Industrial Space Users
  Gaining Competitive Edge in FTZs

[ By Brandi Hanback ]

Above is the New Jersey Foreign Trade Zone in Mt. Olive, nearly 20 years old

A little known, and lesser understood, trade program is gaining momentum as an increasing number of U.S.-based companies are refining their global supply chain strategies. The U.S. Foreign-Trade Zones (FTZ) Program offers importers and exporters the opportunity to reduce costs and expedite import/export cargo movements.

Over $200 billion in value of merchandise is received at U.S. FTZs annually and that number is growing. At the same time, many designated FTZ’s remain dormant, as companies lack understanding of how to realize the program’s benefits. In some instances public and private interests have sought FTZ designation without an integrated plan of how to market the program, attract potential beneficiaries and assist FTZ users in realizing benefits.

FTZs are not a panacea for marketing an undesirable location. However, combined with the right mix of incentives, attractions and education, FTZs do support many companies’ global initiatives to successfully compete internationally from a U.S. base of operations while streamlining their critical lifelines from suppliers to customers.

The program was created through federal legislation in 1934. A long standing economic development initiative designed to maintain and attract jobs and investment in the United States, the FTZ program was slow to catch on, due to the relative lack of participation by a broad range of companies in the global marketplace. By the 1970s, large manufacturers, particularly in the automotive sector, began to use the program, to import certain components with higher associated rates of Customs duty and then to manufacture finished products in the United States.

In an FTZ, the lower duty rate associated with the finished product is applied to the imported components, reducing the duty owed and placing U.S.-based manufacturers on a level playing field with their competitors abroad.

In order to access the program’s benefits, companies must locate within the physical boundaries of a designated FTZ. While it is possible to designate a company’s existing facility as an FTZ, the cost and time involved can be prohibitive. The ideal time to consider implementing an FTZ is in conjunction with a new industrial development requirement.

Rockefeller Group Foreign Trade Zone/8A, (above) located in Cranbury, NJ, has a completed 850,000-square-foot Pearson Education facility. Crate & Barrel has 675,000 square feet in two buildings under construction here.

The Crate & Barrel complex will consist of one building for home furnishings and one for furniture.

Many companies overlook the FTZ criterion as part of site selection even though the savings associated with FTZ benefits can more than offset first year’s rent. The period required to establish a new FTZ can take up to one year, while valuable time and cost savings are lost.

FTZ Manufacturing Comparisons

For those industries in which U.S. manufacturing remains viable today, there are still duty rate differentials between imported components and finished products with finished products commonly having lower duty rates. For example, in the fragrance industry imported components average six percent duty while finished perfume has a zero duty rate. A six percent reduction in the cost of goods sold presents a clear competitive margin that U.S.-based companies cannot afford to miss.

Benefits Extend to Distribution

At the same time that manufacturing volume was moving out of the country, large companies began rationalizing their supply chain networks in favor of regional locations for “big box” distribution, over smaller feeder warehouses, supplying fewer customers. Modeling the supply chain network to take into consideration commodity flows throughout the country combined with the new reality of many more finished products arriving from other continents, particularly Asia, evolved into a mapping approach that customizes and pinpoints the best location for a company’s distribution center, based on transportation, labor and proximity to customer considerations.

To complement such a site selection strategy, companies need integrated logistics solutions that support sophisticated international procurement planning to minimize inventory levels while ensuring customer fulfillment. For importers, the weekly entry procedure fits this model perfectly.

Under weekly entry, FTZ users are able to receive merchandise into their facility prior to making a Customs entry and triggering duty payment. When merchandise leaves the facility, one entry summary is filed covering the entire business week’s shipments, consolidating reporting and deferring payment. Based on first-in, first-out (FIFO) inventory reporting methods, companies can attain a one-time deferral on the entire amount of duty associated with the on-hand inventory.

In a large regional distribution center this savings alone, typically rec-ognized in the first year, far exceeds the cost of FTZ set-up and implementation.

Additionally, foreign inventory exported from a distribution FTZ, or destroyed while in the FTZ, is eligible for duty elimination. Customs broker fees and administrative fees associated with the filing of Customs entries are reduced significantly under weekly entry. Merchandise flows faster in and out of the distribution center, due to flexible Customs procedures allowing for reduced on-hand inventory levels.

