The world is a very small place when it comes to business. Goods are produced offshore, in whole or in part; they are assembled in yet another country and shipped to customers around the globe. Manufacturers are no longer limited by borders. Assuming it makes no difference to their customers, many businesses have the option of putting their plant anywhere in the world with location decisions based on the best return on investment can be found, whether it's in Kansas City or Kuala Lumpur.

The goal of establishing an integrated globally supply chain is to increase the speed and efficiency of production, while decreasing costs to both the manufacturer and consumer. But there is a flip side to the coin. Complex trade rules and regulations can catch a company unawares, leaving the goods held up with customs and the company on the hook for thousands of dollars in fines-to say nothing of lost sales and diminished return on investment caused by delays. Information relating to trade agreements, classification codes, banned goods and tariff structures in export markets is difficult to acquire and keep current, yet never has it been more critical.

In the past, companies have tended to piece together information on various offshore locations from several different sources. They would contact trade desks at the Department of Commerce, customs experts in logistics firms, and legal advisors in order to compile background information on the costs of doing business in a certain area. It is a lengthy and rather unscientific process.

After many experiences with fines and classification problems, companies are becoming increasingly aware of the role trade compliance plays in their sourcing and supply chain decisions. With the expansion of global manufacturing operations the market has responded with specialized services and information providers focusing on tariff information such as FedEx Trade Networks WorldTariff(tm), Open Harbor or Tariffic. These companies house massive databanks of trade information that they make readily accessible to their clients, saving them time and money. Most companies access the information online, although services and licenses vary by provider.

"There has been a proliferation of preferential duty programs and an ongoing trend in shifting production to overseas suppliers," explains Ed Clark, CEO and President, FedEx Trade Networks. "As a result, many companies are recognizing the need to take duty and tax consequences into account when they make international business decisions."

Most of the global information databases classify their information by Harmonized System codes (HS codes). HS codes are a government-regulated system used to classify products and their corresponding tariffs. Getting the proper HS code is a critical first step. From this, other information such as classification number, classification description, import duty, VAT, excise and other tax details can be accessed, depending on the particular database service.

The information must also be kept current, which is no small task given the speed at which trade regulations change. At any time, the U.S. is in negotiations with several different nations to develop free trade arrangements, duties are being raised and lowered as trade disputes arise and are settled, and Homeland Security initiatives are being implemented. It's a tremendous amount of detail to research and manage.

While it is possible for a company to locate this information without a using an information service provider, the task would be onerous, says Nancy Boughton, Vice President, Trade & Compliance, Open Harbor. "There is a significant effort that goes into analyzing and synthesizing the data," says Boughton. "There can be up to fifteen different agencies involved in trade within one country." Open Harbor's 'value added' is to go directly to the government agencies to gather data through its network, which includes vendor sources and agents with different language capabilities. "It cost $50 million to develop the solution we have today," comments Boughton. There aren't too many companies that would have the resources, people or financial, to be able to collect that kind of information.

For the most part, companies that are using the services of global tax and duty information providers tend to be medium-to-large businesses, says Beth Peterson, Vice President Product Solutions, Open Harbor. These are the organizations that have extended global production and supply chains, and require instantaneous, accurate information to make decisions. They tend to use it in three different ways- compliance, which is by far the most common usage; product planning; and product development, also called tariff engineering.

Compliance

Although it seems contradictory, the increase in global trade agreements has made international trade more complex rather than less. It is a burdensome job, controlling customs transactions, keeping track of goods and managing the supply chain. And, with the current state of world affairs, it is critically important to ensure that goods are properly classified. The U.S. has a long list of parties barred from importing goods, which is constantly changing. It also has an equally long list of firms to which U.S. companies are banned from exporting. Make an error here, and fines may be the least of your worries. If goods are classified incorrectly, alerts or warnings could appear. "Post 9/11 there has been a need to ensure that you are exporting the right product to the right person," says Yves Durand, President, Tariffic Inc.

Compliance can also save companies money upfront. There are numerous trade agreements that provide preferential duty rates on certain goods. For instance, the Information Technology Agreement (ITA) results in 0 percent duty on certain IT products among the countries included in the agreement. If goods are improperly classified, they will not be recognized under the ITA and the company will end up paying duty. The same parameters apply to goods that qualify for Most Favored Nation (MFN) treatment.

Boughton tells the story of a company that was making a multimillion-dollar sourcing decision. The company had been told that the duty rate for import of a particular piece of telecommunications equipment to China was 12 percent. A quick check of Open Harbor's system showed that the rate could actually range from 17 percent to 40 percent, unless the import qualified for MFN duty treatment of 0 percent. The U.S. origin equipment fell into this category, allowing the company to make a sourcing decision that saved them millions of dollars.

Product planning

One of WorldTariff's clients is Motorola, a huge multinational with many varied product lines. The company often must determine among several options the most cost effective location to produce or source a product, where it should be sent for subassembly or for further processing. One example was the manufacture of an engine controller unit. The company used WorldTariff's database to investigate the duty and tax costs of fifteen prospective geographic locations to determine the most cost-effective solution.

Motorola has a very large, sophisticated and educated global compliance community within the company. Employees in its many locations around the world are provided with access to WorldTariff's database in order to ensure compliance and to help make sourcing and investment decisions. "We have 80 compliance and logistics professionals [within Motorola] that are using WorldTariff," says Eric Larsen, Senior Trade Compliance Specialist, Motorola

Durand says Tariffic's clients share the same need. "These companies need to know in advance. Large corporations are making decisions daily on where to import parts," says Durand. He believes that one of the greatest benefits to clients using the database is the ability to accurately calculate total landed cost at various points along the decision chain, including point of sale and purchase.

