All about the Harmonised System Code

All about the Harmonised System Code (HS Code), how to find the correct code for the product along with their importance, correct uses & the consequences of incorrect usage

If you are in the business of exporting and importing goods, you would be familiar with the Harmonised Commodity Description and Coding System, better known as the Harmonised System (HS) or Harmonised System of Nomenclature (HSN). It is a universally accepted method of classifying traded goods. Its main function is to help customs authorities identify products and assess the right duties and taxes on them. In the Harmonised System, each product is assigned a unique numerical code called the HS code. This code has a minimum of six digits and can typically go up to 10 digits (though China has a 13-digit code). While exporting or importing, it is mandatory to include your product’s HS code in your shipping documents, such as your commercial invoice, packing list and shipping bill. And as an exporter or importer, it is your legal responsibility to correctly identify your product’s HS code. Incorrect classification can lead to problems that you’d be better off avoiding.

 

Given the importance of the Harmonised System and its correct application in international trade, this article contains the below information you require, including:

What is the Harmonised System?

What is an HS code?

Why are they important?

What is the ITC (HS) code?

How do you use HS codes correctly?

What happens when you use them incorrectly?

What is HS Code under GST - New rule?

How to find the HS code for your product  

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What is the Harmonised System?

The Harmonised System was a solution to the complications and costs associated with having different product classification systems for different countries. Before its creation, a single product could be classified as many as 17 times in a single transaction, according to this report. The Harmonised System came into effect on January 1, 1988. It is administered and updated every five years by the Belgium-headquartered World Customs Organisation (WCO). The system is used by more than 200 countries and economies and covers more than 98% of goods in international trade.

 

The Harmonised System comprises more than 5,000 groups of goods. These are grouped into 97 Chapters and 21 Sections. Each chapter is divided into headings and, where appropriate, sub-headings. As a rule, goods are arranged in order of degree of manufacture – raw materials first, then unworked products, semi-finished products and, finally, finished products. So, Chapter 1 is “Live Animals”, Chapter 41 is “Raw Hides and Skins (other than Furskins) and Leather” and Chapter 64 is “Footwear”.          

 

In the Harmonised System, each product is identified by a six-digit code, arranged in a legal and logical way based on certain rules. The six digits of an HS code can be broken down into three parts:

 

The first two digits identify the chapter the goods fall in. Example: 09 (Coffee, Tea, Maté and Spices)

The next two digits identify a heading within that chapter. Example: 0901 (Coffee, whether or not roasted or decaffeinated; coffee husks and skins; coffee substitutes containing coffee in any proportion)

The last two digits denote a sub-heading that makes the classification even more specific. Example: 090111 (Coffee, not roasted, not decaffeinated). In the absence of a subheading, the last two digits will be indicated by zeroes.

HS Code Structure

Source: World Customs Organization

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There are certain rules that govern the Harmonised System and HS codes. These are:

 

1. General Rules for the Interpretation of the Harmonised System: These ensure a specific product is universally associated with a single heading (and subheading) and not with any other. There are six general rules of interpretation (GRI) and they are hierarchical, as in GRI 1 takes precedence over GRI 2 and so on.

 

GRI 1 states that “classification is determined by the terms of the headings and of the section or chapter notes”. If classification cannot be thus determined, then GRI 2 to GRI 5 are applied.

GRI 2 has two parts. GRI 2 (a) extends the scope of a heading to cover not just finished products but also “incomplete”, “unfinished”, “unassembled” or “disassembled” products, provided they have the “essential character” of the finished product. GRI 2 (b) extends the scope of a heading to cover mixtures or combinations of materials or substances, which must then be classified according to GRI 3.

GRI 3 lays down the rules for classifying goods that fall under more than one heading. GRI 3 (a) calls for classification under the heading with the most “specific description”. But if two or more headings refer to only a part of the materials or substances in the composite product, then these headings are regarded as “equally specific”. In this case, GRI 3 (b) applies, which says the product will be placed in the “heading applicable to the material or component which gives them their essential character”. If the product cannot be classified on the basis of GRI 3 (a) and GRI 3 (b), then GRI 3 (c) provides for its  classification “in the heading which occurs last in numerical order among those which equally merit consideration in determining their classification”.

GRI 4 applies to goods not specifically covered by any heading (perhaps because they are newly introduced). These will then fall in the “heading appropriate to the goods to which they are most akin”.

GRI 5 applies to the classification of boxes, containers and cases in which products are packed (cases for cameras, guns, jewellery, etc). The classification of any packaging that doesn’t fall under GRI 5 is left to the discretion of countries.

GRI 6 applies to the classification of goods in the sub-headings.     

                              

 

2. Section, chapter and subheading notes: Certain sections, chapters and subheadings of the Harmonised Systems come with notes. These notes help interpret the specific sections and chapters by precisely defining their scope and limits. Like the GRIs, these notes are legally binding and are therefore also called “legal notes”.      

 

Importance of the Harmonised System ‍

The primary function of the Harmonised System is to act as a basis for customs tariffs worldwide. But it has other uses as well, such as:

 

The collection of international trade statistics

The collection of internal taxes such as excise duties and value-added tax (VAT)

As a basis for freight and transport tariffs

As a basis for rules of origin (which are the criteria to determine the national source of a product)

As a basis for the setting of preferential tariffs and MFN (most favoured nation) tariffs under free trade agreements

As a basis for governments to decide their trade policies

For the monitoring of controlled goods (narcotics, chemical weapons, endangered species, waste, etc)

As a facilitator of customs controls and procedures such as risk assessment and compliance

What is the ITC-HS code? ‍

As mentioned earlier, an HS code can go beyond the WCO-prescribed six digits. This is because countries are allowed to add more digits to the original six-digit code for further classification. These additional digits typically vary from country to country.

