global trade compliance priorities in 2008

Global Trade Compliance Priorities in 2008 How Best-in-Class Companies Avoid Risks and Reduce Costs

March 2008

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Global Trade Compliance Priorities in 2008

© 2008 Aberdeen Group. Telephone: 617 723 7890

Executive Summary

The Growing Role of Global Trade Compliance (GTC) Research Benchmark

Aberdeen’s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations

Global Trade Compliance (GTC) has come into the spotlight in recent years due to a variety of new security mandates, in addition to the multiple non-security regulations already governing international trade. Aberdeen Group's survey of 340 global exporters and importers in February and March 2008 reveals that trade compliance departments have begun to behave more strategically - their increased responsibility driven both by growing company operations and the lack of understanding of GTC risks among internal stakeholders. Study results show that:

• 94% of Best-in-Class companies are currently in the process of improving their trade compliance capabilities

• 99% of Best-in-Class companies are continuously monitoring key trade compliance trends and new regulations under discussion

Best-in-Class Performance The following metrics were used to determine Best-in-Class companies in this study: 1) Percentage of international orders executed with GTC errors; 2) Percentage of customs / license applications initially rejected due to errors; 3) Percentage of import shipments held at customs; 4) Percentage of export shipments held at customs; 5) Percentage of international shipments with incorrect duty paid; 6) Relative change over the past year in: the total annual trade compliance costs per international shipment, the productivity of the trade compliance staff, and the overall effectiveness of the trade compliance function. The top 20% of performers (classified as Best-in-Class) exhibit significantly better performance across all of these metrics. In addition to metrics used in the definition, Best-in-Class have:

• A one percentage point advantage over Laggards in annual trade compliance costs as a percent of total global trade costs “Our approach to decreasing

our trade compliance costs is to optimize the entire supply chain network’s strategy. We are looking to educate all of the buyers (sourcing specialists) on all the cost factors, like Free Trade Agreements, for example. Our 3PL is helping by providing a landed cost calculation tool. We conservatively believe we could save $3 million dollars with this project."

~ International Director of Logistics at a Fortune 500

Consumer Goods Company

• A 4.3 percentage point advantage over Laggards in percent of trade compliance expense in government fines for non-compliance

Competitive Maturity Assessment Best-in-Class companies in this study (compared to Laggards, among many other strategies) are:

• ~50% more likely to have the ability to access information on the latest trade regulations updates (e.g. restricted / denied parties)

• 80% more likely to centralize GTC at the enterprise level and 57% more likely to involve executive management in GTC initiatives

• Almost 80% more likely to have automated communication / document exchange with forwarders / 3PLs

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• Three times as likely to use automated analytics tools for export / import transactions (reports, statistics, scenario analysis, etc.)

Required Actions Chapter Three provides specific recommendations for trade compliance professionals and executive management at Laggard, Industry Average, and Best-in-Class companies. The recommendations center on:

• Creating the right organizational structure for effective GTC and defining involved stakeholders and leaders for the GTC improvement initiatives

• Improving core processes in GTC

• Developing visibility infrastructure and transaction / document processing automation for faster and less error-prone GTC management

• Using GTC knowledge / analytics in company-wide sourcing, purchasing, and supply chain network design decisions with a goal of achieving significant financial benefits and improving corporate performance




© 2008 Aberdeen Group. Telephone: 617 723 7890 www.aberdeen.com Fax: 617 723 7897

Table of Contents Executive Summary....................................................................................................... 2

The Growing Role of Global Trade Compliance (GTC)................................ 2 Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 3

Chapter One: Benchmarking the Best-in-Class ..................................................... 5 Growing Global Operations Driving Increased Focus on Global Trade Compliance (GTC) .................................................................................................. 5 GTC Improvement Priorities for 2008............................................................... 5 The Maturity Class Framework............................................................................ 7 The Best-in-Class PACE Model ............................................................................ 7 Elevating the Profile of the GTC Function......................................................... 8

Chapter Two: Benchmarking Requirements for Success ..................................11 Competitive Assessment......................................................................................11 Process/ Knowledge Management .....................................................................12 Organization............................................................................................................12 Process Automation/ Information Technology...............................................13 Improved GTC Reduces Supply Chain Risks ..................................................15 Is It Time to “Redesign” Your Global Supply Chain? ....................................15

Chapter Three: Required Actions .........................................................................17 Laggards Steps to Success ....................................................................................17 Industry Average Steps to Success ....................................................................18 Best-in-Class Steps to Success ............................................................................19

Appendix A: Research Methodology.....................................................................20 Appendix B: Related Aberdeen Research............................................................22 Figures Figure 1: Top Two Strategic Actions to Improve GTC....................................... 6 Figure 2: Departments Leading Trade Compliance Initiatives............................ 9 Figure 3: Current Automation of Export / Import Processes..........................14 Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 7 Table 2: The Best-in-Class PACE Framework ....................................................... 8 Table 3: The Competitive Framework...................................................................11 Table 4: Currently Used Trade Compliance Technology .................................14 Table 5: The PACE Framework Key ......................................................................20 Table 6: The Competitive Framework Key ..........................................................21 Table 7: The Relationship Between PACE and the Competitive Framework.........................................................................................................................................21



