Executive Briefings

The 10 + 2 Rule and Competitive Advantage for You

The 10+2 Rule is potentially the single largest importing process change in U.S. Customs history, and it is moving forward quickly. It will, undoubtedly, be the fastest and broadest importing process change ever implemented.

On January 2, 2008, U.S. Customs & Border Protection (CBP) published in the Federal Register a notice of proposed rulemaking for Importer Security Filing and Additional Carrier Requirements, commonly known as "10+2." Thus far, companies importing into the United States have reacted in three distinct ways.

A very small minority of leaders have responded by funding a cross-functional team to study the impact the new rule will have on their business. They have challenged their teams to develop an enterprise-wide strategic solution to meet the new requirements and optimize global trade business processes while they are at it. These best-in-class companies are way ahead of the 10+2 curve.

The remaining companies appear to fall into one of two groups. Those companies heading full speed for a cliff and completely unaware of it...and those companies heading full speed for the same cliff, but at least they are aware.

The "aware" group has a chance to use this dramatic change in customs regulations as a catalyst for process improvement and to remain competitive with the best-in-class group. Any companies that remain unaware will suffer mightily when 10+2 goes into effect.

The reason even "aware" companies are heading towards disaster is while their leadership may be alert to the newly proposed customs regulations; they mistakenly believe it can be managed tactically by their trade compliance department when in actuality it will require an enterprise-wide strategic solution.

Background

In the 1980s, CBP implemented the Automated Broker Interface (ABI) system that automated the transmission of customs entry data. The number of companies impacted by ABI was significant as all U.S. Customs House Brokers were forced to implement technology to capture and transmit customs entry data. The transition took several years before becoming mandatory.

In the 1990s, CBP implemented the Automated Manifest System (AMS), the counterpart to the ABI System which automated transmission of carrier manifest data. In the case of AMS, it took more than 10 years to completely transition fewer than 50 ocean carriers to the new automated system.

The 9/11 tragedy has highlighted the risk that terrorists may exploit our international transportation system to deliver a weapon of mass destruction to our shores. Our government's dilemma is obvious: we simply cannot allow unscreened cargo to enter our ports in ever increasing numbers. Data screening, in conjunction with physical screening of cargo is essential to protect our nation as well as our transportation system.

The urgency of this issue is the drive behind 10+2. Both Congress and the president have demanded implementation of 10+2, calling for it specifically in the Safe Port Act. In fact, CBP is already running late on implementing 10+2. With the strength of this mandate in the Safe Port Act, companies importing into the United States should begin to prepare for a major change in import regulations.

Complexity

It is important for senior management of U.S. importers to understand the significant complexity of the proposed rule and the impact it can bring.



CBP is proposing to require importers to transmit an Importer Security Filing 24 hours prior to loading a U.S.-bound vessel. The filing must contain 10 data elements, including three new data elements not currently required for U.S.-bound imports. The existing seven data elements will need to be reported much sooner in the supply chain than is required today. This is not a small change. It will require considerable re-engineering of corporate processes and systems.

The challenge of the proposed Importer Security Filing regulation is the compilation of various kinds of data from the multiple parties involved in an import transaction. The software community will develop effective filing solutions for the importer. However, the importer will be challenged to create, validate and maintain the stream of data from various sources required to complete an accurate and timely filing.

Solution

Creating an effective solution to the proposed 10+2 regulations is beyond the scope of the trade compliance department. It will require executive leadership and an enterprise-wide, strategic solution. Here are three examples to clarify the point.

Example One: The typical vendor master file in a corporate ERP system defines "Manufacturer" or "Supplier" as the party to which the company makes invoice payments. If a supplier has 10 different factories that may fulfill an order, the proposed 10+2 regulations will require the name and address of the actual factory that fulfilled the order. This granularity of data, and the functionality to differentiate at the specific factory level, does not exist in many ERP systems today.

Example Two: One trade professional has recommended changing the way his company selects freight forwarders in foreign countries in order to manage the requirements of the Container stuffing location and the Consolidator (stuffer) name and address. He feels the 10+2 regulations requires a much closer relationship with fewer forwarders to assure all data elements, especially the two mentioned herein, will be accurate and complete in time to transmit the Importer Security Filing.

Example Three: Today, the assignment of the fully qualified Harmonized Tariff number (US-HTS) is frequently made after the generation of the commercial invoice and before the shipment enters a U.S. port. This gives the importer or its broker weeks to classify all the imported items. The assignment of the US-HTS is often made manually by the broker. In order to achieve the requirements of 10+2, importers will need to create and maintain a Parts Master File complete with fully qualified US-HTS numbers assigned to every item. Many companies have tens of thousands or even hundreds of thousands of imported parts. The Parts Master File data will need to be integrated into software that will be used to electronically transmit the Importer Security Filing  24 hours prior to loading the U.S.-bound vessel.

