March 1, 2009
vertical focus | Electronics

Not playtime anymore

It may sound like fun and games, but managing a consumer electronics supply chain is getting tougher by the minute thanks to new compliance and security restrictions.

By Mark B. Solomon

If your job is selling consumer electronics components or finished goods, you are likely struggling to close deals amid the most difficult business environment in decades. But take heart. You could be managing your company's supply chain.

Consumer electronics exporters and importers—as well as those in other industries—face a year of compliance and security changes that the International Compliance Professionals Association calls the "most significant" since the 1993 passage of the Customs Modernization Act. At the same time, compliance professionals are being forced to manage with scarcer resources from their cash-strapped companies, knowing all the while that fines, penalties, shipment delays, or forfeitures that may have been routinely dealt with in good economic times will not be blithely ignored in a downturn.

The industry's challenges range from new data-filing requirements for ocean imports to physical screening of air exports before they're loaded into passenger planes. Exporters can expect tighter government scrutiny and stiffer fines for inaccurate or non-filed export declarations due to heightened concerns over export shipments falling into the wrong hands, experts say. An array of agencies— including U.S. Customs and Border Protection, the Consumer Product Safety Commission, and even the Federal Communications Commission—will also have their fingers in the enforcement pie in 2009, these experts say.

CPSC, for example, has the authority to place "manifest holds" on imports—including consumer electronics—in order to satisfy its own compliance requirements, according to Amy Magnus, district manager at A.N. Deringer Inc., a St. Albans, Vt.-based customs broker, freight forwarder, and thirdparty logistics service provider.

All of this comes at a time when the industry already faces critical time-to-market issues because of its products' high value and risk of obsolescence, and must also cope with precise and particular tariff classifications. "A slight difference in classification can mean a huge difference in the duties that are paid," says Melissa Irmen, vice president, products and strategy for Integration Point Inc., a Charlotte, N.C.-based trade compliance software developer. Integration Point offers a Web-enabled product called "Global Classification" that allows a supplier in, say, Singapore to populate the site with product information for a colleague in the United States to review and determine the appropriate classification, according to Irmen.

A new world order
The new compliance world is already taking shape. On Jan. 26, U.S. Customs and Border Protection launched its "Importer Security Filing" program, commonly known as the "10 + 2" rule. The name derives from the additional data sets required of importers and carriers—10 data sets from importers to be submitted to CBP at least 24 hours before the cargo is laden aboard a vessel, and two additional sets from ocean carriers to be filed no later than 24 hours prior to a ship's arrival at a U.S. port.

The rule calls for a one-year phase-in, during which time CBP will not impose any fines or penalties for non-compliance. That's a good thing, experts say, because most of the supply chain is not ready to meet the requirements.

The ISF program does not apply to international air freight, the primary mode of transportation for electronics. Still, recent improvements in ocean transit times and delivery precision are prompting many electronics importers to at least begin serious discussions about shifting goods to the sea. At that time, 10 + 2 would become a reality for those companies.

The electronics supply chain is "not aware of the full impact of what is required" by the rule, says Magnus, who spent 18 years at CBP and whose clients include consumer electronics companies, some of which ship by vessel. She adds that importers will need to renegotiate supplier contracts to mandate that product information required by CBP is accurate, complete, and available to the importers at the time they need to file.

Though the 10 + 2 rule may not yet be on the consumer electronics industry's radar screens, what is front and center is a federal law requiring, effective Feb. 3, the screening of half of all domestic and international shipments loaded into the bellies of passenger aircraft. Companies are struggling both with confusing regulations administered by the Transportation Security Administration and a hard-and-fast deadline that many were not prepared for.

For example, there are TSA-approved "certified cargo screening facilities" in 18 cities, where cargo will be screened before it reaches the airport, thus taking some of the pressure off the airlines to perform the service. Once cargo has been screened by either a shipper or freight forwarder at a certified facility, it can be palletized or wrapped, and airlines will not have to reinspect it. However, industry sources said that TSA-authorized equipment needed to perform the tasks might not reach the facilities until March at the earliest. As a result, airlines faced at least a month of being the sole screener of the goods.

"I wouldn't say people are just throwing up their hands. But I think there is some frustration with following programs that are not yet particularly well-defined," says Judy Davis, senior manager, export compliance for Maxim Integrated Products, a Sunnyvale, Calif.-based manufacturer of integrated circuits that are used in consumer electronics products. Maxim, a heavy user of air freight, is working with its primary forwarding partner, James J. Boyle & Co., to build a certified cargo screening facility in San Bruno, Calif., outside of San Francisco.

Bad news for the bad guys
But, as industry innovators are fond of pointing out, for every problem there is progress. Magnus of Deringer says she has noticed "an increased hunger for compliance information" among electronics companies, adding that many, for the first time, have begun recruiting people to focus on compliance issues. She adds that compliance processes are even being integrated into the product design process, also a first for many companies.

Not surprisingly, technology will play a key role in importers and exporters' compliance efforts. Last September, global trade solutions provider Management Dynamics Inc. introduced a software program that aggregates information on individuals and organizations that U.S. firms are prohibited from doing business with. Ty Bordner, vice president, solutions consulting for MDI, says the company culls information from 94 government lists, arranges the names and addresses in a uniform format, and maintains the list on a daily basis. The software uses what he calls "comparing algorithms" to minimize the potential for false positives. Bordner says MDI's software has a false-positive rate of between 0.2 and 1.2 percent; other programs, he contends, have false-positive rates of between 5 and 10 percent.

Letting an export shipment slip into the hands of the bad guys can result in fines of up to $120,000, not to mention the incalculable damage associated with bad publicity, Bordner says. With so much at stake, companies are stepping up to the plate.

"Five years ago, I would have said that U.S. companies had a significant compliance challenge," he says. "But they are solving the problem by buying systems such as ours. Compliance is being taken more seriously than ever before."

About the Author

Mark B. Solomon
Senior Editor
Mark Solomon has spent 25 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. Mr. Solomon graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon

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