Bureaucracy and ancillary charges can add up to just as much as duty or airfreight. However, there are ways of reducing these, as explained below.
A generation ago, the Economist estimated that bureaucracy and ancillary costs added some seven per cent to the costs of the UK’s imports and, separately, seven per cent to the cost of exports. Remember that duty and freight charges are not included in this percentage.
For an economy such as the UK’s, which is in the ‘value added’ business, that is a direct blow to our international competitiveness. Customs reliefs and procedures, plus well designed computer systems which provide the data for management to act, can bring these costs down dramatically. In today’s world these should be of the order of one to two per cent.
One way to help international traders achieve these savings is through Customs consultancy. This is usually welcomed by hard pressed managers in branches, divisions and overseas subsidiaries, who appreciate support from the specialist in saving them money or getting them out of trouble.
It is only when you point to the need for investment now to save money later that the smile fades. Demonstrate that the payback period is short and maybe, just maybe, their financial director will authorise some investment.
Since no two companies are identical in their range of products, geographical spread, volumes of business, or sources of supply there, cannot be an identikit Customs approach. With that qualification I will put forward an approach which is commonplace in the computer industry, multinational companies and many overseas corporations. However, it is less common in British SMEs (small and medium enterprises}.
As a result of many years’ experience, it is often possible to highlight fairly quickly the areas for cost reduction, simply on the basis of some key data and telephone discussions about the business.
The main reasons for high costs are often lack of control of "pipeline costs" between the producer overseas and the final user and a dearth of expertise in Customs law. The vast majority of companies have accounting systems which simply bundle all movement costs into the inventory without any analysis whatsoever. Customs reliefs go unused and cheques for VAT, duty, administration charges, freight and handling are written on the company by third parties without question.
The approach which proved successful (to the extent of multi-million pound savings) is to mirror in a small way the Customs service itself. HM Customs have an advisory function, an investigative role, a preventative role, an enforcement responsibility and significant bureaucratic functions. They have head office specialists and the bulk of staff in the outfield.
So too in large companies with the internal Customs functions and import/export people (or logistics management if there is no Customs specialist in-house). The fact that these functions may be buried in the shipping department, be part-time accounting functions or delegated to forwarding agents does not, in my view invalidate the analogy. The people who run the import/export accounts and shipping functions rarely have the time, the authority, the resources or the necessary knowledge or skills to be experts in all aspects of Customs law. Like the Customs outfield, their jobs are highly structured and subject to policies set by head office.
To achieve results internally, Customs law should be distilled into manuals, regulations, systems and procedures in which import/export personnel must be expert. The investigative, advisory and preventative functions however are properly the role of the specialists whether he be full-time or part-time, in-house or outside consultants who have access to and support from senior management.
As we described in a previous article, compliance is a hot issue. If the company has had a brush with Customs for example on Customs classification or valuation then the predominant issue for the company is " defensive", i.e. to safeguard against Customs penalties. Customs will usually flag the importer on their system for an audit visit or may initiate an investigation over the past three years’ entries next time they or their agent makes an error.
If, on the other hand, it is possible to review all the pipeline costs right the way through, from ex-works abroad to in stock in UK, then opportunities for cost reduction will inevitably emerge, even for relatively small organisations. Many growing companies in the UK are of a size where a change to more direct control of import costs is warranted and offers opportunities for cost reduction. Progression to in-house systems and/or a bureau service for Customs clearance is indicated where the number of transactions or line items is in the thousands rather than hundreds and/or there is substantial duty and VAT and freight bill.
Survey Findings
A short survey of pipeline costs of a number of UK companies indicated that, in return for some investment in logistics control, Customs clearance, IT and staff training, savings of several percentage points of the cost of imports could be made, for example, in all handling, documentation and so-called Customs clearance charges. Customs classification and GSP arrangements often give savings sufficient to cover import clearance operating costs.
Administrative savings and much frustration can also be avoided by using a software package for Intrastat.
Sometimes opportunities for consolidation bring enormous savings. Often buyers do not negotiate or factor movement costs into all up costs or contracts.
These Surveys led us to the following conclusions:
a) That movement of goods (of which duty is a significant part) was the largest opportunity for cost saving within in many companies, with the shortest payback period.
b) That it was all too easy for managers, preoccupied with their prime functions, shipping staff and agents, to bury their errors and write cheques on the company.
c) That HM Customs were providing facilities, procedures and duty reliefs which were excellent but many companies were unable to benefit from them sufficiently because of
- widespread divisionalisation and decentralisation of responsibility for import/export
- the absence of specialist personnel of sufficient calibre and authority to effect a change
- the lack of visibility internally of the potential for savings.
d) Given the nature and variety of sources of product and components, the rapidity with which industry and companies changed, the high incidence of re-export, transhipment and returned goods and other complex, transactions, too much was left to chance and to third parties outside the company
e) That many types of Customs transaction were infrequent, one-offs, never handled by the same people twice and there was therefore no store of accumulated experience except of course for the more mundane transactions.
f) Every company studied was different but the reports showed time and again that widely different initiatives simply lapsed into "good intentions" which divisions were expected to achieve. At best, initial savings, but no follow-on.
g) That most companies acted on the assumption that pipeline costs were fixed, unavoidable and/or non-negotiable
A Case Study
I was called in some years ago by a financial controller to investigate the claims of one of his staff that the company had unnecessarily expended £470,000 in importing units which were a stop gap to supplement its own production. The initial survey revealed that the project manager had accepted a landed price and had been overcharged for carriage freight and handling.
Further analysis revealed that the duty had been overstated and that the accounting systems provided no check whatsoever on true cost. Other surveys have revealed that this is overwhelmingly the case with accounting systems in the UK.
A military-style appraisal by one of my colleagues differed in only one respect from those of the financial controller and myself. Not unnaturally the colleague listed in-house managers under ‘friendly forces’ and HM Revenue & Customs  under ‘enemy forces’. On the other hand, the financial controller and I listed managers as enemy and HM Revenue & Customs  as friendly. And so it was to prove.
We had inordinate help and assistance from HM R&C. After several frustrating weeks were forced to obtain an edict from the top that all imports (and later exports) would be put under a single control in the UK. Within weeks, this had saved tens of thousands of pounds. Within six months, the computer system was up and running (the pilot run paid for the development cost). Within a year, we were able to net direct savings in excess of £1.25 million, and were well on our way to the next million straight into profit. Cash flow, inventory, rapid turn round, reduced handling and other unquantifiable benefits were immense. This was to be the first step not the end.
The client was far from being exceptional, some of its divisions were ahead of other companies, none were too far behind, yet opportunities in plentv existed. They differed only in the high value, rapidity of transactions and the degree to which excessive pipeline costs comparable to year end profits were expended in the name of divisional autonomy.
The Approach
I suggest that a project manager should be asked to look into these factors drawing on information from all relevant in-house sources about future plans. He would need to be satisfied that the cost savings proposed were real. Assuming the decision is made to control pipeline costs more directly, it will be necessary to build up in-house expertise over time and it may be that use of a bureau or a different forwarder who is online to Customs system CFSP will achieve many of the savings. However an in-house system not only provides a means of handling the import data, it produces the reports which enable one to make other cost reductions. These are not normally obvious from existing accounting systems, for example freight and insurance costs are often buried in aggregate figures.
I would recommend a progressive approach – for example:

