DuPont, Future Electronics and J.C. Penney Use Software to Prove They’re Entitled to Duty Drawbacks

Every year, the U.S. government charges U.S. companies billions of dollars ($22 billion in 1999 alone) in customs duties on the products and raw materials they import. And every year Uncle Sam obligingly refunds several billion to those same companies when they export the goods they previously imported. It’s called duty drawback. But here’s the surprise. Even though they’re entitled to refunds, businesses are leaving billions unclaimed. Why? Proving they’re entitled to them is just too much work.

Collecting the duty drawback is contingent on documenting the link between the imported goods and their subsequent export. That’s not too hard with big-ticket items such as cranes, trains and jet airplanes. It is, however, very difficult to prove that those particular nuts and bolts from Taiwan were, in fact, the very same nuts and bolts used in assembling a specific automobile that was later shipped to Brazil.

This is where IT comes in. By deploying software systems that know the intricacies of the rules and their associated supporting documentation and that can also track products and components with sufficient granularity to prove that those Taiwanese nuts ultimately ended up in the chassis of a car sitting in a showroom in Rio, enterprises stand to recoup some not-so-small fortunes in drawback refunds. And wouldn’t it be nice if it were the CIO who could enable his enterprise to retrieve that treasure?

Regulations: A Labyrinth Inside a Maze

Right now, it’s the best of times and the worst of times for global trade.

It’s the best of times because a clutch of software companies that most CIOs have never heard of is making trading with Mongolia as straightforward as trading with Missouri.

It’s the worst of times because international terrorism has made governments acutely protective of their borders. And when governments get protective, rules proliferate.

As is, international trade is beset with tangles of tortuous regulation. Until the Customs Modernization Act of 1993, for example, vessels entering U.S. ports were obligated to report the number of cannons on board. And although that requirement is gone, reams of similarly outdated, burdensome and maddeningly abstruse rules remain.

Cut through those regulations, and rich overseas markets, profitable supply sources and cost savings propagate like Dutch tulips. The world’s top 2,000 companies could gain some $30.2 billion in savings if international trade could be made to work more efficiently, says John J. Coyle of Penn State’s center for supply chain research and emeritus professor of business administration. Excluding freight charges, duties can represent up to 75 percent of the total cost of importing goods and services. “As the largest component of importing expenses, it’s the area in which there is the most room for direct cost savings,” Coyle says. He reckons that in 2001, U.S. businesses left as much as $10 billion in duty drawback on the table.

“Maybe they couldn’t get all of it back, but a significant proportion could be claimed if companies kept better track of things,” he says.

DuPont Gets It Right

Keeping better track of things is exactly what chemical giant DuPont aims to do, says Steve Cohen, CIO of the Wilmington, Del.-based company’s global sourcing and logistic services. Most years, DuPont ships more 20-foot containers of freight from the United States than any other business?80,000 of them in 2001?packed with famous DuPont brands such as Teflon, Tyvek and Kevlar. (The company that perennially vies with DuPont for first place? America Chung Nam, which ships wastepaper to China.) “Only the government ships more stuff,” Cohen brags. And with such massive quantities of inventory continuously in transit, much of it through third-party freight-forwarding companies, keeping tabs on it all is quite a challenge.

But next month, according to Cohen, the first phase of a system to do just that will go live. TransOval (a word play on DuPont’s oval-shaped logo) will enable DuPont to track each of the more than 1 million shipments it makes across international borders each year. That will generate better customs and shipping documentation, which will produce fewer border holdups. That means DuPont products will spend less time waiting in warehouses. And it will also mean bigger drawback checks, says Cohen.

DuPont has woken up to the fact that more efficient management of international trade processes offers a real opportunity to add dollars to the bottom line. To do that, businesses are turning to specialist international trade software systems from companies such as Fasturn, G-Log, NextLinx and Vastera. Vastera, for example, is credited by Ford with helping the automotive giant generate savings of more than $1 billion a year.

As automation projects go, that’s a pretty hefty ROI.

Importing: The Fluctuating Cost of Bed Sheets

The rules for importing goods make up a volume one and a half inches thick. Of course, that’s way too slender a volume for lawmakers, so further guidance is contained in the linked 4-inch-thick volume of the Code of Federal Regulations.

