Clear savings may invoke hidden costs

I heard a great story from one of the leading indirect tax experts in Canada.
A multi-national corporation was approached by one of their supply chain partners with an idea that could save them close to 8% of their total freight costs by creating a centralized worldwide distribution center.

It took a number of years to set up this enhanced and updated supply chain process and the overall savings would definitely justify the upfront costs to initiate all the required changes.

The thought process was that instead of shipping to final jurisdictions from various vendors around the world, creating smaller shipments with higher fees, this model would consolidate all shipments to one distribution center allowing for various products to be shipped together to their final destinations. This resulted in a savings of close to 8% for the freight costs associated with moving the same freight but in a different consolidated method.

After the first year that this initiative was undertaken, the finance team reported an overall net LOSS of 4% instead of a gain of about 8% savings.

WHAT HAPPENED?

Utilizing advantageous preferential duty treatments under various Free Trade Agreements (FTAs) usually requires that goods ship from the point of origin directly to the country with which the FTA has been established. If the goods are "diverted" and enter another commerce prior to arriving at its final destination, the FTA no longer applies.

Therefore, with the story above, the freight and warehousing cost savings of 8% resulted in a loss of 4% because the duties of an average of 12% were now being charged when goods were shipped to their final destination from the centralized distribution center.

This is a great example of ensuring that the Customs regulations are also considered prior to updating a freight process or initiating a program for the purposes of tax savings. Customs rules, regulations and administrative policies are alive and well in all jurisdictions. Ensuring that a new/updated process falls inline and adheres to these Customs regulations is a necessity prior to undertaking a supply chain and/or tax initiative.


There are many examples that I have personally been involved with when clear savings did not take into consideration other potential hidden costs.

- Drawback filing: Many importers are unaware of the potential to recover duties paid once goods are exported. The key to most drawback filings is the record keeping. Records are an essential part of ensuring that a drawback claim is reviewed and approved by the Customs authority of the jurisdiction where the claim is being filed. To ensure a best in class record keeping practice, a budget is required to update systems as well as to train internal team members and associates on how to properly store, archive, and file the necessary records.

- Valuation: This is a huge concern with companies that ship to both Canada and the USA. There are many instances when valuation regulations for US Customs and Border Protection (USCBP) differ considerably from those regulations that are overseen and enforced by the Canada Border Services Agency (CBSA). Utilizing the rules for one jurisdiction may not be inline with how the rules of the other jurisdiction need to be followed and implemented.

Be aware of the differences because only taking into consideration the rules of one jurisdiction to initiate some costs savings may, in effect, cause costs to rise in the other jurisdiction.

Very similar with cooking. (No recipe for this BLOG post, but the analogy works well.)
An ingredient is chosen to bolster the flavor of a dish to be served at the upcoming holiday party where friends and family get together to celebrate the year that was and anticipate the great things for the year that will be.
However, unfortunately, the ingredient that bolsters the flavor causes an allergic reaction in one of the guests. Not a good outcome when trying to make a dish that is more flavorful for everyone.
Another way of looking at it is to determine how much of an ingredient is required. If too much of the ingredient is used, all of a sudden, the taste is not bolstered by ruined.


Best practices are things that take ALL aspects of supply chain (and Customs) as well as cooking into consideration.

Don't succumb to a quick decision due to clear potential savings. Those hidden costs (aka allergies) may extinguish the savings and turn into undue and unforeseen costs and negative reactions to the balance sheets.
And, like an iceberg, the savings that you see may be minute in comparison to the costs that you do not see or take into consideration.
Wishing you all a very restful and happy holiday season.
Much blessing for health, happiness and success for the balance of 2022 as well as for 2023 and beyond.


(Next BLOG posting scheduled for mid-January 2023.)


Thank you to Jean-Hugues Chabot for your mentorship, guidance and expertise. Wishing only the very best in your retirement.
Location: Montreal, QC, Canada

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