FTZs are a growing strategy for duty management, but it takes software to maximize value.
Much of a compliance professional’s burden in trying to get the funding to invest in global trade management technology arises from a simple dilemma: C-level executives often see investment in compliance as a means to minimize risk, while investment dollars are typically allocated to areas that maximize return on investment.
If a company looks holistically at its supply chain, global trade management functions can be seen as providing an ROI (even mostly precautionary functions). But sometimes importers and exporters look at compliance functions in a piecemeal fashion, and it can be hard to carve out ROI from those discrete functions.
There is one standalone area, however, where investment in GTM automation leads to tangible ROI in a relatively short period of time: foreign trade zones.
FTZs provide companies with a mechanism to import raw materials or semi-finished goods into the United States to be stored, assembled, or processed and then re-exported without any duties. It also allows exporters to move goods considered exported upon admission to the zone to take advantage of excise tax rebates and drawback.
There are close to 300 such zones in the United States, and some 400 additional sub-zones. Typically known in other parts of the world as “free trade zones,” FTZs are a key component of any U.S. company’s duty avoidance strategy. They’re particularly useful for manufacturers, especially those with either high-value or high-volume goods, said Wayne Slossberg, senior vice president at the global trade management software provider QuestaWeb.
“The biggest thing we’re seeing is manufacturing in these zones,” he said. “You have the advantages of tariff shifts, but it has also started to create jobs, so it has a lot of financial benefit. Whether you’re manufacturing or distributing in a zone, it has a positive effect of employment in this country.”
Slossberg said he’s seeing rapid growth in FTZs in California, New York City, upstate New York, New Jersey, and Illinois.
“There are FTZs all over the place, and they’re all pretty hot,” he said. “Grantees are taking a more active role in the zones, in terms of who should we go to, what software is available. They’re wanting to be proactive—we can run the zone for you, or recommend the software companies that can support it.”
Anthony Hardenburgh, vice president of global trade content and GTM provider Amber Road, said “From our perspective, we’re seeing more interest in that particular area of compliance, but I broaden it to duty management.
“Companies are taking a more holistic look at their overall supply chain and one key area is duty management. That would include FTZs or FTZ equivalents around the world, free trade agreements, duty drawback. All of these are done with intent to do something more cost effectively,” he added.
Hardenburgh said global companies are not just viewing use of U.S. FTZs as a standalone initiative either. “What we’re seeing is not just use of FTZs, but we’re seeing an uptick in folks trying to take advantage of this around the world,” he said.
FTZs are nothing new. The first such entity was started on Staten Island, N.Y. in 1937. What’s changed in recent years, however, are two realizations: that proper use of an FTZ within a broader supply chain strategy can yield clear bottom line benefits and that technology to help manage the complexities of using an FTZ makes those benefits bigger.
“Automation is a big part of this,” Hardenburgh said. “That umbrella of duty management can be complex. Companies have been trying to do it with spreadsheets, and see whether their products qualify for preferential treatment. In the past, they might have said ‘Hey wait, this stuff is too complex. Why go looking for additional work?’ But the automation component has opened their eyes—there are easier ways to do this.”
Indeed, it can be said that any shipper using an FTZ in any significant way ought to be using software of some kind, either in-house or through a consulting arrangement.
“There are a lot of good FTZ consultants, from name-brand firms to incredible independents,” Slossberg said. “This is the first call a company should make. They’ll do a down and dirty ROI analysis—is it worth their time? They’ll talk about benefits and liabilities. It’s one of the first steps in the FTZ implementation process, unless you have in-house experience.”
Slossberg said there are instances when software to manage FTZ activity might not be essential.
“If you’re importing something like ink cartridges, you could just about do that without software,” he said. “If you’re in a low-volume situation, where nothing is complicated, you could probably do that also.”
Hardenburgh agreed.
“People have been managing FTZs with spreadsheets for a long time,” he said. “When Excel came along, that was an upgrade. Companies have been doing it successfully like that. It’s not like it’s impossible.”
What FTZ technology provides is process efficiency, greater documentation accuracy, and data storage, which are many of the same benefits a company gets from automating any piece of their compliance department.
“With most technology out there, inventory control and audit trails are the most important part of managing the FTZ,” Slossberg said. “That’s what Customs looks for. That’s what the software does. If you aren’t using software, you better be good at keeping good records. It’s not as complex as people think it is. If you’re using software, you’re likely to be compliant, and you start to see the fruit of your investment.”
Slossberg said companies should witness ROI from their FTZ investments within a year.
“It should be able to pay for itself within a year,” he said. “The initial investment is getting approval from Customs, getting your software and your integration done. From there, anywhere from 12 to 15 months should be the ROI.”
After using software, management of the FTZ shouldn’t be too onerous.
“It seldom takes an eight-hour day to manage a zone,” he said. “One client we have manages three zones, and probably spends four hours a day. The company that you’re buying technology should be training someone on how to manage the zone.”
There’s another angle to the argument for FTZ IT as well—connectivity to existing systems.
If you’re in a manufacturing environment you want to be integrated to your [enterprise resourcing planning system] and [warehouse management system],” Slossberg said. “The big ROI cases are the ones that go out and consider integration. You have fewer errors and everything is documented and you have audit trails. You’re also managing by exception.”
As for what initially brings companies to examine the benefits of FTZs, there are a range of avenues.
“I don’t believe folks go out and look for automation for FTZs and that only,” Hardenburgh said. “Typically, they have a need for GTM software, for a robust import solution, for classification, and other import requirements. Companies are looking at things more broadly. FTZ is a component of what they’re looking for as well.
“Specifically with FTZs, they’re coming to us through a couple different avenues. Either they’re setting up an FTZ and they’ll need some automation, or someone is using an existing solution and has an FTZ solution, but they want a single footprint. Or they’re unhappy with their current solution (could be software, could be a consultant). Typically if it’s someone new, it’s a longer-term discussion. FTZs aren’t going to operate in a silo, or they shouldn’t. The information generated through the FTZ is going somewhere, and it’s going to be utilized elsewhere,” Hardenburgh explained.