Count Your Pennies!

John Goodrich | March 15, 2009 | Import Basics, Free Trade Agreements
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Metaphorically speaking, where do you keep the spare change from your import program? Are you overlooking obvious savings? I don’t need to tell you times are tough and that finding every penny of opportunity counts. Perhaps you do not have a bowl full of money sitting in plain sight. Perhaps you will have to work a little harder and check between the sofa cushions or under the car seat to find your savings.

Pile_of_PenniesI don’t know what you do with your spare change, but I put it in a bowl on my dresser. No matter how disciplined I am with my money, I never seem to have these coins available when I need them. Invariably all I need is a penny or two, but I end up with a pocket full of change, which naturally ends up in the bowl. The bowl is mostly pennies with a smattering of shiny quarters, dimes and nickels thrown in. There is also the odd Canadian coin that is vacationing south of the border in my sunny little bowl.

My wife recently tired of hearing me whine about money. She took the coins to the bank and ran them through the change sorter. It turns out there was $38.27, two buttons and a bolt in that bowl, enough to take the family out for a movie.

Despite being frugal (politically correct for “cheap”), I was dumb-founded by how much money there was in plain sight of me on my dresser. What I had thought were merely useless pennies actually had meaningful value.

Metaphorically speaking, where is your spare change bowl within your import program? Are you overlooking obvious savings? I don’t need to tell you times are tough and that finding every penny of opportunity counts. Perhaps you do not have a bowl full of money sitting in plain sight. Perhaps you will have to work a little harder and check between the sofa cushions or under the car seat to find your savings.

What am I talking about? There are differing strategies for structuring your import program. You may have explored some of these in the past but found you had greater opportunities to pursue. With changing times it is time to reevaluate these and other cost reduction opportunities.

1. Harmonized Code Classification

I may be repeating myself, but I remain convinced that if you are not scrutinizing your HTS codes you likely are misclassifying products resulting in your company overpaying duties. I may be wrong when it comes to your particular import program, but you will never know unless you evaluate each and every product you import.

With confidence about HTS codes comes power. If you know your HTS code and its associated duty rate, you know how to price your goods competitively in the market without losing money. In better times it is common for companies to allocate a liberal import cost burden across an entire program ensuring that duty payments are recovered. Downward pricing pressures may force importers to be more precise with their costing and pricing strategies.

HTS codes are also the key to participation in free trade agreements. A company that does not have good controls over its HTS codes risks being excluded from a free trade agreement and losing the associated duty exemptions.

2. Valuation

A number of costs, often included within the purchase price of a good, are not dutiable. Chief among these are international freight, insurance and buying agents’ commissions. Is your company still paying duty on non-dutiable costs?

If your company participates in multi-tiered transactions where there is an intermediary between you and the actual manufacturer, you might be able to reduce your entered value and therefore your duty bill by declaring the selling price between the manufacturer and the intermediary. This concept is referred to as the “first sale for export.” It requires a little additional effort but may save your company considerably. It is not uncommon for an intermediary to charge a 10-15% margin for their services. By removing this margin from the entered value you could instantly reduce your duty bill by 10-15%!

3. Country of Origin

In addition to knowing the HTS code, confidence about the country of origin of a good permits your company to participate in free trade agreements and duty preference programs, thereby reducing or fully eliminating duties.

If that country of origin is the United States, Uncle Sam does not normally charge duties on U.S. goods. As an importer, are you double checking that your U.S. returned goods are properly documented and reported?

Do your imported goods contain U.S. made components? Under the “9802” program, the cost of U.S. components assembled abroad is not dutiable.

4. Audit Freight & Duty Bills

There is a reason an entire industry exists around freight bill audit and payment services. As a rule of thumb an unaudited logistics program contains about 10% billing inaccuracies. In an industry that relies on speed mistakes happen. These include:

  • Applying the wrong freight tariff to a shipment;
  • Incorrectly stating the weight or volume of a shipment;
  • Customs brokers making errors to value, classification, country of origin and duty calculations.

Add to this the normal accounting inaccuracies of shifting decimal points, inverted numbers and double billing. If you are not auditing your import bills you are leaving money on the table.

5. Negotiate Competitive Rates

While no one wants to take a cut in pay, the fact is we are experiencing downward pricing pressures in certain markets. As a buyer of import services, import managers need to be on top of the market and negotiate freight rates and other service fees that are competitive.

6. Consolidate Shipments

It is not always about the rates. Ultimately it is about costs.

I recently encountered an import manager who was proud of his freight rates. Indeed the rates in place were extremely competitive. He was also proud that his containers were arriving fully optimized. Upon closer scrutiny we discovered that the majority of the containers used were 20-footers. As a rule the transportation cost of a 20-foot container is about 75% of a 40-foot container. After a little analysis we discovered that the import program would allow for most of the 20-foot containers to be consolidated into 40-foot or larger containers, a savings of 50% on transportation. Admittedly some of the savings are lost due to an increase in origin consolidation charges, but the net result was a 30% overall cost savings within the program.

If your shipping program exists mostly of 40-foot containers, you can also obtain savings by consolidating cargo into 40-foot high cube and 45-foot containers.

7. File Your Own Customs Entries

Too hard you say? Nonsense! With the implementation of the importer security filing (“10+2”) you already know most of the data elements required to file an entry. Why not consider taking the next step and file your entries yourself? Web-based services providers like TRG Direct can lower entry fees to $30 each or less!

8. Get Creative With Payment Terms

As purchasers we often try to use our trading partners’ capital by requiring extended payment terms. This strategy works well when the trading partners have access to money and their cost of capital is the same as or cheaper than ours. The status quo has changed. By demanding that your foreign suppliers use their expensive money, you may unwittingly be driving up the cost of your goods. As tight as money is today, your company likely has access to more and cheaper capital than your vendor. It may be time to question open account terms and consider other methods of payment such as letter of credit or partial prepayment terms.

One importer creatively provides its foreign manufacturers with U.S. materials. It pays the manufacturers for the finished goods upon delivery. It also pays the U.S. supplier of the materials after finished goods are received. By doing so the importer has partially relieved the manufacturer of its cash flow concerns and expenses.

As with many issues there is a trade-off. By taking on a financial burden earlier in the process the importer may see an increase in capital or inventory expenses.

9. Duty Drawback!

Duty drawback allows your company to apply for a duty refund when you export goods that were imported. Yes, these programs take some time and effort to set up. Yes, the administrative burden of maintaining the program can outweigh the benefits. When is the last time you did the analysis?

The above suggestions are only some of the opportunities your company may choose to explore. You may have explored some of them in the past and discounted them. Seen again through the prism of today’s economy, what then seemed like pennies may now be worth pursuing.

Who knows, you may even discover enough savings to go to the movies!

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