Global Supply Chain

Best Practices in Import Compliance and Customs Management

Best practice in Import Compliance is a topic that is well discussed.  The issue of Customs Management is another issue.

There are several major best in class global players in the area of Trade Compliance – MIC, Amber Road, Integration Point, Tradebeam – along with the ERP modules of SAP, Oracle and Microsoft.  There are others players that deal with import and/or export compliance specific to their local geographies.  However there are very few trade compliance solutions that are able to fully manage and automate the last mile of trade compliance – which is the Customs entry process.

The area of Customs Management is not often written about in the popular supply chain journals.   However, the ability to integrate and automate Import Compliance with Custom Management is now possible with the result that importers are able to achieve dramatic hard-dollar results along with the more typical soft benefits.

This blog is the first of a 4 part series that addresses how you can develop a Best Practices automated Import Compliance and Customs Management program.  The series outlines how importers (of virtually any size) can take advantage of the new technologies to achieve best-in-class trade compliance and automated customs management and as a result dis-intermediate the costs that are associated with providing a best-in-class trade compliance and customs management environment.

• Part 1 – Introduction
• Part 2 – The state of Customs Management with Traditional Customs Brokers
• Part 3 – Best Practices in Import Compliance and Customs Management – redefined
• Part 4 – Conclusions

Part 1 – Introduction

Traditionally, the import process has been managed by freight forwarders and customs brokers.  This relationship, between the importer, freight forwarder, customs broker and customs has been in place since the inception of the country.  The need for the relationship grew out of the complex logistics requirements and documentation management and the relative specialization that is required to deal with international suppliers, carriers and customs.   The Customs Broker has traditionally filled a critical function as an intermediary between the importer and customs.  The Customs Broker provides services to facilitate the filing and remittance process and support a level of objectivity that may help insulate the importer from penalties or prosecution.  However, the Customs Broker does not relieves them of the ultimate responsibility for the custom’s entry filing.

Aligning Control with Responsibility

Today, importers have the opportunity to take charge of the import process and align authority with responsibility.  The reality is that the importer is responsible for insuring they are compliant with customs and other government agencies involved with the regulatory control of foreign produced products into the United States.  The importer, not the customs broker is liable for the regulatory entries supporting imports.  What the Customs Broker provides is expertise and an arms-length authority so that if there is an infraction with a filing, there is the appearance that “reasonable care” has been exercised and the resulting penalty will be minimized.

Import compliance and the customs filing process has historically been managed by full line Customs Brokerage firms.  Where large companies manage the processes internally they are usually staffed by licensed customs brokers and lawyers who oversee and manage their compliance programs and filing process.  However, even in these instances, most companies still use the external services that a full time Customs Broker offers.  This is what has constituted “best practices” when it comes to import compliance and customs management.

Until recently the process of managing an import compliance program with a level of comfort was beyond the reach of most import organizations for several reasons.

The Mystique of Customs

Firstly, there is a mystique around the actual process of the customs relationship and the complexity of the filing process.  This leads to the belief that the Customs Broker is necessary to navigate the relationship with Customs.

Secondly, importers mostly feel they don’t have the expertise to manage the classification, compliance and custom filing processes.   The belief that classifying product is difficult to manage and maintain is one of the greatest concerns of the importer.  The inability to easily maintain product tariff classification within a relational data structure means that the information is not readily available to the importer to support the customs compliance requirements from both an operational and filing support level.  Because of the inability to easily manage the regulatory and tariff information, managing compliance processes is virtually impossible for the importer without the services of a full line customs broker.

Thirdly, the increase in regulatory requirements, from national security and product safety, adds complexity to the import process and makes managing the process appear significantly onerous.

Fourthly, there has been a lack of tools and systems to support the interfacing with customs.  Without information systems to capture, maintain, and access regulatory information, across multiple regulatory agencies, related to a product, supplier or country, simply and within the context of operations, the management of information required to execute a customs import filing is daunting.

The result is that the importer relies on the traditional full-line customs broker to manage the relationship with customs including classifying products, filing entries, etc.  The customs broker extends their services to support the importer in interfacing with the government and helping insure that they are operating in a way that will be deemed to be “reasonably careful” in the import processes and provide the importer with “cover” from penalties or legal proceedings.

It is in this light that traditional best practices for Import Compliance and Customs Management is framed.