Each of these examples requires re-thinking and re-engineering current business processes. The scope of these projects extends beyond the responsibility and authority of the trade compliance department as cross-functional participation is required of the procurement, logistics and information technology departments at a minimum. Some projects will also involve third-parties. Executive leadership should take notice. Lack of understanding and funding today may lead to dire consequences tomorrow.

Penalties

The proposed 10+2 regulations state, "If the principal fails to comply with the proposed Importer Security Filing requirements, the principal and surety (jointly and severally) would pay liquidated damages equal to the value of the merchandise involved in the default." If you have a $250,000 shipment that is in violation of the new regulations, you could be fined $250,000. Furthermore, the prospect of "scrambling" for data at the last minute will slow your supply chain, squander already limited resources, and erode profits from your bottom line.

The public comment period for this proposed rule ended on March 18, 2008. CBP is reviewing the comments received. CBP is expected to finalize and publish the final rule by the summer of 2008. The planned implementation period will be 6 to 12 months after the final rule is published in the Federal Register.

Competitive Advantage

10+2 can be a hidden opportunity for strategic thinking companies with proactive leaders. Optimizing currently inefficient business processes to meet the 10+2 requirements in the most direct, effective manner possible can improve supply chain performance, and potentially deliver a positive return on investment.

More effective management and visibility of additional trade data can:

1. Improve supply chain planning
2. Improve supply chain speed
3. Reduce inventory requirements
4. Improve visibility and controls of international transactions
5. Create competitive advantage

One supply chain study has estimated the cost of each additional day 'in transit' is equal to half of one percent of the value of goods. Improving supply chain speed by just one day would be worth $500,000 per year for a company importing $100m annually.

Forward-thinking executives will study the impact of the newly released 10+2 proposal. Best-in-class companies are funding cross-functional teams to develop a strategic enterprise-wide solution, using 10+2 as a catalyst to optimize currently inefficient processes, and creating competitive advantage in the process. Once you know the terrain, and have a good road map, you too can be traveling safely and efficiently down the new 10+2 highway.

Matt Gersper is founder and president of Global Data Mining and an owner of CUSTOMS Info. Visit www.gdmllc.com.

Bryan Heimbeck is CEO of Seattle-based Trade Tech. Visit
www.tradetech.net.

The 10+2 Rule is potentially the single largest importing process change in U.S. Customs history, and it is moving forward quickly. It will, undoubtedly, be the fastest and broadest importing process change ever implemented.

On January 2, 2008, U.S. Customs & Border Protection (CBP) published in the Federal Register a notice of proposed rulemaking for Importer Security Filing and Additional Carrier Requirements, commonly known as "10+2." Thus far, companies importing into the United States have reacted in three distinct ways.

A very small minority of leaders have responded by funding a cross-functional team to study the impact the new rule will have on their business. They have challenged their teams to develop an enterprise-wide strategic solution to meet the new requirements and optimize global trade business processes while they are at it. These best-in-class companies are way ahead of the 10+2 curve.

The remaining companies appear to fall into one of two groups. Those companies heading full speed for a cliff and completely unaware of it...and those companies heading full speed for the same cliff, but at least they are aware.

The "aware" group has a chance to use this dramatic change in customs regulations as a catalyst for process improvement and to remain competitive with the best-in-class group. Any companies that remain unaware will suffer mightily when 10+2 goes into effect.

The reason even "aware" companies are heading towards disaster is while their leadership may be alert to the newly proposed customs regulations; they mistakenly believe it can be managed tactically by their trade compliance department when in actuality it will require an enterprise-wide strategic solution.

Background

In the 1980s, CBP implemented the Automated Broker Interface (ABI) system that automated the transmission of customs entry data. The number of companies impacted by ABI was significant as all U.S. Customs House Brokers were forced to implement technology to capture and transmit customs entry data. The transition took several years before becoming mandatory.

In the 1990s, CBP implemented the Automated Manifest System (AMS), the counterpart to the ABI System which automated transmission of carrier manifest data. In the case of AMS, it took more than 10 years to completely transition fewer than 50 ocean carriers to the new automated system.

The 9/11 tragedy has highlighted the risk that terrorists may exploit our international transportation system to deliver a weapon of mass destruction to our shores. Our government's dilemma is obvious: we simply cannot allow unscreened cargo to enter our ports in ever increasing numbers. Data screening, in conjunction with physical screening of cargo is essential to protect our nation as well as our transportation system.

