Conversations: Lewis Liebowitz On Supply Chain Disruptions

Earlier today, GFTZ President & CEO Julie Brown spoke with Lewis Liebowitz, an international trade and Customs attorney based in Washington, D.C. about where U.S. international trade is headed.

Q: Lewis, as always, we appreciate your time. One of the major headaches for global businesses at this moment are supply chain disruptions. How is “just in time” delivery – the gold standard in supply chain management – faring under the circumstances?

A: Not well. Ever since the 1970s, the industrial world has been taken with “just in time” inventory management, a system to minimize cost of production by securing delivery of parts and materials “just in time” to be used on the factory floor. Everyone up and down the supply chain needs less warehouse space and minimizes the time between paying for goods they needed and receiving payment from their customers, saving on the cost of borrowing. 

But it doesn’t work when the system breaks down, as it has during the pandemic.  The “just in time” system relies on transportation and logistics reliability.  In the pandemic the transport system broke down due to a shortage of truck drivers and factory closures due to the pandemic, government and private sector responses to the pandemic.  When you cannot get your materials “just in time,” more inventory is needed, costs go up and reliance on a seamless supply chain may no longer be advisable.

Q: I want to draw your attention to a report by Markit PMI showing a tremendous increase in suppliers’ delivery time, which is now at record levels. How are companies going to adjust, and is this really all about the pandemic?

A: The pandemic is a big part of the story, but not all. Consider that a cyber-attack on the Colonial Pipeline caused gasoline shortages up and down the east coast and raised prices for gasoline that we’re still feeling. And don’t forget the Ever Given, stuck in the Suez Canal in April, that made headlines and extended delivery times for thousands of businesses. These and other supply disruptions keep markets (and all of us) on edge. These short-term issues raise questions about the future of “just in time” inventory management, and they should. A new survey of 900 U.S. and EU business leaders concluded that supply chain disruptions are costing large companies on average $184 million annually. An incredible 94 percent said their company had lost revenue because of supply chain disruptions and 83 percent said they had suffered reputational damage. The question is what to do about this drain on company revenues.  Companies need to reevaluate their reliance on global supply chains and develop solutions to build more security into their supply chains.  This will take time and money, but those who do it it will be better able to weather the next storm, whatever it is.

Q: What can a business do right now to protect their ability to stick with ‘just in time’ deliveries?

A: The return of huge warehouses stockpiling six months or one year of needed inventory is simply too costly in the short term. But I think that warehousing could see something of a comeback. Many experts believe that lean inventory strategies will not disappear, but be tempered with additional measures to increase flexibility in inventory management.  For example, warehousing that permits carrying merchandise without Customs duty payment, of which the U.S. foreign-trade zones program is a prominent example, provides a cost-saving option for businesses as they re-evaluate their reliance on “just-in-time” supply chains. Clearly, companies will strive to reduce the risks that shortages in key parts will shut down assembly lines, and they can do so by strategically stocking their supplies in the U.S. while taking advantage of the direct delivery, duty inversion and delayed tariff aspects of the FTZ program.

Q: How else might the foreign-trade zone program support healthier supply chains?

A: A better understanding of the inverted tariff might be help manufacturers buy into the program more regularly. Each manufacturer needs to evaluate its own situation.  Inverted tariffs mean that a manufacturer could pay more US Customs duty on a part than on the finished product.  Essentially, if merchandise is used to create an advanced product with a lower duty rate than some or all of the parts, the FTZ program makes it possible to reduce or eliminate the US Customs duties that would be charged on that product by paying duty on the foreign content at the lower rate of the advance product. This helps bolster supply chains by reducing the cost of increasing inventory levels. Companies can also avoid port congestion by obtaining “direct delivery” as part of their FTZ advantages. Companies should explore direct delivery because goods may be brought, in-bond, to their factories without the necessity to clear Customs at the port of entry. Many companies can benefit from the deferral of Customs duties while maintaining adequate stocks of parts and materials due to the potential of further disruptions, be they pandemics or cyber-criminals. 

Q: Are there likely to be immediate changes in “just in time” inventory management?

A: I don’t think it is feasible to make very many immediate changes. Warehouse capacity, in some cases highly specialized capacity (e.g., sterile, climate-controlled) needs to be contracted for and built. Cost of production will increase and budgets for companies will need to adjust to new realities.  The old system will not die, because over time memories will fade about the disruptions of weather, pandemics, transport disasters, etc.  Progress will be slow—but as always, those who plan for the future will prosper while others will lag behind. More time and attention will be spent on how to avoid (or minimize) the next crisis.