Just-in-time (JIT) and just-in-case (JIC)

Just-in-time (JIT) and just-in-case (JIC)

Just in Case, often referred to as Just in Case Manufacturing or (JIC), is the traditional production model in which finished goods are created in advance and in greater quantities than expected demand. The excess is produced and stocked ‘just in case’ demand suddenly rises or the supply of raw materials and components dries up. JIC is also an inventory management strategy – inventory levels are kept as high as possible.

Just-in-time (JIT) and just-in-case (JIC) are on opposite ends of the inventory philosophy spectrum: One aims for lean operations, the other makes stockpiling a priority. Both are commonly employed in manufacturing and distribution, but any business providing tangible products, such as retail or food and beverage, falls somewhere on the JIT versus JIC curve.

No matter the industry, making the most of inventory requires planning and a solid grasp of current and future customer demand. There are several points about JIT and JIC inventory management that companies should understand to successfully carry out either just-in-case or just-in-time inventory learning objectives or a combination of both.

Choosing Between Two Inventory Management Strategies

Companies committed to just-in-time inventory focus on making the supply chain as lean as possible. It’s a reactive strategy, where inventory purchasing decisions are based on current conditions.

In contrast, those that prefer a just-in-case inventory approach are proactive. Purchases are made to maintain a healthy stockpile and avoid running out of raw materials or work in progress items and slowing or stopping production.

A JIT model is something to aspire to because it aims for a sustainable process, with reliable suppliers and stable demand. JIC is suitable for cases where having adequate inventory is nonnegotiable. JIC companies are often more agile and able to respond to sudden demand increases.

For both JIT and JIC, the term "inventory" refers to raw materials and supplies used in production, unfinished items in various stages of the manufacturing process and final products.

Examples of unfinished, or work in progress, items include motherboards with CPUs installed that are ready to have memory modules attached in the next stage of building a laptop.

What is just-in-time (JIT)?

In inventory management, "just-in-time" means having inventory arrive precisely when needed, no sooner. Another way of referring to JIT inventory management is as a "pull" system. A pull system means supplies are replaced as goods are consumed rather than proactively.

Just-in-time inventory management consists of two core principles:

Materials must arrive when production is expected to begin.

Materials should not arrive before production is expected to begin.

These are important distinctions because production can't go forward without inventory, but the business can incur storage costs if the inventory arrives too soon.

The goal of a JIT inventory strategy is to balance production volume with inventory levels and ensure the company keeps only the stock that's necessary for near-term work on hand. It's an effective method for attaining high production levels with minimal inventory holding and supply costs.

This inventory strategy works best when a company works with reliable suppliers that provide consistent quality, doesn't experience shipping disruptions and pens long-term contracts that minimize price fluctuations.

One of the most significant downsides to just-in-time systems is that unexpected supply chain interruptions in any area can derail the entire process. For example, a sudden shortage of raw materials or bad weather that slows shipments may have a dramatic effect on production.

What is just-in-sequence (JIS) vs. just-in-time (JIT)?

Just-in-sequence (JIS) inventory management is a variation on JIT. The main differentiator between just-in-time and just-in-sequence (JIS) is that JIS ensures inventory arrives in the specific order in which it is used in production. JIS is associated with assembly lines, such as automotive or large appliance manufacturing, where items arrive at the line position at the time they’re needed.

What is just-in-case (JIC)?

Just-in-case inventory strategies are based on expected sales and require companies to purchase supplies proactively to meet any level of demand, within defined parameters. Businesses that use JIC may avoid the effects of common inventory management challenges such as supplier delays, unexpected increases in demand or spikes in the cost of a material or component.

Just-in-case inventory prioritizes preparedness over the cost and cash flow implications of holding stock in reserve. It protects businesses from falling behind in production or losing revenue because they couldn't meet demand.

This inventory management strategy pays off when demand is difficult to predict or a raw material or component is subject to sudden surges in price or going out of stock. It's also helpful in environments where suppliers aren't reliable.

A significant weakness of the JIC method lies in the fact that these systems can be wasteful if demand slows down and inventory stagnates. You’re also tying up cash.

Just-in-Time vs. Just-in-Case: Pull vs. Push

Companies use just-in-time inventory to reduce excess supply and create a lean production process, while just-in-case inventory is used to avoid running out of stock due to a sudden increase in demand. Both strategies provide companies with benefits, but there are drawbacks, as well.

Just-in-time

Just-in-time inventory management optimizes the supply chain, but there are caveats.

Advantages

Just-in-time inventory benefits those with efficient operations and is good for the bottom line. This strategy also prevents overproduction and minimizes transport costs. Other benefits:

Efficient use of resources: JIT inventory management reduces the risk of overordering and having supplies sit idle. This allows the company to divert resources from that inventory to other business areas.

Less waste: There is less waste as businesses keep only the stock they need for production. That is particularly helpful for businesses depending on perishable supplies.

Reduced costs: Eliminating overbuying reduces supply costs directly since companies only purchase what they use immediately. Eradicating stagnant inventory also cuts warehousing expenses, including labor and administration.