But to actually import anything, you’ll need the item’s relevant identification code, which is contained in the two-volume, 8-inch-thick Harmonized Trade Schedule of the United States, published by the Office of Tariff Affairs and Trade Agreements of the United States International Trade Commission. This handy document is used to determine the applicable tariff for the item you’re importing. And read it very, very carefully. Leather gloves attract one tariff, wool gloves another. And would that be lined or unlined gloves? Again, different tariffs apply. A T-shirt with a logo on it attracts a different tariff than one without, as does a shirt with a button on the breast pocket as opposed to one without. And that’s without taking into account the vagaries of geography. Animal ear tags, for example, attract especially punitive tariffs if they happen to come from New Zealand.

The challenge here is twofold. First, a company must be able to prove that it’s paying the right duty or tariff on what it’s importing while making sure it’s not exceeding the annual quota laid down in the rules. (The United States currently plans to phase out import quotas by 2005, in favor of a system based wholly on tariffs. Of course, say observers, that could change.) Second, a company will try to minimize the tariff payable or (legally) circumvent quota restrictions. If leaving a button off a shirt or sewing one on moves it into another quota or tariff category, why not? Of course, this requires up-to-the-minute knowledge of both the categories and the quotas.

At the Plano, Texas, import office of retailer J.C. Penney, Customs and Trade Manager Sandra Fallgatter uses such a service from Fasturn, which maintains timely, product-by-product quota positions on a website to which Penney’s and other companies subscribe. “A lot of the apparel sourcing we do is driven by quota fill rates. And quotas can fill up very rapidly at certain times of the year,” Fallgatter says. Electronic updates, supplemented by the website, keep Penney’s abreast of what’s happening. The goal is to source from the highest quality, lowest-cost manufacturer in the country with the lowest tariff penalties and then the next cheapest, and so on. Make the wrong decision and you’re spending twice as much on sheets as you could, and you’re either passing that cost on to your customers or putting your margins on a helluva diet.

Exporting: Be Careful Who You Trade With

On the export side, there are another thousand pages of dense text in the Code of Federal Regulation plus a further seven sets of regulations relating to the trade embargo rules for countries such as Cuba, Iran, Iraq and Libya. Then there are the so-called denied party lists, maintained by the U.S. State Department, the Treasury and the Commerce Department, that include names and aliases of people, countries and organizations with which trade is prohibited. As of June there were 7,747 of them, including 846 separate terrorists or terrorist organizations, with new additions coming out every three weeks or so.

Policing is carried out by the Office of Export Enforcement, an agency of the Bureau of Industry and Security within the Commerce Department. And no matter your intentions, running afoul of these agencies is all too easy. According to U.S. Treasury Department documents, Swedish retailer Ikea and Tyson Foods were companies recently fined for breaking the rules. Ikea got in trouble for buying rugs from an area of Afghanistan it thought was non-Taliban but which turned out to be Taliban controlled and therefore beyond the pale. In Tyson’s case, a $150,000 fine was levied because a Jordanian company it had acquired shipped chicken parts to Iraq. In another well-known case, American Home Products was fined $2.5 million when a minor, Colombia-based subsidiary was found to have dealt with blacklisted narcotics dealers.

Ship to one of these countries or parties, and senior executives can expect severe penalties, including jail, warns former Commissioner of the U.S. Customs Service George Weiss. And that’s just on the U.S. end. Other lists are maintained by other countries.

Fancy doing business with Action Knitting in Hong Kong? Better not. It’s a front for Saddam Hussein.

The Software Solutions

While the solutions favored by J.C. Penney and PM Global Foods (see “Bills of Lading,” this page) address the particular international trade problem that they are designed to ease, they don’t amount to more than a bite or two from the obstinately indigestible elephant of global trade.

There’s the matter of denied party compliance. Osama bin Laden probably has bigger priorities than sourcing his next shipment of chicken wings, but dealing in high-tech is a different matter. Companies in the electronics, aerospace and engineering industries must make sure that they’re not shipping materials to people who shouldn’t be receiving them. And it’s not just a matter of shipping machine tools to Iraq, which even Joe on the loading dock might recognize as a dumb idea, but shipping them to, say, United Kingdom-based Falcon Systems?a designated alias of the Iraqi government.

