During times of economic uncertainty or recession, it is important to strategically evaluate your supply chain and see where efficiencies can be implemented. Direct-to-consumer brands can use a strategic combination of localization and south-bound shipping using the Section 321 exemption to create a North American supply chain that creates efficiencies and saves money, without sacrificing the customer experience.
What is Localization?
Localization in the context of supply chain fulfillment is the process of placing inventory in warehouses in the same country as your consumers in order to deliver product to them more conveniently, without the hassle of cross-border shipping. For example, U.S. e-commerce companies can place inventory in Canadian warehouses to expedite the fulfillment and delivery of Canadian customer orders. This method reduces transportation costs, provides faster order fulfillment for Canadian customers, and improves the customer experience through faster delivery and no hidden cross-border duty or tariff fees.
An example of this is SCI’s recent partnership with U.S. brand, Dr. Squatch, a leading men’s natural soap and personal care brand. SCI partnered with Dr. Squatch to successfully expand their e-commerce and wholesale business into the Canadian market through localization. With SCI’s effective end-to-end supply chain strategy including localized warehousing, fulfillment, and transportation operations, SCI was able to support Dr. Squatch’s accelerated growth, resulting in reduced delivery times and improved shipping costs for Canadian consumers. Read our case study on this partnership to learn more: https://www.sci.ca/insights/case-study/dr-squatch-case-study/
What is Section 321 Southbound Fulfillment?
Section 321 fulfillment is a cost-effective way for direct-to-consumer (DTC) companies to increase profit margins and save up to 20% in duty and tariff costs. Section 321 is an exemption in the Canada-U.S.-Mexico Agreement that allows small shipments valued under $800 USD to enter the U.S. duty-free. For DTC e-commerce retailers, this offers an opportunity to reduce their cost per unit through waived or refunded import duties on items that enter Canada bound for U.S. recipients.
How the Section 321 Fulfillment Process Works:
- Goods are imported into Canadian warehouses
- Goods are cleared through custom and added to inventory
- When an order is placed, the item is picked, packed, and shipped from the Canadian facility the same day
- Items are shipped across the border and delivered in partnership with U.S. carriers
- Any duties and tariffs paid in Canada are refunded
By saving up to 20% on duties and tariffs, this lowers the cost per unit of retailer’s product, which can be invested elsewhere in the company, or the savings can be passed on to the consumer.
Localization & Section 321: Creating a Strategic North American Supply Chain
Using localization and Section 321 as a strategy not only saves money on duties and tariffs, but also creates a more efficient North American distribution model. By consolidating distribution in strategic centers in Canada, e-commerce retailers can optimize operations by servicing both the U.S. and Canadian markets from a single location (rather than having both U.S. and Canadian distribution centers servicing each market). For example, SCI’s distribution center in Montreal, Canada, can distribute conveniently to customers in Eastern Canada, as well as the Eastern United States. Our Vancouver warehouse can serve the western states, and Toronto warehouses can serve the central states.
Benefits of Localization & Section 321 for U.S. Brands
For U.S. based brands, adding inventory to fulfillment centers in Canada offers the opportunity to expand distribution into a new market of 40+ million Canadian consumers. This approach allows brands to test international growth in a new, geographically close market. Plus, by localizing in Canada your brand can deliver your products faster to Canadians with fewer shipping costs. Once you have inventory situated in Canadian warehouses, you can ship products southbound to U.S. e-commerce customers using the Section 321 exemption and save on duty and tariff costs.
Benefits of Localization & Section 321 for Canadian Brands
Canadian brands looking to expand into the US can also take advantage of Section 321. If you’re currently only selling to the Canadian market, but have interest from U.S. consumers, and would like to test selling to this market, using Section 321 fulfillment provides this opportunity. To do this you would partner with a 3PL who can fulfill orders from warehouses near the Canada-U.S. border, and ship to U.S. customers. This method enables you to leverage the Section 321 exemption to save money on duties and tariffs. You can also save on operations and inventory holding costs by fulfilling orders solely from Canadian warehouses, rather than paying for additional warehousing and fulfillment from in the United States.
Cross-Border Fulfillment vs. Localized Fulfillment
Businesses usually follow one of two distribution models when serving international consumers.
1. Cross-border fulfillment
Cross-border fulfillment uses the traditional method of packing and shipping the order from your country to the customer internationally.
Pros:
- Better for small e-commerce companies just starting and lacking capital for expansion
- One central distribution centre for all customers
- Low cost and speed-to-market
Cons:
- Some buyers are still uncomfortable with cross-border purchases, even from neighbouring countries, over a fear of hidden shipping fees or exchange rates
- Taxes, customs, and international shipping rates are often passed on to customers who are unwilling to foot the bill, leading to shopping cart abandonment
- Longer delivery times
2. Localization
Localization uses warehousing in the same country as your customers.
Pros:
- Decreased shipping costs for the consumer
- Quicker order fulfillment for the consumer
- Decreased carbon emissions from transportation due to fulfilling orders locally
Cons:
- It is a significant investment in time and money to move inventory and distribution to another country
- You may need to apply for licenses to conduct business in a new country, adhere to additional product regulations, etc.
If you’re looking to expand into new markets, or create supply chain efficiencies, now is the time to explore localized fulfillment and Section 321 opportunities with an experienced Canadian 3PL like SCI. For more information, Request a consultation with our localization and southbound fulfillment experts.
