NEW ROLES FOR CUSTOMS BROKERS IN SUPPLY CHAIN …

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New roles for customs brokers in the international supply chain

Conference Paper ? July 2005

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Juha Hintsa Cross-border Research Association, Lausanne, Switzerland 61 PUBLICATIONS 509 CITATIONS

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NEW ROLES FOR CUSTOMS BROKERS IN THE INTERNATIONAL SUPPLY CHAIN

Ximena GUTIERREZ Assistant, PhD Student Faculty of Management of Technology Ecole Polytechnique F?d?rale de Lausanne EPFL CDM IML B?timent Odyssea - Station 5 CH - 1015 Lausanne Switzerland Fax: +41 21 693 24 89 Email: ximena.gutierrez@epfl.ch

Juha HINTSA Assistant, PhD Student Department of Management HEC, University of Lausanne BSFH-1 CH - 1015 Lausanne Switzerland Tel: + 41 76 589 0967 Fax: +41 21 693 4675 Email:juha@cross-

Philippe WIESER Executive Director IML Faculty of Management of Technology Ecole Polytechnique F?d?rale de Lausanne EPFL CDM IML B?timent Odyssea - Station 5 CH - 1015 Lausanne Switzerland Fax: +41 21 693 24 89 Email : philippe.wieser@epfl.ch

Ari-Pekka HAMERI Professor Department of Management University of Lausanne BSFH-1 CH - 1015 Lausanne Switzerland Tel: + 41 21 692 34 60 Fax: +41 21 692 34 95 Email: ari-pekka.hameri@hec.unil.ch

Abstract. Cross-border environment hosts different initiatives to conciliate trade compliance, control and security with trade and logistics efficiency. However, there is uncertainty on the impact of these initiatives for each of the supply chain actors and on how their roles and responsibilities might be affected in the future. The hypothesis is that Customs brokers will be affected by the changing cross-border environment, and that they are or should be starting to transform their portfolio of services in order to increase their added value to the supply chain. The objective of this study was to document the Customs brokers' actual role in the international supply chain and to anticipate the new service opportunities emerging in the future. The study was conducted as a web-based questionnaire, addressing for the first time Customs brokers industry on worldwide basis. The Customs broker sample was selected together with the International Federation of Customs Brokers Associations (IFCBA), and International Federation of Freight Forwarders Associations (FIATA), responses covered 21 Customs broker businesses in 10 countries. As the main result of the study, Product classification, Export and import trade compliance, and Compliance audit were identified as the brokers' key traditional services, which are also expected to keep their importance in the future. Additional services for Arranging international transportation, Trade consulting and International trade automation, appear to have the biggest potential for future business expansion ? or even for business survival.

Kew words: Customs brokers, Customs reforms and modernization, Trade compliance, International trade services, International trade automation, Supply chain security, Crossborder operations management, Supply chain management, Trade facilitation.

The First International Conference on Transportation Logistics, Singapore, 27-29 July 2005.

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Copyright 2005: Cross-border Research Association, EPFL, HEC Lausanne, Switzerland

For additional copies, please send request and contact details to : brokers-study@cross-

1. INTRODUCTION

In this study we are interested in international supply chains, where the need of moving goods across national borders adds relevant constraints to the goal of achieving supply chain efficiency. Crossing a border implies not only moving the goods through ports, airports or road borders but also dealing with Customs regulations and duty payments. Graigner (2000) explains how Customs issues may impact supply chain management decisions not only at cross-border operations but even at the sourcing, manufacturing, marketing and distribution functions. The adequate integration of these additional restrictions to the traditional supply chain management decisions is the main goal for efficient cross-border operations management.

Cross-border operations management is a field that has been rarely included in academic supply chain management studies. In addition, business parties have traditionally expressed a lack of appeal for this subject. Appels et al. (1998) argue that the reason for this is that domestic businesses used to be more important than international ones, and that the manufacturing was the essential function of the business, hence Customs was considered as an external low priority concern that was not to be controlled by the company. However, this situation is currently changing due to the growing importance of international trade, the increased speed of technological development and the continuous changes in regulatory environment. All this has strongly contributed to the change of business environment where cross-border operations take place.

The new cross-border environment has been characterised by balancing between governmental goals of achieving control and security, and the business goals of achieving supply chain efficiency. The generalised hypothesis is that it is possible to enhance security and avoid trade-related illegal acts, while facilitating the movement of goods and achieving supply chain efficiency. Recent reforms in Customs administrations and new supply chain security programs are among the most important initiatives that enforce this development now and in the future. Haughton et al. (2001) examined the existing Customs reforms and showed that while their potential supply chain benefits cannot be disputed, their implementation places unfamiliar responsibilities for traders, which often fail to comply leading to loss the anticipated benefits. Lee et al. (2003) describe how using the right management approach, new technology and re-engineered operational processes it should be possible to achieve higher supply chain security at lower cost. However, there are still multiple open questions on what will be the impact for each of the supply chain actors and how their roles and responsibilities might change in the future as new regulations will be issued.

