Master Data management is the single most important element for an organization. Master Data underlies every operational, financial, and regulatory activity in the organization - regardless of its line of business (raw material provider, manufacturer, distributor, or retailer). Failure to maintain adequate Master Data records and the organization will falter in its primary mission, its financial objectives, and its regulatory compliance.
This blog is a primer on the role of master data with reference to ensuring strong trade compliance practices. It provides basic insights into:
What is Master Data? Master Data is the enterprise repository for all the product/item and account details. It defines a product/item, all its relevant attributes and relationships to other products [BoMs] and accounts. The basic elements that comprise product/item master data are: descriptions, dimensionality, pricing (buy and sell), supplier/customer relationships, product classes, country of origin, classification codes (HS, Schedule B, dual use), underlying regulatory rules and interpretation, special handling requirements, document requirements. In Master Data an account (business entities and related contacts) is defined by its transactional role (related business, manufacturer, supplier, carrier, warehouse, customer, etc.), its terms and conditions for trade and services, its related contacts, and product relationships.
Why is Master Data so Important in Trade Compliance? Master Data is “the foundation” supporting a company’s operations. It establishes the framework and context for operational transactions within and across the organization and with its external actors. If managed well it is the single version of either a product or an account, at a point in time, so everyone from senior management to operations understands its status and quickly interprets how it relates to their unique needs.
Master Data covers static data sets, transactions, structured information, and hierarchical relationships. It is essential to every aspect of operations from product design, sourcing, purchasing, manufacturing, inventory management, sales, marketing, to accounting and finance. Master Data is essential for determining and understanding the total cost of ownership of a product and its profitability contribution to the organization. It is a foundational element of compliance and the ability of the organization to meet its regulatory requirements and manage corporate risk, sustainability, and social responsibility.
A company that deals in products depends on clarity in defining a product-account relationship as it is that relationship that defines how the organization interacts with its entire ecosystem. Master Data management is one of the critical cornerstone functions in any organization and a company’s results depends on how well it is managed.
Simply put, enterprise solutions like SAP, Oracle, Infor, and others were designed when most businesses were focused on domestic manufacturing and markets. The traditional enterprise solutions were highly competent in managing master data from that context. But in the mid to late 1980s, as trade became “global”, the requirements for defining products and managing accounts through a globalized lens dramatically expanded and the enterprise’s orientation to its master data records has struggled to adjust.
In a relatively simple global supply chain, there are a minimum of 12 actors involved in moving a product from origin supplier (country) to its final customer. As the supply chain becomes layered with multi-tiered suppliers, manufacturers, and third-party subcontractors, carriers, geographic regions, and customs regimes, the level of complexity increases exponentially and the need to manage products and accounts from these perspectives similarly increases.
With greater global supply chain complexity comes the need to align both import and export processes with the regulatory requirements of customs and other government agencies responsible for enforcing compliance. Constantly growing rules and regulations imposed on international trade require increasing understanding, knowledge, and flexibility to control and manage master data beyond the standard ERP capabilities or perspective. The ability to execute an effective global supply chain requires a much broader approach to trade which is dependent on increased control, communication, and visibility between all the trade actors including customs and the other regulatory agencies. Effective global supply chain control starts with comprehensive master data management supported by a strong trade compliance orientation.
Simply stated, traditional enterprise master data is sadly deficient when it comes to supporting international trade and customs requirements.
In our list of the 6 Causes of Sub-Optimal Trade Compliance Performance, the top two causes are poor master data management and limited master data visibility and accessibility. Because of the limitations in the way the enterprise master data is managed, organizations of all sizes often augment their enterprise master data with spreadsheets or lightweight databases. Without any doubt, the spreadsheet is the most widely accepted and used database. It is both highly sophisticated and quite crude. Its sophistication lies in its extreme flexibility, its relative ease to learn and implement, and its very low cost of acquisition. Everyone loves the spreadsheet.
However, spreadsheets have their limitations and the limitations result in extremely high costs. Continuously expanding regulatory regimes increase the need for master data to scale appropriately in support of an organization’s international trading activity. It is the need to scale when spreadsheets reach their limits and become an increasing overhead burden. This burden is exhibited in terms of human effort required to maintain the efficacy of the information. As the supporting spreadsheets grow in size and scope the quality of information degrades and the opportunity for trade compliance to positively impact organizational outcomes diminishes.
