On a smarter planet, leading companies know the true costs of global business. Global sourcing can lower costs and boost profits. But procuring goods and services from around the world comes with its own set of risks. How do smarter organizations find success in a recovering global economy? By being flexible and adaptable with the [...]
On a smarter planet, leading companies know the true costs of global business.
Global sourcing can lower costs and boost profits. But procuring goods and services from around the world comes with its own set of risks. How do smarter organizations find success in a recovering global economy? By being flexible and adaptable with the right technologies, wherever they do business.
Discover the tactics used by business leaders to drive profits in our white paper, Learning from Leaders: An executive guide for managing risk in global sourcing.
Find out how they:
• Identify and mitigate vendor and procurement risks
• Find opportunities amid global uncertainty
• Apply sustainable strategies and practices
Are you ready for smarter global commerce?
Click here to download the white paper.
Supply management organizations are moving from a low-cost-country strategy to a best sourcing plan that focuses on value, total cost of ownership and a changing world. Years ago, supply management professionals turned to low-cost countries to manufacture products, establish services operations and source materials in an effort to improve the bottom line for their companies. [...]
Supply management organizations are moving from a low-cost-country strategy to a best sourcing plan that focuses on value, total cost of ownership and a changing world.
Years ago, supply management professionals turned to low-cost countries to manufacture products, establish services operations and source materials in an effort to improve the bottom line for their companies. They found that inexpensive labor in India, China and emerging Asian countries made this new low-cost-country strategy successful — despite requiring the management of lengthy, complex supply chains.
Then the world began to change. Energy prices skyrocketed, risks from unforeseen natural disasters and political upheavals soared, and intellectual property protection posed greater challenges than first thought. Suddenly the quest for cheap labor was not always translating into cost savings.
Supply management professionals agree that a low-cost-country sourcing strategy has lost some of its luster. While low labor costs and prices will always be part of a sourcing strategy, they no longer are the centerpiece. Today’s best-practice supply management leaders are developing sourcing strategies built on a foundation of value creation, total cost of ownership (TCO), landed cost analysis and risk management. Many call it a best-sourcing strategy.
Click here to read the complete article.
Source: Institute for Supply Management | Author: Mary Siegfried
Originally published in March 2013, Inside Supply Management® Vol. 24, No. 2, page 26
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.
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
Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Case in Point – NAFTA Regional Value Content
In North America the key event that started driving focus on Trade Agreements was the original Canada/USA Free Trade Agreement (FTA). That evolved into NAFTA which included Mexico along with Canada and the USA. One of the key components about declaring NAFTA status on goods that are imported or exported is the process of defining Regional Value Content (RVC)
Regional Value Content is simply the calculation of the percent of the value of a good that comes from manufacture/assembly in a NAFTA originating country. The are 2 methods to calculate the RVC; a Transaction Value Method or the Net Cost Method, but that is a topic for another day.
The case in point today relates to an aspect of why you need to consider an integrated trade compliance strategy. It comes from a North American manufacture of electrical transformers, Chapter 84 of the harmonized Tariff.
When this manufacture began exporting they went through the exercise and calculated their Regional Value Content. At that time the goods in question were 94% of RVC. Although the regulations suggest that you need to validate your RVC annually, the effort involved was extensive for this manufacture and they renewed for many years their NAFTA declarations by simply changing the date and providing it to their export clients.
Problem is they began to be challenged as all manufactures have been with global based sourcing in order to stay competitive, and this was never factored in to their NAFTA declarations. The risk of course is that by changing the sourcing or inputs they may no longer qualify for NAFTA benefits, thereby increasing their costs and potentially making their product non competitive in the markets the sell to.
To compound the risk, the issue only came to light when the US CBP requested a NAFTA verification audit. They have been doing this a lot lately because they know that manufactures are facing a global sourcing challenge and that leaves a large GAP in the past trade agreement declarations, especially when there are preferential duty rates as there are with the NAFTA program. This can lead to large financial penalties and other costs that the manufacture did not allow for on the original contract, thereby reducing or eliminating any profit related to that sale.
The risks are increased substantially if issues are found during an audit, especially with US CBP who take a rather black and white approach to mitigating the issues they find during an audit.
The outcome in this case is good news, but clearly a warning that something must change in the strategy used to manage global trade issues. The cut off for RVC content when declaring NAFTA preferential tariff’s is 60%, and while in this case the goods pre global sourcing started at 94%, the revised calculations came back saying the RVC was now 64%. So while the did not incur any financial issues related to RVC calculations on their NAFTA declarations, they are clearly very close to no longer qualifying for those extended trade benefits.
Bob Cowie, Vice President Consulting, GHY International says, “some products which seem very simple compared to an electrical transformer can be even less obvious if NAFTA benefits apply when you consider Regional Value Content.” He offers this advise, “as an example if you look at Chapter 39, Products made of Plastic as defined by the US HS Tariff, the regional value content rules are very clearly laid out for every product in that category, we find numerous mistakes because the assumption is made because a product was made in a NAFTA country from plastic pellets as an example, that it qualifies and the NAFTA benefits are built in to their costing, When doing a detailed evaluation it is often not applicable so caution should be used when making these declarations that you understand the RVC rules and how they apply to your products.”
Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Does this sound like your organization? Could you use an integrated trade compliance strategy?
