Setting up global supply chains can be a hugely costly and complex process. Especially for firms in large-scale manufacturing that might need to source components from all over the world, ensuring these chains are both efficient and cost-effective is vital.
However, getting this right is easier said than done. Many firms may only look at the base price and shipping costs of goods or raw materials when deciding where to source from. But this does not necessarily equate to the cheapest solution once various duties, tariffs and quotas are taken into account.
By turning to countries with favorable free trade agreements (FTAs), companies can ensure they are optimizing their supply chains to be as cost-effective as possible. In an environment where international trade has faced huge upheavals in recent years - from Brexit and China/US trade wars to geopolitical disruptions - this can offer huge benefits in terms of both costs and stability.
So how can firms ensure they are making the most of the options that are out there?
The benefits and challenges of using FTAs
The first step is to determine what FTAs are available to businesses. This alone can be tricky, as there are more than 500 such agreements in force around the world. Therefore, it's essential that firms conduct thorough market research to understand the pros and cons of potential target countries.
Identifying a suitable FTA is only the start of the challenge. If firms are to benefit from these agreements, they will have to go through a long list of steps to ensure they are compliant with the terms of the agreement in order to avoid paying duties. This will include requirements to keep documentation on the suppliers of every component and calculate rules of origin. This can be a highly burdensome process if firms attempt to use manual methods to keep track of these records.
However, if done correctly, the cost benefits are clear to see. By avoiding potentially expensive duties on raw materials, components or completed products, companies can enjoy significant savings.
It is not just the financial rewards that can be useful to businesses. Utilizing FTAs can also mean smoother passage of goods and ensure stable supply chains as part of a more favorable trade environment.
Reducing the burden through automation
Some firms, however, may worry that the additional compliance demands they will face when using FTA provisions may undermine the financial benefits. But while this may be the case if enterprises are attempting to navigate this manually, the right software solutions can help by automating many of these processes, from supplier declarations to rules of origin calculations.
Effective tools will be able to track rules of origin across multiple products and supply chains, maintain arrangements with suppliers, calculate what duties remain to be paid, ensure the right certifications and other documentation are issued to customs authorities, and provide real-time tracking of the entire inventory lifecycle.
It's also essential to have a global solution that is constantly updated to reflect evolving FTAs all around the world. This ensures that should circumstances change, companies can quickly be alerted and understand what they need to do to maintain compliance with FTA rules, or easily calculate whether it would be beneficial to investigate new options for supply chains.
With these tools in place, it becomes much easier for firms to evaluate the benefits of FTAs, make the right decisions for their supply chains, and keep track of all compliance requirements necessary to make the most of these trading rules.