Increased agility: Using JIT reduces the amount of time it takes to change over inventory when fluctuations in demand occur or products change.

Disadvantages

Just-in-time inventory management can increase issues in some key areas. For example, when using JIT, companies order bare minimums of items based on projections. However, if there's a sudden, unexpected surge in demand, there may not be enough products or supplies on-hand. Other downsides:

Supplier stability needed: The success of a just-in-time inventory strategy relies on the timeliness and consistency of suppliers. However, companies have little control over supplier operations, and even previously reliable partners can experience disruptions that ultimately cause delays for the receiving company. Then there are unforeseen shipping delays to consider.

Inability to meet unexpected demand: The just-in-time inventory method also requires few to no fluctuations in demand. Some variations are predictable and planned for, such as seasonal trends, but unexpected spikes or valleys make it difficult to maintain the necessary stock stability.

Pricing risks: A JIT strategy can be more expensive than JIC if materials cost less during certain parts of the year, meaning stocking up would be prudent. Businesses may also lose out on savings because they don't take advantage of bulk-buying discounts.

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Just-in-case

Companies that employ a just-in-case inventory strategy enjoy several benefits, but it is not without downsides.

Advantages

Just-in-case inventory management can facilitate growth and profitability in a few ways.

Increased competitiveness: Companies can keep up with most any level of demand, increasing their competitive edge and even boosting market share if they can meet demand when a competitor is out of stock.

Fewer lost sales: With JIC, companies reduce the risk of lost sales due to a lack of inventory. JIC inventory allows companies to continue production while waiting for stock to be replenished.

More wiggle room in demand forecasting: There is less need for precise demand projections because inventory levels are high enough to keep up with demand.

Savings: Companies can take advantage of bulk discounts or make large purchases when prices are lowest, decreasing direct procurement costs.

Disadvantages

Just-in-case doesn't address all inventory issues and creates a few of its own.

Additional storage costs: Companies incur more carrying costs to maintain the excess inventory. These costs can be high, equaling 20% to 30% of total inventory value.

Increased opportunity costs: Capital is tied up in inventory. That takes flexibility away from other aspects of the business and increases opportunity costs.

Wasted stock: There is an increased risk of stock spoiling or becoming obsolete if items don't sell. This risk is particularly significant if the goods are perishable, seasonal or part of a flash-in-the-pan trend.

jit vs jic inventory on netsuite

Just-in-Time vs. Just-in-Case: What's the Difference?

Just-in-Case Just-in-Time

A "push" system where inventory purchases are not based on actual current demand. A "pull" system where inventory is essentially purchased to order.

Focuses on maximizing flexibility with less concern for capital application. Focuses on minimizing inventory and using capital efficiently.

Excess inventory is kept on hand to avoid running out due to supplier delays or demand spikes. Inventory is purchased only to meet immediate production or sales needs.

Companies generally make larger, more expensive inventory orders Less working capital is required because inventory purchases occur in smaller batches.

Valuable when demand is unpredictable or suppliers are unreliable. Works best when demand is stable and suppliers are highly dependable.

Demand forecasting is less critical as long as there is enough inventory to meet the highest demand. Requires accurate demand forecasts to avoid over- or under-buying inventory.

Choosing the Right Strategy for the Right Time: A Hybrid Model

There are more cons than pros from hewing strictly to either a JIC or JIT inventory management strategy. In the real world, they work best in tandem. Companies that develop a hybrid inventory management model that combines the buffer of just-in-case inventory with just-in-time's conservative use of capital can have the best of both worlds.

Employing a hybrid system

A standard method of employing a hybrid push-pull inventory system is to have some stages of the supply chain operate as pull systems while others operate in a push model. This strategy requires a more accurate demand forecast than a JIC system but doesn't aim to keep standing inventory at zero, as in JIT systems.

The main objective is to address long- and short-term production and sales needs by keeping inventory levels low enough to be cost-effective but high enough to withstand supplier or production delays or meet increased demand.

The first step is an inventory analysis exercise, where you classify items as, for example, vital, essential or desirable and then consider how scarce an item is and how easily you can acquire it, as well as the likelihood of spoilage or obsolescence.

Companies can employ JIC inventory for vital, quick-turnover items, ensuring stock is always available but constantly consumed. JIC can also be helpful for scarce items that are available only from unreliable suppliers or that are often out of stock or have long lead times.

Of course, you might also look to find a more reliable or backup supplier.

Companies use JIT inventory for less popular items or those that sell in small batches. For example, the customization stage of a personalized t-shirt order would benefit from a JIT approach since there is no need to keep a stockpile of made-to-order items. However, a JIC approach should manage the inventory of plain t-shirts awaiting printed designs.

Economic order quantity

Knowing how much inventory to purchase is essential to apply a push-pull inventory system effectively. The economic order quantity (EOQ) formula helps this hybrid method of inventory management determine the optimum amount of stock to purchase.