The Internet and new web native global supply chain solutions now provide global supply chain professionals and their organizations with the opportunity to take control over the entire global import process including compliance and customs.  Every organization is unique in the way it transacts business and structures its business processes.  However, dealing with Customs and OGAs is a highly procedural process.  Trade compliance and the internet and new software solutions that are designed to provide control and management of the global commerce environment afford possibility for organization to rethink and reconfigure their current processes and dramatically improve their international operational results.

To take advantage of the opportunities that these new solutions enable is to understand what is now possible.  To be a best in class importer means rethinking the way international business has been traditionally transacted and reconfiguring the processes to disintermediate the services that have ceased to add value.   A major opportunity for disintermediation is the area of import trade compliance and customs management.

Up until recently the ability to internally manage the entire trade compliance and customs filing process was difficult and, for most organizations, impractical.  It was too labor intensive and required specialized domain experience.  For those reasons the Customs Broker was able to provide and charge for services.  That has all changed.

• Compliance can be managed, for the most part, with specialized Compliance solutions that provide comprehensive analysis and product classification tools and Account screening for suppliers and service providers.  For the more difficult compliance issues, specialists (customs consultants, lawyers) are available on a fee-for- services basis to provide professional and targeted support.
• The filing process is now possible and streamlined with self-filing internal ABI or SaaS e-filing solutions.  Self-filing is possible either in a semi-automated process or a fully automated database driven process.
  • The semi-automated solutions reduce the manual component but don’t eliminate it.  The solutions provide templates which enable repeat entries to be created and processed reasonably quickly.  They are appropriate for companies that are doing a relatively low volume of entries (<1000 entries annually).
  • The fully automated solutions provide for complete integration of compliance with internal operations, external partners and e-filing processes.  With a highly integrated solution, automation manages trade compliance in a powerful relational database and integrates it with the import procure-to-pay processes and customs preparation, filing, pre- and post-audit, and reconciliation processes.  The automated customs management system virtually eliminates manual customs entry (except by exception) and increases accuracy dramatically.  The automated solutions are ideal for companies that are doing high volume Customs entries (>1000 entries annually).

There are several key advantages to moving towards best practices in import compliance and customs management solution.

1. Automation brings with it standardized processes and procedures.  This is significant in managing a customs compliance program, whether in a single or multi-divisional organization.  Having standardization of process  is considered a critical value when looking at any compliance program and highly valued by CBP in any focused assessment.
2. Automating the product HTS classification and management process  reduces (if not eliminates) errors and is a critical component needed to support downstream automated customs filing preparations.
3. Automating the import compliance and customs management processes and integrating these components with global trade management functionality allows companies to extend automation to the customs filing process.
4. Finally, the opportunity for direct hard dollar savings is substantial.   Our clients that have implemented an automated import compliance and customs management capability have been able to reduce the direct cost of filing (Customs 7501 entries and ISF/OGA filings) from $75-$150 per entry.  For a relatively small importer (500 entries a year) the savings are in the area of $50K.  For a mid-size importer (2500 entries annually) the savings more than offset the cost of solutions required to achieve the savings.

This PwC Global Supply Chain Survey 2013 is worth a very close look. It provides insights into the why, how, at what will drive supply chains to excellence in the foreseeable future. It is predicated on the basis that the macroeconomic cycles are becoming more volatile and unpredictable and make supply chain planning and management much more challenging.

As part of the survey PwC looked at 6 key industries:
Automotive
Chemicals and Process
Industrial Products
Pharma and Life Sciences
Retail and Consumer Goods
Technology and Telecon

6 key findings:
1) Companies that are committed to strategic supply chain management achieve significant operational and financial advantage over their peers.
2) The leaders are focused on customer needs and requirements. But they are also focused on delivering high levels of service at lower cost and maximum flexibility.
3) It is not good enough to be the same. Tailored solutions set the leaders apart from their peers.
4) Core competencies are not outsourced because they are strategic.. This requires an understanding of what are the core competencies of the company.
5) Leaders are constantly investing in differentiated supply chain capabilities. This means extending their capabilities to take advantage of real-time demand and supply signals and collaborating more effectively across all supply chain partners.
6) Constant improvement in technologies to support their supply chains is endemic to the leaders as is a concern with sustainability.

