Companies must fully comply with all applicable export and import control laws and regulations for all of the countries in which they conduct business.
International trade is complex. It involves multiple parties and handoffs of product and data as borders are crossed. This process requires an elite team of experts partnering with colleagues to obey international laws while efficiently transacting business. The goal is to sustain a global structure that enables rapid problem-solving and which continuously improves productivity, all while eliminating regulatory barriers to growth. Managed properly, trade becomes an asset by reducing cycle time, opening doors for growth, and creating productivity from a foundation of compliance.
Customs Laws—the requirement is to declare goods accurately on importation
Export Control Laws—certain goods of a strategic nature require government approval before export. There are also restrictions and embargoes on exporting/ importing products from certain countries.
I was astonished when a business leader asked me how to circumvent the law on shipping to embargoed countries. I’ve never understood the propensity of a business to try to throw an extra undocumented box onto a trailer or put a part into their suitcase because it’s too difficult to follow the process.
What they all eventually learned was that there are very real consequences of poor trade practices, including:
•A delay or seizure of goods in transit
•Operational disruption
•Loss of reputation and customers
•Fines and penalties
•Negative repercussions for a business’s “trusted importer” status, which adds to cycle time
•Loss of business.
The Trade Pyramid
The following trade pyramid illustration (Figure 11.1) is the easiest way to convey what the trade function does.
Figure 11.1 The Trade Pyramid
The trade function begins with steps to ensure compliance. These include standardizing internal controls, classifying all products correctly, assessing internal risk and developing corrective action plans for areas out of compliance, and performing pre-acquisition due diligence and post-acquisition integration.
Once this is achieved the organization can build the ability to support supply chain operations and create productivity. This is accomplished by managing areas such as:
•Duty savings, drawbacks, or (best of all) avoidance
•Broker management
•Collaboration with manufacturing and sourcing for technology and/or product moves
•Working with logistics to improve the physical and information flow of material
•Utilizing foreign trade zones (FTZ).
Then, the trade function can facilitate growth by assisting marketing and sales with opening doors. This is done by decontrolling or licensing product for export, collaborating with government relations in preferential free trade agreement (FTA) negotiations among countries as well as with sourcing to change the origin of specific supplies in order to achieve a duty avoidance.
Elements of a Great Trade Program
People
In my experience, the trade function is often scattered throughout companies’ business operations. Sometimes, it is housed entirely within legal or finance, and at other times it has been broken into subcomponents within export, import, and/or customs. Trade personnel can suffer from a professional identity crisis in which they don’t know who or which organization they serve. What they do know is that they will be chastised for slowing any transaction.
The trade function needs to be most effective when it’s part of the supply chain. This keeps everyone focused on crossing borders legally and efficiently while providing productivity and cash management.
Centralizing the trade activities facilitates a greater impact to a business through extended global reach and improved focus on process improvement. It does this by providing the following:
•The ability to focus attention on regulatory requirements, growth, and productivity
•Adequate resources that proactively manage trade policies and strategies
•Quicker responses to regulatory changes, risks, and opportunities as they appear.
By unifying the trade functions, a business can create a foundation that focuses on its highest priorities, aligns the group into a common direction, and assesses talent across a business for career development with a standard set of tools to generate efficiencies.
Process
All products crossing borders are required to have accurate trade data, as shown in the following figure (Figure 11.2).
Figure 11.2 Global exporters/importers
Information must be provided for all items, including samples. This is essential as the first step to a compliant trade process. The basic elements include:
•Tariff code
•Country of origin
•Export Control Classification Number (ECCN)
•Net weight
•Declared value.
These data are integral for the transmission of import and export documents, the creation of commercial invoices, as well as for export control screening. After ensuring that all trade data are accurate, a business can intelligently and legally cross borders, utilize FTAs, and closely manage its vital cash resources.
Free Trade Agreements
FTAs are programs such as ASEAN (the Association of Southeast Asian Nations) supporting local manufacturing in the 10 ASEAN countries—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.
Goods that “originate” under an FTA are permitted to cross borders at a free or reduced duty rate if they are covered by a valid certificate of origin. This is a precise process; inaccurate claims can result in severe penalties and the stoppage of the flow of goods.
For raw materials and purchased finished goods, suppliers are best positioned to provide the trade data for their products. Contracts should always include a requirement to provide this data for all goods. The inability to provide complete data within the specified timeframe can have a negative impact on sales.