Product development

While duty and tax information is commonly factored into compliance and product planning efforts, there are some truly leading edge applications. A few companies have taken duty and tax research to the next level, implementing 'tariff engineering' in their operating procedures. "Companies are now mastering and rationalizing their supply chain," says Boughton. As a result, they are considering the savings to be found if all or part of their manufacturing is moved around the globe to take advantage of lesser duty and tariff structures. Considerations could include the existence of various trade agreements that provide lower or no duty.

A perfect example is Renault, the European car manufacturer. According to Peterson, Renault's recently launched LOGAN automobile represents the most innovative use of duty and tax information. "They based the entire auto line on information gathered from surfing trade regulations and benefits," she says. As part of its long-term growth strategy, the company was focused on expanding its sales outside of Western Europe. However, exporting cars manufactured in Western Europe to countries such as Russia or Colombia would result in a car priced far beyond the reach of most middle-class earners in those countries. To produce the most cost-effective, acceptably priced car possible, Renault decided to have the LOGAN assembled on-site in the market country, using both locally sourced and imported Renault parts. This approach, however, significantly increased the complexity of customs clearance. In order to manage the process, Renault used Open Harbor's Global Security and Compliance solution to store and manage the LOGAN parts catalog, including country of origin and country-specific HS codes, thereby simplifying the customs procedure and keeping costs down.

While tariff engineering is not a common practice yet, it appears to be a growing trend. Companies are looking into the classification of a product prior to actual production in order to determine not only where the product should be produced but also how it should be built. "Many global companies use tariff engineering in the planning phases of product development to identify the lowest duty and tax opportunities," says FedEx's Clark.

Such forward thinking, however, is not yet the norm. While it's safe to assume that global supply chain manufacturers are constantly seeking to optimize the cost efficiency of their business, in terms of operation and production, duty and tariff rates seem to be the last bastion for cost savings. To a large extent, such considerations still remain an after-thought. "Sourcing groups tend to make decisions based on the bids and forget the other elements," says Larsen. "People lose sight of just how high duty and taxes can get." So, although the labor and capital costs might be lower, quotas may apply and duty rates could be very high. Indeed, Peterson points out that duties and taxes can constitute as much as 75 percent of the cost of the product to import.

Adding half again as much to manufacturing is a stiff cost to pay. With such rates looming in the balance, companies can't afford not to be fully attentive to global trade information. Global competition won't be growing more lax nor will trade regulations become less complex in the near future. "The shape of global trade is constantly shifting," says Boughton. "Companies need to calibrate and reassess information." It's a huge job but, as companies like Motorola or Renault demonstrate, the results reward the effort.

Side Bar: How Motorola Chose Its Plant Site

Motorola's Automotive and Embedded Electronics group had a dilemma. The division, which essentially creates the computer brains for cars, was looking to move manufacturing out of the United States. Business costs were simply too high when it came to the production of a widely-used automobile component-an engine controller unit that controls the fuel flow and makes the warning lights on a car go on.

The group had identified three potential sites for their new plant location (Mexico, Asia, and eastern Europe) along with a list of the fifteen countries to which the controller unit would be shipped. "They wanted an analysis of the customs ramifications- the duty rates from the country to the others, as well as any special programs [for preferential duty treatment]," explains Eric Larsen, Senior Trade Compliance Specialist, Motorola.

Larsen used FedEx Trade Networks World Tariff(tm) to create a matrix showing the data for each site in relation to the potential shipment-recipient countries. He already had the correct HS codes, so using that to start, Larsen was able to search each country, looking for 'red flag' items such as non-MFN (Most Favored Nation) rates, or anti-dumping regulations. Conversely, he also highlighted any preferential duty programs.

It sounds like a massive undertaking, but according to Larsen, it was not difficult because the information was so readily available and easily accessible on World Tariff's database. He admits that it would have been a different story if he had done the search the 'non-database way'. "It would have been a series of emails to our people in the various countries. Over time, we probably could have gotten the information, but it would have taken awhile," says Larsen. He also says that it's very possible that the information would not have been as good.

With a decision such as re-locating a manufacturing facility, time is critical. There are huge considerations, such as labor and capital costs that factor into the analysis. Duty and tax information is an often overlooked, but equally important factor. Having access to immediate and accurate information helped Motorola get the data they needed to choose the optimal plant location.

Side Bar: "The 'Hidden Costs' Can Really Hurt"

A company sourced logoed bathrobes from an Asian country. In order to support its marketing efforts around the world, the company had to import and export the robes in and out of the U.S. several times. Each time the terrycloth bathrobes were moved, they were subject to textile quotas and charged very high duty rates. (Ultimate analysis showed the company was paying upwards of 300 percent duty over the course of production).

Another company had just designed a new, innovative printer with components that its customers have been eagerly awaiting. As a service-minded company, it is decided that the printers should be shipped with a printer cartridge already installed allowing the customer to start printing immediately. It sounded like good business until, after the first few shipments, it was realized that the company was paying a 4.7 percent duty rate because the cartridge was installed. If, on the other hand, it were simply shipped with the printer (rather than in the printer), it is duty free. That amounted to millions of dollars in savings.

-FedEx Trade Networks, World Tariff