The survey is full of important supporting information that provides context and content. For virtually all companies, large or small, it is worth studied reading. Every company has a supply chain that they must manage. From the PwC study the clear impression is that companies that are focused on their supply chains as strategic weapons are decisively winning the battle in the trenches.

APICS editor Abe Ashkenazi wrote a wonderful piece called “Back to Inventory and Demand Planning Basics” on August 31, 2012, where he quoted the New York Times on the significant build up of inventory in China.

Over the past 4-6 months, as we have been discussing solutions for trade compliance with literally 100′s of trade compliance officers.  It is apparent that trade compliance is an area of business that struggles to get the respect and recognition it deserves from their organizations.  This is unfortunate for there are opportunities where trade compliance can translate into real value for an organization in terms of corporate reputation, cost reduction, and improved compliance.  Trade compliance is an area which is under serviced by technology and is still highly reliant on spreadsheets or simple databases to manage the basics such as HTS codes , Supplier or Customer and 3rd party profiles.

Trade Compliance touches virtually all areas of the business involved in international trade.  It impacts product records (HTS classification and tariff rates, documentation, product registration numbers [ECCN], licenses and visa documentation), accounts (account registration numbers, denied parties, documentation), countries (embargoes) as well as most operational functions (sourcing, purchasing, sales, import/export logistics, and customs).  It is a significant supporting activity, but is very often ignored or undervalued.

With respect to implementing Trade Compliance there are five (5) basic questions that need to be answered:

1. why implement trade compliance?
2. who owns the trade compliance responsibility in the organization?
3. who has the authority to impose trade compliance across the organization?
4. what is the role of software in supporting trade compliance?, and
5. who owns the responsibility for the selection requirements and maintenance of the software?

The answer to each of these questions lies in the commitment of the senior management and the structure of the organization.

Why implement trade compliance?

Trade compliance is a necessary requirement of international trade.  It is usually a core process of the Customs department of a country.  However, the responsibility of complying with the import/export laws and regulations lie with the importer or exporter.  This responsibility for trade compliance cannot be delegated although the execution of compliance can be.  Under the United States tariff act the importer or exporter is ultimately responsible for using reasonable care for product classification, valuing the product for import or export, insuring correct documentation is collected and submitted to support customs in collecting any duties or fees, statistics for census purposes, and enforcing any other legal requirements.

Failure to comply with  trade compliance laws and regulations exposes the importer/exporter to delays at the border for their shipments, the possible imposition of significant penalties, and impairment of reputation for the organization and/or its management.

However, the best argument for implementing a strong trade compliance program is that it provides management with the ability to align trade management with overall corporate governance policies and compliance practices.  It makes the organizations operational units better and more effective and contributes positively to the bottom line.  By understanding the rules that govern import and export compliance companies can can take advantage of tariffs and special programs that enable them to reduce costs of imports.  A trade compliance program in conjunction with new software trade management solutions provide clear and structured processes that result in improved record management, analysis and reporting.  It provides effective and practical opportunities to significantly reduce reliance on and costs associated with Customs Brokers and Freight Forwarders.  New IT solutions allow organizations to manage trade compliance much more easily than in the past and take advantage of automating the interaction with Customs and OGAs.

Who owns the trade compliance responsibility in the organization?

The answer to this question lies in the leadership, size and structure of the organization. The ultimate responsibility for implementing an effective and responsible trade compliance program lies with senior management.

In small/medium size organizations trade compliance often is applied informally without any specific direction or leadership from top management.  In larger organizations, where management has identified trade compliance as an area of risk either from a regulatory or reputation perspective, there is a higher level of compliance specialization often headed by a senior executive and implemented by a trade compliance team.  In those organizations that treat trade compliance seriously, the operational responsibility lies with senior legal counsel, supply chain managers, or under the IT umbrella.  The actual responsibility for day to day trade compliance is often under the leadership of a designated responsible operator who understands the basics of customs import/export compliance at the product, account and country level.

Note: In most organizations, trade compliance gets short shrift, is often ignored or is treated very cavalierly by senior management.  Senior management may be unaware of the risks associated with non-compliance with customs or OGAs, figure that they have not been held accountable to date and therefore either they are acting in a compliant manner, or intentionally ignore the need for a meaningful trade compliance regime.

Who has the authority to impose trade compliance across the organization?

