Trade Compliance

6 Causes of Sub-Optimal Trade Compliance Performance

Many supply chain professionals have sub-optimal trade compliance and this negatively impacts the organization's overall supply chain performance.

Ned Blinick

December 21, 2018

It is the primary responsibility of trade compliance to assure that the organization is compliant with all government regulatory agencies. However, in most instances, trade compliance has little control over the source and quality of information it needs to work effectively.Beyond its primary role, when trade compliance expertise is consulted during the early stages of product design, it has the potential to positively impact many operational departments in the company and save the company money. By understanding product composition and related product BOM country of origin details, marginally changing a product's composition can meaningfully impact the tariff rate to be assigned.When we talk with trade compliance professionals about their current state, many have similar issues. The issues and challenges are fundamental, like managing master data from a trade compliance perspective, classifying products effectively and efficiently for customs and PGAs, managing regulatory rulings, or screening accounts and contacts. Or, the issues and challenges focus on more sophisticated problems like improving processes to contribute to more efficient and effective global supply chain control and management.What is clear is that the vast majority of organizations have sub-optimized trade compliance and this negatively impacts the organization's overall supply chain performance.

6 Causes of Sub-Optimal Trade Compliance Performance

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Poor Master Data Management

Master data management in support of trade compliance is complex and complicated. It requires reflecting a regulatory view of products, accounts, units of measure, locations/geographies, and regulatory profiles. This is all in addition to the basic HS tariff codes, duty rates and special programs, restricted party status, and country of origin determination.Master data management is central and foundational for trade compliance performance. How an organization manages this cornerstone of trade compliance is one of the major reasons that trade compliance performance is sub-optimal. Many organizations still manage master data in the ubiquitous spreadsheet. We have seen global organizations whose trade compliance departments use spreadsheets as their "automation" tool for master data management. These spreadsheets often have 5 or 6 sheets, 1000s of rows, and upward of 50 columns.Spreadsheets are a recipe for inefficient master data control.Poor master data management manifests itself in inconsistent data quality, unnecessary human intervention, inaccurate documentation, reporting, and analysis. The result of poor master data management is that all related processes and reports are compromised.

Limited Master Data Visibility and Accessibility

Visibility is a specific problem for trade compliance. It often begins with a lack of visibility into the product during engineering, product design, and sourcing activity and continues on through the purchasing and transportation execution. The lack of visibility results in data that is incomplete or misclassified and negatively impacts both operations and the trade compliance function. Too often, simple details that are necessary for operations and trade compliance (i.e. HS Codes, Units of Measure, PGA specific information, Restricted Party status) are overlooked because of the lack of systematized process. The lack of visibility into the product and the account records manifests itself in trade compliance having to operate in crisis mode when the goods arrive at the port of entry (import), or shipments being delayed (exports).

Constrained Oversight and Monitoring Capability

Oversight and monitoring are major responsibilities for trade compliance. Oversight ranges from master data management to entry auditing. Monitoring is focused on 3rd party auditing and management.With weak oversight, simple things are overlooked or ignored and subject to errors and omissions. Poor master data management limits the value of the sourcing and purchasing teams by reducing their ability to create accurate total landed cost estimates based on incomplete tariff and tax implications. Transportation may be missing information that affects product acceptance by carriers, i.e. Hazmat control.Weak monitoring of 3rd party service providers is particularly prevalent because the human resources and time requirement are not sufficient to support it. Weak monitoring results in limited visibility to the work output (entries audit) and adherence to service level agreements by customs brokers, freight forwarders, etc.

