Does your company structure support or hinder your customs compliance strategy?
Despite the current challenges in the global economy, Canadian trade volume is expect to expand 1.4x by 2020. The profile of that trade is also changing with increasingly less of it coming from our traditional trading partner, the US. There are currently 50 trade agreements in the works with countries from all over the globe. Expanding trade,however, raises the challenge of dealing with sometimes vastly different customs regulations and the penalties for non-compliance can be hefty.
At the same time, cash-strapped governments around the world are looking to raise money and government officials know there is money to be found in supply chains. Canadian Border Services Agency audits, for example, have increased dramatically since 2008. In such an atmosphere, where the potential for costly screw-ups is growing and government agencies are aggressively looking to catch and penalize customs infractions, compliance becomes the price of admission to global trade.
Does your company structure support your customs compliance strategy?
At CITT’s recent Reposition 2011 annual conference in Montreal Reynold Martens, executive vice president of GHY International, made the case for rethinking the way most companies currently handle their customs compliance strategy.
Most companies tend to compartmentalize their trade activities into import and export functions, with separate groups working independently with outsourced providers of financial, legal, trade, and customs services. For many companies the related supply chain functions are managed by the business information group, either through an inhouse customs and trade department or in collaboration with outsourced providers. This, according to Martens, can create a “silo” affect that, while effective for the day-to-day execution of trade-related activities, reduces or even eliminates visibility to the areas of the enterprise impacted upstream or downstream. For example, Martens points out that finance and administration becomes passive to this area of corporate activity aside from cash flow management.
Yet the reality is that customs-related regulators are involved in virtually every stage of the business cycle from product design and manufacturing all the way to final fulfillment and auditing. An incomplete picture of how customs regulations impact a company’s overall structure can lead to failure to build in allowances that at best result in ineffective product costing and at worst financial troubles when regulators impose fines and take away trading privileges key to a company’s survival. Martens provided the example of a multi-national vehicle manufacturer, serving markets in Europe and North America, which failed to accurately classify a major component imported by one of the its Canadian divisions, resulting in overpayment of duties by $250,000 annually. It is estimated that the impact of this omission after production burden costs and overheads were applied, was double that amount at the point of sale, resulting in margin erosion.
As the saying goes, what’s known can be managed; what’s unknown is a disaster waiting to happen.
Martens believes the better alternative is an integrated trade compliance strategy. (GHY has authored a whitepaper on the subject.) Such an approach, Martens says, provides a horizontal channel of accountability between the business operation, finance and administration, and business development areas; and a vertical link to the service providers, executive team, CEO, and board of directors. While the fundamental structure of the company remains intact with no major rework of the reporting structure, or the core functional role of each of the primary components of the enterprise, all stakeholders have a role to play in the effective execution of the integrated strategy, beginning with the board of directors who set the risk appetite, and place a priority on legislating that checks and balances are in place at all levels, with appropriate accountabilities and audit trails.
Martens says the end result of a fully integrated international trade strategy is increased predictability and visibility of regulatory consequences and opportunities. The whitepaper provides the example of a leading manufacturer of household accessories which was able to save over $6,000,000 annually in duty by designing and implementing an effective NAFTA management strategy. The company invested in a compliance champion to track and log the flow of imported inputs through all the stages of the manufacturing process. By doing so, they were able to benefit from multiple duty reduction programs, saving costs and gaining competitive advantage.
As Martens stressed, working towards an integrated customs compliance strategy is not merely an exercise in compliance; there may be significant savings to be realized as well.
