Media Coverage
The Advantages of Origin Management
By Marc Bunch and Anne van de Heetkamp
January 1, 2008—In today’s world where global competitiveness is highly associated with effective supply chain management and where Free Trade Agreements (FTAs) are being implemented at a rapid pace, origin management has emerged as a key aspect of strategic sourcing and global trade management. Origin management is the practice of leveraging continuously updated trade data and rules of origin to determine the economic origin and free trade agreement eligibility, while creating detailed documentation of the findings and enabling in-depth scenario analysis. It replaces the largely manual approach to these activities traditionally employed in the past.
Origin management provides companies with the opportunity to combine trade intelligence and trade management software, offering the following benefits:
- Obtaining clear insight into all relevant legislation, duty rates, exclusions, and qualifications for a given FTA/product combination.
- Reduction of duties by identifying the production location best fit to benefit from the free trade agreements.
- Obtaining proper documentation by determining the country of origin in automated fashion.
- An origin management program allows companies to use a single platform to collect data from suppliers, determine FTA eligibility for each shipment (if needed), and document and create an audit trail for each item and shipment. These benefits make it easier for companies to comply with local legislation on a shipment-by-shipment basis.
Origin management in detail
The ideal origin management program consists of four elements:
1. Sourcing
In an origin management setting, sourcing is the key for finding the best location for manufacturing from a duty rate perspective. The company needs to be informed not only about the currently existing FTAs, but also whether the items to be manufactured are included in the FTA. The company also needs to know what new FTAs are likely to be implemented during the life cycle of the products, and what are the current duty rates and bound duty rates from a WTO and FTA perspective.
Together with the additional considerations such as the available locations (manufacturer’s current and future locations, locations available through partnerships) and labor costs, logistics, and local incentives, the manufacturer can decide on the most beneficial location.
Once the decision on the location has been made, or at least narrowed down, the manufacturer will need to decide which configuration the bill of materials would qualify for preferential treatment. The actual text and Rules of Origin in the FTA define what requirements the bill needs to meet and is therefore added to the trade intelligence elements.
2. Economic Origin Determination
The origin determination is made independent of the FTA(s) for which the manufacturer seeks to qualify. Based on regional preference, determining the actual originating country of the item shipped can also be referred to as the economic or non-preferential origin determination.
The process is somewhat similar to determining FTA eligibility—based on the rules of origin that for this purpose are typically defined in local customs legislation, the exporter needs to determine the origin of the goods. Even if this is not the exporting country, the exported item might still qualify for preferential treatment. In specific circumstances, a product can even have multiple countries of origin.
The country of origin for the exported item is part of data sets used for generating the relevant export documents, including the certificate of origin.
3. Free Trade Agreement Eligibility
Determining whether or not a given bill of materials is eligible for preferential treatment at any given time is a crucial element of the origin management process. Manufacturers may want to double check eligibility upon shipment, against potential exchange rate increases, using different sourcing options when specific suppliers do not come through with supporting documentation, anticipating supplier’s price changes and other factors.
Again, it’s crucial to have access to trade intelligence that informs the manufacturer on the rules of origin in order to determine whether or not a specific product is eligible for preferential treatment. The rules of origin are now dictated by the FTA language, and there is a wide variety of calculation and determination methods. Examples are qualified versus non-qualified, accumulated versus non-accumulated, rolled up versus traced, and Transaction Value method versus Ex Works value method.
Applying or requesting preferential treatment comes with obligations to allow authorities to verify the origin calculations and qualifications. The manufacturer has to ensure the preferential treatment claim can be sustained, and will therefore have to document its processes and calculations with the utmost care.
4. Compatibility with other Programs
A well-run origin management program will be beneficial and simplify other trade programs the manufacturer may be involved in.
For example, origin data (e.g. supplier’s data) can be used for drawback programs. In addition, origin determination can be used for other documents, not just certificates of origin. For example, origin management can be the program of choice to package the sourcing process within the company. Origin management can also keep origin data and documentation readily available, since every manufacturer at some point is likely to be asked by its buyers to submit it in order to support origin claims made by its buyers.
Other Key Elements
In addition to these specific elements, origin management incorporates the following capabilities:
Trade Intelligence—Access to current trade intelligence is vital to a well-run origin management program. The difference in preferential and non-preferential duty rates, updates on trade agreements that have either been signed, amended, or are under negotiation, and in general a proven source of trade information will allow companies to make decisions based on the most up-to-date data.
Reporting and Audit Trail—For both internal and external purposes, bill of material changes, origin verifications, free trade agreement eligibility decisions, and so forth must be closely monitored and captured in a variety of reports. The data will also be the basis for answering queries from chamber of commerce and customs agents.
Solicitation—A key element associated with the free trade agreement eligibility claims is the solicitation process—the process where suppliers are asked for proof of origin of their items, in order for the manufacturer to support its own preferential claims. A ‘new school’ origin management program supports a pro-active, automated program that informs suppliers on what origin data are missing and when various proof of origin (such as Certificates of Origin or Manufacturer’s Affidavits) run out of validity. It also allows the suppliers to submit these data and documents in a secure online environment.
Origin Application—For the most productive way of conducting origin management, all items above are preferably tied together in an on-line origin application. The application will be the place where product data and associations (Bill of Material) will be stored, and at the same be the central location where origin calculations, document generation, reporting, etc. will be accessible.
Clearly, free trade agreements significantly impact sourcing and supply chain strategies. Companies not in tune with these developments will lose market share to more competitive pricing. A proper origin management program, built on trade intelligence and trade management software, allows companies to benefit as much as possible from the network of free trade agreements and sustain their claims in an affordable fashion. Origin management is of vital importance for companies that want to open up new trade lanes, build or maintain a global presence, and manage trade like any other process—using technology and intelligence.
