraly increasing the cost of the component and wilfully withholding the product.
Malaysia is well known as an exporter of technological goods and the United States is one of their biggest trading partners. Raw materials and semi finished componets are regularly sourced globally. As stated by Hummels (Study Guide:38) the use of imported inputs as a share of gross outputs in countries like Malaysia has increased 300%. This highlights the importance of outsourcing for components in Malaysia.
Security Initiatives of the United States:
The United States of America has focused on homeland security after the terrorist events of 11 September 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 United States are secure and free from any risks which could harm the country.
The 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 United States. After the implementation of the various initiatives, trading partners had to align themselves with the US initiatives. This included ensuring that all participants of 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 to the country of destination, ensuring the security of the cargo while in transit via. the use of locks and tamper-proof seals and inspection of the cargo in entry into the United States.
The goods are shipped from Singapore which is a CSI - Container Security Initiative accredited port to the United States. The significance of Singapore being a CSI Port implies that there is a close working relationship with the United States focusing on the screening of containers prior to their departure to the United States. The US Customs representative at the port in Singapore oversees the screening process which is conducted by Singapore Customs officials. However, the trial in Singapore was terminated in August 2008 (Study Guide: 55). There is however still strict security requirements in the port of Singapore.
The 24 Hour Advanced Vessel Manifest Rule: This initiative requires the cargo carrier to submit detailed cargo information to the CBP. This information must be submitted 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 United States. The information is used to pre-screen containers according to risk criteria. If containers are stopped, there is added risk of delays, and if information submitted is not adequate or incorrect, the delays will 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 (or supply) and country of origin, amongst others. (Study Guide: 49-50).
The International Organization for Standardization 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 enterprise an international high-level management standard that enables organisations to utilise a globally consistent management approach to applying supply chain security initiatives.
The security initiatives has impacted on every facet of the supply chain which includes, amongst others shippers, companies, carriers, retailers, importers, distributors, manufacturers and their source of materials. The C-TPAT element of CSI is relevant to business as it aims to assist businesses to focus on their vulnerable areas and address them in the international supply chain. Importers in the United States 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 material. This means having 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 details of the end user and destination.
Flotsam and Jetsam, the distributor for the technological products in the United States is a member of the US C-TPAT programme. The Customs Trade Partnership against Terrorism is a voluntary compliance program 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. The strict requirements states that the importers shall have documented routines for the selection of business partners.
Great importance is 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 any way when it is dispatched. Both processes and premises must be regularly checked in respect of risks and they 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 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.
As it is the first import into the United States, the likelihood of the consignment being stopped as it represents a risk to US Customs as the country of source of the for physical examination and the ensuing delays is highly likely.
The security initiatives have the following effect:
There has been a fundamental change in the way businesses trade with one another.
There are additional potential cost increases for e.g. higher insurance costs, longer cash-to-cash cycles, lost revenue due to stock-outs or missed promotions, additional inventory, slowing down or shutting down production lines, to name a few.
There need to be adaptation of existing practices, procedures and systems to meet customs' advance export information needs. (www.sars.gov.za)
Ruth Banomyong in her article (Supply Chain Dynamics in Asia) comments that security has now become very much a part of the mainstream supply chain paradigm and can also become a trade facilitation driver. She further contends that the management of the supply chain leads to stricter requirements at all levels, and the benefits will be eliminated if certain links or stakeholders are not working at the required level.
The security issue is directly related to the performance measurement of any supply chain. This means that all security conditions must be met and guaranteed in order for goods to move unhindered within supply chains. Security has become one of the fundamental elements of high performance supply chain management as goods move between points of origin and destination.
However, she says that security comes at a cost as supply chain security leads to an increase in logistics costs and exerts a relatively negative pressure on economic growth, especially for the Asian countries involved. Even though the cost of security is universal, much of the burden has been shifted to Asian countries by the main importing countries in the West (such as the US), whose security programs have been targeted at Asian exporters, including Malaysia who is a regular exporter of technological products to the United States. This reinforces the belief that the exports of Bright Sparks will be targeted as one of the suppliers of the component is a security concern to the United States. Furthermore, Ruth Banomyong eludes in her article (Supply Chain Dynamics in Asia) that cost of delays and procedures linked to the trade of goods is estimated to be between 5% and 13% of the value of goods traded. Security issues, if not dealt with properly, can also become a major cause of delays. This has to be avoided at all costs by Bright Sparks as it will have a detrimental effect on the business. (Ruth Banomyong: Supply Chain Dynamics in Asia: 1-22)
Cost Effective Ways of Supplying:
The most cost effective ways will be to ensure supplying the product timeously and not incurring any penalities and abiding by all the legislative and regulatory requirements throughout the supply chain. Ensuring the product is produced, transported and cleared timeously and as per the terms and conditions of the contract. Managing the process throughout the supply chain and mitigating all risks by having an effective and efficient risk management programme.
"The failure to understand or comply with the rules, regulations and requirements of Customs and other regulatory authorities during the importing and exporting of goods process can lead to significant costs, including border delays, increased inventory and inability to meet contratual 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". (Study Guide: The influence of Customs on Supply Chain Management:36). In order to be apply to supply the market in a cost effective way, it is imperative that all customs and regulatory requirements are met in order to eliminate costly delays and attraction of financial penalties.
Choosing a supplier on the basis of lowest cost only can create a dangerous precidint. Various other factors including risk factors must be taken into consideration when choosing suppliers as there needs 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 Phillips and destroyed stocks. Their competitor Nokia was able to be resourceful and managed to obtain the necessary stocks. This clearly demonstrates the need to have more than one supplier and to ensure risks are managed within the supply chain. (Study Guide - Case Study - Supply Chain Disruption: 32).
