Foreign Trade Zones and Bonded Warehouses for Luxury Goods

By -

Nadya Petrova MASSACHUSETS INSTUTE

OF TECHNOCLOGY
M.B.A., IE Business School, 2012
B.A. Business Administration, American University in Bulgaria, 2007

And

A. Todd Templeton
B.S. Industrial Distribution, Texas A&M University, 2003

Submitted to the Engineering Systems Division in Partial Fulfillment of the

Requirements for the Degree of

Master of Engineering in Logistics

at the
Massachusetts Institute of Technology
June 2013
0 2013 Nadya Petrova and A. Todd Templeton
All rights reserved.

The authors hereby grant to MIT permission to reproduce and to distribute publicly paper and electronic
copies of this documentin whole or in part.

Signature of Author...................... ........................ .

Mas r~t'Engineering in Logistics Program, Engineering Systems Division
. May 10, 2013

Signature of Author.............................................. ........ .. . . .............................

Master of Engineering in Logistics Pogra n,Engineering Systems Division
May 10, 2013

Certified by............................... ........................................

Dr. Roberto Perez-Franco
Research Associate,
Center for Transportation and Logistics
Thesis Supervisor

Accepted by.................... .............. V .....................................................................

Prof. Yossi Sheffi
Elisha Gray II Professor of Engineering Systems, MIT
Director, MIT Center for Transportation and Logistics
Professor, Civil and Environmental Engineering, MIT

1
 Foreign Trade Zones and Bonded Warehouses for Luxury Goods
By

Nadya Petrova

And

A. Todd Templeton

Submitted to the Engineering Systems Division in Partial Fulfillment of the

Requirements for the Degree of

Master of Engineering in Logistics

at the
Massachusetts Institute of Technology

ABSTRACT

We explore and compare the benefits of establishing and operating Foreign Trade Zones (FTZs)
and Bonded Warehouses (BWs) for luxury goods in North America, using the case of the
distribution network of Ralph Lauren Corporation (RLC). RLC is a luxury brand company with
about $7 billion annual revenue. With over 3 million square feet of warehousing facilities in the
USA, the company wants to explore potential savings from changing the legal titles of four of its
existing inventory holding and transload facilities to either FTZs or BWs while considering the
respective complexity and cost of setting up and managing the zones. To eliminate one of the
FTZ and BW options, we measured both of their operational fits to the metrics of RLC's
facilities. We found out that BWs are not a viable alternative for large-scale facilities such as
RLC's because of the complicated Customs and Border Protection control they require.
Furthermore, to determine which, if any, of the facilities should be transformed into FTZs, we
conducted a cost-benefit analysis and evaluated the Net Present Value of the projects. As a
result, we found out that it is financially beneficial to transform two of the four facilities under
consideration, leave one in its current state, and explore the future strategic role of the fourth
facility to determine the value of its FTZ transformation. We also suggest possible operational
opportunities that may increase the FTZ benefits for the RLC North America network.

Thesis Supervisor: Dr. Roberto Perez-Franco

Title: Research Associate, Center for Transportation and Logistics

2
 TABLE OF CONTENTS
A BSTRACT .................................................................................................................................... 2
A CKN OW LED G EM EN TS...................................................................................................... 5
LIST O F FIGURES ........................................................................................................................ 6
LIST O F TA BLES.......................................................................................................................... 7
LIST O F A BBREV IA TION S AN D ACRON Y M S ................................................................... 8
1. IN TRO DU CTION ...................................................................................................................... 9
1.1 Ralph Lauren Overview .................................................................................................... 10
1.2 Ralph Lauren Supply Chain............................................................................................. 11
1.3 Ralph Lauren U .S. Facilities ............................................................................................. 13
1.4 These Overview .................................................................................................................. 14
2. LITERA TU RE REV IEW ...................................................................................................... 15
2.1 Terminology and Definitions ........................................................................................... 15
2.1.1 Foreign Trade Zone Definition.................................................................................. 16
2.1.1 Bonded Warehouse D efinition ................................................................................. 18
2.2 Im plem entation Costs ...................................................................................................... 18
2.2.1 Implem entation Costs - Foreign Trade Zone........................................................... 19
2.2.2 Im plem entation Costs - Bonded W arehouse ............................................................. 19
2.3 Financial Benefits................................................................................................................ 20
2.3.1 Financial Benefits - Foreign Trade Zone.................................................................. 20
2.3.2 Financial Benefits - Bonded W arehouse ................................................................. 21
2.3.3 Key Differences between Foreign Trade Zones and Bonded Warehouses ............... 21
2.4 Exam ples of Existing Im plem entations .......................................................................... 23
3. M ETH O D O LO GY ................................................................................................................... 23
3.1 Im plem entation Costs ...................................................................................................... 24
3.2 Financial Benefits................................................................................................................ 25
3.2.1 Financial Benefits - Foreign Trade Zone.................................................................. 26
3.2.2 Financial Benefits - Bonded W arehouse ................................................................. 27
3.3 Cost Benefit Analysis....................................................................................................... 27
3.4 Supply Chain Im pacts ...................................................................................................... 28
4. DA TA CO LLECTION AN D AN A LY SIS............................................................................... 28

3
 4.1 Implem entation Costs - Foreign Trade Zone ................................................................. 29
4.2 Im plem entation Costs - Bonded W arehouse .................................................................... 32
4.3 Financial Benefits - Foreign Trade Zone......................................................................... 34
4.4 Financial Benefits Calculator - Foreign Trade Zone...................................................... 38
4.5 Cost Benefit A nalysis - Foreign Trade Zone.................................................................. 40
4.6 Supply Chain p ...................................................................................................... 42
5. CONCLUSIONS AND RECOMMENDATIONS............................................................... 42
5.1 Conclusions ......................................................................................................................... 43
5.2 Recom m endations............................................................................................................... 44
5.3 A dditional Opportunities.................................................................................................. 46
5.3.1 Reduce the Num ber of Importer of Records ............................................................. 47
5.3.2 Im port A ir Shipm ent Entries through FTZ................................................................ 47
5.3.3 Consolidate W est Coast Operations .......................................................................... 47
5.3.4 H andling Reverse Logistics...................................................................................... 48
5.3.5 Canada N etw ork ........................................................................................................... 48
5.4 Final Rem arks ..................................................................................................................... 51
6. A PPEN D IX ............................................................................................................................... 53
7. REFEREN CES ......................................................................................................................... 63

4
 ACKNOWLEGDEMENTS
We would like to take this opportunity to thank our thesis advisor, Dr. Roberto Perez-Franco, for
his efforts and insights in guiding us through the research process. We greatly appreciate his
support and motivation throughout the year.

We would also like to thank the Ralph Lauren team for sponsoring our project. Without their
dedication to the MIT Supply Chain Management program, this thesis would not have been
possible.

We are indebted to our families for their continuous support and love throughout this challenging
year.

Special thanks to the industry experts and organizations that have contributed to our thesis.

We are grateful to the members and staff of the MIT Supply Chain Management program for
their valuable leadership and the opportunity to participate in this great learning experience.

5
 LIST OF FIGURES
Figure 1: Ralph Lauren Annual Income Statement Results and Financial Forecast ................ 12
Figure 2: Foreign-Trade Zone: Merchandise Received 1991-2011.......................................... 17
Figure 3: Key Differences Between FTZs and BWs ................................................................. 22
Figure 4: Beechwood - Foreign Trade Zone Financial Benefits Calculator............................. 39
Figure 5: Financial FTZ Benefit Summ ary............................................................................... 40
Figure 6: Beechwood - Cost Benefit Analysis including DEE (in thousands of dollars)...... 41
Figure 7: Custom er Drop Shipment Example.......................................................................... 51
Figure 8: Eagle Hill - Foreign Trade Zone Financial Benefits Calculator ............................... 53
Figure 9: RL Direct - Foreign Trade Zone Financial Benefits Calculator................................ 54
Figure 10: OHL Transload- Foreign Trade Zone Financial Benefits Calculator ...................... 55
Figure 11: Beechwood - Cost Benefit Analysis excluding DEE (in thousands of dollars)......... 56
Figure 12: Eagle Hill - Cost Benefit Analysis including DEE (in thousands of dollars)......... 57
Figure 13: Eagle Hill - Cost Benefit Analysis excluding DEE (in thousands of dollars)...... 58
Figure 14: RL Direct - Cost Benefit Analysis including DEE (in thousands of dollars).......... 59
Figure 15: RL Direct - Cost Benefit Analysis excluding DEE (in thousands of dollars)...... 60
Figure 16: OHL Transload - Cost Benefit Analysis including DEE (in thousands of dollars).... 61
Figure 17: OHL Transload - Cost Benefit Analysis excluding DEE (in thousands of dollars) ... 62

6
 LIST OF TABLES

Table 1: Ralph Lauren Unit Volume by Region........................................................................ 12

Table 2: Size, Throughput, and Customer Data by DC April 2012 - December 2012 ............. 14
Table 3: Im porter of Record Breakdown................................................................................... 25
Table 4: FTZ Im plem entation Cost Range .............................................................................. 29
Table 5: Capital District Regional Planning Commission Operator Fees ................................. 30
Table 6: FTZ Set-up and Administrative Costs Estimated by RLC DCs ................................. 32
Table 7: Estimated Annual Entry Value (in thousands of dollars).......................................... 35
Table 8: Estimated Number of Ocean Shipments Entries by Facility ...................................... 35
Table 9: Annual Value of Exports (in thousands of dollars)................................................... 36
Table 10: Consolidated Financial Data by Importer of Record Category ................................. 38
Table 11: Results of the Cost Benefit Analysis (in thousands of dollars)................................ 42

7
 LIST OF ABBREVIATIONS AND ACRONYMS

3PL - 3d Party Logistics

AAEI - American Association of Exporters & Importers

BW - Bonded Warehouses

CBP - Customs and Border Police

DC - Distribution Centers

DEE - Duty Exemption Exports

FTZ - Foreign Trade Zones

GPZ - General Purpose Zone

GSC - Global Supply Chain

IOR - Importer of Record

MPF - Merchandise Processing Fee

NA - North American

NAFTA - North American Free Trade Agreement

NPV - Net Present Value

RL Direct - Ralph Lauren Direct

RLC - Ralph Lauren Corporation

ROI - Return on Investment

SKU - Stock Keeping Units

8
1 INTRODUCTION

Ralph Lauren Corporation (RLC) is a rapidly growing global luxury apparel company that

focuses on high end clothes for men, women and children, as well as accessories, footwear,

fragrances, and home furnishings. RLC's North American (NA) operations consist of 5

Distribution Centers (DC), with a total of 2,960,000 sq. ft. of warehousing, that services over

3,200 customers located in 30 countries with over 180,000 unique SKUs. From April through

December of 2012, 82% of all products sold through the NA DCs were procured from China,

India, and other areas across Southeast Asia, including Hong Kong, Vietnam, and Indonesia.