The dictum – Responsibility without authority is futile.  This dictum is as pertinent to trade compliance as to any other activity.  Without the authority to impose and enforce procedures on the cross-functional operations that trade compliance impacts, the results will be modest at best.  Herein lies the greatest challenge to implementing a successful trade compliance program.  Because trade compliance is often seen as a necessary, but burdensome, staff function in the organization it does not receive the full support from top-management that is required to give it the authority to enforce its responsibilities on the operational units.

In those organizations that have dedicated trade compliance teams, the authority resides with the C-level executive or director.  Titles often associated with the responsibility and authority for the trade compliance activities are Chief Supply Chain Office, Director of Global Supply Chain, Legal Counsel, COO, Director of Operations, and Director of Global Sourcing.  However, even in these organizations trade compliance is often short funded, short staffed, and without the requisite IT support to keep it strong enough to carry out its mandates.

In many organizations, trade compliance is given a cursory nod as to its importance but without any authority to impose process and procedures on the operations.   In the majority of import/export organizations trade compliance is often minimized and the responsibility outsourced to a customs broker or freight forwarder with misconception that they will keep the company compliant with Customs and OGA regulations.

What is the role of software in supporting trade compliance?

Software and IT are increasingly important factors in supporting trade compliance within and across the organization.  In many organizations, managing trade compliance without supporting software or IT is inefficient, ineffective and prone to errors and omissions. Trade compliance software provides structure, process resulting in streamlined operational processes.  Trade compliance software should not only support the requirements of the trade compliance group in managing product, party and country information but should integrate with the cross-functional global operations to insure that trade compliance is a seamless part of the workflow.

In many organizations trade compliance management is still rudimentary. Where companies have implemented trade compliance many struggle with the basics, such as managing HTS codes Party screening or Country programs.  If managed internally the HTS codes are mostly managed in the ubiquitous spreadsheet or Access database and require significant manual input to maintain and update records.  The process is heavily labor intensive, inefficient and prone to error.  Denied party screening, embargoed country management, visa and license management are all difficult to manage in a manual process.

Currently, a variety of trade compliance software solutions are available in a SaaS (Software as a Service) environment.  These applications allow organizations to export their trade compliance information to a managed service which maintain and update the product, party and country details.  The information is then accessed on-demand or integrated back into the ERP system for operational use.  Some of these SaaS solutions have extended global trade management capabilities that include shipment visibility and payment processing.  Three negatives for these solutions are:

a) a relatively high cost and is beyond the reach of many small and medium sized organizations,

b) the information is limited to their platform, and

c) lack of portability.

New generation software solutions are evolving which allow for trade compliance to be more open and collaborative.  The open solutions act as a comprehensive platform for trade compliance information and are open to accept compliance and operational content from any authorized provider.  The open platform allows for the trade compliance team to configure their network in a way that supports of their needs and can be reconfigured to their needs as they change.  Open trade compliance software solutions free the trade compliance team from any specific content provider and gives them the flexibility to configure the trade compliance content and deployment environments.  Open trade compliance software solutions are important for organizations that have disparate companies or divisions operating on different enterprise systems.

Who owns the responsibility for the selection requirements and maintenance of the software?

No one knows the requirements of Trade Compliance better than dedicated compliance staff.  In the absence of a dedicated trade compliance staff, operations has the best knowledge of their products, trade parties and countries with which they do business.  According to many trade compliance professionals, operations should have the responsibility for setting the trade compliance requirements the software.  If the software solution is brought in-house IT will definitely be involved with respect to authorizing the technical specifications of the application and the integration of the application to other internal and external solutions.  The maintenance of the software is the responsibility of IT.

The issue of who is responsible for the budget is an issue that can confuse the lines of responsibility.  The budget falls into the acquisition and maintenance.  How it is allocated and who controls the budget will suggest who is responsible for the selection and maintenance.

Random thoughts on implementing Trade Compliance

There really is not a good reason why a company cannot implement a highly automated and comprehensive trade compliance program.  The new trade compliance software solutions that are available to companies are often scalable for functionality and price.  Depending on how far into automating the entire trade compliance process a company wants to go determines how cost effective the program will be.  The cost of implementing a trade compliance program has been reduced dramatically and is within the reach of any organization of any size.  The benefits are many (see they Why) and being trade compliant is only one of the benefits.