It's written as:

EOQ = √KM/H

"K" represents the costs of inventory orders, "M" represents the amount of inventory used in a given period and "H" represents total inventory expenses — including warehousing, depreciation and opportunity costs — within the same period.

The resulting figure is the amount of inventory that a company should order.

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Successful companies integrate just-in-time and just-in-case inventory methods to achieve efficient, agile supply chain operations. This strategy creates a buffer allowing for an adequate response to unexpected demand or supplier issues while maintaining a minimal amount of inventory and keeping costs low.

However, ensuring that demand forecasts are accurate and optimizing the supply chain to ensure reliable operations is critical to either approach.

Modern enterprise resource management (ERP) software supports both JIT and JIC inventory to account for both push and pull. It provides granular and birds-eye views of current inventory levels, inventory in the pipeline and future demand. Look for a system can also gather and analyze supplier, inventory turnover and demand data to generate more reliable forecasts.

Agility, cost savings and the ability to meet demand are three pillars of effective inventory management. Getting the balance between JIT and JIC right can overcome many challenges, from shifting customer demand to limited visibility to poor production planning.

Challenges of Just-In-Time & How To Overcome Them

 Challenges of Just-In-Time & How To Overcome Them

Many global companies, most famously Toyota with its renowned Toyota Production System, have been using just-in-time (JIT) to improve efficiency and reduce waste. JIT refers to a management strategy that aligns the production of goods precisely with customer demand. It aims to create an ideal factory scene – every product is made just when it needs to be, resulting in zero wastage and zero surplus inventory.

However, the fragility of the JIT inventory system became apparent when the COVID-19 pandemic caused dramatic fluctuations in demand across industries, making it difficult to maintain appropriate inventory levels. In some cases, businesses were left with severe product shortages, while in others, they found themselves with an oversupply of products that were in low demand due to lockdown restrictions.

Moreover, the just-in-time model depends heavily on the reliable and swift transportation of goods. When lockdowns and workforce shortages disrupted global logistics, it caused significant delays and disruptions in the supply chain. With limited stock on hand due to the JIT approach, businesses were unable to fill the gaps with stored inventory and faced production shutdowns in some cases.

Now we are in 2024, and the question of whether JIT is still a good approach is not easy to answer. Read on as we look at the current difficulties with just-in-time inventory management and how best to handle these challenges!

Table of Contents

What are the challenges of JIT supply chains in 2024?

How businesses are adapting their JIT supply chains?

Crisis-proof supply chains are the key to business success

What are the challenges of JIT supply chains in 2024?

Working on an ‘as-needed basis’, JIT inventory systems are designed to closely sync with the manufacturing process, while keeping inventories as close to zero as possible. However, this tight alignment can sometimes prove challenging. Let’s take a look at some of the most significant challenges facing just-in-time supply chains.

Unpredictable consumer demand

Cutout paper appliques of hand with a glass magnifier

The first challenge of JIT systems is the volatile nature of customer behavior. According to a survey by Accenture involving 1,700 global C-suite leaders, a staggering 95% of executives from both B2C and B2B sectors perceive that their customers’ needs and expectations are evolving more quickly than their companies can adapt.

This rapid alteration in consumer behavior is hardly startling in today’s world, given that consumers are comprehensively connected via social media platforms. They are perpetually exposed to a myriad of new products, trends, and ideologies, which propels their appetite for novelty and transformative products. 

For instance, the latest iPhone model becomes obsolete the moment speculations arise about a new version’s launch. Similarly, the prevailing fashion trend can lose its appeal within just a few weeks.

The Just-in-Time (JIT) inventory system is intended for consistent, scheduled operations and doesn’t maintain additional stocks as a contingency to counter sudden shifts in demand. Consequently, if a product experiences an unforeseen surge in demand, companies may find it challenging to meet orders promptly, causing delayed deliveries and potentially missed sales opportunities.

Cost fluctuations

Wallet with coins, banknotes, and a credit card for payment

Since JIT relies on procuring materials exactly when needed in the manufacturing process, it becomes heavily susceptible to variations in supplier prices. A Boston Consulting Group (BCG) study reveals that raw materials often face market volatility due to supply disruptions, high demand, or significant price changes. This can impact production costs unpredictably.

Businesses using just-in-time (JIT) inventory systems may experience a sudden increase in operational expenses when raw material prices surge, as they lack a stock buffer to cushion against these fluctuations.

For example, a fashionable brand depending on cotton for their t-shirt line operates with a JIT system and orders cotton to save on storage costs. Unfortunately, severe weather affects global cotton supplies, causing prices to skyrocket. 

Without pre-purchased cotton, the brand’s cost of goods sold (COGS) rises, hurting its profit margins. They face the dilemma of either passing the costs to customers or damaging their profits.

Raw material shortages

In addition to the pressure caused by rising prices, the need for raw materials is set to become two times greater by the year 2050. However, these materials are becoming increasingly harder to get. This is particularly true for lithium, cobalt, nickel, and rare earth elements.

Think about technology companies like Apple, which use rare earth elements to make their products. In the JIT system, these elements should arrive at factories just when they’re due to be added to the products. 

