Manufacturers can spend 50 percent or more of revenue on purchasing parts. So, it’s not surprising that sourcing from low-cost countries to improve competitiveness has been such an important business strategy in the past 10 years. According to Aberdeen Group, 60 percent of manufacturers have turned to China as the cornerstone of their low-cost sourcing strategies, and in the past few years, this level of spend has almost doubled — from 21 percent to 39 percent.
The ability to outsource product and skilled trade labor at a fraction of the cost is integral in maintaining a competitive advantage in market pricing.
To achieve the next level of savings from a low-cost country sourcing strategy, progressive-thinking companies are using trade agreements to reduce landed costs through duty reduction. The U.S. is party to many bilateral and multilateral trade agreements, including Australia, Bahrain, Chile, Israel, Jordan, Morocco, Peru, Oman, Singapore, Canada, Mexico and, most recently, South Korea and Colombia.
The North American Free Trade Agreement has increased trade among the U.S., Canada and Mexico by some 200 percent since its 1993 inception. To put this into perspective, U.S. exports to the NAFTA partners grew at a rate of 133 percent, while its exports to the rest of the world grew only 77 percent.
Savvy companies are manufacturing saleable goods in a particular region or country, and sourcing their components from countries encompassed within an existing FTA. Likewise, major duty savings can be realized by taking advantage of existing sourcing and distribution channels.
However, there are a number of complexities and costs associated with capturing the benefit of trade agreements. First, companies must be able to accurately track purchased parts information such as the country of origin, as well as special program or trade program indicators. This information is sourced from the supply base, and companies need tools to solicit for each trade agreement and collaborate with suppliers to improve accuracy and timeliness. Finally, companies must be able to collect the duty savings “post transformation” by qualifying each saleable good against the country’s rules of origin. Failure to do so runs the risk of being noncompliant and can lead to fines and other penalties.
Automating the process with a global trade management solution addresses these challenges and is a key enabler to achieve the next level cost savings from low-cost country sourcing.
What follows are five best practices that will allow your company to fully take advantage of FTA opportunities.
Implement a supplier management program: To effectively manage free trade agreements, you must have a supplier management program to collect information critical to supporting a preferential status claim. Most FTAs require a certificate of origin, as well as a trade program certificate to prove a claim.
To consistently collect this information, there are three important steps to establish a supplier management program.
First, establish a communication channel by which suppliers can expect to receive requests and information. Knowing where the request is coming from and how often it will be received will greatly improve your response timeliness and accuracy. One of the best tools for this is e-mail. E-mail can be frequently accessed, supports documentation attachments, and can be archived for future reference. All are a must-have when communicating with third parties and exchanging information. Also identify who within your supplier’s organization will be responsible for sending the information. Identifying key players is a big part of the success in any communication program.
Second, explain the importance of knowing the country of origin for the parts, as well as the trade program benefits. If a supplier can claim the parts they manufacture are qualified for preferential treatment in an FTA, your demand for those parts may increase because the reduction in duty makes them cheaper to source. The investment to support a trade agreement becomes a win-win situation.
Next, you need to explain how you intend to gather this information. Most suppliers prefer to provide this information based on a specific request for a given set of parts. This focused request allows the supplier to respond with accurate information for each part and provide the necessary documentation. Using online software (portals) to collect this information is a plus, as is a spreadsheet. Let the supplier know how you want the information to come back to you and for which parts. Open-ended requests lead to frustration and low response rates.
Achieve multisourcing data visibility: An effective supplier management program also requires systems support to provide multisourcing data visibility. When sourcing from multiple suppliers, there are often situations of multiple countries of origin as well as multiple FTA opportunities depending on the source country for the part.
Supply chains are set up to run efficiently, meaning shorter lead times, optimal safety stock and low-cost sourcing. As a result, a company could source one product from many countries to achieve varying degrees of each. Understanding where a part came from dictates which FTA programs are eligible.
Data visibility can be achieved by creating a representation of your purchased part information. GTM solutions allow you to keep separate information for each part with respect to an individual supplier.
This information is often constructed from purchase orders and can automatically build the relationships between parts and suppliers. With this baseline, you know all parts by supplier as well as the applicable FTAs and can easily create supplier solicitation campaigns and build a request without rekeying any part information.
Automate the supplier solicitation process: The key to managing a portfolio of trade agreements is to automate the process of soliciting suppliers for all required FTA information to establish compliance with the program. Look for a GTM solution with campaign management capabilities, which allows you to create mass solicitations using purchased part data for many suppliers at once and for any given trade program. In this way, you can solicit hundreds of suppliers in a few minutes. This can eliminate 90 percent or more of the effort to solicit and manage responses from your suppliers and provide a mechanism to manage suppliers that haven’t responded.
It’s important to target only suppliers eligible to participate in a given FTA. Soliciting a manufacturer in Singapore for a U.S.-Chile origin certificate may not get you any results, and will likely dilute the effectiveness of future communication with that supplier. You must ensure your important information request doesn’t come across as spam. Look for a GTM solution that can identify FTA opportunities by a supplier’s country so you can focus your requests for a particular preference program.
