September 19, 2011
technology review | Trade Management

Trading made easier

Trading made easier

When trade documentation threatened to become a major chokepoint, engine maker Tognum America turned to software to rev up the process.

By James A. Cooke

As any importer or exporter can attest, trade documentation is a necessary evil of doing business on the global stage. Tognum America is no exception. The U.S. subsidiary of Germany's Tognum Group, Tognum America (formerly MTU Detroit Diesel) is doing a brisk business in propulsion systems and engines for ships, rail equipment, and defense vehicles, bringing in parts from abroad and selling the finished product both here and overseas. As a global trader, it expects to spend time and money to ensure it's in compliance with regulatory requirements.

Nonetheless, things were getting out of hand by 2009. Even by the standards of a company that's heavily involved in cross-border trade, Tognum America found itself devoting an inordinate amount of time and money to trade documentation.

There were a couple of reasons for that. First, there were the headaches associated with filing customs paperwork for the parts it brought into the county. U.S. Customs regulations require importers to classify each incoming item under the Harmonized Tariff Schedule (HTS), the system used to determine customs duties on imports. An item's tariff classification, which is denoted by a 10-digit number, is based on such criteria as its name, its use, and the material used in its construction.

What made the task particularly burdensome for Tognum America was the wide array of items it had to classify. Many of its engines are custom built for a specific application or customer, which means the company often has to bring in parts it has never used before. Each time that happens, it has to start from scratch to determine the item's classification from a list of more than 17,000 unique 10-digit numbers.

Although Tognum America often consulted with its customs broker on classification matters, it couldn't just hand off that responsibility to an outside party. Nor did it want to, says Christin Gleissner, the company's manager of logistics and customs compliance. "We work closely with our broker, but we decide what's the tariff code," she says. "The importer of record carries the responsibility to classify the good accurately according to the Harmonized Tariff Schedule."

The other part of the problem is that as a supplier of engines and spare parts for military vehicles, Tognum America is responsible for making sure those items don't fall into the wrong hands. To prevent that, the company has to cross check the names of buyers against the U.S. government's list of sanctioned parties—companies, individuals, and institutions barred from importing U.S. goods due to security concerns. Exporters face substantial fines or even jail time for selling goods to an entity on the so-called "denied parties" list.

The task is more daunting than it might sound. There are thousands of names on the list, and the lineup changes daily. Although Tognum America hired an outside firm to help with the screening, compliance remained an ever-present worry. "If you're non-compliant, you could lose the ability to sell military products," Gleissner explains.

What brought the problem to a head was a surge in volume. Despite the global economic downturn, Tognum America has seen sales soar in recent years. "Our business is booming," says Gleissner. "The mining, oil, and gas industries are doing well." While that was great for the bottom line, it was putting strain on the staffers who were preparing all the documents manually. Clearly, it was time for the company to rethink that part of the operation.

An end to manual processes
Given the situation, it's no surprise that when the company had a chance to acquire trade management software as part of an enterprisewide systems upgrade, it didn't hesitate. Two and a half years ago, Tognum America made the decision to go with an SAP system as its corporate IT backbone. As part of the project, it installed SAP's trade management module, BusinessObjects Global Trade Services. Among other functions, the app is designed to cut costs, reduce the user's risk of trade penalties and fines, and help it clear both inbound and outbound shipments through customs faster. It has also allowed Tognum America to systematize trade documentation processes throughout the company.

Today, the entire documentation process is automated. For imports, the trade management software stores all of the assigned HTS codes in its system. When an order is entered, the software can swiftly determine which items have already been classified and which require attention. "You can focus on those parts that have not come in before," says Gleissner.

Once the items have been classified, Tognum America passes that information on to its customs broker, which, in turn, transmits the requisite electronic "paperwork" to U.S. Customs and Border Protection for clearance of the goods prior to their arrival at the port. "When the shipment arrives, the goods are 95 percent cleared," says Gleissner.

As for exports, the software has automated the labor-intensive buyer screening process to help ensure compliance with export regulations. The company has purchased a denied party database and feeds daily updates into the trade management system. When an order is placed, the software checks the sanctioned parties list and determines whether any of the shipments will require a special export control license. It also conducts a second check on the delivery address before a product gets shipped. "If an address in Cuba comes up, it would block the shipment immediately," says Gleissner.

Lower costs, better compliance
As for how the software has worked out to date, Gleissner says one of the biggest benefits is that it has allowed the company to keep critical compliance-related functions in house. "It's the highest priority within our organization to be compliant," says Gleissner, noting that non-compliance carries the risk of fines, penalties, and audits. "To mitigate risk, you don't really want the data to reside on an outside source," she says. "You want your own controls in place to ensure compliance."

In addition to risk mitigation, the trade management system has improved reconciliation of orders with shipments. In fact, the software has reduced potential invoicing mistakes by 80 percent. That's because the system keeps tabs on exports and imports, facilitating the matching of shipments with invoices. "Before the goods leave, we already know what purchase order they are related to," says Gleissner.

Tognum America is also saving money on compliance-related matters. With the software in place, it no longer has to pay a third party to cross check the names of buyers against the U.S. government's embargoed list.

But the biggest gain of all for the engine manufacturer has come in the area of enhanced regulatory compliance. SAP reports that since installing the software, Tognum America has achieved a compliance rating with U.S. Customs of over 95 percent.

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

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