Since 9/11, the addition of security initiatives like the Customs-Trade Partnership Against Terrorism (C-TPAT), the new Importer Security Filing (also known as "10+2") and stepped up enforcement by government agencies have intensified the risk and complexity of the compliance landscape -- as have heightened corporate and government activities to ensure the safety and reliability of imported products.

These factors are driving companies to devote more time and resources to compliance management. About three-fourths of 340 global importers and exporters surveyed last year by Aberdeen Group, Boston, said they were in the process of improving their global trade compliance (GTC) capabilities, with an additional 21 percent planning to begin improvements within the next 12 months. Best-in-class companies in this group also were raising the importance of compliance within the organization and viewing it more strategically, Aberdeen reports in Global Trade Compliance Priorities in 2008.

The downturn in the economy has had an impact, however. "We see a loss of momentum, particularly in terms of making compliance more strategic," says Bernie Hart, global product executive in the Global Trade Services division of JPMorgan, New York. "This trend has not dried up completely, but we are not seeing the big groundswell we saw before the crash."

"In today's economic climate, companies are primarily focused on survival," says Robert DeCamp, director of regulatory affairs and consulting at A.N. Derringer, a customs broker based in St. Albans, Vt. "We see more and more companies talking about compliance, but resource availability, coupled with the level of regulatory oversight, ultimately will dictate what improvements are made."

Getting a share of corporate resources can be further hampered by a lack of understanding internally as to the importance of compliance, says Aberdeen. "A disturbing 71 percent of all companies surveyed complain that internal stakeholders outside of the compliance department do not understand the impact of their actions on trade compliance or the risks associated with non-compliance," it reports.

Centralizing global trade compliance processes and reporting at the enterprise level is helpful in overcoming these barriers, Aberdeen reports, noting that in its survey 60 percent of best-in-class performers had taken this step. Centralization allows companies to "accumulate global knowledge and best practices to manage processes more effectively," it says.

"The onus today is on businesses to make sure they have compliance governance processes in place that go across all of their divisions," says Hart. "Demonstrating a standard of care means having consistent processes, procedures and control points across the enterprise."

"We do see companies placing more responsibility and oversight of compliance at the corporate level rather than pushing it out to individual sites and facilities," says Kevin Marshall, CEO of PSI Software, El Paso, Texas. "They want a more standardized and unified approach to compliance issues." PSI provides international trade software with a particular focus on U.S.-Mexico trade.

Technology makes such centralization possible, says Warren Sumner, general manager-enterprise software group at Take Supply Chain, Austin, Texas. "Technology is evolving to where it is much easier to integrate systems, which enables visibility across a distributed supply network that has lots of different systems in place," he says. When you have a unified vision, it is much easier to ensure compliance across the supply chain, which in turn helps ensure brand protection and prevent supply disruptions."

The trend for the future may well be a merging of global trade compliance and vendor compliance in such areas as product safety and social responsibility, some experts say. "We do see that starting to happen," says Melissa Irmen, vice president of products and strategy at Integration Point, a provider of global trade management and compliance solutions based in Charlotte, N.C. "When we developed a program for C-TPAT compliance, we knew there were a lot of different programs coming along not only in the U.S. but around the world, so we decided to build more of a supplier validation tool. And we are seeing customers beginning to use this tool to do vendor surveys and vet their suppliers," she says.

PSI is working on expanding its e-Request application, currently used to solicit origin information for NAFTA qualifications. "This application could easily be used to gather information to see if a supplier complies with a buyer's social responsibility requirements, for example," says Marshall. "We are looking at ways to expand and leverage this into other areas."

"Among our large customers, many are establishing a compliant purchasing process," notes Nathan Pieri, senior vice president at Management Dynamics, a global trade management company based in East Rutherford, N.J. "This starts with understanding all the compliance issues around products, then properly classifying products and extending this process to suppliers through a supplier portal. This enables compliance management from source all the way to destination."

It makes sense for these compliance activities to come together, Pieri says, because there are many common data elements that can be shared. "There is a waterfall effect," he says.

Fear or Money?

However compliance management is organized, the things that motivate companies to invest in compliance are the fear of fines and penalties - which clearly are on the rise - and the promise of a strong return on investment.

"Return on investment is what counts today because everyone is being asked to do more with less," says Clay Perry, senior vice president of global markets at Integration Point.

Anne van de Heetkamp, director of global trade and compliance at TradeBeam, San Mateo, Calif., agrees, noting that global trade systems can actually help reduce staffing needs by automating such functions as trade documentation and the checking of licenses and denied-party lists. "This allows companies to run their normal business with the same number of people, if they are growing, and with fewer people if they are stable or losing business," van de Heetkamp says. TradeBeam provides global trade management software and services.

However, notes Perry, taking full advantage of compliance opportunities sometimes requires upfront spending. "Compliance managers need to be willing to stand up and say, 'give me better systems, give me more people and here is how I will bring money to the table,'" he says.

One example Perry offers is the effective use of foreign trade zones (FTZ). "If a company doesn't have a strong compliance program, it probably has not looked at FTZs," he says. "But a company that is willing to spend money to establish and manage an FTZ can easily see a positive return."