Chapter One: Benchmarking the Best-in-Class

Growing Global Operations Driving Increased Focus on Global Trade Compliance (GTC)

Fast Facts

√ 71% of respondents indicate that internal stakeholders outside of the compliance department do not understand the risks of non-compliance

√ Product classification is among the top three improvement areas for GTC in 2008

√ 59% of companies eligible for duty drawback do not usually recover it in full

Economic globalization and the growth of global trade volumes continue to drive increased focus on GTC among exporters and importers. The top two pressures forcing companies to focus on GTC include:

• Growing global operations (including sales, purchases, and distribution networks) - 52% cited among the top two

• Growing complexity of security regulations for international trade - 37% cited among the top two

Most companies face numerous internal challenges to improved GTC: a disturbing 71% of all companies surveyed complain that internal stakeholders outside of the compliance department do not understand the impact of their actions on trade compliance and the risks associated with non-compliance. Manual transaction processing (53%) and the lack of qualified staff (33%) complete the list of the top three internal challenges to improved trade compliance.

GTC Improvement Priorities for 2008 About three-fourth (74%) of research respondents are currently in the process of improving GTC capabilities, with an additional 21% planning to begin improvements in 2008. Companies are planning to focus on the following areas in their GTC initiatives this year:

• Compliance with government security regulations (e.g., restricted party screening, license management etc.) - 59%

• Compliance with global (multi-country) export and import regulations - 54%

• Product classification - 50%

Product misclassification issues can impact many facets of global supply chains, from restricting the movement of certain products to potential over-payment of duties, leading to higher global trade costs. Companies should be especially attentive to classification if the product they trade in is:

• Defense-related or of dual-use (i.e. may be used for both military and civilian purposes), a potentially sensitive technology

• Chemical/ pharmaceutical product

• Food, nutrition supplement

• Other substance / item to which additional health, safety, or environmental regulations may apply




Figure 1: Top Two Strategic Actions to Improve GTC

34%

38%

46%

0% 25% 50%

Improve productivity of the trade compliancedepartment by implementing new technology

Launch a company-wide initiativeto improve trade compliance

Improve productivity of the trade compliancedepartment by streamlining processes

% of all respondents Source: Aberdeen Group, March 2008

About one-fifth of companies are planning to redesign their international supply chain to save on duties, taxes, and other trade compliance costs, while13% intend to hire more staff as one of the top two strategies for improvement this year.

Renault: Turning Trade Compliance into Competitive Advantage

A great example of a supply chain design project based on trade compliance considerations is the case of Logan, a low-cost car created by Renault in 2006 (described by Aberdeen in the September 2006 case study Renault: Turning Trade Compliance into Competitive Advantage). To capture automotive market share in emerging markets, Renault created a corporate mandate for a low-cost car. The company knew that duties, taxes, and tariffs would need to be carefully managed to meet its target list price for Logan of 5,000 Euros. However, Renault’s established process of managing trade compliance from a separate import and a separate export database for each country created many obstacles in this process. The corporate Customs and Trade Engineering Team, supported by the local trade compliance staff, was made a center pin of the Logan initiative and worked with the company’s executives to help set regional manufacturing and logistics strategies that would drive the lowest total landed cost and would create new, more automated and streamlined processes with customs agencies. Renault implemented an on-demand GTC technology platform to enable process automation and access to the necessary trade content. As a result of this initiative, Renault was able to:

• Design a lower-cost car by taking full advantage of trade agreements in product design and sourcing

• Determine the correct lowest-cost product classification across the company and broker partners

• Lower compliance and documentation costs by automatically reapplying electronic data to different parts of the import/export process

• Reduce the risk of customs-related delays and fines and enhance its ability to identify cost overruns and new cost-reduction opportunities


http://www.aberdeen.com/summary/report/case_study/CS_Renault_3448.asp




The Maturity Class Framework Eight performance metrics were used to distinguish the Best-in-Class companies from Industry Average and Laggard organizations in this study.

Table 1: Top Performers Earn Best-in-Class Status

Average Performance

Definition of Maturity Class

Best-in-Class: Top 20% of aggregate performance scorers

Industry Average: Middle 49% of aggregate

performance scorers

Laggard: Bottom 31%

of aggregate performance scorers

Percentage of international orders executed with trade compliance errors

4.6% 9.2% 25.7%

Percentage of customs / license applications initially rejected due to errors

0.6% 2.4% 6.5%

Percentage of import shipments held at customs 2.2% 3.4% 9.4%

Percentage of export shipments held at customs 0.7% 1.7% 6.7%

Percentage of international shipments with incorrect duty paid

2.2% 2.6% 11%

Over the past year: Total annual trade compliance costs per international shipment

Increased – 34%, decreased - 21%, remained the same - 30%, don't know - 15%

Increased - 45%, decreased - 5%, remained the same - 27%, don't know - 23%


Over the past year: Productivity of the trade compliance staff




Over the past year: Overall effectiveness of the trade compliance function




Source: Aberdeen Group, March 2008

The Best-in-Class PACE Model Best-in-Class companies jointly reported the following pressures, actions, capabilities, and the use of technology enablers (Table 2).