Due to its global supply chain complexity and the continuous operational cost pressures, RLC

wants to determine if it is financially feasible and operationally efficient to qualify any or all of

their NA DCs as Foreign Trade Zones (FTZ) or Bonded Warehouses (BW).

The goal of this thesis project is to build a comparative analysis of the costs, financial benefits

and supply chain impacts of transitioningany or all of their currentDCs to either BWs or FTZs.

Unlike the standard import procedure, where goods are subject to import duties at the point of

the goods' entry into the country, goods entering through an FTZ or a BW are tariff-free until

withdrawn from the activated facility (United States. Department of Homeland Security, 2011 a).

At the time of shipment out of the warehouse, products are subject to the import duty rates of the

destination country. This postponement of duty payment can provide significant cash-flow

improvements. In addition to this cash-flow improvement, additional benefits, which will be

described in detail in this thesis, include import tax and fee savings.

9
One of the main differences between an FTZ and a BW is that FTZs are considered outside the

U.S. Customs territory, therefore import entries can be consolidated and filed just prior to

removal of the zone (United States. Department of Homeland Security, 2011 a). While BWs are

considered within U.S. Customs territory, import entries are must be filed before goods enter the

warehouse and all goods remain in the U.S. Customs and Border Protection (CBP) supervision.

(United States. Department of Homeland Security, 2010). Another key difference between FTZs

and BWs is the range of activities that are allowed within the facilities. BWs function primarily

for storage, with allowances for cleaning and sorting, while FTZs can permit product assembly,

packaging, destroying, cleaning, testing, and labeling among other activities (United States.

Department of Homeland Security, 2010; "About Foreign-Trade Zones," n.d.). Further

differences regarding FTZs and BWs will be discussed within subsequent sections.

The above-mentioned benefits, as they pertain to RLC NA's operations, will be analyzed against

the specific set-up costs for FTZs or BWs, the on-going administrative fees, and the supply chain

impacts on the company's existing operations.

This research should facilitate RLC's decision-making regarding possible FTZ or BW

implementations. In addition to the direct applicability to RLC, this research could be useful as a

framework by other companies that face similar challenges and wish to understand the benefits

of FTZs and BWs.

1.1 Ralph Lauren Overview

Founded by designer Ralph Lauren in 1967, RLC started in the necktie market, but soon

expanded into men's apparel before quickly entering into women's fashion. The company

boomed in the 1980s due to the popularity of the flagship brand Polo, which reflects an

10
American perspective and lifestyle, as well as its vast expansion into markets such as children's

apparel, housewares, footwear, hats, and eyewear. During the 1990s, RLC introduced multiple

brands such as Polo Sport, Ralph Lauren Jeans, and acquired Club Monaco. In 1997, the

company went public and raised approximately $767 million through the initial public offering

("RLC Company Overview," n.d.).

Today, RLC manages strategic brands including Polo, Lauren, American Living, Ralph Lauren

Home, Chaps, Rugby, Club Monaco, and Ralph Lauren's Premium Collection ("Ralph Lauren

Investor Relations," n.d.).

RLC's Global Supply Chain annually supports:

e 200 million units * 20 Distribution/Fulfillment Centers
* 5 million shipments e 60 non-inventory holding DCs
e 10,000 points of delivery 0 800 factories/product licensee

In RLC's 2012 fiscal year, the company posted revenue growth of 21% to $6.9 billion and

operating income growth of 23% to $1.0 billion. Growth in wholesale revenues (17%), retail

revenue (27%), and licensing royalties (1%) also contributed to this strong performance in 2012,

which is similar percentage-wise with RLC's strong performance and growth over the last 5

years. The company's 2007 - 2012 annual financial results, along with Thomas Reuters', a

financial analyst firm, financial expectation for the next 4 years, can be seen in Figure 1

(Zonebourse, n.d.).

1.2 Ralph Lauren Supply Chain

RLC's Global Supply Chain (GSC) is organized as a global functional shared service

organization, combining regional operations and capabilities. The GSC function is structured

11
around 4 regional platforms: North America, Latin America, Europe, and Asia. Each regional

platform services the local markets, manages inventory across key channels, and is tightly

income Statement Evoludon

2007 2008 2009 2010 2011 2012 2013. 2014e 2015. 2016.

9 000

8000

7000
a 6 000
C
4000

4000

3000

2000

1000-

0
M SE" Operaing profit Net Income Net Margin =*- Operatng Margin
(c) Zonebourse.com - Thomson Reuters

Figure 1: Ralph Lauren Annual Income Statement Results and Financial Forecast

integrated and connected within its own region. The North America region dominates with

almost 80% of the unit volume, while the Latin America and Asia regions offer the biggest

percentage growth opportunites. Table 1 provides the breakdown of unit volume per RLC

region.

Table 1: Ralph Lauren Unit Volume by Region

Total 1 208 1 100%),

12
In addition to the regional segmentation, the company is divided into divisions, autonomous

profit centers, and market channels. Each division may generate revenue from wholesale

customers, retail customers, and/or direct licensing. The combination of brands, channels, and

geographies-along with the large number of Stock Keeping Units (SKUs) and diversified

customer base with unique requirements-pose an extremely complex challenge to RLC's

operations. To combat this challenge, RLC develops customized supply chain solutions to drive

customer performance.

1.3 Ralph Lauren U.S. Facilities

For this analysis we focused our research on 4 physical NA RLC facilities:

* 1 Transload Facility - OHL Transload

* 3 DCs - Beechwood, Eagle Hill, and RL Direct

The OHL transload facility is located in near the port of L.A. and is managed by a 3PL company

named OHL. This is a non-inventory holding facility used to transfer merchandise from the west

coast coming for Asia into RL NA facilities.

All three DCs are located in the Greensboro/High Point area of North Carolina. They service

different RLC divisions across different product lines with unique supply chain strategies. Table

2 provides details by DC on the size, the volume shipped, and the number of customers.

Beechwood, with approximately 1.3M ft2, is the largest RLC DC in North America. This facility

shipped over 40 million units of product from April through December of 2012, and ships

approximately 100 million units annually. The Beechwood DC services multiple RLC divisions,

such as RL Menswear, RL Childrenswear, RL Womenswear, Polo, Lauren, Rugby, and Club

Monaco, in both the wholesale and retail markets. This DC delivers to key customers such as

13
major department stores like Macy's, which represented 18% of the 2011 wholesale revenue,

Ralph Lauren retail stores, and Ralph Lauren outlet stores.

Table 2: Size, Throughput, and Customer Data by DC from April 2012 - December 2012

Numberof SKUs (units) 152,000 3,100 180,000

AV -iii-11W,41,3b 3,766,432!
Volume Shipped (units) 41,801,429 3,549,383 6,300,000

Export Destinations 29 22 -
%ExotbyDestitin 1% 29% 0%

Eagle Hill, which exports almost 30% of its product, manages the Ralph Lauren Home

Collection. The Ralph Lauren Home Collection consists of both Ralph Lauren Home and

Lauren Home divisions. These divisions include the following products:

" Bedding and Bath - towels, linens, pillows, and blankets

e Table Top - silverware, plate settings, and barware
" Home Decor - rugs, lighting, candles and pet accessories

RL Direct, the newest expansion facility, handles the company's e-Commerce sales. This is the

smallest of the three DC's in the North Carolina area, but also manages the highest number of

unique SKUs. The nature of the e-Commerce market requires this facility to hold and ship small

volumes of many different products that span most of RLC brands. Currently, RL Direct does

not export or import any products. All products come from RLC's other U.S. facilities and all

shipments are made to destinations within U.S.

1.4 Thesis Overview

The subsequent chapters of this thesis are structured as follows: Chapter 2 reviews the literature

regarding both FTZs and BWs, including key definitions of terminology used throughout this

14
thesis and examples of FTZ and BW implementations. Chapter 3 discusses the methodology

used to perform the comparative analysis, while Chapter 4 walks through the actual data

collection and analysis. The final chapter describes the results from the analysis and the final

conclusion and recommendations.

2 LITERATURE REVIEW

In this literature review, we summarize existing research related to FTZs and BWs and their

impacts on cash flow management and supply chain management. In the first section, we provide

explanations of relevant terminology and definitions. In the second section, we point out

publications related to the implementation costs of both FTZs and BWs. In the third section, we

provide a comparison between the financial benefits of FTZs and BWs. We then summarize

literature on existing FTZ and BW implementations, since these past experiences served as a

guideline for the data analysis part of our thesis.

The publications that we found in professional journals focus on the implications of FTZs and

BWs on the economic development of countries and regions. Because we could not find

academic publications related to the effects on the operations of companies that function out of

FTZs and BWs, we turned to trade publications, white papers, and government reports.

2.1 Terminology and Definitions

The following definitions from the CBP are important terms that will be used throughout this

thesis.

Customs Dutv - a tariff or tax imposed on goods when transported across international borders

15
Goods Entry - filing of paper or electronic documents with the CBP to declare the value,

classification, and duty rate for imported merchandise

Importer ofRecord - entity responsible for filing the goods entry and paying the assessed import

duties

PortofEntry - a port in the U.S. where customs officials are located to oversee the entry of

merchandise

Customs Duty - a tariff or tax imposed on goods when transported across international borders

Merchandise ProcessingFee - a fee required at the time of entry paid to the Customs and Border

Protection for processing the entry documents for imported shipments

HarborMaintenance Fee - a port use fee for unloading cargo from a commercial vessel

Customs Brokerage Fee - a fee charged by an agent to facilitate the entry of the goods

Country of Origin - country of manufacture, production, or growth of any article of foreign

origin entering the U.S. customs territory

Dutv Drawback- a refund, reduction, or waiver in whole or in part of customs duties assessed or

collected upon importation of materials that are subsequently exported

2.1.1 Foreign Trade Zone Definition

Also known as Free Trade Zones, FTZs are locations in or near a port of entry that are legally

considered outside of Customs territory for the purpose of entry procedures and payment of

duties (What are Foreign Trade Zones?, 2011). FTZs were first established under the Foreign-

Trade Zone Act of 1934 to "expedite and encourage foreign commerce and other purposes"

(United States. Department of Homeland Security, 2011 a). The authority for establishing an FTZ

16
is granted by the Foreign Trade Zones Board, a part of the Import Administration within the

International Trade Administration of the U.S. Department of Commerce (United States.

