Opportunities or Adversity for Global Supply Chains in 2008?

When considering the global trade environment in 2008 there are a number potential issues looming that can disrupt global supply chains, sourcing strategies, and the flow of working capital. If not properly addressed, importers and exporters may face significant unexpected costs and increased disruptions to their supply chain. But the news for 2008 isn’t all bad. A number of opportunities exist as well.

1. Green Grows
Public health and environmental concerns will remain a major issue. Continued attention on global warming, lead-based paints and the contamination of goods will drive businesses toward environmentally friendly packaging, recyclable products, and the enforcement of trade regulations pertaining to the use of toxic electrical and electronic components. The concept of having a green supply chain will move from being a public relations strategy to a necessary means of deriving real economic value and improving compliance. As companies focus on supply chain and product lifecycle management initiatives in this environmental light, concepts that will be embraced include designing products derived from recycled materials; striving for ‘zero waste’ from a product at end-of-life; and employing sourcing and fulfillment strategies based on less fuel consumption and the environmental practices of supply chain partners.

2. Manufacturers Lag in Environmental Compliance.
Though a number of environmental regulations have been implemented globally over the past year, a majority of manufacturers are lagging in terms of demonstrating and maintaining compliance with new trade laws, such as the Restriction of Hazardous Substances (RoHS) regulations in effect in China, Japan, and the European Union. Non-compliance with these directives can result in stalled supply chains, lost revenue, fines, and damage to corporate reputation. While many companies claim to have met certification requirements, others may not be up to par and will need to make further adjustments to their manufacturing processes. Make sure that an internal team or outside trade specialist is actively managing compliance with these regulations as laws may evolve. Validate that your supply chain partners are shipping RoHS-compliant products and that you maintain an audit trail to track and capture data pertaining to compliance measures you have taken.

3. Sourcing Shifts from Asia to the Americas.
Coinciding with the 2008 Summer Olympics in Beijing, media attention will focus on China as the world’s next potential “bubble” and cause many manufacturers to shift sourcing strategies from Asia to the Americas. The falling US dollar, limited free trade agreements, high energy costs, and rising production costs in Asia will lead companies to reevaluate extended supply chains and move sources closer to their home markets. In addition, shareholders and board members could question the reliance on China and the Asian region should any further negative headlines arise regarding quality issues or if China receives bad press on handling protestors and dissidents prior to the Olympics. While opportunities still exist in Asia, Mexico will be increasingly popular as a source for manufactured goods as companies compete on time-to-market strategies, seek financial advantages found in Mexico’s multiple free trade agreements, its investment incentives, streamlined customs processes and abundant English-speaking workforce.

4. Import Safety Initiatives Increase for US Importers.
According to the US Interagency Working Group on Import Safety, US consumers purchase approximately $2 trillion worth of products annually that are imported by over 800,000 importers through 300 ports-of-entry. Due to increased product recall issues and the fact that imports are expected to rise, the Import Safety group in November 2007 published an action plan that provides specific short- and longterm recommendations to better protect consumers and enhance the safety of the increasing imports. In 2008, importers will face new requirements and fines.

The Import Safety plan is a set of 14 broad recommendations and 50 action steps, such as establishing third-party certification, raising consumer safety penalties and strengthening enforcement actions to ensure accountability. As the US government steps up enforcement of import safety, companies should be asking “What are we doing to make imports safe?”

5. Supply Chain Security Initiatives Get “Teeth”.
Five years after the introduction of the Customs-Trade Partnership Against Terrorism (C-TPAT),, smaller firms are finding C-TPAT participation is becoming critical to the viability of their business. As part of the vendor selection process, more large-scale importers are requiring vendors to become C-TPAT certified or have an equivalent security program in place. While US law states that C-TPAT certification is not mandatory, C-TPAT participants are assessing their own risk exposure and reassessing whether they should be conducting business with a vendor lacking effective, documented security measures. The obligation remains with the C-TPAT participant to ensure the vendor poses minimal risk to their supply chain. As a result, many smaller companies are creating their own security criteria above and beyond the C-TPAT requirement. In the European Union, manufacturers braced for the January 1, 2008 launch of the Authorized Economic Operator (AEO) global security program. Similar to C-TPAT, AEO extends customs authorizations to the financial and security areas of corporate global supply chains. While AEO participation is not mandatory, manufacturers with AEO Certification will benefit from expedited processes, preferential opportunities and peer group recognition.

6. Trade Compliance Further Scrutinized.
The US Government will continue to apply additional resources and emphasis on trade compliance and enforcement, ensuring the most sensitive US technologies are safeguarded. This will result in increased investigations to hold US manufacturers, exporters, importers and brokers accountable and in compliance with the letter and spirit of trade control regulations. These efforts will result in even more enforcement actions for entities that violate the law.

Fines will increase based on a bill signed by the President on October 16, 2007. For example, Commerce Department fines for administrative violations jumped dramatically from $50,000 to $250,000 per violation. Countries around the world also are focusing on the importance of trade compliance. The United Arab Emirates recently issued Federal Law No. 13 of 2007 on commodities that are subject to import and export control procedures. Non-compliance can lead to a minimum of one year’s imprisonment, fines of up to AED 500,000 ($136,000), or both. The implementation of the Law is expected to bring import and export controls to the forefront in a country that has often been the concern of the US and the EU as a destination for re-export of controlled commodities.

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Bernie Hart is Global Product Executive, Logistics for JPMorgan Global Trade Services (www.jpmorganchase.com/trade).