Media Coverage
Manufacturer Copes with Trade Regulations by Automating Processes (A Delicate Balance)
by Lauren Gibbons Paul, Contributing Editor
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For manufacturers that sell goods outside U.S. borders, complying with governmental regulations that prohibit selling to a restricted party or for a restricted use can be a heavy burden. Each company must weigh the risk of violating regulations against the need to have an efficient, globally competitive supply chain.
For companies selling products that could be used in weapons of mass destruction, achieving equilibrium is trickier still. If your product should fall into the wrong hands, the outcome could range from simple bad publicity to exorbitant penalties to a terrorist act. These manufacturers must automate the screening of orders and customers to have any hope of surviving the onslaught of regulations created by the U.S. Department of Homeland Security post-9/11.
Take electronics test and measurement equipment maker Anritsu Company Inc., for example. Even before the disaster of 9/11, the subsidiary of $776 million, Japan-based Anritsu Corp. was struggling to comply with a growing list of trade regulations. With largely manual trade management processes, the company was forced to hire scores of employees to keep orders moving. Even then, customer shipments were sometimes delayed.
In the years that have followed, however, Anritsu has taken a series of steps resulting in increased automation of trade compliance processes. The company now uses an on-demand global trade management system from TradeBeam Inc., which has allowed it to shift the personnel who once handled manual compliance to more value-added functions. More importantly, automating export processes has significantly reduced Anritsu’s legal exposure for non-compliance, as governmental agencies tend to view companies that have automated more favorably than those that have not. Beyond limiting liability, export compliance automation reduces the chances that Anritsu’s products will get into the wrong hands, which is important to the company, regulations notwithstanding.
Vetting the Supply Chain
For Anritsu, the need to automate compliance with export regulations became pressing around 2000. At the time, employees in a number of different departments were beginning to spend inordinate amounts of time tediously checking client names and addresses against lists of restricted parties. Although the lists were considerably shorter in those pre-9/11 days, the process was manual and burdensome, as customer names had to be checked against the Bureau of Industry and Security’s denied persons lists (DPLs) after an order had been made, just before shipping the order, and again after any delays before delivery.
And it was not enough just to make sure the customer’s name was not on the DPL. Regulations governing sellers of dual-use commodities (such as the test and measurement equipment made by Anritsu) dictate that companies exporting sensitive goods cannot sell to any company in a restricted party’s supply chain. The implications are huge.
“It’s not just the corporation you’re transacting with, but its entire supply chain lineage,” says Greg Aimi, director of supply chain research for AMR Research. “If any entity in the supply chain of that company is a denied party, then they’re also denied.”
The compliance assurance process was even more arduous, as the potential use of every order had to be checked as well. The U.S. Bureau of Industry and Security (BIS), which governs the class of products Anritsu makes, requires that any manufacturer of a product deemed for a sensitive use apply for an individual license before an order for that product can go through the system. The BIS oversees the development, implementation, and interpretation of U.S. export control policy for dual-use commodities, software, and technology. Dual-use items subject to BIS regulatory jurisdiction have predominantly commercial uses, but also have military applications. So, Anritsu’s staff also had to check the orders for a potential license requirement.
In short, the process was disjointed and time-consuming. “It was really painful,” says Jane Solomon, trade compliance manager for Anritsu. Situated in the legal department, she and employees from other groups would fax and e-mail lists to the company’s locations around the world so all of Anritsu’s operations could ensure compliance, too. As many as 30 people were involved in the checking process in North America alone, which put a drag on getting orders out the door.
Anritsu invested in 2000 in an early, hosted trade compliance application from a company then called Capstan. (Capstan was later acquired by a company called Qiva, which in turn was acquired by TradeBeam.) But the level of automation in that initial system did not go far enough to reduce Anritsu’s risk. For example, the application did not do “smart” licensing determination. And the system did not retain data about a potential licensing requirement, so that had to be resolved anew with each successive DPL screening.
Regulation Groundswell
Then 9/11 occurred. Commerce was frozen for a week or so immediately after the events of that day, and in the aftermath the number of names on the DPL shot up. In addition, agencies such as the Treasury Department and the State Department greatly increased the number of names on their own DPLs. Suddenly, the burden was even greater.
