Some games require practice and a lot of skill. Dodge ball is not one of them. As you may recall from your playground years, being a good dodge ball player requires some fairly basic athletic skills. You have to be able to see when a ball is coming. And it’s generally helpful to know when to duck.
For this year anyway, the legal and regulatory risks fulfillment operations face seem a bit like that old, cruel playground game — lots of things heading in your direction from various angles at varying speeds. The main thing is to make sure you see them coming. And don’t forget to duck.
At the top of everyone’s list of hard-hitting legal brickbats this year are shipping charges, which have long been one of the trickier aspects of direct sales. Should you give away shipping as a promotional gimmick or should you sell things below cost but add back your profit when the order is completed? Or, should the shipping charge just cover … shipping?
A rash of class-action suits against direct-to-consumer retailers that allege that their shipping policies are deceptive may settle mail order’s oldest strategic debate once and for all. George S. Isaacson, a partner in Brann & Isaacson, a law firm based in Lewiston, ME, says that while no suit has reached trial, plaintiffs have won settlements against several big players, including Columbia House.
“The reason why these suits are very nasty and uncomfortable for retailers is that in a class-action lawsuit, notice has to be given to each member of a class if they’re identifiable, [and] in the case of direct marketers, they usually are identifiable because you have captured their names and addresses,” says Isaacson, who is counsel to the Direct Marketing Association. Once they have your list, plaintiffs’ attorneys send a letter out to all your customers “saying essentially that the retailer may have ripped you off and would you like to participate in this class action lawsuit,” he adds. “Well, that’s a pretty bad message to be sending to your best customers.”
Isaacson says that this notice requirement gives the companies a lot of incentive to settle early on. “It’s also what makes them such tempting targets,” he explains.
His advice: Make sure you can substantiate your shipping costs. “If the current practice is one that is justified, you’re in a better position to dissuade the case from going forward,” he says. For companies that can’t, adding some broader terms — such as shipping, handling, and processing — can make it harder for plaintiffs to argue that the practice is deceptive. (However, Isaacson cautions, just adding this language may create a different kind of risk, as some states will use this to try to demonstrate that the retailer is using the shipping charge to evade some portion of the sales tax due on a given order.)
September 11 changed business-as-usual for everyone, particularly for shipping, and experts say that the rules of the game are still changing at a rapid rate. Darren Maynard, chief operating officer of NextLinx, a Rockville, MD-based company that sells automated customs compliance software to such industry giants as UPS and Fedex, says that the rules, regulations, and tariffs are all changing so quickly that it’s now no longer practical to take care of the required paperwork by hand.
Import and export protocols have been changing significantly in recent years. One change is voluntary. The Customs Trade Partnership Against Terrorism (CT-PAT) encourages importers to conduct security audits of their supply chain. More than 60 companies have already registered, including General Motors, Ford Motor Co., Motorola Inc., and DaimlerChrysler A.G., according to the U.S. Customs Service. The advantage for a CT-PAT-certified company: faster border clearance.
“What that’s leading to is more and more, we’re really moving the borders of our country into the borders of the foreign country,” Maynard says.
For exporters, knowing your customer, always a duty technically, is a duty that’s taken much more seriously today. Some of this needs to be done manually, Maynard says, by looking at slight discrepancies in spelling between the customer’s order and the shipping address, cash orders, and information that doesn’t quite match up.
What may touch many fulfillment executives more directly is a new legal requirement that all food-handling facilities be registered with the Food and Drug Administration. The FDA’s “interim final rule” went into effect on Dec. 12, 2003.
Chris Corrado, vice president of customer support for APL Logistics in Oakland, CA, says that the filing can be done online and isn’t too difficult. It’s just 10 or 15 screens, he says, and mostly the kinds of questions that you might anticipate. “It’s pretty straightforward — it’s just a matter of getting the information collected and then inputting it through their system.”
Anyone who makes food for Americans or American animals must register. “The owner, operator, or agent in charge of a domestic or foreign facility that manufactures/processes, packs, or holds food for human or animal consumption in the U.S., or an individual authorized by one of them,” must register under the new regulations. While there are no penalties for failing to register under the interim final rule, Corrado says he suspects that compliance will probably improve the speed at which a shipment moves through customs.
Another new rule that could indirectly matter to anyone in shipping is the change in truckers’ hours of service, which was scheduled to begin Jan. 1, 2004. This regulation from the Department of Transportation changes the number of hours that truckers are allowed to stay on the time clock in a given day, a measure designed to reduce driver fatigue.
At press time, several long-haulers had announced that their rates would rise by 5% beginning in January as a result of the change. Russ Dixon, marketing director of Stonier Transportation Group, a freight-forwarding firm based in Jacksonville, FL, says that he is not sure how much the overall increase will be, but says the revised rules are likely to change the way shipments are handled at the loading docks.
Before this change, shippers could keep truckers waiting for loading or unloading until it suited them, because the truckers’ waiting time was essentially free. Like a doctor who keeps a packed waiting room, shippers stayed efficient — at the truckers’ expense. Now, these new limitations on the numbers of hours in a day that a trucker can be on duty suddenly turns the truckers’ downtime into a cost of doing business. Dixon predicts that the cost will be borne by the shippers, not the companies doing the hauling. “I just don’t see how it can,” he says.
Nevertheless, the impact may not be less severe for parcel shipments. “We’re anticipating a little bit of impact to cost, but nowhere near these numbers that are being thrown out,” says Jeff Kruepke, director of transportation services for Parcel/Direct, a ground residential parcel expeditor headquartered in New Berlin, WI. He adds that his company already has “the types of practices in place that these transportation providers are prescribing.”
Fulfillment executives in public companies might well look upstairs from the loading dock for the next ball to dodge. The Sarbanes-Oxley financial disclosure act passed last summer calls for stringent controls over corporate accounting. Under Section 404 of the law, public firms must attest to the accuracy of their financial reports, and are liable if assets and inventory are stated incorrectly.
David Hardesty, an accountant at Wilson, Markle, Stuckey, Hardesty & Bott in Larkspur, CA, says that because Sarbanes-Oxley is mostly concerned with making sure that the corporation has good financial controls, shipping departments are likely to face special scrutiny. The reason: Companies have sometimes shipped goods ahead of actual orders in order to boost their tally of orders. “I suspect that you’re going to be under the gun to document your processes,” Hardesty says.
Here’s a tricky one: What should you do when Uncle Sam decides to change the game from dodge ball to catch? Several new accelerated depreciation rules actually make it much cheaper for companies to buy equipment this year.
First, a “bonus depreciation” rule that’s in effect for 2004 gives companies the ability to write off 50% of the cost of the asset in the first year, in addition to the 10% or 20% that would be written off anyway. “This applies to any business of any size,” says Tonya Flesher, a professor of accounting at the University of Mississippi at Oxford.
Second, smaller companies have some additional options. Firms that buy less than $512,000 in assets next year may write off 100% of the cost of any item worth less than $102,000. Previously, the write-off was available only for assets under $25,000. “For the small business, it eliminates a lot of record keeping,” Flesher says. She points out that this Section 179 provision now applies to more users. Previously, only businesses that spent up to $100,000 could qualify.
But should you take advantage of Uncle Sam’s generosity just because you can? Bill Kuipers, a principal at Spaide, Kuipers & Co., a fulfillment consulting firm in Bala Cynwyd, PA, is not so sure. It’s generally a good idea to buy things because you need them, he says, not because the tax or financing is favorable. “What I do find in matters like this is that the need dictates the action.”
Bennett Voyles is a business and financial writer based in New York City. He can be reached at email@example.com.