Aerogistics. Insight on Meeting Global Trade Compliance Requirements

Transcription

1 Aerogistics Insight on Meeting Global Trade Compliance Requirements

2 Introduction This white paper discusses the current state of the aerospace and defense (A&D) industry and how an increasingly global footprint creates both opportunities and challenges in managing global trade compliance. Growth in emerging markets and a constantly changing array of international trade regulations are combining to put strain on the ability of A&D companies to manage their compliance efforts. This white paper further identifies the advantages of aligning transportation, logistics and compliance efforts with an external partner, which can greatly facilitate global trade and enable A&D companies to succeed. Methodology UPS worked with IDC Manufacturing Insights, which utilized a combination of existing resources and research, as well as new primary research, to develop this white paper. On behalf of UPS, IDC Manufacturing Insights fielded a survey of 76 United States-based A&D firms with annual revenue greater than $10 million. In addition, IDC Manufacturing Insights analysts conducted an in-person focus group with 7 participants from United States-based A&D firms with annual revenue greater than $10 million. IDC Manufacturing Insights utilized additional data and intelligence from its Supply Chain Strategies research program. Market dynamics reshaping global aerospace and defense compliance efforts The prolonged surge in growth within the aerospace industry continues to fuel expansion throughout the A&D value chain, and companies on the commercial and defense sides alike are responding to the opportunities. On the commercial side, the Big Two aircraft manufacturers, Airbus and Boeing, expect to ramp up total production by 500 aircraft in the next three years. This increase will more than double production output from 2008 and will put significant strain on the global supply base that collectively feeds them. On the defense side, international orders have increased backlogs for defense manufacturers in the United States and Europe. Year-over-year value of U.S. total military exports grew 9.2% to $14.75 billion in The Pentagon plans to triple production of the $440 million F-35 Joint Strike Fighter to 150 aircraft per year by This growth is occurring within a highly regulated industry. A&D companies must meet stringent country-specific compliance requirements and negotiate a complex labyrinth of global trade agreements. Global Expansion Across Established and Emerging Markets The pace of growth in the A&D market is a major driver for change across members of the value chain. Ramp-up of production on both the commercial side and the defense side is requiring the relocation of production and service facilities, even as A&D value chain members continue servicing and satisfying demand for existing products. In recent months, developments have indicated the truly global nature of the A&D industry, with reports that China Civil Engineering Construction Corporation Ltd. is contributing to a $600 million project to build two new airports in the Horn of Africa over the next few years. This mirrors other aerospace infrastructure investments in Africa, Asia/ Pacific, and the Middle East, which are fast becoming sources of economic growth and development for global A&D organizations. For example, Rolls-Royce recently opened its first customer service center in Singapore, a notable departure from its centralized critical services location outside headquarters in England. Rolls-Royce is responding to the increased volume of business in Asia and customer demands for local, dedicated services. The impact of emerging market growth on the A&D supply chain is explored more deeply in a companion white paper titled Aerogistics: Insight on Emerging Markets and Supply Chain Complexity. 2