“After 9/11 it became impossible,” Solomon recalls. “Before then, the [DPL] would change a couple of times a year. After 9/11 it was changing a couple of times a day.” Fortunately, Anritsu was better equipped to handle the onslaught because it had begun to automate processes. But, over the years, with ever more regulations and an ongoing economic recession that stretched the company’s human resources to the limit, Solomon knew it would be necessary to go further, by integrating the automated compliance process engine with the company’s order entry system.
That advancement took place in 2005. TradeBeam Inc. by then had acquired the global trade and logistics technology assets of Qiva, which Anritsu’s North American operations were using at the time. In 2005, Anritsu took the step of transitioning to TradeBeam’s Global Trade Management (GTM) software. TradeBeam offers its trade compliance, trade visibility, and trade finance applications only as hosted services with a monthly fee and per-transaction charges that kick in each time the system assesses a customer, product, or potential use. That fit Solomon’s plans at the time.
She looked into implementing an automated trade compliance assurance system in house as opposed to using TradeBeam’s on-demand system, but quickly rejected the idea. Implementation and maintenance costs would be high. And, she says, “We wanted it to be Web-based so it could be accessed worldwide.”
A hosted solution offers “better, quicker ROI,” says Graham Napier, TradeBeam’s president and CEO. “You don’t have to hire IT people to support it. Our clients get updates automatically.” The ASP pricing model is scalable, allowing a company’s use (and costs) to grow along with its business, he adds.
Link to ERP
The TradeBeam system is set up so that as each order is placed in Anritsu’s QAD MFG/PRO system, an XML file is automatically generated and sent to the TradeBeam system. Anritsu has fully automated screening throughout the quote-to-ship cycle in its North American operations. Under this process, automated screening is done at multiple points in the cycle, including at the time of initial order quotation, at order placement, at order amendment, and at time of shipment. The TradeBeam system does DPL screening, license determination screening, and end-use/user screening.
“The system looks at the country of destination and end user to see if we need a license or more screening. We get an automatic response back from the system,” Solomon says. If the order does need a separate license, that process can take anywhere from weeks to months to move through governmental bureaucracy. It’s a drag on the supply chain, but it’s a cost of doing business in this industry.
The chief benefit of compliance process automation is reduced risk, Solomon believes. “You’re reducing your risk of fines and penalties, losing your trade privileges, bad publicity. The fines start at $30,000 and go up to millions,” she says. If the company were to ship a product to a restricted party by accident, it is likely the governmental bodies would judge the company less than harshly, given the lengths to which it has gone to automate. “The government strongly encourages companies to automate,” Solomon says.
Meanwhile, additional benefits come in the form of productivity gains. Where there once were 85 people from nine different departments worldwide handling compliance assurance, that number has been reduced to three: Solomon and two colleagues from the legal department. Everyone else has moved to value-added roles.
Anritsu would have had no hope of surviving the increased regulations if it hadn’t faced trade compliance head on, Solomon says. “We couldn’t have done it without automating.”
The cost of the automated system is the one sticking point for Solomon. Given that Anritsu must pay a per-transaction charge as well as a monthly software rental fee, the costs for GTM are variable and prone to rising exponentially based on the number of names on the government’s restricted lists. “It needs to be cheaper,” says Solomon, who declines to specify the exact fee. “But it’s not cheap to remain compliant. And it gets more expensive every year.”
TradeBeam’s pricing model could change over time to remove the variability, AMR’s Aimi speculates. One way would be for TradeBeam and its competitors to apply a fixed cost for a set number of transactions and charge for any overage, rather like cell phone contracts that include a certain number of minutes per month. Alternately, the vendor could charge a one-time fee for use of the software and then an annual “subscription” fee that would include updated lists, similar to anti-virus software products.
TradeBeam CEO Graham R. F. Napier acknowledges that paying per transaction can mean uncertain costs, but he does not see a problem with the company’s pricing model. “There’s a yin and yang in every pricing model. Some clients like to have a variable cost. We’re pretty good at modeling where your use [will be] before you get there,” to minimize surprises, he adds.
In the meantime, despite the cost issue, Solomon sleeps much better at night knowing Anritsu’s risk for trade non-compliance has been reduced as much as possible.
