Theres more to compliance cooperation than just C-TPAT
There's More to Compliance Cooperation than just C-TPAT
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Posted: March 2, 2008
Today’s global supply chain managers are facing increasing demands on improving the fluidity of shipments in the wake of changing regulations and increased cargo security measures. Benchmarking efforts require supply chain managers to seek new ways to harness innovation, technology and networks to lower risk with potential supply chain disruptions. The latest recall efforts of many global companies have emphasized the need to anticipate obstacles and align all functions within a supply chain. Understandably, managing risk within this environment requires strategic partnerships from within the organization as well as through external sources.
The most often overlooked partnership within the supply chain is the Government to Business relationships and a company’s ability to align them on a global level. Voluntary government programs for international supply chains have emphasized two areas of mutual concern between the government and global corporations: cargo security and regulatory compliance issues. A third issue, product safety, threatens to become the next emphasis of government action. Often, companies volunteer for one program, such as cargo security, and avoid joining the additional program geared toward customs compliance that would give them the greatest benefit for supply chain risk management.
Border issues improperly handled result in the holding of shipments, storage fees, potential compliance penalties and even the seizure or destruction of shipments. The business case for partnership with governments is the reduction of risk associated with certain disruptions, as well as allowing a company to commit to their own core values of protecting corporate brands and reputations.
The Government outlook sets the stage for the sharing of priorities, as they are the creators of market frameworks for our regulatory, legal and operating systems. Their main focus is to reduce risk in global compliance issues, cargo security concerns, and the movement of illicit drugs and misuse of international property rights.
Transformational diplomacy
To align government initiatives with corporate supply chain risk strategy requires a level of transformational diplomacy—a government-private sector approach to building partnerships that go beyond promoting best practices by strengthening information sharing for greater transparency. The latest U.S. government approach is the 10+2 initiative, requiring more advanced data to be transmitted at the time of the shipment move from the foreign port inbound to the U.S. Advanced data information improves the government’s ability to target high risk shipments, allowing low risk companies to continue to move freight timely. Similarly, the European answer to the 10+2 approach is the goal of developing the “single window” concept—the creation of a Web-based approach for all participants within a supply chain to access a single window where real time data will be available, including Customs clearance details. Still in an exploratory stage, the single window could provide the necessary compliance and cargo security data elements all groups are seeking.
Government short-term reaction to any potential terrorist or health threat is to close the port or limit access. In most cases, a move to “orange” on the Department of Homeland Security’s Web site Advisory System signals a slowdown of the movement of products and people. Long-term reactions generally result in increases in the stringency of import regulations. The critical components of enhanced supply chain security, increased visibility, throughput and execution are the same levers that drive operational efficiency and the resulting business benefits.
Risk management focused on compliance + security
To achieve the benefit of a fluid international supply chain, global companies must align supply chain risk strategy across their trade networks by aligning their strategies with existing government programs. The greatest benefit for reduced risk is obtained when a company joins a cargo security program that also has a compliance program attached—allowing the lowest risk score to be obtained. Some examples of these programs include the U.S. C-TPAT program and the Canadian FAST program. C-TPAT participants are rated under a Tier system, with a Tier 1 level simply being certified into the program while a Tier 3, the highest status, recognizes the company’s security measures as exceeding minimum requirements and demonstrating best practices.
C-TPAT participants at any level then have the ability to join the governments’ voluntary compliance program, Importer Self Assessment or ISA, which then takes them out of the pool of company’s that can be audited under a Focused Assessment (FA). A CTPAT/ISA participating company will be given preferential treatment in both security and compliance concerns. Despite these benefits, only 146 companies in the U.S. currently participate in the ISA program of the approximate 12,000 C-TPAT members. With an estimated 724,000 importers in the U.S. today, most companies are not taking advantage of a strategic approach to risk management through government to business programs.
Those same companies with Canadian divisions or Canadian suppliers could benefit from even lower risk ratings by having their Canadian counterparts join the Canadian cargo security program, FAST (Free and Secure Trade) and then move into the voluntary compliance program, Customs Self Assessment (CSA) which has benefits similar to ISA.
Similar cargo security programs with existing compliance overlap include the European Union’s cargo security program the Authorized Economic Operator (AEO) and Sweden’s StairSec. All in all, a global corporation with strong risk management strategies should align their global cargo security and customs compliance programs to achieve worldwide preferential treatment in all trade lanes in which these programs operate. Instead, the achievement of C-TPAT rarely results in ISA participation and does not become the catalyst for joining similar programs where a company has other divisions.
Aversion to compliance initiatives
What prompts a company to move into C-TPAT and then avoid one of its greatest benefits—the ability to remain outside the scope of an FA audit through ISA participation? Generally, it revolves around the concern of aligning multiple departments along a single strategy for compliance. ISA participation requires a company to demonstrate its internal control policies through presentations and entry file review under the close eye of Customs. As a voluntary program, participants invite Customs into their facility for the opportunity of revealing their reasonable care process over the import transaction, with emphasis on how they value and classify product. Equally as important is the discussion around their monitoring programs, internal and external, that prove long term compliance will be achieved.
Ironically, all of the requirements of ISA participation are the same requirements a company must demonstrate in an audit, which may last up to two years and cost a company severely. Therefore, if a company is not ready to participate in ISA, they are not ready to survive a long-term audit of their current processes. So of the Government to Business programs that incorporate both a security and compliance measurement, the majority of the companies avoid participating at a complete level and leave a portion of their risk management programs on the table.
