8 Ways ERP Can Help

Ever since the 1976 enactment of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR), manufacturers in the aerospace and defense industry have had to avoid selling items listed on the U.S. Munitions List to non-U.S. parties unless authorized by the Department of State or by special exemption.

However, since then, enforcement efforts have increased exponentially, putting aerospace and defense companies and their executives at risk. The U.S. Department of State in 1999 focused more on enforcement of export control. Then, a Presidential Executive Order on Export Control Reform, issued on March 8, 2013, caused the Departments of State and Commerce to issue important new rules, which take effect on Oct. 15, 2013. These rules require companies around the world that manufacture, export, or re-export ITAR-controlled items to evaluate and amend their current authorizations and restructure compliance activities.

The complexity faced by aerospace and defense manufacturers is significant, starting with the multiple regulatory documents with which manufacturers are confronted. The Commerce Control List (CCL), and the United States Munitions List (USML) both mention different items that must be controlled. To confuse matters more, different agencies are responsible for different types of application procedures: the Department of Commerce for the CCL items and the Department of State controlling the USML items.

Enterprise Resource Planning (ERP) vendors know export control is a serious challenge facing companies in the industry, and will typically claim to offer some level of compliance functionality. In selecting a new system of record in an aerospace and defense manufacturing or contracting environment, however, there are specific and granular types of functionality to look for to ensure your new system will meet your export control needs.

One requirement is that now more than ever, suppliers and contractors to the aerospace and defense industry need an integrated application where data from customer relationship management, manufacturing, supply chain management, engineering, and other functions can be shared in a cross-functional, agile fashion. Data and ERP functionality from these and other areas of the business are central to the compliance process, and ERP software must effectively mash up these functions with third-party denied party lists and other data so orders can be taken and fulfilled without delay or exposure to organizational risk.
 

Eight Functions
Here are the eight functions your enterprise software must handle in order to protect you, your company, and your directors.

1. Denied Party Check – When committing to a sales order, the ERP software needs to check to ensure the order isn’t going to a denied party. This might be achieved through a link to a database of denied parties that is compiled and updated regularly by an agency or third party. However, you need to have confidence that you have checked the denied parties list before processing the order.

2. Management of Part Specific Regulatory Schema – For items that might be export controlled, the ERP system needs to indicate which regulation and regulatory body covers the part or material and the classification or rating within that schema that applies to it. Are there specific end usages that are allowed for export and other end usages that are not? The parts catalog needs to hold that information about each part.

3. Management on the Assembly Level – If you are handling an order for an assembly, an ERP application needs to record the parts within that assembly and the extent to which they are covered by different export regulations and commodity jurisdictions. The overall assembly might need one license or several licenses from different agencies. Therefore, the application needs to analyze the bill of material (BOM) and register:

• Which licenses for regulatory parts are in place?
• What commodities do they cover?
• For which end usages are they allowed?
• For what dollar value does the license allow?
• What quantity of the parts does the license permit?

4. License Application – If it turns out that the assembly requires a license the company does not have in place, the ERP software needs to record that license amendment request by pulling in email traffic with the outside parties. If the license application or application to increase coverage of the license is not progressing in a timely manner, ERP needs to escalate that matter up the organization automatically. The order will need to be halted before regulations are broken, and this requires some forced order connections between licenses and orders for controlled parts.

5. License Usage Reporting – The software needs to report on usage of licenses from various government agencies. These licenses are both a valuable commodity and a potential constraint on sales, and executives will need to use ERP to monitor the consumption of licenses by orders and manage that consumption.

6. Secure Document Management – Some documents having to do with control items have licenses that can only be viewed by certain people. Ideally, the same user permissions the ERP software uses to control access to sensitive data within the enterprise software can be made to apply to the document management solution. This means ERP with embedded, native document management functionality will be more desirable for export control.

7. Control of the Export of Data and Intangibles – The ERP system must offer at least some support in controlling the export of technical data or intangibles. This includes ad hoc data exchanges like the shipping of a controlled piece of equipment to an overseas trade exposition. That event will not be on a sales order, BOM, or other formal document subject to other control points in ERP. But this shipping of a sample or display model will probably require a license, so ERP must offer functionality to identify and manage these situations that fall outside of established controls.

Data may also require a license if a company is working collaboratively with a partner company overseas. If, for instance, that overseas partner needs one of our parts or assemblies so they can create the interfacing part, it may require a license. Again, there is no sales order involved, and the ERP application must offer functionality to help link these ad hoc events to export licenses.

8. Other Countries’ Requirements – This whitepaper largely focuses on U.S. requirements, but U.S. exporters often have overseas divisions that might be working in the U.K., other countries in the European Union, Australia, or other countries worldwide, each with export controls requirements. Just within the U.S., regulatory control over items is moving from one regulatory body to another. In addition, doing business overseas makes it even more important to have the ability to move your items and control types, fluidly, from one regulatory schema to another.

International Attention
Various international agreements and regulations that bear close attention include:

• The Nuclear Suppliers Group – “The Nuclear Suppliers Group (NSG) is a group of nuclear supplier countries which seeks to contribute to the non-proliferation of nuclear weapons through the implementation of guidelines for nuclear exports and nuclear related exports. The NSG guidelines are implemented by each participating government in accordance with its national laws and practices. Decisions on export applications are taken at the national level in accordance with national export licensing requirements.” http://www.nuclearsuppliersgroup.org/
  
• UN Security Council Sanctions Committees – “Under Chapter VII of the Charter, the Security Council can take enforcement measures to maintain or restore international peace and security. Such measures range from economic and/or other sanctions not involving the use of armed force to international military action.” http://www.un.org/sc/committees/
   
• The Wassenaar Arrangement on export controls for conventional arms and dual-use goods and technologies. http://www.wassenaar.org
   
• Australia Group – “The Australia Group (AG) is an informal forum of countries which, through the harmonization of export controls, seeks to ensure that exports do not contribute to the development of chemical or biological weapons.” http://www.australiagroup.net
• The Missile Technology Control Regime – “The Missile Technology Control Regime is an informal and voluntary association of countries which share the goals of non-proliferation of unmanned delivery systems capable of delivering weapons of mass destruction, and which seek to coordinate national export licensing efforts aimed at preventing their proliferation.” http://www.mtcr.info/english/index.html
   
• Zangger Committee – “... was formed following the coming into force of the Nuclear Non-Proliferation Treaty (NPT) to serve as the ‘faithful interpreter’ of its Article III, paragraph 2, to harmonize the interpretation of nuclear export control policies for NPT Parties.” http://www.zanggercommittee.org

Keep Current
Export control regulations are changing rapidly, and will continue to do so. Keeping abreast of regulation on each and every order and transaction is not a process that can be effectively handled manually – at least not on a level that ought to inspire confidence from management. Manufacturers and contractors involved in the aerospace and defense industries as well as other industries dealing with materials and equipment of strategic importance will need to rely on more automated systems so they can profitably and efficiently meet customer demands without exposing themselves to legal repercussions.

ERP software that is designed specifically for export control may offer the most direct route to an export control process that inspires confidence while protecting the company and its directors.

Learn more: Visit http://bit.ly/110iimg to listen to a podcast on ERP for defense manufacturing.

IFS North America
Brookfield, Wis.
www.ifsworld.com

About the author: Kevin Deal is vice president for aerospace and defense at IFS North America and can be reached at kevin.deal@ifsworld.com.