How to select and manage your customs broker effectively?

How to select and manage your customs broker effectively? For many companies that conduct cross-border supply chain activities, customs clearance can be a major headache if not handled correctly, given that each customs transaction is essentially a statutory declaration to the government.

False or incorrect customs declarations carry legal liabilities for the exporter, importer, and the broker, which can lead to possible penalties that include heavy fines, suspension of business license, seizure of cargo or even criminal charges. Not to mention, damage to a company’s brand and reputation. To help organizations select the right customs brokerage vendor, the following seven-step process is recommended.

Step 1: Precision & Accuracy in the Scope of Work

One of the biggest errors in outsourcing is the lack of clarity that surfaces when companies are providing business requirements in the scope of work. Also, it is common to see a big disconnect between the headquarters and the local offices in different countries during vendor selection, which is why representation from local teams is necessary in cross-border projects. To enable vendors to execute projects successfully, it is imperative to specify clearly all information pertaining to organization’s business requirements as well as the performance metrics. This document should include:

• Geographical coverage – Which markets/cities are covered? Are there specific port locations?
• Product types – Specify the type of products as well as their HS codes.
• Estimated volume projection – Provide estimated volume on import and export under different types of transportation modes, as well as different types of clearance formalities, such as those involving Export Processing Zones (EPZ), Free-Trade Zones (FTZ), bonded warehouses, in-land transits.
• Any special customs services may be required – State any services that require special attention. These may include temporary import and export, ATA CARNET, customs inspection, Other Government Agencies (OGA) declaration, import or export permit application, advance ruling application, FTA duty concession, duty drawback, and export control.
• Operating hours – State the regular operating hours required of customs brokerage vendor, even if it’s 24×7.
• Electronic customs integration – Ensure that customs transactions are carried out electronically to speed up the process with minimum human intervention. It also benefits companies as they can receive real-time updates on the entire customs clearance process.
• Reporting requirements – Specify the frequency and format of reports (daily/weekly/monthly).
• Other value-added services – State all other needs required, such as duty & tax advance payment, customs control tower, HS code classification, duty & tax optimization, staff training, or post-clearance audit.
• Performance metrics – Make sure companies establish measurements for success. These should include the pre-clearance and error rates, percentage of shipments cleared within 48/72 hours, percentage of green lane clearance etc.
• Record retention requirements – Specify the type of storage (electronic vs hardcopy) and period of retention.

Step 2: Ethics & Rules of Engagement               

Clear and concise rules of engagement are necessary to outline the flow of communication between the broker and the customer covering different operating scenarios, including having a deviation recovery plan should there be any customs delays. As such, it is absolutely critical to outline a supplier code of conduct for all customs vendors to adhere to the ethical standards of the company.  These should include:

• Integrity, ethics, and conduct (e.g., anti-corruption)
• Corporate governance (e.g., accountability & transparency, data protection)
• Labor and human rights (e.g., anti-slavery, diversity, and equality)
• Health and safety (e.g., providing a safe and healthy workplace)
• Environmental management (e.g., carbon footprint reduction)

Step 3: Broker Selection

Broker selection is often based mainly on pricing which unfortunately means that a lot of the times companies choose less established brokers who are not able to provide strong process control and robust IT infrastructure. Which can lead to lower level of regulatory compliance in the end. While choosing the right vendor, companies should base their decision on other critical factors like:

• Product Line for Customs Clearance- Not all customs brokers have the experience and expertise to handle all types of product lines, companies should consider using a customs broker that has the experience and expertise to handle products in specialized verticals, such as oil & gas, pharmaceutical, chemical, aerospace, and food & beverage. These types of cargo require in-depth knowledge to ensure smooth clearance due to additional regulatory controls from Other Government Agency (OGA).

• Track Record of the Broker- Customs authorities in many countries have already implemented Authorized Economic Operator (AEO) certification on all supply chain players, including customs brokers. Companies should do their due diligence by performing background checks to ensure that they only appoint AEO-certified customs brokers who have a good standing and clean track record without any prior customs violations.

• IT Capabilities – With the ongoing global supply chain volatility, it is more important than ever that customs brokers offer real-time visibility and electronic data-interchange so that companies are informed of any changes or incidents as-they-happen and are able to respond swiftly. Equally important is to make sure that the company’s appointed customs broker is well-equipped with robust IT security to prevent cyber-attacks, malwares and other disruptions by hackers.

• Global Reach – For companies that operate in different continents, an international customs brokerage service provider with global reach is essential. The established provider is able to ensure service level consistency, seamless data transfer, single window contact point, global view reporting and regulatory updates with robust compliance control.