Standardized templates and cover letters streamline supplier communication. It’s important your initial communication with the supplier is clear, instructional, and references troubleshooting contact information. Templates tailored to the supplier by country, language and cultural tone improve response rate.
An example would be soliciting suppliers for NAFTA and U.S.-Chile preference information in Spanish templates when the supplier resides in Mexico or Chile. Another example may be modifying the tone of your content to be more formal when soliciting suppliers in Asia. The same letter and content doesn’t work for all suppliers globally — your trade agreement solution should allow end-users to customize these messages as they see fit.
Not all parts may require solicitation. When soliciting suppliers, it’s important to remember the response will require time and effort to complete. It’s not always appropriate to solicit for preference information on every single part you’ve purchased.
A more focused information request often means getting the information back from your supplier faster.
With the widespread adoption of e-mail, communicating via written letter or fax is becoming outdated. Your GTM solution should be able to create mass e-mail campaigns and deliver e-mails to all suppliers that are part of a campaign. This should be a fully automated process, as many companies must solicit hundreds, if not thousands of suppliers.
E-mails are most effective when the body contains instructional information and attachments also can accompany the solicitation. E-mails should be based on templates, and compliance managers should be able to create their own instructions for a given supplier request. E-mail attachments can include a spreadsheet of parts or a certificate of origin in a PDF format that the supplier can use to fill in details. This communication also should include instructions that a supplier can reference when responding.
When soliciting a large number of suppliers, it’s important to be able to manage by exception. The best GTM solutions provide a dashboard and metrics that help you understand what percent of suppliers have responded and what percent of responses are complete. Importantly, you can establish a need by date, and focus your efforts to work with those suppliers that miss the “response window.”
Alerts can be set to notify you when a supplier has responded so you can approve the submission, or more importantly when a supplier is trying to respond and has a question or requires clarification on a matter. Questions or inquiries should prompt interaction from a manager, which can be achieved by utilizing notification alerts that are system-driven and delivered to your work e-mail inbox.
The key to streamlining this process is to give the supplier access to the solicitation request online, via a portal. By logging into a secure site and providing origin and preference information directly into the GTM solution, you can eliminate the effort of rekeying information and reduce the potential for data entry mistakes.
Portals also can provide the supplier with tools to reduce the time needed for a response by looking up harmonized tariff codes, uploading data via a spreadsheet, or by creating an FTA document directly from the screen.
In the global trade space, nothing is more important than having visibility to your transactions and being able to substantiate your duty claims in an audit. Compliance professionals ultimately will be held responsible for the preferential status information they’re using from suppliers. So, reviewing each and every supplier response can be an excruciating but necessary task.
The ugly fact of this process is that no matter how much guidance you provide, some suppliers still will respond incorrectly. Look for a GTM solution that provides basic error checking when a supplier provides information, as well as an approval process with which your compliance team can review and accept the information before it is used for qualifications.
Automate the qualification process for multiple FTAs: Now that you have collected certificates from all of your suppliers for the affected purchase-parts, the final step is to systematically qualify bills of material using the appropriate rules of origin. This will determine if the product qualifies for preferential treatment. Rules of origin for each of your targeted FTAs must be available for qualification algorithms to test the product bill of material for each end-item. Rules of origin should be able to be loaded into your system without having to upgrade your software.
The following information is needed to perform a qualification: Costed bill of material. Part information (HS, country of origin, certificate information). Rule of origin content.
A bill of material provides you with a structure or blueprint as to how a finished part was constructed. It includes the finished good part number, as well as the component part numbers used to manufacture it. Bills of material usually are “costed,” meaning it details the extended value of each component line item. The parent part also should have a value or cost associated with it, which is needed for certain FTA rules of origin.
Each part record also should have an associated HS number. In a GTM solution, the bill of material can reference the HS number, country of origin and preferential status (certificate info), all of which are needed when qualifying for a rule of origin.
To support high-volume environments, it’s critical that rule-of-origin content — for each FTA in the portfolio — is integrated with the GTM solution and can be maintained without having to upgrade the software. The qualification engine, therefore, must be able to support the universe of qualification methods for FTAs including Tariff Shift, De Minimis, RVC (Build Up/Build Down, Net Cost/Transaction Value), among others. Then, the system analyzes the bill of material against the rules of origin and available certificates to make a determination. This process should be executed “top-down” so you don’t need to classify or manage certificates for low-value component parts that don’t affect regional calculations of value.
Add new FTAs by building on your base portfolio: Companies can rapidly support new trade programs by building on the existing infrastructure and business data of available FTAs in the base portfolio. Often, the only primary difference between FTAs is the rule-of-origin content. The bill of material integration and supporting business data can be fully reused.
Solutions that have a multi-FTA qualification engine should provide rules of origin as plug-ins. Plug-ins are purely content that tell the engine how to analyze the bill of material for preferential status. They also don’t require a company to upgrade its software to support additional FTAs. This allows for flexibility to start small and add FTAs as time progresses, and scalability to support more as your market reach grows.
Nathan Pieri is senior vice president of marketing and product management for Amber Road. This report was adapted from the Amber Road white paper, “Leveraging Trade Agreements to Achieve the Next Level of Savings From Global Sourcing.” For more information, contact firstname.lastname@example.org.