Table 2: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers Growing global operations - 54%

Improve productivity of the trade compliance department by streamlining processes - 52% Launch a company-wide initiative to improve trade compliance - 35%

Ability to access information on the latest trade regulations updates - 70% Trade compliance management centralized at the enterprise level - 68% Mostly manual trade compliance practices - 61% Measure GTC performance once a month or more frequently - 55% Online visibility into the trade document status - 38%

Analytics tools for export / import transactions (reports, statistics, scenario analysis, etc.) - 26% In-house developed software: for import - 26% , for export - 31% Trade compliance software from an ERP company: for import - 22% , for export - 20% On-premise software from a third-party GTM solution provider: for import - 14%, for export - 21% On-demand software from a third-party GTM solution provider: for import - 22%, for export - 13%


Quantifying the Best-in-Class Advantage In addition to the metrics listed in Table 1 (that are included in the definition of maturity classes), Best-in-Class companies demonstrate better performance across several categories:

• Annual trade compliance costs (including labor, software, fines, broker fees, etc.) as a percentage of total global trade costs (including compliance, logistics / forwarding, transportation, warehousing, and related, excluding actual cost of goods). The Best-in-Class have a 0.5 percentage point advantage over Industry Average and a 1 percentage point advantage over Laggards (12.8% versus 13.3% for Industry Average and 13.9% for Laggards)

• Percentage of trade compliance expense in government fines for non-compliance. The Best-in-Class have a ~1.8 percentage point advantage over Industry Average and 4.3 percentage point advantage over Laggards (0.6% reported by Best-in-Class versus 2.4% by Industry Average and 4.9% by Laggards)

Elevating the Profile of the GTC Function This study shows that trade compliance departments are beginning to behave more strategically - their increased responsibility driven by growing company operations and the lack of understanding from other departments. When asked to identify the main source of responsibility for the trade compliance improvement initiative, 36% of respondents indicated that it was led by the trade compliance department, 23% - by the supply chain organization, and 17% - by cross-functional teams of two or more departments. Interestingly, although Best-in-Class have more departments commonly involved in managing trade compliance, the results show that it is



more important that one department carry responsibility for the strategic trade compliance initiatives.

Figure 2: Departments Leading Trade Compliance Initiatives

21%

15%

12%

31%

35%

46%

17%

28%

22%

0% 25% 50% 75% 100%

Laggards

Industry Average

Best in Class

% of respondents in each maturity group

Trade compliance departmentSupply chain organizationCross-functional team(2 or more departments)


Flowserve Rolls Out Integrated GTC Initiative Globally

Flowserve is a large North American-based manufacturer of pumps, valves, and seals to the oil and gas, power, and chemical industries. The firm has manufacturing, sales or service centers in more than 55 countries and sells to customers in over 70 countries.

Scott Sullivan, Vice President of Global Trade Compliance at Flowserve, describes how the company made a push to improve its GTC. “Following a change in global export regulations applicable to our industry in 2005, our company (and our industry peers) was faced with more stringent industry-specific compliance requirements, in addition to already tightened global security regulations. To ensure we kept up with the changes, Flowserve rolled out a global improvement initiative for import and export compliance. The initiative has included process analysis and streamlining, revising policies and procedures, additional internal training, and implementing new technology.”


As a result of its improvement efforts, Flowserve has been able to noticeably improve its compliance processes. Due to improved classification and prohibited party screening, the potential problems with restricted parties and products are now more easily avoided. “We can get to the heart of the issue before having gone too far down the path,” said Sullivan.

He continued, “Securing management’s buy-in, as well as the later buy-in of logistics and other departments, was critical. Although we have a team-oriented workflow, having our CEO list GTC as a critical priority has definitely helped. Our management sees trade compliance as a strategic opportunity, not just a back-end cost.”

“We dedicate a lot of resources to training. Our training efforts include regular webinars, annual or bi-annual conferences for our regional export compliance coordinators and sales staff, and in person training during inter-company site visits.”

