MODULE 3: Introduction to Supply Chain Management

LESSON3: SCM Systems and Logistics Interfaces

INTENDED LEARNING OUTCOMES

At the end of this module the students must be able to:

1.

Supply Chain Systems

What is a Supply Chain Management System?

In short, an SCM system is defined as the software your company uses to manage the flow of goods,
data and resources related to any product or service you sell, moving it from raw material
procurement to final delivery.
Defining SCM Systems: What is a Supply Chain Management System?
A supply chain consists of a network of organizations and facilities that work in tandem to transform
raw materials into finished, customer-ready products. A supply chain management (SCM) system is
an inter-organizational solution that manages these activities from beginning to end.
While there are many different types of supply chain management software that each focus on certain
functions, there are also comprehensive supply chain management systems. These SCM systems
benefit companies by managing a variety of supply chain processes, such as:

Procurement
Planning
Product or service creation
Order fulfillment
Order tracking
Order management
These functions shouldn’t be isolated to in-house teams. Rather, the SCM platform must be
accessible across the supply chain, encompassing every stakeholder, including:

Suppliers
Manufacturers
Wholesalers
Transportation providers
Logistics managers
Retailers
This ensures that everyone has visibility into the product or service as it moves along the production
chain. By gaining better oversight into these processes, companies benefit from SCM systems as
they can expedite delivery, improve the customer experience and achieve supply chain cost
reduction.

SCM functionality can also be found within many ERP systems. ERP vs SCM is an important
distinction to understand before software selection.

History of Supply Chain Management Systems

SCM systems have existed in some rudimentary form since the very first products or services were
created and sold in ancient eras. With industrialization came necessary advancements, as evidenced
in the standardization and mass production of automobile parts first perfected by Henry Ford.

In the years that followed, supply chain management progressed beyond the assembly line. The
advent of computers, for instance, allowed some facets of SCM to be managed from afar, though the
effort rested primarily on the shoulders of a select group of supply chain specialists.

It wasn’t until the Digital Era came into full swing that the task of supply chain management became
less linear and more enterprise wide, changing the definition of supply chain management. Now,
SCM systems consist of widespread networks that can be accessed by different departments
throughout an organization.

What drove this change? In addition to technological advancement and a growing global economy,
increases and shifts in customer demand were also key. Now, nearly 80% of consumers expect
companies to offer free, two-day shipping, requiring companies to keep pace to stay competitive.

As such, today’s SCM systems center on demand-driven operating models capable of delivering the
speed and precision that modern business requires.

The Rise of Industry 4.0

As digital tools continue to become more innovative, their application in the manufacturing realm has
been recognized as “Industry 4.0,” or the Fourth Industrial Revolution.

Largely built to enable supply chain optimization, these technologies are designed to radically
transform the ways that companies develop, manage and distribute new offerings. Industry 4.0
technologies include solutions such as:

Artificial Intelligence (AI)

The Internet of Things (IoT)
Machine learning
Automation
Sensors
With this movement, it’s now evident that the way companies have traditionally approached supply
chain management is giving way to a more advanced and automated approach.

Take the benefits of SCM systems regarding quality control, for instance. Rather than waiting until a
part malfunctions or a customer calls with a complaint, companies can now leverage smart tools to
identify and correct issues with a product or service before they even occur. The ability to proactively
recognize these glitches ensures that the supply chain can continue uninterrupted, without timely and
costly roadblocks.

Then, there’s the concept of lean manufacturing. Companies that operate on this model must have
accurate insight into customer demand to ensure they’re producing just enough products to meet it.
Intelligent SCM tools allow companies to optimize the planning and forecasting stages, save money
and prevent waste and overstocks.

Moving forward, modern SCM technology won’t just make the supply chain more efficient. It’s poised
to make the entire enterprise smarter and more innovative than ever before.

A Look at Today’s Supply Chain Management Systems

As Industry 4.0 continues to progress, what does this mean for modern SCM systems? The greatest
shift in recent years has been an increased focus on the customer.

Supply Chain Management System Benefits

At their core, SCM systems have always been built to maximize efficiency and reduce operating
costs. While that goal remains, the customer experience is now taking center stage. To maintain a
competitive advantage, companies must be able to identify and leverage the SCM tools that will
enable them to deliver goods and services to their buyers in the timeframe they expect.

Here are three hallmarks of a modern supply chain management strategy:

1. An Emphasis on Agility
In addition to being quicker, the modern supply chain must also be agile. In the past, customer-brand
relationships were relatively straightforward and one-directional. They moved from beginning to end
with very little opportunity for change along the way.

Now, customers can engage with and purchase from companies in multiple ways, including in-store
and online. They also expect personalization at every turn. In fact, more than 60% of today’s buyers
want personalization included as a standard of service, and expect to be recognized as an individual
when they receive an offer from a company.

These expectations are moving beyond the marketing realm and into the production space. In
addition to expecting targeted advertising, customers also want the ability to control their checkout
options, delivery timelines and pickup locations. In turn, they will reward brands that can
accommodate these demands with repeat purchases and ongoing loyalty.

An SCM system that’s rigid and unable to conform to these expectations will be unable to keep up.
Prioritizing fluidity can also help companies work around common issues that could threaten to slow
production, including issues with sourcing and regulatory compliance. The ability to adjust parameters
as required is essential, and newer SCM technologies provide this benefit.

2. Cloud-based SCM
Where can companies look for the agility and flexibility they need? The cloud.
The daily fluctuations associated with today’s enterprise environment can make it difficult for on-
premise legacy systems to adjust. For instance, if a sourcing issue occurs unexpectedly, a custom-
coded application may not have the bandwidth to modify parameters and adapt accordingly.

A cloud-based system, however, could make use of Industry 4.0 technologies to facilitate quick
changes. This is because the cloud is naturally more capable of adapting to change and isn’t bound
by the restrictions imposed by traditional in-house solutions. The cloud is also a better deployment
option for the new and innovative technologies changing the SCM landscape.

However, transitioning and retrofitting your current systems to the cloud can prove laborious and
expensive. In lieu of a full-scale migration, many companies are embracing SCM solutions that
enable them to leverage their current assets while adopting certain elements of cloud-based SCM to
meet their current and future needs.

3. Meeting Demands for Trust and Traceability

It’s always been important for companies to have real-time access to their supply chain. Yet,
increasing customer demands and regulatory requirements have transformed traceability from a nice-
to-have feature into an imperative one.