  • use a bureau for CFSP

  • or use a forwarding agent’s CFSP system initially

  • do classification and Intrastat using the packages progressively

  • and build up expertise in Customs law and procedures

  • and build up data on costs, alternatives, anomalies, etc

  • then finalise system plans.
Being in Control
The first prerequisite therefore is control. Unless you know the detailed make-up of all the elements in the difference between FOB and CIF you are not in control. Or let’s put it another way: in our experience, the largest single reason for duty loss, customs penalties and excessive movement and handling costs is lack of control at the level of the individual import transaction.
Control also means internal communication and discipline – ie authority to import and export is given only to a select few. One must ensure the goods are properly valued, classified and (for those who re-export or re-import) are correctly entered to claim relief. This in turn implies employing high-calibre staff. Control also means procedures and systems without which one would drown in paper. Control gives a further benefit - it throws up exception transactions, statistical data, cost figures which, if acted upon, give further opportunities for cost control. Lastly, control is the price HM Revenue & Customs  quite rightly demand in return for many of the reliefs, e.g. duty suspension or end use relief.
It makes no apparent sense to have buyers trim the last 0.1 per cent off a contract or have development engineers substitute materials to bring about a tiny product cost reduction, when controllable costs, far in excess of these, are left to other people’s control, or are uncontrolled . In many ways and in many cases the duty control is a catalyst. Control it and a great deal more falls in line. It can and should be a self-financing service, many times over. If grouped with compliance functions such as export control, health and safety, audit etc., savings will often pay for the whole Compliance department and leave lots over.
Supply chain management
Finally, a word about product planning. Buyers and product managers should aim to get the logistics/Customs equation included in company plans at an early stage. Not only so that reliefs can be claimed and duty reduction facilities like Customs warehousing, IPR or end use relief are set up in advance, but also because contract terms and invoice instructions and a little bit of negotiation can dramatically reduce duty and other pipeline costs, If and only if action is taken at time of contract. More about that and customs procedures, systems and reliefs will be the subject of future articles.
The key message is if you don’t know your pipeline costs you are not in control… and somebody else is writing cheques on your company.

This article first appeared in Croner’s Trade International Digest magazine in March 2003. For subscription enquiries, please ring: 020 82457 1261.