~ Scott Sullivan, Vice President of Global Trade

Compliance, Flowserve

The Best-in-Class GTC departments are also more effective in attracting the attention of their executives to the transformation initiatives in GTC. Best-in-Class companies are 50% more likely than all others to involve their executive management in GTC improvement initiatives at certain stages in



the process. It helps them elevate the profile of the trade compliance function across the enterprise, attracting attention to the risks of non-compliance and potential savings opportunities from improving GTC processes, and gain executive support of compliance mandates that need to be extended to other departments. It is impressive that:

• 94% of the Best-in-Class companies report that they are currently in the process of improving their trade compliance capabilities (compared to 71% of Industry Average and 66% of Laggards) and

• 99% of the Best-in-Class are continuously monitoring key trade compliance trends and new regulations currently under discussion (compared to 83% of Industry Average and 73% of Laggards)

Aberdeen Insights — Strategy

The mandates of GTC have become more pressing and complex over the past decade. However, trade compliance departments at many companies have been unable to establish company-wide processes and enforcement mechanisms to ensure that all internal stakeholders are aware of how their actions impact GTC and why they should do their best to comply. Best-in-Class companies in this study have shown the importance of bringing the GTC function into the spotlight and evaluating potential cost savings from process improvement and better-designed global supply chains.

Launching a formal company-wide initiative – backed by the executive management – is a good first step in improving GTC that can help grow awareness of GTC issues across the enterprise. A company should establish an owner of this process – usually the trade compliance or the supply chain organizations are best suited to take the lead. Establishing infrastructure for regular internal training is another success factor, ensuring that the initiative doesn’t lose momentum and translates into normal routine for cross-departmental processes.



Chapter Two: Benchmarking Requirements for Success

Competitive Assessment Best-in-Class, Industry Average, and Laggard companies were identified based on their performance in the selected metrics described in Chapter One. The three groups were then examined to identify their differences across process, organization, knowledge management, technology, and performance management. Table 3 provides a summary of this analysis.

Table 3: The Competitive Framework

Fast Facts

√ 68% of the Best-in-Class centralize GTC at the enterprise level

√ 59% of companies eligible for duty drawback do not usually recover it in full

Best-in-Class Industry Average Laggards

Continuously monitoring trade compliance trends and new regulations currently under discussion 99% 83% 73%

Automated communication / document exchange with brokers (import only): Import - 61% Export - 47%

Import - 48% Export - 40%

Import - 45% Export - 33%

Automated communication / document exchange with forwarders / 3PLs (export and / or import) 46% 37% 26%

Automated restricted party screening: Export - 58% Import - 32%

Export - 44%


Import - 29% Export - 41% Import - 19%

Automated export license determination and management 37% 27% 16%

Automated export customs management

Process

35% 31% 9% Executive management involved in trade compliance initiatives

69% 48% 44% Trade compliance management centralized at the enterprise level

Organization

68% 47% 37% Ability to access information on the latest trade regulations updates (e.g. restricted parties etc.)

70% 52% 47% Online visibility into the trade document status

38% 23% 17% Automated access to trade-related content (export and/or import-related)

Knowledge

58% 49% 41% Frequency of performance measurement in GTC:

Performance Measurement

At least monthly - 55% Two to four times per year - 31%; Annually - 9% Never - 4% Don't know - 0%

At least monthly - 31% Two to four times per year - 28% Annually - 16% Never - 16% Don't know - 8%

At least monthly - 15% Two to four times per year - 17% Annually - 16% Never - 28% Don't know - 25%

Analytics tools for export / import transactions (reports, statistics, scenario analysis etc.) Technology 26% 22% 8%




Process/ Knowledge Management Fast Facts

√ Best-in-Class companies are over 35% more likely than Industry Average and 49% more likely than Laggards to have the ability to access the needed trade-related information in a timely manner.

√ Best-in-Class companies are somewhat more likely to use automated tools to access trade content: 58% of them report current use, versus 49% among Industry Average and 41% among Laggards

√ In a September 2007 study, A View from Above: Global Supply Chain Visibility in a World Gone Flat, 56% of respondents reported monitoring customs clearance events manually (via phone, fax, or email) and 25% reported monitoring these events with the help of a visibility tool. This presented one of the top four highest gaps between manual and automated monitoring of supply chain events reported in the study.

Accessing Trade-Related Information Having timely access to the latest updates on security regulations, tariffs, restricted party lists and other trade-related information is critical for fast and efficient trade compliance management. About half of all respondents have adopted or developed automated software tools to obtain such content. Companies that have automated / online access to trade related information (for either export or import regulations), are twice as likely to report that they currently have the ability to access information on the latest trade regulations (e.g. restricted parties) - 74% versus 34% among those without automated / online access. Having timely access to such data is one of the cornerstones of effective GTC management.

The Lack of Process Visibility Mires GTC Management Although Best-in-Class companies are almost twice as likely as all others to have online visibility into the status of trade documents (filing / entry submission status when dealing with a broker or customs directly, shipment document creation / inclusion with shipment, C-TPAT and other application forms, etc.), the overall level of visibility is still low: less than one-third of all survey respondents report having online visibility into the status of global supply chain events (e.g. inventory or customs clearance events) or trade document creation / submission status. The complexity of international processes and diverse sets of rules in different geographies complicate this process, which is further slowed by the heavily manual processing of most transactions and internal communications. The lack of process visibility is one of the key barriers to more effective management of GTC, which exacerbates the challenges faced daily by the trade compliance staff (no single view of supply chain events, regulations, and difficulty in document / event matching and reporting).

