Foreign Trade Zones and Bonded Warehouses for Luxury Goods

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1 Foreign Trade Zones and Bonded Warehouses for Luxury Goods Authors: Nadya Petrova and Todd Templeton Advisor: Roberto Perez-Franco MIT SCM ResearchFest

2 Problem Statement This project explores the benefits of establishing and operating Foreign Trade Zones and Bonded Warehouses for luxury goods in North America, using the case of the distribution network of Ralph Lauren Corporation. MIT SCM ResearchFest 2

3 Agenda Background Operational Feasibility Implementation Costs Financial Benefits Cost Benefit Analysis Conclusions and Additional Opportunities MIT SCM ResearchFest 3

4 Ralph Lauren Facilities Beechwood RL Direct OHL Transload Eagle Hill MIT SCM ResearchFest 4

5 Definitions Foreign Trade Zone (FTZ) Zones where merchandise undergoes assembly, cleaning, manufacturing, labeling, destruction, and storage duty free Duties are paid when the merchandize leaves the zone Bonded Warehouse (BW) Buildings where dutiable goods may be stored and manipulated without the payment of duties Duty bond liability upon entry into the warehouse Duties apply upon export, withdrawal, or destruction of goods May 23-24, 2012 MIT SCM ResearchFest 5

6 Operational Comparison Key Difference Foreign Trade Zone Bonded Warehouse Customs Jurisdiction Outside U.S. Customs territory Inside U.S. customs territory Permissible Cargo Foreign and Domestic Foreign Storage Period Unlimited Five years Control of Goods Full control Controlled by customs Movement of Goods Relatively unrestricted Limited - customs approval MIT SCM ResearchFest 6

7 Operational Feasibility BWs - Not appropriate for Ralph Lauren facilities FTZs - Feasible for Ralph Lauren facilities Stringent control Merchandise reporting Physical searches Compliance reviews Audits Activation flexibility Reverse logistics Movements unrestricted Weekly consolidations MIT SCM ResearchFest 7

8 Implementation Cost Range FTZ Implementation Costs Cost per one facility One-time Costs Minimum Maximum Application Fees $ 4,000 $ 12,000 Activation Fees $ 25,000 $ 300,000 Software/IT Integration $ 75,000 $ 100,000 Total Set-up Costs $ 104,000 $ 412,000 On-going Costs Minimum Maximum Administration Personnel $ 45,000 $ 90,000 Software/IT Maintenance $ 20,000 $ 25,000 Operator $ 1,000 $ 10,000 Total Administration Costs $ 66,000 $ 125,000 MIT SCM ResearchFest 8

9 Cost Estimates Based on consultant feedback and the size of the facilities we assumed implementation costs on the higher end of the range FTZ Implementation Costs Beechwood Eagle Hill RL Rirect OHL FTZ Set-up Costs (one-time) Application Fees $ 7,500 $ 7,500 $ 7,500 $ - Activation Fees $ 100,000 $ 100,000 $ 100,000 $ 31,250 Software/IT Integration $ 100,000 $ 100,000 $ 100,000 $ 68,900 FTZ Administration Costs (annual) Administration Personnel $ 90,000 $ 90,000 $ 90,000 $ 94,200 Warehousing $ - $ - $ - $ 120,000 Software/IT Maintenance $ 25,000 $ 25,000 $ 25,000 $ 25,000 Operator $ 10,000 $ 10,000 $ 10,000 $ 10,000 MIT SCM ResearchFest 9

10 Financial Benefits Duty Deferral Duty Reduction Duty Exemption - Exports Brokerage Fee Reduction Duty Exemption - Scrap MPF Reduction MIT SCM ResearchFest 10

