Self-learning systems

Product classification: art, science, or sorcery?

Classifying products is typically a complicated process requiring a high level of expertise. Need to make it easier (without witchcraft)? Here is how.

Classifying your products can be an onerous and time-consuming task. For many companies, it is a manual process involving a potent mix of ingredients in the witches’ brew: lengthy internal discussions, Excel sheets, high resource investment, and much head-scratching. The resulting concoction can leave a bitter taste in the mouth: lack of transparency, poor recordkeeping, and a high error-rate.

Does this sound familiar?

If you’re tired of sifting through dozens of sections, chapters, and subheadings in the tariff nomenclature to find the right code, then read on.

Guaranteeing security, compliance, and cost-effectiveness

Commodity codes are the key classifier in international trade. They determine, for example, the customs duties for imports. And they define import and export restrictions as well as documentation requirements.

For businesses dealing with controlled goods, an additional export control number is used to check whether goods are subject to export controls, whether they require an export license, and whether they can even be exported at all.

Both codes are important. And it is your responsibility to identify the correct codes whenever you add a new product, component, replacement part or the like to your material master data.

Knowing the right commodity code (and export control number, if relevant) guarantees:

  • Security: Correct classification is essential to determine whether your goods are subject to any export bans or restrictions.
  • Compliance: You need the appropriate commodity code to determine the correct import customs duties and avoid running into trouble with the tax authorities.
  • Cost-effectiveness: Utilization of preferential trade agreements is also linked to products with certain commodity codes.

Assigning the wrong commodity code can have far-reaching consequences. The commodity code affects not only fiscal matters such as customs duties, value-added taxes on imports, and excise duties but also bans and restrictions, import/export licensing and permit requirements, special foreign trade statistics (supplementary unit), documentation requirements, and the obligation to report certain measures.

An art unto itself for too long

Identifying these commodity codes and export control numbers has often been an art unto itself, and some companies don’t afford it the attention it deserves. Many businesses have no established process for product classification. And often, the expertise is concentrated in just a few employees.

Given the tremendous importance of these codes, the rudimentary procedures in place at many companies are just not fit for purpose. It’s far too dangerous to rely on hocus-pocus, consulting the runes, or reading tea leaves… 😊

After almost twenty years of supporting businesses with their global trade operations, I have visited very many companies. Quite a few of these are still practicing the dark arts of product classification: slow and cumbersome manual processes with little accompanying documentation of the decision-making involved.

Many are quite surprised when I advise them that it doesn’t need to be so.

The kind of IT support that is commonplace for many other aspects of global trade and logistics is now also available to support the product classification process.

It’s a kind of magic: Software automation

The lyrics of the Queen song A Kind of Magic spring to mind as I think of the possibilities in this area:

It’s a kind of magic.
It’s a kind of magic.
A kind of magic.
One dream, one soul,
One prize, one goal.
One golden glance of what should be.
It’s a kind of magic.

Yes – “One golden glance of what should be”.

That is: well-documented and (semi-)automated processes that dramatically reduce the product classification workload.

How is it done? Simple. Well, actually with quite a complex bit of software. But, the principles themselves are very simple…

The science of automated classification

As soon as a new product is created in the master files of your ERP, it is automatically downloaded into AEB’s software solution for classification. Several methods can be used to determine the classification. But, for the purposes of automation, the key two are:

Rulebase

The product data defined in the ERP system – product groups, technical characteristics, materials, etc. – is used to define a rulebase that in turn is used to analyze and suggest the appropriate commodity codes and/or export control numbers. 

Something along the lines of: If condition X, condition Y, and condition Z are met, then the commodity code is definitely this one. As I’m sure you can imagine, once rulebases for a solution are defined, this can result in a high degree of automation.

Self-learning algorithm

When a new material is defined and its attributes such as product group, size, or application are assigned, the software solution compares this new data against materials that have already been defined and classified. Most likely commodity codes and/or export control numbers are proposed based on statistical probability. 

That is, if the new material has similar characteristics to, for example, 500 other materials that all are classified with a single commodity code, then there is a high probability that the new material should be classified with the same code. A sophisticated algorithm helps the software “remember” classifications already accepted as correct. 

Over time, the software gets “smarter,” and you benefit from a higher accuracy rate of commodity code suggestions!

Once the commodity code and/or dual-use number is determined using one of the above methods and approved by an administrator, it is automatically passed back into the product master tables of the ERP system.

Get the magic started!

Automation of product classification is very much achievable with the support of software. This lets you accelerate your global flow of goods, save customs duties, secure your supply chains, and achieve a competitive edge by eliminating errors in the execution.

Now, that surely is a kind of magic! 😊

Read more about the benefits of automation in this case study

Find out more about automated Product Classification with AEB

If you have any comments or remarks, I’d be happy to exchange with you. Get in touch with me via LinkedIn.