Department of Homeland Security, 2011 a). Though the FTZ Board manages the establishment,

zones are managed by the "grantee", a local public or non-profit organization required to operate

the zone uniformly across all companies (United States. Department of Homeland Security.

Foreign Trade Zone Board, 2012a).

There are two different types of FTZs - General Purpose Zones (GPZs) and Subzones. GPZs are

areas open to the general public. Subzones are private sites established as a result of the

transformation of a company's facilities into an FTZ. Both types of FTZ are operationally the

same. The Subzone is a legal title transfer that allows companies to transform their existing

facilities into an FTZ while avoiding the huge expenses related to closing down and relocating

their existing warehouses to GPZs (United States. Department of Homeland Security, 201 lb).

M00

700

500

U
400

300 .

200

100

0
1991 1993 1995 1997 1999 2001 2003 2005 2 07 200 -i1

EForeign Statue *Domestic Statu* O TOta

Figure 2: Foreign-Trade Zone: Merchandise Received 1991-2011

17
In 2011 the value of shipments into the 171 active U.S. FTZs was over $640 billion, up from the

$534 billion in 2010. Figure 2 provided by the Foreign Trade Zone Board shows the value of

both foreign and domestic merchandise entered in FTZs from 1991 to 2011. This figure also

shows the exceptional growth of FTZs over the last twenty years. The main industries utilizing

these zones included: oil and petroleum, automotive, textile and footwear, electronics, and

pharmaceutical (United States. Department of Homeland Security. Foreign Trade Zone Board,

2012a).

2.1.2 Bonded Warehouse Definition

The CBP defines BWs as buildings or areas where dutiable merchandise can be stored and

undergo physical manipulation without payment of duties for up to 5 years from the date of

importation. In a BW the warehouse administrator incurs a liability for the merchandise under a

warehouse bond, a bond issued to guarantee the payment of customs fees. When a warehouse

receives the status of a BW, the Port Director defines the amount payable based on the purpose

for the bond. The minimum amount per building or area is $25,000. There are eleven different

classes of BWs. These classes range from government, private, and public facilities used

primarily for the storage of material to facilities that allow, under supervision by the customs

authority, cleaning, sorting, and repackaging but exclude manufacturing (United States.

Department of Homeland Security, 2012b).

2.2 Implementation Costs

In this section, we present information found on U.S. CBP's official website in order to

understand better the costs related to the implementation of both FTZs and BWs. We also

18
include our findings from an interview we had with Randy Campbell and Corey Campbell,

professional FTZ consultants.

2.2.1 Implementation Costs - Foreign Trade Zone

Set-up costs are usually one-time costs incurred during the application process, which requires

CBP approval, and the FTZ activation process. Set-up costs include FTZ Board Application Fee,

Preparation of FTZ Application, Grantee Application Processing Fee, Grantee Activation,

Grantee Manufacturing Request Processing Fee (if manufacturing is planned in the FTZ),

Operations Manual/Training, Inventory System, and Security.

Administrative costs are usually incurred on an on-going basis. They are related to Operator

Bond, Grantee Annual Fee, Administration/Operation, Inventory system, Brokerage, and

Consultant/Attorney.

2.2.2 Implementation Costs - Bonded Warehouse

Set-up requirements for BWs differ from FTZs in that the Port Director determines the amount

of the bond depending on the purpose of the bond. The minimum bond amount is $25,000. The

following formula was used in determining the limit of liability according to the purpose for

which the bond is issued (United States. Department of Homeland Security, 1991):

If duties and taxes are between $0 and $1,000,000, the bond limit liability will be fixed in

multiples of $10,000 nearest to 10 percent of duties, taxes, and fees paid by the importer.

If duties and taxes are > $1,000,000, the bond limit liability will be fixed in multiples of

$100,000 nearest to 10 percent of duties, taxes, and fees paid by the importer.

19
Currently, the following formula is used to estimate the limit of liability that a trader must be

responsible for, in case of using a BW: "1% of the maximum inventory level" (Randy Campbell,

Corey Campbell, personal communication, April 16, 2013).

Set-up costs for BWs are related to Application for BW, Warehouse Survey, Background

Inquiry, and Approval/Denial of Application. The change of a BW's purpose is allowed but it

involves additional costs associated with Alteration, Relocation, Voluntary Suspension, or

Discontinuance (United States. Department of Homeland Security, 2012b).

2.3 Financial Benefits

This section showcases publications related to the benefits and the differences of FTZs and BWs.

2.3.1 Financial Benefits - Foreign Trade Zone

The panelists at the conference of the American Association of Exporters & Importers (AAEI)

discussed savings related to operations in FTZs such as duty deferral, duty exemption on exports,

duty exemption through scrap, duty reduction through inverted tariff relief, brokerage fee, and

MPF reductions ("Five Ways," 2006). These savings are defined below.

Duty Deferral - Within an FTZ, duties are delayed until product is shipped out of the FTZ and

into the U.S. customs territory. This postponement of duty payment can provide a significant

positive cash-flow impact.

Duty Exemption through Exports - Product re-exported out of an FTZ is exempt from import

duties. This duty exemption can be a direct cost savings.

Duty Exemption through Scrap - Product scrapped or discarded within an FTZ is exempt from

import duties. This duty exemption can be a direct cost savings.

20
Duty Reduction - Also known as an Inverted Tariff, it is used within Manufacturing FTZs where

duty rates can be applied to the lessor of the raw materials entered into the zone or the finished

material withdrawn from the zone.

Brokerage Fee Reduction - FTZs allow weekly consolidated entries, thus reducing the total

number of entries and the incurred brokerage fees.

MPFReduction - FTZs allow weekly consolidated entries, thus, reducing the total number of

entries and the incurred MPF.

Mongelluzzo (2003) examines the benefits of FTZs for non-manufacturing importers. It discloses

that the main savings opportunity comes from MPFs because the company can delay entering the

Customs territory for up to a week. Instead of paying MPFs every time a shipment arrives, an

importer can consolidate the goods in an FTZ and pay the MPF once.

2.3.2 Financial Benefits - Bonded Warehouse

The main savings of BWs, resulting from import duty postponement and re-exporting of goods,

are duty deferral and duty exemption. BWs do not affect costs related to MPFs and customs

brokerage fees as entries are not consolidated. BWs are considered to be on Customs territory

(United States. Department of Homeland Security, 2012b). Thus, all imported shipments arriving

in a BW owe immediate MPFs for their documents to be processed by the CBP.

2.3.3 Key Differences between Foreign Trade Zones and Bonded Warehouses

Figure 3 is derived by information collected from the Economic Development Council for

Central Illinois and the Greater Indianapolis Foreign Trade Zone ("FTZ vs. Bonded Warehouse,"

2013; "Bonded Warehouse versus FTZ," 2013).

21
 a

A Bond is not required for goods in a FTZ.

Customs Bonds are required for al warehouse
Customs Bond Admissions to the zone are covered under the
entries.
FTZ operators Customs Bond.

Duties are due only upon entry for U.S. Duties are due prior to release from bonded
Payment of Duty
consumption warehouses.

Manufacturing is permitted within the FTZ. Duty

is payable on either the imported components or
the finished product whichever has the lower Manufacturing is not permitted in a bonded
Manufacture of Goods
rate. There is no duty on waste material or on warehouse.
value added mnufacturing such as labor,
overhead and profit.

-T141ateendukaetgxosisk4 rnpd

Storage Period Unlimited Not to exceed five years

May be adnitted without customs permit and co

Domestic Goods May not be admitted.
mingled with foreign goods.

Movement of goods is limited in a bonded

Movement of goods is relatively unrestricted in
Movement of Goods warehouse. Specific customs approval is required for
and out ofan FTZ.
each novement.

Figure 3: Key Differences between FTZs and BWs

This figure shows some of the main differences between and FTZ and BW. For example only

foreign cargo is allowed within a BW while both foreign and domestic cargo may be placed in an

FTZ. Also manufacturing is not allowed within a BW, but with CBP approval, manufacturing

can occur in an FTZ.

22
2.4 Examples of Existing Implementations

Neville (2010) showcases that in practice the major FTZ-related savings come from MPFs and

duty deferrals. It estimates that VP Corporation's annual savings are 55 percent from MPFs and

44 percent from duty deferral. Transforming a DC into an FTZ subzone, Swatch Group reported

savings from "lower customs broker charges, MPF, and paperwork" to be 70 to 75 percent of

their total savings (Neville, 2010). Neville also points out that FTZ operations have become the

industry standard among the watch and jewelry brands.

Hirotoshi Otsubo gave an example of FTZ effects on Reebok International's operations in his

thesis for the University of Tokyo (Otsubo, 2005). Reebok specializes in the design and

marketing of footwear and sports apparel. To offset U.S. quotas on Chinese-made products and

customs regulations, Reebok established a network of FTZs around the world. Otsubo points out

that Reebok benefits the most from "duty deferral, volume reduction [product destruction], and

the simplification of foreign trade procedures" as the company performs its quality control and

product destruction out of FTZs (Otsubo, 2005).

We are not able to identify any publications showcasing the implementation of BWs in the

apparel sector. Furthermore, we could not find white papers or articles detailing the benefits of

operating a large-scale distribution business out of a BW in any other industry.

3 METHODOLOGY

To determine the feasibility of implementing either an FTZ or a BW across all or part of RLC's

current U.S. distribution network, we compared the implementation costs with the respective

financial benefits, as well as other potential supply chain or network impacts. This section

23
describes the processes and equations we used to estimate the implementation and administration

costs, the cost savings and cash-flow improvements, and the supply chain impacts. We then

discuss our methods to consolidate these factors to help RLC's future distribution decisions.

We began this analysis by collecting data from four of RLC's North America (NA) facilities:

Beechwood, Eagle Hill, RL Direct, and OHL Transload. Next, we estimated the costs and

savings of establishing and managing each facility with the new legal status. Third, we applied a

cost-benefit analysis comparing the representative costs and savings to determine whether RLC

should transform any of its current NA DCs into FTZs or BWs. The cost-benefit analysis helped

to determine financially which DCs, if any, should be transformed. Finally, we consolidated our

findings to make recommendations and advise further considerations.

3.1 Implementation Costs

To calculate the cost side of the cost-benefit equation, we investigated the costs related to set-up

and manage FTZs and BWs. The U.S. CBP is the government agency responsible for declaring

the requirements for setting up and managing either an FTZ or a BW. In this analysis, we used

the latest postings on the U.S. CBP website. However, as these requirements are subject to

change, the future outcome of a similar analysis may vary.

