Building a Secure and Compliant Supply Chain
By Thomas A. Cook -- Supply Chain Management Review, 7/1/2003
The events of Sept. 11, 2001 have forced supply chain professionals to develop a whole new knowledge base. Today they must be conversant with a glossary of compliance and security terms that includes: Container Security Initiative (CSI), Customs-Trade Partnership Against Terrorism (C-TPAT), 24-Hour Manifest Ruling, U.S. Principal Party Interest, deemed export rules, homeland security, and Bureau of Customs and Border Patrol.
The net effect of these terms is that the world is being forced to fall in line with the new U.S. Government initiatives in post-Sept. 11 security and compliance—and supply chains are at the center of the action.
New Set of Challenges
The Bush administration has taken a historic and aggressive approach to protecting the United States, its citizens, and overseas interests. This approach has affected every global supply chain in a number of significant ways. It has added cost and time to international transportation. And it has required supply chain executives to re-evaluate their logistics processes and factor in a new set of import and export considerations. Now supply chain managers are not just concerned with documentation, production and inventory control, finance, customer service, and logistics. They must also focus on security and compliance management. As a result, companies are updating their supply chain standard operating procedures [SOPs] to include provisions for dealing with the new security and compliance issues.
Reorganization at the federal government level has had a major impact on global supply chain management. The new Department of Homeland Security, under Tom Ridge, has become the focal point of the country's efforts to protect the homeland. This agency incorporates more than 30 government agencies, which previously reported to, or were part of, other government departments. U.S. Customs, the oldest U.S. government agency, is now part of Homeland Security and has been renamed the Bureau of Customs and Border Patrol. A main reason for these changes is to reflect the primary mission of this agency: to protect our borders.
One of the new supply chain actions resulting from this redefined focus is the Container Security Initiative (CSI). The government believes that if a container were to arrive at a U.S. port with a dirty bomb or a biological weapon on board, it would already be too late for authorities to deal with the problem. Therefore, it created the CSI as a proactive and preventive outreach program. The CSI extends Customs' reach into foreign ports, enabling the agency to inspect foreign supplier facilities and container loading/handling operations well before the goods are shipped into the United States.
Tied into this effort is the 24-hour manifest ruling, which requires importers and their carriers to declare the contents of all inbound containers at least 24 hours before the vessel sails from the foreign port. U.S. importers have had to significantly change their suppliers' "import alert and documentation process" to comply with these new requirements.
As the initiative is still new, some companies have not worked out all of the bugs with their suppliers, to the dismay of many importers. For example, a West-Coast-based clothing importer recently changed contract manufacturers in Karachi, Pakistan. The new manufacturer was unable to provide product details prior to shipping. This lack of product detail curtailed the import supply chain for three months until the Pakistan supplier could meet the new homeland regulatory requirements. Because of this delay, the U.S. importer was forced to find temporary, alternative sources of merchandise, which turned out to be more costly and not up to product specifications.
Smart global supply chain managers also will make an effort to join the Customs-Trade Partnership Against Terrorism (C-TPAT). C-TPAT is an effort to enlist the support of all the parties in the global supply chain from principal importers and exporters to carriers and service providers. In this voluntary initiative, Customs asks businesses to ensure the integrity of their security practices and communicate their security guidelines to Customs and to their business partners. The agency is basically asking members of the trade community to declare whether or not they are a "partner" in this effort to strengthen supply chain and border security.
For those companies that participate in C-TPAT, the benefits are likely to include: expedited clearances, less scrutiny during any audit process, and access to self-assessment programs. For most companies these benefits outweigh the risks, time, and effort involved in managing the C-TPAT application process.
In addition to these new initiatives, the government is placing increased emphasis on some older Customs rulings. In particular, the Departments of State, Census, Customs, and the Bureau of Industry and Security (BIS) are now enforcing rules regarding U.S. Principal Party in Interest (USPPI) and deemed exports.
The U.S. Principal Party in Interest for an export is defined as the entity that receives the primary financial benefit for the export transaction. The government requires that the USPPI be identified on all shippers' export declarations as the entity responsible for the export's compliance. In most cases, this is the U.S. manufacturer. So irrespective of contractual obligations, routed freight shipments, or terms of sale, the manufacturer likely will have to apply a much higher level of due diligence in export compliance. This includes knowing the end use for the export, the end user, how the goods or equipment will be utilized, valuations, and schedule-B numbers. This also may potentially apply to U.S. companies' foreign subsidiaries.
The concept of deemed exports, although not new, also is receiving increased attention. Deemed exports basically constitute what the U.S. government considers to be an export. The government holds that exports are not only the physical transfer of freight but also the passing of information, technology, and software.
As with freight, these other items can be controlled as exports according to the deemed export rules. These rules extend, for example, to situations where foreign nationals—including foreign employees—visit a plant or facility in the United States to receive technical information or training, which they intend to take back to their own country. This transfer of information, data, training, or technology is a "deemed export" and is subject to the same export controls as if it were the physical export of a product overseas.
All of our supply chains include foreign subsidiaries, contract manufacturers, and channel partners with whom we share technical and proprietary information. But how many of us think about export controls when sharing this information?
Six Steps to Success
These are but a few of the issues facing supply chain executives post-Sept. 11. The best supply chain managers are taking steps to enhance their supply chain security and compliance. Outlined below are some recommended actions for creating successful import/export supply chains in this new environment:
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Identify a point person for security and compliance. Invest in the resources needed for this person to develop the necessary skills to make your company compliant. These skill sets would include: a working knowledge of Customs and BIS regulations; an ability to develop and implement standard operating procedures; and a knowledge of the ins and outs of working with freight forwarders, carriers, and customhouse brokers. Although this person can be part of any unit of the organization, he or she can be most effective when situated somewhere in the supply chain command. In many organizations, security and compliance are such important issues that new internal positions are being created to address them.
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Develop resources. The environment surrounding supply chain compliance and security issues is constantly evolving. To mange their responsibilities in a timely and comprehensive manner, supply chain executives must keep up to date on current information by developing various resources. Some of the best resources are the dozens of Web sites, both government and private, that provide compliance and security information for supply chain initiatives, such as www.cbp.gov and www.bis.doc.gov. Other good resources are weekly and monthly trade magazines and organizations such as the National Cargo Security Council and the Professional Association of Import/Export Compliance Managers.
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Develop an internal set of SOPs for import/export compliance and ensure that all relevant personnel understand the role of compliance in the global supply chain.
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Train and educate all your supply chain personnel not only in operational areas but also in compliance and security. Keep them current on the latest rulings and interpretations related to CSI, C-TPAT, and other government trade initiatives.
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Develop effective relationships with global service and third-party providers that make compliance and security a top priority.
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Build compliance and security SOPs into your vendor contracts with various levels of performance guarantees.
Global supply chain executives are working in a new world post-Sept. 11. Those that integrate compliance and security procedures into their international supply chain structures will mitigate the risks of fines, penalties, and work stoppages. At the same time, they will create the most comprehensive, cost effective, and best managed supply chains.
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