Intelligent SCM tools can enable this function, and the most effective ones build those tools directly
into your SCM process. They do so using blockchain technology, resulting in a solution that promises
visibility and insight at every turn. While all enterprises can benefit from SCM systems with such
seamless integration, it’s especially important in highly regulated niches, such as the food and
beverage (F&B) sector.

Cutting-edge SCM systems operate as end-to-end, cloud-based product suites that uncover every
aspect of the supply chain, resulting in 100% visibility that leaves nothing hidden or up to chance.
After implementing these technologies, companies are better positioned to meet customer demands,
shorten product lifecycles and stay agile amid market fluctuations.

Looking Ahead to the Future of SCM

What is a supply chain management system? It’s the very backbone of an enterprise, and optimizing
it is a requirement to maintain a competitive advantage with the benefits of SCM systems.

As we prepare to enter a new year, companies are looking ahead at what’s on the horizon for their
supply chain. How can they improve responsiveness and take the customer experience to a new
level? The answer lies in modern SCM systems that operate on a network-based model rather than
the linear systems of ages past. ( Panorama Consulting Group, 2021)

Logistics management
Logistics management is the governance of supply chain management functions that helps
organizations plan, manage and implement processes to move and store goods.

Logistics management activities typically include inbound and outbound transportation management,
fleet management, warehousing, materials handling, order fulfillment, logistics network design,
inventory control, supply/demand planning and management of third-party logistics services
providers.
Logistics management functions

To varying degrees, logistics management functions include customer service, sourcing and
procurement, production planning and scheduling, packaging, and assembly. Logistics management
is part of all the levels of planning and execution, including strategic, operational and tactical.

Further, it coordinates all the logistics activities, and it integrates logistics activities with other
functions, including marketing, sales, manufacturing, finance and information technology.

Importance of logistics management

Effective logistics management is important to companies for a number of reasons, both positive and
negative.

Good logistics management ensures that products are shipped in the most economical, safe, efficient
and timely manner. This results in cost savings for the company and more satisfied customers.

In contrast, poor logistics management can result in damaged or delayed shipments, which can then
lead to dissatisfied customers, returns and scrapped products. The consequences of these problems
include higher costs and customer relation problems. In order to avoid these results, effective logistics
management includes careful planning, proper software system selection, proper vetting and
selection of outsourced vendors, and adequate resources to handle the processes.

Logistics management process

Logistics management generally consists of processes for inbound and outbound logistics traffic.
Inbound logistics is the process of moving goods from suppliers into a warehouse, then into a
production facility to make products. Inbound logistics can include raw materials, tools, component
parts, office equipment and supplies. Outbound logistics is the process of moving finished products
out of warehouse inventory and shipping them to customers.

Here are some examples: For a computer manufacturer, inbound logistics might involve electronics
parts, computer chips, cables, connectors, molded casings and shipping cartons. Outbound logistics
involves the finished computer and associated peripheral devices. Meanwhile, for a furniture
manufacturer, inbound logistics could involve wood, glue, fabrics, screws, nails, paint and safety
glasses, while outbound logistics would involve the finished furniture.

Logistics processes also include reverse logistics, or the management of all the functions used to
return goods and materials. Reverse logistics takes goods from the customer or final destination and
returns them to the originating organization, where they can be reused, repaired, remanufactured or
recycled.
Logistics management software

Logistics management software includes functions and processes that enable companies to manage
and execute product storage and delivery. Logistics management applications run the gamut from
large ERP systems that include comprehensive and integrated functions to specialized applications
that only handle a few functions.

Logistics management functions that are a part of ERP systems are usually integrated with other
business functions in the system, like sales, finance, procurement and human resources. More
specialized logistics management applications focus on warehouse management, transportation
management, and supply chain planning and supply chain execution.

Some logistics management software is designed to be configurable for various industries, while
others are aimed at specific industries. Logistics management software generally began as on-
premises systems, but more cloud or hybrid cloud options are now available.

Prominent logistics management software vendors include SAP, Oracle, IBM, Microsoft, Infor, Epicor,
JDA Software, Manhattan Associates, HighJump, PTC, Coupa, Kinaxis and GEP. (O’ Donnell, 2018)

The Role of Logistics in a Supply Chain Management

Supply chain management (SCM) is one of the main ways to optimize the budget of enterprises
producing goods and/or services. At the same time, a great role in the supply chains is played by
logistics – the management of physical, informational, and human flows in order to optimize them and
avoid unnecessary waste of resources.

Below we will talk about the important role of logistics in supply chain management that includes
many suppliers, transit points, as well as points of departure, and destination

What is the Difference Between Logistics and Supply Chains?

Logistics and supply chain should not be confused. Logistics is a rather narrowly focused concept
(narrower than the SCM), which simply means globalization of resource management — from every
local unit to the entire network of production points.

In turn, supply chain management is a more complex category. Supply chain management involves
logistics and thus performs end-to-end optimization – that is, not only within the enterprise but also
when working with counterparties.

The purpose of efficient logistics management is to achieve maximum competitiveness and

profitability of the company, as well as the entire network structure of supply chains, including the
end-user. In this regard, the integration and introduction of innovations into the processes of supply
chains, as well as into the processes of logistics, should be aimed at increasing the overall
productivity of all their participants.

The Functions of Logistics within Supply Chain Management

If we systematize all areas of logistics that need to be developed for the rational management of
production resources, we can single out the following functions:

 Warehouse design and management. This role of logistics in supply chain management covers
several tasks at once: from the design of storage facilities to the requirements for storage of
products and ending with the introduction of various automation solutions (for example, for
machinery intended for transporting goods within warehouses);
 The formation of packages. Packaging, tracking and accounting – all of these tasks allow for
end-to-end control of goods on the way to the customer/distributor;
 Transportation of products. This includes work with cargo carriers and vehicles listed in the
company’s fleet: planning their routes, calculating fuel costs, etc.;
 Working with customs. When an enterprise plans international delivery of goods, it is very
important that during their transportation the goods fully comply with customs requirements
and contain all the necessary documentation;
 Working with intermediaries. Intermediaries in logistics are all third-party, non-company
resources that are directly involved in the implementation of supply chains. In turn, finding
intermediaries with the most acceptable ratio of quality to cost of services, as well as
establishing long-term, reliable relations with them are also included in the list of tasks for
efficient logistics management;
 Working with written off and returned goods. There is also such a thing as “reverse logistics”,
which establishes the rules and routes for transporting the returned/discarded goods, as well
as ways to dispose of them.

