6. Case Examples
Healthcare Co.: Customs Prescriptions for Moving Healthcare Products Vary around the Globe
Healthcare Co., a global healthcare company, manufactures and distributes healthcare products around the globe, encountering a wide range of customs procedures that vary by market. Many countries have adopted one of several trusted trader programmes that diverge considerably in the requirements they impose on importers. For example, in Canada, the market with the most effective programme, goods are processed by account rather than by individual transaction, enabling Healthcare Co. to import product based only on periodic check-ins. Other countries, including China, continue to conduct rigorous inspections and customs assessments that can take many days but only reduce their frequency. These extensive customs procedures can result in lengthy delays that can increase Healthcare Co.’s customs costs nearly tenfold.
Healthcare Co., a US-based healthcare products company with annual import/export volumes in excess of US$ 2 billion, derives substantial revenues through the sale of products and services to healthcare providers around the world. The company’s products must clear customs and security in each country in which it operates, resulting in inventory delays and increased costs. Customs procedures vary considerably by country, but they basically follow two broad approaches:
- Account-based clearances require customs authorities to assess and inspect only a small portion of the total shipments a company imports
- Transaction-based procedures require the extensive inspections of a generally larger proportion of a company’s shipments and a review of each customs declaration.
Countries are increasingly moving towards the account-based approach through trusted trader programmes that motivate higher-volume importers to implement practices that will ensure their compliance with streamlined customs regulations, including less frequent inspections, reduced paperwork and speedier entry, among other import-friendly advantages. Although many countries have implemented some form of the programme, their implementation varies considerably. Nevertheless, for importers like Healthcare Co., following the account-based trusted-partner paradigm of “trust but verify” would confer major benefits over the old transaction-based system.
The principal benefit of a switch to simplified account-based procedures would be to significantly lower Healthcare Co.’s cost of doing business – chiefly, by shortening the time needed to clear customs and by increasing the consistency and certainty of those time savings. Reliability in being able to move all but a very small percentage of its shipments through the supply chain with minimal interruption would result in major savings in warehousing and handling costs, as well as the expense of having larger inventories.
A comparison of Canada’s highly evolved trusted-trader programme and China’s onerous transaction-based customs procedures illustrates just how big a cost and efficiency difference a streamlined approach could make.
Healthcare Co. has already attained the highest level of trust by authorities in both countries. In Canada, whose programme takes a risk-profiling approach based on the company account, Healthcare Co. is required to perform a customs self-assessment in order to qualify for expedited border crossing. Canadian authorities physically inspect only around five out of every 10,000 Healthcare Co. shipments, reducing the daily amount of incremental inventory to clear customs by half.
In China, by contrast, where Healthcare Co. has established a proven track record for reliability in its conformity to customs regulations, the company is still subject to the country’s transaction-based rules. Chinese authorities physically inspect nine out of every 1,000 Healthcare Co. shipments, resulting in long delays and uncertainty that add approximately nine full days to incremental inventory in transit.
The additional delays Healthcare Co. encounters at Chinese borders require holding additional inventory, driving up the company’s warehousing outlays and increasing its carrying cost of capital. Furthermore, administering customs clearance on a shipment by shipment basis with its attendant extensive documentation and review processes makes customs clearance into China nearly six times more expensive for Healthcare Co. than into Canada. Together with the costs associated with the higher inventory, the total costs of importing a US$ 50,000 shipment into China is on average US$ 320 versus just US$ 33 for an equivalent shipment to Canada.
The heavier cost burden that Healthcare Co. faces on its Chinese shipments appears to derive almost entirely from the burdens imposed by China’s transaction-based clearance procedures. In neither its shipments to China nor to Canada have Healthcare Co.’s customs procedures required a significant number of corrections resulting either from its own or its agents’ discovery of errors. Through the significant investment the company made in processes and systems to conform with requirements of both programmes, Healthcare Co.’s level of paperwork accuracy is high in both markets. Indeed, the company’s accuracy level in shipments subject to period reporting was slightly higher, leading Healthcare Co. to doubt whether a complex transaction-based system adds any real value.
The EU and the US appear to be moving in the direction of account-based clearance, and it would befit other countries and customs authorities to consider doing the same. Though not evaluated specifically within the scope of this analysis, it is likely that countries as well as importers would benefit from the wider adoption of account-based trusted trader programmes. Once importers like Healthcare Co. establish their reliability with customs authorities, the administrative costs borne by governments that move to the streamlined approach should start to fall. More importantly, the supply chain efficiencies resulting from the account-based approach should ultimately lower the cost of healthcare for the nation’s consumers.