Next year marks the 80th anniversary of the Foreign-Trade Zones Act, which created an important—but what has been an underutilized—weapon for U.S. business. The law established Foreign Trade Zones, or FTZs, secure areas located in or near U.S. Customs ports of entry but legally considered to be outside the Customs territory for the purpose of tariff laws and entry procedures. There, goods may be handled, manufactured or reconfigured, and re-exported without the intervention of customs authorities. Only when the goods are moved to consumers within the country where the zone is located do they become subject to the prevailing customs duties.
Despite the advantages of FTZs, most U.S. companies don't take advantage of them. There are about 600 zones and sub-zones in the U.S., a fraction of the number in existence worldwide. One company that has moved to take advantage is Blount International Inc., a Portland, Ore.-based designer and manufacturer of equipment used in the forestry, farming, ranching, and construction sectors, among others. At the helm of the effort is Dino Scott, Blount's Kansas City-based global compliance and FTZ manager, who has spent 22 years plying his trade on four continents. The Panamanian-born Scott holds bachelor's degrees in business administration and supply chain, and expects to get his master's this month in transportation and logistics.
Scott was interviewed by Senior Editor Mark B. Solomon about the benefits of an FTZ, the challenges Blount faced in implementing the program, why it chose Kansas City, and why companies engaged in international trade should look hard at establishing a zone regardless of the cost and effort involved.
Q: When did the Blount FTZ open?
A: Our FTZ was launched on Aug. 5. At this time, it is the only manufacturing FTZ designation in the Kansas City area.
Q: What was your objective in establishing an FTZ, what benefits has Blount derived from it, and what, if any, changes did this demand of your internal procedures?
A: The primary objective was to support and improve the flow of inbound and outbound inventory. The implementation of an FTZ operation allows any company to review, revise, and improve its inventory management skills. The secondary goals include the cost-savings that come with duty-inversion, duty-avoidance, and duty deferral.
The integration of the FTZ into Blount's established supply chain and distribution infrastructure required that certain practices undergo a review and revision process. A reassessment of Blount's receiving and shipping methods allowed our management to analyze the required practices at the FTZ, determine where inconsistencies lay in our current shipping and receiving areas, and correct those inconsistencies. We also spent much time and great care auditing the [Harmonized Tariff Schedule] numbers associated with each part listed on Blount's SAP system before fully integrating the FTZ.
Q: Duty inversion (which exists when the duty rate for the finished good is lower than the duty for the component parts) is considered a powerful benefit of an FTZ because it allows U.S. importers to manufacture in the U.S. while taking advantage of a lower duty rate. Yet it requires precise recordkeeping and a significant investment in traceability systems and resources. Has Blount captured benefits from duty inversion?
A: Blount is benefiting from duty inversion. Recordkeeping and traceability issues have been alleviated by using a "bolt-on" FTZ system supported by [FTZ software provider] Integration Point. Through extensive training, we have made every stakeholder—team leaders, line supervisors, managers, and the production employees—aware of the importance of maintaining accurate inventory counts, accounting for waste produced during the process, and minimizing the errors associated with "pulling" the elements used for production.
Q: Blount located its FTZ adjacent to the Kansas City airport. Yet Blount's products are not designed to move via air cargo. What drove the company's decision?
A: Kansas City is an ideal location for distribution centers. It is located nearly in the geographical center of the United States. It is the crossroads of trucking and railroad services. Movement via truck or railroad is basically three days from the East or West coasts. UPS and FedEx have major handling facilities in the area. Improvements by the BNSF Railway and other railroads are shortening the transit times from either coast. FTZ operations are permitted to request "direct delivery," which provides an additional reduction in container transit times. The Kansas City metro area does not face the same congestion problems as the ports of entry on the coasts, and it has a well-educated and highly experienced workforce.
Q: In the U.S., FTZs have been around for nearly 80 years, and they are considered a powerful tool for companies involved in international business. Yet they are not as widely utilized as one might expect them to be. Why do you think that is?
A: A lack of understanding of the FTZ processes is the primary reason many companies choose not to embark on such an operation. Some assume that the costs of establishing an FTZ are overwhelming. A lack of compatibility with an existing ERP [enterprise resource planning] system could be another obstacle. An organization's ERP system may not be capable of handling the information required by the FTZ.
Q: Some companies may be deterred by the compliance requirements for maintaining FTZ status. Should they be?
A: The compliance requirements established by the FTZ regulations are very similar to the requirements that are listed for the [Customs-Trade Partnership Against Terrorism]. Compliance issues should not be considered a deterrent to employing an FTZ model. On the contrary, compliance issues are one of the unknown or unmentioned benefits when a company is weighing the FTZ option. Product shrinkage, improved shipment accountability, protecting against cargo diversion, and ensuring that export and import processes are properly followed all stem from the discipline that comes from ensuring proper FTZ compliance.
Q: What are the key metrics an importer or a shipper should evaluate before taking this step? Are there companies that engage in international trade whose operations would not be suitable for an FTZ?
A: Individual businesses will likely use different sets of [Key Performance Indicators] to evaluate the benefits of incorporating an FTZ operation. Companies need to carefully review their import and export processes in order to determine if an FTZ operation is right for their organization. In my opinion, any company that is importing and exporting has an opportunity to find some advantages to operating in an FTZ environment.
Q: Do you plan to do more manufacturing within the FTZ, and would that involve more nearshoring, or on-shoring, back to the U.S.?
A: It is too early in our operation to answer that. What I do know is that although all FTZs follow the same rules and regulations, each FTZ, over time, develops its own personality. What may work well at one FTZ may not have the same positive effect at another. As Blount's FTZ matures and we gain more experience, we may well find additional uses for the FTZ and incorporate other ideas or products into the operation to enhance its value to us and our customers.
Gartner, Inc.
