GST’s Impact On India’s Supply Chain

It was the first time post-GST roll out, that a GST Commissioner met with industry representatives and provided clarity on GST-related issue. Even though the govt-industry talk was confidential which can not be shared, we are able to bring you unmissable and useful insights from the conference to help you better negotiate the post-GST world.

On Friday, 04 August, Mumbai-based ASCW Media organized a GST Conference in Mumbai, the first supply chain event in India post-GST implementation that saw government authorities and industry representatives gather at one forum to address GST-implementation related challenges. The Chief Guest of the conference was Shri Sandeep Puri, GST Commissioner (W) Mumbai and his colleagues, who were present all through the conference, and held a 40-minute Q&A session with industry representatives. Their support and contribution made it a landmark event — one, which is sure to have a far-reaching, galvanizing impact on the operations industry..

The Keynote Presentation was delivered by Prahlad Tanwar, Director – Transport and Logistics, which was followed by a Chief Supply Chain Officer (CSCO) Panel and an industry Q&A session with the Chief Guest and his colleagues. In this feature, we bring to you the highlights of the event that that will give you unmissable insights into how GST will impact the supply chains of companies in the near and the long term.

In his Welcome Address, Hon’ble Chief Guest Shri Sandeep Puri, GST Commissioner (W) Mumbai said: “Logistics and supply chain form the fulcrum of an enterprise. This is the segment through which the Japanese introduced Kaizen and JIT management which were essentially about cost saving and increased efficiency. So I can understand the concern and the anxiety this industry is facing [about GST] because this industry is the first pillar of support.

GST, as a concept, is not new. It was introduced in 1954 in the world and today, about 160 countries follow GST. India, we have brought in the dual model of GST – there is the state GST and the Central GST. From one state to the other state, there is the IGST. In your industry, what I find [from the shared questions] is that people have apprehensions about pure services versus pure supply and what is taxable and what is not. We will take up those questions in today’s session.  The second area is the reverse charge mechanism (RCM). To those who are not used to the concept, RCM was used round about 2005. The actual issue was that [the transportation industry representatives] said that they are not were adept at keeping books and recordkeeping, so they requested the tax burden to be passed on to the receiver. So that is how the reverse charge mechanism came into being. I thank the organizers of the event to have invited us all and look forward to our interaction.”

Road Transportation Cost Could Be Lowered by 15-70%

Prahlad Tanwar, Director – Transport & Logistics, KPMG India, in his Keynote Address titled
‘GST’s Impact On Logistics and Supply Chain in India’ said: We as supply chain professionals had been awaiting GST for over half a decade. I’ve to admit that over the last couple of years I had stopped going to events to talk about GST because it became a repetitive process [of talking about the same things]. Now that GST is finally here, we can talk about its real impact. Today I am going to talk about transportation because I believe it will be impacted by GST the most and I am going to highlight some numbers and simulations that highlight that aspect.

Let’s take a quick look at pre-GST and post-GST paradigms. Pre-GST, the tax regime discouraged interstate trade, which is encouraged post-GST.

Pre-GST, we had different taxes and levies such as excise, VAT, CST on sales, and Service Tax provisions; now we have a tax on “Supplies” where the scope of the term “supply” is wide which includes barter, stock transfer, etc. Pre-GST we had a limited credit regime and now we have a liberal credit regime with limited restrictions.

Over the last 5-6 years there were four fundamental questions that we have been constantly asked. The first one is, of course, how can my supply chain be effective and compliant post-GST.

As Indians we are very cost conscious and every time you look at the publications we see articles on how GST is going to save costs – it is one of the things we will talk about today.  Third is how my supply chain can be remodelled for efficiencies. This is where networking ‘solutioning’ has come into vogue, things like how you can reduce your warehouses from 50 to 32 using geo-code and various supply chain modelling tools.

The fourth question is, what is the supply chain operating model with which to realize these opportunities.