The main set-up costs of FTZs and BWs are related to the application for change to FTZ/BW

status, the FTZ/BW activation with the U.S. CBP, and the implementation of FTZ/BW

management software. To facilitate the FTZ/BW application and activation activities, companies

contract consulting firms. However, the set-up and administration costs for FTZs/BWs vary

tremendously based on the consulting fees of those organizations. To collect data related to those

24
costs, we approached five companies specializing in trade facilitation and 3PL services. We were

able to collect data through phone interviews from two of these companies:

Foreign-Trade Zone Corporation - a consulting firm with clients in over 40 states specializing in

FTZ/BW application and activation located in Mobil, AL

Campbell Trade Group, Inc. - a foreign-trade zone consulting and economic development firm

located in York, PA

Conducting further research online, we also collected costs data from a feasibility analysis posted

on the website of IMS Worldwide, Inc. - a FTZ and industrial park consulting firm located in

Webster, TX. In our analysis we also used RLC's quoted OHL FTZ implementation costs as a

fourth source of reference to set-up and administrative costs. All four sources were consistent in

defining the cost range, which is large, and the showed the actual costs can vary significantly.

3.2 Financial Benefits

To determine the financial benefits, we solicited historic data, related to the importing, exporting,

and warehousing of each DC, directly from RLC. This historic data is assumed to be reflective of

future operations and is used to calculate the benefits outlined in this section.

Table 3: Importer of Record Breakdown

Amrerican Lig Dresses Polo Jeans Co.

American Living Womenswear Ralph Lauren Chikdrenswear

Chaps Dresses Ralph Lauren Footwear, Inc.

Club Monaco Ralph Lauren Media

Lauren Ralph Lauren Rugby by Ralph Lauren Corporation

25
For each RLC facility, data was consolidated into categories based on Importer of Record (IOR).

Consolidating the details by IOR helped standardize the estimation process across a large

number of SKUs and unit volumes. Table 3 provides the list of the specific IORs.

3.2.1 Financial Benefits - Foreign Trade Zone

As described in the literature review, there are five key opportunities to reduce costs and improve

cash-flow when utilizing an FTZ. These savings include duty deferral, duty exemption, duty

reduction, MPF reduction, and brokerage fee reduction. We used Equations 1 through 6 to

determine the savings at each facility with (i) indicating each IOR category. The following

equations were derived from standard equations found within trade publications and white papers

altered to align with the RLC data collection process (Alvarado, 2011; "Five Ways," 2006).

Key Variables:

DD =Duty Deferral COGS, = Annual Cost of Goods Sold

DEE = Duty Exemption through Exports A,= Average Inventory
DEs = Duty Exemption through Scrap e, Percent Value of Exports
DR, = Duty Reduction s, Percent Value of Scrap
MPF = Annual MPF Savings rFi Weighted Average Finished Goods
BF = Brokerage Fee Savings
Duty Rate
V = Annual Entry Value
F =Annual MPFFees
r =Weighted Average Duty Rate E Annual Number of Custom Entries
CC = Cost of Capital B Broker Fee

Duty Deferral: DD = V, r,CC (1)

COGS,

Duty Exemption through Exports: DEE >ijii (2)

26
 n

Duty Exemption through Scrap: DE, =ZVsiri (3)

Duty Reduction/Inverted Tariffs: DR = V(r - rFi)( i)( - s) (4)

Merchandise Processing Fee Savings: MPF F - (52)(485) (5)

Brokerage Fee Savings: BF = (E - 52)B (6)

3.2.2 Financial Benefits - Bonded Warehouse

BWs provide the same advantages as FTZs with Duty Deferral (Equation 1) and Duty Exemption

through Exports (Equation 2). Therefore these equations will be the same, with the restriction

that the storage period cannot exceed five years. The other FTZ savings outlined in the previous

section do not apply to BWs.

3.3 Cost Benefit Analysis

In order to evaluate the transition to either an FTZ or a BW for each DC, we calculated the

annual Net Benefits, total benefits minus the total expenses, for each of the four RLC facilities.

These annual Net Benefits were then used to calculate the Net Present Value (NPV) and

Discounted Return on Investment (ROI) over a three-year period. NPV is a method of

calculating the expected net monetary gain or loss from a project by subtracting the present value

of the cash outflows from the present value of the cash inflows at the present point in time.

Equation 7 shows the formula used to calculate the 3 year NPV for the Cost Benefit Analysis.

C, = InitialInvestment r =Discount Rate

C = Cash Flow t = Time

27
 C CC
NPV = -C,+ 1 + 2 +...+ ' (7)
l+r (1+r)2 (1+r)'

The Discounted ROI is simply calculated as the discounted benefits minus the discounted costs

divided by the discounted costs.

The Cost Benefit Analysis provides RLC with an overall estimate of the financial return, based

on the total costs and savings for the three-year period. Though each company may have

internal metrics to determine required return to move forward with a project, IMS Inc.'s

feasibility analysis suggests that the return on investment in an FTZ facility should be at least

200% (Spencer, n.d.). We were not able to identify a similar break-even point suggestion for a

BW implementation.

3.4 Supply Chain Impacts

In addition to the financial feasibility of FTZs and BWs, we explored how moving to an FTZ or

BW could impact RLC's Supply Chain and NA Network. These impacts could include

adjustments to lead time, inventory, transportation, and network flow. Since we were unable to

find any previous research in this area, we discussed these possible impacts with FTZ/BW

experts. We further explored how RLC could use the advantages of FTZs or BWs in the U.S. to

service customers in Mexico and Canada.

4 DATA COLLECTION AND ANALYSIS

This section, we describe the data gathered and analyzed to determine the feasibility of

implementing FTZs or BWs within four of RLC's U.S. facilities. These data include the

28
implementation costs of both establishing and managing an FTZ or a BW, financial benefits, and

supply chain impacts.

4.1 Implementation Costs - Foreign Trade Zone

Consulting experts play an important role in assisting companies with the application, activation,

and software implementation processes of FTZs. As described in the previous section, we

collected information from consulting firms that specialize in FTZ implementations. This data

was collected through multiple methods including interviews, a recent feasibility analysis, and a

recent FTZ set-up request for quotation (RFQ) specifically for RLC's OHL facility. These

specialists confirmed that the main set-up costs of FTZs are related to the application for change

to FTZ status, the FTZ activation with the CBP, and the implementation of FTZ management

software and the main on-going costs are related to the personnel required for FTZ

administration. The ranges of data for these costs do vary by FTZ implementation, but the ranges

provided by each of the consultants were consistent. Table 4 provides the range of both set-up

and on-going costs related to implementing an FTZ.

Table 4: FTZ Implementation Cost Range

FZ Implementation Costs Cost per one facility

FTZ Set-up Costs (on-time) 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
FTZ Administration Costs (annual) 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

29
Table 5 shows the size scale of FTZs located within FTZ 121 in Albany, NY. RLC's

Greensboro facilities are substantially larger than the highest size scale of 250,000 square feet

with Beechwood - 1,300,000 square feet, Eagle Hill - 800,000 square feet, and RL Direct - 300,

000 square feet. Thus, we applied the highest set-up and on-going FTZ costs whenever their cost

drivers are based on the facility's size. When evaluating OHL's case, we applied the specific

costs that RLC provided to us in regard to OHL's FTZ transformation.

Table 5: Capital District Regional Planning Commission Operator Fees

Operator Few for AN Sb. Activated for Wardousig Only

Annual Fee Schedue for Acdvaed Opeaows wih Warehousing Authority
Less than 20,000 sq. ft. of Activated Zone Space $ 1,000
20,000 - 50,000 sq. ft. $ 2,5001
>50,000 - 100,000 sq. ft. $ 5,000
>100,000 - 250,000 sq. ft. $ 7,500
More than 250,000 sq. ft. $10,000
Includes Tradinonal General-Purpose Zone, Magnet, Usage-Driven, & Subzone Sites

One of the data collection phone interviews we had was with Craig Pool, the FTZ Corporation

founder. According to Pool, the total FTZ set-up costs for zone application, activation with the

CBP, and software implementation can vary between $75,000, using a small scale consulting

firm, and $250,000, contracting a leading consulting firm. According to Randy Campbell, one of

the Campbell Trade Group founders, the FTZ application fee is a one-time charge that varies

between $7,500 and $12,000. This range includes the FTZ Board Application Fee, the

preparation of FTZ Application, and the Grantee Application Fee. Because multiple sites within

the same zone can be on the same application, each additional site would cost approximately

$2,500 for the additional preparation of the application. For this analysis, based on the expert's

feedback, we estimate the FTZ application fee to be $7,500 for each of RLCs facilities because

30
non-production facilities, such as RLC's, require a lower application fee than that for

manufacturing facilities.

The CBP activation fee, is a one-time cost that consultants charge for their services, including

activation request, site inspection, site plan layout, and FTZ procedures manual. This cost does

not vary according to the size of the facility to be activated as an FTZ. The activation of a single

property is around $25,000, depending on the number of employees that need to be trained to

operate the FTZ. Activating an additional property within the same zone would cost 25% of the

initial activation fee. The exact cost for the activation of each additional property is related to the

personnel training that is required to manage an FTZ. Given the large scale of the RLC facilities

and the big number of employees at each facility, we assign $100,000 for FTZ activation and

employee trainings.

The largest cost driver in FTZ establishment is the implementation of FTZ management

software. Software implementation costs are based on the number of transactions accounted for

by the software. Transactions refer to each physical movement of goods within, in, or out of an

FTZ. The average software implementation cost, according to Randy Campbell, is $100,000 for

the system set-up and $20,000 to $25,000 annually for system maintenance. We assign $100,000

per DC because of their size and operational complexity. Although we evaluate each DC's

transformation into an FTZ as a separate project, additional savings from software

implementation are expected. When implementing FTZ management software in multiple

properties within the same site, a company has the opportunity to run one software

implementation if it tracks inventory in the same system across the multiple properties prior to

transforming the site into an FTZ. However, if the company operates different inventory tracking

systems in each property, it has to undergo separate software implementations in each property.

31
Due to the large number of transactions within RLCs facilities we estimate the annual system

maintenance cost to be $25,000. Table 6 provides the estimated FTZ implementation costs for

each facility.

Table 6: FTZ Set-up and Administrative Costs Estimated by RLC DCs

FTZ Implementation Costs Beechwood Eagle Hill RL Rirect OHL

FTZ Set-up Costs (on-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

The ongoing management of an FTZ requires a dedicated FTZ administrator, whose salary varies

between $75,000 and $90,000 annually. This person is responsible to manage the daily FTZ

operations and ensure the company complies with all FTZ regulations. In addition to the

administrator fee, companies will incur a Grantee Annual Fee and could incur additional

warehousing fees if the facility is managed through a 3PL and additional space is required. We

assign the maximum FTZ administrator salary of $90,000 based on the complexity of managing

large scale facilities of RLC's size.

