International Sourcing Strategies

Taking a proactive approach to the implications of offshore sourcing helps protect your bottom line. Many North American manufacturers are finding it increasingly challenging to deal with a growing influx of imported materials and products originating from off competitors, especially those based in China and India.

These competitive pressures are compelling Canadian and US companies to consider various measures to protect market share, including shifting their sourcing arrangements for components, peripherals and finished products outside of North America, to take advantage of lower cost alternatives originating in the emerging economies of Asia, Eastern Europe and South America.

This post highlights the importance of doing the appropriate research and background checks of all the cost and regulatory elements BEFORE you commit buying components or finished goods from new off shore vendors.

Why is this more important than ever?

Because North American manufacturers have traditionally sourced most of their materials in the US., Canada or Mexico, where duty is generally not an issue of the goods are NAFTA qualifying, and Customs and regulatory issues are well documented and understood. These assumptions can not be taken for granted when sourcing goods outside North America. Canadian and US importers are encouraged to review the full spectrum of variables, including currency exchange ratios, marking and packaging requirements, duty rates and tariff treatment, anti-dumping/countervailing duty applicability, duty drawback eligibility, and NAFTA eligibility, if the offshore components are incorporated into products ultimately sold in Canada or the US.

For example, purchasing motors in China that are incorporated into machines you manufacture in Canada for sale to a customer in the US, may negate the finished product’s NAFTA eligibility and duty free status, thereby increasing the ultimate cost of the product, and possibly eroding your margin or forcing you to raise your retail price and risking your competitive position.

Conversely, if you purchase the motors from China and sell them to an US customer in the same condition and without modification, you may be eligible to recover all Canadian duties paid at time of import under the Duty Drawback program. Of course you will need to assess all the trade offs to arrive at a bottom line comparison that takes all the factors into consideration, and gives you and “apples to apples” view of the offshore versus North American sourcing options.

Taking a proactive approach to studying the implications of off shore sourcing can confirm that you will achieve the desired competitive cost advantage, help you avoid unexpected costs or surprises, and minimize the probability of unexpected regulatory issues with Canada Border Services Agency or United States Customs and Border Protection

An industry leading organization specializing in window covering was able to save over $6M in duty as a result of having an effective integrated trade compliance strategy. By coordinating NAFTA with organizational processes by use of a compliance champion, the company was able to assign tariff to every item.

This then allowed the organization to have clear visibility of duty payments thus allowing the option of duty recovery for particular items. By integrating a well structured NAFTA program throughout the industry, the organization was able benefit from multiple drawbacks and save both time and cost.

Case Analyzed

The message is clear, by using the model of an Integrated Trade Compliance Strategy, this firm created efficiencies in terms of process but also cash management with an integrated strategy that factored NAFTA status and duty drawback for Non-NAFTA related products.

The resulting $6 million savings were a result of their in-house trade compliance champion who oversaw the entire process on imports as well as exports and worked in conjunction with their professional trade services provider to handle the claims paperwork on both sides of the border.

U.S. Commerce Secretary Gary Locke, hosted a meeting for North America’s Industry Ministers.  Tony Clement, Canada’s Minister of Industry, and Bruno Ferrari, Mexico’s Secretary of Economy, were in attendance.  They discussed the importance of trilateral cooperation on issues such as the National Export Initiative.  The leaders agreed to identify ways to encourage small and medium-sized firms to export their goods and services.  Secretary Locked added:

Canada, the United States, and Mexico have a sophisticated and robust trade relationship because of NAFTA… Because our businesses already cooperate in the production of goods and delivery of services, we must work together to develop strategies that will benefit these businesses and the workers of this region.

According to American Shipper, trilateral trade among the NAFTA partners totaled more than $735 billion in 2009.  (An increase of 148% since the year before NAFTA’s implementation.)

However, developing expertise on the complex rules associated with NAFTA and free trade agreement qualification is difficult and individuals within firms responsible for signing certificates may not have the expertise required to complete the form.

After surveying import and export compliance managers from 200 firms, Customs & Trade Solutions Inc and Management Dynamics have compiled key statistics into our latest benchmark study, “Best Practices for Managing NAFTA and Free Trade Agreement Programs.”