But if something unexpected occurs, like a political issue or a natural disaster, and disrupts the supply of these elements, what happens then? The production of iPhones wouldn’t just slow down – it could stop completely if key parts are missing.

Overdependence on automation

Automation is the backbone of lean manufacturing as it increases productivity and reduces operational costs. However, when a JIT supply chain heavily depends on automation, technical glitches can disrupt the operations and cause major delays. 

For instance, a relatively small issue in an automated assembly line can stop production.

Furthermore, automation is rigid when dealing with sudden changes, such as an unexpected surge in orders, a shortage of materials, or an equipment failure.

Consider a food processing facility that uses automated machines for packaging and shipping. If there is a sudden change in packaging regulations or new labeling requirements arise, such as for allergens, it can create problems. In this situation, the machines need to be reprogrammed to include new information or adapt to different packaging, which can be both challenging and time-consuming.

How businesses are adapting their JIT supply chains?

After understanding the challenges of having a zero inventory system, let’s explore how various businesses are adjusting and strengthening their JIT supply chains to become more resilient.

Switching to Just-In-Case (JIC)

Many companies are turning to the just-in-case (JIC) inventory approach. JIC is a safety net. It involves keeping extra stock ready to counter unexpected scenarios, like sudden surges in orders or hiccups in the supply chain.

Even though this strategy may lead to increased inventory costs, the benefits of the JIC method often outweigh its costs:

Customer satisfaction: Keeping a sufficient inventory means a company can always meet its customers’ needs promptly. It avoids running out of stock and ensures timely delivery of orders, leading to satisfied and loyal customers.

Price stability: Holding surplus inventory protects businesses from short-term market price swings. They can buy and hold stock when prices are low, which helps maintain stability in costs.

Market adaptability: Having surplus inventory enables businesses to adapt to market changes quickly. Whether it’s a demand surge or a disruption in supply, companies can use their extra stock to smooth over these bumps, demonstrating adaptability and resilience.

Diversification of suppliers

Close-up photography of colorful plastic cones

Building a diversified supplier base is another strategy that businesses can use to make their JIT supply chains more resilient. In a JIT framework, any disruption from a single supplier can stop the entire production process, particularly where timing is crucial.

A great example of such mitigation in action is Toyota’s response to the 2011 earthquake and tsunami in Japan. Having learned from a previous crisis in 1997, Toyota developed a diversified supplier strategy, which enabled it to keep production going in the face of significant supply disruptions.

Creating a diverse network of primary and backup suppliers is beneficial and can be classified as follows:

1. Geography-based suppliers:

Local suppliers: These are close by, leading to shorter delivery times. If issues occur, they can be sorted out quickly due to the nearness and improved communication.

Global suppliers: These offer alternative supply options if local chains are disrupted. They can also give more competitive rates, due to lower production costs in their regions.

2. Lead time-based suppliers:

Short lead time suppliers: These are key during emergencies as they enable quick responses to unexpected demand or other supply interruptions.

Long lead time suppliers: These usually offer more affordable rates and are suitable for consistently demanded products.

Increased localization

Just-in-time supply chains relying on international suppliers can be susceptible to risks such as trade restrictions, changes in currency value, political instability, and even natural catastrophes. 

To fight these challenges, localizing production can be helpful by sourcing materials mostly from suppliers located in the same country or region. Here are some advantages of utilizing local assembly units:

Faster lead times: Local suppliers can hasten the acquisition process, resulting in businesses being more apt to fulfill customer needs.

Decreased transport expenses: Having sources closeby lowers transportation costs since components can arrive at production facilities without traveling far.

More efficient production: The closeness of suppliers to the production sites helps businesses streamline their production lines, coordinating JIT deliveries with production timetables.

Looking back at 2018, a growing trade war between the U.S. and China negatively affected many industries including the bicycle manufacturing sector. The U.S. imported a lot of bicycles from China, which underwent a hefty 25% tariff. As a result, a U.S.-based bicycle manufacturer, Huffy, saw their costs increase by millions and had to raise prices, resulting in decreased sales.

On the other hand, Canyon Bicycles, which assembles its bicycles in Germany, was less affected. Although they sourced parts worldwide, having an assembly location closer to their main European markets helped mitigate the effects of tariff disruptions. This helped keep their costs and pricing relatively steady.

In-house manufacturing

Wine bottles on an industrial machinery

“Why purchase a loaf when you can bake your own?” Making raw materials in-house, instead of outsourcing them, has become a strong strategy to make JIT supply chains that rely heavily on timing much more resilient.

In-house production of raw materials can lead to cost savings by eliminating the need for markups and transport fees charged by third-party suppliers.  Moreover, producing raw materials in-house allows businesses to control the quality of their inputs more closely, ensuring consistent standards and reducing the risk of defective products. 

While in-house manufacturing offers considerable benefits, it’s important to understand that it might not be practical, achievable, or cost-effective for all parts of a product. Therefore, it’s important that businesses prioritize the production of key components that can be manufactured internally without the need for substantial investments or drastic changes to the current production setup.

