Communicating about reliable trade compliance
In today’s business landscape, many manufacturers turn to global sourcing strategies to reduce production costs and expand markets. But there is significant challenge and risk in managing longer, more complex supply chains. For global organizations, one area of particular concern is the proliferation of international regulatory trade requirements. While regulations regarding the movement of goods across borders might seem to be solely the concern of supply chain and logistics personnel, people on the factory floor also must be prepared as compliance initiatives continue to move upstream.
At many global manufacturers, production personnel already share in the responsibility for regulatory compliance. These companies adhere to the very principles that reshaped quality initiatives some years ago: They address issues at the outset, before sunk costs and the expenses of correcting problems downstream grow. For example, if export regulations such as restricted party checking prevent shipment to an international customer, it is best to know that before processing. Likewise, if a product has missing classification information that would delay export licensing or customs, the sooner production people know, the better.
The extent and the speed at which trade regulatory compliance reaches into an organization is largely dependent upon corporate decisions made well above the plant floor. But becoming more knowledgeable about requirements and deploying robust global trade management solutions can add an additional line of defense against running afoul of regulations.
Risk management is essential to successful global trade. The proliferation of trade regulations, as well as the fluidity of product classifications and restricted party lists—compilations of people, companies, and countries to which no goods can be sold—all contribute to putting more areas of the enterprise under scrutiny to avoid penalties when audited. This growing frequency and broadening scope of changes present huge challenges to corporate compliance officers. Restricted party lists and goods classifications change daily, and a major overhaul to harmonized tariff system codes takes place every five years. As a result, companies must review and potentially reclassify as much as 40 percent of the components, materials, and finished goods they import or export. And if a company isn’t screening against the most current restricted party lists, it might as well not screen at all.
It is inevitable that nearly every enterprise involved in global trade will become audited by a national or international authority. Compliance departments have to accommodate more and more demand for their resources and personnel from a range of initiatives, including product standards and various forms of trade legislation. Compliance officers find that they must collaborate more and more closely with manufacturing, logistics, and supply chain and operations management functions to collect all data necessary for compliance (and detect any missing data as early as possible).
Likewise, when working with functions such as product design and development, it is important to reach even deeper to ensure that nothing is passed over. As trade regulation compliance is not traditionally their central concern, increasing cooperation and visibility into these areas also should be a top priority for any compliance staff member looking to effectively mitigate risk.
The right software helps
Most enterprise resources planning systems are unable to track items’ source and destination attributes to the degree required to ensure global trade compliance. In addition, many trade management systems used by compliance personnel are not integrated with other key enterprise systems, which requires ever-increasing manual efforts and raises the likelihood of errors. And, while some trade management systems provide tools for improving visibility, they do not integrate daily updates to lists as standard features to the core solution. The result is low data visibility in critical areas, such as manufacturing stores and shipment processing centers. This greatly hinders compliance efforts. It also compounds problems on the ground and lengthens delays—especially, for example, when dealing with challenging destinations or adding trade lanes.
Considering these issues, the case is obvious for an integrated global trade management solution, especially one that incorporates daily updated trade content. These software applications manage and track documentation and licensing, provide early visibility into missing data, and alert people as soon as they wish about legislation changes that can affect the flow of goods. The right global trade management software provides the collaboration and visibility tools needed to manage compliance risk before problems arise in the first place.
Some leading enterprises evaluate supply chain and trade compliance performance with a new set of metrics. Transit time has long been a measurement worth watching, but the root causes for delays are even more important to monitor. Was a holdup due to a licensing problem? Did a delay in filing an export declaration arise because of missing documentation? Or did a problem stem from failure to use proper packaging? Full-featured global trade management solutions provide users with greater granularity to drill deeper into the causes for unplanned events. Other metrics to look for include the match rates of parties with which you do business, entries on restricted party lists, the number of items requiring reclassification because of changes to legislation, and shipments that were initially declared eligible for preferential treatment but were found not to after review.
The best global trade management solutions offer daily automated updates to goods classification and to restricted party screening lists, so scheduled shipments are always validated and screened against the most current, relevant data. Additionally, these programs enable the tracking and benchmarking of performance against industry best practices—an ability unique to cloud solutions. Drilling into performance matrices to determine root causes of delays and compliance issues empowers organizations to eliminate delays and improve overall compliance.
Compliance and your business
In the broadest terms, enterprises should implement programs to achieve three essential compliance best practices:
- The inclusion of compliance activities as early in a process as possible.
- Seeing compliance as a collaborative, managed service that supports multiple areas of the organization.
- Constant observation of noncompliance match rates against industry indicators to drive improvements.
The potential for regulatory noncompliance has grown significantly in the last five years, and it will only continue to evolve. While risk is inevitable, it is also manageable. Part of the key is selecting a software solution that meets your needs today, is accessible to your partners and internal groups, and grows with you as your compliance requirements expand.
Anne van de Heetkamp is the director of global trade and compliance at CDC TradeBeam, where he is responsible for all trade compliance-related consultancy, data collection, and managed services. He has nearly 20 years experience in trade consultancy, global trade software, and global trade product development. He may be contacted at firstname.lastname@example.org.
Three Important Global Trade Rules
10 plus two. Implemented by US Customs and Border Protection, an arm of the Department of Homeland Security, the 10 plus two system demands that manufacturers, importers, and carriers provide the agency with 12 critical data elements: the manufacturer or importer files 10 of these, while the other two are filed by the vessel carriers (hence, “10 plus two”). This information must be submitted to US customs electronically 24 hours before shipments are loaded. Before the rule went into effect in 2009, some of the elements were not typically required for shippers to provide. But the additional data now are pushed upstream to better facilitate customs reviews.
Harmonized tariff system. Another compliance area of note is the harmonized tariff system (HTS), a global standard for classifying trade goods. More than 200 countries, customs, and economic unions—covering nearly 98 percent of all global trade—adhere to the HTS for customs tariffs processing, collection of international trade statistics, establishment of rules of origin, collection of internal taxes, monitoring controlled goods, and more. The system is maintained by the World Customs Organization (WCO), an independent, intergovernmental organization with more than 170 member countries. The HTS consists of a 10-digit code that is required when filing an import declaration, whereby the first six digits are coordinated by the WCO and the last four digits are country-specific with regard to where the goods are being imported.
Rules of origin. Some trade agreements between two nations reduce duties on goods originating from the other country (or combination of other countries), and there are requirements the goods must meet to qualify for the lowered rates. These requirements, known as the rules of origin, often are value-add or based on tariff- or HTS-code-shift. The rules can make choosing what bin to pick from incredibly important: If picked from the bin with an origin that does not count toward the value-add threshold, the requirements may not be met and the applied duty rate will not be lowered. As customs duty is a net cost to business, the bottom line is directly affected.