4.2 Implementation Costs - Bonded Warehouse

Establishing a BW requires an application to the local CBP port director, a certificate showing

the building is fit for fire insurance and the blueprint of the space to be bonded. While

interviewing the consulting experts, both of them made it clear that BWs are not a feasible option

for a facility of a size similar to the RLC's facilities. BWs are more suitable for international

32
consolidation centers or cross docks that require limited material handling. This allows the final

export decision to be postponed while duty is deferred. Within a BW, product is under constant

CBP supervision and no receipt or goods issue is allowed within the warehouse without customs

approval (Chapter 7: Free Trade Zones, 2004). We were unable to further explore the cost

details of setting up a BW facility as there were no related examples the experts could provide.

According to Craig Pool, operating BWs imposes strong managerial limitations and "no large

scale DCs operate out of BWs." BWs' operations require stringent reporting of incoming and

exiting items to the CBP. According to the Bonded Warehouse Manual for Customs and Border

Protection Officers and Bonded Warehouse Proprietors, the CBP has the authority to conduct

physical checks of the activities in the BW (United States. Department of Homeland Security,

2012b). A search in a BW can be done at any time without advance notice and without a warrant.

The BW proprietor should provide all necessary equipment for these searches, such as equipment

for weighing, gauging, and measuring. Compliance reviews are frequent and are conducted by

the port office to physically check all transaction within a BW to make sure that the BW is

compliant with the existing regulations. Compliance reviews are conducted without prior

notification and at any time the CBP considers necessary. Audits are another form of stringent

control over BWs. These audits are very detailed checks of the proprietor's financial and

inventory records. Unlike compliance reviews, audits are announced by an advance notice.

Although audits are not as frequent as compliance reviews, they are much more thorough and

take much more time, up to a month (United States. Department of Homeland Security, 2012b).

Besides for the operational complications and limitations, the BW administration requires "a lot

more time" in comparison to managing an FTZ, which boosts man-hour costs.

33
4.3 Financial Benefits - Foreign Trade Zone

Based on the findings in the previous section, BWs are not deemed a feasible option for RLCs

facilities. Thus, we focused our financial benefits data collection on FTZs. Working closely with

our contacts at RLC, we collected the key information outlined in Section 3.2.1. The historic

data used for the financial benefits came from a number of different RLC IT systems across

multiple time periods. For this analysis we assume all time periods are weighted equally

throughout the course of a year, without any major seasonality or variation. This allows the data

points to be averaged over each time period and annualized to obtain a serviceable estimate. The

following descriptions outline the origins and time periods for the collected data.

EstimatedAnnual Entry Value: We annualized data from eFocus, a system that tracks import

shipments and manages customs, from April 2012 through February 2013. The total product

value of entries was $2.1 billion. The Beechwood and OHL facility accounted for almost 75% of

the total product value that was entered into the US over the course of a year. Table 7 below

shows in detail the total entry value in each warehouse facility and the corresponding IOR.

EstimatedNumber ofAnnual Entries: Using a Customs Entry Detail Report, provided by RLC's

freight forwarder, that covered January 2012 to December 2012, we estimate the number of

ocean shipment entries per facility. The annual number of entries from ocean shipments for

RLC's U.S. operations was approximately 7200. A third of the entries went through facilities

other than those reviewed in this analysis, including RLC's Chino and Buena Park facilities as

well as direct shipments to customers. Table 8 below shows the annual number of entries per DC

and the importers of record corresponding to each entry.

34
 Table 7: Estimated Annual Entry Value (in thousands of dollars)

American Living Dresses $ - $ -8$3- $ $ 5,971 $ 5,971

760&
American Living Womenswear -4- $ $
$ 702
$ 702
$ -t$ $
27,040 27,040
Chaps Dresses $
$ - $ - $ - $ 9,395 $ 9,395
:hiadjbo Wear $
.4 $ 6,2
$ $ 60409 $ 60,109
Club Monaco $
$ 14,084
$. 28,325 $ - $ $ 42,409
$ $ 25,250
$t
Lauren Ralph Lauren 36,770 $ 144,138 $ - $ $ $ 180,908
$ $ 24110 $ $2120
%
$
Polo Jeans Co.
$ $ 2,869 $ 2,869
153,049t $ $ - $ $ r1 5' 153,048
Ralph Lauren Childrenswear $ 78,605 I 119,804 $ - $ 27,825 $ 226,233
$
$ 106;2$ 982V779
$
Ralph Lauren Footwear, Inc. $ 4,101 $ 6,721 $ - $ $ 83,914 94,736
$$15971
$ 9$ -'
$
Ralph Lauren Media $ - $ - $ - $14 50,274 $ 160,274
$
5,672 5 2Z300
Rugby by Ralph Lauren 1,410 $ 10,788 $ - $ $ 12,198
Total IS 67,0451 S 889,459 S 32,489| S 160,274| S 348,739 S 2.107,006

Table 8: Estimated Number of Ocean Shipment Entries by Facility

American Living Dresses - 95 95

76
American Living Womenswear - 53 53

Chaps Dresses - 122 122

Club Monaco 90 181 271

--
Lauren Ralph Lauren 175 686 - 861

Polo Jeans Co. - 51 51

Ralph Lauren Childrenswear 361 514 164 1,039

Ralph Lauren Footwear, Inc. 30 51 612 693

rz' I ilk.'-
~W;~S ~N; -

Ralph Lauren Media

V 73
Rugby by Ralph Lauren 20 153 173
Total 1,405 1 3,1831 2401 - 1 2,3681 7,196

35
Annual Value of Exports to NAFTA and Non-NAFTA Regions: The provided export shipment

data came directly from RLC's ERP system covering the period of April 2012 through October

2012. This data was provided by the RLC Division; we then aligned the data to the appropriate

IOR to ensure the data analysis was uniform. After annualizing this data we estimated that RLC

exported approximately $23.7 million of product from Beechwood and Eagle Hill. Neither the

OHL nor the RL Direct facility currently exports material. The largest exporter was the Home

Collection division, which is managed exclusively through the Eagle Hill facility. Table 9 below

shows the value of total exports in thousands of dollars and the breakdown of exports' value per

importer of record going to NAFTA and Non-NAFTA destinations.

Table 9: Annual Value of Exports (in thousands of dollars)

Club Monaco $122 $113 $ 235

Leathergoods and Accessories $356 $ 1,719 $2,075

Ralph Lauren Corporation $659 $ 3,822 $4,481

Ralph Lauren Home Collection $ 7,387 $ 5,786 $ 13,173

Scrap/Waste PercentageofAnnual Entry Value: Based on an interview with RLC, since none of

the facilities are expected to manufacture finished goods and the amount of scrap was limited, we

assumed 0% scrap/waste.

36
Average Inbound Duty Rate: Because the product mix fluctuates within each Importer of Record

category, the RLC Trade Department recommended an average duty rate of 16% for each IOR

category with the exception of Ralph Lauren Footwear, which should be 20%.

FinishedProductDuty Rate: This data point will not apply to RLC operations because the

company will not utilize a Manufacturing FTZ. Based on conversations with RLC personnel, for

this analysis all products are assumed to be imported as finished goods. Hence, average the

Inbound Duty Rate equals the Finished Product Duty Rate.

Cost of Capital:We could not obtain RLC's actual cost of capital within the timeline of our

research. We assumed a 6% internal rate of interest for key project evaluation.

Average Days ofInventorv: We could not obtain RLC data to calculate Inventory Turns or

Average Days of Inventory. RLC's Financial Department recommended that we use 10

inventory turns, or 36.5 days of inventory, as an estimate for each DC. Since the OHL Transload

facility does not store inventory, we estimated an average of 3 days of inventory to receive,

process, and ship product.

Merchandise ProcessingFee: RLC's Freight Forwarder provided MPFs for all entries through

the Port of LA from July 2012 through September 2012. During this time period RLC paid

$355,000 for 1250 entries. We averaged the MPFs to obtain an estimated fee per entry of $284.

Brokerage Fee: The Brokerage fee was estimated to be $125 per entry (Laden, 2008).

Table 10 below combines the financial data for RLC's U.S. facilities broken out by each IOR

category.

37
 Table 10: Consolidated Financial Data by Importer of Record Category

Amrican Living Dresses 16% $ -$ - $ 5,970,541 95

Amrican Living Womenswear 16% $ -$ - $ 701,926 53

Chaps Dresses 16% $ - $ 9,394,634 122

Club Monaco 16%

$ 122,335 $ 112,529 $ 42,408,907 271
$ - ~$ ~ 2529717
2 35.7
Lauren Ralph Lauren 16% 318,040 $ 180,907,705 861
-SA~
$
$ 8999$ U5O,192 370'
Polo Jeans Co. 16% - $ 2,868,918 51
$
- V
Ralph Lauren Cbildrenswear 16% $ 13,817 $ 96 5,658 $ 226,233,472 1,039
11602,
Ralph Lauren Footwear, Inc. 20%
$ 7,136 $ 94,735,665
37 9,528 $ 693

Ralph Lauren Media 16% - $ - $ 160,273,654

R1tjiaenWormwnswear $ 772 1,46 5$1 223000 287
Rugby by Ralph Lauren 16%. $ - $ - $ 12,197,729 173
Total S 9,123,268 S 14,567,7621 S 2,107,005,534 7196

4.4 Financial Benefits Calculator - Foreign Trade Zone

Because of its operational complexity, the BW model is not deemed a viable option for the scale

of RLC's facilities. Thus, we continued the research by exploring the FTZ option for RLC's four

facilities.

Using the financial data collected in the previous subsection, we developed a Financial Benefit

Calculator in Microsoft Excel. This tool calculates and consolidates all the financial benefits for

each RLC facility based on the collected and estimated data. Figure 4 shows the three primary

sections of the Benefits Calculator. These sections include:

1. Input Variables - the area to input the collected key variables outlined in Section 3.2.1

38
2. Output Data - this section calculates the savings specific to each IOR using equations 1-6

from section 3.2.1

3. Results Summary - a summary of the total savings for each type of FTZ benefit

A copy of each facility's FTZ Financial Benefits Calculator and a summary of all results can be

found in the Appendix.