In the aftermath of September 11, 2001, government and industry began to focus more on cargo security. The number of Customs exams on imports increased and companies began holding buffer inventory to safeguard against border delays. Importers were asked to partner with Customs as part of the Customs Trade Partnership Against Terrorism (CTPAT) to secure their supply chains and reduce the vulnerability of international cargo as a vehicle for terrorist activities.

The FTZ program mirrored these efforts. Long-standing security and reporting requirements of FTZ participation were equated to low risk, secure and predictable movements, allowing the government to focus more on high risk, lesser known trade. The public-private partnership that makes the FTZ program unique underscored this confidence as FTZ grantees (local community sponsors of foreign-trade zones), operators and users continued to self-regulate the program to a large extent, having demonstrating core controls. The convergence of all of these factors over the last three years has resulted in an ideal environment for companies to take advantage of FTZ opportunities.

From an industrial development standpoint, access to FTZ benefits, as importers and exporters are plotting future distribution locations, will be a sought-after market distinguisher along with labor, transportation, local incentives and proximity to customers.

For the Rockefeller Group Development Corporation, this was the beginning of a much larger initiative to develop FTZs in key markets throughout the country. Combining talents with their joint venture partner IDI and leveraging on 20 years of experience and success in FTZ development in New Jersey, RGI/IDI is poised to supply what by all measure will be increasing demand for integrated real estate solutions cognizant of global supply chain trends.

Debunking FTZ Misconceptions

• The program isn’t just for exporters. In fact, most financial savings associated with FTZs relate to importing.
• Foreign and domestic merchandise do not have to be physically segregated and may be commingled or stored together by SKU within an FTZ.
• There is no on-site presence by Customs in an FTZ, although the facility is subject to spot checks that generally occur once per year.
• FTZ users are not audited more than importers at large. A company’s volume, value and nature of product dictates whether Customs performs an audit — not FTZ usage.
• FTZ users do not have to report to Customs on a lot or specific identity basis. Other approved methods including FIFO make FTZ reporting flexible and workable without disrupting operations.
• FTZ users are not required to have a greater reporting accuracy than importers overall. Overages and shortages as a normal part of business operations are acceptable and may be reported periodically based on established FTZ procedures.

Why Crate and Barrel Chose an FTZ A recently announced new industrial development in Cranbury, New Jersey is illustrative of these trends. Crate and Barrel, a major home furnishings and housewares retailer, recently signed a lease for a 650,000-square-foot distribution center within the Rockefeller Group Foreign Trade Zone. The FTZ, combined with a location in the right proximity to the retailer’s stores, highway access and attractive labor, created a winning combination in a competitive development marketplace where reduced industrial activity has reflected a sluggish economy. For Crate and Barrel, FTZ procedures will position the company to receive merchandise on an expedited basis from suppliers while allowing uninterrupted delivery from the distribution center to the stores. Consolidated reporting will increase compliance while reducing administrative costs. The discipline of FTZ inventory control reduces shrinkage and supports the company’s business plan to reduce overall inventory levels in the midst of increasing sales. For further optimization of FTZ benefits, companies such as Crate and Barrel can structure zone-to-zone transfers to extend cost savings up and down the supply chain and integrate closer with suppliers and customers. While Crate and Barrel is illustrative of the latest profile of FTZ users, the program’s benefits extend to a wide range of industries and locations. For companies that are familiar with FTZs but haven’t revisited the concept lately, it is worth a second look. Prior to weekly entry and before the wide use of inventory management software, some companies found the structure of FTZ use over-burdensome. Affordable and modernized inventory management software tools, combined with flexible Customs procedures, have created a favorable operating environment that opens FTZ benefits to a broad profile of users.

For more information
International Trade Administration – U.S. Department of Commerce

National Association of Foreign Trade Zones
The National Association of Foreign-Trade Zones (NAFTZ) is a non-profit organization composed of public entities, individuals and corporations involved in the U.S. Foreign-Trade Zones program.

IDI — www.idi.com

Rockefeller Group Development Corp. — Foreign Trade Zone Development and Management

Brandi Hanback is managing director of Rockefeller Group Foreign Trade Zone Services, a division of Rockefeller Group Development Corp.