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Not All Risks Are Created Equal: Why You Need a Risk Management Plan Now More Than Ever.

In 2012, an explosion at a resin plant in Germany shut down production of nearly half the world’s supply of a critical polymer used in automotive fuel and brake lines, sending auto manufacturers scrambling to identify and qualify alternate sources (1). In 2011, a tsunami and nuclear disaster in Japan forced the shutdown of nearly 40% of the world’s 12-inch semiconductor wafer production (2).

A few months later, massive flooding in Thailand disrupted production of a critical high-tech component supplier, forcing Honda Motor Company to cut vehicle production rates by 50% for several weeks (3). Labor unrest at a major electronics supplier in China, piracy in the Indian Ocean, freight and fuel cost volatility–it hasn’t been easy managing global supply chains recently. Although the practice of supply chain risk management has been around for many years, events and headlines of the past 18 months have moved discussion of supplier risk to the top of the agenda in many companies.

In addition to delivery disruptions, these events can carry devastating financial implications for suppliers and buyers. Munich Re, one of the largest global re-insurance companies, reported that 2011 was the highest ever loss year on record for commercial insurers (4). These losses force insurers to raise premiums and reduce coverage for shippers that are already operating under financial strains associated with the global economic slowdown. As a result, more and more suppliers–especially smaller suppliers–are forced to renegotiate contracts with customers or go out of business altogether. Supplier financial risk and continuity of supply have become major concerns for many companies.

So, what should companies with global supplier networks do to manage risk?

1) Define Risk Criteria

Supply chain risk can originate from a range of sources, including demand, product, transportation, compliance, and supplier risks. Companies need to carefully evaluate their supply chains to determine what factors can create risk in these categories and define what constitutes acceptable and unacceptable levels of risk for each. Not all risks are created equal. So, the risk definitions should be closely tied to the company’s strategic business objectives. For example, if business objectives depend on quick fulfillment of customer orders, then risk factors that can create stock-outs may be deemed more critical than cost risks related to inventory levels.

2) Identify All Risks

For each supply network, it’s important to identify all possible risks that could impact the operation, not just the obvious ones. Oftentimes, it can be an unexpected issue with a second or third tier supplier that creates a supply disruption. Had the auto industry recognized how collectively dependent their car makers were on one supplier in Germany, they likely would have developed additional supplier capacity to mitigate the risk of a production stoppage. Flow charts and process maps can be useful tools for visualizing the physical flow of materials and goods through the network.

3) Evaluate and Prioritize Risks

The next step is to assess the risks and classify them in an organized manner, usually in terms of likelihood of occurrence and impact on operations. Once the risk criteria are prioritized, they should be used commonly across the entire enterprise. The risk classification system does not need to be complicated. Experience has shown that a simple system of risk classification (e.g., critical, high, medium, low) is preferable, in that it is easier to communicate and will be used more consistently across the organization. Once the various risks are classified, the focus should shift to identifying root cause factors for the most critical risks.

4) Develop Risk Management Plans

A risk management plan is simply a documented plan that describes a particular risk or risk category, and provides alternatives and steps to be taken to eliminate or mitigate that risk. Detailed risk management plans should be developed for the most critical risks identified in the prioritization process. For supply chain risks, the plans should include elements such as alternate suppliers and transportation modes, contact information, internal and external notification requirements, inventory classification and control measures, and other tasks needed to ensure a smooth transition and continuity of supply. Best-practice companies use cross-functional risk assessment teams to develop plans for the most critical risk scenarios. Failure modes and effects analysis can be used for assessing the potential effectiveness of such plans before they are required to be put into action. This systematic process identifies potential failures in a process design and the countermeasures that could be applied to reduce or eliminate the effects of such failures. Whichever methods the organization decides to use, the plans need to be fully documented so that various functions in the company can be briefed on their roles should the plans be put into action.

5) Exercise & Maintain Plans

As with any form of contingency or back-up plan, risk management plans are only useful if they can be successfully executed. If a key component of plan is to activate an alternate supply source for a critical component or material, it makes sense to occasionally place orders with the alternate source to test the supplier’s ability to deliver to specification and on schedule. An alternate supplier who is never used may well turn out to be no supplier at all, just at a time when they are most needed. All risk management plans should be reviewed and refreshed at least annually by the cross-functional team, to ensure that the plans and assumptions are still viable. Forward-looking companies that rely on international sourcing networks are wise to take a proactive approach to supply chain risk management in the near term.

MGTA can help your company develop or improve a risk management plan. Click here to learn more about our risk management services.


(1) Nathan Bomey, “Auto Supply Chain Seeks Other Sources of Chemical,” Detroit Free Press, April 24, 2012: A14.
(2) Rick Becks, “Risky Business: Re-thinking Supply Chain Risk and Resiliency,” Supply Chain Brain, February 24, 2012.
(3) Mike Ramsey, “Honda to Restore Some North American Production,” The Wall Street Journal, November 8, 2011.
(4) Rick Becks, “Risky Business,” Feb 24, 2012.

