Why does free trade cost so much?

April 4, 2006
The increasing reliance on offshore sourcing has put more logistics professionals than ever in the middle of a global supply chain, and that can be a

The increasing reliance on offshore sourcing has put more logistics professionals than ever in the middle of a global supply chain, and that can be a confusing place. Accustomed to moving goods, logistics professionals must also become acclimated to managing and moving information.

As customs broker and trainer Suzanne Richer notes, one role of logistics is as a filter for information. Logistics filters information between the customs broker and Customs and, to act effectively in that role, a logistics professional must have full insight into the global supply chain. When you have multiple players involved, continues Richer, executive director of Customs & Trade Solutions Inc., no one typically has that insight.

According to Richer, even a third-party customs broker doesn't have access to all parties to an international trade transaction. She sees the heavy reliance many companies have on their customs broker or third-party logistics (3PL) company to handle import/ export operations and compliance as potentially part of the problem. In the end, she says, you can't transfer the risk on compliance to your broker or 3PL.

Adrienne Graddy, director of compliance solutions for BDP International (www.bdpinternational.com), joins Richer in her view that someone must be able to see the complete-supply chain. She offers a more financially oriented example. When U.S. Customs and Border Protection (CBP) (www.cbp.gov) performs a compliance audit, says Graddy, they spend 95% to 98% of their time in finance. With an import transaction, for instance, the purchase order value, declared value on an import at time of entry, the value actually paid by the customer and the value paid to the supplier must be equal at all stages of the transaction.

Financial settlement may take place at some point long after the goods are entered, Graddy continues. But what if the shipment is received two drums short? The overseas supplier makes an adjustment and issues a credit that is received in accounts payable. In effect, the settlement amount has changed, and if there is no communication at the importing company, the differences can surface during a Customs audit, which is not where you want to see them.

The issues are not only financial, but the trail is often linked to the financial side of the transaction. People at the receiving warehouse have to be aware of these compliance issues in imports and report them back through a compliance group, says Graddy. The compliance group can then reconcile the entry-value based on what was actually received and ensure the proper records are linked. The same is true on commissions and other discounts or payments that might be arranged through other departments like sales or customer service.

CTSI's Richer doesn't like to use the term "record-keeping" because it turns people off before they appreciate the significance of what's at stake, but the fact is that it's all about the data. This is not the sort of thing that is easily offloaded onto a third party or to software. Even having someone trained and licensed on staff doesn't ensure a clear view of the supply chain or strict compliance, though it can be one step on the path to better compliance.

Richer calls for the same rigor as is applied to financial systems, including external audits for customs compliance. And, while you're at it, she points out, you may as well perform a security audit for Customs-Trade Partnership Against Terrorism (C-TPAT) and other security-related compliance.

You have to apply the same checks and balances and the same standards to import/export compliance as your company does for tax compliance, says Richer. And if recent history has taught us anything, she continues, it is that you cannot audit yourself. Having a trained, licensed person in customs compliance is like having a CPA in accounting, she explains. You still need an annual, external audit.

While examining the path of import/export transactions for regulatory compliance, it's important to look into all areas. Graddy offers the example of goods regularly sourced from Germany. If the plant there decides to fill part of the order through production in another country, that other country is the actual country of origin for that portion of the order. Purchasing must be made aware of any changes and, as the earlier example demonstrates, those changes must permeate the records of that transaction.

Shipments going direct to a customer present potential problems as well. If purchasing or customer service decides to ship direct to expedite an order, it's possible to miss compliance issues like country of origin or packaging and labeling (particularly in the case of hazardous materials). A change in the consignee can also start a cascading effect with compliance and security.

When the consignee on an import shipment changes, Customs wants the Internal Revenue Service number for that customer, Graddy points out. That's partly compliance and partly security. Complying with the data requirement may not be as easy as it sounds if the IRS number has not been part of what was previously a domestic relationship. The issue surfaces most often with samples or other one-time orders, but it points to yet another small detail that can create compliance problems for importers.

While academics and consultants debate definitions of supply chain management,the real-world issues surrounding goods in international trade come to roost for logistics in the form of regulatory compliance.

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