Happy Birthday, GST! You Are Delivering Supply Chain Savings

| By Karthik Ravikumar | Senior Manager, Supply Chain Design | and | Vikas Argod | Senior Manager, Supply Chain Operations | Chainalytics |

Exactly one year ago, on 1st July 2017, India entered into “one country, one tax” world. Overnight, the country transformed into a single marketplace with the Goods and Services Tax (GST) overwriting the fragmented, multi-level, and confusing tax structures that had prevailed since 1947. Under GST, companies no longer need to optimise their supply chains solely for reducing tax burden. Now, they can rather focus on enhancing core supply chain elements – warehousing and transportation.

To help companies prepare, we worked with multiple organisations in planning for the GST network before GST became law, and as a result of it’s announcement, new trends have emerged in the industry which must be considered in optimising the supply chain. While some of these trends may not have anything to do with GST, looking at supply chain study holistically is important. Recently, an Active Pharmaceutical Ingredient (API) manufacturer and distributor sought to change their network to utilize the benefits of GST and ended up with 28% better service levels for customers at lower transportation cost. Additionally, a typical post GST network doesn’t necessarily mean reduction in number of warehouses. The aforementioned API manufacturer reduced working capital by 35% while closing only one out of seven existing warehouses.

Hyperlocal network modeling, inventory service level optimisation, and redesigned transport modes are the three factors we recommend in a supply chain in India at this stage. Failure to include these three considerations will result in money being left on the table, usually in the range of 2% to 9% of total spend. Typical network designs consider candidate locations at city level. Given multiple Special Economic Zones (SEZ) in a greater municipal area, and many new warehouse parks that have come up in last one year, hyperlocal strategy is key. At this stage, oversupply is prevalent in some areas, which can be advantageous in a total cost picture. It is a two-step process. In the first step, select the city. The second step involves working with a real estate partner to find a hyperlocal location to establish the warehouse. In one case, we found that the rental in the new location in Delhi was 60% cheaper than the candidate location being considered by the company. Our real estate partners have current rental and labour costs along with database of ready-to-move in locations. Negotiations will, of course, further save the costs – something you can use later to pay for implementation.

Whether shipping cement bags or smartphone, faster delivery is a requirement of the market now, particularly in the metropolitan areas where delivery is moving from day scale to hour scale. Inventory deployment is a costly game and optimising it for the service levels can’t be dependant upon tribal knowledge. With large, consolidated warehouses, all the warehouses can operate as full service DCs. While this sounds beneficial, unless inventory is optimised, service levels or working capital will take a hit. For a life science network, we were able to reduce the inventory by 35% while increasing the fill rates from 85% to 95%. Even though this may sound counterintuitive, this is the result of combining inventory service levels and network consolidation.

Pre-GST road transportation was mostly LTL while the post-GST network has larger volume movements and most are probably full truckload. Since transportation managers are mentally stuck in pre-GST world, they still calculate their math with per tonne LTL rates. The same problem is occurring with air shipments. Rates for low volumes from multiple locations needs to be re-negotiated for higher volumes originating from fewer locations. To create a successful model, these lower costs must be considered in GST network design, and transportation rate databases come in handy in such cases. Furthermore, certain facilities can be marked for cross docking while air shipments can be restricted to one or two warehouses. These methods of  consolidation help to negotiate better rates from 3PL providers as well. Employing this strategy, the life science company mentioned earlier was able to reduce the transportation spend by 5%.

As expected, GST has been a positive enabler for Indian supply chains. Whether or not individual supply chains can use this opportunity to witness real, beneficial  change depends on the rigor of network design and ability to learn from the trends. That would be the best birthday celebration of GST!

Karthik Ravikumar  is Senior Manager of the Supply Chain Design at Chainalytics. Karthik’s expertise is in modeling complex supply chains for recommending optimal networks. He has worked with diverse industries like pharma, retail, appliances, food, agri products etc.

Vikas Argod  is Senior manager of the Supply Chain Operations competency at Chainalytics. Vikas specializes in warehouse operations, transformation program design, and service delivery processes in project-based business environments.

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