Most business people today know about the Pareto principle, commonly referred to as the 80/20 Rule. It was named after the Italian economist Vilfredo Pareto. Pareto discovered that 80% of the land was owned by 20% of the population. He also observed that 20% of the pea pods in his garden contained 80% of the peas.
The principle is relevant to many aspects of our modern business world today. For example: 80% of sales come from 20% of the customers; 80% of the customer complaints come from 20% of the customers; and so forth.
The principle also applies to risk management. For example: 80% of the crime comes from 20% of the criminals; and 80% of Customs non-compliance comes from 20% of the Customs client base.
Most Customs compliance efforts by the authorities today are geared toward the 80/20 Rule. The concept, also spurred on by WCO (World Customs Organisation) is geared ‘in part’ toward trade facilitation.
In the Customs environment, identifying risk requires pre-and post-audit data, knowledge of one’s client base, a study of market trends combined with current legislative mechanisms and, of-course, a bit of sixth sense. Once validated, place the information into a database containing a series of formulae. What do you have? A Customs risk engine. The objective is to comply with the 80/20 Rule and to facilitate trade. It also allows Customs authorities to utilise resources more efficiently.
One industry expert explains this with an example. If a hundred fish swam toward a shark, the shark could not possibly eat all the fish at once. The shark will need a system to help it decide which ‘non-compliant’ fish to bite. The balance of the ‘compliant’ fish are allowed to swim past, un-affected.
Also applicable to this discussion is the concept of non-intrusive interventions. The UNECE (United Nations Economic Commission for Europe) goes into more detail about this. The document can be found at the following link: http://tfig.unece.org/ .
So, what does this mean for the average trader, importer and exporter? Do you apply the 80/20 Rule when conducting annual self-compliance audits, or do you aim for a 100% coverage? Do you audit every single document passed throughout the year?
Well firstly, understand that any contravention found by the authorities immediately becomes part of the assessment criteria which gets built into the Customs risk engine. Once you are on the Customs radar it is difficult to escape it. Secondly, understand the industry that you are in. If you are in the clothing and textile industry you should know by now that Customs interventions (at present) are at an all-time high. Expect to be targeted for possible undervalued foreign purchases. Thirdly understand the relative size of your company and the volume of trade you are involved in, in relation to the market. If you are a smaller operator, then expect to attract more attention relative to the size of your operation. If for example you trade in 10 x shipments per annum and 1 x shipment gets stopped by Customs, it will equate to 10% of your trade. You are generally advised to conduct 100% compliance audits. Larger operators who for example trade in several thousand shipments annually may, relative to their size and particular industry be less severely affected.
With the new Customs legislation it is becoming more apparent that an approach by the authorities toward zero defects is the desired outcome.
While there is no one size that fits all to the 80/20 question, the answer may depend on how smartly you conduct your compliance approach.