The automotive industry is under pricing pressure due to discounting and rebates in order to move inventories. Also, increased demand in emerging economies is requiring automakers to bring lower-priced models to market. These drivers are creating pressure on manufacturers and suppliers to reduce component and assembly costs.
With various components, including electronics, coming from around the world, a factor of manufacturing cost is the total landed cost of the parts, which is determined by the manufacturing and shipping costs, as well as country of origin, its trade regulations, and the free trade agreements (FTAs). Duties and tariffs from trade regulations can contribute a few but critical percentage points to the cost of the component. As a result, it is important to be familiar with trade regulations, when making sourcing decisions.
The problem is that trade regulations change frequently, with little notice, and FTAs are being implemented at a record pace. In 1995, for example, 12 new FTAs were concluded. For 2007, more than 120 new FTAs are in place. Most companies try to track these changes in trade regulations manually, but it is an expensive, labor-intensive and detailed task requiring many professionals at home and abroad. The failure to get it right results in many problems:
- An inability to identify the best country of origin for parts based on FTAs and duty/tariffs, leading to a more expensive component and assembly cost.
- Inconsistency in product classification resulting in duty cost overruns.
- Process inconsistency with freight brokers and customs agents resulting in higher documentation and transaction costs.
- Lack of a unified audit trail, resulting in an inability to sustain preferential claims that can lead to additional duties and penalties.
- Limited understanding of risk factors that can negate the benefits of an FTA.
Strategic sourcing, understanding where to source products and components to achieve balance between obtaining the lowest total landed cost and ensuring timely delivery, requires an automated, software-based approach to global trade management. Such an approach, based on accessing a single, centralized database of the trade regulations and FTA information, eliminates the time and cost of manual research and quickly delivers recommendations. It can enforce best practices for selecting the country of origin, executing transactions, classifying products, and ensuring compliance with regulations, while keeping an audit trail of all activities.
The key to implementing an automated global trade management system is to find a solution that won't be disruptive and delivers value. The approach that works best is an on-demand model — software as a service (SaaS). On-demand software solutions don't require a large upfront investment or a long purchasing cycle, and are designed for flexibility and configurability. Because companies pay only for the services they use, the solution can be brought online quickly and expanded as warranted.
ON-DEMAND STRATEGIC SOURCING
To increase market share in emerging markets, Renault set a goal to develop a car it could list for 5,000 Euros, but its sourcing strategy revealed that duties, taxes and tariffs on parts would make this goal impossible. Renault was managing its global trade manually from separate import and export databases for each country, making it impossible to source strategically. Renault adopted an on-demand global trade management solution from TradeBeam, which supports global trade management with a single, centralized database that manages imports and exports from many countries to many countries. Because the activity is based on one global trade database, the system has enforced parts classification consistency and reduced the stress of managing cross-border shipments.
Using TradeBeam, Renault designed a production and distribution process that has delivered the optimal balance between the lowest total landed cost for parts and on-time deliveries, allowing it to compete in emerging markets. In today's global environment, every auto manufacturer should deploy strategic sourcing capabilities using an automated trade management system — because its competitors will.
ABOUT THE AUTHOR
Graham Napier is president and CEO of TradeBeam, a provider of on-demand Global Trade Management software.