Take, for example, a chocolate manufacturer that relies on a supplier for its raw cocoa nibs, the core ingredient in chocolate production. The company could purchase raw cocoa beans and roast them in-house to create their cocoa nibs. 

Minimal investment in a roaster and basic processing equipment would allow them to have better control over the quality, flavor profile, and consistency of the cocoa nibs. Consequently, this not only enhances their chocolate products but also ensures reliable and constant availability of the crucial ingredient whenever needed.

Crisis-proof supply chains are the key to business success

In summary, recent global disruptions have challenged the once-praised just-in-time supply chains. These challenges spotlight the urgent need to crisis-proof supply chains in today’s unpredictable business landscape. 

Irrespective of the management strategy adopted, building resilient supply chains—through measures like supplier diversification, increased inventory buffers, and advanced predictive analytics—is not just a choice but a crucial requirement for survival. Explore other inventory management techniques and equip your business with the right tools to handle future uncertainties!

How can GEN AI revolutionize Supply Chain

Generative AI injects agility into your supply chain. By predicting demand fluctuations, pinpointing supply chain disruptions before they hit, and optimising logistics for cost reduction, GenAI acts as a strategic co-pilot. 

Generative AI in supply chain goes beyond basic automation, offering risk assessments, production planning, and demand forecasts, all tailored to your specific needs. This foresight allows you to make informed decisions, streamline operations, and navigate disruptions with confidence.

How does generative AI help supply chain?

By analysing vast amounts of data, GenAI can predict changes in demand and supply chain disruptions and optimise logistics networks. Generative AI in supply chain empowers businesses to make data-driven choices, streamline operations, adapt to unexpected challenges, and improve supply chain efficiency.

Generative AI (GenAI) can revolutionize the supply chain in various ways, including:

1. *Predictive Analytics*: GenAI can analyze historical data, market trends, and real-time information to predict demand, detect anomalies, and forecast potential disruptions.

2. *Smart Inventory Management*: GenAI can optimize inventory levels, reduce stockouts, and minimize overstocking by analyzing sales patterns, seasonality, and supplier lead times.

3. *Automated Procurement*: GenAI can automate procurement processes, such as identifying suppliers, negotiating prices, and managing contracts.

4. *Intelligent Logistics*: GenAI can optimize routes, modes of transportation, and warehouse operations to reduce costs, lower emissions, and improve delivery times.

5. *Supply Chain Visibility*: GenAI can provide real-time visibility into the supply chain, enabling proactive decision-making and risk mitigation.

6. *Risk Management*: GenAI can identify potential risks, such as natural disasters, supplier insolvency, and geopolitical events, and suggest mitigation strategies.

7. *Sustainable Supply Chain*: GenAI can analyze and optimize supply chain operations to reduce carbon footprint, waste, and energy consumption.

8. *Autonomous Warehouses*: GenAI can enable autonomous warehouses, where robots and drones manage inventory, picking, and packing.

9. *Dynamic Pricing*: GenAI can analyze market conditions, demand, and competition to optimize pricing strategies.

10. *Collaborative Robots*: GenAI can enable collaborative robots (cobots) to work alongside humans, improving efficiency, safety, and productivity.

11. *Real-time Monitoring*: GenAI can monitor supply chain operations in real-time, enabling swift response to disruptions and exceptions.

12. *Personalized Logistics*: GenAI can create personalized logistics experiences for customers, tailoring delivery options, and communication to individual preferences.

By transforming the supply chain with GenAI, companies can achieve significant improvements in efficiency, agility, and sustainability, leading to increased customer satisfaction and competitive advantage.

India's Trade

Despite persistent global challenges, overall exports (merchandise + services) estimated to surpass last year’s highest record. It is estimated to reach USD 776.68 Billion in FY 2023-24 as compared to USD 776.40 Billion in FY 2022-23.

FY 2023-24 closes with highest monthly merchandise exports of the current FY in March 2024 at USD 41.68 Billion.

Non-petroleum & Non-Gems & Jewellery exports increase by 1.45% from USD 315.64 Billion in FY 2022-23 to USD 320.21 Billion in FY 2023-24.

Main drivers of merchandise export growth in FY 2023-24 include Electronic Goods, Drugs & Pharmaceuticals, Engineering Goods, Iron Ore, Cotton Yarn/Fabs./made-ups, Handloom Products etc. and Ceramic products & glassware.

Electronic goods exports increase by 23.64% from USD 23.55 Billion in FY 2022-23 to USD 29.12 Billion in FY 2023-24.

Drugs and pharmaceuticals exports increase by 9.67% from USD 25.39 Billion in FY 2022-23 to USD 27.85 Billion in FY 2023-24.

Engineering Goods exports increase by 2.13% from USD 107.04 Billion in FY 2022-23 to USD 109.32 Billion in FY 2023-24.

Exports of Agricultural commodities namely Tobacco (19.46%), Fruits and Vegetables (13.86%), Meat, dairy & poultry products (12.34%), Spices (12.30%), Cereal preparations & miscellaneous processed items (8.96%), Oil seeds (7.43%) and Oil Meals (7.01%) exhibit positive growth in FY 2023-24.