3 Aerogistics Traceability and Visibility Throughout the Supply Chain The rise of global trade brings with it an entirely new level of complexity around moving parts and products throughout the aerospace supply chain, including country-specific rules as well as customer and supplier requirements. Visibility is imperative, and documentation can be overwhelming for A&D companies as they operate in this intricate global trade market. Regulations such as International Traffic in Arms Regulations (ITAR) and Sarbanes-Oxley from the United States, AS9100 and AS9120 aerospace standards for quality and compliance, and requirements from the European Aviation Safety Agency (EASA) and other similar national agencies require extensive attention to detail and the understanding of constantly changing tariff schedules and forms. Another overarching compliance challenge is the U.S. Export Control Reform (ECR) initiative that was launched in This program impacts the vast majority of A&D companies because, in addition to controlling U.S. origin products, it covers any foreign products derived from U.S. origin items or technology and foreign partners. Documenting genealogy of parts and tracking them throughout the supply chain is increasingly important to meet regulatory compliance for A&D companies. The requirements for document retention, which vary across the globe, add another layer of complexity. A closer look at how global trade is impacting aerospace and defense companies The reality of an increasingly global environment brings with it a new set of challenges as A&D companies navigate the many layers of regulations, trade agreements and import/export compliance when moving products throughout both established and new trade routes. As their customers originate from or expand into new geographies, A&D companies need to quickly get up to speed on country-specific requirements, find suppliers, locate or build facilities and manage logistics. As Figure 1 shows, regulatory compliance/increasing or changing regulations was the overwhelming top supply chain issue for A&D companies, with 71.1% of respondents ranking it among the top 3. Figure 1 Most Concerning Supply Chain Issues Question What are the three most concerning supply chain issues that might impact your business? Please rank the top 3. Regulatory compliance/increasing or changing regulations Contingency planning for supply chain disruptions caused by unplanned events Supply chain cost containment Visibility/information management Product damage or spoilage Global market access to reach new customer bases Product security (such as theft, tampering or counterfeiting) Source: UPS Aerospace & Defense Survey, IDC, April 2015 Changing distribution and go-to-market channels 0% 10% 20% 30% 40% 50% 60% 70% 80% 3

4 Clearly A&D companies have significant concerns around their ability to effectively manage the moving target of changing compliance mandates. As one participant shared during the focus group, The challenge is certification of the product in that country because each country has to go through a certification process of that product before it gets to be used in their local market. We have to hold hands with the government to go through that whole process. To further illustrate the reality of global trade, A&D companies identified the number 1 key barrier to expanding into emerging markets as internal compliance concerns on adhering to all requirements. And keeping up with regulation changes was among the top four barriers. 1 In the face of unprecedented expansion into new and often emerging markets, A&D companies are facing a number of specific challenges that they must address in order to succeed. We have to hold hands with the government to go through the whole process [of product certification]. A&D company discussing certification in new countries Challenges A&D Companies Experience with Global Trade Management Many factors are involved as A&D companies move to support customers in new geographies. Once a contract is won, A&D companies need to determine how best to establish operations and build the infrastructure to support the new business. This can include locating production, service or warehousing within the customer s country or within a neighboring country. When asked what the top three key challenges are in terms of global trade management, 63.2% of A&D companies identified the challenge of developing the best sourcing strategy for our product, with 55.3% also ranking selecting and managing suppliers to serve new markets as a top challenge. Choosing suppliers in a new geography can be a source of great Figure 2 Key Global Trade Management Challenges Question What are the key challenges for your company in terms of global trade management? Please rank the top 3. Developing the best sourcing strategy for our product Meeting customs and regulatory compliance requirements Selecting and managing suppliers to serve new markets Country-specific trade requirements Denied/restricted party screening Creation of trade documentation, trade agency notifications and clearance status Selecting/creating distribution and transportation networks in new markets Item classification for customs Global or cross-border traceability/visibility of our products Understanding free-trade agreements (FTAs) and government-sponsored trade initiatives Source: UPS Aerospace & Defense Survey, IDC, April % 10% 20% 30% 40% 50% 60% 70% 1 Data can be found in Aerogistics: Insight on Emerging Markets and Supply Chain Complexity, April