Duty and Fee Savings Estimator for FTZ

n-awood
31"r&WfWA |
Finished Product Duty Rate N/A
Merchandise Processing Fees S284I 1. Input Variables
Brokerage Fee $125
Avg Days of Inventory 36.5
Est. Interest Rate 6%
Scrap(Waste % 0%

Summary of Savings
By Input:

DruMes $ - S 24,240 S
S
2. Output Data
arenlabLare $ S
- S
173,671 5 50,886
S
24.480 S 15.371
rgoodIsadAccessodea S S
- S
26,986 5 275.040 S
*AoRelapspaden S
S
- S 146,926 $ S
abhLMuenC&ww S 190,473 S 154.505 77.304 S 38.625
S S
*Lamn cperada $ $S
S - S 841,684 S 611.497 150.576 S
£
70,875
*hLannFoowewnc. S S -
-
S
S
12.986 S 75,906 $ S
S
*hLaannWameasaar $ - S 21,408 S .234,485 S 2,625
uAybyRWLosm S 11.710 S S
$ - t - S L4 90.76 1,420,324 S 252,700 S 3225i

By Type:

Duty Reduction =[I Z Duty Deferral= __490796

Duty Exemption E:Sport = Brokerage Fee I__3 3. Results Summary
Duty Exemption Scrap = S j MPF Savings 700

Total= LIA I

Figure 4: Beechwood - Foreign Trade Zone Financial Benefits Calculator

39
Figure 5 shows a graph of the financial savings, across each RLC facility. The graph does not

include either Duty Reduction or Duty Exemption Scrap as there were no expected savings for

any of the analyzed facilities. The Beechwood facility provided the largest financial benefits

with approximately $3.3 million in annual savings. The annual savings at this facility are

primarily driven by duty deferral, $1.5 million, and by duty exemption of export, $1.4 million.

At the OHL Transload facility the main benefits are related to MPF savings. This is in line with

the large number of import entries coming into the West Coast of the U.S. from RLC's extensive

Asia supply base.

$4,000
$3,296
$3,500

$3,000

$2,500
IA
V5
$2,000
C
$1,500
$1,084 $1,066
~1,U~A)

$154

Beechwood Eagle Hill RL Direct OHL

MDuty Deferral MDuty Exemption Export U Brokerage Fee E MPF Savings

Figure 5: Financial FTZ Benefit Summary

4.5 Cost Benefit Analysis - Foreign Trade Zone

The FTZ benefits of duty exemption export (DEE) can also be achieved without an FTZ through

duty drawback, the refund of duty collected on imported material that is subsequently exported.

Because the details of the RLC duty drawback process are unknown, we performed two cost-

benefit analyses. The first analysis included all duty exemption savings assuming there was no

duty drawback. While the second analysis did not include any duty exemptions savings
40
assuming all savings are retrieved through duty drawback. Depending on the timing of the duty

drawback refund there could be some cash-flow savings, but without the necessary information

we did not include this factor.

We compared the set-up and administrative costs of each RLC facility to the expected savings of

operating out of an FTZ for a three year period. Based on the financial analyst growth

expectation of 7% outlined in the Introduction and an estimated discount rate or 10%, we

estimated the NPV of each DC as a separate project. Figure 6 provides an example of the

Beechwood FTZ Cost Benefits analysis including the estimated benefits, the estimated costs, and

the net results. In addition to the net results we calculate the NPV and Discounted ROI for each

separate project.

Beechwood - Including Duty Exemption Export Growth Rate 7%

Discount Rate 10%
FTZ BenefIs and Expenses by Type Year 0 Year 1 Year 2 Year3 Total

FTZ Financial Benefits

Inverted Taxes
Duty Exemption Export
Duty Exemption Scrap
$
$
$
-
-
-
$
$
$
-

-
$

$
-
1,420 $ 1,520
-
$
$
$
-
1,626
-
$
$
$
-
4,566
-
-A 1. Estimated
Benefits

Brokerage Fee Savings $ - $ 132 $ 142 $ 151 S 425

MPF Savings S - $ 253 S 270 S 289 $ 812
Duty Defrral $ - $ 1,491 $ 1,595 S 1,707 $ 4,793

Total FTZ Benefits S 3.296 S 3.527 S 3,774 S10,597

FrZ Expenses
ApplicationFees $ 8 S - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - S 100 2. Estimated
Software/IT Integration $ 100 $ - S - S - $ 100
Administration Personnel $ - $ 90 $ 90 5 90 $ 270 Costs
Warehousing S - $ - $ - S - $ -
SoftwareIT S - $ 25 $ 25 S 25 S 75
Operator and Bond Fee S - S 10 $ 10 S 10 $ 30

Total FrZ Expenses S 208 S 125 S 125 S 125 S 583

Net FrZ Benefit S (208 S 3.171 S 3.402 $ 3.41

0 S 10.014

3. Results I
NPV @
YUm. ... (O%)
A C -I

IM7J

Figure 6: Beechwood - Cost Benefit Analysis Including DEE (in thousands of dollars)

41
Copies of the Cost Benefit Analysis for each facility for both scenarios, including and excluding

duty deferrals, can be found in the Appendix.

The summary of the 3 year NPV and Discounted ROI for each RLC facility is shown in Table

11. Based on feedback from the consultants, they suggest a ROI greater than 200% to implement

an FTZ.

Table 11: Results of the Cost Benefit Analysis (in thousands of dollars)

Eagle Hill $2,358 455% ($99) -19%

OHL $2,163 325% $2,163 325%

4.6 Supply Chain Impacts

One of the Supply Chain impacts of an FTZ that was pointed out to us by consulting experts is

the reduction of one to two days of lead time. By avoiding immediate Customs' processing of the

merchandise stored in an FTZ, traders can shorten their lead time. However, we were not able to

collect any data to substantiate that statement. If obtained, this lead time reduction could reduce

both pipeline and safety stock inventory levels for RLC. No other inventory or logistics impacts

were determined through our analysis.

5 CONCLUSIONS AND RECOMMENDATIONS

The following conclusions and recommendations are based on the data collected and analyzed,

and are contingent on the assumptions outlined in the methodology. These assumptions,

especially inventory turns, play a critical role in this analysis. Since we were unable to collect

42
data regarding inventory turns, RLC suggested we estimate ten inventory turns at each DC. Our

results are contingent on the accuracy of this assumption.

5.1 Conclusions

As a result of our data analysis, we came to the following conclusions:

Conclusion 1: FTZs are afeasible option operationallyfor RLC's large scale

distributionfacilities.

Based on expert feedback, operating out of an FTZ does not negatively impact operations and in

some cases it may reduce the time to clear customs by bypassing the standard customs clearance

procedure.

Conclusion 2: BWs are not afeasible option operationallyfor RLC's large scale

distributionfacilities.

It is not the cost associated with BW set-up and administration that render it unattractive, but

rather the complexity of managing the high level of CBP supervision. Thus, our

recommendations consider only FTZ implementation.

Conclusions 3: It is cost beneficial to transform RLC's OHL Transloadfacility

and Beechwood DistributionCenter into FTZs.

With discounted ROI's of greater than 300%, these two facilities' financial benefits outweigh the

costs to establish and maintain an FTZ status. The total estimated three year Net Benefit NPV of

these two facilities is between $10.4 million, including duty exemption through export, and $6.6

million, excluding duty exemption through export.

43
 Conclusion 4: It is not cost beneficial to transform RL Direct into an FTZ.

Since there is little to no import or export activity within the RL Direct, eCommerce, facility

there are neither import fees savings nor export duty exemptions. Relying only on the cash-flow

impact of duty deferral, the FTZ benefits do not provide sufficient savings to offset

implementation costs. The expected 3 year Net Benefits NPV is ($110,000) and the Discounted

ROI is (21%).

Conclusion 5: The profitability of transformingEagle Hill into an FTZ cannot be

determined by the information collected.

With the largest savings coming from DEE, approximately $1 million, the two scenarios of

including and excluding DEE, provideconflicting results. RLC's existing duty drawbacks affect

the level of expected DDE. Without the duty exemption the 3 year discounted ROI greatly

reduces from 455% to (19%), making this a negative investment.

5.2 Recommendations

As a result of our conclusions, we recommend the following actions:

Recommendation 1: OHL Transloadshould be the firstfacility transformedinto

an FTZ

Following from Conclusion 3, the OHL Transload facility should be transformed into an FTZ.

Though OHL Transload does not provide the most financial savings, with $2.2 million three year

NPV Net Benefits and 325% discounted ROI, its FTZ status will directly impact the savings of

the other facilities. Merchandise shipped through the West Coast moves first through OHL

Transload before reaching the North Carolina DCs. Goods cannot move from a non-FTZ facility

44
to an FTZ facility without incurring duties and import fees. Implementing another DC into an

FTZ prior to OHL Transload's transformation would not allow the destination DC to take

advantage of all FTZ savings.

Recommendation 2: Beechwood should be implemented into an FTZ following

OHL Transload.

Following from Conclusion 3, in addition to being cost beneficial, the Beechwood DC receives

approximately 55% of its total imported merchandise value through the OHL Transload facility.

Thus, to achieve the expected savings it is critical that the merchandise is transported in-bond

from an FTZ West Coast facility to Beechwood. An in-bond shipment allows merchandise to be

transported between FTZs without entering U.S. customs territory.

The Beechwood facility provides the greatest financial benefits and is impacted the most by the

duty drawback process. The estimated savings for Duty Deferral through Export for this facility

is $1.4 million. If RLC is currently receiving duty drawbacks for this entire amount, the expected

total annual savings will reduce from $3.3 million to $1.9 million. Though the 3 year discounted

ROI will reduce from approximately 1600% to 860%, the FTZ savings still justify transitioning

to an FTZ. These large savings align with expectations since Beechwood is the largest facility

with the highest number of entries, and the largest average inventory value.

Recommendation 3: A follow up analysis should be performed if RLC

decides to import to or exportfrom RL Direct.

Following Conclusion 4, transforming RL Direct is not beneficial at this time. The lack of direct

imports to and exports from the facility lead to no savings from duty deferral and duty

exemption. However, a strategic change in the use of the facility would change the results of our

45
cost benefit analysis. In this case, a follow up analysis utilizing the FTZ Benefit Calculator and

the Cost Benefit Model should be performed.

Recommendation 4: The duty drawbackprocess, if any, should be reviewed to

determine the cost benefit of transitioningEagle Hill to an FTZ.

