Part 1: Outsourcing Global Trade Management
Importing goods into the Unites States used to be as easy as turning over shipping documents to a US Customs broker. Then the US Congress passed the Customs Modernization Act, which shifted the legal responsibility of compliance from the Customs broker to the importing company. The theory was it was easier to hold the big importers liable than chase thousands of suppliers from all four corners of the globe.
"Customs has tightened the screws to make sure documents are accurate," says Beth Enslow, Vice President, Enterprise Research, at Aberdeen Group. For example, US Customs needs 35 different pieces of data 24 hours prior to it shipping. Aberdeen's Global Trade Management Benchmark Report June 2003 found that classifying products for customs purposes, connecting to government trade systems, and submitting regulatory compliance documents were among the most challenging aspects of global trade. Information about the average import transaction must flow to 17 different parties, including government agencies, banks, freight forwarders, and transportation carriers, to complete the import forms.
Customs officers can demand at any time and without prior notification that the importer prove the declared value of any particular item in a shipment is in fact the actual price it paid to the supplier. The penalties for not being able to produce the requested documents on demand can be as much as $10,000 per document and up to $100,000 for each shipment in violation. "The fines are major," Enslow notes.
Then came September 11, which added new security initiatives to the customs rules.
The confluence of these two events has made customs compliance daunting for importing companies. The costly risk of failure and the complexities of compliance are causing importers to outsource management of their global trade.
It's a growing field for outsourcing. The UN's World Trade Organization says 40% of the world's gross domestic product crosses international borders. More than 37% of the Aberdeen study's respondents, all from North America, said over half their supply base is located overseas; 60% said over half their supply base would be located overseas by 2008.
Automation is the one of outsourcing's chief attractions. The Aberdeen study found only 10% of its respondents had automated their global trade management process. "Companies can either hire more people to do more spreadsheets or use an outsourcer who has the technology to integrate the supply chain," Enslow notes. Technology, however, is not the only internal constraint. "Most importers don't have the in-house expertise for this specialized work. They have to rely on outside experts," she adds.
Why Cloudveil Outsourced
Headquartered in Jackson Hole, Wyoming, Cloudveil is an outdoor apparel manufacturer that competes with bigger brands like North Face and Patagonia. When the company started in 1997, it manufactured everything domestically in California. But in 2000, it moved all of its manufacturing to Asia with additional work done in India, Canada, and Mexico.
Because it was a start-up, most of the executives wore a number of hats. The executive responsible for product design was also in charge of product delivery. Because the customs requirements were so complicated, the designer was spending "an inordinate amount of time" dealing with customs issues. "We wanted her to spend more time designing our new products. And she didn't have the bandwidth to stay current with all the customs classification rules. So we decided to outsource," says Jon Boris, Vice President, Corporate Development. The company chose Sojitz -- Trade Management Solutions, a division of Sojitz Corporation of America.
Boris says the classification challenge was a key reason Cloudveil chose to outsource. "It's about risk management," he says.
Apparel is one of eight categories of goods that receive extra review from the Customs Department. These designated industries are required to achieve a 95% compliance rate with all customs regulations. Each item a company imports has to be put into the correct customs classification, whose rules change constantly. Boris says the outsourcer's team inputted all of Cloudveil's imported goods into the Sojitz database where Sojitz personnel and technology verify each SKU in each PO for any possible changes or updates in US Customs data. Now the outsourcer's technology takes care of compliance.
"Manual processing is no longer a safe or economically sensible means of managing the import process," says Jeff Guettler, Director, Business Development for Sojitz. He estimates manual methods can only guarantee 20% accuracy while an automated system is designed for zero errors. The Sojitz technology integrates three data streams: purchase orders, shipping documents, and financial documents. All three have to match in the customs paperwork, he points out. Secure, Web-based entry screens allow overseas manufacturers to download information directly into the Sojitz system.
"At the end of the day, global trade management is not their core competency. Filling out paperwork and making sure it's correct is part of ours," concludes Guettler. Cloudveil now doesn't have to worry about $10,000 fines. But there was another benefit to outsourcing. Boris says the popularity of the company's brand indicated that Cloudveil had great growth potential. But its lack of infrastructure due to its start-up status was holding back its growth. Outsourcing its global trade management formed one pillar of the needed infrastructure. The company grew 79% last year and hopes to repeat that rate this year. Boris credits outsourcing with helping spur that growth.
Lessons from the Outsourcing Journal:
- Changes in US Customs laws and new security initiatives after September 11 have put all the liability on importers for the accuracy of their customs paperwork. The changed environment is a stimulus for outsourcing.
- An Aberdeen study found only 10% of importers are using software automation for their global trade management. Getting access to this technology and expertise provides an impetus to outsource.
- Risk management is one reason to outsourcing global trade management since the fines for errors are serious.
Next month: How outsourcers' letters of credit help their buyers.