Today’s Best Practices allows the people with the best knowledge and understanding of their products (importers) to manage the regulatory and customs process with no more risk than using a traditional custom broker. What is necessary for an importer to implement the new Best Practice paradigm is confidence to actually control and manage the compliance and filing processes for which it is ultimately responsible. 

So, what has changed the landscape for the redefinition of best practices in Import Compliance and Customs Management?

The internet has dramatically altered the landscape and changed the possibilities for the way importers interact with Customs and other regulatory agencies.  The internet allows for solutions providers to create systems that enable importers to confidently take control of the heretofore unsupported functions that created the need for traditional freight forwarding and customs broker services.

Today Best Practices in Import Compliance and Customs Management are defined by the ability of the Importer to directly manage the entire process of importing products into the United States while being able to comply with all regulatory and CBP Customs requirements.  Because the internet and new SaaS (Software as a Service) solutions provide a broad range of solutions – from specific TMS and Trade Compliance applications) to fully integrated import control, execution and reporting capability, best in class importers are taking control of the entire import compliance and customs management processes and driving incredible and previously unattainable value from their global supply chains.

9 Steps to executing a secure, independent Best Practice capability in Import Compliance and Customs Management

1)  Establish management commitment – It is important to have management commitment to an import compliance program to establish its importance for the organization.  Compliance, while important, often flies under management’s radar until there is a significant problem.  In order to avoid being reactive to regulatory agencies it is important to create a set of policies or an explicit understanding that addresses CBP, Customs and other regulatory agencies issues.  It is not enough to have management’s initial buy-in.  Commitment implies a long-term commitment and support of the import compliance and customs management program.

2)  Professional and well trained staff –The importance of a well trained staff that is familiar with import processes and customs procedures cannot be overstated.  While having a licensed customs broker on staff is a benefit, it is not critical to implementing a best-in-class automated import compliance and customs management program.  What is necessary is to be able to have trained people who understand the requirements surrounding the import environment and are able to deal with the professionals who interface with customs and other government agencies with respect to imports.  Implement a centralized responsibility for import compliance and customs management with the full support of management.  Because compliance issues have a way of becoming very problematic, high profile and expensive to resolve, a centralized authority and responsibility will mitigate the effects of problems where non-compliance might be an issue.

3)  Create a set of policies and procedures – The global supply chain is very procedural and regulated.  Therefore a best in class importers have in place policies and procedures  governing import compliance and customs management.  These policies and procedures should be published and made readily available to members of the import and customs staff.  Most importantly, the procedures and policies should be managed to insure that they are implemented in practice.

4)  Automate and centralize Product, Account and Customs Record management – Implement an automated infrastructure to capture and maintain all product, account and customs details in a data base structure.  The ability to relate HTS codes to the product record in a database environment is necessary to support and streamline import workflow and execute import compliance and customs management at a high level of competence.  (A concern among importers is their ability to properly classify their products.  With the on-line customs solutions available today, the ability to classify a product is made much simpler. In instances where product classification is more complex special rulings might be required to classify a product properly and the on-line systems provide licensed customs brokers to support proper classification.) Relating product HTS codes and compliance details with the product and account record allows the import operator to execute their work, manage their 3^rd parties and insure compliance effectively and with a very high level of confidence.

With a central repository for product, account and customs information, importers are able to:

Create and maintain a Customs and regulatory product record that captures the relationships of the product to HTS codes (General, Special Programs and rates (including Antidumping and Countervailing [ADD/CVD]), Country of Origin relationships, visa and license requirements).      

Interface with internal systems and external information sources to capture landed product costs, supplier and logistics information necessary to provide data to support regulatory and customs filings as well as providing a comprehensive Procure-to-Pay product provenance capability.

5)  Automate and integrate internal and external import processes – There are several solutions, both SaaS and Licensed models that automate and support seamless integration of the import processes from the purchase order to the receipt of product at the importers DC or customer.  Automation streamlines import processes, finance, compliance and customs management by enforcing process while simplifying workflow.  Automation of the internal import processes also provides the ability to easily interface to 3^rd party partners information – including customs and other regulatory agencies – with the added benefit of further streamlining workflow, electronically capturing critical supply chain data, providing visibility into products across the supply chain, improving visibility into suppliers and other 3^rd party partners, and providing a rich source of data for analysis and reporting on products and partners.