Challenges Logistics Helps to Overcome in Supply Chain Management

Given the above list of tasks that logistics performs in supply chain management, we can single out a
number of advantages provided by its correct implementation:

 Minimization of enterprise expenses. The main role of logistics in supply chain management is
primarily to increase the overall value of each delivery, which is identified by customer
satisfaction. This means that the reduction and optimization of labor resources must be tied in
with keeping up a certain level of quality customer service. This problem is solved both by
reducing the total labor resources (primarily by eliminating unnecessary chain links), and by
introducing automation solutions;
 Consolidation of traffic volumes. Transportation costs are one of the largest expense
categories in logistics management. In general, transportation costs increase depending on the
distance, batch size, and product exposure to damage. On the other hand, the transportation
cost per unit of weight decreases as the lot size increases on long runs. Thus, the maximum
consolidation of transportation volumes can help reduce transportation costs. Enlargement can
be achieved by combining small lots into a single large one, intended for a long run (i.e., for a
longer distance);
  Improving the quality of service. With regard to the quality of service, it is largely influenced by
the speed of delivery of the goods to the end-user, as well as its transportation in proper
conditions (for example, many products today are supplied with RFID tags so that both the
manufacturer and the end customer could track whether all storage conditions are being
observed during the transportation of the goods) and within the allowed time limits (this refers
primarily to perishable goods);
 Reduction of actual losses and reduction of possible risks. As you know, a business is
profitable if the value it creates exceeds the costs associated with the implementation of
activities. To achieve a competitive advantage, a company must either carry out these
activities at lower costs or carry them out in a way that will lead to differentiation and price
increment. The first thing to be done to effectively solve this problem is reducing the losses
that are associated with the return of goods. It is very important to plan not only the routes on
the way to the distributor or the end-user but also the routes by which the goods are delivered
back to the warehouse or to the establishments for their disposal. The second factor affecting
risk reduction is the correct planning of enterprise resources, which minimizes the likelihood of
damage or loss of goods or manufacturing components on the way from the extraction of raw
materials to delivery of the finished product/service to the end-user;
 Minimization of the need for intermediary services. Intermediary services (transportation,
storage, marketing, recycling, etc.) take up the lion’s share of the cost of the implementation of
supply chains. Experienced logisticians plan routes so as to minimize the need for involving
third-party services for efficient logistics management;
 Supporting goods with the necessary documentation. Insurance and support of documentation
are two fundamental tasks of logistics, solving which helps to eliminate any problems
associated with legal restrictions in the storage, transportation, and marketing of goods;
 Timely response to changing market demands. Advanced logistics scenarios also help to
quickly adapt to changing market requirements and, thereby, maintain top positions against the
backdrop of competitors and remain in demand for the target audience.

Values Logistics Provides to the Supply Chain Business

Supply chain management with the help of logistics tools helps to ensure a consistently high level of
customer service with some reduction in the cost of extracting raw materials, storing, transporting,
and selling goods/services to end-users. Thus, the role of logistics in supply chain management is to
carry the following values:
 ensuring the smooth operation of all parts of the supply chain. Continuity of workflow is a rapid
step towards both reducing the expenses and increasing overall customer satisfaction.
Usually, this is achieved through proper planning and the formation of a fault-tolerant scheme
of interaction between the individual links in the supply chain;
 release of labor resources. On the other side of fault tolerance is the elimination of redundant
elements (intermediaries), the participation of which entails additional costs. Thus, it is very
important to find a balance in which the reduction in labor resources does not entail forced
downtime during the implementation of supply chains;
 coverage of a new target audience. Increasing overall customer satisfaction is a rapid step
toward popularizing your brand by means of word of mouth. An additional advantage is a fact
that such advertising (which is also one of the most effective methods) comes absolutely free
for you;
  net cost reduction. By eliminating a number of intermediary links in the supply chain, you will
be able to reduce the net cost of a product or service, and thus increase their availability to the
end-user.

Conclusion
Let’s sum up the role of logistics in supply chain management. As you can see, logistics and supply
chain management are two inseparable concepts that help not only reduce the company’s overall
costs for the production of goods and/or services but also improve the overall impression of the level
of service for your target audience. The choice of the right software also plays a significant role in
optimizing logistic tasks. After all, automation today is at the head of the progress for industrial
enterprises. (Tural Mamedov, 2021)

What is the Relationship Between Manufacturing and Logistics?

The concept of logistics and manufacturing go hand in hand; however, both have their portfolios to
look after. Logistics deals with managing the resources by acquiring them and transporting them from
one place to another. Moreover, it also deals with the storage of the products. On the other hand, the
process of manufacturing deals with the process of changing the raw material into a finished usable
product.

Role of Logistics
Logistics is among the main building blocks of a business. The role of this portfolio is not only
confined to the movement of the resources from one place to another, but it also includes the safety
of the products and proper storage in case of delicate products. Hence, logistics play a vital role in
building a business.

Manufacturing Logistics
Manufacturing logistics is a process of analyzing, planning, and coordinating the essential information
to carry out the vital functions required to keep a company running. These functions, in the end,
merge to manufacturing and then successful shipment of the resources.

Manufacturing Vs Logistics
Logistics contributes to the economy by providing access to more significant markets that can be
seen as taking advantage of the various locations. Supply chain management deals with the
coordination process of logistics and management; however, logistics and manufacturing deal with
the processing and transporting of goods, to be more precise.

Manufacturing and Logistics Trade-Offs

When talking about logistics, certain costs of products vary; for example, some goods are more
expensive than expected, some have low transportation costs, others have average storage costs,
but the trade-off occurs when there comes a balance in the prices at the end. The exchange in
manufacturing occurs when the process of coordination is incompatible. Concluding, issues on both
sides may highly affect the other interlinked portfolio.

Logistics Management Essential for Manufacturing Companies

It is precious when it comes to transportation and manufacturing goods. One flaw in the process
might affect the manufacturing hence finding an efficient company for the logistics process is a game-
changer for your firm. The reason behind the immense importance given to these portfolios clarifies
that they play a magnificent role in establishing a company,

FAQs
What is the relationship between logistics and marketing?
Logistics deals with the movement of one product from one place to another; however, marketing
deals with how to showcase a product to create awareness in people regarding that good.

