Supply Chain

Measuring Whether Digital Trade Opportunities

Digital trade will become more cost-efficient as governments strive to establish more explicit rules for cross-border digital transactions. There are opportunities and challenges for businesses that want to join or expand their digital trade operations, and one of the biggest challenges is assessing the total costs. Digital trade is a broad concept that refers to the internet and digital technologies supporting international trade, online commercial and consumer product and services buying, and digital services across industries for home and work use. It is transforming the global economy, which means it is transforming supply chains. For this reason, governments are working to develop frameworks for identifying and measuring the digital economy. At the same time, despite its ability to spur economic growth and present new business opportunities, digital trade also offers a number of challenges that business leaders, including supply chain and procurement managers, must address.

The Confusing Mix of Digital Trade Opportunities and Challenges

 The University of Oxford Blavatnik School of Government addressed the various challenges of digital trade. They include protecting data flows and intellectual property, identifying the most provident role in e-commerce, and each country having different digital trade requirements and restrictions. Whereas paper documents supported commercial transactions in the past, digital trade elements present challenges such as ensuring that the people signing documents are whom they say they are, and ensuring digital documents are not tampered with. Governments have developed separate trade agreements and laws for domestic and international digital trade.

The OECD identified the opportunities that digital trade presents. Digital trade enables any size of business as well as individuals to participate in international trade, where with digitization and the internet, many could overcome the cost disadvantages. It supports more traditional trade due to lower trade costs, supports new digitally delivered services like cloud computing and smaller value services like apps through new tech platforms, bundles smart products with the characteristics of goods and services that are always connected, like the Internet of Things, and streamlines border crossings.

Tracking the Digital Economy

 There are costs associated with digital trade too. Businesses must establish new operating models and meet international trade policies and local government requirements. Measuring the costs of digital trade is not as simple as measuring the costs of traditional document processing. For example, a document-based process is specific, and processing costs are easily identified. As the OECD points out, data flows underpin all digital transactions, and protecting data flows means investing enough resources to address issues like privacy, cybersecurity, national security restrictions, intellectual property protections, and government requirements. All of this equates to more costs for businesses.

The U.S. Bureau of Economic Analysis (BEA) tracks the digital economy, which it defines as having four types of goods and services: infrastructure that supports computer networks and the digital economy (which primarily consists of information and communications (ICT) goods and services), e-commerce, priced digital services, and federal nondefense digital services. The BEA is “working toward improving price measurement, especially for high-tech goods and services which frequently experience changing characteristics, improved quality, and price changes relative to other goods and services.”

The OECD, WTO, and IMF wrote the Handbook on Measuring Digital Trade because digital trade amounts are mostly hidden in official trade statistics. The conceptual framework breaks out the elements of digital trade included in conventional trade statistics, questioning how, what, and who. “How” is the nature of the digital trade, which can be digitally ordered, digitally ordered plus digitally delivered, or digitally delivered. The “what” is product which is goods and services. “Who” are the actors: corporations, governments, households, and nonprofits serving households.

The Business Costing Challenge

 If governments and world organizations continue to struggle to measure global digital trade, how does an individual business measure its digital trade? The McKinsey Global Institute summed up the costing challenge for companies. “Managing across multiple geographies with different cultures, languages, regulations, and tax regimes is no small challenge. It often involves going up against local competitors that may have deeper market insights and better ability to execute on their own turf. The costs of coping with complexity can take a toll on the bottom line as well as organizational health, making it harder to create a cohesive culture and strategy.” Business leaders must assign costs to a new organizational model, strategy, technology infrastructure, and operations. New business models include supply-chain management of remote inventories and supplier management.

Businesses need a centralized back-office operation, real-time communications and collaboration, a cross-border digital payments system, and data sharing and analytics-driven decision-making. An important aspect of sourcing and procurement in the digital trade economy is the potential for digital transformation to improve sustainability and supply chain transparency and promote supply chain optimization. The UK’s technology trade association techUK sees digital trade as including a set of sustainability opportunities for things such as reducing packaging (which improves cost efficiency), setting up systems that combine shipping (to reduce waste), using route planning tools and software (to reduce greenhouse gases through more efficient routing), and reducing the need for product storage places due to direct shipping from supplier to consumer (which means less paperwork handling and improved data sharing plus improved relationships with customers). Increased sustainability could offset the cost of implementing or expanding a company’s digital trade footprint. These are issues impacting the bottom line, and supply chain management is a principal participant in balancing costs.

Understanding the Implications of Digital Trade

 Digital trade increased in volume during the pandemic lockdown, but there was no broad understanding of the implications. Digital trade continues to grow post-pandemic, meaning there needs to be increased awareness of its impacts and how businesses can leverage digital trade for success. It is a complex topic, reflected by the fact that even government agencies continue to work on finding a mutually agreeable framework for measuring digital trade, which is necessary for benchmarking and comparison purposes. Businesses wanting to increase their presence in the digital economy must develop methods for finding opportunities, overcoming challenges, and measuring the cost of new operational models. Sourcing and procurement functions are essential as they adapt to the new supply chain models.

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