When managed well, master data (with the critical trade compliance components) delivers significant benefits to the organization. Comprehensive trade compliance master data detail delivers 5 major benefits:
The overriding responsibility of trade compliance is to ensure that the organization is in compliance with customs and partner government regulations. Control from a trade compliance perspective is:
Incorporating trade compliance implications as part of the product design and sourcing decision can have a meaningful downstream effect on the duties, fees and taxes paid. Assessing and sharing the status of a supplier, service provider, or customer from a trade compliance and risk profile is growing in importance in overall supply chain network planning, agility, and execution.
The importance of communicating correct trade compliance product detail with external actors (suppliers, customers, carriers, freight forwarders, customs brokers, customs, and PGAs) is essential to ensure that the supporting import and export documentation is accurate. Accuracy and timeliness of information directly impacts:
The relationship between an importer/exporter and their customs broker or freight forwarders is special. Aside from the routine entry preparation and filing activities that brokers and freight forwarders provide, importers/exporters rely on their brokers for information and guidance. However, the relationship is often one of dependence because the broker maintains the product/item trade compliance master data on its system as well as other important information. Controlling its master data providers the importer/exporter a degree of independence from their customs broker which rebalances the relationship to one of shared interdependence.
The trade operations and the regulatory environment are in constant flux. The forces for change that are beyond the control of the trade compliance team are many. When trade terms or conditions change, whether that change originates with suppliers or customers; customs or PGAs; customs brokers or freight forwarders; or internally, trade compliance must adjust to the new conditions. The need to quickly manage and update the product/item and account masters is an essential part of the trade compliance regimen and affects border clearance activity.
Failure to appreciate the potential benefits of trade compliance master data perpetuates inefficient data management and workflow. Failure to manage master data from a trade compliance perspective has real costs to the organization far beyond trade compliance.
The role of customs tariffs and free trade agreements (FTAs) has a direct, and at times, material impact on the total landed costs of a product and its profit contribution. The design and composition of a product can impact its acceptability to PGAs and the product’s resulting status at the border. The commercial and regulatory status of an actor (supplier, customer, 3rd party provider, contact) is a factor that can have serious negative consequences if not vetted correctly.
The value of master data for trade compliance is more than managing the data elements that make up the master data records. While managing the data elements is foundational to any master data program, the real value of master data is in the broader business activities it supports. These activities are divided into three basic areas:
The success of any master data program is measured by the value delivered against these 3 basic activities. Learn more about the role of the product master file In a successful import management program.
The compliance function within the organization is focused on reducing the company risk profile. In large organizations, corporate compliance, in the broadest sense, generally falls under the authority of the legal function within the organization. In SMEs, it often falls under the responsibility of a C-level executive or Human Resources.
Whoever is responsible, whatever the formality, compliance focuses on the alignment and enforcement of the behavior of its employees with its internal rules and processes and the rules of engagement of the company with external regulators.
Trade compliance is a sub-function of the broader compliance regime. Its major responsibility is to manage the organizational risk exposure to government agencies that oversee international trade like customs, food and drug, census, department of defense, etc. At its core, trade compliance is primarily responsible for ensuring that all declarations to these government agencies are accurate and filed in a timely manner. This responsibility exists whether the filings are done on behalf of the organization through third parties (customs brokers or freight forwarders) or executed internally.
To appreciate the importance of master data control specifically for trade compliance, it is critical to understand the breadth of operational activities the trade compliance team is responsible for, and how master data for trade compliance supports the trade compliance functions.
A major challenge for trade compliance is that its rules, regulations, and language are so fundamentally different from normal compliance or operational activities that its mandate and value are poorly understood by management with the result that its value is significantly undervalued.
Ensuring that the trade compliance filings are accurate and timely requires control over the data elements that specifically and uniquely apply to government regulatory agencies. These data elements generally do not reside in standard enterprise master data solutions and require external systems to support the trade compliance perspective.
The ability to provision the right information to customs and/or PGA through a customs broker, freight forwarder, or an automated self-filing solution, require complete oversight and access to the product and account master records. For all but the smallest organization, a trade compliance master data solution that provides the proper infrastructure is essential for trade compliance success.
The value of strong, centralized trade compliance master data control and management is the downstream benefit it has on trade compliance processes like automating processes, classification management, denied party screening support, entry preparation, custom broker/freight forwarder oversight, and management.
Basic product information (product descriptions, units of measure, HS and ECCN classification, PGA profiles, country of origin (COO), Bills of Material (BoMs), document requirements, etc.) is necessary to support either a customs broker (item master) or an automated internal process for entry preparation and filing purposes.