Businesses are allowed to import goods into FTZs duty-free, where they can undergo further processing. Duty is due only when the goods are brought out of the zone for sale in the U.S. market, and typically the duty is less than it would have been had the finished product been imported. Goods that are re-exported owe no duty.

"Starting an FTZ can be expensive and time consuming but if you have enough entries it can be very cost effective," says Wayne Slossberg, vice president of sales at QuestaWeb, an on-demand global trade management solutions provider based in Westfield, N.J. "There are a lot of similar opportunities in the compliance area that can help businesses. The big issue is how to get the C-level people to sit up and look at them," he says.

A major opportunity resides in optimizing the use of preferential free-trade agreements. By shifting supply sources to take better advantage of the more than 200 FTAs now in existence, companies can realize significant duty savings, says Aberdeen. Twenty-nine percent of firms it surveyed report having changed their global sourcing mix or redesigned their supply chains based on such considerations.

Leveraging FTAs is one of the biggest value propositions for trade compliance systems, says Pieri. Without automation, "it would not be possible to do the necessary modeling and analysis to optimize use of the various FTAs out there," he says.

To better clarify the needs of the market in this area, Management Dynamics recently conducted a survey of more than 200 global manufacturers and retailers. Forty-two percent say they currently are managing three to five trade agreements and 15 percent are managing six or more. Better than half say they would like to add at least two additional FTAs; however, a third of respondents have opted not to expand their FTA use due to the effort and cost.

This survey also confirmed that companies realize substantial savings from FTAs. Forty percent of respondents say they are saving $500,000 or more per trade agreement.

To respond to growing demand for more trade-agreement support, Management Dynamics last year introduced a solution capable of managing multiple FTAs. "Today we support 10 free-trade agreements and by the end of the year we will support 20," Pieri says.

He says the Management Dynamics solution has a compliance engine that looks at all purchases that a company wants to qualify under an FTA, determines the country of origin and automates the collection of a certificate of origin. "Every FTA has rules of origin that can be very complex and full of legalese," he says. "We translate that into a rules engine that allows us to automatically determine if a product qualifies for the duty preference or not and, if not, what needs to be done in order to qualify. Managing this is just not scalable if you are doing it manually."

Proliferation of free-trade agreements is making compliance management much more complex, "but if you don't take advantage of the opportunities they offer for duty and tax savings you may not be competitive in marketing your product," says Bill Ansley, vice president of UPS Trade Management Services, a division of UPS Supply Chain Services, Atlanta. "These agreements come with an obligation and a cost to be compliant, though, and no two agreements are ever the same. You have to make sure you understand the requirements and are compliant with all the obligations." This can involve a lot of record-keeping, he says. "Technology can help, but it does not replace the due diligence required to make sure your products qualify for the preferences you are claiming."

Van de Heetkamp underscores this point. "You can source something to take advantage of a free-trade agreement, but that product may not ship until a year later, and a year after that there may be an audit where you have to verify and prove that the claim was correct," he says. "So you have to think at all three levels - sourcing, shipping and supporting an audit."

In addition to the many differing requirements of FTAs, most have a phased schedule that also has to be understood. "As a purchaser, you have to look not only at the situation today but at future periods as well, particularly if you are engaging in long-term contracts," says van de Heetkamp. "Most FTAs have reduction tables that impact the duty rates over time."

"We call them free-trade agreements but there is nothing free about them when it comes to administration," quips Hart. "They are really an administrative morass."

Hart says JPMorgan's solution eases this administrative problem considerably. "We begin by running a costed bill of materials through an engine set up for a particular trade agreement, such as NAFTA," he says. These bill of materials can be quite complex, potentially having thousands of part numbers. "Our engine checks the classifications associated with each part or sub-assembly- however it makes sense to break it down - and then we let the company know whether they qualify under NAFTA. If not, we identify some parts that are being sourced outside of NAFTA that the company might want to consider re-sourcing. We can show them how much they would save by making specific changes, so it is a very good tool in terms of letting them clearly see what a failure to qualify will cost them."

JPMorgan also solicits and maintains certificates of origin to fully support preference claims "and we stand behind those in terms of liability if we happen to make a mistake," he says. "We put a lot of emphasis on first-time yield, meaning a product qualifies under NAFTA or any other trade agreement the first time that it crosses the border. We want a first-time yield of 90 percent to 95 percent as a minimum."

Free-trade agreements are only one part of understanding how compliance issues impact total landed costs, notes DeCamp. "There are a number of key cost components that come into play when you have multiple purchasing opportunities from various countries -- whether it is duty, tax or just logistical costs -- that can result in large differences in landed costs," he says. "You have to crunch the numbers for each supply chain."

Security Compliance Benefits

DeCamp, who has been in the import/export business for 39 years, says he has been surprised at the operational benefits A.N. Derringer has derived from complying with security requirements under C-TPAT. "I find it amazing that we have discovered and corrected a number of issues that we had totally overlooked before, which have resulted in operating efficiencies," he says. One of these regarded Derringer's process for validating the powers of attorney that it must have in order to act on behalf of customers. "We found we were not validating these as carefully as we should, so we stepped up our process on this. We are a better broker and offer a higher quality product as a result."