And what about Harmonized Tariff Schedule codes on exports, the classifications that will be used by the destination country in order to levy tariffs, contained in those two weighty 4-inch volumes? Or gathering the information necessary to prove a claim for duty drawback? Slickly produced documentation is a start, but it’s far from the whole story.

At Montreal-based electronics distributor Future Electronics, which has offices in 35 countries, Vice President of IT Robert Lapointe selected a system from Dulles, Va.-based Vastera that aims to meet these needs. Installed in export hubs in Bolton, Mass., Singapore and London, and soon in Montreal, the system provides all of Future’s export documentation, as well as carries out denied party compliance checking. “We have multiple shipments crossing borders every day,” notes Lapointe, pointing to heightened post-Sept. 11 security checks. “We can’t afford to have them delayed, and the documentation needs to be perfect for them to get through without holdups.”

While AMR Research of Boston calls Vastera the largest trade specialty vendor, and the one with the most comprehensive functionality, it is far from the only company in the emerging international trade logistics category. At the Alexandria, Va.-headquartered WorldWide Retail Exchange, CIO Don Norman last April oversaw the implementation of an international trade solution designed to bring its members (currently 61 of the world’s largest retailers and suppliers) significant savings. Web-based, it provides buyers and sellers with standardized documentation and gives buyers true “landed cost” comparisons that include the effects of tariffs and quotas through a link to the international trade functionality of NextLinx.

Development has been driven directly by the member retailers themselves, explains Jim Schwab, product director of the Retail Exchange’s worldwide trade logistics, with the United Kingdom’s leading supermarket, Tesco, leading the way. With stores in the Czech Republic, Hungary, Malaysia, Poland, Thailand and the United Kingdom?and a global supplier base?it’s a fair bet that if the system works for Tesco, it will work for most retailers, says Schwab.

“Two different suppliers of bed linen in a given Far Eastern country can have widely different tariffs levied on their products, with some attracting antidumping duties of 200 percent,” says Stuart Blackery, a supply chain development project manager at Tesco, now assigned to the Retail Exchange’s development team. “The buyer in the homeware department really needs to know that information, and the NextLinx data is six weeks ahead of hard copy in the U.K.”

But no single product currently meets the full spectrum of international trade requirements, says Michael Bittner, former research director of supply chain strategies at AMR Research’s West Coast office in Irvine, Calif. And while the potential lure of duty drawback and the like is attractive, it is often fear that is driving companies to make a choice now, as they weigh the mounting costs and risks of noncompliance.

The Holy Grail of global trade, says Bittner, involves more than compliance and documentation; it also demands carrier management and shipment visibility. Consequently, of late there’s been a spate of acquisitions and alliances as vendors attempt to acquire those capabilities. The DuPont implementation, for example, comes courtesy of G-Log’s partnership with trade compliance vendor Xporta.

Meanwhile, CIOs impatient with the speed at which the software industry is catching up with their needs, must develop their own homegrown capabilities, often in partnership with small startups.

Global electronics contract manufacturer Solectron of Milpitas, Calif., which assembles computers and other high-tech equipment for companies such as IBM, Lucent and Sony wanted a Web-based tool usable internally, as well as by suppliers and customers. With 5,000 shipments in motion at any one time, shipment management was clearly important. But so was documentation and compliance.

“When we bring on a new supplier in China, we need to ensure that they could produce the right documentation to ship to a plant in Brazil,” says Jim Molzon, Solectron vice president of global logistics. “We put a specification together and went to the marketplace and found there wasn’t a single vendor that offered everything. The carrier management and visibility people weren’t good at compliance and documentation, and vice versa.”

So Solectron made a deal with logistics software specialist Arzoon of San Mateo, Calif., leveraged by Arzoon’s acquisition of a much smaller trade compliance vendor. Through a combination of integration and coding from scratch, says Molzon, Solectron finally got its needs met.

The moral? IT and international trade are coming together faster than anyone would have believed possible a few years ago. Budgets are strained, but the penalties for failing to develop efficiencies in all trade areas are so large that they will put late adopting companies out of the game altogether.

The challenge of global trade is a nettle that must be grasped.

But those duty drawback checks could ease the pain.