Overall trade deficit is estimated to significantly improve by 35.77% from USD 121.62 Billion in FY 2022-23 to USD 78.12 Billion in FY 2023-24; Merchandise trade deficit improves by 9.33% at USD 240.17 Billion in the current FY as compared to USD 264.90 Billion in FY 2022-23.

What is a Bill of Lading? Problems and solutions

Bill of Lading 

Bill of lading is a legal document that's issued by a carrier to a shipper detailing the type, quantity, and destination of the goods being carried. A bill of lading is a document of title, a receipt for shipped goods, and a contract between a carrier and a shipper.

Types of Bills of Lading

Some of the most common types of bills of lading include:

Inland bill of lading

Ocean bill of lading

Through bill of lading

Negotiable bill of lading

Non negotiable bill of lading

Claused bill of lading

Clean bill of lading

Uniform bill of lading

Why Is a Bill of Lading Important?

A bill of lading is a legally binding document that provides the carrier and the shipper with all the necessary details to accurately process a shipment. It can be used in litigation if the need should arise and all parties involved will make a committed effort to ensure the accuracy of the document.

A bill of lading essentially works as undisputed proof of shipment. It allows for the segregation of duties that is a vital part of a firm’s internal control structure and to prevent theft.

The problem : Eliminating paper and manual intervention

The Bill of Lading (B/L) is the most important trade document in container shipping. Currently, stakeholders along complex supply chains using original B/Ls (OBLs) must physically courier the original documents to the importer so they can present them at the time of goods collection, which is inefficient, expensive and creates opportunities for fraud. Even with an electronic Telex release for OBLs or paperless Seaway Bills (SWBs), the lack of standard data formats and processes creates confusion that contributes to shipping discrepancies, operational delays, financial losses, and higher costs.  

The solution

The DCSA Digital Trade initiative was designed to facilitate universal acceptance and adoption of a standards-based electronic Bill of Lading, applicable to both original Bill of Ladings and Seaway Bills. Using open source Application Programming Interfaces (APIs), DCSA B/L standard enables straight-through processing of B/L data, eliminating paper and manual intervention from B/L processes. Standardised digitalisation of B/L data and processes will help create a more secure, agile and sustainable supply chain ecosystem. DCSA is also working closely with eBL solution providers on technical and legal interoperability to enable seamless digital transfer of original B/Ls across different platforms and stakeholders, which will facilitate the global uptake of B/L standards.  

The benefits

Optimise your supply chain with DCSA's Bill of Lading standard, enable frictionless sharing of digitised shipping data and improve efficiency of your shipment documentation and operations.

Increased efficiency

Reduce the time required for the documentation process, enabling more efficient cargo handling and customs clearance.

Reduced costs

Reduce expenses related to printing, handling, storage, and transportation of physical documents. 

Increased accuracy

Enhance the overall accuracy of shipping and logistics processes by minimising errors associated with manual data entry, illegible handwriting and lost documents.  

Fraud prevention

Enhance the security of shipping documents with digital signatures, encryption technologies and authentication mechanisms to ensure that the information in the B/L is tamper-proof.

Streamlined compliance

Adherence to B/L standards can contribute to improved compliance with regulatory requirements. 

Greater supply chain resilience

Gains to the Global Trade

In a recent study, McKinsey estimates that if the electronic bill of lading gains 100% adoption across the industry, it could unlock around $18bn in gains for the trade ecosystem through faster document handling and reduced human error (among other improvements) plus $30-40 billion in global trade growth, as digitalisation reduces trade friction.

FREE TRADE AND WAREHOUSING ZONE IN INDIA : A MINI GUIDE

Free Trade and Warehousing Zone 

Get to know all about the Free Trade and Warehousing Zone in India with our mini-guide.

The Free Trade and Warehousing Zone in India or FTWZ is an economic policy of the Indian Government. They offer strategic management and logistics platforms for the import-export of goods and services. It aims to encourage ease of doing business, generating investment and trade FTWZs enjoy special economic zone status and are considered foreign territory with regards to compliance and currency. FTWZs are deemed the quintessential global trading hubs that streamline the logistics infrastructure and drive international trade.

FTWZ : International Game Changers

FTWZs are regulated by the Special Economic Zones Act (2005) and Rules (2006) as well as the Ministry of Commerce and Industries. They enable warehousing, trading and all other activities related to these. FTWZs facilitate the partial or phased clearance of imported cargo into Domestic Tariff Areas or DTAs. Similarly, goods moving from DTAs to FTWZs are considered exports and enjoy all accruing benefits. Usually, FTWZs is located within easy access and proximity to transportation hubs, while some have their own rail operations service.

In India, FTWZs are highly competitive, offering state-of-art warehousing and trading facilities. This includes expedited customs clearance, cutting-edge technology and infrastructure, inland container depots and yards, commercial complexes, etc. Companies wishing to operate via FTWZs can do so in one of two ways:

As a Trading Unit: for the purpose of carrying out authorized operations such as trading, warehousing, labelling, consolidation, etc.