Despite the hurdles for developing NAFTA and Free Trade Agreement (FTA) expertise, the programs bring strong benefits to companies.

For exporters, signing a NAFTA certificate allows their customers to legally declare a lower, preferential duty rate in the receiving country – making the exporter’s product more competitive on pricing than exporters not qualifying their product for NAFTA.

For an importer, cost savings associated with NAFTA qualifying products can be high and a major impact on the company’s bottom line. Most survey respondents  recognized savings of $50,000 to $500,000 annually due to NAFTA and/or other Free Trade Agreement qualifications – a strong indicator for the company to continue to pursue free trade agreement programs.

The benchmark study also revealed key findings in NAFTA qualification management:

• 86% of all firms used a manual process to manage their NAFTA data
• Only 34.3% of all companies were confident of the information they shared with Customs and their Customers through the NAFTA certificate
• 32% of respondents have had their customs group audited in the last 3 years

Additionally, firms qualifying products for trade agreements realized significant savings, with 28.2% of the participants posting savings of $500,000 or more per year. Clearly working with trade agreements can result in substantial savings to a firm, justifying both the staff and training programs for maintaining accuracy with the filing of NAFTA certificates.

On the other hand, 36% of all companies could not qualify their duty savings through their NAFTA / FTA programs. Management resources are generally allocated to programs where impact on the bottom line is quantifiable – so the key insight here is to start measuring your savings (or unnecessary spend if you have not implemented NAFTA) in order to secure future support of your programs.

Best Practices for Managing NAFTA and Free Trade Agreement Programs

Curious about what else the survey uncovered? If you’d like to benchmark your best practices, download the NAFTA Benchmark Report for yourself!

Take the 2010 NAFTA Benchmarking Survey

If you do not manage trade agreements at your company, feel free to share the link with your colleagues.

Many firms walk away from these duty savings due to the difficulty of learning origin rules or due to the time-frame involved in accurately qualifying a product for reduced duties – even when the benefits are significant.

Please participate in a survey on how companies manage NAFTA qualification! With the results, we hope to advance industry knowledge of best practices and better understand overall use of NAFTA processes across a wide spectrum of organizations.

Take the 2010 NAFTA Benchmarking Survey

This is a brief survey and should take less than 10 minutes to complete. Your answers are kept strictly confidential and will be reported anonymously.

Customs & Trade Solutions, Inc. and Management Dynamics are working to identify best practices when dealing with the complexities of NAFTA. Our goal is to identify best practices, and pass those along to you so that your company may benefit from improved processes and procedures.

The results will be used to prepare a report which Management Dynamics and CTSI Advisors will distribute during the AAEI Annual Conference, June 6-8. If you plan to attend the AAEI Conference, please stop by our booth for a copy of the results. Otherwise, we will email you a copy when it’s ready.

Take the 2010 NAFTA Benchmarking Survey

The survey will close on June 2nd, so please be sure to participate early.

Please refer to your own company’s policy on whether this would be considered a work-related activity, and be sensitive to what data about the company can be provided.

According to an MSNBC article, the ‘rules are complex, confusing.’ No kidding!!

It takes roughly 40 pages to spell out the FTC’s rules of the road for companies that want to make the Made in America claim. And those are just one of a half-dozen separate sets of rules that apply to “country of origin” labeling.

This doesn’t include the additional complex, confusing rules that make up free trade agreements. And this is why we have extensive networks of trade compliance professionals, customs brokers, customs law attorneys, and regulatory agencies such as the CBP & FTC, constantly working with companies to either ensure their products are in compliance with these complex rules, or to work towards improving the rules.

As is the nature of government, products pop up or change faster than the rules are made, so the entire system is in constant flux. So if you think you’ve got those 40 pages of regulations memorized today, unless you are keeping up-to-date on new developments, you will soon be left in the dust when the rules change.

What does that entail? Well, you could be subject to duties when you thought your items were duty-free, and you could be subject to fines & penalties. Or you could be uneccesarily paying taxes on free-trade eligible items – and don’t bet on the government knocking on your door to return your money!

What happens if you make a false “Made in America” claim? This article focuses on the consequences of selling in the US:

If you get caught, and the FTC decides you’ve crossed the line, you’ll get an order to stop making the claim. Most companies who get nabbed agree to stop making false Made in America claims without admitting or denying they did anything wrong. If you break the rules again, you’ll probably get hit with a heavy fine for each infraction.