What are the production logistics operations?

For production, the process of manufacturing, storing of raw materials and transportation of spare
parts, etc., is a production logistics operation. (Gillson Inc. 2021)

A Relationship Between Logistics & Marketing

At first glance, logistics and marketing might seem to be diametrically opposed. Logistics deals with
the nuts and bolts of handling and delivering products. Marketing, on the other hand, is a combination
of creative activities and the detailed analysis that backs them up. However, these two departments
within any company have a symbiotic relationship. As clients, for example, routinely expect
production and shipping to be fast and efficient, logistics is an increasingly important component of
marketing.
Understanding Logistics
Logistics refers to the part of the company that moves around goods. The term is sometimes used to
refer to the trucking industry, but it's much broader. Logistics cover everything from receiving goods
from suppliers overseas, getting them to a U.S. entry point, packaging them for domestic sale,
warehousing them and shipping them to stores or fulfilling online orders. Companies can handle
logistics in-house or can use outside third-party logistics providers, sometimes referred to as 3PL.

The importance of logistics becomes obvious as soon as there is a problem anywhere in the logistics
chain, such as when:
 a shipment of supplies is delayed,
 inventory levels drop to zero,
 inventory levels increase beyond warehouse capacity,
 outbound shipments get bogged down.
 Any of these situations not only hurt sales, they can drive a profitable business quickly out of
business.

Marketing's Relationship in Logistics

Marketing is the practice of understanding what customers need and then communicating how the
company can achieve those needs. While advertising, social networking and product packaging
design are all part of marketing, so is the analysis of sales and response data to figure out what
customers like and want so that the outgoing messages can be adjusted.

Logistics' interface with marketing is highlighted whenever a company markets such things as:
  free shipping,
 next-day delivery
 same-day delivery.

As Inbound Logistics points out, a good logistics system becomes an advantage that can easily
outperform any other marketing your competitors may be running.

Handling Demand
Marketing that works drives increased sales – and when it does, both production and logistics
systems get stressed. Once products are made, they need to get from the factory to the store or
customer in the case of an e-tail business. Logistics has to not only take care of this but ensure that
there is enough excess capacity to handle the next hot product. When a company's marketing focus
shifts, reverse logistics take care of getting products out of stores or accepting returns from
customers.

Leveraging Logistics
An efficient logistics department can become a marketing tool. Some companies have logistics
systems that are so efficient that they're able to charge lower prices because of them and market that
fact. Others can achieve delivery times that either let online shoppers get their goods faster or, in the
case of fast-fashion retailers, can use their logistics systems to move goods from overseas factories
to stores quickly enough to be on top of (or ahead of) the latest trends.

Managing both logistics and marketing often takes creativity. In late 2020, when the USPS and
delivery companies were overwhelmed with a sharp spike in packages, Forbes highlighted an Uber-
based start-up that small businesses could use to bypass logistical bottlenecks to get packages
delivered before Christmas. (Chron Contributor, 2020)

Why Is Logistical Efficiency Important in Marketing?

Logistical efficiency refers to how effectively a business conducts its operations. Logistics typically
concerns the movement of physical objects and vital information. A business with good logistics can
keep track of product shipments and move products or information quickly to the correct locations.
This has several important impacts on marketing, and marketing is often connected with logistics
strategies.
Reduced Delivery Time
Reduced delivery time refers to a shortening of the period between a customer ordering a product
and that customer receiving the product. When companies need to ship inventory (as e-commerce
businesses do), delivery time is a vital concern of both logistics and marketing. By shortening delivery
time, businesses can impress customers and create loyalty while adding more value to their
processes than competitors have.
Pinpointing Customer Issues
With a highly efficient logistics strategy, companies can easily track product orders and product
shipment data. This allows a business to spot exactly where a product has gone, what product was
originally ordered and shipped and what needs to happen to fix problems with the order. With such
expert tracking and communication procedures, a business can easily placate an irate customer and
turn a bad situation into a good marketing opportunity.

Quality Control
Logistics is also important to manufacturers, because it allows for a high level of control over
production processes and immediate adaptations. A company does not want to produce flawed
products that have inherent problems -- few things are as damaging to a business's reputation. With
efficient logistics, a manufacturer can spot problems immediately and quickly narrow down the issue
to find the source and correct it.
Extra Services
Many businesses offer extra services as part of their marketing strategy; these allow them to impress
customers through advanced customer service techniques. With modern logistics, companies can
offer advanced tracking options for product shipments that customers can track at any time. Good
logistics also allows for greater product customization and tools for customers to use themselves.
((Chron Contributor, 2020)

Factors affecting the Logistics Management Cost

In supply chain management most of the manufacturing organizations outsource materials from the
overseas and proper control of cost is a crucial factor. Logistics Management which usually covers
procuring transporting and storing of goods is affected by variation in cost. For example variation in
fuel price affects transportation and international trading laws affect the delay in getting materials. The
following things can be done to reduce the cost in Supply Chain and Logistics Management.

1. Understanding about the actual cost of outsourcing raw materials which include the freight
charges, duties to be paid and cost involving the transportation of inventory.

2. Focusing the variations in the timings between the transits which causes the freight forwarding
charges and also storing of inventory in bulk is another factor affecting cost.

3. Considering the cost that is involving in the duty and tariff rates of the region.

4. Consolidating shipments from a single country into one and clubbing them together will reduce the
cost involved in the Supply Chain.

5. Informing to the concerned people about the actual cost involved in freight and the various services
that are come to affect the decision making factors. ( WUC, 2016)

The changing role of Customs: Customs aligning with supply chain and information
management
The World Customs Organization (WCO) Framework of Standards to Secure and Facilitate Global
Trade (SAFE) introduced concepts of supply chain supervision and authorised operator schemes.
While it has been implemented in many countries, supply chain supervision still requires further
exploration and development. In this article we present a vision on how the role of Customs could
change in the coming years, taking into account innovations in supply chain management and
information technology. We present how the Customs Administration of The Netherlands adapts their
supervision, based on these innovations. The innovations range from the data pipeline to collect extra
data to cross-validate customs declarations, the use of big data and data analytics, new advances in
detection technology, handheld apps to check goods and drones to support surveillance.