As a Service Unit: availing the services of an authorized Trading Unit.

Companies that are registered as Trading Units must be an Indian entity with a nature of the business that includes import-export, trading, shipping, etc. Authorized operations are listed in the Letter of Approval (LOA) which is granted by the Unit Approval Committee. LOAs are valid for five years with the option to extend for another five years.

Several specific activities are allowed to be conducted in FTWZs. These include:

Trading which is inclusive or exclusive of labelling.

Packaging and repacking.

Re-export, resale, re-invoicing of goods.

Warehouse storage of goods for domestic or international clients.

Value add or optimizing activities on goods.

Assembly of complete or semi-knockdown of goods.

FTWZs offer unparallel advantages to international trade. Aside from the reduction in formalities for customs and excise, other incentives include income tax and demurrage costs exemptions. Efficiencies are also increased for logistics, supply chain management and operations, adding to faster turnaround times.

Currently, India has eight FTWZs which can be found at the following locations:

Taluka Panvel, District Raigad, Maharashtra.

Sriperumbudur Taluk, Kancheepuram District, Tamil Nadu.

Moujpur, Bulandshahar, Uttar Pradesh.

Taluka & District Nagpur, Maharashtra.

Chillamaturu Mandal, Ananthapur District, Andhra Pradesh.

Padur, Karnataka.

Thoppumpady Rameswaram Village, Cochin, Kerala.

Ponneri Taluk, Thiruvalur District, Tamil Nadu.

Contact us today to learn more about the Free Trade and Warehousing Zone in India and how you can use it for your business. 

Classification of Goods and Compliance Requirements in India International Trade

The Harmonized System (HS) is an international nomenclature of goods classification developed by the World Customs Organization in 1988. It has been adopted by more than 190 countries. The HS consists of 6-digit codes for all traded goods, which are used to satisfy customs requirements worldwide. In most cases, in order to import or export a product, it must be assigned an HS code that corresponds with the Harmonized Tariff Schedule of the country of import. Most countries have added additional digits to classify goods more specifically. A code with six digits is a universal standard (HS Code) and a code with 7-10 digits (HTS Code) is often unique after the 6th digit and determined by individual countries of import. These codes are important because they not only determine the tariff/duty rate of the traded product, but they also keep a record of international trade statistics that are used in most countries.

The Indian Trade Classification (Harmonized System) (ITC) (HS)[1] code has 8 digits (the first 6 digits are common as per WCO with an additional 2 digits for added specificity). There are two schedules to the ITC HS: Schedule 1 – Import tariff, and Schedule 2 – Export tariff.   Both tariffs are a key instrument for establishing the customs duty rate applicable to imported goods per the First Schedule. The Second Schedule incorporates items that are subject to export duties and the rates of duties thereon in the Indian Customs Tariff Act of 1975. Import permissibility in terms of Foreign Trade Policy, duties that can be levied on the goods, benefits like applicability of various duty exemption notifications, identification of applicable incentives for export goods, and determining a product’s eligibility under a trade agreement are also based on HS code classification. The classification of goods for import and export purposes has always been a challenge for corporations due to the very nature of the classification process and its interpretation between customs and corporations.

Classification is most critical when new products are introduced into a company’s trade environment because it requires in-depth understanding of the product description and use as well as knowledge of the classification system process. This is supported by a study that Thomson Reuters and KPMG conducted this year. It revealed that ambiguity in product descriptions and different classifications are the biggest challenges to performing product classification globally. Governments scrutinize HS codes and product descriptions to detect fraudulent activities.

The Comptroller and Auditor General of India, an independent Supreme Audit Institution, mentioned in its report no.12 of 2014 that the Directorate of Revenue Intelligence of India had detected 298 duty evasion cases involving mis-declaration of goods to the tune of Rs.2392.26 Crore (USD 378 Million) in the financial year 2013.

A wrong or misleading product classification brings a lot of risk to a company and can substantially erode its profitability due to increased penalties and recovery. For example, chain and sprockets used in motorcycles could either be classified under ITC (HS) Code 73151100 as roller chain in the subheading of chain and parts thereof, or under ITC (HS) Code 84839000 in the subheading of toothed vehicles and chain sprockets. The former has a preferential duty rate of 0% under the Indo-ASEAN FTA and the latter has a preferential rate of 5%. However, as for automobiles, based on the end use, these classifications mentioned above are not applicable. The product should be classified under 87141090 under the subheading of parts and accessories of vehicles, which are not eligible for preferential rates under the India-ASEAN Free Trade Agreement. Such incorrect classification could lead to a finding of non-compliance, resulting in penalties and delays in shipment clearance.

If a company is found to have misclassified commodities for import and export, the local customs authority may flag the company as needing extra scrutiny. This will lengthen the product’s review process and delay the import and export process. If misclassification is found to be a continuing problem, the government may cancel the company’s Accredited Client Programme (ACP) status and in extreme cases may cancel its Importer Exporter Code (IEC). The person responsible for classification ultimately does not want to be the source of this type of action.