5 Aerogistics consternation for companies because supplier performance is not always known, and the service quality of the supplier selected will reflect in the finished product or service, good or bad. The other top challenge, as rated by 55.3% of the companies, was meeting customs and regulatory compliance requirements. As Figure 2 shows, clearly, A&D companies, which are no strangers to regulatory matters, are finding it difficult to manage compliance on a global scale. How well do A&D companies feel they are handling some of these key challenges? When asked to rate the efficiency of their supply chain when managing regulatory compliance, survey participants gave themselves high marks. However, several pain points were noted, including corporate compliance, country-specific compliance and document management related to global trade requirements. One focus group participant shed further light on country-specific challenges: [We are challenged by] specific government requirements for receiving government exporting/importing. Korea has a fair trade agreement that requires a completely separate set of documents that s synonymous only to them. Taiwan also has one. Each government entity [is unique]. While improvements have been made in the past decade, namely the European Union creating uniformity across a group of 28 member countries, managing compliance can still be problematic. The consequences of missing a form or failing to record accurate classification based on local customs requirements can range from a critical shipment languishing in customs to penalties and fees being levied on the company. In addition, A&D companies can face serious business disruption or damage to their reputation, including loss of contracts that can hamper their ability to compete in the market. These global compliance challenges can plague A&D companies and, in some cases, can cause companies to turn down business because of the overwhelming complexities of global trade management. Top Compliance Pain Points Respondents were asked to rate the efficiency of their supply chain in managing regulatory compliance in several areas on a scale from 1 to 10 (1= very poor/not efficient at all and 10= excellent/the hightest level of efficiency). The following areas recieved the lowest ratings: Corporate Compliance Country-Specific Compliance Document Management Source: UPS Aerospace & Defense Survey, IDC, April 2015 The Inherent Risk of Noncompliance Cautionary tales abound, including in 2014 when a major supplier to aerospace and defense companies, including Airbus and Boeing, agreed to pay a total penalty of $20 million to the U.S. Directorate of Defense Trade Controls (DDTC) in a consent agreement that it improperly transferred technical data to foreign person employees and misclassified defense items controlled under ITAR. According to DDTC documentation, the DDTC Office of Compliance determined that [the company s] internal administrative controls were inadequate to ensure ITAR compliance. As part of the agreement, the DDTC agreed to suspend $10 million of the total penalty on the condition that these funds have been or will be used for remediation and enhanced ITAR compliance measures. 5

6 Future outlook: gaining visibility and achieving compliance in global markets The rise of activity in emerging markets and the growth in global commitments to customers are driving new levels of complexity for A&D companies. While the A&D industry is not new to regulatory oversight, the intersection of compliance mandates with globalization and customer requirements is creating an even greater need for visibility throughout supply and service networks. A&D companies are finding success in meeting these challenges through a combination of technology and partnering with the right logistics providers. Figure 3 identifies how A&D companies are addressing their global trade compliance capabilities. Among companies that have taken steps to strengthen their global trade compliance expertise, investing in technology and seeking out service providers and outside experts are the top approaches. Figure 3 Steps Taken to Strengthen Global Trade Compliance Expertise Question Which of the following steps has your company taken to strengthen your global trade compliance expertise? We have invested in technology We have partnered with service providers We have hired outside experts We have changed our internal structure Source: UPS Aerospace & Defense Survey, IDC, April % 5% 10% 15% 20% 25% 30% 35% 40% 45% In many cases, and as evidenced by companies taking more than one action, A&D companies are using a dual approach to global trade, adding technology that provides them with better visibility while also partnering with an outside expert or service provider to help identify potential gaps in global trade compliance and shore up those gaps with the necessary processes and documentation. Essential guidance Logistics partners can help provide the necessary visibility and documentation management for the increasingly complex global movement of parts throughout the global A&D network. In particular, these companies can help manage the compliance that is needed when shifting to different parts of the world. Logistics partners can provide guidance as it relates to brokerage compliance and country-specific rules. Among the capabilities that A&D companies should look for in a logistics partner to help manage global trade compliance are customs and industry-specific compliance expertise, breadth of services to support new endeavors in global markets, and global visibility and relationship management. Figure 4 identifies what A&D companies are most often looking for in logistics partners. As Figure 4 shows, A&D companies actively search for logistics partners that can help manage the customs process, including submission of paperwork, visibility into status and management of any potential exceptions or delays. This is the top need for MRO providers, with 46.7% identifying it as their single greatest need in a logistics provider. Several other key capabilities that A&D companies look for when partnering with logistics providers are discussed in the sections that follow. 6

