Trade Compliance

What is the Value of Trade Compliance?

Trade compliance provides valuable insights affecting the optimization of sourcing, purchasing, and product engineering decisions.

Ned Blinick

June 21, 2019

What is the value of Trade Compliance? For a trade compliance professional the answer is obvious.

Regulatory compliance = (Lower corporate risk + less CBP/PGA intrusion + speedier supply chains) = Lower total cost

However, for everyone else, the answer is anything but obvious. Lower corporate risk and less intrusion from regulatory agencies are hard to measure. And increased velocity through the supply chain is hard to measure. "C" level executives or other senior executives that are motivated by ROI arguments find it hard to invest in this kind of argument. For directors and managers, where the focus is on operational outcomes of their departments, often find it more difficult to accept.Sadly, trade compliance is far from top of mind in almost all organizations. And where it is recognized, it often has limited internal sponsorship. It is most often thought of as a "cover your ass" discipline for the organization. This view of trade compliance makes it very difficult for it to be appreciated for its underlying value. The end result is that organizations lose out on opportunities to improve supply chain performance, reduce product cost, and improve overall profitability.

Trade Compliance impacts cost and performance

Trade compliance touches almost all parts of the business and has the potential to provide real savings to the organization. This fact - and it is a fact - is often overlooked by executives at all levels of the supply chain. Because of the lack of understanding of the impact that trade compliance can have on the financial results, it remains a marginal player and under-resourced part of the business. To change this perception, trade compliance must be able to articulate a value proposition that delivers a strong and quick ROI.In the vast majority of companies, trade compliance gets involved in product classification after the critical product manufacturing and sourcing decision have been made. This underutilization of trade compliance at these early stages of product development and purchasing result in a significant lost cost-saving opportunity for manufacturing companies.

The value proposition that Trade Compliance should be articulating is how trade compliance provides valuable insights affecting the optimization of sourcing, purchasing, and product engineering decisions. These fundamental areas of the business hold potential value that trade compliance can unlock. By being part of these processes trade compliance can identify:

  • optimal sourcing locations based on preferential tariffs by origin/destination relationships,
  • product engineering and design decisions based on optimized product classification,
  • optimal manufacturing decisions based on component acquisition affecting product Country of Origin determination and HS classification by destination.

Trade Compliance shortens global supply chains

Trade compliance has a direct role in streamlining the import and export processes. By assuring that factors affecting CBP and PGA delays at the border are avoided a company reduces the overall transit time from source to destination. This benefit is positively compounded by a reduction in the quantity and number of regulatory holds put on products and the associated costs.The areas where poor trade compliance practices impede global supply chain performance and increase supply chain times are manifold: (See "Customs Inspection Questions Answered" - Shapiro Blog 2018)

  • paperwork is incorrect or not filed correctly
  • a supplier might be flagged by CBP or PGA as being a trade risk
  • a product's country of origin is suspect
  • the product being imported is commonly counterfeited
  • the importer has a poor regulatory compliance profile

The simple fact - each of the five (5) issues referenced above are manageable through good trade compliance practices. Managed separately, each issue provides value. However, managed collectively the value proposition is much more impactful and meaningful.The new ACE environment heightens CBP and PGAs ability to target importers and exporters based on current performance. This capability to capture huge amounts of data that any regulatory misstep negatively impacts the importer/exporter profile and increases the clearance and release times for shipments.Poor trade compliance practices lead to uncertainty in clearance times. This uncertainty impacts inventory decisions (often reflected in increased levels of safety stock), demand fulfillment decisions, and unplanned import costs (exam fees, demurrage and detention fees).

The value proposition that Trade Compliance should be articulating is that by ensuring trade compliance best practices the reputation of the organization with CBP and PGAs is enhanced directly resulting in much less friction at the border. This friction-reduced environment increases the speed and certainty that product moves through the supply chain. The impact on cost and finance of a friction-reduced border can be measured and are meaningful.

Trade Compliance reduces corporate risk

There are multiple levels where corporations are exposed to trade risk. Trade uncertainty, regulatory controls, and supply disruption - to name a few - all increase corporate risk. Trade compliance has a unique opportunity to help the organization navigate the risks that challenge the smooth operations of the corporate supply chain.

  1. Trade uncertainty is at its highest levels in decades as the world adjusts to the chilling effects of protectionist policies and the deconstruction of globalization. In today's political environment, policy by tweets, trade regulation and enforcement is a very direct and immediate way that governments affect trade. With the daily imposition of new, or higher tariffs on a growing number of items, increased scrutiny of trade and financial transactions, politically motivated trade actions, rapid technological change, and the attack on traditional global trade institutions (WTO), the level of anxiety in corporate boardrooms is palpable. What worked yesterday is not necessarily going to work today. The uncertainty surrounding trade requires the organization to react quickly as the trade ground shifts to reconfigure supply chains so as to minimize the commercial and financial fall-out. ("Toward a new era of trade and investment policy" - Baker McKenzie 2018). Trade Compliance teams are a critical participant to navigate the potential trade risks and to provide solutions to mitigate corporate risk
  2. Regulatory controls are powerful tools that governments lever to influence trade. This is abundantly clear in the U.S. where CBP and PGAs are increasing enforcement aspects of their mandates to ensure trade is compliant. For companies that play somewhat loose or uninformed with trade regulations will see delays at the border due to inspections and detentions and additional costs are the consequences. More importantly, with each regulatory trade infraction, the corporate profile is negatively impacted and the risk to the company's supply chain performance increases.
  3. When supply chains are disrupted, the cost to the organization is significant in both the short and long term. Significant supply chain disruption seriously impacts the company's ability to function effectively and negatively influences corporate valuation. ("Supply Chain Disruption - a major threat to business" - Forbes 2013). Because supply chain disruption is never planned the organization can only prepare for the eventuality through serious scenarios. But, to truly mitigate the effects the organization must have systems in place that enable quick, well-considered reconfiguration of the supply chain. At this point, Trade Compliance has a major role to play in helping management understand the regulatory, tariff, and cost implications associated with addressing alternative supply options.

The value proposition that Trade Compliance should be articulating is that they have a significant positive role to play, at a corporate level in reducing broader supply chain risk. By narrowly focusing on specific functions like product HS classification, denied party screening, or duty mitigation strategies in the absence of broader corporate risk context, Trade Compliance dramatically under-represents its benefit to the organization.

How to make a Trade Compliance value proposition

In order to be successful in making the case for value, it requires 4 basic elements:

  1. The belief that trade compliance really does add value.
  2. A strong individual to champion the reason for the company to adopt strong compliance procedures and processes.
  3. A senior leader that appreciates the value proposition that trade compliance brings.
  4. A management team that is focused on the global supply chain as a core component of organizational success.

Trade Compliance was born out of regulatory and security necessity. Today, it has strategic and financial value for the organization. Those companies that invest in Trade Compliance and take advantage of the product, account and regulatory expertise of their trade compliance professionals derive real value with a substantial ROI.