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Customs Brokerage
A service offered by most 3PL firms that not only complements but also begins to integrate logistics activities is customhouse brokerage. This process is vital to supply chain execution and requires that the customhouse broker (the 3PL firm) engage in the "classification and valuation" of merchandise for entry into the importing country. At best, this is a complex process that, when handled incorrectly, can inflate landed costs and create unnecessary lead time troubles.
In the parlance of customs clearance processes, classification involves the proper identification of products based on the product description provided for in the supplier's commercial invoice. Echoing the importance of the 3 Cs, the information taken from the invoice allows the customs broker to "classify" the product(s) according to the nomenclature of the customs entity in the country of importation. Made up of thousands and thousands of possible classifications, every conceivable product iteration has a corresponding tariff number that identifies to customs in a numerical format exactly what the product is.
GOVERNMENT AND THE FACILITATION OF TRADE
Business process improvement is not the only way in which international trade can be facilitated. Governments play a vital role in the proliferation of commercial activities and, not unlike large corporations, must seek ways to enhance their global competitiveness.
In recent years, governments have made a great deal of progress in their efforts to remove both tariff and non-tariff barriers to trade. With a tangible link to landed costs, lead times and inventory levels, trade policy must continue to eliminate processes and procedures that impede the international movement of goods. One such entity that endeavors to facilitate international trade is the World Customs Organization (WCO). Originally founded in 1952 as the Customs Co-operation Council, the WCO is an intergovernmental body committed to the facilitation of trade amongst nations. Today, the WCO works with 159 member governments to better manage their customs entities and expedite the flow of goods, documents and information. The primary way in which the WCO facilitates customs processes is via its adoption of the Harmonized System.
The Harmonized System is an internationally recognized, standard nomenclature for the classification of merchandise, collection of internal taxes and compilation of trade statistics. Prior to the introduction of the Harmonized System, countries around the world used discrete nomenclatures for the classification of products. This, of course, generated a great deal of confusion not only between buyers and sellers but also among the customs entities of trading nations. Today, the Harmonized System covers 5,000 commodity groups, is used by 190 countries and accounts for 98% of the worldwide classification of goods.
Based on a six-digit common nomenclature, the impact of the Harmonized System on day-to-day business cannot be underestimated. Because trading partners are capable of classifying products and determining any customs duties in advance, landed costs can be calculated with extreme accuracy. Also, because there is no question about product classification, there is no time lost in preparing customs documentation. Finally, as governments link their customs databases to accelerate commerce even further, the entire system will be built upon the Harmonized System. Already in place in many countries today, this facility will allow the clearance of merchandise prior to arrival, reducing cycle times even further.
If individual governments need an example of how their activities either facilitate or impede international trade, they need not look much farther than the WCO and the Harmonized System. Whereas the WCO has been a boon to commerce, many countries still adhere to archaic customs laws and procedures that only stand to make them less competitive in global markets. It will be the continued elimination of waste-ridden customs laws that makes developing nations more attractive to do business with and increases trade volumes.
Source: World Customs Organization Web site (www.wcoomd.org)
Additionally, each tariff number has a duty rate assigned to it, which allows the customs broker to determine exactly what duty, if any, is applied to the import under consideration. Not surprisingly, duty rates vary by country of origin depending on the nature of trade relations between nations, whether they belong to the World Trade Organization and if they are party to any trade agreements.
Valuation forms the second and equally critical portion of the customs clearance process. Whereas classification determines the duty rate assigned to a product based on its description and country of origin, valuation specifies how much the product is worth, or what is known in customs terminology as the price "actually paid or payable." Although beyond the scope of this discussion, suffice it to say that issues such as ex works price, transfer pricing, assists and underinvoicing are quite familiar to customs entities. For purposes of this analysis, valuation is an important component of the import process because it determines the monetary amount upon which duties will be assessed. To summarize, classification determines the duty rate, whereas valuation ascertains the dollar amount upon which that duty rate will be applied.
Whether viewed from an operational or financial perspective, it should be very clear just how important the customs clearance process is to SCM. Given this understanding, the importance of the 3PL firm to the entire process should be equally apparent. The slightest variation between planned and actual execution can create customs delays, fines and, ultimately, loss of market opportunities. On the other hand, a misclassification of products can have a negative impact on landed costs and eventually cost of goods sold.
The difference in duty between one tariff classification and another can be several points, and it is common to see duty rates vary 5 to 10% between similar line items. If a product is classified incorrectly due to poor product description on the invoice, inaccurate country of origin information or simple human error, the landed cost will also increase by that same percentage difference. It is said in business that "the devil is in the details." In this and many other supply chain instances, so are the euros, dollars and pesos.
Operationally speaking, it would be difficult to dispute the value of 3PL companies to SCM. Whether or not an organization is a disciple of the outsourcing philosophy, it is undeniable that certain supply chain functions are best carried out by a 3PL company. Not surprisingly, it is precisely these functions that collectively drive supply chain performance, creating the opportunity for financial enhancements on both the income statement and balance sheet. Similar to the benefits described in the section on contract manufacturing, when negotiated and managed correctly, an outsourced 3PL model offers advantages that a company could never achieve on its own.
