By Mayur Vamanan | Director of Consulting | Chainalytics India
The much awaited Constitution Amendment Bill to institute a single Goods & Service Tax (GST) to replace over a dozen disparate taxes is now finally a reality. Eleven years after the GST was first proposed, both houses of the Indian Parliament passed the bill this week. While intervening in the Lok Sabha, Prime Minister Narendra Modi hailed it as the biggest taxation reform in recent history and rightly credited all political parties and the “democratic ethos of India”. Now, the bill will be sent to the President for his approval and the GST Council will be set up. While the government is targeting April 2017 implementation, the more likely date is 6-12 months later.
Looking beyond the celebrations and political backslapping, what does the new tax regime mean for companies doing business in India? Regardless of implementation date, companies need to start preparing now as changes to processes, systems and physical distribution networks take time.
Contrary to conventional wisdom, optimal GST distribution networks are not drastically different, in terms of number of inventory stocking locations, from current distribution networks. Based on our experience, there is often only a net reduction of 4-8 warehouses (including closure of some existing warehouses and addition of new warehouses) in going from the current tax regime to GST. There are several influencing factors that need to be considered in a holistic manner.
Service Levels: Customer service level, i.e. time taken to fulfill a customer order, is a big consideration. When a customer is promised delivery within a certain time, it is not possible to serve that customer from a distant warehouse. For example, “next day” service requires a warehouse to be within 250-300 km. Contracted service levels prevent a company from having too few warehouse locations.
Warehouse Fixed Costs: Fixed costs are inversely related to number of warehouse locations, i.e. high fixed costs result in fewer warehouse locations. In India, most companies work with CFAs (Carrying and Forwarding Agents) with low fixed costs. This fact, combined with the service level consideration, results in more warehouses…
… such that companies can take advantage of higher shipment sizes, and therefore lower cost per unit, on more Primary Transportation legs. The shipments into stocking locations from plants or upstream distribution centres are larger and more homogenous and use larger trucks compared to shipments to end customers. Secondary Transportation, i.e. deliveries to end customers, is on smaller vehicles and often involves multiple drops, requiring detailed load building and route planning. The interplay between primary and secondary transportation and their respective costs is therefore a big influencer of size and number of warehouse locations.
Inventory Carrying Costs are a big consideration, especially in industries with high product values, Ex. Electronics, Consumer Durables and Automotive. More stocking locations translate to higher inventory carrying costs. One strategy commonly employed is to stock slow moving, high value items in a central stocking location while stocking the fast moving items in customer facing locations. Inventory deployment is thus another consideration in determining an optimal GST network footprint.
Companies must continually review alternate candidate locations as potential sites for stocking / manufacturing. Macro and micro economic factors are constantly changing. In addition to proximity to supply and demand, access to road infrastructure and transportation assets, special economic zones (SEZ), real estate and labour availability and costs all play a role in selection of alternate sites.
GST implementation is a game changing reform that will eliminate the artificial tax barriers preventing Indian companies from operating in a truly optimal manner. But companies should not be lulled into believing they can move from a 30 DC network to a 5 DC network overnight. Careful consideration must be given to each of the above factors that influence the number, size and location of distribution centres in a GST optimal network.
Stay tuned for another detailed report on the Top GST Locations in India which consolidates the learnings from the work we have done in the last 6 years. Meanwhile, if you have a GST question, do not hesitate to contact us.
Read more on what Chainalytics has written on the subject:
- (BLOG) How to Reap the Supply Chain Benefits in India’s GST
- (BLOG) Will It or Won’t It? The $1.5 Trillion Question of India’s Tax Reform
- (ARTICLE) Prepare for the New Kid on the Block: India
- (ARTICLE) How Bright is India’s Future?
Mayur Vamanan is a Director of the Supply Chain Consulting at Chainalytics India. In addition to leading client engagements, Mayur is responsible for advancing Chainalytics’ project delivery methodology within the Supply Chain Design and Sales & Operations Planning competencies.