Global Logistics: Rolling through customs
An importers guide to keeping your company free and clear of emerging regulatory obstacles—and stiff financial fines.
By Mark Crone, Principal, PRTM Management Consultants -- Logistics Management, 10/1/2007
Supply chain and logistics professionals typically view their processes as comprised of two key areas—planning and execution. Planning is the up-front consideration around how much product to make and when/where to move it. Execution is the process of doing the work—making, storing, and moving product.
However, my experience has been that there’s a remarkable lack of awareness to an equally important issue—compliance to the regulatory environment surrounding these processes. As supply chains continue to expand across borders, trade compliance is an especially important area in which numerous governmental bodies are increasingly more involved, in the United States and overseas. Just in the U.S., for example, the agencies include the Food and Drug Administration (FDA), Department of Agriculture (USDA), the Environmental Protection Agency (EPA), and, perhaps most importantly, Customs and Border Patrol (CBP).
While compliance has always been a challenging activity, there has been a telling transition in recent years as customs has moved from the Department of Treasury to the Department of Homeland Security and the re-named Customs and Border Protection (CBP). In moving, customs has transitioned from being a commercially-oriented organization to one equally focused on supply chain security.
At the same time, other regulatory bodies have become more involved in security as well. For instance, the FDA has started to focus on bio-terrorism threats to the food supply chain. With this shifting regulatory focus has also come an entirely new set of concerns for importers.
However, nowhere in my academic education was I exposed to trade compliance. It was not until I assumed responsibility for the supply chain of a food importer in a post 9/11 security environment that I was forced to become well- versed on this important topic.
Now, with stiff financial fines on top of the threat of criminal penalties for non-compliance, developing a robust compliance program is well worth the money. Michael Lambert, director of import planning for Limited Brands, suggests “it’s wise to view compliance efforts as an investment with clear future payback rather than a simple expense.” Now, let’s cover ways shippers can begin laying the building blocks for a solid compliance capability and keep their company free and clear of regulatory obstacles.
Putting the blocks in place
It’s important to remember that the CBP expects the importer to take the lead in ensuring their compliance. However, they don’t dictate compliance processes to the importer. Instead, they recommend a series of controls that should exist around however you choose to develop your processes. In fact, these controls are at the center of their auditing programs.
If CBP were to audit your company, they would focus on the controls you have in place and the environment you have created more than the processes themselves. That is, do you understand your compliance risks and do you have the appropriate checks and balances in place so as to minimize the probability of non-compliance? Do you have audit and detection procedures in place to detect non-compliance?
For instance, suppose you identify valuation as one of the most important and risky areas of compliance. Once you have established a standard operating procedure (SOP) for declaring a value of shipment, are you auditing those involved to make sure they are adhering to it? Can mistakes be detected after the fact? A solid SOP coupled with an audit procedure and error detection will ensure minimal mistakes.
CBP has defined the following items as essential components for developing effective internal control of compliance processes: environmental controls; risk assessment; internal controls; information/communication; and monitoring. A good place to start is to make sure your internal controls map to these guidelines.
So, how do you best go about building a trade compliance capability? Here are a few practical issues to consider.
Align upper-level leaders: Strong commitment from leadership will help ensure the proper resources are available from both internal and external partners.
Bill Julich, President of Delmar International, a customs broker, believes that leadership commitment is the single biggest factor in the success of a program. “Without senior management buy-in, you are doomed to failure,” says Julich. Misty Rutter of Rutter & Associates, a customs compliance-consulting firm, agrees and suggests creating a corporate policy statement clearly articulating the company’s view on the criticality of compliance—and then circulating it to all involved in order to drive home its importance.
Decide where compliance belongs: Trade compliance belongs in many places and many people must be engaged. However, the function needs to report somewhere; and where it reports may be the key to your success.
Generally there are three options: legal, finance, or supply chain. And there are pros and cons involved with each. Despite the potential conflicts, it’s common to see trade compliance reside within the supply chain organization. This may make sense in smaller companies with less well developed organizations and fewer options. After all, compliance does fit nicely into the series of steps that take place as product moves. However, compliance can be viewed as a legal issue and, at larger firms, be more closely associated with the legal function or office of the general counsel. Given the financial impact of compliance decisions, a reporting relationship through the finance organization with an emphasis on visibility and control may make sense as well.