Organization Best-in-Class companies are instituting a more strategic approach to GTC, involving executive management in company-wide initiatives and proactively communicating the value of strengthening GTC capabilities. One of the reasons it is easier for them to excel is because most Best-in-Class companies have centralized their GTC processes and reporting at an enterprise level. This allows them to accumulate global knowledge and best practices to manage the processes more effectively. Best-in-Class companies are ~60% more likely than all other lower-performing peers to have centralized GTC at the enterprise level.


http://www.aberdeen.com/summary/report/benchmark/4303-RA-global-supply-visibility.asp






Case Study: Sony Ericsson Forms a Global Trade Compliance Committee

Sony Ericsson, founded in 2001, is a global manufacturer of mobile multimedia phones with customers worldwide. When the company was formed, trade compliance was managed regionally but there was no clear central direction. As the company experienced growth world-wide, Sony Ericsson realized that it needed to scrutinize trade compliance-related processes more effectively and uniformly in order to avoid potential compliance-related errors, mitigate global supply chain risks, and avoid unnecessary expense of duplicated efforts.

Thomas McKelvey, Manager of Trade Compliance at Sony Ericsson, explains the organizational structure of the trade compliance function at his company. “Instead of having a traditional trade compliance department, we have a Global Trade Compliance (GTC) committee of selected individuals – these are the representatives of GTC across the organization. The committee holds regular bi-weekly meetings and a week-long in-person meeting about once per month. In addition to this group, we have Trade Compliance Administrators (TCAs) – assigned to manage trade compliance at the regional level. The GTC committee and TCAs jointly develop regional group guidelines for the regional managers to follow: operationally, most of the day-to-day management is the responsibility of regional TCAs, while the global strategy is developed and coordinated by the GTC committee. This ensures the most effective management within regions, as we can accurately account for the region / country-specific regulations and programs.”

Process Automation/ Information Technology “We look at automation as a tool to help good people, not replace them. One supports the other. Effective trade compliance has to be a combination of the two.”

~ Scott Sullivan, Vice President of Global Trade Compliance,

Flowserve

GTC lags behind other GTM functions in the use of information technology: 64% of all companies in this study report having mostly manual trade compliance practices, with disparate automation efforts for certain processes reported by many respondents. Certain processes, such as trade document generation and access to information on trade regulations, have been among the early beneficiaries of automation (these efforts are often disjointed and most companies are far from having the IT infrastructure to adequately support this area, despite relatively high levels of automation reported for certain specific processes, shown in Figure 3).

The Impact of Process Automation on Metrics Companies with automated communications / document exchange with their 3PLs and forwarders are (compared to those with no automation):

• 1.5-times more likely to report zero percent of export shipments held (stalled) at customs longer than usual (37% versus 24% respectively) and 20% more likely to have less than 2% of export shipments stalled (67% versus 56%, respectively)




• 35% more likely to have less than 2% of import shipments held at customs (65% versus 48%, respectively).

Companies with automated processes for restricted party screening (compared to those with no automation) are 30% more likely to report zero government fines for non-compliance (52% versus 40% respectively).

Figure 3: Current Automation of Export / Import Processes

44%

68%

53%

41%

26%

25%

35%

46%

39%

14%

35%

36%

27%

50%

0% 25% 50% 75%

License determination and management

Customs management

Communication/document exchangewith forwarders/3PLs

Restricted party screening

Communication/documentexchange with brokers

Access to trade-related content(denied party lists, classifications, tariffs etc.)

Document generation

% of exporters or importers

% of importers (reporting automation of this process on the IMPORT side)

% of exporters (reportingautomation of this processon the EXPORT side)

44%

68%

53%

41%

26%

25%

35%

46%

39%

14%

35%

36%

27%

50%

0% 25% 50% 75%

License determination and management

Customs management

Communication/document exchangewith forwarders/3PLs

Restricted party screening

Communication/documentexchange with brokers

Access to trade-related content(denied party lists, classifications, tariffs etc.)

Document generation

% of exporters or importers

% of importers (reporting automation of this process on the IMPORT side)

% of exporters (reportingautomation of this processon the EXPORT side)

Fast Facts

Best-in-Class companies are noticeably more likely to report automation of:

√ Communication / document exchange with brokers (import only) and with forwarders/3PLs (export and / or import)

√ Restricted party screening

√ Export license determination and management

√ Export customs management

√ Access to trade-related information Source: Aberdeen Group, March 2008

Information Technology Types Table 4 shows the adoption levels for different types of GTC technologies.

