Tax & Accounting Blog

Supply Chain Management Through Cost Reduction

Blog, Global Trade, ONESOURCE December 8, 2017

One of the most important business areas in any industrial facility is, of course, the supply chain.

Profits to the company can be in the millions of dollars simply by decreasing supply chain costs.  The potential reductions are actually widely open in areas to analyze and focus on when pursuing optimized spend and savings opportunities.

A common definition of trade costs is: “…costs incurred in getting a good to a final user other than the cost of producing the good itself: transportation costs (both freight costs and time costs), policy barriers (tariffs and non-tariff barriers), information costs, contract enforcement costs, costs associated with the use of different currencies, legal and regulatory costs and local distribution costs (wholesale and retail)” (Anderson and Van Wincoop, 2004)

In understanding this definition, in order to achieve a certain degree of global supply chain cost savings, this overview provides a good starting point on to focus. There are several areas that consistently offer opportunities for savings on supply chain costs for the businesses with all sizes and across all industries. For example; negotiated freight rates with your service providers. Reducing costs in packaging and consolidation of shipments. Evaluating your customs broker fees and evaluating the harmonized tariff assignments to determine if the applied duty rates are accurate.

According to the results of a 2016 global trade market survey, main challenges are manual processes that may bring audit risks, lack of automation that may open business to human mistakes and inefficiencies, and FTA underutilization. Often companies look at the obvious costs, where there is a payable, for example freight forwarders and consolidators. Often what is not a focus, and in my estimation a lost opportunity, is looking at process efficiencies (i.e., manual processes vs. automation). Often we hear about the missed savings to a company in their manufacturing as to how they cannot capture all the savings for FTAs, or support their customers because they simply do not have the band-width to support a robust program.

These trade compliance areas are necessary in a company’s supply chain, but are often overlooked as a cost cutting area. In fact, by not focusing on these efficiencies, trade costs could increase considerably. When adding to this list the complexity in inaccurate classifications and customs valuation, companies open their supply chain up to audit risks and possible penalties.

Furthermore, any product manufacturer and their distributors must know where the goods have been as well as whom and what has interacted with them. Every importer and exporter must have the knowledge and records about its products, where they were sourced from and how they were transported. This activity now falls under the realm of supply chain security and opens up the supply chain to risk when not adhered to, and ultimately costs associated with delays.

Managing global trade will continue to be laden with complexities and changes from all sides of the puzzle: governments, trading partners, 3rd party service providers, nongovernmental groups and consumers. Importers and exporters are increasingly challenged to utilize automation which has become a necessity to streamline processes and ensure the highest levels of safety and compliance.

Computerized supply chain management has revolutionized modern business by providing end-to-end visibility and tracking. Companies have recognized this is a must in their oversight in moving goods and cutting costs. By automating and streamlining the supply chain processes it can actually help in bringing costs to minimum levels and minimize a company’s exposure to audits and penalties.