1. Introduction

The WCO adopted, more than a decade ago, the Framework of Standards to Secure and Facilitate
Global Trade (SAFE), which introduced the concepts of supply chain supervision and authorised
operator schemes as a response to demands for increased security (WCO, 2018). Whereas the latter
has been implemented in many countries, known as AEO (Authorized Economic Operator), C-TPAT
(Customs Trade Partnership Against Terrorism) or Certified Enterprise, supply chain supervision still
requires further exploration and development. However, since the introduction of SAFE we have
witnessed additional obligations to provide data at entry and exit being placed on several supply
chain stakeholders that do not have a business interest to hold these data nor—in a commercial
sense—being held responsible for these. When we want to further innovate supply chain supervision,
we need to respect roles and responsibilities of different stakeholders in the supply chain. This
implies that, when it comes to information on the content of the consignment, contracts, price,
Incoterms, quality and product, we should move upstream to the shipper, the one who packed the
box, or to the buyer, as only they know exactly what is ordered. Innovation of supply chain
supervision requires respecting interests, roles and responsibilities of stakeholders in business,
placing burdens on the right parties, simplifying procedures and reducing red tape—in particular
within the logistic chain—by re-using data from the source (Baida et al., 2008; Hesketh, 2010;
Klievink et al.; Tan et al., 2011).

Information on quality, quantity, Incoterms and prices must be requested from the buyer, or the
supplier where there is no buyer at importation. Demands on physical security and the integrity of
movements should be put on the logistic stakeholders in the supply chain. More customs training and
academic education of supply chain management, IT, business compliance, as well as legislation and
enforcement (as already addressed in the European Union Competency Framework for Customs
professionals in the public and the private sector), are key investment requirements to initiate and
enhance further innovation in supply chain supervision (see European Union, n.d.). The WCO
upholds the PICARD standards, mainly focusing on management skills for customs executives (see
WCO, n.d.). As such, today’s knowledge requirements move much further than internal customs
management, enforcement and legislation. Updating the PICARD standards, which were once
leaders in global customs knowledge development, to today’s requirements in skills and expertise, is
urgently needed to enhance supply chain supervision. By taking the lead in this initiative the WCO will
maintain its leading role in safeguarding the global supply chain. In this article we will present a vision
on how the role of customs could change in the coming years. We present a compilation and
adaptation of the vision and ideas that were published earlier in white papers by the Customs
Administration of The Netherlands (Customs Netherlands, 2017; 2020) based on innovations and a
sequence of research projects that Dutch Customs are involved in. We would like to share these
insights with the WCO community.

2. How the role of Customs could change

Customs is responsible for the enforcement of the fiscal integrity, security and safety of crossborder
movements of goods. At the same time, Customs is expected to contribute to the economic
competitiveness of the country by providing support and furthering the implementation of measures
that promote trade. As a result, Customs fulfils a dual role: it both inspects and stops goods and
allows goods to pass through without unnecessary interruptions. Customs intends to continue to fulfil
this demanding task in an efficient and effective manner in the future.

2.1 Pushing boundaries

For this reason, some years ago Dutch Customs—under its ‘Pushing Boundaries’ motto—developed
a new vision that will serve as a benchmark for reviews of all the measures to be implemented in the
coming years and marks the final destination Customs will aim for. This vision is not a blueprint, but
rather a compass that will enable Customs to take the right steps to reach its ultimate objective. A
preliminary study identified that the approach of Customs, as prescribed in the Pushing Boundaries
vision, could help trade to reduce their customs-related costs by 137 million US dollars per year in the
Netherlands (ACTAL, 2013).
Since the introduction of the Pushing Boundaries vision, international trade flows continuously grew.
This is not only applicable to goods imported or exported by sea but is equally applicable to other
modalities. Above all, e-commerce has changed the landscape substantially. However, at the same
time Dutch Customs’ traditional enforcement capacity is expected to remain unchanged or even
decrease. As a result, Customs needs to refine its enforcement process. For this reason, Dutch
Customs has developed its enforcement vision—a concept of the most sophisticated manner in which
the organisation can supervise large volumes of cross-border flows of goods in the near future. In
essence, pursuant to this vision, Customs supervises 100 per cent of the goods that cross its EU-
external borders. However, this does not imply that Customs opens each and every box or container,
but that Customs can determine whether the required notification and declaration has been filed for
every transport entering or exiting the country. It also implies that the information in the declarations
and other sources provide Customs with a thorough insight into every container and pallet entering or
exiting the country. In this ideal situation, Customs will be able to conduct more targeted physical and
administrative inspections than is currently the case. It is aimed to increase the effectiveness of
enforcement interventions. These inspections are preceded by the collection and weighing of
information, and by risk detection and selection. To achieve these objectives, innovations have been
conducted in five innovation areas: auto-detection of goods, auto-detection of data, and the
differentiation of three flow types of goods; green, yellow and blue, each receiving different
enforcement actions (see also Figure 1).

2.2 Automated detection

Customs will need to continue to invest in innovative technology and ICT to be able to implement this
philosophy. A variety of modern technological aids have already increased the effectiveness and
efficiency of Customs’ supervision. These include, to achieve 100 per cent supervision, what are
referred to as the aviation and maritime ‘virtual networks’: radar images made available via the
Coastguard and Ministry of Defence provide Customs with an insight into the vessels and aircraft in
territorial waters and airspace. Nuclear detection gates are the first enforcement layer, with 100 per
cent of all cargo moving though ports being detected on radiation. These gates are located at logical
points along the customary routes: drivers do not need to make detours or stop as the equipment
automatically detects whether goods emit radiation. Customs does not need to intervene unless
variances are detected. In other words, this system constitutes a form of 100 per cent inspection that,
in principle, causes the business community no interruption whatsoever.