But the FTC doesn’t have a Made in America Police browsing store shelves for violations. The agency relies on consumers to tip them to infractions. If you think a company is falsely making a “Made in America” claim, you can notify the FTC’s Complaint Assistant Web site.

For more answers to frequently-asked questions about Made in America regulations, visit: ‘Made in America rules’ are complex, confusing.

Trade Agreement Best Practices Benchmark Study

If your company is considering utilizing a free trade agreement such as NAFTA, or wants to maximize the savings from a free trade agreement, read our Trade Agreement Best Practices Benchmark.

Implementing and maintaining compliance with a free trade agreement is a complex and technical process. Make sure your company takes full advantage of the trade agreement savings by benchmarking your process against 300 respondents across many different industry verticals and revenue size.

Receive the Trade Agreement Best Practices Benchmark Study Now!

First, “Made in America? Not always ones you think” details the results of an informal poll MSNBC performed on it readers, asking for their favorite products that are made in the US. The results perfectly illustrate how most global corporations are strategically sourcing from low-cost countries to maximize both customer satisfaction, quality, and profits.

The list of US-made products also makes note of how these companies are taking advantage of globalization to grow their product lines without sacrificing quality:

In most cases, the companies readers named make some products in the United States but also rely on manufacturers in other countries to produce certain product lines or lower-priced items.

In addition to babies and crooked politicians, readers named these companies as producing their favorite US-made products. Can you name which ones on the list no longer have 100% US-based manufacturing?

• Harley Davidson
• Craftsman Tools
• Red Wing Shoes
• Levi’s clothing
• Fender guitars
• Smith & Wesson
• All-clad cookware
• Weber grills
• KitchenAid stand mixers
• Zippo
• Fiesta Dinnerware
• Cars

Most of these manufacturers go on to say, they aim to provide low-cost, high quality items- whether that means sourcing from home or looking overseas. They also supplement their main US-made product line with accessories or low-end items sourced internationally sourced. For example:

Larry Costello, spokesman for the Sears tool line [Craftsman], said the company is always looking for the most cost-effective suppliers to manufacture its products, and that hand tools made overseas carry the same warranty as those made domestically.

Weber-Stephens Products Co. says most of its barbecues, including the iconic kettle grill, are manufactured in the United States at factories in the Chicago area.

Mike Kempster, the company’s chief marketing officer, said the only exceptions are certain accessories, such as toolsets, and its Spirit line of gas grills, which are made in China.

The company also occasionally relies on overseas suppliers for certain, low-value parts, because they aren’t available in the U.S., Kempster said.

Others are moving their manufacturing as part of a low-cost country sourcing initiative. Whirlpool, which owns the US-made mixer manufacturer KitchenAid, announced that it would close its refrigerator plant in Evansville, Ind., and move that production to Mexico. Sounds like they are cutting labor costs & taking advantage of NAFTA.

Additionally, some products are made in America- but by foreign companies. Many people listed their car as their favorite Made in USA item – whether that’s a Ford, Chevy, Nissan, or Honda, these companies manufacture their vehicles in the US.

Still trying to figure out which of the list is 100% Made in America? Check out the slideshow on MSNBC for the answers.

Happy 16th birthday, NAFTA- you can drive now!

Sometimes NAFTA prefers to be called "Emily"

The United States Trade Representative (USTR) believes that the issue should be resolved by a NAFTA panel rather than the WTO, as trade disputes involving conservation and environmental issues, the United States says NAFTA is the proper forum if the respondent requests it. This is the first such NAFTA venue challenge, the USTR said.

From Reuters:

Photo by naotakem

The United States bars the “dolphin-safe” label on tuna caught by boats using purse seine nets that also snare dolphins — a technique used by Mexican vessels, the U.S. Trade Representative’s office said.

“We are enforcing the right that the United States, Canada and Mexico negotiated in the NAFTA,” USTR spokeswoman Debbie Mesloh said in a statement.

“This is an important right that has not previously been invoked by a NAFTA party, and defending our right under this clause preserves and strengthens the NAFTA dispute settlement regime.”

Read the complete article: U.S. requests talks with Mexico over tuna dispute