• Management Commitment to Customs Brokerage Services – It is common for freight forwarders to provide customs brokerage services on top of freight services. For large companies looking to secure long-term partnerships with these freight forwarders, it is critical to assess their level of commitment to customs brokerage services. Common indicators of this commitment can be:

• Having a dedicated global and regional leadership in customs and trade compliance management
• Having their top talents in the customs brokerage team
• Continuous investments in IT infrastructure for customs operations
• Collaborations with customs authorities
• Providing regular training & development opportunities for their brokerage team

Step 4: Contractual Agreement

Make sure the business requirements and deliverables – including service level agreements, agreed pricing rates and timelines, and detailed terms and conditions – are clearly written in the contract. Given that there is usually a long lead time for onboarding a new customs broker, companies should consider establishing a fair and equitable deal for both parties. This helps with avoiding the impression that the terms and conditions favor one party over the other – something which inevitably creates friction and instability in the business relationship later on.

Step 5: Implementation & Execution

Onboarding a new customs broker can be challenging if it is not well-planned. Consider this high-level workflow of a successful implementation plan after selecting a new broker:

Step 6: Performance Monitoring

Having an effective and structured performance management process in place will help companies not only to measure and analyze how well the vendor is doing, but also to ensure that the company is regularly assessing their service levels, costs, and compliance practices. The following are some of the best practices on vendor performance monitoring:

• What a company scorecard should include – A company’s performance scorecard should include all relevant KPIs that align with its business objectives. Other than customs-related performance metrics, also include other operational KPIs, such as response to escalation, invoicing accuracy, and timeliness.

• Conduct regular reviews-Regular business review meetings – preferably conducted monthly during the first six months of any new project, with the customs broker to ensure everything is under control. Work together to identify opportunities for further improvement. The frequency of these meetings can be reduced to quarterly discussions if the vendor is meeting contractual expectations.
• Corrective action plans –When things go wrong, request a corrective action plan immediately to ensure that there is no repeat of similar errors.

• Onsite audits-Annual onsite audits of the vendor’s premises are a necessary part of the company’s regulatory compliance management. This gives companies an opportunity to check on other aspects of their operations, and to ensure that they are conforming to expected ethical and corporate governance requirements.

Step 7: End of Contract or Renewal

When the customs brokerage contract is expiring, companies can decide to renew or end the contract according to the agreed terms and conditions. This is a good opportunity to assess the contract against industry guidance and make any necessary amendments. Here are a few points to consider before making a final decision on renewing a contract:

• Lead time to plan ahead
  Always plan ahead on contract review for the existing customs brokerage subcontracting activities. At least six to nine months of preparation is required in view of commercial negotiation, internal legal review, and approval process for both parties.
• Making a comprehensive review – Although pricing is one of the major considerations in any contract renewal with an existing supplier, it is critical to also look at other major aspects of the customs brokerage performance. These include regulatory compliance, mistakes and violations, exception handling, flexibility, and overall relationship.
• Understand the market – Conduct market research to see if there are other suppliers that can provide even better service at similar or lower pricing.
• Refining the Service Level Agreement (SLA)- This could be warranted due to changes in a company’s operating model, changes in the regulatory environment, or the organization’s goal of setting higher requirements as part of continuous improvement.

Conclusion

Having a solid compliance model in place is critical for any successful company that is looking at international trade. The role of a top-tier customs brokerage vendor that provides high-quality service with uncompromising regulatory compliance and excellence in customer experience simply cannot be overstated. Companies often place an excessive amount of focus on pricing, making it their leading factor for choosing the right vendor only to realize that the cost of the damage done by weak compliance can be much higher, in the end. It is important to give multiple factors equal weightage while choosing the vendor.

Another issue that large enterprises often face is the fact that the local subsidiaries (particularly in developing markets) often do not have access to more experienced brokers which have a global reach. Furthermore, employees at these local subsidiaries may not be fully aware of the importance of data security or customs and trade compliance. So, their reliance on professional, global brokers is even higher. As a result, if they do not find an experienced vendor with the required know-how and capabilities, companies are at a higher risk of any regulatory violations due to an overseas subsidiary or supplier lacking the correct knowledge and infrastructure. The result being sizeable negative repercussions for the company.

While planning for any overseas ventures, it is non-negotiable to have an experienced, reputed and well-equipped customs brokerage partner and a tried-tested and seamless process of onboarding and engaging with the vendor. The resources dedicated to developing company-wide best practices for regulatory compliance pay huge dividends to companies in the long term as they unlock more growth opportunities for them, in a world that is becoming smaller and more connected thanks to technology.