A next step in the auto-detection is the introduction of algorithms in non-intrusive scanning

equipment. The scanned images currently need to be analysed by an officer, but with research and
developments as set out, in the future they will be examined by automated scan interpretation
software. Software will then compare the scans with reference files that include all the information
about the relevant goods known to Customs, such as information from the declarations. Variances
detected between the information on the documents and the contents of the container will result in the
generation of a signal. Customs will use this intelligence to take appropriate action.
A second development track of which Customs has great expectations in the long term is the co-
creation of scanning equipment that not only makes images but also assesses them for irregularities.
These are artificial intelligence systems that signal that there is a mismatch, for example, between the
data entered in the declaration and the goods present. Or that there are items in a container, suitcase
or postal package that are prohibited or subject to a licence. In the meantime, predictive models for
goods scans are being developed, based on data analytics algorithms. But that is no easy task. In
order to design predictive models, data analysts must be able to rely on an archive (database) with a
large number of scan images. For example, automated recognition of a weapon requires hundreds of
images from all angles of this weapon. To process the goods scans automatically, it is necessary that
all sensor data—in this case the x-ray images—is collected and processed in one central database,
together with the declaration data and historical inspection data. The results of this automated
processing must then be taken back to the scan.

In the past, there was no need for this infrastructure to store, collect and process sensor data.
Customs is now faced with the challenge of building this infrastructure with a minimum of delay. The
first thing to do now is to store and label scan images on a large scale for reuse and analysis. To
place what scanned images can reveal in the right context, it is important to label each type of object
with the utmost care. There can be no reliable algorithm without thorough data preparation! It goes
without saying that this data preparation is a time-consuming and labour- intensive process. The
process of storing, labelling, reusing and analysing scan images also involves formal legal aspects.
Take the overriding importance of information security, for example. In short, what are the
preconditions for using and sharing data to enable the auto-detection of scanned images? And how
do we ensure that we put these conditions into practice in the right way? These issues are relatively
new to Customs and take time. For Customs, the development of auto-detection of data and goods
calls for investment in time and effort. But the first steps in this promising direction have been taken.

To rapidly develop this X-ray scanning and detection technology, Dutch Customs is taking part in
various international research projects in which new technologies in this field are being tested. An
example is the European Commission – funded research project C-BORD (Effective Container
Inspection at Border Control Points) in which customs services, knowledge institutes, universities and
industrial partners are working on the development of ultramodern scanning and sensor techniques,
which are used for integrated inspection purposes in a single passage for trucks (C-BORD, n.d).
Special attention is paid to the detection of narcotics and nuclear goods in freight containers. How
does C-BORD work? As soon as a truck passes through the gate, it is subjected to a range of
inspection technologies. A component or a combination of components of the inspection line is
activated for each type of goods and for each type of risk selection. Gas phase measurement is
carried out, for example, by means of sensors (i.e. an analysis of air from the container). This is
followed by passive radiation detection. Traditional X-ray scanning technology is also part of the C-
BORD arsenal, but in its most advanced form. These steps may give rise to further checks, such as
when a significant radiation value is detected. The second-line photo-fission measurement offers a
solution; this is a new method in which an X-ray beam is briefly aimed at a single position, after which
secondary radiation is released and captured.
This can be used to identify heavy metals, such as uranium or plutonium. The recently developed
neutron scan is also being operated in the second line. This instrument is specifically aimed at
identifying organic substances, especially narcotic
drugs and drug precursors.

These examples make clear that, although Customs continues to adopt a risk-oriented approach, the
organisation is also in part shifting towards 100 per cent inspections based on state-of-the-art
technology. Elements of this approach are already both feasible and operational at the main ports
such as the port of Rotterdam and Schiphol Airport. This approach is even more effective when
improved detection technologies for the physical movement of goods is supplemented by the
associated declarations for the goods.

2.3 Intelligence: collecting, weighing, validating, selecting, detecting

Customs automated declaration processing systems are already capable of screening many
elements of declarations and accepting the declarations by the use of business rules. When this
screening reveals, for example, that an inward processing declaration is lodged while the declarant
does not hold the required licence, the declaration will not be accepted. The same goes for an
illogical combination of country codes and certificate data. Customs systems also identify declarations
that contain illogical information, such as an unlikely customs value. In the longer term, Customs will
incorporate more of these automated inspections in its declaration acceptance procedure. On the
control elements that are checked by business rules, Customs conducts 100 per cent controls.

Specific declarations are selected for further inspections for other risks. These selections are based
on intelligence: Customs collects information from various sources, refines the information, based on
its
World Customs Journal knowledge of goods and risks, and then draws up selection profiles. The
information in declarations filed with Customs is reviewed against these profiles. As a result, specific
declarations may be flagged for an inspection. The number of sources of and types of information
used in these processes are being expanded continually. Customs will shortly, for example, be able
to detect, online, when a business was established, the itinerary of a container from origin to
destination and the business’s regular goods flow. In other words, Customs will have much more
information available prior to the inspection of consignments. Part of the detection process will then
be based on automated systems that select risks. In the longer term, declarations will be inspected by
specialists who perform their duties on the basis of workflow management systems.

2.4 Green, yellow and blue flows

Although an increasing number of risks can be detected by these autodetection mechanisms, still
risks remain that require the ‘traditional’ interventions. But there the other innovation areas of the
enforcement vision Pushing Boundaries appear. Imagine the total flow of goods as one big haystack,
and customs searching for the needle. But knowledge of the integrity of traders and supply chain
offers the possibility to differentiate trade flows. A supply chain for which the data and movement are
known and secured does not need to be checked in the same way as a shipment from an unknown
trader.
And trusted traders, like AEOs, deserve different treatment due to the level of compliance they have
built into their businesses. Therefore we split the haystack into three: the yellow flow, smart and
secure trade lanes, in which controls are mainly done at loading: the green flow, trusted traders,
mainly checked by system-based controls in the companies’ records; and the blue flow, which is
treated with the more traditional enforcement instruments and has many more physical inspections.

