a duty to savethe desire to take advantage of a particular duty reduction program affect other...

Published June 2016

IntroductionIt may sound obvious, but shippers that fail to consider the ways duties impact their supply chains are leaving opportunities, and money, on the table. But simply put, most shippers don’t fully utilize all the tools available to them to reduce, and in many cases, eliminate their duty obligations.

A Duty to SaveAvoiding Missed Opportunities in Duty Management

Written By: Eric JohnsonResearch Director American Shipper

Special Report

Sponsored by:

Duty Management | Special Report

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American Shipper research shows that, for example, only a quarter of shippers use free trade zones or foreign trade zones to reduce their duty obligations. Fewer than half of shippers use instruments like temporary importation bond or duty drawback. A larger proportion use free trade agreements, but that number would likely be much higher if all shippers used the tools available to them to lower their duty burdens.

Figure 1: Only 1 in 4 importers use free or foreign trade zones

Source: American Shipper Import Benchmark Study

So what explains this behavior? Why wouldn’t a shipper seek to take advantage of all opportunities to lower the costs associated with importing and exporting goods? The answer is “perceived complexity.” The myriad duty reduction savings programs available to shippers can be difficult to navigate. It takes expertise to determine which programs are best suited to a particular product. And there may be one program that best applies to a product moving between two countries, and a different program for that same product moving from a different origin point.

What’s more, duty savings programs require continuous management and maintenance. Rules can change quickly, and the documentation associated with proving that a particular good qualifies for a certain duty reduction program can be onerous. Things get more complex considering that decisions configured around the desire to take advantage of a particular duty reduction program affect other aspects of a supply chain, like sourcing and transportation.

It is far from a straightforward endeavor to reduce duties. But there is a way to both take advantage of duty savings programs and provide a clearer understanding of the way duties and duty savings strategies affect the broader supply chain. Technology underpins this whole initiative.

From analyzing how duty management factors into a product’s total landed cost, as far back as the pre-production phase, to how to take advantage of free trade agreements or foreign trade zones, global trade management technologies today provide visibility that ties the customs entry and logistics components of shipments all the way back to sourcing activities.

With the use of FTAs, FTZs, and other duty savings instruments on the rise, it’s critical that shippers understand how to fully leverage those programs. Here’s how.


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I. FTZ and FTA Strategies for Duty Savings or Deferral of Duties

The National Association of Foreign-Trade Zones reported in fall 2015 that FTZ

imports have tripled as a share of U.S. imports over the past two decades. Yet

despite rapid growth, foreign trade zones are clearly an underutilized instrument

in the toolbox of importers. FTZs are designated areas in or near U.S. ports that

provide shippers with two primary benefits—the deferral or elimination of duty

payment, and the ability to submit associated entries on a weekly basis rather

than on a shipment-by-shipment basis.

Both those benefits have powerful impacts from a trade compliance perspective,

because FTZs allow shippers to avoid duty payments on goods coming into the

United States that will eventually be exported. Shippers of goods moving through

an FTZ that will eventually be sold in the U.S. market can defer the duty paid on

those goods until the product leaves the FTZ. And the weekly submission

provision of FTZs significantly decreases the cost of customs compliance

through vastly reduced merchandise processing fees (MPFs).

So why don’t FTZs play a bigger role in U.S.-based supply chains? For one,

companies often fail to see the benefits of such an initiative, instead focusing on

the program compliance costs and complexity. Many aren’t even aware such a

program exists, or that their company would be eligible for it. Second, many

compliance departments lack the technology to make the management of an FTZ

more efficient, and consequently, more integrated with its broader supply chain

management initiatives.

Like most programs, FTZs are meant to be used strategically, not in isolation.

Only when a company has a view of how its use of FTZs impacts other

compliance and supply chain functions, can it truly extract optimal value from

participation in the program.