Managing beyond security and compliance
In a few rare cases, some companies have embraced Government to Business program for risk management purposes and then developed Business to Government programs to further strengthen these ties. One U.S.-based company, through the monitoring of shipments under cargo security and compliance benchmarks, discovered their exports through certain trade lanes were submit to cyber smuggling and theft. Using the guidelines of Government to Business initiatives, they developed a training program for Customs groups in their customer’s country and provided training on how Customs personnel could recognize fraudulent paperwork and gray market goods. An extended training program reached out to more than 600 Customs Agents, resulting in a lower reaction by the Government to limit trade and resulted in a 30% increase in their export shipments.
Global systemic approach
Managing risk in an international supply chain requires a systematic approach on a global basis. The first step would be to identify current trade lanes and the existing government programs in place in each country or region; then identify which government programs are geared toward security or compliance, or both. Next, compare the program contents. For example, many of the security requirements of C-TPAT such as physical and access security concerns are also requirements of AEO participation. Reviewing the goals of the government programs and aligning training for employees in those locations will help a global team better understand global networks, and work together to prepare a plan of action.
Global reciprocity
Once each global location has been provided training on these initiatives, seek to participate in all global government to business programs where offices are maintained. The benefit will be in the global reciprocal agreements that U.S. Customs & Border Protection (CBP) is now pursuing with individual customs administrations through a four-step process.
First, CBP will compare the operating procedures of C-TPAT with a foreign partnership program. The key areas for each program will be the application, certification, validation, suspension and removal processes for each security program. Then, CBP will seek to conduct joint visitations of foreign business, which will lead to the third step of developing mutual recognition operating procedures. The fourth and final step is to formalize agreement on mutual recognition.
C-TPAT participants undergo a two-step process toward improving their security rating. When they first enter the program, they are considered to be certified. The next step is to undergo a validation review of both a U.S. office as well as one of their foreign-based supplier sites. If the foreign site is already participating in a cargo security program considered to be part of a reciprocal agreement, then Customs will forego the foreign site review. Therefore, aligning global strategies will reduce the costs associated with reviews and limit the number of different government organizations to be on site.
Programs aligned under the mutual recognition program include New Zealand’s Secure Export Scheme, Jordon Customs Department’s Golden List and Singapore Customs Secure Trade Partnership. The AEO programs of the European Union and Australia are also part of CBP’s mutual recognition program. True global supply chain management means aligning resources to take full advantage of these programs on worldwide basis.
Align worldwide partners
A strategic approach to risk management within an international supply chains requires participation of the senior management team responsible for worldwide initiatives. A global supply chain team will benefit from recognizing the overlap of multiple government to business programs and undertake an effort locally, regionally and internationally to participate on a companywide basis. Furthermore, it will limit the ability of one country’s team to block participation in one program while other internal groups are moving forward to participation on a reciprocal program within their country.
To complete the circle, the company must align the compliance portion of their risk management strategy to be a global effort. Inconsistencies in the classification of product moved worldwide offers perfect insight as to how companies ignore and push aside global compliance strategies. Products imported into one division under one code, and then repacked and exported to another division under a different classification code raises electronic red flags with customs and may lead to fines, penalties or seizure of shipments. And yet, such activities are tolerated when a company lacks a global compliance team or group that will be responsible for such a project.
Best practices interpreted
Defining a best practice from a customs perspective may differ from country to country. Aligning your global team to develop and implement best practices internally may result in debates of what constitutes a true best practice and alienate groups from reaching consensus. For example, in the U.S., a best practice is to require visitors and employees to park away from a building, and ideally, have barriers in place to prevent vehicle access to the front of a facility. Clearly, this is an unattainable goal in a crowded city anywhere in Europe. Refocusing the team on the definitions of best practices will eliminate these types of disagreements.
Specifically, ensure the best practice incorporates the customs view of TARF—a written guideline incorporating Testing, Auditing, Recording and Follow up. By incorporating checks and balances with accountability, best practices will be in place at all facilities even with differing physical and access controls.
Strong risk management programs will seek to minimize costs while obtaining the maximum benefit of cargo security and compliance programs. Opportunities to participate in multiple voluntary government to business programs that are compatible in nature constitutes a true supply chain risk management system. Taking full advantage of all the benefits of these programs will require a systematic approach at the global level. True best practices will be demonstrated by those companies able to focus a global team on a supply chain framework reflective of worldwide standards. wt
Sidebar: A Case Study in Risk Assessment
Baker Oil Tools (BOT), a known importer and exporter of oilfield equipment, viewed the requirements of C-TPAT as an outreach of their company’s core values and goals of improving supply chain efficiency. The program offered the benefits of expedited clearance for members, and that was the initial pursuit of the company. With rig operations and oilfield customers sourcing with a “just in time” mentality, any holdup at the border would be costly.
With assistance from their consulting group, Customs & Trade Solutions, Inc, BOT joined C-TPAT and obtained a Tier 3 rating after validation. An internal team was assembled under the Import Compliance Manager to take BOT to the next level of participation, by joining the Importer Self Assessment (ISA) program. The C-TPAT and ISA programs have helped BOT improve communication across multiple functions within the corporation. BOT now enjoys greater supply chain visibility, stronger communication between BOT and its suppliers, and have experienced cost savings by fine-tuning its import programs. Joining these government-business programs has been an exercise in achieving best practices within the industry.