The weak links and vulnerabilities within the supply chain must be identified and action taken to strenthen the link. The weak link is the supplier who is a security concern in the United States. Dealing with this supplier will have negative connotations for the reputation of the company. It is imperative that the reputation of the company is upheld as any dealings with suppliers who are deemed to be security concerns can have the effect of "guilty by association". This can have far reaching implications for the company. The reputational costs to a company can not be fully explained in financial terms. However, in order to be able to supply the United States in a cost effective way, the reputational risk must be eliminated. This would entail dealing with suppliers whose reputation is not compromised.
There are various other cost effective ways of supplying the US markets and these include making use of trade agreements, becomming members of authorized economic operator programmes and ISO accredited, and being compliant with all regulations and legislative requirements, having a sound plan to effectively manage the supply chain to minimise risks effectively .
Free Trade Agreements:
Making use of trade agreements and the benefits which are offered . This would entail Bright Sparks registering with the Customs authorities to use the free trade agreements certificates.
Free trade agrements partner countries provide each other favourable treatement on trade. Malaysia has signed and implemented two bilateral and four regional free trade agreements. The bilaterals were signed with Japan (MPCEPA). The ASEA partners and Malaysia are parties to the ASEAN Free Trade Area (AFTA), ASEAN Korea Free Trade Agreement (AKFTA) and the ASEAN-China Free Trade Agreement (ACFTA).
The elimination of import duties on negotiated products will enable manufacturing companies in Malaysia to take advanatage of any duty elimination or substantial reduction in duties as they will be able to source inputs at more competititve prices. This will improve their competitiveness.
The most important benefit for importers is that it provides access to cheaper imports from the Free Trade Agreement partner countries, which can be used as inputs into Malaysia exports thereby assisting manufacturers to reduce costs. It can increase the efficiency of industries in Malaysia through increased competition and economies of scale.
The country where the goods are manufactured can make use of the free trade agreements if the goods are considered originating as per the rules in the free trade agreement. For example, if the components and raw materials are sourced from a member country of the free trade agreement, it can be imported into Malaysia at a free rate of duty. This will reduce the imported cost, thus having the potential to lower the cost of the finished product. If goods are imported from a non-member country and 10% duties are applicable on a component valued at US$10. The duties on each component is US$1. By importing from a member country there is a saving of US$1 per component.
FTA Price - FCA Tax Incentives AEO Programme ISO
Country A no US$5 yes no no
Country B yes US$5.5 no yes yes
Country C yes US$6 no yes no
The table above illustrates the differences .
Country A is a security concern, which offers tax incentives but is not a member of a free trade agreement, member of authorized economic programme or ISO accreddited.
Countries B and C are do not offer the lowest price, but are members of accredited programmes and standards and are not regarded as security concerns. Therefore, it will be more cost effective to use supplier from Country B and C as the technological exports to the United States will not be subject to the same controls as from Country A.
Bright Sparks must apply to become a member of the Customs Golden Client AEO Scheme and become ISO accredited. Membership of a Customs authorised economic operator scheme and membership of the International Standards Organisation will provide Bright Sparks with the necessary creditentials.
The Authorised Economic Operator Scheme - AEO - Customs Golden Client - is a scheme which offers green light facilities for accredited clients. The benefits are several, but the main benefit is reduced business costs through simplifed and speedier customs processes.
The certification programme offers benefits which includes being an accredited an "trusted" client. This will enable Bright Sparks to continue operations during disruptive incidents. The added benefits are better relationship with the Regulatory and Customs authorities leading to a reduction in the number of controls and examination of cargo. 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. The assessment constitutes the basis of a decision whether the customs authorities shall proceed with checks of radioactivity or inspections with x-ray or gamma ray technology, Non-intrusive inspections. The delays associated with these types of control can be lengthy and costly in terms of the delays and affect the timeous delivery at the end of the supply chain.
Companies have erroneously only looked at low labour costs and made their decision 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 manufacturers 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/country-specific costs, and the cost of quality-validation, communications, performance impact, operations and quality costs, including in-plant inventory and handling, inventory maintained in the supply chain and satelite warehouse operations and overhead, Warehouse operations and overhead and Customer centric supply capabilities. Other costs, including such standard costs as risk and local tax incentives, and situation costs such as procurement of staff, broker fees, infrastructure technology and facilities, exhange rate differentials and tooling and mould costs. These elements must be considered holistically in order to make the best decision which will impact on the cost effective way of supplying the United States.
There is a need to focus on the total landed cost and not only on the low labour costs without taking all the other relevent costs into account. (Study Guide: Reading 7:39)
Choice of Partners in the Supply Chain:
A robust supply chain and supplier base management control system will provide fact-based insights vital to all key areas 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.
Country of Origin: It is imperative that the location and production details of all the suppliers are know in recognizing 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.
Shipment and delivery accuracy - ensuring that a supplier can deliver consistently and on time is key to assessing the risk they pose. Shipment dates, modes of transport, rerouting procedures when natural disasters occur must be in place.
Physical Security: It is extremely important to assess the physical security of the supplier's country as terrorism is a crucial factor. Enquiries should be made about areas such as the materials used to make the product, declaration to the effect, the physical perimeter and physical security of the production location.
Internal Processes: Information must be sourced about the suppliers' internal process in the production of the product. This will provide information about their security and controls in place during the manufacturing process. Suppliers should be able to ensure that the entire production process and the staff they employ do not constitute a security risk.
Social and environmental responsibilities: The supplier must be able to provide information that they abide by all the applicable United Nations Resolutions - for example that no child labour is employed in the production of the products.
This brief has provided the 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 United States of America and recommendations were made on the most cost-effective means of supplying the US market taking into consideration the various security initiatives of the US Government.