International supply chains provide retailers with enormous benefits. Globalization helps to lower the costs of supply and manufacture, taking advantage of economies of scale. But, for many retailers, challenges remain. Supply chains can be fragile, import duties can be expensive, and retail inventory management can be a significant burden. Importing and exporting have substantial overheads, including strict regulations, documentation, and licensing.
These risks put pressure on already thin profit margins. Retailers must reduce costs and boost cash flow, all while optimizing product availability. One solution that can solve several of these issues is the Foreign Trade Zone (FTZ).
Setting up an FTZ is easier than ever, giving retailers greater control over stock levels and import duties. Critically, an FTZ also provides more options for when goods are released, and duties are paid, drastically improving cash flow management.
FTZs are particularly popular for certain categories of goods. Consumer products, particularly electronics, textiles, and clothing inventory, often take advantage of FTZs. In addition to direct-to-consumer retail, vehicles, machinery, and pharmaceuticals are other products commonly imported to a Foreign-Trade Zone.
For many retailers, FTZs can support strategic goals and maximize competitiveness while reducing costs. Let’s explore how an FTZ can solve your retail inventory management challenges.
The Basics of the Foreign-Trade Zone
Here’s a quick breakdown of FTZs and why they’re a strong option for importing goods into the US.
- FTZs are specific, controlled sites located close to US ports of entry.
- FTZs must operate under strict regulations and supervision from US Customs and Border Protection (USCBP).
- Importers and exporters can move products from and to an FTZ without paying duties on the goods.
- Products in an FTZ are considered outside the US customs territory even though the FTZ is on US soil.
- Goods can be received, manufactured, re-exported, or destroyed in an FTZ without paying duties.
- Products can also be repackaged, relabeled, tested, cleaned, repaired, processed, salvaged, or sorted in an FTZ without paying duties.
- Goods can be stored in an FTZ indefinitely with no duties paid while in storage.
- Duties only become payable when goods move from the FTZ into the US marketplace.
The benefits of FTZs apply to most goods imported into the US. Some types of goods are excluded from FTZs, and some may require specific duties to be paid even if moved to an FTZ.
How an FTZ can help retail inventory management
The main benefit of an FTZ is the ability to defer duties and other fees. Let’s expand on that benefit and see how it can help you to optimize your retail inventory management.
Receive retail inventory and only pay duties when products enter the marketplace
International supply chains can add days or weeks to order fulfillment times. You could order products well before they’re needed, but you still have to pay duties, taxes, and other fees as soon as the goods come into the US. This can significantly burden cash flow, requiring the immediate payment of duties when you may not see product sales revenue for weeks or months.
An FTZ solves this problem. Retailers can order ahead, import products, and store them in an FTZ, all without paying duties. Then, you can release products close to the date of the prospective sale, ensuring a closer matchup between product sales and duty payment dates.
This can be particularly important during peak seasons when you hold higher inventory levels to meet consumer demand.
Manufacture retail products in an FTZ to maintain inventory levels and reduce duty costs
Duty is levied on products based on their categorization by the Harmonized Tariff Schedule (HTS). In the United States, duties are calculated based on the HTS product category and the quantity of goods you import into the country.
The issue is that the duties payable on raw materials and parts may be higher than those on a finished product. For example, if you’re managing clothing inventory, you might be paying more to import cotton thread, linen materials, buttons, and accessories than if you were simply to import a sports coat in its finished form.
An FTZ allows retailers to import the parts and raw materials without paying duty on them. They can then be manufactured or assembled within the FTZ, and the duties are paid on the finished product when you make it available in the marketplace.
While you might pay a combined duty of 5% on raw materials, the blazer you sell might only have a duty of 3%. That saves you the equivalent of 2% on your raw material duty costs. Please note that an FTZ Board must authorize you to manufacture and process products in an FTZ. Your FTZ provider can assist you with getting that authorization.
Sort, repackage, and label retail products without paying duty
You might take advantage of economies of scale and favorable pricing to bring many consolidated shipments into the US at once. Processing, sorting, repackaging, and relabeling all those products into your inventory can take time. Without an FTZ, you’re paying duties on import, and you’re out-of-pocket for the time it takes to get the goods ready for the retail marketplace.
Instead, you could receive all those shipments into the FTZ, then process and store them without paying duty. You would only pay fees when they’re ready for retail.
Destroy imported products in an FTZ and never pay duty on them
Despite your best intentions, you may be holding stock of retail products you’ll never sell. Goods can get damaged in transit, fail to meet sales expectations, or go out of fashion. If you import products straight to the marketplace, you can recover duty on them through the duty drawback process. Although this is a helpful way to recover some of your costs, it does have some downsides:
- You can only claim duty drawback up to five years after importing the product.
- You’ll be out-of-pocket for the cost of the duties from the time you import the product until the duty drawback refund has been processed.
- Refunds can take a while to process, impacting your cash flow.
If you import into an FTZ, you can destroy products without going through the duty drawback process. Since you haven’t paid duties before destroying the goods, there’s no need for a duty refund. This also applies to waste, scrap, and defective parts.
You or your FTZ provider will need to keep strict records and use a certified destruction service. However, this can often involve less overhead and more capital; retention than the standard import, destroy, and refund approach.
Meet quota restrictions for certain types of products
The US does impose some restrictions on certain products. For example, there may be a limit on importing goods from a particular country or in a specific category. If the quota for the year has already been met, you cannot bring new products of that type directly into the US marketplace.
Instead, you can bring products into an FTZ, provided they are not released from the FTZ while the quota is still in effect. This can allow you to stockpile inventory until quotas are reset when you can bring it into the marketplace.
Integrate with other logistics services for end-to-end retail supply chain management
Some FTZ providers are parts of larger third-party logistic companies. This can provide a “one-stop shop” for your supply chain and distribution needs. That can start with freight forwarding, international transport, customs brokerage, and FTZ services. Once products are released from the FTZ, a 3PL provider can transport your products to a warehouse, arrange for order fulfillment, and distribute products direct to the consumer or a wholesaler or retailer.
Outsource the complexities of setting up and managing your retail FTZ
One challenge for retailers is that setting up and running an FTZ can be complex and expensive. FTZs are strictly controlled and require extensive licensing, regulatory compliance, tracking, and documentation. Fortunately, FTZ providers can remove a lot of this burden. They’ll work with you to:
- Set up your FTZ to your exact requirements.
- Manage your FTZ on your behalf.
- Ensure compliance with all regulatory frameworks.
- Assist with obtaining any required FTZ licensing or permits.
- Work with the FTZ Board on any necessary permissions.
- Track all inventory, products, documentation, and other information on your behalf.
- File and report everything with USCBP and other agencies.
- Advise on strategic ways to take advantage of your FTZ.
- Integrate with 3PL providers for seamless end-to-end supply chain management.
Trust GEODIS to provide FTZ services for your retail inventory management
Here at GEODIS, we’re experts in providing FTZs as part of our integrated 3PL services. We understand the pressures you’re under, the need for strong cost control, and the importance of cash flow management. Our experienced customs brokers provide retailers a complete range of services, from FTZs, customs clearance, and temporary imports to tariff engineering and duty drawback. Even better, we’re part of the global GEODIS network, spanning more than 170 countries—so we’re there, wherever you are.
Get in touch today to learn how we can help you.