2.5 The yellow flow: data pipeline for enabling smart and secure trade lanes
When the green and the yellow flow traders make available additional data about shipments,
stakeholders and transactions, Customs can better assess the risks in the flow of goods. The better
the assessment, the less the risk of unnecessary physical interventions through inspections, so data
sharing is a win-win for all.
Dutch Customs has been making great efforts to promote these developments for some years. For
example, Customs participates in European Commission – funded research projects such as the
ITAIDE, IINTEGRITY, CASANDRA and CORE, which are exploring options for the implementation of
a sophisticated form of supervision of the entire chain (Baida et al., 2008; Grainger et al., 2018;
Hesketh, 2010; Hulstijn et al., 2016; Jensen et al., 2017; Klievink et al., 2012; Ravulakollu et al., 2018;
Rukanova, Hennignsson et al., 2018a; Rukanova, Zinner et al., 2018b; Rukanova et al., 2019;
Rukanova et al., 2017; Segers et al., 2019; Tan et al., 2011; Tan et al., 2019; van Engelenburg et al.,
2017; CORE Project, n.d.). The key concepts developed in these projects are the Data Pipeline and
the Customs Real-time Information System (CRIS), a monitor with all the relevant goods information
from each player in a trade lane. The data pipeline is a kind of internet for logistics that is brought
about by connecting the enterprise IT systems of all parties in a supply chain, and which gives
Customs access to data from the source such as purchase order, invoice or container packing list to
cross-validate the accuracy of declarations. CRIS is an interface of the data pipeline where
businesses make this information available on a voluntary basis.2 This dashboard is developed by
Dutch Customs, and it includes technology that ensures that the information accessed via a data
pipeline from different business systems is available in a uniform manner. When Customs can consult
this information via CRIS as and when it wishes—and possibly, even analyse the information with its
risk selection tools—then it will need to request much less supplementary information from the
relevant businesses manually.

2.6 Benefits offered by advance declarations

Another, general feature to reduce logistic burdens is the option to lodge declarations earlier than at
arrival of the goods. As a result, the system can assess whether all technical acceptance
requirements have been met at an early stage. Consequently, the control begins once the goods are
on their way to the country of destination. Customs can carry out a risk analysis of the data, if
required, or request the underlying documents for their verification—all before the arrival of the goods
(e.g. Rukanova et al., 2017). This approach can avoid delays during the physical movement of the
goods. For trusted traders, Customs could even communicate ahead of time that shipments at arrival
will be inspected physically, which increases predictability of the supply chain substantially.
2.7 Coordinated border management
The success of the differentiated approach in supervision of goods depends on the willingness of
colleague enforcement authorities, such as for example the product and food safety agencies, to
keep pace with Customs’ vision and operational approach, as this is necessary if the business
community is to gain the potential benefits. Dutch Customs has already implemented a government
single window for incoming and outgoing maritime and air traffic—a facility whereby businesses
submit information once and the various border enforcement authorities send one reply message and
re-use the information as required. In addition, it will be possible to complete the one-stop-shop and
joint inspection principles: all supervision authorities carry out their inspections at the same logical
place in the transport chain and the same logical moment. This will enable government agencies to
jointly work towards coordinated border management. In the research project CORE, Dutch Customs
developed a coordinated border management approach jointly with the Dutch National Plant
Protection authority to share electronic phytosanitary certificates of flowers from Kenya, which can
lead to faster import clearance and significant reduction of logistic delays after arrival of the flowers at
Schiphol airport (Rukanova et al., 2017). In particular, the implementation of this coordinated
digitisation at both ends of the supply chain, in Rotterdam as well as in Kenya, made this project
unique.

2.8 Data analytics

Data analytics scientists at Customs Netherlands are involved in the design of data analytics
algorithms for accessing, structuring and analysing large amounts of data. With the aid of these smart
technologies it will eventually become possible to automatically detect irregularities and fraud patterns
in declaration and other data and scanned images and to develop predictive algorithm software.
Customs is currently working on a project concerning risk filters. The aim of these filters is to reduce
the relatively high number of false positives in the traditional risk selection of Customs. Based on
historical data about declarations and related inspection results, a number of test filters have been
built, through which what is rejected goes back in, as it were. These are test filters on the entry
process and for taking samples for examination in the customs laboratory. The filtering method
makes it possible to determine whether a perceived risk is real and whether it is worthwhile to check a
batch of goods. This is expected to make customs supervision more efficient and effective. It is also
good news for the trade as it means a reduction in unnecessary inspections and a reduction in logistic
delays. How does the filtering method work? The model assigns a risk score to each selection
produced by a risk profile. If the risk score is higher than a set threshold value, a selection is checked;
if it is lower, no check is carried out. So, the higher the threshold setting, the fewer checks there will
be; but also, the higher the number of missed non-compliant declarations. However, research by the
data analytics experts shows that it should be possible to reduce the inspection selections in the entry
process by a maximum of 30 per cent without this leading to non-compliant declarations being
missed.
Another example of data analytics innovations for customs risk targeting is the website data retrieval
tool that is being developed in the European Commission – funded research project PROFILE
(PROFILE, 2018) in which Dutch Customs actively participates. This website data retrieval tool for the
postal and courier process can be used to collect additional data from external sources, such as e-
commerce websites, to cross-validate the accuracy of goods descriptions of customs declarations.
The first check is for the price of a product. If the value of a given goods description found in the
declaration differs significantly from the average value found on the internet, this could be a reason to
physically check the shipment. The long-term aim is to automate this cross-validation process (see
e.g. Rukanova et al., 2019). Another objective is to create more precise risk indicators and risk
profiles by means of data mining in historical datasets. In particular, algorithms are developed that
can identify risks with increasing accuracy based on historical declaration data, profiles and
inspection results. In another research project, Dutch Customs developed a mobile app that can help
to identify prohibited Chinese medicines being transported in passenger luggage.

2.9 Camera surveillance and drone technology

In the context of Pushing Boundaries, good progress has been made in the supervision of the blue
flow in recent years. Important innovations have already been covered in the previous sections: the
installation of onsite scan systems at all container terminals and the State Inspection terminal in the
Port of Rotterdam and the Joint Inspection Center at Schiphol. An area still under development is
airborne inspection. Using drones will make it possible in the future to observe port areas, vehicles
and vessels. In 2018 the Port of Rotterdam carried out experiments with unmanned aircraft as a
potential tool for customs supervision. In this pilot, Customs joined the Coast Guard, which has been
conducting experiments into the added value of drone technology for the maritime domain for some
time now. For Customs, for example, there were tests to establish whether airborne objects could be
selected for inspection using cameras, whether the surroundings of these objects could be closely
monitored, and whether any risks could be identified more quickly in this way. Customs will also
investigate whether drones can contribute to the monitoring of locations around ships with a high risk.
This aerial inspection should be seen as complementary to the existing surveillance using video
networks of fixed CCTV surveillance cameras. In the future, Customs also plans to experiment with
mini drones. These drones will not operate in the open air, but only in enclosed spaces—especially
onboard vessels. This concerns small locations that are difficult for tracking dogs and officers of the
national inspection team to pass through. There are also places where there is a danger to people
and animals, such as fuel tanks where toxic gases are present; these are, of course, ideal hotspots
for concealed contraband.

