Yamaha's "hybrid" approach to foreign trade zones

As any importer will tell you, bringing goods into the country is a complex process that's subject to many laws and regulations. It can be costly, too. A host of fees, duties, and taxes come with the territory. On top of that, if an importer fails to adhere to the regulations, the U.S. Bureau of Customs and Border Protection (CBP) can assess fines that will make any CFO sit up and take notice.

The challenge for many importers, then, is to comply with customs regulations while reducing the cost of bringing goods into the United States. That's a challenge Yamaha Corporation of America (YCA) has successfully met. The importer of musical instruments and audio-visual equipment found it could achieve both of those objectives by importing through foreign trade zones (FTZs).

Foreign trade zones are government-approved facilities within the United States where foreign and domestic merchandise is considered to be outside of U.S. customs territory. FTZs help importers compete with low-cost goods entering the U.S. market by allowing them to defer, reduce, or avoid duty payments as well as some taxes and fees. For example, importers don't pay duties on merchandise until it leaves the zone for U.S. consumption. If the goods never enter U.S. commerce—if they are subsequently exported, for instance—then the importer pays no duties on those items. (For more about the benefits of foreign trade zones, see sidebar.)

YCA knew that using FTZs would significantly reduce its costs. Before it could go ahead and do that, however, the importer had to decide which of the two conventional operating models to follow: outsource the entire process, or handle everything—including setting up and operating warehouses—itself.

Neither was the right fit. Instead, YCA, making use of specialized software, chose a "hybrid" approach combining the two models. Here's a look at what the importer is doing and why that strategy has proved successful.

OUTSOURCE OR IN-HOUSE?
Yamaha Corp. is the world's largest manufacturer of musical instruments and a leading supplier of audio-visual products. The company manufactures those products in Asia and Europe; its YCA subsidiary, headquartered in Buena Park, Calif., imports them into the United States for distribution in U.S. and other markets in the Americas. U.S.-bound shipments arrive by ocean and air.

In 2010, YCA's import/export compliance group decided to address areas where costs were high. One such area involved products that were imported to the United States and subsequently exported. Those shipments incurred duties in both the United States and the destination countries, and YCA was paying customs brokerage fees for both sets of import transactions. Another concern was the Merchandise Processing Fee (MPF) assessed on each formal entry, which was scheduled to increase the following year.

YCA discovered that those costs and more could be eliminated or reduced by importing through foreign trade zones. The company hired the consulting firm KPMG to guide it through the complex planning and preparations, including the feasibility study, license application, analysis of security requirements, methodology for selecting FTZ management software, and establishment of operational procedures, says Juna Kim, YCA's import/export director. Internally, YCA's management, import/export compliance group, and information technology team worked on the project.

Yamaha decided to establish two FTZs, one in the Los Angeles area and another near Chicago. The importer wanted to retain full control of compliance with the complex FTZ regulations. Yet the company felt it did not make economic sense to go through the lengthy and expensive site-approval process, and then to hire and train employees to set up and operate FTZ facilities, Kim says. The solution: become licensed as a foreign trade zone user, and lease dedicated space in established FTZ warehouses operated by experienced, trustworthy third parties.

HARMONIZING OPERATIONS
Today, YCA works with third-party warehouse operators Schafer Brothers in Long Beach, Calif., and DSC Logistics in Elwood, Ill. These licensed FTZ operators set up segregated areas for YCA within their facilities. They handle receipt, storage, pick/pack, and shipping, and they ensure that security mandates are met. The importer, meanwhile, controls and manages the day-to-day decisions and transactions, as well as compliance with the stringent customs and inventory control requirements.

To ensure compliance and enable electronic data sharing, YCA licensed the FTZ^QW software module from QuestaWeb. The software, approved by CBP for electronic filing, plugs into a centralized product database of export/import information in QuestaWeb's global trade management system, which YCA also uses. In addition to the comprehensive information required for import/export operations and regulatory compliance, the database holds all of the pertinent information for any type of FTZ transaction, according to Wayne Slossberg, QuestaWeb's vice president. Because regulations require FTZ users to document every movement into and out of foreign trade zones as well as every activity within the facilities, "there has to be cradle-to-grave information," he says.

The software automatically generates all required documents and reports, and files them with the proper regulatory agencies. These include an annual report to the Foreign Trade Zone Board, monthly activity permit reports, inventory control reports, and removal audit reports, among others. The system handles input from the two FTZs but maintains the complete data separation the government requires.

One of the most important issues for YCA, says Kim, was systems integration. In order to keep accurate track of shipments and inventory—and their related import and export transactions—as they move into and out of the zones, the software must interface with YCA's enterprise resource planning (ERP) system and the third parties' warehouse management systems (WMS).

"There's so much information that has to be managed ... and some of that has to come all the way from manufacturing up through distribution," Slossberg says. "The ERP interface is critical because that's where detailed information about what's coming into the zone begins."

The WMS integration enables Yamaha's daily inventory reconciliation, which compares inventory in its ERP, data on what has physically entered and departed from the FTZ, and the information submitted to customs. The software does "a three-way check" to make sure YCA, the third-party operator, and customs have consistent information, and alerts YCA if there is a discrepancy, Slossberg notes.

So much information is involved that integration is essential for error reduction, streamlined processing, and timely reporting, Kim says. "Without integration, day-to-day operations would be overwhelming." Data collection and reporting is so automated, in fact, that YCA manages both FTZs with just one full-time and one part-time staffer.

IMMEDIATE SAVINGS
YCA's foray into foreign trade zones has been "an extremely successful project when it comes to cost savings," Kim says. The importer no longer pays duties on imported merchandise that is later exported, and it does not pay state and local inventory taxes on goods while they are in the FTZs. YCA has reduced customs brokerage fees and can delay customs entries and duty payments until goods have been sold and leave the zones for U.S. consumption.

In addition, the company has greatly reduced the Merchandise Processing Fees it pays on formal entries. The fees are assessed by CBP as a percentage of the value of the goods, with a minimum of $25 and a maximum of $485 for each entry. Because FTZ users are allowed to pay weekly, YCA can cover all entries for a particular week with a single filing subject to the $485 maximum. For some shipments, the fees have been eliminated altogether.

There are other benefits as well. For example, YCA no longer has to wait until goods have cleared customs before picking them up from the carrier and delivering them to the DC. Eliminating delays due to customs clearance has cut up to three days off YCA's order-to-delivery cycle. "It also relieves the daily pressure of making customs entries and allows us to deal with any delays on an immediate basis," Kim says. "In most cases, FTZ use allows sufficient time to solve logistics and compliance issues, while the computerized system keeps track of and warns us of existing and potential problems."

For importers that may be considering using foreign trade zones, Kim has this advice: "It is not a simple project, but it is not overly painful either. The effort expended in shifting processes is well worth the benefits attained. If you understand the return on investment and have the proper players aboard, you will experience cost savings right away."