Table 4: Currently Used Trade Compliance Technology

Import Export Type of Information Technology Used

29% 29% In-house developed software

15% 20% Trade compliance module or suite from an ERP company

12% 19% On-premises software from a third-party GTM solution provider

11% 10% On-demand software from a third-party GTM solution provider

12% 6% On-demand software from a 3PL provider

10% 6% Managed service: outsourced trade compliance function

On-premises software from a 3PL provider 8% 7%


Due to the early-stage adoption of GTC technology solutions compared to other supply chain applications, there is almost no definite lead in performance among companies using different solution types. The comparison of three maturity categories shows only a slight advantage of




companies using trade compliance-related functionalities / modules of their ERP systems and specialized (best-of-breed) on-demand GTC offerings for import management (on-demand deployment option is often available from the same solution provider along with on-premises or “license and install” models, although it may also be available as a pure on-demand solution):

• Current use of on-demand software from a third-party GTM solution provider (import only): Best-in-Class – 22%, Industry Average and Laggards – 8% on average

• Current use of trade compliance modules or suites from ERP companies (import and / or export): Best-in-Class – 21%, Industry Average and Laggards – 16% on average

Most companies that do use GTC automation use a combination of different solutions (including custom developed) to best match their unique global processes.

Improved GTC Reduces Supply Chain Risks Fast Facts

Benefits of improving the overall effectiveness of the GTC function:

√ Reduced supply chain risk - 69%

√ Easier to audit processes (audit readiness) - 47%

√ Improved relationships with the customs and other government regulatory bodies - 47%

√ Less costly trade compliance - 31%

√ New profit / savings opportunities - 30%

Half of all survey participants indicated that the overall effectiveness of their GTC function had increased over the past year. The number one benefit of this improvement has been a reduction in global supply chain risk, reported by 69% of those with improved GTC efficiency.

Enhanced process visibility, better access to trade regulations data, centralized GTC organization, executive management support, and streamlining of processes and introduction of certain technologies have all contributed to improvements in GTC performance. Best-in-Class companies in this study are twice as likely as Industry Average and 4,7 times as likely as Laggards to have decreased the number of supply chain disruptions due to trade compliance errors over the past year. This is a significant achievement that makes their supply chains more secure and improves the business reputation of these companies.

Is It Time to “Redesign” Your Global Supply Chain? Redesigning a company’s supply chain may not necessarily involve complex multi-stage network design and optimization projects. Using GTC knowledge (about applicable preferential trade agreements and Free Trade Zones, as well as local trade regulations), a company can realize initial duty savings from re-distributing the sourcing mix among current suppliers or replacing some existing suppliers with new sourcing opportunities. Aberdeen Group's November 2006 study on financial strategies of companies involved in low-cost country sourcing, New Strategies for Financial Supply Chain Optimization, found that companies were expanding their low-cost country sourcing strategies beyond China; India and Vietnam were reported as the top two new sourcing locations being considered.

Twenty-nine percent (29%) of firms in this study report having changed their global sourcing mix or redesigned their supply chains based on trade compliance considerations: Best-in-Class and Industry Average companies are


http://www.aberdeen.com/summary/report/benchmark/RA_BM_FinSCOptimization_VS_BE_3606.asp

http://www.aberdeen.com/summary/report/benchmark/RA_BM_FinSCOptimization_VS_BE_3606.asp



more likely to have done this with positive financial impact. This process is consistent with the broader trend in global supply chain management - in Aberdeen’s January 2008 study, The Supply Chain Executive's Strategic Agenda, 65% of over 800 research participants reported that they were currently in the process of transforming their global supply chains.

Fast Facts

Reasons for a reduction in import duties paid:

√ Began using preferential trade agreements (bi-lateral, regional, multi-lateral or WTO) more effectively - 36%

√ Trade regulations changed - 36%

√ Changed the sourcing mix by adding new suppliers and adjusting the mix with existing suppliers - 34%

√ Began using FTZs more effectively - 22%

√ Began managing duty drawback more effectively - 20%

Making the Most of FTZs and Duty Recovery Programs Sixteen percent (16%) of the current study participants report that their import duties have decreased over the past year and 19% report an increase in the amount of duties paid. The top reasons for increase in import duties are: unsuccessful shift in the sourcing mix by attracting new suppliers (43% of those with increased duties), change in trade regulations (33%), and unsuccessful change in the sourcing mix among existing suppliers (18%). The key reason for reduced import duties is the more effective use of preferential trade agreements (bi-lateral, regional, multi-lateral or WTO) (reported by 36% of those with reduced duties).

Among companies filing for duty drawback (44% of study participants), Best-in-Class are almost 50% more likely than all others to be able to recover 81% to 100% of the duties they are entitled to (56% versus 38%). Companies that have automated the management of duty drawback in the US, Inward Processing Relief (IPR) / Outward Processing Relief (OPR) in Europe or other duty relief / recovery programs (15% of study participants) are about 50% more likely to recover 81% to 100% of eligible duties (59% versus 37%).