 

The United States uses a 10-digit code where the first six digits are the WCO-provided HS code. The US code is called a Schedule B number for export goods and a Harmonised Tariff Schedule (HTS) code for import goods.     

 

Similarly, in India, goods for export and import have an eight-digit code called an ITC (HS) code, where ITC stands for Indian Trade Classification and/or Indian Tariff Code. This system has two schedules – Schedule I for imports and Schedule II for exports. Schedule I has 21 sections and 98 chapters. The chapters are further divided into headings and subheadings. Schedule II has 97 chapters. The ITC (HS) codes are developed, maintained and updated by the Directorate General of Foreign Trade (DGFT).

 

An ITC (HS) code comprises the six-digit HS code plus a two-digit national “tariff item code”. For example, if the ITC (HS) code is 09011111, then

 

09 – Coffee, Tea, Maté and Spices

0901 – Coffee, whether or not roasted or decaffeinated; coffee husks and skins; coffee substitutes containing coffee in any proportion

090111 – Coffee, not roasted, not decaffeinated

09011111 – Arabica plantation: A Grade

ITC (HS) Code Structure India

Source: Indian Customs

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How to use HS codes, and the consequences of incorrect usage

HS codes are used by governments, customs authorities, statistical organisations, regulatory bodies and traders. As an importer/exporter, you are legally bound to classify your goods correctly and enter the correct HS code in your shipping documents.

 

Using the correct HS code ensures:

You pay the right duty

You receive the benefits you are eligible for, such as a suspension of customs duty

You are informed of whether your product attracts anti-dumping duty, requires a special licence to be shipped or comes under a trade quota 

Incorrect HS code usage means you end up paying a higher or lower rate of duty. When discovered, this can result in:

Steep fines and penalties imposed by customs authorities

Denial of import-export privileges

Denial of refund or a lengthy process to claim a refund if you have paid a higher rate of duty

Payment of duty difference plus interest if you have underpaid

Confiscation of goods if you have underpaid, which is the practice in some countries. The goods are released only after the fine has been paid and certain documents submitted       

Rejection of input credit tax (ITC) claim under the Goods and Services Tax (GST)

Shipping delays and the effects of that on your business

Additional expenses (demurrage/detention/storage charges, etc) as a result of the delay            

HS Code under GST – New rule

As of April 1, the Indian government has made it mandatory for Goods and Services Tax (GST) taxpayers with a turnover of Rs 5 crore or more to include the international six-digit HS code in invoices they issue for the sale of taxable goods and services. The earlier requirement was a four-digit code. Similarly, taxpayers with a turnover of up to Rs 5 crore must include a four-digit HS code on B2B (business to business) invoices. The earlier requirement was a two-digit code. Thus far, many GST taxpayers have been voluntarily including six-digit HS codes on their invoices and GST returns. The objective behind the move, according to this report, is to make taxpayers furnish a more precise HS code so that tax officials can “arrest tax evasion from fake invoices and irregular tax credit claims”.

 

 

How to find the right HS code for your product

Use search tools: In India, you can use the ITC (HS) code search tools on Icegate, which is Indian Customs’ electronic data interchange platform, or on the Indian Trade Portal, which is the property of the Commerce Ministry. In both search tools, you need to enter part of the ITC (HS) code, if you know it, or a brief description of your product. Similarly, to move goods in and out of the US, you can use the US Census Bureau’s Schedule B search tool or the US International Trade Commission’s HTS search tool. For the UK, you can use the Trade Tariff tool, provided you  know the type of your product, the material used to make it, and its production method.

Go through HS code lists: A simple Google check is all it takes to find one of these lists. The current version of the Harmonised System, which is the 2017 edition or HS 2017, is available on the WCO website. In India, you can search the DGFT website or several non-governmental portals for the ITC (HS) code list. In the US, you can look up the Harmonised Tariff Schedule on the ITC website. Once you get to the list, click on the relevant chapter and search through the headings and subheadings to find the right HS code for your product.

 

 

Important points to remember

HS codes vary from country to country. If you are exporting, for example, find out the correct HS code for your product in the country of import, as it might be different from the HS code for the same product in your country. A single digit might be all that is different but it could lead to your goods getting stuck, delayed or even rejected.

HS 2022 has been approved and will come into effect from January 1, 2022. With 351 amendments, it makes several major changes to HS 2017. Rules governing the classification of certain goods – including electronic waste, tobacco and nicotine-based products and smartphones – will reportedly change. Traders must familiarise themselves with these changes before the new system kicks in.

Look out for updates and amendments. In June 2020, for example, the Indian government made amendments to Appendix 3 of Schedule II of the ITC (HS) Classification system, which deals with the export of SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) items. These include controlled substances such as nuclear material, toxins, aerospace systems, electronics and even computers. The amendments included changes in headings, new entries, the deletion of some entries and the addition of some notes, among others.

Most traders leave the classification of their products to their customs agents. Make sure you pick a professional with experience in this field. Remember, customs will hold the owner of the goods (exporter or importer) and not the agent responsible for any classification violation.

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.