11 Benefits Calculator MIT SCM ResearchFest 11

12 Benefits Calculator - Input Facility Beechwood Finished Product Duty Rate N/A Merchandise Processing Fees $284 Brokerage Fee $125 Avg Days of Inventory 36.5 Est. Interest Rate 6% Scrap/Waste % 0% Importer of Record Duty Rate % Exported % Exported Annual Entry Annual Number of NAFTA Non-NAFTA Value Entries Club Monaco 16% 0.3% 0.3% $ 42,408, Lauren Dresses 16% 0.0% 0.0% $ 25,249, Lauren Ralph Lauren 16% 0.0% 0.2% $ 180,907, Leathergoods and Accessories 16% 1.3% 6.1% $ 28,110,060 - Polo Retail Corporation 16% 0.0% 0.0% $ 153,047,790 - Ralph Lauren Childrenswear 16% 0.0% 0.5% $ 198,408, Ralph Lauren Corporation 16% 0.1% 0.4% $ 876,754, Ralph Lauren Footwear, Inc. 20% 0.1% 3.5% $ 10,821, Ralph Lauren Wormenswear 16% 2.6% 6.6% $ 22,300, Rugby by Ralph Lauren 16% 0.0% 0.0% $ 12,197, Total $ 1,550,206,683 1,405 MIT SCM ResearchFest 12

13 Ralph Lauren Corporation 16% 0.1% 0.4% $ 876,754, $ 30 Ralph Lauren Wormenswear 16% 2.6% 6.6% $ 22,300, Rugby by Ralph Lauren 16% 0.0% 0.0% $ 12,197, Total $ 1,550,206,683 1,405 Ralph Lauren Footwear, Inc. 20% 0.1% 3.5% 10,821,650 Benefits Calculator - Output/Results Summary of Savings By Input: Input Duty Reduction Duty Exemption Duty Duty Exemption MPF Brokerage Name Inverted Tariffs Scrap/Waste Deferral Export Savings Fee Club Monaco $ - $ - $ 40,713 $ 18,005 $ 340 $ 4,750 Lauren Dresses $ - $ - $ 24,240 $ - $ - $ - Lauren Ralph Lauren $ - $ - $ 173,671 $ 50,886 $ 24,480 $ 15,375 Leathergoods and Accessories $ - $ - $ 26,986 $ 275,040 $ - $ - Polo Retail Corporation $ - $ - $ 146,926 $ - $ - $ - Ralph Lauren Childrenswear $ - $ - $ 190,473 $ 154,505 $ 77,304 $ 38,625 Ralph Lauren Corporation $ - $ - $ 841,684 $ 611,497 $ 150,576 $ 70,875 Ralph Lauren Footwear, Inc. $ - $ - $ 12,986 $ 75,906 $ - $ - Ralph Lauren Wormenswear $ - $ - $ 21,408 $ 234,485 $ - $ 2,625 Rugby by Ralph Lauren $ - $ - $ 11,710 $ - $ - $ - Total $ - $ - $ 1,490,796 $ 1,420,324 $ 252,700 $ 132,250 By Type: Duty Reduction = $ - Duty Deferral = $ 1,490,796 Duty Exemption Export = $ 1,420,324 Brokerage Fee = $ 132,250 Duty Exemption Scrap = $ - MPF Savings = $ 252,700 Total = $3,296,070 MIT SCM ResearchFest 13

14 Summary of Financial Benefits MIT SCM ResearchFest 14

15 Cost-Benefit Analysis MIT SCM ResearchFest 15

16 Cost-Benefit Analysis Results Duty Exemption Export can also be achieved through Duty Drawback Lacking Duty Drawback process details we performed two Cost- Benefit Analysis Facility With Duty Exemption Export Without Duty Exemption Export NPV ROI NPV ROI Beechwood $8, % $4, % Eagle Hill $2, % ($99) -19% RL Direct ($110) -21% ($110) -21% OHL $2, % $2, % MIT SCM ResearchFest 16

17 Conclusions FTZs - Operationally feasible for RLC s facilities BWs - Operationally unfeasible for RLC s facilities FTZ Transformation: OHL Transload and Beechwood DC - cost beneficial RL Direct - not cost beneficial Eagle Hill - cannot be determined MIT SCM ResearchFest 17

18 Additional Considerations Reduce the number of Importer of Records Consolidate air shipments through FTZ Consolidate west coast operations through FTZ Handle Reverse Logistics in FTZs Explore FTZ effects on Canada Network MIT SCM ResearchFest 18

19 Foreign Trade Zones and Bonded Warehouses in Luxury Goods Authors: Nadya Petrova and Todd Templeton Advisor: Roberto Perez-Franco MIT SCM ResearchFest