Risky Business: The Problem with Silo’s

Back in October 2010 we introduced the foundational elements of why an Integrated Trade Compliance Strategy makes sense in todays global supply chain world. You can find the original piece titled; The Problems with Silo’s.

In that original article we shared some insights as to why a silo based business may consider the adoption of an Integrated Trade Compliance Strategy.  To refresh your memory here was that original list we shared.

Some of the issues that arise in evaluating a silo based organization include;

• Compliance outsourced or compartmentalized
• Import and export functions internally are often “silos”
• Trade related financials have limited corporate visibility
• Regulatory interventions force executive focus
• End result is clear audit trails and  accountability
• Integrated cross-functional approach reduces exposure
• End game: reduce risks & maximize opportunities
• Are international traders adapting to new trade reality?
• Cost of reacting is more than a taking a proactive stance

 

The end result of the lack of an integrated trade compliance strategy approach is that, “regulatory risks occur at virtually every stage of the international business cycle from product design and development, through sourcing and manufacturing, past the sales and fulfillment phases”, says Reynold Martens, Executive VP of GHY International and author of the white paper, “The Case for an Integrated Trade Compliance Strategy”.

History of the Silo Based Model

While the rationale of the strategy seems to make sense in todays global economy, so many folks still operate under the model of what we define as a silo based approach. You can see the visual demonstrating that model below.  While it is not our place to say how you design your business, we believe that we have many examples now from the market that define the success of an integrated trade compliance strategy, as well as the failures for not adopting one.

A Model of a Silo Based Business and it’s Relation to International Trade:

Demonstrating a Case in Point:

Common failure of not having an Integrated Trade Compliance Strategy.

In a silo based model of an organization, each part of the business is tuned to perform well independently. It is normal that purchasing doesn’t communicate with export sales, we see this often.

This example while changed to protect the original participants, does reflect a common problem we see and is a result of working in a silo based model and not an Integrated Trade Compliance Strategy model.

In this example it is the impact of each part of your business performing well, but not together. Just like Newton’s law of physics, his third law summarized states: “To every action there is always an equal and opposite reaction”. In this case that of purchasing causing an opposite impact on export sales.

In our example Purchasing does its role very well, they in fact just negotiated a $50 per motor reduction in price from a new supplier in China.  Using information in the planning system they go ahead and commit to the new supplier for the volume they need, including their export volume which isn’t identified in their planning information.

Without an integrated strategy, Purchasing just saved the company money, but also now made the manufactures NAFTA claim invalid as the motor was sourced outside from a location where the motor does not qualify for NAFTA, and the NAFTA qualifying condition is no longer met at the 60% because of the motor’s value.

Here’s the hard dollar impact to help you understand:

Motor was $500 and NAFTA qualifying (ie: duty free) under the RVC requirement

Now the Motor is $450 and Not NAFTA qualifying

The non NAFTA duty rate on teh finished machine that incorporates the motor is 3% and the unit sells for $50,000 each

So they saved $50 on sourcing costs, but cost $1500 in duty costs now.

In the end the finished units are no longer duty-free under NAFTA, but dutiable instead.  The $50 savings without consideration of impact to the company’s business, is a small amount compared to the costs incurred because of no longer qualifying for NAFTA, or the lost sales as the product is no longer competitive in the export market.

From a customs perspective the real issue is that most companies are not re-validating their NAFTA’s when they change sourcing, so the sleeping giant (Customs – CBP/CBSA) may in fact get around to an audit 4 yrs from now and if they determine it does not qualify when the manufacture thought it did, not only will the y recover the 3% duty on the machines for all units sent the period in question, there would MOST likely be a penalty attached since SOMEONE in your firm has certified the goods to be NAFTA qualifying.  I wouldn’t want to be that certifying party without knowing that the firm has adopted a Integrated Trade Compliance Strategy that ensures I am kept in the loop in terms of sourcing changes, valuation changes, origin changes and the like.

 

Does this sound like your organization?

While there is no easy blue print to follow to create an Integrated Trade Compliance Strategy, they are as unique as the business’ that implement them.  We do have resources available under the download tab to assist you in understanding and developing a framework to move forward with your own strategy.

If you have any questions, please ask using the comment form to this posting, or see the resources available under the Contact us tab above.