GLOBAL SOURCING

Oneof thebiggest trendsinbusinesstodayisglobal sourcing. In2001, the

UnitedStatesalonesourcedover $1.3trillioningoodstolow-cost suppliers
aroundtheglobe. Of course, thebiggest reasonfor global sourcingisthecost
savings; whichcanbesignificant. Most companiesreportanaveragesavingsof
upto30%whentheybeginglobal sourcing(alsoknownasoffshoring). Despite
this savings, however, manypitfallscanprevent thesecost-conscious
companiesfromfindingthesuccesswithoverseassuppliersthat theyhad
plannedfor.
Thebiggest pitfall that manycompanieshavefoundduringoffshoringisthat
thoseinitial savingsdon't always equal total savingsinthelongrun. For
example, it maycost lesstoproducethegoodsinChina, but whenthecostsof
shippingtherawmaterials, dealingwithgovernment taxesandtariffs, and
bringingthefinishedproductsback tothehomecompany, theactual cost of
productionmayactually behigher. Also, somecompanieshavefoundout the
hardwaythat theyoftenget exactlywhat theypayfor. Cheaplabor inother
countriescanspell lower productivity, poorer quality, andmoredefective
goods, whichfurther increasetheoverall costsof production.
Manyof thesecompanieshavefallenintothesetrapssimply becausetheyonly
lookedat thecost factor insteadof realizingthat global sourcingisonly
effectivewhenit involvesatotal evaluationof all factors. Theseother factors
includethecostsof thematerials, of thetransportation, of theinventory
carryingcosts, of thetariffs andtaxes, of theoperational performance, andof
theoperational risks. Only whenall of thesefactorsaretakenintoconsideration
canaclear pictureabouttheeffectivenessof global sourcingbepredicted.
Additionally, companiessometimesfail torealizetheimportancecultural
differencescanplayinthesuccessor failureof anoffshoringventure. Most
westernbusinessindividuals simplydonot havesignificant knowledgeof other
culturestoeffectively workwiththem. If thesebusinesspeoplefail torealize
this problembeforehand, they candoomthepartnershipbeforeit ever getsoff
theground. For example, donot tendtobelievewomenshouldbeinvolvedin
business. If aU. S. companylookingtooutsourcesomeof their projectsinthat
countrysent atopfemaleexecutivetoconduct thenegotiations, this company
might bemakingamajor error injudgment. Inorder toworkindifferent
countries, westerncompaniesmust bewillingtotraintheir employeestowork
withdifferent culturesandunderstandhowtheseparadigms playout in
businessrelationships.
Another aspect of theglobal sourcingprocessinvolvesbeingknowledgeabout
changesintraderegulationsandcostsinother countries. For this reason,
individuals involvedinglobal sourcingneedtobeextremely familiar withboth
theHarmonizedSystemCodeandtheInternational CommerceTerms. The
HarmonizedSystem(HS) Codesaresix totendigit numbersthat represent
The Importance of Harmonized Code to International Trade
Professionals
If you are in the business of importing and/or exporting, you must perform an HS code search from time to time
to determine what the harmonized number is for goods and raw materials that you may be shipping in and out of
your country to and from other countries. Each product or substance crossing international borders has its own
HS tariff classification number, which is part of the Harmonized Commodity Description and Coding System, an
international standard for reporting goods to customs and other governmental agencies. The Harmonized Code is
a classification system of numbers and words that is used by more than 200 countries, customs and economic
unions around the world, affecting nearly 100 percent of global trade. It is a complex, often confusing, yet
necessary system.
The Harmonized code was created by the Brussels-based World Customs Organization, or WCO, which is still
responsible for administering and maintaining the system. Each HS tariff classification number contains six digits
at the beginning that are used universally, and various countries can add more digits to the number depending
on their own tariff and statistical needs. The resulting codes may be eight, 10 or 12 digits long. These numerical
codes are used for each and every commodity that crosses an international border and is declared to customs,
making it easier to calculate and assess duties and taxes, determine import and export admissibility, assess
risks and other tasks.
If you are in the business of international trade, either at the commercial level or the governmental level, it is
important to understand these international codes. Government officials and staff must be able to perform a
quick HS code search to assess customs duties, enforce domestic regulations, perform risk assessment and
collect trade statistics. Business professionals must also be able to find the correct codes to determine the landed
cost of imported goods and materials, identify international selling and sourcing opportunities and bring together
procurement and compliance along the supply chain.
The Harmonized code may be complex, but without it there would be no standardized system to classify goods
and materials in global trade. It is an important system for anyone in the trade business to understand
The Role of the HS code in Global Importing And
Exporting
different traderegulationsandtariffsaroundtheglobe. Hundredsof thesecodes
exist andappropriatecodesmust beappliedtoanygoodsthat needtocrossany
border. TheInternational CommerceTerms(Incoterms) areacollectionof 13
standardsthat dictatetherulesandresponsibilitiesof buyersandsellers
responsiblefor goodsthat arebeingtransportedacrossborders. When
businessesattempt todobusinessoverseaswithout athoroughunderstandingof
theHSCodesor theIncoterms, thosesituationsmight becomesomewhat
problematic.