6)  Automate Customs and Regulatory Filing Processes – Establish an e-filing capability with CBP Customs through on-line Customs Brokers or in-house ABI.  Establish filing and payment profiles with CBP Customs – Importers can go on-line and quickly obtain an Importers filing code and ACH settlement code that comply with customs to support the electronic filing and settlement process.  Today it is possible to generate electronic facsimiles of the 7501/3461 entry, ISF, and FDA Prior Notice messages that can be filed directly with customs without the intermediary of a traditional customs broker.  The entries can be generated from the system, audited prior to submission, and filed with Customs when executed.  The system automatically tracks the filing and provides visibility into the status of the entry and release.

7)  Establish and maintain complete data records and document files of all import and customs transactions – Record maintenance is critical for import compliance and customs management.  Automated import solutions assure accurate, searchable and retrievable records in data format is manageable and simple.  The information that is maintained includes product details (supplier, manufacturer, product [packing lists, production codes]), carrier details (tracking dates, container numbers, B/L details), delivery receipt details, Customs entry information.  This data records are augmented with the paper based files to insure responsiveness to Customs and Regulatory agency inquiries and audits.

8)  Take Charge of Import Processes that you pay for – Taking charge of the import processes is made much more manageable today because of the global commerce technology that exists.  However, it is not simply about the technology.  A critical factor that makes taking charge of and managing the import processes possible is the integration of the systems which result in a completely synchronized information and document environment.  Best in Class import organizations do very little, if any, of the physical work. However, they have systems which allow them to effectively manage those who do.  Best in Class importers command the entire procure to pay environment from the time the purchase order is issued until it is received and paid for.  This means integrating purchase order management, global transportation management, customs compliance and filing, total landed cost management, vendor invoice auditing and payment control into a cohesive solution that provides end-to-end visibility, tracking and alerting capabilities.

9)  Benchmark your Performance – Benchmark yourself against the industry.  Industry stats so that you can are available and for a modest fee you can obtain these from consulting organizations or your trade partners.  However, most importantly it is necessary to benchmark yourself.  This requires analysis tools and reports that let you see how your supply chain and your supply chain partners are performing period over period) and adjusting your organization to make continuous improvements.

Benefits of Implementing a Best Practices Environment for Import Compliance and Customs Control

The benefits that are achieved by implementing a best practices Import Compliance and Customs Control program range from the “hard” benefits – the ones that deliver real dollars, to the usual “soft” benefits that are harder to quantify.

The hard benefits are achieved as an outcome of implementing a comprehensive automated customs entry solution supported with automated global supply chain source data.  The major hard benefit is the ability to fully automate the ISF and 3461/7501 customs filing processes that when implemented provide real savings that flow to the bottom line.  Typically, a traditional customs broker charges between $25-$40 for an ISF filing and $80-$120 for a 3461/7501 customs entry.  By automating the import compliance and customs management processes and integrating to an e-broker filing system the rates can drop as low as $5 for the ISF filing and $25 for the 3461/7501 customs entry.  This savings for the combined automated ISF and 3461/7501 filing amounts to between $75-110 per filing.  For a relatively average size importer – 500 entries per year the net savings can be ~$50,000.  For a large importer the net savings can run into the millions of dollars.

The soft benefits are the ones that result in consistent and timely information presentation, improved supply chain visibility, streamlined business process, greater operational efficiency, improved inventory planning, replenishment and utilization, greater CBP and regulatory compliance management, and the development of internal core competencies.  The soft benefits are the ones that every software solution claims will be achieved when the solution is implemented, but are hard to quantify and often not delivered for a variety of legitimate and practical reasons.  

Historically, the complexities of dealing with Customs – the tariff classification process, and the actual preparation, filing, and liquidation of customs entries – made the job of managing and complying with customs highly problematic.  Layer on top of that a whole regime around Anti-dumping/Countervailing duties, quota and visa control, foreign trade zone management, bonded warehouse management, country of origin declarations, and other nuanced programs and the task was virtually impossible to execute without specialized personnel.  On top of that, the entire process was exceptionally difficult to manage because supporting information was not easily accessible and the entry process was extremely manual.

Enter the Customs House Broker.  The Customs House Broker grew out of the need for specialized skills in understanding and interpreting import compliance, proper classification of items, and understanding how to properly prepare entries to optimize and minimize the amount of duties and fees required to be paid.  For a relatively modest fee the importer outsourced the expertise and manual processes to the Customs House Broker and had a  level of confidence and comfort that it would remain compliant with the requirements of Customs and the other government agencies.  However, what the importer did not outsource was their responsibility for the work that was performed by the Customs Broker.