7 Aerogistics Figure 4 Greatest Supply Chain Needs from Logistics Partners Question From a supply chain perspective, what is the single greatest need from key logistics partners? Ability to manage the customs process, including submission of paperwork, visibility into status and management of any potential exceptions or delays Visibility into movement of goods throughout the network Providing best practices as an industry leader Current understanding of complex and ever-changing rules across multiple countries In-country warehousing, distribution, and transportation presence Working with company s preferred broker Easier online/web-based shipment processing systems Source: UPS Aerospace & Defense Survey, IDC, April % 10% 20% 30% Customs and Industry-Specific Compliance Expertise The extensive labyrinth of global customs compliance is daunting, and A&D companies seek logistics providers that can manage this aspect of global trade. Finding a partner that can provide customs clearance across all modes of transportation is important, as companies often need to use air, ocean, and ground to move a product to its final destination. Expediting the customs clearance can make a difference, so partners that are able to notify authorities in advance of ground shipments crossing borders are preferred. In addition, navigating the unique nuances of the A&D industry is paramount, so finding a logistics provider that has depth of expertise in aerospace and defense is often a top consideration. Industry-specific leadership was ranked the third top supply chain need (refer back to Figure 4). Breadth of Service Across Processes Because of the multifaceted nature of global trade, A&D companies should partner with logistics providers that offer services spanning the processes necessary for moving goods throughout global supply chains. Among the best practices that some leading companies have adopted is partnering with a logistics provider to manage the warehousing and kitting of all the parts involved in a particular process. Equally important is the ability of the logistics provider to offer the full range of transportation services. This means not only handling documentation/customs clearance for getting parts from land to sea but also, once they reach the destination country, providing extended delivery to get the product across the ground to the plant or flight line. Clearly, potential logistics partners should be able to span transportation modes as well as offer comprehensive services such as warehousing and kitting. Global Visibility and Relationship Management A&D companies expect logistics providers to provide full visibility into the movement of their products throughout the transportation process, including location information, processing exceptions and customs clearance status. The A&D company must also be able to pick up a phone when necessary to work through a potential disruption or exception. Relationship management becomes significant when there are disruptions. If a production line is waiting for a part, the ability to identify the cause of the delay and solve it quickly and efficiently to mitigate downtime is important, and working with a customer representative to evaluate the best options is imperative. Often a logistics partner needs to be the conduit for the level of service the A&D company delivers to its own customer, and if the goal is exceptional service, then the logistics partner needs to be able to provide transportation flexibility to meet that goal. 7

8 Final thoughts The increasingly global nature of the A&D supply chain and the growth in business within emerging markets put added strain on the compliance and global trade management efforts for many A&D companies. Organizations efforts to find new suppliers and set up operations in new global locations consume many resources and do not always lead to successful outcomes. Furthermore, managing the daunting amount of documentation and gaining visibility into the global movement of parts and products are increasingly difficult tasks. Leading A&D companies have quickly learned that partnering with a key logistics partner to facilitate global trade and compliance efforts is imperative for success. The right logistics partner can help streamline the documentation requirements, facilitate customs clearance and eliminate unforeseen shipment delays caused by lack of documentation. The result is a supply chain that keeps pace with business demands, letting the A&D company focus on its core competencies and entrusting a logistics provider to clear the global trade runway for efficient movement of parts and products. Navigating the Road of Compliance From constantly changing regulations to country-specific trade requirements, document management and item classification, navigating the road of compliance can be time-consuming and complex. As a result, leading A&D companies are turning to knowledgeable logistics providers to facilitate global trade and compliance. To learn more about UPS Solutions for Aerospace and Defense, visit: ups.com/aerospace 2015 United Parcel Service of America, Inc. UPS, the UPS brand mark and the color brown are registered trademarks of United Parcel Service of America, Inc. All rights reserved /15