Following from Conclusion 5, the analysis is inconclusive because we could not collect relevant

data to determine the actual effects of the existing duty drawbacks on Eagle Hill's expected FTZ

savings. With limited benefits coming from the other savings areas, RLC should review the duty

drawback details and the expected long term strategy for exports from Eagle Hill. If RLC expects

the future non-NAFTA export rate to substantially decrease or is currently receiving similar

financial benefits from duty drawbacks, this facility may not benefit from the transition to an

FTZ. If RLC expects this export rate to continue or increase and the duty drawback process is not

refunding the entire duty exemption savings, implementing this facility as an FTZ should provide

sufficient savings. Additionally, we were asked to apply averaged inventory turns of 10, but

given the lower inventory turns in the RLC Home Division operating in Eagle Hill, higher duty

deferral savings are expected.

5.3 Additional Opportunities

In addition to the conclusions and recommendations we derived from the cost benefit analysis,

we provide suggestions for further consideration. Though we were unable to collect data

regarding these proposals, we believe more research could display additional FTZ benefits.

5.3.1 Reduce the Number of Importer of Records

Currently RLC is importing under 20 different IORs. Consolidating the number of IORs coming

into each facility would provide further potential savings. As an example of multiple IORs, there
46
are currently four American Living IORs: Childrenswear, Dresses, Menswear, and

Womenswear. Because FTZs allow weekly consolidated entries by each IOR, reducing the

number of IORs will result in potential annual savings of $25,220 per IOR for each facility.

Both Beechwood and OHL Transload import with over 10 different IORs, therefore reducing the

number of IORs could result in annual savings of up to $225,000 per facility.

5.3.2 Import Air Shipment Entries through FTZ

This analysis focused on import ocean shipments coming into RLCs U.S. facilities and did not

take air shipments into account. Data received at the end of this analysis showed that RLC had

12,843 air shipment import entries in 2012, of which 95% of these shipments entered through

New York's JFK airport. This number of air shipment entries is substantially higher than the

roughly 7,500 2012 ocean shipment entries. If entered through an FTZ these entries could

provide additional significant MPF and Brokerage Fee savings. Since products can arrive at any

U.S. Port of Entry and be shipped in-bond to an FTZ, these air shipment entries should be further

explored to determine if they can be routed through an FTZ facility.

5.3.3 Consolidate West Coast Operations

In addition to the OHL Transload facility, RLC also has two other facilities in the LA area,

located in Chino, CA and Buena Park, CA. The Chino facility primarily supports brands such as

RL Mens, Chaps, and RL Childrenswear, while the Buena Park facility supports the American

Living brand. To increase the FTZ benefits on the west coast RLC, depending on the long term

brand strategy, RLC could look into consolidating some or all of the operations into FTZ

facilities. These two locations combined accounted for over 2,300 ocean container import

47
entries in 2012. This is approximately one third of RLC's total number of import entries, while

the entry value was only 15% of the total value. If combined with the entries through OHL,

Chino and Buena Park's entries could provide additional annual savings of approximately

$400,000 on MPFs and approximately $200,000 on Brokerage fees. Utilizing the FTZ Benefits

calculator and Cost Benefit Model, RLC could investigate if it is beneficial to convert either of

these two facilities to stand-alone FTZ locations or to a single consolidated LA FTZ facility.

5.3.4 Handling Reverse Logistics

RLC handles returned merchandise in their current Greensboro facilities. Reverse logistics

cannot be handled within an FTZ activated area. Once merchandise leaves the FTZ it is

considered officially imported into the country of destination and the appropriate duties apply

and cannot be returned to an FTZ area. This is commonly handled by activating only a portion of

the facility as an FTZ, leaving the remaining area as a non-FTZ area for other daily operations

such as reverse logistics. The FTZ experts recommended including the whole footage of each

facility in the FTZ application but only activate the portion specifically needed to operate the

FTZ activities. The part that is left not activated would be used for handling returned

merchandise.

5.3.5 Canada Network

To determine the significance of having inventory-holding FTZ locations in the North American

region, we looked at the current RLC distribution network in Canada. RLC's Toronto DC

receives material directly from overseas suppliers, and accounts for 1%of total sales in North

America. To take advantage of the savings related to MPFs, brokerage fees, and duty deferral by

48
using a U.S. FTZ, we suggest further analysis and a possible network change. To consolidate the

Canadian volume, thus benefiting from U.S. FTZs, we suggest exploring four potential options:

Direct Transload, Hub and Spoke, Customer Direct Shipment, and Customer Drop Shipment. A

major financial impact to these options is the dutiable value of the goods at the time of export, on

which the customs duties will be paid. Given the high margins associated with luxury industries,

the difference between the duties paid on retail price versus transfer price could be significant.

When exploring the four options to support RLC Canada through a U.S. FTZ the following

special NAFTA provisions for duty deferral programs should be taken into consideration. This

provision applies to goods that are imported into a FTZ with the U.S. and Canada, and then

subsequently exported to other NAFTA countries. At the time of export goods from an FTZ are

treated as if withdrawn for domestic consumption, thus subject to the applicable duties. These

duties may be reduced or waived by the amount up to the total customs and duties paid to the

exported NAFTA country (United States. Department of Homeland Security, n.d.). Further

details can be found from the U.S. Custom and Border Protection FTZ Manual.

Below are the four suggested options to support RLC Canada through a U.S. FTZ. We believe

these options could be very beneficial to RLC's FTZ strategy, but were unable to collect the

necessary data to complete the analysis. Therefore we only outline the options for future

research. Each option should be reviewed thoroughly to determine the additional costs and the

expected FTZ savings before finalizing a recommendation.

Direct Transload:For orders bound to Canada, consolidating shipments through the OHL

Transload facility, instead of directly to a Canadian port, would allow RLC to take advantage of

additional FTZ savings related to MPFs, and brokerage fees. This option would involve the least

49
amount of change by allowing RLC to utilize the existing infrastructure and only requiring west

coast Canadian shipments to be redirected through the OHL Transload facility.

Hub and Spoke: In this option Canadian bound material would be consolidated and stored in a

RLC inventory holding DC (Hub) until replenishment to the RLC Canadian facility (Spoke) is

required. Based on the number and volume of shipments, in addition to RLCs supply chain

strategy, the Canadian facility could either be an inventory holding DC or a pull point, a non-

inventory holding location, where consolidated shipments from the U.S. would be

deconsolidated for customer delivery. This option would allow FTZ benefits of MPFS,

brokerage fee, and duty deferral in addition to other supply chain benefits of inventory flexibility

from risk pulling and postponing the replenishment decision into Canada.

Customer Direct Shipment: This option suggests consolidating U.S. and Canadian shipments

from Asia and warehousing them in Greensboro, NC, then exporting directly to RLC Canadian

customers. If Canadian retail customers order merchandise directly from U.S., the dutiable value

of the goods would be the retail price at which the merchandise is sold to the Canadian retailer.

This option would not require any infrastructure in Canada and allow inventory flexibility

through risk pooling, but it would substantially increase the required duties based on the retail

price.

Customer Drop Shipment: Figure 7 shows the difference between the invoice flow (green) and

the physical flow of goods (blue) in the case of customer drop shipment. To avoid paying duties

on high retail value, RLC could use a transfer price for shipments to Canada. A RLC Canada

entity could receive orders from Canadian retail customers then RLC Canada would order from

RLC USA in Greensboro, NC. RLC USA would send an invoice to RLC Canada but drop-ship

50
the merchandise from the Greensboro FTZs directly to the Canadian retailers. This option

minimizes the increase in duties while eliminating the need for warehousing in Canada.

* Shipping entity
* Destination Retailers
ES Invoicing entity
E11 Flow of money
* Flow of goods

Figure 7: Customer Drop Shipment Example

In this scenario duties would be collected on the transfer price between the U.S. and Canadian

RLC entities, which would be lower than the retail price.

5.4 Final Remarks

This thesis summarizes research conducted to compare FTZs and BWs for RLC NA operations.

To complete this research we compared the financial benefits, as they pertain to RLC NA

operations, against the facility specific set-up and management costs, as well as the operational

efficiency, for FTZs and BWs. This research can be utilized by RLC to make strategic

51
operational decisions and to determine a roadmap to possible FTZ or BW implementations. In

addition to the direct benefit to RLC, this research may be useful as a reference for other

companies that face similar challenges and wish to understand the benefits of FTZs and BWs.

The opportunity for RLC to implement and utilize an FTZ is dependent on each facility

operations and strategic plans. The facility's inbound, outbound, and internal operations

influence FTZ benefits. Any major strategic change in the operations of the facilities in

consideration would require re-evaluation of the FTZ implementation initiative. Increased

exports, inventory turns, value, type, and origin of the merchandise are some of the critical

factors for fluctuations in FTZ-related savings. The recommendations and suggestions listed

above are dependent on the data gathered and analyzed regarding the current operations in the

Beechwood, OHL, Eagle Hill, and RL Direct facilities, and contingent on our working

assumptions.

52
APPENDIX

Figures 8 through 10 are discussed in Section 4.4 and Figures 11 through 17 are discussed in

Section 4.5.

Duty and Fee Savings Estimator for FTZ

FagI HiI

Finished Product Duty Rate N/A

Merchandise Processing Fees $284
Biokerage Fee $125
Avg Days of Inventory 36.5
Est. Interest Rate 12%
Scrap/Waste % 0%

Sumnmary of Savings

By Input:

42,940 $ 23,500
Total $ - $ - $ 91.750 $ 925.699 $ 42.940 $ 23.500

By Type:

Duty Reduction= $ - Duty Deferral= 91,750

Duty Exemption Export =[ 9699 Brokenge Fee= 2
Duty Exemption Scrap/Waste =$ - MPF Savings = $ 42,940

Total= $1,083,889

Figure 8: Eagle Hill - Foreign Trade Zone Financial Benefits Calculator

53
 Duty and Fee Savings Estimator for FTZ

Direct

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 %I 0

Ralph L.auren Medi 16% 0 0 $ 160,273,654-

Total S 160,273,654

Summary of Savings

By Input:

Ralph Lauren Media $ - $ - $ 153,863$ - $ - $

Total $ - $ - $ 153,863$ - $ - $

By Type:

Duty Reduction= $ - Duty Deferral $ 153,863

Duty Exemption Export =$ - Brokerage Fee = $ -
Duty Exemption Scrap/Waste =$ - MPF Savings =$

Total = $153,863

Figure 9: RL Direct - Foreign Trade Zone Financial Benefits Calculator

54
 Duty and Fee Savings Estimator for FTZ

OHLTDnbad |

Finished Product Duty Rate N/A

Merchandise Pmcessing Fees $784
Bmkerage Fee $125
Avg Days of Inventory 3.0
Est. Interest Rate 6%
Scrap/Waste % 0%