2.10 Blockchain technology

Blockchains are distributed databases that together form a network. Blockchains make it possible for
parties to securely share data and execute transactions and to reach consensus agreement on the
existence, status and changes of this shared information (Zheng et al., 2017). Using blockchain
technology means that all the databases in a network register the blocks of information that are
associated with the transfer of value or exchange of messages and data between the parties in the
network. Software links these blocks to each other to create a digital general ledger in which the
assets, debts or properties of all the participants in the network are stored. The information stored in
the digital ledger is irrefutable and cannot be manipulated. It is also possible to program so-called
smart contracts in blockchains; for example, conditions for a value transaction in advance, such as a
check on a minimum balance, the availability of the right authorisations, or trigger a payment from
buyer to seller. The network can then verify a number of aspects, such as the authorisation of the
parties concerned. Only when all the conditions have been met is the transaction automatically
completed. Examples of such conditions are the issuance of a bank guarantee for the start of a
customs duty exemption of transit procedure, or receipt of a bill of lading by the bank that activates an
automated payment to the seller according to a letter of credit arrangement.

The technology that makes blockchains possible is based on various emerging techniques such as
data exchange between distributed data bases, cryptography and consensus algorithms. Blockchain
technology is already operating at a global level. One example of such a worldwide operational
blockchain platform for sharing logistic and customs-relevant data is the TradeLens system
developed by MAERSK and IBM, of which the initial prototype version was developed in the CORE
project (TradeLens, 2020; Segers et al., 2019; Tan et al., 2019). TradeLens users experience the
global platform as a messaging service. It gives the exporter a web address to which they send a
contact number, which is then stored in the blockchain. Which data they receive (e.g. from the
forwarder) and in what form, depends on their authorisation. Typically, TradeLens contains risk-
relevant datasets that correspond to a container, such as the invoice, packing list and bill of lading
related to the goods shipped in a container. Dutch Customs is developing a dashboard—CRIS—that
a customs officer can use to retrieve these data via TradeLens about the containers coming to
Rotterdam (i.e. all the data provided by the parties concerned in TradeLens). Using a risk filter,
Customs can identify the most high-risk shipments. Based on these findings, Customs could in turn
provide status information to the TradeLens platform, such as ‘container selected for inspection’ or
‘container released’. TradeLens can count on the increasing interest of the business community.
More and more shipping companies, shippers, importers and exporters are now using this industry-
wide platform.

2.11 The spot on the horizon—smart enforcement—smooth logistics

The change of the trade landscape requires Customs to constantly adapt to the outer world’s
changing demands. But also to have a permanent innovative approach. Therefore, the vision Pushing
Boundaries, once developed to introduce blue, yellow and green trader flows, is changing. With
increasing technological developments and changing needs in enforcement, a stronger is placed on
autodetection. Regardless in what flow goods will be placed, all in- and outgoing cargo and data are
scanned automatically on an increasing number of risks. And customs interventions are not merely
done based on the possibility that a detected risk shows a mistake. Customs act on anomalies,
differences in data detected in various sources of information, of which the customs declarations and
scan images are just a few out of a wide range of data sources.

2.12 Multidisciplinary customs education

The innovations described above require multidisciplinary expertise from customs officers on
customs legislation and procedures, supply chain management and information technology and
compliance. Customs officers need to understand how supply chains are managed to be minimally
disruptive when physical inspections are still needed. And they need to understand how companies
have implemented the appropriate internal controls in their IT systems to mitigate the customs risks in
their business operations. This multidisciplinary expertise is taught in the Master Customs and Supply
Chain Compliance3 of the Rotterdam School of Management, which is based on three pillars:
teaching expertise in (1) customs legislation and procedures, (2) supply chain management and (3)
information technology and compliance. This master’s program is based on the principles of the
Pushing Boundaries vision and was developed in close collaboration with Dutch Customs. This
master’s program is internationally recognised and accredited by the European Commission in the
context of the European Union Competency Framework for Customs as well as by the PICARD
program of the WCO.

3. Conclusion
In summary, Customs needs to move more to the supply chain, the innovation area that is left partly
underdeveloped compared to the other goals of the SAFE Framework of Standards. An example of
the role of Customs in a supply chain approach can be found in the Dutch vision Pushing Boundaries.
Although this was developed a few years ago, Customs is still working towards autodetection and its
layered approach enforcement concept, with supervision in blue, green and yellow variants. Customs
then:
• in the blue goods flow intervenes in the logistics at the border based on risk analyses
• in the green goods flow makes observations—preferably outside of the logistics process—to verify
that traders are acting correctly
• in the yellow goods flow works on securing entire chains.
However, the success of this concept is not only dependent on Customs but is equally dependent on
the business community’s faith in the concept and its efforts. This is already the case with, for
example, the AEO system—which is founded on economic operators’ trust in the system. Trusted
trade lanes, in conclusion, can operate solely when businesses identify their own (commercial)
benefits for improved data sharing and granting government, like Customs, access to those data. The
WCO SAFE Framework aims to establish standards that provide supply chain security and facilitation
at a global level to promote certainty and predictability; enable integrated supply chain management
for all modes of transport; recognise AEOs; and promote the seamless movement of goods through
secure international trade supply chains. Pushing Boundaries provides a Customs response to all of
these goals. Trusted traders receive a customs treatment that serves their level of compliance;
trusted trade lanes are mainly controlled upstream at the consignment completion point, and
Customs-to-Customs information exchange avoids double controls. Business will be acknowledged
for its compliance efforts, and Customs can focus on the real dangers. The WCO PICARD Standards
that focus on knowledge development need to be updated to meet these new requirements on all
levels of the customs profession in government and business. Since the term autodetection was
introduced, many new technological developments have occurred, and the term autodetection has
moved into a new dimension. Whereas initially this focused on mechanisms and technology to split
the flows into green, yellow and blue, the examples in this article show that autodetection is an
enforcement goal in itself. Technology can assist Customs to detect risks in data, from various
sources, declarations, commercial data and images. So technology takes over part of the customs
analytics work. Therefore, we move towards ‘Pushing Boundaries, the next step! Smart Enforcement
and Smooth Logistics’. (Heijmann, Tan, Rukanova and Veenstra, n.d.)
 Activity 1

Reference:

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