© 2012 Mohawk Global Trade Advisors

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Don’t Overlook Reasonable Care

One common misconception among U.S. importers is that they don’t have to worry about what’s on their commercial invoice and other import documentation. These importers will often neglect to provide their Customs broker with a truly complete product description or accurate country of origin because they don’t think they have to sweat the details. What they may not realize is that these types of requirements fall under the umbrella of what U.S. Customs & Border Protection (CBP) refers to as “reasonable care.” Importers who do not attend to these crucial requirements risk delays in release of their goods, audits, and penalties.

Defining reasonable care

CBP expects all importers to exercise some form of caution (i.e. reasonable care) when dealing with [1]

  • import documentation
  • country of origin verification, marking, and labeling
  • tariff classification, valuation, and duty rates
  • quantity
  • free trade agreements
  • other government agencies
  • recordkeeping

Although this is by no means an exhaustive list, importers must be careful with all details relating to these areas, as well as have written procedures to document their approach. In other words, as an importer, you should be able to prove to Customs that you provided and obtained the right information to meet these regulatory standards.

Is there a right way to manage my reasonable care?

CBP allows you flexibility in how you manage your reasonable care responsibilities. You can manage them yourself, use an expert (a licensed Customs broker, attorney, or accountant), or a combination of the two.

If you decide to use an expert, it is important to choose wisely. CBP expects you to qualify your expert by asking if their firm is a licensed Customs broker or, in the case of an attorney or accountant, if they have specialized knowledge or expertise in CBP matters. When in doubt, avoid taking advice from unregulated or unlicensed “experts,” as it will not serve in your defense during a CBP audit.

Once you’ve qualified your expert, it is crucial to provide him or her with complete and accurate information about the import transaction. Falling short of this requirement will lead CBP to view your company as lacking reasonable care.

What steps can I take?

Prior to import

  • Familiarize yourself with U.S. import requirements by reading informed compliance publications like, What Every Member of the Trade Community Should Know About: Reasonable Care [2].
  • Determine if there are any other government requirements for your imported products, such as an FDA Prior Notice for food products or additional labeling requirements for wearing apparel.
  • Bookmark the link to the online Harmonized Tariff Schedule for quick classification reference [3].
  • Consult with a licensed or certified expert, such as a Customs broker, attorney, or accountant.
  • Search CROSS, CBP’s online ruling database, to see if Customs has previously ruled on a product similar to yours [4]. Use this ruling as a guide for classifying, valuing, and marking your goods.
  • If after consulting with an expert and reviewing CROSS you are still in doubt of your product’s correct classification, origin, value, etc., seek a binding ruling from CBP. The beauty of a binding ruling is that it provides CBP and the importer with a definitive answer on these aspects of the product.
  • Document your processes for classification, origin verification, valuation, marking, etc. and provide employees with step-by-step instructions to achieve compliance. Keep procedures simple and easy to follow and them with your vendor and Customs broker.
  • Create a tariff database and share it with your broker to cut down on entry errors. Periodically review the database and provide your broker with any updates.
  • Issue purchase order instructions to your vendor that match your invoice requirements.

After import

  • Attend trade seminars and read newsletters to stay informed of changing requirements.
  • Review your commercial invoice or proforma invoice to make sure all requirements are met [5].
  • Verify that entries prepared by your broker are correct. If you find an error during a post entry review, correct it and work with your vendor and broker to prevent it from happening again.
  • Establish a recordkeeping program. Verify which documents should be kept, how long they should be retained, and how they should be stored.

Keeping up with your reasonable care responsibilities is not easy but with continued effort you will be able to show CBP that you’ve done your homework.

MGTA’s import audit service can help you to uncover gaps in your import procedures. Click here to learn more about our import audit services. Our import compliance programs can assist you in developing, improving, and enhancing your reasonable care policies and procedures. Click here to learn more about our import compliance programs.


[1] per U.S. Code Title 19, Section 1484(a)(1).
[2] See the list of Informed Compliance Publications, including Reasonable Care (A Checklist for Compliance), on U.S. Customs & Border Protection’s website, www.cbp.gov.
[3] View the Harmonized Tariff Schedule at www.usitc.gov/tata/hts/.
[4] See rulings.cbp.gov.
[5] For a complete list of requirements see 19 CFR 141.86-141.89 and 142.6.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2012 Mohawk Global Trade Advisors

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Mike Frail Is Now a Certified ITAR Professional

Mike Frail, Senior Advisor, has recently been recognized as a Certified ITAR Professional by the International Import-Export Institute.


This rigorous program of study is the highest level of professional certification for International Traffic in Arms Regulations (ITAR). Participants must complete a demanding 36-week course on all aspects of ITAR, including documentation, compliance ethics, ITAR exemptions, auditing, Technology Control Plans, and many other requirements.

Mike is the ITAR project leader for Mohawk Global Trade Advisors. He is also a Certified U.S. Export Compliance Officer.

Mike Frail – Senior Advisor
Certified ITAR Professional  |  Certified U.S. Export Compliance Officer

An up-and-coming speaker on export compliance and ITAR, Mike Frail’s specialties include export procedures, security controls, compliance program setup and strategic enhancement. Mike holds a bachelor’s degree in Science from SUNY Empire State College. He is the Rochester Operations Manager at Mohawk Global Logistics.


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