From an account (supplier, customer, carrier, broker, freight forwarder, 3PL) perspective trade compliance master data provides for the capturing and management of names, addresses, contacts, and relationships. It enables the association of account status management (denied party screening (DPS/RPS), registration control, country of origin, and extended CSR (Corporate Social Responsibility),
The essence of a well-run trade compliance operation is the level of control it has over the end-to-end trade compliance process - from Master Data management to Customs Entry preparation and management to Broker/Forwarder management and scorecarding. In the vast majority of instances, customs-facing work is outsourced to customs brokers and freight forwarders. Ensuring that they have the correct information to prepare and execute an entry on the importer/exporter behalf is totally dependent on the quality of product and account information that exists in master product and account records.
Managing the broker or forwarder is dependent on the physical capacity of the importer/export to review the entries and invoices that are submitted to customs or PGAs. Effective and efficient broker/forwarder auditing is a direct result of the analysis of the underlying product and account master data compared against the declared details of the commercial invoice, packing list, Bills of Lading that comprise the entry detail.
The logical outcome of successfully auditing the import/export entry data is the ability to Scorecard customs brokers and forwarders against measurable KPIs.
Bills of Material (BoM) are a core function supporting several critical trade compliance functions. BoMs provide the SKU level detail necessary for many similar but different trade compliance outcomes, i.e. Country of Origin (COO) determination, Free Trade Agreement (FTA) qualification, Foreign Trade Zone (FTZ) inventory management, Duty Drawback analysis, and Corporate Social Responsibility (CSR) control.
A well designed BoM incorporates the SKU level operational (commercial invoice, packing list, customs entry reference) and trade compliance master data detail (Descriptions, Units of Measure, HS/Schedule B codes, tariff rates, Rulings, PAG profiles, special handling conditions, sanction details, etc.). Most or all of these details are fundamental to the analysis necessary to derive the BoM-specific outcome required.
Failing to integrate operational and trade compliance master data detail results in BoMs which are incomplete and require significant manual interventions to achieve the desired results. The effective management of master data is not possible without the capability to accommodate detailed BoMs, so it is crucial to understand the role of the product master file In managing bills of material.
For a company that is currently executing (or contemplating) duty drawback, having access to the underlying master data is essential in order to correctly determine the correct value of the drawback. As with the BoM, the accessibility of SKU level HS codes/tariff rates and the related SKU entry detail (imports) are essential to building the duty drawback claim.
The level of detailed product information required to support and validate the preparation of a claim is often overwhelming. The direct labor necessary to sift through spreadsheets to cross-reference and validate supporting customs entry detail against export AES filings and company inventory records often limits the scope of the drawback claims. Product master data is fundamental to automating the drawback data aggregation and validation which eliminates most of the manual effort and expands the opportunity for drawback results.
Trade compliance is one of the few areas of a company that benefits from enterprise software solutions (like SAP, Oracle, Infor, Microsoft). Trade compliance is most often a low-priority function within a company and receives little IT support. The result is that trade compliance processes are poorly automated, and those areas that do benefit from automation are usually not integrated into a coherent and comprehensive solution.
A major benefit of trade compliance master data is that it enables the automation of trade compliance processes. However, managing master data from a trade compliance perspective is not a recipe for success. In order to optimize trade compliance value, drive process excellence, and achieve maximum efficiency, master data must be managed centrally and integrated with automated downstream process.
The automated processes that integrated trade compliance directly supports (and impacts):
Each of these processes are supported by master data.
The impact and value of trade compliance master data has opportunity well beyond its support of the trade compliance function. The trade compliance detail contained in a product and account master influence other functional areas within a company and its trading partners.
Internally, Master Data for Trade Compliance has a direct role to play in a company’s supply chain network design and resiliency; product design and engineering; purchasing and sales functions; and financial results. Externally, the master data is important in ensuring suppliers and service providers fulfill the terms and conditions of trade and regulatory requirements that govern the import or export activity.
Visibility into the related tariffs, taxes, fees, trade agreements, and regulatory rulings on a product and country pairing relationship is necessary to optimize overall corporate supply chain network design. When these tariff and country pairing relationships are accessible, visible, and managed centrally the network design team can better evaluate the impact of their choices to the overall outcomes.
In times of severe disruption when decisions must be made quickly to reconfigure the supply chain (origin and destination pairings) and minimize the effects of the disruptive event, access and visibility to trade compliance impact are vitally important.