As other countries adopt protocols similar to C-TPAT, mutual recognition will help goods of participating companies move through the supply chain with greater speed, says Perry. "That brings us back to the issue of return on investment. C-TPAT and similar initiatives could easily cut off a day in the supply chain, which would be extremely valuable. These are the kinds of things we are pushing our customers to understand. We would like to see them launching a Compliance ROI Group as opposed to a Risk Management Group."

The jury is still out on whether there is ROI to be found in the Importer Security Filing, but there will be costs in failing to comply. Fines of $5,000 per incident will begin next January when U.S. Customs and Border Protection is set to begin enforcement of the 10+2 rule.

"CBP is usually pretty good at mitigation, but keep in mind that the nature of these errors can be very small," says DeCamp.

IFS requires importers of ocean freight to submit 10 data elements to identify what is on a loaded container 24 hours before the container leaves the origin port. The ocean carrier files two additional pieces of information, including the container location on ship, once the ship is at sea. Global trade management vendors and many third-parties have developed solutions to help companies comply with ISF.

"The core problem with 10+2 is that importers are obliged to gather and report data that is only available at the point of origin," says Greg Kefer, director of marketing at GT Nexus, Oakland, an on-demand trade and logistics portal. "These include information about the manufacturer and the seller, which often are different entities, and the country of origin." This information can be very hard to obtain and few companies currently have the capability to capture these data elements accurately and within the time frame required, he says.

Several of GT Nexus's large importer customers have incorporated ISF management as part of a broader supply chain visibility project. For smaller companies, GT Nexus recently introduced Easy ISF. "Easy ISF gives importers access to a standard online application to enter and validate the 10 data elements required by CBP," says Kefer. The information can be transmitted directly to CBP with a simple click. An online dashboard and exception management tools allow importers to maintain control of all filings, he says. "The entire service is priced at a flat fee of $295 per month, which gives up to 5 users at a company the ability to make unlimited filings on the GT Nexus Portal. New customers can test-drive the service because the first month is free," says Kefer.

CargoSmart, a global trade software provider based in San Jose, Calif., has developed an ISF application that is self-service. "Customers already are able to set up an e-shipment folder within our system for each shipment," explains Joe O'Brien, managing director-North America. "This enables them to designate which parties in the transaction are responsible for giving the various data elements that are needed. It sets up a time frame within which that information needs to be submitted and reminders are sent if there is not a timely response." O'Brien says the information also can be sent either through a Web link or by email. "The system automatically consolidates the information and the importer only has to press a button to file it with CBP," he says. "The last step we enable is monitoring all this activity through an online dashboard. If you have 100 shipments moving and 75 have been approved, for example, those 75 will be in green. Any with missing data elements will be in yellow and any that have been rejected will be in red," he says.

O'Brien emphasizes that this solution is simple and low-cost. "We estimate importer's will have costs of less than $5 per filing with our system," he says.

IES, Midland Park, N.J., also takes a self-service approach, says Ray Baliatico, executive vice president of the global trade software company. "Because our platform is a multi-party system, the manufacturers, who are the ultimate source of data regarding origin of components and location of assembly, can feed their data in directly, as can other parties involved. By exposing the system to as many parties in the supply chain as possible, we are able to get closer to the original source of the information so there are fewer inaccuracies," he says. Baliatico says IES's importer customers are having success in convincing their overseas vendors to provide the necessary information. "It is actually working quite well," he says.

Vendors also are making sure they automate collection any information needed for IFS that already exists. "Our solution will automatically pull ISF data elements that are in a purchase order or a commercial invoice," says Slossberg.

"We have really focused on the automation because re-keying all that information would be prohibitive for large importers and would lead to a high error rate. You want to pull in as much information as possible automatically and then manage by exception."

Many companies will opt to have their third-party partners do the filing for them. "We are in a unique position because we provide such a myriad of services for our customers, says Ansley of UPS Trade Services. "We may be the carrier or the broker, we may manage the suppliers or we may do all of these." Performing many roles means that "we may already have much of the data required for IFS filings. We will collect the data from other service components or from other parties and our brokerage group will manage the submissions to CBP."

Kefer encourages importers to view IFS as an opportunity rather than a burdensome mandate. "Visionary importers will see IFS as an opportunity to insert a new level of automation and process control into their global supply chain," he says. "Gathering the data that CBP is demanding will, in turn, give importers and unprecedented level of visibility and control."

Resource Links:

Aberdeen Group, www.aberdeen.com
A.N. Derringer, www.anderringer.com
JPMorgan, www.jpmorgan.com
PSI Software, www.psisoftware.com
Take Supply Chain, www.takesupplychain.com
Management Dynamics, www.managementdynamics.com
TradeBeam, www.tradebeam.com
QuestaWeb, www.questaweb.com
UPS Trade Services, www.ups-scs.com
GTNexus, www.gtnexus.com
CargoSmart, www.cargosmart.com
IES, www.iesltd.com
Integration Point, www.integrationpoint.com