Challenges faced by Exporters and Importers for classifying products:

Lack of available resources (e.g. technical information, classification data, literature, etc.)

Not having dedicated a person/expert within the organization

Inadequate description on invoice and supporting information

The risks for misclassification of goods (summaries below):

Disqualification from Risk Management System (RMS) Clearance

Over/underpaid customs duty

Under-claimed duty drawback and other export incentives

Eligibility for export, import and licensing requirements

Missed Other Government Agencies (OGA) requirements

Disqualification from Risk Management System (RMS) Clearance: Exceptional growth and complexities in international trade and increasing burdensome global security requirements have put customs in a more challenging environment than ever before. The Risk Management System wing of Indian customs plays a very important role in the Import/Export clearance process to detect fraud and drive compliance. Product classification in a Bill of Entry/Shipping Bill is one of the key parameters among many for the risk management system to alert officials for additional inspection. Inspection of Import/Export consignment could result in additional cost, time and potential delay to the clearance for the Importer/Exporter.

Over/underpaid customs duty: Customs calculates duties based on the HS code of the product declared by the importer in the Bill of Entry (BOE).  An incorrect HS code could result in higher or lower duty based on the tariff rate. The product code selected might also have a higher rate of total customs duty because of Anti-dumping (ADD) or safeguard duty or both, depending upon the origin of the goods. If the importer realizes the HS code declared in the BOE is incorrect, an amendment to the BOE is required. That can be expensive and time-consuming.

Under-claimed duty drawback and other export incentives: Availability of duty drawback (DBK) is linked to HS codes, although one DBK code could be applicable to a similar set of HS codes. For example, menthol falls under 2 ITC (HS) codes. Code 29061100 represents menthol, which has DBK under the All Industry Rate (AIR) schedule of 1.4%, and Code 30039021 represents menthol crystals which have a 1.9% DBK. However, both codes have the same export benefit rate of 3.0% in the recently announced Merchandise Exports from India Scheme (MEIS).  If the exporter is exporting menthol crystals using the code 29061100, which has a 0.5% lower DBK (AIR) available, and if the shipment has a value of USD 150,000 FOB, the exporter could lose about USD 750 on this shipment. This is a very large amount when the exporter has a high value of shipments/turnover. If a company is exporting USD 150 million in value per year it can lose up to USD 750,000 annually.

Eligibility for export, import and licensing requirements: The Directorate General of Foreign Trade (DGFT) issues a Foreign Trade Policy every five years with a focus on the country’s interest. The policy prohibits some goods from export and import transactions, linked to their product classification or HS code. Importers/exporters should be well-informed before agreeing to any contract for export or import of such goods and comply with licensing requirements as prescribed in the policy.

Missed Other Government Agencies (OGA) requirements: OGAs play an important role in international trade controls. The HS code listed in the BOE and shipping bill is one of the criteria on which the customs officer marks the documents for additional requirements, such as a No Objection Certificate (NOC)[2]. NOC is required for pharmaceutical and cosmetic products. It is issued by the Assistant Drug Controller and classified under Chapter 30, which automatically qualifies a product for ADC-NOC (Additional Drug Controller). Some products may fall under Chapters 1-10, 29 and 33 and be subject to the OGA for a wildlife NOC. The exporter and importer should be aware of the NOC requirements to avoid delays in customs clearance and meet the regulatory requirements for declarations.

Summary: In today’s complex trade environment, product classification remains a major challenge for companies and regulatory authorities. As companies are continuously developing new products that serve more than one purpose/end use, product classification becomes more challenging for trade professionals and customs officers. Companies are looking at options to reduce costs by applying relevant exemptions under certain conditions, avail themselves of export benefits etc., and be compliant with the requirements. Customs agencies are continuously enhancing their systems with additional controls to avoid fraud and protect the nation’s interests. In both these conditions, having a good product classification approach plays a major role in avoiding conflicts.

Automation of product classification and other tools to keep trade professionals up-to date on regulatory changes could assist in driving compliance and cost benefits.

To learn more about import or export, visit our ONESOURCE Global Trade page

[1] ITC (HS) codes are better known as Indian Trade Clarification (ITC) and are based on Harmonized System (HS) of Coding. It was adopted in India for import-export operations. Indian custom uses an eight digit ITC (HS) code to suit the national trade requirements.  This schedule has two parts – First schedule with an eight digit nomenclature and the second schedule with description of goods chargeable to export duty. The first schedule is based on H.S code system. The Indian Tariff Code has 8 digit which has been designed in such a way without any modification of first 6 digit as per H.S code system, but followed by another two digit classified as ‘tariff item’. So ITC has been classified as first four-digit code called ‘heading’ and every six digit code called ‘subheading’ and 8-digit code called ‘Tariff Item’. This addition is done, within the permissible limit of World Customs Organization – WCO, without any changes in H.S. code system.

[2] A type of legal certificate issued by any agency, organization, and institute or in certain cases, an individual, which does not object to the covenants of the certificate.