Overall, global sourcingisnot assimpleasjust movingproductionfromthe
UnitedStatesor other higher-cost countrytoalower-cost countrylikeChinaor
India. Whilecompaniescansavemoneythroughoffshoringactivities, they
must alsotakethetimetoevaluatethebigpicturethat includesmultiplefactors
suchasshippingcosts, tariffs, andpotential risks. Theymust alsobewillingto
dotheir homeworkonother culturesandtoexpandtheir knowledgetoinclude
theHScodes, Incoterms, andother regulationssothat theycancarryout their
offshoreoperationssmoothly andcost-effectively.
Therearemanythingsyoumust understandif youaregoingtobeinvolvedinglobal
trademanagement, andmanycomplexsystemsthat youmust bewell versedwith. The
HScodesystemisonekeytoglobal trade, whichisusedby governmentstoassess
customsduties, enforcedomesticregulations, performrisk assessment andcollect trade
statistics
Therearemanythingsyoumust understandif youaregoingtobeinvolvedinglobal
trademanagement, andmanycomplexsystemsthat youmust bewell versedwith. The
HScodesystemisonekeytoglobal trade, whichisusedby governmentstoassess
customs duties, enforcedomesticregulations, performrisk assessment andcollect
tradestatistics. Companiesalsousethecodetodeterminethelandedcost of imported
goodsandmaterials sotheycanidentify sellingandsourcingopportunitiesabroadand
bringelementsof procurement andcompliancetogether inthesupply chain.
Inorder tounderstandtheHScode, it isagoodideatolearnalittlebit about its
history. TheHS, or HarmonizedCommodityDescriptionandCodingSystemof tariff
nomenclature, isaninternationally standardizedsystemof namesandnumbersthat is
usedtoclassify tradedproducts. It wasdevelopedbytheWorldCustomsOrganization,
alsoknownastheWCOfor short, whichisstill responsiblefor maintainingthe
code. Theorganizationhasbeenintegral toglobal trademanagement for manyyears,
and was formerlycalledtheCustomsCo-operationCouncil. It isanindependent
intergovernmental organizationbasedinBrussels, Belgiumwithmorethan170countries
asmembers.
Companiescandeterminethelandedcost of rawmaterials, semi-finishedandfinished
goods, consistingof thetotal cost of purchasing, transporting, warehousingand
distributing, usingthis code. Government organizations candeterminecustomsduties,
enforcedomesticregulations, performrisk assessmentsandcollect statisticsusingthis
trade-relatednumberingsystem. Thedigitsinthecodeconsist of afour-digit heading,
whichispart of asix-digit subheading, whichcannot bechanged. Individual countries
mayextendtheHSnumber toeight or tendigitsfor customsor export purposes, however.
TheHScodeisusedfor manythings. It isusedasabasis for customstariffs, transport
tariffs andstatistics, thecollectionof internal taxes, thecollectionof international trade
statistics, tradenegotiationssuchastheWorld Trade Organization schedules of tariff
concessions, rulesof origin, themonitoringof controlledgoodsincludingwastes,
narcotics, chemical weapons, ozonelayer depletingsubstancesandendangeredspecies
andAreasof Customscontrolsandproceduressuchasrisk assessment, information
technology andcompliance. Althoughmanypeopledon't evenknowit exists, it isa
crucial part of theglobal market asweknowit today.
HSCodeandOther Aspectsof Global Trade
ThingsliketheHScodeandall theassociatedcostsarenot necessarily thefirst things
that cometomindwhenpeoplethink about global trade, but theyareintegral tothe
processof anyimport andexport of goodsandmaterials. If youareinvolvedwith
global trademanagement, youmust understandtheHarmonizedCommodityDescription
andCodingSystem(HS) of tariff nomenclature, aglobally standardizedsystemof names
andnumberstoclassify tradedproductswhichwasdevelopedandmaintainedby the
WorldCustomsOrganization, aBrussels-basedindependent intergovernmental
organizationwithmorethan170member countries. Youmust alsounderstandthe
landedcost of anyrawmaterials, semi-finishedandfinishedgoods, includingthetotal
cost of purchasing, transporting, warehousing anddistributing.
Theaveragepersonprobably doesnt knowtheHScodeexists, but chancesarethat
productsthroughouttheir homeandofficewereclassified bythis codingsystembefore
makingtheir waydownthesupplychaintotheir local store. TheHSisasix-digit
nomenclatureconsistingof four digitsknownastheheading, followedby a
subheading. The170member countriesthat usethiscodingsystemcannot alter the
headingor subheadinginanyway, whichkeepsthenumberingsystemharmonized.
Therearemorethan200countries, customsandeconomic unionsintotal that usetheHS
for anumber of activitiesrelatedtoglobal trademanagement. They canuseit to
determinethelandedcost andasabasis for customstariffs, collection of international
trade statisticsrulesof origin, collectionof internal taxes, tradenegotiations, transport
tariffs andstatistics, monitoringof controlledgoodsandareasof customscontrolsand
proceduresincludingrisk assessment, information technology andcompliance. The
codeshavechangedabit over theyears, though, soit isimportant tobesurethat the
definition set beingusedfor thegoodsor materials inquestioniscorrect for thecurrent
system.
Understandingall thecodesandperformancemeasuresusedtodetermineglobal trade
factorsandexaminetheefficiency of anorganizationslogistics isanintegral part of
managinganinternational commodity-basedbusiness.