Free trade agreement usage among importers surveyed by American Shipper is

much higher—roughly two-thirds said they use at least one FTA. But even those

companies that are currently using FTAs could likely be using their existing FTAs

more fully, or expand to use other FTAs they’ve not previously considered. And

that’s to say nothing for the third of importers that don’t even use an FTA today.

FTA compliance is complicated by the sheer number of bilateral or multilateral

trade pacts in existence today. The complexity is fluid as well, since agreements

can change. New FTAs are being negotiated that could easily supersede existing

agreements.

For example, the United States is negotiating far-reaching FTAs with 11 nations

on three continents (the Trans-Pacific Partnership, or TPP) as well as a similarly

broad pact with the European Union (the Transatlantic Trade and Investment


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Partnership, or TTIP). In addition, further regional FTAs between neighboring blocs

in Asia and Europe are being discussed.

Keeping pace with the impact of these FTAs is difficult even on a superficial level;

understanding how they might impact a shippers’ specific supply chain is that

much more difficult. Companies wanting to know the benefits these agreements

might have on their duty obligations often turn to external partners, like

consultants or customs brokers, but there are also tools to help manage this

process internally.

Here again, global trade management technology is well-suited to help

shippers navigate the current state of FTAs to make initial strategic decisions

on sourcing and production, and then to help shippers keep pace with an

ever-changing landscape.

II. How Duty Management Factors into Total Landed Cost

One important aspect of duty management strategy is this—there are ways to

understand the impacts of programs like FTZs and FTAs without actually

implementing changes to strategy.

Companies can deploy technology that enables them to simulate the effect of

FTZs or FTAs on their duty obligations, MPFs, or in choosing the best parts or

materials supplier. These “what if” scenarios can be applied to broader supply

chain evaluations to help estimate the impact on the total landed cost of a product.

There’s been a lot of buzz around predictive analytics in recent years, but this

is a case where that concept can be applied in a tangible way. Plugging in past

duty payments and MPFs for a product without the use of an FTZ and comparing

that to the same structure where an FTZ is used yields actionable potential cost

reduction information.

Predictive analytics can also help companies understand their duty burdens from

conscious sourcing decisions, and how those decisions impact their FTA

qualification. This is key because FTA qualification has a direct impact on sales

of finished goods in foreign markets (for instance, when the finished good no

longer qualifies for a given FTA, the duty burden increases for an importer and

that impacts the price of a product in a market).

Importers can also start to think about the larger total landed cost picture,

from procuring raw materials, manufacturing, arranging transportation, and

distributing finished products. It’s possible to use a single system to integrate

duty management with other supply chain functions, to putting those potential

savings in a proper context.

The United States is currently negotiating many far-reaching FTAs on multiple continents.


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III. Extending the Landed Cost Calculation into Pre-production

Because total landed cost calculations at their most basic level tend to focus on a few core elements: the cost of the product, the transportation costs, and duties and fees. So let’s think even further upstream for a second.

But total landed cost includes so many more variables, especially when the calculation is extended into pre-production phases. Accurate landed cost calculations can influence procurement and sourcing decisions and vice versa. It’s not just about knowing bottom line transportation and compliance costs.

In this way, it’s helpful to think of the past use of duty management tools like FTZs and FTAs captured by a global trade management platform as potentially influencing future sourcing decisions on that same platform. Of course, not all GTM platforms have an integrated capability to manage sourcing activities, but some do, and others can be linked in some way to approximate those benefits.

Most importers will find that the data elements that comprise a true landed cost calculation reside in multiple systems, and are sometimes locked in paper documents. Gathering these elements is critical to the success of a landed cost evaluation, and yet it’s a difficult and time-consuming process without a system to act as a backbone.

The larger point is that there’s a knock-on effect. As an importer refines its duty management strategies through the use of FTZs and FTAs, it is in a better position to make more impactful upstream sourcing decisions. And that knock-on effect is all the more smooth when those activities are coordinated on a single platform.