Find the key outcomes and gaps: Certain process outcomes are more important than others and need to be managed more aggressively. Focus first on closing the process gaps which affect critical outcomes. And, aggressively manage the risks to them. The important outcomes are not the same for all companies. In the apparel industry valuation, classification, origin, and quota are key issues. But, in the food industry we are far less concerned with valuation since the imported product had a very low duty rate—and, quota wasn’t an issue at all.
Once you find the key areas, determine the significance of your performance gaps and begin to close them. Technology may be an enabler but is not a panacea. More importantly, you need to find the process that best matches your transaction level and sophistication. A firm I managed several years ago relied exclusively on paper and fax. Sounds crude until you consider they were clearing roughly 100 entries a month—a level that would not benefit greatly from technological automation. Whatever the process turns out to be, documenting it for all to see is critical.
Focus on security: Don’t forget about the growing mandate to focus on security in addition to commercial issues. The regulatory authorities may especially scrutinize certain product types like food, which present a unique risk in regards to bio-terrorism.
Consider joining C-TPAT: As a member you agree to manage your extended supply chain using certain controls. In return, you are entitled to certain preferential benefits which may be especially valuable should import flow ever be hindered due to a security related event.
Build awareness: CBP considers communication and training to be one of the key internal controls that must be in place. Regardless of what the process is, make sure there is broad awareness of it and train your people to use it. Communication is especially critical to supply chain security.
Partner with CBP: Bill Julich at Delmar believes that “the relationship with CBP transcends all others.” But he says some people are reluctant to let government into their operations. He suggests shippers should “be proactive and get out ahead of where CBP programs are going.” For instance, importers should consider becoming part of CBP’s Importer Self Assessment (ISA) program. Among the benefits of ISA, importers will be assigned an account representative to assist in compliance efforts. Other programs include C-TPAT, Automated Commercial Environment (ACE), Container Security Initiative (CSI), and Fast and Secure Trade (FAST).
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Biotech pioneer Genzyme has experienced rapid growth over its 25 year life. Today, the Cambridge, Mass.-based company does over $3 billion in sales and has major overseas operations transacting significant global trade. As with any fast-growing global company, developing an efficient trade compliance program didn’t take center stage during the company’s early years. But, in 2000, the company decided to take a closer look at how it was handling its compliance activities. “At the time, we were paying lots of duties and we weren’t aware of all the opportunities to reduce them,” says Larry Sweeney, senior director of logistics and distribution for Genzyme. Unclaimed drawbacks, as well as detentions on perishable products, were other issues that were adding up, he says. In addition to the hard costs, a poorly documented process exposed Genzyme to unnecessary risk. Fully understanding that it’s incumbent upon the importer to manage these risks, Sweeny’s response was to undertake a methodical multi-year process to rethink how the firm executed compliance processes. He started by defining the gaps that existed in the current compliance processes and focusing on closing the most significant chasms. At first, Sweeney relied on his past experience and found that his key focus areas were to be on product classification and valuation. However, additional action steps were identified with the help of outside consultants who further recommended focusing on two key areas—hiring people with the right expertise and building broad awareness around the extended enterprise. On the “people” front, Luiz da Costa was brought in to lead the Trade Compliance Group, a group that today is comprised of four associates. Da Costa’s initial mission was to focus on import compliance and fully implement the recommendations of the consultants. One of da Costa’s early accomplishments was to document compliance processes via standard operating procedures and then make them available on the corporate intranet. Sweeney and da Costa were careful to focus on the need to partner and communicate with a wide-variety of stakeholders. These stakeholders included the Genzyme manufacturing facilities scattered around the world as well the materials management, transportation, and security functions. “We had no formal reporting relationship with many of those involved in the process,” says Sweeney, “so we needed to work hard to build awareness and influence them.” Sweeney believes this communication, in addition to training, is a key enabler of building a world-class compliance capability. By early 2002, Sweeney and da Costa had engaged senior leaders all the way up to the CEO to ensure their commitment. This commitment was critical to filing their C-TPAT application which happened soon after. Genzyme is now a Tier 3 C-TPAT company. As a result of their hard work, Genzyme now runs a far more integrated and well-documented process than in the past. Da Costa’s Trade Compliance Group uses internal audits to ensure their business units are following established procedures, helping to ensure a lower level of overall non-compliance risk. They have seen notable reductions in Customs, USDA, and FDA detentions due to increased awareness of the need for accurate and timely document delivery. And they now manage duty payments by monitoring eligibility for specific duty reduction programs and they fully understand when they are eligible for duty drawback. |
| Author Information |
| Mark Crone is a Principal with PRTM Management Consultants' Operational Strategy Practice. He is based in PRTM's New York office. |
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