Aberdeen Insights — Technology

Aberdeen Group's global trade management (GTM) research over the past two years has shown that GTM still lags behind other supply chain management areas in building a robust technology infrastructure, and GTC is an even more manually managed function compared to other GTM processes, such as logistics, transportation, or inventory management. Some efforts have been made in automating select import and export management processes, but the majority (64%) of companies still report that, overall, GTC management at their companies is mostly manual. With more companies planning to improve and streamline GTC processes, the role of automation will grow. This study shows that the impact of select process automation on trade compliance metrics is positive, and early GTC reformers have already begun to use a variety of tools.

As importers and exporters worldwide begin treating trade compliance knowledge as a strategic asset, they will need IT tools to enable in-depth analysis of how existing trade data can drive more informed decisions and targeted improvement strategies. Already, Best-in-Class are leading in the use of GTC reporting and analytics tools. These industry leaders will be able to gain a market advantage by capitalizing on a number of cost savings and profit growth opportunities from improving global trade compliance.


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Chapter Three: Required Actions

Aberdeen Group recommends the following actions for companies focused on improving GTC this year.

Laggards Steps to Success If your company does not have a trade compliance department, the quality of GTC may be at risk. Effective GTC requires specialized knowledge and skills, which may not exist in the accounting, legal or supply chain departments currently in charge of trade transactions. Consider hiring at least one full time GTC professional who would assume responsibility for trade-specific compliance requirements and programs.

Trade compliance professionals should consider the following: • If your company is not yet focused on improving GTC, build a

strong case to attract executive attention to this area immediately. Focus on the risks of non-compliance (highlight examples recently publicized by the media and point out the reputation and financial risks of such errors) and areas of vulnerability in your current trade processes. As discussed in Chapter 1 of this report, executive support will be critical to the success of your initiative if you face resistance from other internal stakeholders.

Fast Facts

√ Companies with automated supplier evaluation / surveying process under C-TPAT (23% of participating importers) are twice as likely to be already validated under C-TPAT

• Evaluate requirements of government voluntary certification programs aimed at Best-in-Class exporters and importers, including Importer's Self-Assessment (ISA), Customs-Trade Partnership against Terrorism (C-TPAT), European Union's Authorized Economic Operator (AEO), etc. Comparing your current processes and IT systems to these benchmarks will give you a good idea of the most pressing gaps in your company's GTC infrastructure. Develop an actionable improvement plan, prioritizing supply chain and anti-terrorist security, followed by improving processes and visibility.

• Focus on increasing visibility into GTC-related processes (see Process/ Knowledge Management and Process Automation/ Information Technology sections in Chapter 2). Find out what technology is used by your company's supply chain / logistics and finance groups to see if you could benefit from accessing the information in their system. If there is some automation of global supply chain event monitoring, collaboration, or other relevant processes, work with that group to get access to data and add certain compliance-related milestones to the system to begin tracking them (e.g. customs cleared, denied party check performed)

• Examine potential savings opportunities from using preferential trade agreements and free trade zones. Is your company aware of all opportunities currently available with its trading partners / sourcing regions?




Executive management:

• For a company with global operations, ensuring effective trade compliance is critical to success. Ask your trade compliance team to prepare a report identifying the biggest current weaknesses and visibility gaps in GTC and pledge support in helping them drive company-wide participation in improvement initiatives.

Industry Average Steps to Success Fast Facts

√ Although used by a small percentage of enterprises overall, the Best-in-Class are almost twice as likely as Laggards to use automated GTC training tools (24% among Best-in-Class versus 13% among Industry Average and 9% among Laggards).

√ Although automation of FTZ / bonded warehouse management for import is used only by16% of importers in this study, those with automation are 60% more likely to report that their import duties have decreased over the past year (23% versus 14% among those not using automation). Automated access to updates on relevant trade regulations is another capability to enhance.

Trade compliance professionals:

• Focus on improving the accuracy of product / parts classification globally. Communicate with suppliers and customers to utilize their knowledge of local regulations. Improved classification process not only reduces potential supply chain disruptions and non-compliant shipments but may lead to significant savings on duties.

• Conduct regular training for the GTC staff and other departments. Consider using online tutorials, webinars and interactive tools.

• Continue enhancing the visibility into GTC-related documents and events by streamlining the process workflow and developing technology infrastructure. Having process visibility is essential for ensuring control. If your company is an active user of FTZs and preferential trade agreements, consider automating this process.

• Measure GTC performance at least monthly. Best in Class companies are almost 80% more likely than Industry Average to do so (see The Competitive Framework in Chapter 2).

• Work with your counterparts in supply chain, purchasing, and sourcing departments to incorporate GTC milestones, controls, and cost tables into the sourcing and sales and operations planning process. Your goal should be the creation of an integrated process, in which, for example, purchasing cannot place an order without having performed a restricted party check and satisfied other applicable GTC controls. The next step should include building out a landed costing capability to compare total landed costs of various sourcing and sales scenarios after applying all relevant FTZ / preferential trade agreement rules. Embedding GTC into the GTM process in this way will ensure more effective GTM decisions, considerable savings, and less risky global supply chains (read more on the use of global supply chain analytics, including total landed cost tools, in Aberdeen’s September 2007 report, A View from Above: Global Supply Chain Visibility in a World Gone Flat).