Club Monao 16% 0.0% 0.0% $ 28,324,768 181

Lauren Dresses 16% 0.0% 0.0% $ 22,632,800 320
Lauren Rabh Lauren 16% 0.0% 0.0% $ 144,137,846 686
Iathrpods and Accesories 16% 0.0% 0.0% $ 28,110,060 200
Ralph LaurenChilrnswear 16% 0.0%0 0.0%0 $ 119,804,214 514
Ralh Lauren Corportion 16% 0.0% O.0% $ 497,016,075 750
Ralh Lauren Footwea, Inc. 16% 0.0% 0.0% $ 6,720,539 51
Rabh Lauren Home Collctin 16% 0.0% 0.0% $ 15,297,138 113
Ralh Laren Wormenswear 16% 0.0% 0.0% $ 16,627,897 214
Rusby by Rap Lauren 16% 0.0% 0.0% $ 10,787,587 153
Total $ 889,458,923 3183

Summary of Savings

By Input:

Club Monaco $ - $ - $ 2,235 $ - $ 26,184 $ 16,125

LaurenDresses $ - $ - $ 1,786 $ - $ 65,660 $ 33,500
Lauren Raph Lauren $ - $ - $ 11,373 $ - $ 169,604 $ 79,250
Leafhrods and Accessories $ - $ - $ 2,218 $ - $ 31,580 $ 18,500
Ralph Lauren Chilfrenswear $ - $ - $ 9,453 $ - $ 120,867 $ 57,799
RalphLauenCorporation $ - $ - $ 39,217 $ - $ 187,919 $ 87,311
Ralph Lauren Footwear, 1nc. $ - $ - $ 530 $ - $ - $ -
Raph Lauren Home Collection $ - $ - $ 1,207 $ - $ 6,872 $ 7,625
Ralph Lauren Wormenwear $ - $ - $ 1,312 $ - $ 35,556 $ 20,250
Rugby by Ralph Lauren $ - $ - $ 851 $ - $ 18,232 $ 12,625
Total $ - $ - $ 70,182 $ - $ 662,474 $ 332,985

By Type:

Duty Reduction = L] Duty Deferral= _70,182

Duty Exemption Export =$ Bmkerage Fee = 332,985
Duty Exemption Scrap/Waste =$ MPF Savings =$ 662,474

Total= $1,065,642

Figure 10: OHL Transload - Foreign Trade Zone Financial Benefits Calculator

55
Beechwood - Excluding Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Benefits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ 132 $ 142 $ 151 $ 425
MPF Savings $ - $ 253 $ 270 $ 289 $ 812
Duty Deferral $ - $ 1,491 $ 1,595 $ 1,707 $ 4,793

Total FZ Benefits 0 $ 1,876 $ 2,007 $ 2,148 $ 6,030

FTZ Expenses
Application Fees $ 8 $ - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - $ 100
Software/IT Integration $ 100 $ - $ - $ - $ 100
Administration Personnel $ - $ 90 $ 90 $ 90 $ 270
Warehousing $ - $ - $ - $ - $ -
Software/IT $ - $ 25 $ 25 $ 25 $ 75
Operator and Bond Fee $ - $ 10 $ 10 $ 10 $ 30

Total FTZ Expenses $ 208 $ 125 $ 125 $ 125 $ 583

Net FTZ Benefits $ (208) $ 1,751 $ 1,882 $ 2,023 $ 5,448

NPV @ (10%) $ 4,459

Discounted ROI 860%1

Figure 11: Beechwood - Cost Benefit Analysis Excluding DEE (in thousands of dollars)

56
Eagle Hill - Including Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Benefits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ 926 $ 990 $ 1,060 $ 2,976
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ 24 $ 25 $ 27 $ 76
MPF Savings $ - $ 43 $ 46 $ 49 $ 138
Duty Deferral $ - $ 92 $ 98 $ 105 $ 295

Total FZ Benefits 0 $ 1,084 $ 1,160 $ 1,241 $ 3,485

VFZ Expenses
Application Fees $ 8 $ - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - $ 100
Software/IT Integration $ 100 $ - $ - $ - $ 100
Administration Personnel $ - $ 90 $ 90 $ 90 $ 270
Warehousing $ - $ - $ - $ - $ -
Software/IT $ - $ 25 $ 25 $ 25 $ 75
Operator and Bond Fee $ - $ 10 $ 10 $ 10 $ 30

Total FTZ Expenses $ 208 $ 125 $ 125 $ 125 $ 583

Net FTZ Benefits $ (208) $ 959 $ 1,035 $ 1,116 $ 2,902

NPV @ (10%) $ 2,358

Discounted ROI 455%

Figure 12: Eagle Hill - Cost Benefit Analysis Including DEE (in thousands of dollars)

57
Eagle Hill - Excluding Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Benefits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exention Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ 24 $ 25 $ 27 $ 76
MPF Savings $ - $ 43 $ 46 $ 49 $ 138
Duty Deferral $ - $ 92 $ 98 $ 105 $ 295

Total FTZBenefits 0 $ 158 $ 169 $ 181 $ 509

FZ Expenses
Application Fees $ 8 $ - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - $ 100
Software/IT Integration $ 100 $ - $ - $ - $ 100
Administration Personnel $ - $ 90 $ 90 $ 90 $ 270
Warehousing $ - $ - $ - $ - $ -
Software/IT $ - $ 25 $ 25 $ 25 $ 75
Operator and Bond Fee $ - $ 10 $ 10 $ 10 $ 30

Total FTZ Expenses $ 208 $ 125 $ 125 $ 125 $ 583

Net FTZBenefits $ (208) $ 33 $ 44 $ 56 $ (74)

NPV @ (10%) $ (
Discounted ROI -19%

Figure 13: Eagle Hill - Cost Benefit Analysis Excluding DEE (in thousands of dollars)

58
RL Direct - Including Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Benefits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ - $ - $ - $ -
MPF Savings $ - $ - $ - $ - $ -
Duty Deferral $ - $ 154 $ 165 $ 176 $ 495

Total FTZ Benefits 0 $ 154 $ 165 $ 176 $ 495

FTZ Expenses
Application Fees $ 8 $ - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - $ 100
Software/IT Integration $ 100 $ - $ - $ - $ 100
Administration Personnel $ - $ 90 $ 90 $ 90 $ 270
Warehousing $ - $ - $ - $ - $ -
Software/IT $ - $ 25 $ 25 $ 25 $ 75
Operator and Bond Fee $ - $ 10 $ 10 $ 10 $ 30

Total FTZ Expenses $ 208 $ 125 $ 125 $ 125 $ 583

Net FTZBenefits $ (208) $ 29 $ 40 $ 51 $ (88)

NPV @ (10%) $ (110)

Discounted ROT -21%1

Figure 14: RL Direct - Cost Benefit Analysis Including DEE (in thousands of dollars)

59
RL Direct - Excluding Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

VFZ Financial Benefits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ - $ - $ - $ -
MPF Savings $ - $ - $ - $ - $ -
Duty Deferral $ - $ 154 $ 165 $ 176 $ 495

Total FTZ Benefits 0 $ 154 $ 165 $ 176 $ 495

FTZ Expenses
Application Fees $ 8 $ - $ - $ - $ 8
Activation Fees $ 100 $ - $ - $ - $ 100
Software/IT Integration $ 100 $ - $ - $ - $ 100
Administration Personnel $ - $ 90 $ 90 $ 90 $ 270
Warehousing $ - $ - $ - $ - $ -
Software/IT $ - $ 25 $ 25 $ 25 $ 75
Operator and Bond Fee $ - $ 10 $ 10 $ 10 $ 30

Total FTZ Expenses $ 208 $ 125 $ 125 $ 125 $ 583

Net FTZBenefits $ (208) $ 29 $ 40 $ 51 $ (88)

NPV @ (10%) $ (110)

Discounted ROT -21%1

Figure 15: RL Direct - Cost Benefit Analysis Excluding DEE (in thousands of dollars)

60
OHL Transload - Including Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Bene fits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ 333 $ 356 $ 381' $ 1,071
MPF Savings $ - $ 662 $ 709 $ 758 $ 2,130
Duty Deferral $ - $ 70 $ 75 $ 80 $ 226

Total FTZ Bene fits 0 $ 1,066 $ 1,140 $ 1,220 $ 3,426

HFZ Expenses
Application Fees $ - $ - $ - $ - $ -
Activation Fees $ 31 $ - $ - $ - $ 31
Software/IT Integration $ 69 $ - $ - $ - $ 69
Administration Personnel $ - $ 94 $ 94 $ 94 $ 283
Warehousing $ - $ 120 $ 120 $ 120 $ 360
Software/IT $ - $ 7 $ 7 $ 7 $ 22
Operator and Bond Fee $ - $ 6 $ 6 $ 6 $ 17

Total FTZ Expenses $ 100 $ 227 $ 227 $ 227 $ 781

Net FTZBenefits $ (100) $ 839 $ 913 $ 993 $ 2,645

NPV @ (10%) $ 2,163

Discounted ROI 325%1

Figure 16: OHL Transload - Cost Benefit Analysis Including DEE (in thousands of dollars)

61
011L Transload - Excluding Duty Exemption Export Growth Rate 7%
Discount Rate 10%
FTZ Benefits and Expenses by Type Year 0 Year 1 Year 2 Year 3 Total

FTZ Financial Bene fits

Inverted Taxes $ - $ - $ - $ - $ -
Duty Exemption Export $ - $ - $ - $ - $ -
Duty Exemption Scrap $ - $ - $ - $ - $ -
Brokerage Fee Savings $ - $ 333 $ 356 $ 381 $ 1,071
MPF Savings $ - $ 662 $ 709 $ 758 $ 2,130
Duty Deferral $ - $ 70 $ 75 $ 80 $ 226

Total FTZ Benefits 0 $ 1,066 $ 1,140 $ 1,220 $ 3,426

FTZ Expenses
Application Fees $ - $ - $ - $ - $ -
Activation Fees $ 31 $ - $ - $ - $ 31
Software/IT Integration $ 69 $ - $ - $ - $ 69
Administration Personnel $ - $ 94 $ 94 $ 94 $ 283
Warehousing $ - $ 120 $ 120 $ 120 $ 360
Software/IT $ - $ 7 $ 7 $ 7 $ 22
Operator and Bond Fee $ - $ 6 $ 6 $ 6 $ 17

Total FTZ Expenses $ 100 $ 227 $ 227 $ 227 $ 781

Net FTZBenefits $ (100) $ 839 $ 913 $ 993 $ 2,645

NPV @ (10%) $ 2,163

Discounted ROT 325%1

Figure 17: OHL Transload - Cost Benefit Analysis Excluding DEE (in thousands of dollars)

62
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