Foreign Trade Zones (FTZs) can help businesses of all kinds reduce or manage inventory, and compete more effectively in the international marketplace. Still, many companies are reluctant to take advantage of FTZs, either because they don’t understand the benefits of a well-run program or don’t believe the effort necessary to create one is worth it.
But according to Eric Berry, Director of Client Solutions at the trade-management firm Copper Hill, setting up an FTZ program is certainly a serious undertaking, but it isn’t as complicated as it may seem.
What are the benefits of a Foreign Trade Zone?
Using a Foreign Trade Zone (FTZ) offers numerous benefits for businesses of all sizes. FTZs are specially designated sites near U.S. ports of entry that allow importers and exporters to move goods in and out of the country without paying customs duties, taxes, and fees. Governed by U.S. Customs and Border Protection (CBP), these zones are available in all 50 U.S. states and provide numerous advantages for businesses. By utilizing an FTZ, businesses can save money, and gain access to greater flexibility in their operations.
Almost anything except retail can be done in an FTZ—e.g., manufacturing, repackaging, storing, testing, salvage, scrap, etc. Indeed, companies can benefit from FTZs in any number of ways, says Berry, but the savings on duty deferrals and merchandise processing fees (MPFs) alone are often enough to justify investment in an FTZ program.
How do you set up an FTZ program?
Creating an FTZ isn’t especially difficult, Berry says, but it is a lengthy, multi-step process that requires some attention to detail. Companies that decide to set up an FTZ program should understand that the application process can take anywhere from six to nine months to complete, and there are several managerial and technical issues that need to be addressed before a Foreign Trade Zone can operate successfully.
“The first thing a company interested in starting an FTZ should do is a feasibility analysis to make sure they know what areas of an FTZ program can benefit them,” says Berry. Knowing where the savings are going to come from and how operating an Foreign Trade Zone is going to impact the company and its employees is crucial, Berry says, because implementing a Foreign Trade Zone affects almost everyone up and down the supply chain.
Companies also need to know precisely what they are going to do in their FTZ and how they are going to manage it. According to Berry, here are some of the most important questions a company needs to be asking to prepare properly for opening an Foreign Trade Zone:
- Who is going to champion the project?
- Who is going to manage the application process?
- Who is going to run the FTZ once it’s open?
- How much training will employees need?
- What is the project’s timeline?
- How will reporting be handled?
- What are the FTZ’s program’s technical requirements?
- What will the ROI be, and when will the company see it?
Once these questions are answered, the next big challenges are education, awareness, and communication.
“Communication is key, because leaders need to secure buy-in from everyone whose job is going to be impacted by the FTZ,” Berry says. “People need to know how their jobs are going to change; they need to understand why the changes the company wants to implement are going to make thing better for everyone; and they need to understand what the benefits of the FTZ are going to be.”
Suppliers also need to be involved in the conversation, says Berry, because they too are going to be affected.
Meeting technology and data requirements for an FTZ
Another factor that cannot be overlooked in any successful FTZ implementation is the technological component.
Foreign Trade Zones have specific compliance requirements and the correct duty amounts need to be calculated and paid on time. According to Berry, most corporate ERP systems are not designed to manage the FTZ process, so will need to be integrated into the system, which requires the cooperation of—and communication with—the company’s IT department.
Getting the IT department onboard early is important, says Berry, because one of the most important aspects of running a successful FTZ program is clean data and meticulous record-keeping. Shipping, invoicing, and inventory data are used to calculate duties, for example, and customs bases its record-keeping on the data the company provides, so accuracy is essential.
“FTZ reporting requires looking at the complete data picture from start to finish,” Berry says, “So the people involved need to know where the data is coming from, and whether it is clean and correct.”
What are the best practices on creating a foreign trade zone?
In any event, these matters all need to be addressed before the FTZ opens for real. Hiring an outside consultant can help streamline the FTZ application process and ensure that things are handled correctly the first time, Berry says, but several additional best practices can also help keep the project on track.
- Make sure upper management is involved and get buy-in from the top
- Understand what the benefits, savings, and ROI of the FTZ program are going to be
- Understand how the FTZ will impact employees, suppliers, and other departments
- Communicate with IT early and get on their schedule
- Keep a project management plan
- Plan for ongoing management and security of FTZ premises
- Stay on top of regulatory changes
Foreign Trade Zones can certainly save companies a great deal of money, but starting one is a significant undertaking that requires careful research and planning. Follow these guidelines, says Berry, and you will be several steps closer to a successful outcome.