Among the actors playing an important role in the cross-border operations, we have identified Customs brokers as an interesting party positioned between border authorities and traders. It has been observed that the vast majority of formal import entries in several trade intensive economies are handled by Customs brokers, whose main service is to guarantee the compliance with Customs regulations, and to submit information and documents for Customs clearance. Under the new cross-border environment several paradigm shifts that are changing the conditions in which Customs brokers should operate, e.g.:

- The change from traditional import cargo controls (by Customs administrations) towards end-to-end security management;

The First International Conference on Transportation Logistics, Singapore, 27-29 July 2005.

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Copyright 2005: Cross-border Research Association, EPFL, HEC Lausanne, Switzerland

For additional copies, please send request and contact details to : brokers-study@cross-

- The move from paper and labour intensive operations to documents and processes automation;

- The demand to change from high physical inspection rates to selective control using risk analysis techniques.

On the one hand, this situation could represent a threat for Customs brokers business, but on the other hand they could exploit it to redefine their role in the international supply chain. In order to conclude how Customs brokers could increase their added value for international supply chains it is necessary to understand who they currently are and what their actual roles are. Previous literature has rarely addressed this subject and this study sets to bridge part of that gap by analyzing the roles of Customs brokers in the supply chain by describing their current service portfolios and their expectations for the future. One of the underlying assumptions for the study was that brokers could play a relevant role in the creation of more secure and efficient supply chains.

2. RESEARCH SETTING

2.1 Research question

Cross-border environment hosts different initiatives to conciliate security and control with efficiency. The automation of various international trade tasks and the creation of partnerships between public and private sectors are two initiatives promising large advancements in the achievement of this goal. Customs brokers, which traditionally are experts to manage relationships between these two groups, could be affected as streamlining of Customs procedures and the automation of clearance tasks progresses, but at the same time they could be well positioned to build or orchestrate the creation of new partnerships. The research hypothesis for the study is that Customs brokers are being affected by these change drivers, and are starting to transform their portfolio of services in order to increase their added value to the supply chain. This study sets to answer the following research questions:

i) What is the current Customs brokers service portfolio and the relevance of each service for their business today?

ii) What type of business opportunities are they looking for in the future?

2.2 Methodology

The main instrument of the study is a questionnaire of 33 questions that was developed together with the International Association of Customs Brokers Associations (IFCBA), and validated during a workshop with Customs brokers from multiple countries world wide. The workshop was held at the biannual Conference of IFCBA in Mexico in May 2004. The survey was carried out through the WWW. The questionnaire (see: cross-) was divided into three sections in order to address Customs brokers industry from the following perspectives:

A. Current business environment and service offerings (questions 1-13). B. Potential change drivers - Supply chain security and Information communication

technologies (questions 14-26). C. Future trends and roles for Customs brokers' business (questions 27-33).

The First International Conference on Transportation Logistics, Singapore, 27-29 July 2005.

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Copyright 2005: Cross-border Research Association, EPFL, HEC Lausanne, Switzerland

For additional copies, please send request and contact details to : brokers-study@cross-

In section A Brokers were asked about the business and regulatory environment of their countries, and the services that they are currently providing. Section B explored the impact of Supply chain security and Trade automation initiatives on Customs broker's service offerings. In section C the respondents were asked to predict what would be their future role in international supply chain management based on their current capabilities and the new threats and opportunities they are potentially facing.

The focus of this paper is mainly on sections A and C. Based on results from section A we describe the current situation of Customs brokers: their role in the supply chain, certain characteristics of the business environment in which they work and their current service portfolio. Using results from section C, we present the future perspectives for this industry: the potential service portfolio and the future opportunity areas. In this paper we are not exploring the reasons of the observed changes (partially addressed in section B), this aspect will be further analyzed and covered in future papers.

2.3 Sample

The respondents sample was selected among the members of the International Federation of Customs Brokers Associations (IFCBA, members in over 30 countries), and the International Federation of Freight Forwarders Associations (FIATA, members in over 90 countries). In order for brokers to be members of these associations they must apply for membership and they must comply with the regulations of their respective national associations, also the Customs agency of the respective country must be a member of the World Customs Organization/Customs Co-Operation Council. Based on this selection it can be assumed that the quality of replies represent well the situation in each country that was included in the survey.

The questionnaire was sent to 100 Customs brokers in 21 different countries, and 21 complete responses from 10 different countries were received. The respondents were composed of 75% active Customs brokers with more than 20 years of industry experience, while 85% of the respondents had a license to operate and all of them had a top management position in their company.

Answers covered Customs brokers operating in the following continents: Europe, North America, South America, Australia and Asia, with a higher percentage from Australia and Europe. More than half of the respondents (60%) work in pure Customs brokerage companies, while 40% work as an in-house broker in bigger companies, mainly Freight Forwarders and Logistics integrators. 26% of the companies are operating globally in more than one region, 16% internationally in more than one country and 16% locally only in one port, while 42% has nationwide service coverage.

3. STUDY FINDINGS

3.1 The current situation

3.1.1 Customs brokers role In principle companies face two main risks while moving their goods across national borders: i) non-compliance fees and ii) variation in clearance lead times. To reduce these risks,

The First International Conference on Transportation Logistics, Singapore, 27-29 July 2005.

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Copyright 2005: Cross-border Research Association, EPFL, HEC Lausanne, Switzerland

For additional copies, please send request and contact details to : brokers-study@cross-

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