Figure 2: Duty Management Programs Impact Sourcing Decisions

FTZSourcing

FTA


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IV. Visibility’s Role in Connecting Logistics and Customs Entry Processes

One of the things that the emergence of cloud-based technologies has fostered

is improved data accuracy and visibility. In a supply chain context, visibility is

often thought of as a purely transportation-related function. But there is a trade

compliance- and duty management-related element to visibility as well.

Having crystal clear insight into the duties paid down to the SKU level is a different

type of visibility, but just as important from a total landed cost perspective. For

example, a company that has dynamic, real-time visibility into duty savings from

the use of an FTA can make timely sourcing decisions, as opposed to waiting to

see reports on duty savings from FTAs at periodic intervals.

Say the duty treatment for a particular electronic component has changed due to

the ratification of an FTA between two nations. Rapid insight into how much that

FTA might lower the total cost of the finished product might compel the company

to throttle up production of that component in that country, if it produces the

component itself. Or it might drive the company to seek a supplier in that country.

Prior to the FTA being ratified, it may have been more cost effective for the

finished good manufacturer to make it, but with the new FTA, it may make sense

to just buy it at a competitive price. In this way, duty management visibility

becomes a key lever in a “buy vs. make” decision.

Alternatively, a failure to attain visibility into that constantly changing environment

might result in an opportunity left on the table. The company might not have seen

the benefit of increasing production of the component in that location for weeks

or months without visibility into its duty reduction programs. Worse still, that

company might never have even known about the beneficial FTA change if its

duty management program wasn’t automated.

A duty management strategy (as part of a wider strategy to measure total landed

cost) is dependent on capturing information as it happens, and presenting it to a

decision-maker to enable that decision-maker to take action.


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V. Benefits of Duty Management Investment

For many companies the decision to invest in technology that can enable

greater use of duty management programs comes down to a simple

mathematical equation: is the cost to buy and implement a system, and the cost

to train personnel to optimally use the system, worth it in terms of duty savings

and supply chain optimization? Is the return on investment sufficient, and

does the investment yield a clearer view of total landed cost on a product-by-

product basis?

Often these types of investment dilemmas come down to whether a company

thinks short-term or long-term, but the reality is investing in duty management

tools is a short and long play. Systems that help an importer determine the best

FTAs to use, and ones that allow them to automate the administration of an FTZ,

can yield results in the first 12 months. And in the long run, they can foster more

sustained efficiency gains and bottom line benefits.

Figure 3: No ROI Tradeoffs in Duty Management

Immediate value from duty management

Longer term strategic value


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For example, a 30-year-old food and beverage company reported more than $8

million in annual duty savings through understanding how to leverage NAFTA (the

North American Free Trade Agreement), and an additional $500,000 in qualifying

for CAFTA (the Central American Free Trade Agreement). A $1 billion office

furniture manufacturer saved $1.2 million in duties and taxes annually by

qualifying for NAFTA preferential treatment.

And the example below shows that a company with 2,000 entries per year could

save 97 percent on its MPFs by using an FTZ to file entries weekly rather than

per entry.

2,000 Entries per year

x $485 MPF per entry

= $970,000 per year

With Zone Processing:

52 weekly entries

x $485 MPF per entry

= $25,220 per year

Saving $944,780 per year

Figure 4: FTZs Reduce MPFs

If a company is concerned about the investment and process change that duty

management technology requires, they might do well to consider the lost

opportunities of not embracing change: duties and fees it didn’t need to pay, and

a suboptimal supply chain for which they have no visibility into FTA and FTZ

applicability back to pre-shipment activities.


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VI. Recommendations

American Shipper research initiatives and white papers seek to provide

actionable ideas that supply chain practitioners can use to improve their global

trade processes. In this case, the author suggests that companies:

1. Create an internal team crossing sourcing, transportation and trade

compliance departments to determine whether opportunities exist to better

utilize free trade agreements and foreign trade zones.