Utilizing FTAs is completely optional, but a business will want their suppliers to participate for the productivity opportunities. A business’s customers will want them to participate for the same reasons.
Broker Management
For many companies, customs brokers are not managed; rather, they become an extension of the logistics process. Carriers decide HS classifications based on the shipping documentation. There is no control of customs entries or structured program for minimizing duties.
By defining and standardizing processes, a business can bid out its process and work to the regional strengths of brokers around the globe. Choosing the right partner assists with:
•Establishing standard work or standard operating procedures (SOP)
•Initiating the use of performance metrics and broker scorecards
•Enabling service-level agreements (SLA)
•Creating an ability for customs declarations to be audited and verified
•Controlling the cost of trade services.
The benefits of an aggressive broker management program are the reduction of compliance risk and an alignment with trade policies, a decrease in the cycle time of crossing borders, improved financial controls with minimized duties paid, and the ability to respond to increased regulatory requirements.
Programs like the C-TPAT* (Customs Trade Partnership Against Terrorism) in the United States are an excellent example of where industry can partner with government to facilitate trade while accomplishing a key objective of the government. The purpose is to adopt procedures and best practices to secure the global supply chains, which include:
•Faster clearance times and reduced inspections across borders
•Establishment of minimum security requirements
•Use of security best practices along with validation assessments
•Visible component of good corporate citizenship with U.S. Customs.
Tools: Automating the Process
The automation of trade requires tools for the ever-changing world of global regulations (see Chapter 15); typically, manual import/export processes are susceptible to human error and raise the risk of noncompliance. It is also difficult to ensure that manual processes are in compliance with internal controls. This makes them prone to costly errors and doesn’t allow the business to leverage duty reduction opportunities through FTAs.
As governments around the world implement new automated tools to detect violations, those businesses without proper systems in place will find their exposure grows exponentially. Benefits of automating trade are:
•A strengthening of compliance while redirecting focus to training and prevention
•The reduction of the risk of disclosures/penalties to Customs agencies
•Allowing the ability to extend global compliance within the current headcount constraints
•Increasing duty savings through expanded use of global FTAs
•Reducing brokerage fees through electronic feeds of import and export data
•Increasing the accuracy and responsiveness to customer requests.
Building a Foreign Trade Zone (FTZ)
An FTZ is a secure facility that is within the geographical boundaries of a country, but which is legally considered to be outside its Customs territory. In an FTZ, merchandise can be warehoused, assembled, manufactured or processed, sampled or mixed, relabeled, repacked, or repaired and/or destroyed.
Each country has its own rules for operating; however, the goals of operating an FTZ are a streamlined Customs process, reduced exposure to duties and taxes, and encouragement of the use of local products and services.
The following illustration shows how the process works for a facility in the United States.
The process of creating an FTZ is not always an easy proposition. As with any other practice within the supply chain, creating an FTZ revolves around people, process, and tools.
The requirements to operate an FTZ include:
•Security measures (including background checks) are implemented to safeguard the merchandise within the FTZ
•Maintenance of all records related to the admittance and removal of merchandise in/out of the zone is required (5 years)
•Use of a Customs-approved Inventory Control and Recordkeeping System (“ICRS”) that will monitor all movements and include specific trade data elements with each transaction
•Approval by Foreign Trade Zones board and Customs to operate as an FTZ through the application and activation process
In addition, in order to use an FTZ, accurate trade data are essential as the first step to a compliant process. As referenced earlier in the chapter, these basic elements are:
•Tariff code
•Country of origin
•Export Control Classification Number (ECCN)*
•Net weight
•Declared value
Lead time for creating this process averages between 9 and 14 months. In addition, operating an FTZ is not free. People, processes, and tools are literally required to implement this type of operation.
The estimated cost benefits for opening an FTZ include these points.
Some of the costs are:
•Engagement with an outside consultant to assist in FTZ setup and help secure approvals with Customs and local community
•Staffing to manage the FTZ daily operations, achieve productivity goals, and provide adequate backup support to avoid operational disruptions
•Transportation cost for utilizing bonded carriers to the zone
•Software to operate the FTZ.
The realized benefits include:
•Deferred cash expenditures—this is achieved by the deferral of duties (duty is not assessed while merchandise remains in the zone).
•Reduction of brokerage fees—allows the use of a weekly import filing versus on a per-shipment basis, thus reducing the amount of brokerage charges from multiple transactions.
•Elimination of duties—no duties are paid on merchandise exported from an FTZ. In addition, merchandise that is destroyed, declared obsolete, or categorized as waste/scrap waste can avoid duties.