The urgency of this issue is the drive behind 10+2. Both Congress and the president have demanded implementation of 10+2, calling for it specifically in the Safe Port Act. In fact, CBP is already running late on implementing 10+2. With the strength of this mandate in the Safe Port Act, companies importing into the United States should begin to prepare for a major change in import regulations.

Complexity

It is important for senior management of U.S. importers to understand the significant complexity of the proposed rule and the impact it can bring.



CBP is proposing to require importers to transmit an Importer Security Filing 24 hours prior to loading a U.S.-bound vessel. The filing must contain 10 data elements, including three new data elements not currently required for U.S.-bound imports. The existing seven data elements will need to be reported much sooner in the supply chain than is required today. This is not a small change. It will require considerable re-engineering of corporate processes and systems.

The challenge of the proposed Importer Security Filing regulation is the compilation of various kinds of data from the multiple parties involved in an import transaction. The software community will develop effective filing solutions for the importer. However, the importer will be challenged to create, validate and maintain the stream of data from various sources required to complete an accurate and timely filing.

Solution

Creating an effective solution to the proposed 10+2 regulations is beyond the scope of the trade compliance department. It will require executive leadership and an enterprise-wide, strategic solution. Here are three examples to clarify the point.

Example One: The typical vendor master file in a corporate ERP system defines "Manufacturer" or "Supplier" as the party to which the company makes invoice payments. If a supplier has 10 different factories that may fulfill an order, the proposed 10+2 regulations will require the name and address of the actual factory that fulfilled the order. This granularity of data, and the functionality to differentiate at the specific factory level, does not exist in many ERP systems today.

Example Two: One trade professional has recommended changing the way his company selects freight forwarders in foreign countries in order to manage the requirements of the Container stuffing location and the Consolidator (stuffer) name and address. He feels the 10+2 regulations requires a much closer relationship with fewer forwarders to assure all data elements, especially the two mentioned herein, will be accurate and complete in time to transmit the Importer Security Filing.

Example Three: Today, the assignment of the fully qualified Harmonized Tariff number (US-HTS) is frequently made after the generation of the commercial invoice and before the shipment enters a U.S. port. This gives the importer or its broker weeks to classify all the imported items. The assignment of the US-HTS is often made manually by the broker. In order to achieve the requirements of 10+2, importers will need to create and maintain a Parts Master File complete with fully qualified US-HTS numbers assigned to every item. Many companies have tens of thousands or even hundreds of thousands of imported parts. The Parts Master File data will need to be integrated into software that will be used to electronically transmit the Importer Security Filing  24 hours prior to loading the U.S.-bound vessel.

Each of these examples requires re-thinking and re-engineering current business processes. The scope of these projects extends beyond the responsibility and authority of the trade compliance department as cross-functional participation is required of the procurement, logistics and information technology departments at a minimum. Some projects will also involve third-parties. Executive leadership should take notice. Lack of understanding and funding today may lead to dire consequences tomorrow.

Penalties

The proposed 10+2 regulations state, "If the principal fails to comply with the proposed Importer Security Filing requirements, the principal and surety (jointly and severally) would pay liquidated damages equal to the value of the merchandise involved in the default." If you have a $250,000 shipment that is in violation of the new regulations, you could be fined $250,000. Furthermore, the prospect of "scrambling" for data at the last minute will slow your supply chain, squander already limited resources, and erode profits from your bottom line.

The public comment period for this proposed rule ended on March 18, 2008. CBP is reviewing the comments received. CBP is expected to finalize and publish the final rule by the summer of 2008. The planned implementation period will be 6 to 12 months after the final rule is published in the Federal Register.

Competitive Advantage

10+2 can be a hidden opportunity for strategic thinking companies with proactive leaders. Optimizing currently inefficient business processes to meet the 10+2 requirements in the most direct, effective manner possible can improve supply chain performance, and potentially deliver a positive return on investment.

More effective management and visibility of additional trade data can:

1. Improve supply chain planning
2. Improve supply chain speed
3. Reduce inventory requirements
4. Improve visibility and controls of international transactions
5. Create competitive advantage

One supply chain study has estimated the cost of each additional day 'in transit' is equal to half of one percent of the value of goods. Improving supply chain speed by just one day would be worth $500,000 per year for a company importing $100m annually.

Forward-thinking executives will study the impact of the newly released 10+2 proposal. Best-in-class companies are funding cross-functional teams to develop a strategic enterprise-wide solution, using 10+2 as a catalyst to optimize currently inefficient processes, and creating competitive advantage in the process. Once you know the terrain, and have a good road map, you too can be traveling safely and efficiently down the new 10+2 highway.

Matt Gersper is founder and president of Global Data Mining and an owner of CUSTOMS Info. Visit www.gdmllc.com.

Bryan Heimbeck is CEO of Seattle-based Trade Tech. Visit
www.tradetech.net.