And therein lies the risk to the importer.  The importer is responsible for the errors and omissions of the Customs Broker and are liable for any disruptions to their supply chain or subsequent penalties that may be the outcome of improper compliance.

Like all businesses, the level of service and competence between and within Customs Brokerage Houses varies widely.  Competence levels within a Customs Brokerage firm can range from the highly trained licensed customs broker (LCB) to the unskilled clerical assistant.  (PWC paper – Customs Broker Management 2009).  A Customs Brokerage must have a LCB on staff to be able to file entries with customs.  However, it is not a requirement that the LCB actually work on the entry, and it is often the case that junior staff, with varying levels of knowledge of compliance requirements actually makes the decisions and creates the entries.

Importers who have recognized that they are ultimately responsible for the import filings done on their behalf by the Customs Broker have take steps to implement processes and procedures to insure that they have taken “reasonable care” to insure they are in compliance.

Most importers (large and small) outsource the classification, compliance and filing processes to Customs Brokers. By outsourcing the processes to Customs Brokers, the importer would be incorrectly assuming that they have mitigated their responsibility and the associated risks of non-compliance with customs – namely, serious fines and penalties if and when the importer is audited.

Traditional Best Practices in Import Process and Customs Compliance Management

1. Importer has centralized responsibility for import compliance and customs management
2. Importer has processes in place to properly classify products for HTS numbers, duty rates based on Country of Origin, FTA and Special Program control, ADD/CVD rulings, Visa/License management.  This function is often outsourced to Customs Brokers, Freight Forwarders, and Trade Compliance Specialists but remains the responsibility of the Importer
3. Importer, or its agent, establishes Importers filing code and ACH settlement code with CBP Customs.
4. Importer, or its agent, accurately and completely files entries with CBP Customs and other regulatory agencies in a timely manner –7501/3461 Entry, ISF Entry, OGA entries.
5. Importer, or its agent, provides settlement for customs fees and other fees with CBP Customs in a timely manner.
6. Importer maintains complete and accurate import files to support each customs entry and support a customs audit (when necessary).

But the Best Practices that applied in the traditional model are no longer Best Practices.  Technology has dramatically changed what is now possible for Best Practices in Import Process and Customs Compliance Management.  This will be discussed in our next blog: Best Practices in Import Compliance and Customs Management – redefined (Part 3 of 4 Parts)

Managing CBP compliance is a challenge that has potential for all kinds of opportunity and problems.  As CBP becomes more capable to manage import data, every importer becomes more susceptible to a customs audit.  This can/will lead to additional expenses and potential penalties if the importer does not have proper documentation and systems in place to support their import practices.

A substantial opportunity lies in the ability to make GSP claims.  There are however, minimum requirements that the importer must meet in order to take advantage of the lower opportunities that this special customs program provides.  The first is understanding that minimally 35% of the products’ input ingredients must originate in the beneficiary country.  Secondly, it is important to be able to validate all aspects of the entry during an audit.

These requirements lead to fundamental questions about the GSP filing process.

1. Who has the knowledge about whether a product qualifies for the GSP?  Answer: the supplier.
2. Who will verify the supplier statement?  Answer:  The Importer
3. How will your customs broker know whether the product should be claimed under a GSP entry?  Answer:  ???

Because, being able to take advantage of special custom’s programs is so opportunistic there are strong reasons that the importer should take a hands on interest into the customs filing process.  Nobody knows the product better than the importer.  With responsibility for product duty classification residing with the importer and the new technologies supporting automated customs record management, the importer has incredible opportunity to take advantage and significantly increase compliance while reducing cost at no greater effort.

The Association of Food Importer has published an insightful article on GSP Compliance – Getting it right

Last week I highlighted a study that McKinsey Quarterly published called  “Building the Supply Chain of the Future”.  Interestingly this week Bloomberg (among others) published a study called “China Will Face Crisis Within 5 Years”  http://www.businessweek.com/news/2011-01-26/china-will-face-crisis-within-5-years-investors-say.html which provides a glimpse into the future.

