The consequences of the Corona pandemic: the end of just-in-time manufacturing?
Effects on the customs environment
The Corona pandemic has seriously affected the economy, society and social life. Economists assume that it will lead to one of the most serious (if not the most serious) economic recessions since WW2. The working environment and international trade will never be the same again. In the latest online report by AWB Consulting, Frank Görtz examines the expected changes to the existing model of “just-in-time” (JIT) manufacturing and the advantages offered by alternative solutions.
The advantages and challenges of JIT-manufacturing
Many producers organise their manufacturing operations “just in time”. This means that goods are only produced and delivered when needed. In this respect, one refers to “demand-oriented” or “on-demand” manufacturing with the focus on logistics.
As part of the global supply chain, this concept enables companies to:
- reduce capital commitment, thereby freeing up the liquid capital available to a company,
- reduce lead times and
- minimise or even eliminate storage risks, such as the loss of quality or value during storage.
Many companies first produce the goods and only deliver them when needed for the subsequent production stages. The weakness of this strategy is that the loss of one vital component could bring the assembly lines to a standstill, thereby interrupting the entire production process.
The principle of JIT-manufacturing was introduced at a time when an uninterrupted supply of goods using different modes of transportation was normal and taken for granted.
Thanks to the Corona pandemic, this is no longer the case and many companies in industry and trade are now grappling with the consequences.
Lessons from the pandemic
All over the world, JIT-manufacturing is being questioned and subjected to scrutiny. Companies are investigating potential alternatives which still allow goods to be produced and traded as cost-effectively as possible.
If the relevant materials and commercial goods are not produced in Germany or another EU country, the question arises as to what solutions customs law offers for non-Union goods.
Companies must identify viable customs procedures and consider how to implement them.
Before companies can carry out a detailed process analysis and performance audit, they must correctly classify the relevant goods under the common customs tariff. The relevant legislation is Regulation (EEC) No. 2658/87, which introduced the Combined Nomenclature (CN) as the mandatory customs tariff scheme (and statistical nomenclature) of the European Union on the basis of the Harmonised System (HS) of the World Customs Organisation. It is updated annually and provides information on all the import and export rules applicable to the tariff headings including customs and tax rates.
The potential import duties are extremely important for the performance audit and the choice of customs procedure.
If the goods have been imported free of duties (i.e. under a preferential agreement or a zero tariff rate) they can be released for free circulation according to Article 201 of Reg. (EU) No. 952/2013 (Union Customs Code/UCC).
Assessing the customs and import duties is more difficult. This requires a precise performance audit to determine whether it would be better to release the goods for free circulation or use a different customs procedure.
This performance audit basically resembles a straightforward cost-benefit analysis. Accordingly, the import duties and related costs are compared to the advantages of other solutions and simplifications provided by customs law.
Possibility of storing non-Union goods
Following entry and presentation, the non-Union goods are in the customs territory of the European Union until they are placed under the temporary storage procedure, which is regulated in Articles 144 to 152 UCC.
The customs authority determines the location of temporary storage. As a rule, the goods may be stored in a temporary storage warehouse operated by private companies.
Temporary storage is rarely considered an alternative to JIT-delivery, since it suffers from disadvantages in comparison with other customs procedures.
These disadvantages, especially the 90-day period for storage and restriction to preservation measures, are not acceptable to many companies and so other customs procedures should be considered.
Besides release for free circulation, the special procedures and export are also considered customs procedures. For our purposes, however, only the special procedures under Article 210 UCC are relevant.
These are divided into transit, storage, specific use and processing and require the prior authorisation of the customs authorities.
As an alternative for JIT-delivery, only the special storage procedure comes into consideration because the other special procedures are only of very limited use for this purpose.
Storage is divided into customs warehousing and free zones. Both have the advantage of unlimited storage time. During storage, import duties and other charges and taxes are not levied and trade policy measures are not applied.
Free zones/free ports
In the past, free zones (better known in Germany as “free ports”) had the great advantage of being fictionally located before the customs territory and so no customs formalities were applied before the shipment crossed the customs border into the economic territory.
This has now changed owing to increased security requirements. As a result, non-Union goods in a free zone are always under customs supervision and can be checked by the customs authorities at any time.
The only free ports in Germany are Bremerhaven and Cuxhaven, which are approved as free zones of the European Union.
Companies must decide by means of internal checks and analysis whether it is feasible to store the goods in free zones. They should also carry out a cost-benefit analysis, particularly in relation to a separate customs warehouse on the company’s site or premises.
The customs warehousing procedure has other advantages besides the unlimited storage of non-Union goods, namely the exemption from import duties and commercial policy measures:
- Generally-speaking, all storage facilities can be approved as spaces or other sites on the company’s premises and existing storage areas can be used as customs warehouses under certain conditions.
- Other forms of handling than preservation measures are possible.
- Warehouses may also be authorised to carry out processing and end-use operations under other specific customs procedures such as inward processing and end-use.
- The goods may also be temporarily removed from the customs warehouse for usual forms of handling or customer demonstrations, provided this has been approved by the customs authorities.
- Equivalent goods may also be allowed to replace the non-Union goods originally placed under the customs warehousing procedure, provided they have the same eight-digit CN tariff heading, commercial quality and technical characteristics.
- The customs warehousing procedure may be terminated by placing the goods under other customs procedures for non-Union goods. Accordingly, other customs procedures (e.g. inward processing) may be used directly after storage thereby saving import duties.
Companies wishing to use a customs warehouse must decide which type is suitable for their purposes. They have a choice between a public customs warehouse or a private customs warehouse.
Type I and II public warehouses differ in terms of responsibilities. Both the holder of the authorisation and holder of the procedure are responsible for type I warehouses whereas only the holder of the authorisation is responsible for type II warehouses.
There are also type III warehouses which are operated by the customs administration itself. However, there are no such warehouses in Germany.
Of far greater importance are private customs warehouses operated by companies that hold both the authorisation and procedure. The authorisation is not limited to a single location or premises but may apply to several sites of the company.
Due to these advantages and possibilities, storage is a viable alternative to JIT production. Many companies may choose to establish new warehouses or expand existing ones.
The pandemic will lead to changes in production systems (especially JIT-manufacturing) and the storage of non-Union goods is becoming increasingly important within the context of global supply chains. However, the costs of developing storage capacity must also be taken into account.
In order to avoid further production downtimes and save costs, it is essential to analyse production processes in the light of customs requirements and the available alternatives.
Customs law already offers viable alternatives for the cross-border movement of goods. In particular, customs warehouses offer unlimited and duty-free storage of non-Union goods and allow various forms of handling to be carried out. For these reasons, the special storage procedure may be the procedure of choice for many companies.