Reprinted from IWLA—3PL EXECUTIVE, Summer, 2006

FTZs Add Value for Customers in the Global Supply Chain

“This is the future.” That’s what U.S. Secretary of Commerce Carlos Gutierrez said when he toured DSC Logistics’ one-million-sq.-ft. Logistics Center and the rest of the CenterPoint Intermodal Center near Joliet, IL, in March.

And the future is why DSC went through an extensive process to become Foreign Trade Zone (FTZ) certified and activated for the Joliet location. The FTZ enables DSC, a leading supply chain management company with a nationwide network, to provide additional services to customers and help customers reduce costs. FTZ certification positions the company to serve the global marketplace, ready to provide services in streamlining international supply chains for customers and facilitating ease of global trade.

The U.S. Foreign Trade Zone is a federal incentive created to help international and domestic companies reduce costs and increase efficiencies. As FTZs facilitate the ease of trade within the U.S., the goal of the program is to generate additional domestic employment as a direct result of increased global business and global partnerships with U.S. and foreign suppliers.

Because goods admitted into an FTZ are not considered part of U.S. commerce upon arrival into the zone, the Customs Entry procedure does not occur until the goods leave the Zone for domestic distribution. For example, shippers can bypass the congestion at West Coast ports by loading goods directly onto bonded transportation modes and sending them to an FTZ like DSC’s at Joliet. After all, a port is simply where goods enter U.S. territory.

In essence, an FTZ is considered a “foreign land” by U.S. Customs and Border Protection (CBP). In DSC’s case, the entire Joliet facility is an FTZ. Controlled locally by Customs and supported by a local grantee, an FTZ site has enhanced merchandise security. And key personnel at an FTZ operation who undergo a government background check can manipulate FTZ inventory data and CBP reporting. In addition, an FTZ operator can perform these functions: distribution, storage, testing and inspection, repackaging, repair and, with permits, assembly and manufacturing.

Adding Value
An FTZ adds value through four main areas of potential savings: reduction of the merchandise processing fee, duty deferral, duty elimination and product manipulation. In a standard supply chain, a merchandise processing fee of 0.21 percent (with a maximum of $485) is assessed on each container coming into the U.S. In an FTZ environment, this fee is not applied until goods are shipped out of the zone into U.S. commerce. The overall fee is typically reduced since all containers shipped to U.S. commerce from a zone are lumped into a weekly entry rather than a per container entry. If there is a high duty rate when something is brought in, the duty is not paid until the goods are shipped out.

Duty can be eliminated if goods are brought into the U.S. to ship to another country. If testing shows something is wrong and goods are sent back, as long as the goods do not touch U.S. commerce, no duty has to be paid. And in many cases, imported parts that are assembled into a finished product in an FTZ may be dutiable at a lower rate, rather than the higher duty that would be applied on the imported components.

Achieving FTZ certification and activation is part of DSC’s ongoing research and development, reflect-ing the company’s commitment to being ready for anything. In 1995, DSC adopted a sense-and-respond culture and transformational strategy to enable the company to prepare for the unexpected—to anticipate, understand and make the most of change. FTZ certification is part of that strategy: a response to the need for increased services from supply chain management experts in a world of ever-increasing globalization (“flattening”).

The process of becoming FTZ certified and activated requires a significant investment of time (typically a 10-18 month procedure) and financial resources. Since DSC worked with an FTZ consultant, IMS Worldwide, that fee was a major part of the cost. The cost also includes security enhancements, drafting of security procedures, generation of general procedural documents, software costs, activation fees and approval from CBP, a local grantee and the FTZ board. Essentially, DSC assumes all liability associated with operating an FTZ and incurs all fees applicable for errors.

The Payoff
The investment in developing this new capability positions DSC for a growing list of potential global customers (in electronics, music, industrial components, etc.). The company vision is to deploy this capability to other areas of the U.S. If, as at Joliet, the land has already been designated an FTZ, DSC would gain acceptance from the local grantee (in addition to the FTZ board and CBP) to activate a site within the established zone. Setting up a brand new “zone” would require obtaining local community approval and establishing a zone grantee.

DSC considers its FTZ certification a competitive advantage, differentiating it from other companies. It also gives DSC additional international expertise, allows the company to offer broader supply chain services and opens up new sources of revenue on a global scale. In establishing FTZ certification, DSC is responding to the globalization of sourcing products—the future—and positioning the organization for change.

FTZ IMPLEMENTATION TIPS
   • Regulatory expertise—As this is a governmental program, there is a wealth of knowledge
      out there that a company must know to operate an FTZ.
   • IT support—Essentially a “bolt-on” software package is essential for customs reporting
     and accurate zone merchandise tracking. Manual options are only viable if volumes are
     somewhere in the neighborhood of two-to-three containers in and out a week.
   • Lengthy process—Document preparation and set-up work can be done rather quickly,
     but waiting time for approval from the grantee, customs and, in certain cases, the FTZ
     board, can be long.
   • Financial dimension—Developing new capability requires a significant financial investment.

Adrian Potgieter is vice president of business development and Sam Sharp is logistics manager II for DSC Logistics, a supply chain management company based in the Chicago suburb of Des Plaines, IL. Adrian can be reached at Adrian.Potgieter@dsc-logistics.com. IWLA offers information on FTZs through its International Trade Council. For more information, contact IWLA’s Nathan Noy at nnoy@iwla.com.
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