The McKinsey study talked about the need for having a global supply chain strategy that was agile and able to flex to the rapidly shifting global environment.  The Bloomberg report highlights a significant concern that China will face exceptional dislocations in their banking system that will reverberate around the world.  If this happens, and clearly the vast majority of the respondents to the study poll believe it will happen within 5-7 years, it begs the question, what will be the impact on supply and supply chains around the world?  At this time the question is moot.  However, if it happens, the impact on supply and supply chains will  likely be impactful and possibly devastating to some companies. The way organizations respond will greatly impact their success.  The way organizations respond will depend on the strategies they have formulated and are able to implement.

Another column appeared in Supply Chain Digest today titled “Time for More Dynamic Supply Chains” http://www.scdigest.com/assets/news/11-01-27.htm#FT.  In the article, Dan Gilmore, the publisher and a very insightful guy asks the question: “ What is of more importance for supply chain success (and agility): the trucks and the software, or the people who design and run them?”

What links all three of these articles is their focus on the need for organizations to have agile supply chains to address the unknowns that the future holds for their supply chains.

I think that the questions posed by Dan is worthy of thought and a response.  The response to this question is that they are all important, but not all equally important.

I believe that people are the foundation of any organization, and therefore the most critical component for creating and maintaining an agile supply chain.  An agile supply chain is ultimately about being able to respond to changing supply conditions quickly, with the least amount of disruption, and at the lowest possible cost.  People interpret information that the software (systems) provides and make the decisions that organize the trucks (physical supply chain components) to deliver the materials.  Therefore people who run the supply chain are the most important.

I would then argue that the software is next in importance for creating and executing supply chain agility.  As supply chains become more complex, the amount of information related to the planning, procuring, moving, making and distributing products to the final customer is growing geometrically, if not exponentially.  Having systems and software solutions that capture the raw information and contextualize it is a major keystone component of any successful supply chain infrastructure.  Access to the underlying supply chain information is vital to the people who are responsible for making the decisions about the design, deployment, and execution of the supply chain.   Software solutions that contextualize the information and present it in a way that is meaningful for the user is critical to supporting the decision making process that people must do on a minute-by-minute basis.

The final component addressed by Dan’s question, the trucks, are important but are the outcome of the former.  When people have meaningful information that they can then apply to their experiences they can make better decisions as relates to the physical (trucks) supply chain.  When major supply disruptions arise in the physical supply chain having visibility to the problem is critically important.  The visibility is provided by information.  It is this information, most often supported by appropriate software solutions that enable the people to make the best decisions about how to deploy the resources across the supply chain.

These opening 2 paragraphs from a McKinsey Quarterly report (https://www.mckinseyquarterly.com/Operations/Supply_Chain_Logistics/Building_the_supply_chain_of_the_future_2729) clearly enumerate the challenges that companies face in managing their global supply chain.  How they deal with these challenges will determine their success in the future.  The BRIC countries (Brazil, Russia, India and China) are radically changing the playing field and affect everything in the supply chain from raw material availability to logistics capacity to currency exchange.   How successfully organizations deal with the rapidly changing global environment will depend on creating and implementing agile global supply chain strategies and executing the mechanics of those strategies.

The integration of strategy with mechanics is so inextricably linked that it can be easily argued that one without the other will ultimately lead to limited success of the former.  Which come first – the global supply chain strategy or the supporting mechanics that provide the infrastructure?   While having a global supply chain strategy provides companies with powerful differentiating plans of action, lacking comprehensive supply chain execution mechanics leaves the organizations highly vulnerable to failure in carrying out the strategy.

Executing agile global supply chain strategies is dependent on information that provides transparency into all aspects of the global supply chain.  As a company moves further away from its basic manufacturing paradigm – both physically and geographically – it depends more and more on information to provide insights into events and their outcomes.  This requires a comprehensive set of tools designed to support the gathering, synthesizing, contextualizing and reporting of the information into meaningful and easy to access analysis and reports.  However, without the ability to execute the tactical activities in support of the overarching strategy limited success is the most likely outcome.  It is being able to rapid execute change across their global supply networks that ultimately delivers the success of the strategy.

In our white paper, Lean, Agile and Adaptive Global Organizations,
http://blinco.com/casestudies/whitepapers/leanagile02206.pdf we present a comprehensive roadmap on how it is possible to build a lean, agile organization that will be able to support whatever agile global supply chain strategy the organization implements.