Inefficient Processes

Inefficiency in the area of trade compliance is endemic. Inefficient processes are the result of poor master data management, a lack of overall system design, fragmented content support, and rudimentary system support. The importance of a comprehensive, easy-to-use system design for trade compliance cannot be overstated when addressing optimizing trade compliance. A clear statement of objectives and requirements for the trade compliance practice is necessary to achieve a complete holistic solution that streamlines processes. Failure to have a clear statement of objects and requirements leads to a piecemeal approach to trade compliance processes with little likelihood of achieving the desired overall outcome and the related benefits.Process support is critical for trade compliance because of the complexity of the activities it is required to manage. Understanding what is happening at the product and account levels (master data) is necessary to ensure that information is correct when communicating with Customs or PGAs, directly or through a Customs Broker. Inefficient processes increase data redundancy, manual data entry, and error rates. Or, poor processes result in additional direct cost (managing trade compliance - internally and with 3rd party providers, i.e. customs brokers, freight forwarders, legal), indirect cost (additional fees and penalties), or operational supply chain costs (extended time clearing product on arrival which impacts logistics, inventory, and sales).

Communication Barriers

Communication is one of the more significant problems that exist between trade compliance and the rest of the organization. Poor communication impacts the way trade compliance is understood internally and externally, and how trade compliance relates to its broader constituencies. Underlying poor communication is the reality that trade compliance speaks a different language from operations, legal, and/or finance.Trade compliance exists in the world of customs and PGAs. The language of trade compliance is unique to its needs and very different from the rest of the organization. The lack of common language makes communication between trade compliance and the rest of the organization very difficult. Whenever people speak different languages, the opportunity for misunderstanding and inefficient behavior increases. The lack of common language is exhibited in the way trade compliance communicates with the organization and the way it is understood and perceived within the organization. The inability to speak a common language hinders communication with internal stakeholders.

"Businesses that have invested in advanced internal compliance programs (ICPs) and automated tools to manage global trade will understand the benefits of approaching this subject strategically and enjoy a competitive advantage over companies that continue to view global trade compliance solely as an administrative issue." Lisa Zajko is a Partner at KPMG.

Ineffective Trade Compliance Process Platform

The most significant reason why trade compliance is sub-optimized is the operating platform. Trade compliance is a series of activities and processes that are interdependent and should be treated as an integrated whole. There are very few organizations with an integrated process platform to manage and synchronize all the tasks and processes that encompass all the activities that trade compliance addresses.In the vast majority of organizations, trade compliance is highly manual. Even with powerful point solutions that enable companies to do specific tasks, (ex. denied party screening, HS classification, HazMat management, FTA qualification) the benefits are greatly minimized because they are managed as discrete activities. Because these activities are not treated as part of an integrated whole they significantly fail to deliver the full value that could be derived.When analyzing trade compliance objectively, it is evident that all the underlying activities are to support the filing of accurate and timely entries with Customs and associated regulatory agencies. All the entries require information from internal systems (product and account records, purchase orders), operations (shipping details and packing list information), and finance (commercial invoices and terms of payment). This information must be aggregated and formulated so that it can be presented to customs and regulatory agencies. Processes and mostly manual with some limited automation.Optimizing trade compliance activity and processes require a comprehensive platform that is designed to manage all the master and operational data seamlessly so that the outcomes are simple to achieve with minimal manual input.ConclusionThe management and execution of trade compliance activity is still highly manual in the vast majority of organizations. While there is some technology supporting the trade compliance effort, most functions are still managed in antiquated paper-based systems. These manual activities and inefficient paper-based systems result in high levels of inefficiency at all levels of trade compliance activity and management.

“...operational mechanics of import and export continue to be a significant time drain on trade teams, with import documentation and licensing, product import classification, and global supply chain management taking up the most time and resources, according to respondents. This creates more opportunities for automation.” (2016 Global Trade Management Survey - KPMG)

The current state of trade compliance is fraught with:

  • Poorly documented and executed processes
  • Ineffective document management
  • Limited reporting and analytic capability
  • High error rates (classification, invoice validation, filing routines)
  • Marginal oversight of 3rd parties (customs brokers)

The bottom line is that trade compliance is an area of business that is greatly sub-optimized. The positive spin - trade compliance sub-optimization is easily remedied at a very low cost and easily justified ROI.