By Prateek Chauhan | Manager, Supply Chain Strategy, Chainalytics
After all the brouhaha, April 1, 2016 will still be celebrated only as All Fools Day! With the political impasse over the Goods and Services Tax (GST) bill in India’s last parliament session, the new launch date now seems to be 12 to 18 months away. So what does that delay mean for your supply chain planning?
Rather than putting GST initiatives on the back burner, this is a golden opportunity to work out all the details and finalize your blueprints for this inevitable change, which promises significant cost reductions. A logical first step is a thorough network design study, followed by a meticulous execution plan for large-scale network modifications.
How much GST-related supply chain savings could your firm accrue?
Based on Chainalytics’ experience, companies save between 2.2 to 8.5 percent in logistics costs in a GST environment. Couple those savings with the corresponding reduction in safety stock of 3.5 to 10 percent—due to lesser stocking locations—and you may very well have a massive savings story to tell!
A consolidated network also enables more accurate inventory stocking levels at warehouses, reduced stock-outs, higher fill rates, and less disruption to the upstream supply chain. And on the transportation side, the new GST tax regime would improve lead times by 30 to 40 percent, due to seamless transfer at state borders, according to Denis Medvedev, senior country economist for India at the World Bank.
Supply chain network optimization in India’s GST environment
Most enterprises today have high growth projections for the next three to seven years. So a host of other factors become relevant for companies that want to design their networks around real demand and constraints, rather than inefficient tax structures:
- Land will remain a state matter. Hence, companies will need to evaluate states that offer better land deals for siting plants and warehouses. Establishing a single greenfield warehouse can take upwards of six months with uncertainty around availability, negotiations and legal processing.
- Resource availability –water, electricity, etc. –as well as labour law reforms will have a big impact on site selection.
- Connectivity via major highways, railway and waterways will boost options.
Additional, immediate changes include:
- Manufacturing realignment along with the distribution network changes, with the option of looking at larger truck containers and cheaper modes like rail and inland waterways
- Exploring sourcing alternatives, since the change in manufacturing footprint means sourcing decisions and contracts may need to be revisited
- Making warehouse operations more efficient, with the possibility of implementing automation systems
What’s the long-term upside of all this change? More organized transport and 3PL sector, a surge in better technology and processes for warehouses, development of industrial clusters, and hopefully better infrastructure to support all of that.
Why start now?
Consolidating a warehousing network across a large country like India can be a challenging task. Firms should do the analysis now, so they have enough time to implement changes before GST hits.
Additional considerations in implementing an optimal GST network:
- Identify or hire the key people required for your transition
- Consider warehousing and inventory management process documentation requirements
- Prepare IT systems to uncover any potential hurdles to optimizing your supply chain
- Plan for issues surrounding permanent or union labour, to minimize operational disruption
As a mini case study: One global safety and security devices manufacturer started their U.S. branch network optimization in September 2015, with the goal of consolidating 300 locations to about 150. The process design and initial implementation plan is scheduled as a three year project—a month per location with multiple parallel teams implementing the change. A delay in the onset of GST regime may in fact be a boon for companies that are yet to start this drawn out process of network realignment. To realize the benefits of GST from day one, it will pay to begin your journey today.
Prateek Chauhan, Manager, Supply Chain Strategy, Chainalytics, has managed consulting projects in supply chain strategy, inventory optimization and deployment, replenishment planning, master planning, procurement planning, and supply and demand management in areas including fast-moving consumer goods (FMCG), semiconductor and consumer electronics.