•Inverted tariff relief—manufacturing companies can elect the duty rate of either the imported material or the finished good.
•Taxes—property imported from outside the United States and held in a zone, as well as that produced in the United States and held in the zone for exportation, are not subject to state and local ad valorem taxes*.
While FTZs are not for every supply chain, they are a highly efficient way for a business to manage its cash. More important, a carefully crafted, frequently reviewed supply chain strategy can make a real difference in a small business’s bottom line.
Most companies looking to cut costs direct their focus on introducing austerity into areas that negatively impact employee morale and have marginal impact. By using the people, processes, and tools equation and making incremental changes to the multiple components of the supply chain—in keeping with the company’s core values—you can make a lasting and dramatic improvement, while at the same time improving efficiency and operations.
Case Study 11.1
Brazilian Trade Management
Project Description
In 2011, our business leaders in Brazil complained—quite loudly—that they were having difficulties selling product in the region. The high cost of doing business was a direct result of failures in the supply chain. Our initial observations noted that long lead times, missing shipments, and our 3PL’s total indifference to correcting problems were all contributing to the problem.
We further determined that our factories in China, Germany, Mexico, and the United States were completely unqualified and unaware of the intricacies of shipping product to Brazil. This led to costs that were excessive, abundant fines and penalties, and no one in or out of the country doing anything to correct the problem.
A project was undertaken to correct the flows, as well as the high cost of moving products. The goals were to:
•Comply with Brazilian trade regulations by establishing proper business controls
•Eliminate all fines and penalties
•Improve service levels to customers by 25 percent
•Create a productivity machine by hiring world-class experts
•Build a scalable model to enable growth throughout Latin America
Facts to Note
•$4 million of inventory was continually in transit to Brazil
•Cost pressures were making the Brazilian businesses noncompetitive
•A lack of standardized work contributed to the majority of delays and fines
•Delays were routine due to weak execution and paperwork discrepancies
•Discrepancies were not measured
•The logistics and trade teams were very weak and in need of a significant upgrade
•Regional trade agreements could not be utilized due to the lack of accuracy and complexity of the process.
The Trade Flows to Brazil
•Immediately end all noncompliant practices and activities by instituting a policy of “if it’s not perfect, it doesn’t go”
•Correct the general ledger to accurately state the cost of doing business
•Hire a strategic leader who overhauled all trade and logistics teams and processes
•Develop a formal relationship with Brazilian Customs to demonstrate resolve toward correcting the historical poor business performance
•Terminate and replace the indifferent 3PL and create a new consolidation point in Miami as the focal point for shipping to Brazil and the region
•Globally train all plant shipping personnel on the requirements of shipping to Brazil
•Track cycle times and set targets for every shipment
•Implement standard metrics to provide visibility and establish a monthly review with the business leadership to resolve open issues and track improvements.
Results
•Reduced Brazil Customs clearance time from 29 to 6 days. This produced a $3 million improvement in working capital performance
•Obtained a classification ruling from Brazilian Customs to avoid misinterpretations and conflicting assessments from Customs inspectors
•Created $850,000 of productivity from duty reductions.
Brazilian cycle time reduction were as follows:
Conclusion
Having previous experience with shipping to Brazil, I sensed that something was awry in the company’s activities into the region, but when I’d ask where the fines and penalties were, I was consistently told that there weren’t any.
In 2012 we placed a new full-time country leader from the United States for the business. Once he was settled we began to work together to identify and work through the issues one by one:
•Brazil is a complicated place to do business, and this is especially true if you’re only distributing product rather than manufacturing. Building an elite Brazilian trade and logistics team was the key to stopping the bleeding. We were able to standardize and correct longstanding issues with Brazilian Customs, which yielded significant productivity and reduced cycle time and lowered working capital requirements for the business while building a scalable model for growth in the region.
•We spent months trying to fix things, only to find that our logistics provider was subverting us by continuing to incorrectly ship goods to Brazil. Terminating the indifferent 3PL provided immediate benefits in quality, costs, and delivery.
•Partnering with the local business leaders eliminated the rock-throwing. Once we were able to demonstrate our resolve to repair things we were able to build credibility and get the breathing room we needed to start the improvement process. The monthly review process allowed everyone to air their grievances, acknowledge improvements, and celebrate success. It took about 8 months to stop the hemorrhaging and begin to turn things around, and about 18 months to become world class.