Jerry Peck is a Licensed Customs Broker, with more than 30 years’ experience working in product classification — mostly within the corporate trade operations of Fortune 300 multinationals. In this QAD Precision Report, Jerry recounts “lessons learned” from his time in industry.
By Jerry Peck
Correctly classifying goods for import or export with the correct Harmonized System (HS) codes is no easy task. The HS is an internationally recognized tariff nomenclature that uses a six digit code to classify products. Countries can add extra digits for their own reporting purposes. The United States uses a 10-digit code, known as the Harmonized Tariff Schedule (HTS).
Having said that, ensuring you have the correct tariff classification is a critical aspect of international trade and regulatory compliance.
Classification is a difficult for three major reasons:
Lack of detailed product descriptions
The complexity of the General Rules of Interpretation (GRI) of the HS System
Lack of time to deal with issues 1 and 2
When I first began my career as an Entry Writer for a Customs Broker, I had very little control over how and when pending Entries landed on my desk.
When I moved to the industry side of the fence, beginning with Mattel Toys, I learnt the importance of gaining early visibility into the arrival of goods.
In other words, if I could give myself more time, I could more easily address the first two major reasons that make classifying products a challenge.
Better still, if I could gain visibility to the complete process — in particular where the build/buy decisions are made — it was possible to turn Classification from a tactical process to a strategic one.
Here are five important lessons I learned from my time in industry.
During my time at Mattel, we were producing a special Bob Mackie-designed ball gown for Barbie. The gown contained a feather boa made from a real feather.
But by having advanced visibility we were able to secure the certificate required by the Department of Fish & Wildlife. This documents the genus and species of the bird feather used. If we did not have this, our shipments would have been detained at the Port.
Advanced visibility also creates an opportunity for “Tariff Engineering”. This is where you can take an originally designed product and alter its content and/or functionality so that it qualifies under a more favorable HS Code.
My favorite example of Tariff Engineering is also my first experience, which happened quite by accident.
To buy myself additional time to Classify Mattel’s products, I went further and further ‘upstream’ into the product design process. I would bring a copy of the tariff that covered toys and walk behind the designers to see what they were working on.
One day, I saw someone working on the next generation of the Barbie Doll Case.
I knew that Customs classified these as articles of luggage in Chapter 42. This carried a duty rate of 20 percent. In spite of our best efforts to convince them otherwise, Customs would not budge. Therefore, if we couldn’t change Customs, then we needed to change the Doll Case.
We held a meeting with the designer, his boss, and the head of marketing. We opened a doll case and placed it on the table and began thinking about what we could do.
Well, we had an obvious structure, so maybe a building? What kind of building? What if it was a clothing store where Barbie could try on her clothes? Then at the end of the day, it all folded up as a carrying case?
We inserted a connecting pull down floor, mylar mirrors, clothing racks and a dressing room. Suddenly we had created the “Barbie Boutique Play Case.”
Customs agreed that we had incorporated enough play value to now make the play activity the “essential character” of the product, which could now qualify as a toy accessory.
After our tariff engineering redesign, the new Barbie Boutique Play Case now qualified for a much lower tariff rate — 6.8 percent instead of 20 percent.
Even better, the redesign meant that the product was also eligible for preferential duties under NAFTA. Therefore, we shifted production to our plant in Mexico where it qualified for duty-free entry. This ultimately saved Mattel seven figures in duty payments.
Any time you change the composition of a product, or source a new product, you should look to see if it qualifies for preferential duties under a Free Trade Agreement.
My experience with the Barbie Boutique Play Case is when I had the proverbial “light bulb” moment.
Why wouldn’t any company not formally include Trade & Customs considerations as part of their strategic planning? I mean it just made so much common sense, why wasn’t this a standard practice?
Now granted, Tariff Engineering is not going to be an available option for every company, but the point is that there are still plenty of other value-add services that can be performed. This includes risk modelling.
Classification is used to identify cost and/or regulatory risks. Therefore it can have a direct impact on sourcing decisions. It also serves as a starting position towards identifying other country-related risk considerations as part of a more comprehensive Risk-Modeling Strategy.
It’s always surprising to me to see the number of companies that don’t factor in total landed cost and related logistics factors when selecting an international supplier. For instance, and I’m over simplifying, but generally a buyer will vet potential suppliers based on factors such as their ability to meet:
The product engineer’s design specifications
Any quality requirements, such as clean room filtering
And whether they can meet the company’s production demands
Let’s say two suppliers make the cut – one from China and one from Mexico, with China having the lowest per unit cost. Based on unit cost alone the buyer may see the Chinese supplier as the logical choice.
However, without factoring in landed costs and logistics considerations, they’ve unknowingly just omitted a supplier that qualifies for zero duties under a Free Trade Agreement, has lower transportation costs, a shorter supply chain, and is in the same Time Zone for easier communication.
The first step in turning Classification into a competitive advantage is to start with a general assessment of what you have today with regard to people, processes and enabling technology. Begin by identifying any gaps:
Do I have enough people, and are they proficient in Classification or do they need additional training?
Are my Classification procedures documented? Do I lack centralized control if I have multiple divisions importing?
And do you have any supporting systems or is your process entirely manual?
Next, learn where your company’s product build/buy decisions start. Introduce yourself to the key people in these departments, as well as the other supporting departments such as procurement, marketing, sales and finance.
Explain how what you do could benefit them and the company. This is far more successful than a “I need your help” perspective. Note any systems they are using which you might also be able to leverage.
This initiative isn’t going to drive itself. Be prepared to take ownership. You’ll need to schedule meetings with these groups to explain and evangelize how this will benefit them.
And finally, get your efforts noticed by tracking and publishing your wins. Send out congratulatory emails noting the people that helped make it happen. A company newsletter, if you have one, is an excellent source for this. You’ll likely find that other people and departments will start contacting you to see how they could benefit.
Jerry is the VP of Product Strategy with QAD Precision and is based out of Dallas, Texas. But most importantly, Jerry is a Licensed Customs Broker with over 3 decades of experience in product Classification, with over half of that time spent within the corporate trade operations of Fortune 300 multinationals.
To access an on-demand version of Jerry Peck's webinar, Turning Import Classification into a Competitive Advantage, please click here.
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ASSESSING AND MITIGATING FINANCIAL SUPPLY CHAIN RISKS
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IMPORT MANAGEMENT: THE IMPORTANCE OF CORRECT CLASSIFICATION