The design or engineering specification of a product can have a meaningful impact on the tariff rate applied and the duties and taxes paid. The duty applied on a product can be dependent on the country it is being imported to as well as its composition.
Understanding the tariff implications at the design stage has a direct impact on the competitiveness and profitability of the product.
Imports: For companies that rely on international sourcing for their products Master Data for Trade Compliance (the HS code, tariff rate, associated fees and taxes, ownership, labor practices, origin material, etc.) is unquestionably important in determining what countries/suppliers to source or buy products from. In a time of a hyper geopolitical trade environment knowing your supplier and their supply chain partners is becoming increasingly important. Punitive tariffs (301/232), antidumping/countervailing duties, preferential tariffs, all impact the total landed cost of a product and the resulting product profitability.
Exports: Product and Account master data are essential elements of any export program. Ensuring that accounts are properly screened against appropriate sanctions lists for both trade and social practices (forced labor and source materials) is a best practice. However, the need to look at accounts more broadly in terms of secondary and tertiary ownership relationships should be a standard practice in order to avoid serious fines and penalties. The same is true for ensuring that products are properly classified and documented to meet both the exporting and importing country regulatory requirements.
The opportunities for missteps are growing in both import and export trade compliance enforcement and Master Data for Trade Compliance is a necessary resource to ensure compliance.
The implications of Master Data for Trade Compliance on the financial outcomes of the company are directly related to how capably an organization designs, sources, purchases, sells and imports or exports its products. Total product landed cost is greatly influenced by the tariffs, taxes, duties that a company pays on its imported raw materials, components, or finished goods. How a company can construct its supply chain to take advantage of duty mitigation strategies directly impacts competitiveness and profit margins.
The savings that can be achieved because of a comprehensive and well-designed trade compliance program has measurable consequences for the financial outcomes of the organization. Master Data for Trade Compliance is at the root of any trade compliance program and the financial outcomes.
An integrated Master Data for Trade Compliance capability is a keystone component of any trade compliance program but is often not well understood or appreciated. The consequences for sub-optimized Master Data for Trade Compliance are that trade compliance departments are still mostly manual, operate in disparate legacy systems, can’t easily communicate with or manage its customs brokers and freight forwarders, lack the ability to easily share and collaborate with internal functional peers or contribute positively to the financial success of the company.
Using product HS classification and denied party screening tools without a comprehensive master data management capability is like treating the symptom but not the disease. In order to reach its full potential and deliver on the full promise of trade compliance an organization must have a strategic appreciation and approach to Master Data for Trade Compliance.
Anything less than an overarching strategy diminished the role of trade compliance as a contributor to the overall health and success of the organization. Conversely, a well-designed, integrated, and automated trade compliance strategy built on detailed, supportive Master Data for Trade Compliance has the potential to deliver important benefits to the organization and make the trade compliance function an equal partner in overall global supply chain success.
3rdwave Master Data Management is a single destination and source for all supporting product and account information that is fundamental to any trade compliance strategy. It fills the major trade compliance data gaps in standard enterprise systems master data that are required to support the trade compliance function.
3rdwave's master data structure recognizes that the Product and Account master data have different orientations supporting trade compliance and require their own structures. The separation of Products and Accounts provides users with flexibility in building, managing, and controlling the Master Data at the necessary level of detail required to support trade compliance activities.
3rdwave’s Product Master provides a user-configurable product profile to ensure that any product elements necessary for trade compliance activities are easily supported. Based on user-defined product classes and attributes the product master contains:
3rdwave Account Master delivers highly configurable multi-perspective account control that simplifies and streamlines the management of the master account record.
3rdwave Master Data management is powerful but its value goes far beyond centralizing and standardizing trade compliance data.
3rdwave Master Data when combined with 3rdwave’s Trade Compliance module drives downstream activities, like:
Each of these downstream activities depends on comprehensive trade compliance master data that can be relied upon for its accuracy and completeness.
Trade compliance master data is a foundational component of any trade compliance program. However, failing to manage it within a scalable database structure reduces its potential for organizations of any scale of international trade. 3rdwave Master Data for Trade Compliance provides an industry leading solution that is designed with the understanding and appreciation that master data is the foundation of all derived trade compliance activity.
3rdwave Master Data provides the essential master data management and control that empowers trade compliance to meet its full potential within its own functional area and as an important knowledge and information resource for the rest of the organization.
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