When there is a free trade agreement (FTA) between countries, the parties who have signed the agreement can claim tariff benefits that result in lower or zero duty rates. Claiming preference can save importers a lot of money and can give exporters a distinct competitive advantage when selling their products internationally. Yet preferential origin management is often considered an insurmountable task for companies, so much so that many leave money on the table rather than trying to tackle the difficulties of claiming preference.  

Fortunately, there is a digital solution to origin management which can help organisations overcome challenges so they can claim the preference they’re entitled to. This blog outlines four of the top origin management challenges we hear about from international traders and how they can be addressed with a software solution. 

Challenge #1: Unraveling the “spaghetti bowl” of rules of origin in free trade agreements 

At their core, free trade agreements were designed to tear down the barriers to trade, promote stronger commerce between the participating countries, and support resilience and diversification. Yet the proliferation of free trade agreements has led to what is known as a “spaghetti bowl effect,” with different and complex rules of origin tied to different FTAs becoming a tangled mess. This has resulted in some companies not always reaping the full benefits of FTAs and others claiming the preferential treatment without compliant proof of origin.  

Today, there are more than 300 FTAs worldwide and over 100 additional ones under negotiation. Each FTA specifies the rules of origin which traded goods must comply with in order to qualify for preferential treatment. Sometimes these rules can be difficult to follow and, as the number of FTAs increases, so does the challenge of staying in compliance. This can create a quandary for customs managers, supply chain managers, or any responsible party that has been tasked with origin management—especially since incorrectly claiming preference can result in fines for importers and, increasingly, exporters as well.  

Today’s leading cloud-based customs management software solutions have legal content built in. When the terms of an FTA change, the logic incorporated in the software is updated with changes to the rules of origin, keeping your origin operations aligned with current agreements.  

Challenge #2: Collecting supplier’s declarations 

To benefit from customs preferences in free trade agreements, the originating status of sourced goods must be documented in (long-term) supplier’s declarations (SDs/LTSDs). These are either provided to customs authorities as proof of origin or serve as the basis for determining origin of goods that are manufactured using the products obtained from suppliers. However, collecting LTSDs is often a manual task requiring constant follow-up with suppliers. This can be time consuming, and obtaining LTSDs may fall through the cracks, leaving a company exposed to risk. 

Origin management software can automate and streamline this with a digitised, three-step process: 

1. Creating a list of suppliers requiring proofs of origin from your company’s host system, 
2. sending an email request asking the supplier to issue an LTSD for corresponding items, and 
3. guiding the supplier to input all relevant data in the legally required format, ensuring accurate proofs of origin. 

Determining the country of origin of a manufactured good is in some cases simple—for example, when a product is wholly obtained in a specific country. However, in cases of more complex manufacturing, calculating where a product originates can be much more involved and, in most cases, companies are still using spreadsheets to calculate origin.  

Consider this manufacturing scenario: 

• 20 end products 
• 10 commodity codes 
• a two-stage bill of materials 
• 18 incoming raw materials 
• sourced from 15 different countries
• delivered to 8 countries on preferential terms 
• added-value-based preferential origin rule for the end products 

How could you correctly calculate origin using spreadsheets in this situation? Consider also how much time and effort it would take to obtain, issue, and maintain documentary proof. These types of complexities make spreadsheet management nearly impossible for many companies, leading them to either forego the financial benefits of claiming preference or risk the repercussions of claiming preference incorrectly. 

Manufacturers using multiple components or materials, for example industrial machinery, automotive parts, and specialty chemicals, as well as manufacturers of subassemblies or intermediate products for the worldwide market, would benefit from origin management software that calculates origin automatically. These advanced systems take the material information that is already contained in the goods receipts, purchase orders, sales orders, and bills of materials that reside in your host system(s) and run it against the terms of free trade agreements to determine if and when a product qualifies for preferential origin. They then apply multiple factors to automate preference calculation, including:  

• value-based rules 
• item changes 
• combinations of various rule components 
• minimal operations 
• mixed origin 
• minimum sales price needed to maintain preference 

Challenge #4: Issuing proofs of origin to customers 

The EU has trade agreements with about 70 countries around the world, while the UK has 38 FTAs covering 99 countries and territories. The ability to issue proof of origin to potential customers in these countries can give your sales team a substantial competitive advantage. 

Top origin management software solutions sync the data obtained from your suppliers with your ERP system so that, in addition to collecting proofs or origin and keeping them current, you can also provide LTSDs your own customers, allowing them to claim preference. 

An end-to-end solution for customs management 

One objection we hear from companies is that they do not have the internal resources to onboard and support a digital customs management solution, especially for specialised functions like origin management and product classification. Due to factors like lack of awareness of features and use cases, lack of support from the vendor, lack of clarity about how the software fits into processes and strategies, and integration issues with current systems, an estimated 70% of software adoptions fail to meet a company's intended goals (Forbes). 

Portorium ensures that organisations realise the full potential of their investment in customs software from day one. We go beyond integration and onboarding to supplement customs software with day-to-day managed services provided by our team of customs experts. This allows companies to take advantage of the efficiency, cost savings, and operational visibility afforded by implementing a digital solution without having to hire additional resources to support it.  

Are you interested in learning more about how customs digitisation is in grasp for companies of any size? Contact us to schedule a demo. If you are curious about how other organisations have benefited from the implementation of an origin management solution, take a look at the use cases on our origin management web page.