• View GTC as a strategic area of focus to increase profit, enable the development of new products, and improve business reputation. Continue supporting your GTM team in their improvement initiatives and send a clear message to other internal stakeholders that the GTC initiative is mandated company-wide.






Best-in-Class Steps to Success Trade compliance professionals:

• Continue analyzing global trade data to determine how sourcing strategies or product design plans can be improved to minimize duties (e.g. by applying preferential trade agreements, engineering or sourcing parts for which lower import duties apply, or increasing the use of FTZs / bonded warehouses, Maquiladoras (factories that import materials duty-free and then re-export the assembled/ manufactured product) etc.).

• Additional savings can arise from the use of trade data to help finance and procurement counterparts identify which suppliers to approach for early payment discounts (see the June 2007 Research Brief 5 Ways to Increase the Business Value of Trade Compliance).

Fast Facts

In addition to the benefits reported throughout this report, companies with automated supplier evaluation / surveying process under C-TPAT (23% of participating importers) are twice as likely to be already validated under C-TPAT

• Increase GTC automation to further improve staff productivity, product classification accuracy, the use of preferential trade agreements, and duty recovery process. A more automated and visible trade compliance process can also improve supply chain velocity and increase inventory turns. Aberdeen Group's May 2007 study on Global Trade Management Strategies for 2007 found that companies with import or export compliance automation were 40% more likely to have increased customs clearance speed over the past two years compared to their peers.


• Communicate regularly with your GTC team to monitor progress in strategic improvement initiatives and ensure that GTC considerations are being increasingly embedded in the corporate supply chain planning, network design, sales and operations, inventory optimization, and other processes. Monitor the dynamics of GTC metrics and supply chain security enhancements due to improved trade compliance; ensure that your GTC team informs customs and government regulatory authorities of the highest-level support for improving GTC competencies at your enterprise.

Aberdeen Insights — Summary

Although most exporters and importers recognize the importance of effective trade compliance in mitigating supply chain risks, few have understood the true value of this enterprise function in reducing end-to-end costs. This study demonstrates that Best-in-Class companies have a more strategic view of trade compliance and have understood both the mechanism for quantifying reduced costs due to avoided supply chain risks, and the potential of using trade compliance to reduce costs though improved product and supply chain network design.



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Appendix A: Research Methodology

In February and March 2008, Aberdeen Group conducted a survey of 340 exporters and importers located in North America, EMEA (Europe, Middle East, Africa) and Asia-Pacific regions to find out their key pressures, actions, capabilities and improvement plans in GTC. An online survey was supplemented with telephone interviews with select survey respondents, gathering additional information on their experiences.

Study Focus

The purpose of this study is to examine how global companies:

√ Ensure effective import and export compliance at a lower cost

√ Manage complex security and customs requirements for international shipments

√ Manage Free Trade Zones (FTZs)/trade agreements, duty drawback, classification, landed costs, restricted parties, export/import licenses and more

√ Use trade compliance knowledge to strategically re-design global supply chains to save on duties, taxes and other trade compliance costs

Demographics of research study participants • Job titles of respondents: C-level/ VP - 10%, Director/ Manager -

72%, Other - 18%

• Functional area of responsibility: Trade Compliance - 47%, Logistics/Supply Chain - 37%, Other - 16%

• Company size: Small (< $50 mln. in annual revenue) - 11%, Mid-size ($50 mln. - $1 bln. in annual revenue) - 40%, Large (>$1 bln. in annual revenue) - 49%

• Geographic location of company headquarters: North America (Includes USA, Canada, Mexico) - 85%, EMEA (Europe, Middle East, Africa) - 10%, Asia/Pacific - 5%.

• Industry/sector: Discrete Industries – 35%, Process Industries – 30%, Consumer Industries – 30%, High-tech Sector – 27%, Public Sector/ Services – 20%, Retail/ Distribution/ Wholesale – 20%.

• Exporter/importer distribution: Both exporter and importer - 85%, Importer only - 11%, Exporter only - 4%.

Table 5: The PACE Framework Key

Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)





Table 6: The Competitive Framework Key

Overview

The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.

In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance?


Table 7: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.




Appendix B: Related Aberdeen Research

Related Aberdeen Group's research publications include:

• Global Trade Management Strategies: Surviving Growing Complexities in 2007, May 2007

• 5 Ways to Increase the Business Value of Trade Compliance, June 2007

• A View from Above: Global Supply Chain Visibility in a World Gone Flat, September 2007

• Global Supply Chain Benchmark Report, June 2006

• Renault: Turning Trade Compliance into Competitive Advantage, September 2006

Information on these and any other Aberdeen publications can be found at www.Aberdeen.com.

Author: Viktoriya Sadlovska, Research Analyst, Global Trade Management/ Supply Chain Finance, [email protected]

Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500.

As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. 010908a



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