Duties Optimization

Ministry of Supply is a company that designs clothes appropriate for scenarios both in and out of the office. The product differentiator is their innovative fabrics. The brand strategy is centered on this product differentiator.  Unfortunately, employing innovative fabrics translates to a high cost of goods sold (COGS). The parts of COGS that the Supply Chain team is wholly responsible for are: (1) transportation of products between our supplier and our third party fulfiller (3PL) partner and (2) duties. In particular, I identified a high average rate of US import duties affecting our COGS.

There were two specifics that affected our high duty rate. First, the man-made or synthetic fabric used in a majority of our products had a duty rate of approximately 28%. Second, during the Trump administration (2017 - 2021) there were additional penalty import taxes levied on products with a country of origin (COO) of China; at the time of this project (2019), the majority of our products were made in China.  

Due to a limited number of employees in Operations, we had to be focused and tactical in our solution. To determine how to allocate our time, I listed the options and the potential reduction in average duty rate. Based on the results (below), the focus of the Supply Chain team became option #3.  

1. Change the fabrics that we used

   1. Estimated Duties Adjustment: 5-15% decrease 

   2. Project Approval: Rejected because fabric is our product differentiator

2. Change our COO for products by changing the supplier

   1. Estimated Duties Adjustment:  5-7% decrease

   2. Project Approval: Approved as a cross-functional project with the product team.  In 2019, it was unclear whether duties would continue to increase for imports from China so we began the re-sourcing process to get ahead of this issue.

3. Change our duty rate by importing products to 3PL in another country

   1. Estimated Duties Adjustment: 75-90% decrease

   2. Project Approval: Approved - limited headcount because the Supply Chain team could complete from start-to-finish on its own. Additionally, this project would have the largest impact on duty rate. 

1. Identify 3PL options

   1. Location: The majority of our customers were in the US. To keep last mile delivery costs low, we needed to keep our 3PL in North America thus limiting our options to Canada and Mexico. 

   2. Duty Programs: Both Canada and Mexico have preferential duty programs. In Canada, you can hold the products at a 3PL in a free trade zone (FTZ). In Mexico, you can hold the products on an IMMEX permit. 

2. Selecting a  partner

   1. Financial Analysis: Due to lower labor costs, Mexico was more financially desirable than Canada. 

   2. Qualitative Analysis: We required a 3PL with an agile and responsive customer support team. There was only one 3PL in Mexico that could promise this level of service.  

3. Moving the products while maintaining stock-in to minimize loss of sales

   1. Determine the Project Timeline: In order to see financial impact as quickly as possible, we executed the move in three inventory moves. Each move took approximately eight weeks including packing each shipment at our current 3PL, trucking inventory to Mexico, and putting into inventory at our new 3PL.  

   2. Product-Level Movement: With input from our merchandiser, I determined which products to pull off the website all at once and which products to ship in multiple shipments. For products undergoing split shipment, I analyzed our sales data and our forecast to determine tactical-level shipping. 

4. Logistics execution basics

   1. Provided the Mexico 3PL with the data needed to register our products on the IMMEX permit with the Mexican government. 

   2. Coordinated packing products at the US 3PL 

   3. Planned transportation to the crossdock in San Diego. 

   4. Ensured that the eight week deadline was met by triaging any receiving issues at the 3PL in Mexico

By moving our 3PL to Mexico, the average duty rate decreased by 80% resulting in 20% COGS savings in perpetuity.  

1. System thinking is the way that the best supply chain solutions are found.  
   Problems in one part of the supply chain can often be resolved through a change in a different part of the supply chain. Here, changing our 3PL improved our duties situation. 

2. Everything that Operations touches relates back to business sales (topline growth).
   The purpose of a business is to make money, so no matter how much money your project is saving it is crucial that you do not disturb the collection of money from customers. In fact, for projects longer than approximately 3 months, you will likely cause lasting damage to a business if you place import on saving money over sales.