LAST Friday, we were invited to speak at the two-day conference of the Supply Chain Management Association of the Philippines (SCMAP) held at EDSA Shangri-La. Given the emergence of supply chain management as a profession and as a field of expertise, we made a presentation on the latest trends in managing the supply chain in international trade.
Shift in Supply Models
Globalization has obviously changed how companies source materials and sell products. Markets have opened and trade barriers have fallen, making international trade rules more complex. The advent of numerous free trade agreements have also greatly impacted on the supply structures and sourcing strategies of multinational companies.
As a result, supply chain management has become more relevant and important. Managing international trade now requires a multi-disciplinary approach and the integration of customs and trade understanding. While globalization has opened new trade opportunities, competition has heightened and risks must be managed to prevent disruptions in the supply chain.
To date, related party transactions are estimated to constitute more than 50% of international trade. Many years ago, international trading merely involved a sale transaction between a seller and a buyer who are unrelated, resulting in the purchase of goods by sea freight and the payment covered by a letter of credit. Suppliers sold goods to everyone and in some instances, appointed exclusive selling agents or distributors.
Most big suppliers now operate only through affiliates and related parties. While raw materials are still mostly purchased from unrelated parties, the trade of finished articles has been largely characterized by sales among related parties.
Consignment and Indent Sales
A major change in international trading is the establishment of subsidiaries by multinational companies in most of its markets. These subsidiaries generally act as sales agents and indentors — merely facilitating the sale transaction between the local client and the parent company. The sale transaction is between the local company and the supplier, with the subsidiary earning commission from the supplier/parent company.
Another major change is the practice of consigning the goods to affiliates, rather than selling the same. In this type of trading arrangement, the seller consigns the goods to the importer on condition that the importer will earn a commission only when the goods are sold in the domestic market. The importer does not own the goods and merely acts as a commission agent. The supplier retains ownership of the goods and absorbs the risk of obsolescence or non-sale.
Reducing Logistics Costs
Increasing competition in the global marketplace has caused companies to continuously find ways to lower production costs and offer competitive prices for their consumers. Many companies have thus overhauled their supply chain (from the acquisition of raw materials to the provision for sales and after-sales service) in order to promote efficiencies and create savings.
As logistics cuts across the whole supply chain, companies likewise look at possible savings opportunities in the transport, insurance, customs clearance, inspection, storage, packing, handling and distribution of goods.
For companies engaged in international trade, logistics normally involves securing the exact quantity of materials for delivery at the right time and location at a minimum cost. In international sale transactions, logistics may include inbound logistics (from supplier factory or farm to the buyer in another country) and outbound logistics (warehousing and distribution of the goods to the production lines or retail shops).
Redefining Supply Chain Management
Supply chain management is generally focused on the physical movement of goods and reducing the cost of moving such goods. The bottleneck in supply chain normally arises in the complicated invoicing and documentation involved in international sale transaction.
The management of cross border supply now requires an in-depth understanding of international trade rules. In addition to fully understanding how goods are physically moved across borders, supply chain managers will also need to study the invoice/document flow and the movement of payments.
Who is responsible for every aspect of the goods flow (ref: INCOTERMS and transport contract) and for the payment flow (ref: sales contract, INCOTERMS, L/C and transport contract)? Who is responsible for the documents (ref: sales contract, INCOTERMS and transport contract)?
What are the roles, risks and responsibilities of the parties involved in international sale transactions (supplier, buyer, forwarder, customs broker, shipper, consolidator, government agencies, etc.)?
The author is an international trade consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on Supply Chain Management. Please contact firstname.lastname@example.org for your comments.