2. Understand their internal technological capabilities and research the market

for solutions that address automating FTA and FTZ compliance, as well as

how those tools fit within a broader global trade management strategy.

3. Be mindful that visibility into FTA and FTZ eligibility and application is as

important as visibility into supplier activity and transportation, and that

having a single source of visibility across those functions creates quicker

value.

4. Target true total landed cost capability with the idea that decisively knowing

the benefit of using FTAs and FTZs will help immeasurably in improving

accuracy of those calculations.

5. Analyze the ROI of investing in duty management technology in the short-

and long-term. There doesn’t need to be a trade-off.


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Appendix A: About Our Sponsor

Amber Road

Amber Road’s (NYSE: AMBR) mission is to improve the way companies

manage their international supply chains and conduct global trade. As a

leading provider of cloud based global trade management (GTM) solutions,

we automate the global supply chain across sourcing, logistics, cross-

border trade, and regulatory compliance activities to dramatically improve

operating efficiencies and financial performance. This includes collaborating

with suppliers on development, sourcing and quality assurance; executing

import and export compliance checks and generating international shipping

documentation; booking international carriers and tracking goods as they

move around the world; and minimizing the associated duties through

preferential trade agreements and foreign trade zones.

Our solution combines enterprise-class software, trade content sourced

from government agencies and transportation providers in 145 countries,

and a global supply chain network connecting our customers with their

trading partners, including suppliers, testing/auditing firms, freight

forwarders, customs brokers and transportation carriers. We deliver our

GTM solution using a Software-as-a-Service (SaaS) model and leverage a

highly flexible technology framework to quickly and efficiently meet our

customers’ unique requirements around the world.

Our Trade Agreement Management solution automates the supplier

solicitation, qualification and certificate management processes for importers

and exporters. By associating certifications with products, the system

maintains audit trails of preferential claims and how they were achieved. Our

Foreign-Trade Zone (FTZ) solution integrates fully with existing Amber Road

capabilities providing companies a more effective approach for managing their

bonded warehousing and foreign-trade zone operations so they can lower

importing costs, enhance inventory control and improve supply chain velocity.

For more information, please visit www.AmberRoad.com, email

[email protected] or call 201-935-8588.


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Background

Since our first edition in May 1974, American Shipper has provided U.S.-based logistics practitioners with

accurate, timely and actionable news and analysis. The company is widely recognized as the voice

of the international transportation community.

In 2008 American Shipper launched its first formal, independent research initiative focused on the state of

transportation management systems in the logistics service provider market. Since that time the company

has published dozens of reports on subjects ranging from regulatory compliance the transportation

management to sustainability.

Scope

American Shipper research initiatives typically address international or global supply chain issues from a

U.S.-centric point of view. The research will be most relevant to those readers managing large volumes of

airfreight, containerized ocean and domestic intermodal freight. American Shipper readers are tasked with

managing large volumes of freight moving into and out of the country so the research scope reflects those

interests.

Methodology

American Shipper benchmark studies are based upon responses from a pool of approximately 40,000

readers accessible by e-mail invitation. Generally each benchmarking project is based on 200-500 qualified

responses to a 25-35 question survey depending on the nature and complexity of the topic.

American Shipper reports compare readers from key market segments defined by industry vertical,

company size, and other variables, in an effort to call out trends and ultimate best practices. Segments

created for comparisons always consist of 30 or more responses.

Library

American Shipper’s complete library of research is available on our Website:

AmericanShipper.com/Research.

Annual studies include:• Global Trade Management Report

• Global Transportation Procurement Benchmark

• Global Transportation Management Benchmark

• Global Transportation Payment Benchmark

• Import Operations & Compliance Benchmark

• Export Operations & Compliance Benchmark

Contact

Eric Johnson Research Director American Shipper [email protected]

Appendix B: About American Shipper Research


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