The template that we use when we are called in to do supply chain remodelling activities comprises six different quadrants. One is your network. This is where we see how it has grown organically and how you can reassess your supply chain. The second one, something that has grown in significance over the years is inventory management– the working capital and related aspects are becoming extremely relevant because of increased volumes of goods transported in India and in terms of exports and imports.  Third is procurement – which is my pet subject. I think that that biggest change for supply chain managers is going to come from this area. With GST, the biggest challenge is how companies will restructure their contracts for supply chain activities. You may want to work with fewer 3PL players pan India – the challenge is going to be how you structure these RFQs. What are the services you want to outsource, what are the SLAs and KPIs you want around that and as importantly, how do you validate the capabilities of your 3PL. Our view is that in the next 16-18 months, the biggest value in capturing value from a supply chain perspective is how well companies manage procurement of logistics contracts.

S&OP planning is the fourth area where all planning processes need to be synced to the new network design. Then we have Geographies and People in terms of alignment of planning, sales and operations to sync up to new network. And lastly we Channel Management where margins and service costs need to be revisited.

Road Transportation:
Cost Saving Opportunities

The first thing you consider when you look at GST is, where is the money being spent in supply chain. According to some of our latest research reports, the total revenue in India for the transport and logistics sector was about $130 billion as of FY16. The biggest spend on logistics is on movement – about 60 to 65 percent. Warehousing is about 23-25 percent. Freight forwarding is 6-7 percent which is more for the EXIM leg, and the value-added services is 7 percent. To give you a context, spend on logistics in any developed part of the world is always less than 50 percent; and value-added services is 20-25 percent. These are the areas where you are going to see a lot of focus in India in the next 10-15 years.

It’s important to dwell a bit on transportation because the last several years, the emphasis has mostly been on warehousing and rationalising and improving the size and sophistication of warehouses.

To give you some context —  you know that in India there is significant modal skew towards Road. Freight movement through Rail is about 32 percent. Fifty years ago, the share of rail in freight movement was 89 percent. If you want to have a robust and efficient economy you have to ensure that Road’s share is less than 50 percent in terms of safety, cost, and of course environmental impact. In India, road offers the path of least resistance.

The total road length in India is about 5.5 million km which makes it the second largest road network in the world. The total length of national highways in 2011 was just 71,000 km. In 2016 it increased to 1 lakh km which is only about 2 percent of the total road network in India. The CAGR growth in this time period is very impressive therefore clearly the govt over the last 5-6 years has been cognizant of the fact that we need to develop the highways infrastructure.

The length of state highways has increased by only about 0.5 percent in the last 5-6 years. The total capacity [maximum rate of traffic flow] of state highways is about 3 percent – this is glaring because of this 5.5 million km of roads, less than half is paved. Forty percent of all freight in India is moved through only 2 percent of the road network. That is a big challenge.

If you look at the growth of commercial traffic including one-ton trucks to 32 tonners, you will find that the total vehicle production and sales has been three times of the development of road networks in India. The good news is that the govt’s earmarked spend has significant increased – from FY 12 the spend has been increasing at a CAGR of 17.

Now here is something interesting. According to a [KPMG] research, you will find that the amount of time that a truck spends in moving on the road is 60-65 percent where check-posts take 20 percent — some states like Maharashtra are better in this aspect than others whereas in states such as Jharkhand and Bihar, there is a significant wastage in the amount of time trucks spend at checkposts of which 5-7 percent is at toll points. The average delay [countrywide] at a check-post ranges from 80 minutes to about 220 minutes for any truck anywhere, reducing asset utilisation and increasing costs.

In one day, a truck in India covers approx 200-250 km. In a developed economy such as the US or Japan, a truck on an average covers 550 to 600 km. The average speed is 30 to 35 km per hour in India whereas in developed countries it is 60-67 kmph. Now let’s look at how this scenario can change in India post-GST. In the pre-GST scenario, a large company had a central warehouse and then it had a state warehouses. In the post-GST scenario there will be a mother DC, and you will have a strategically located large warehouse, of the size of, say, 1 lakh – 1.5 lakh sq feet. Which means your primary transportation hauls will increase and so will your truckload sizes.

You can find the real value of GST here. If you move one-ton truck for a distance of 200 km in a day, the average spend per ton per km is Rs 16. But if you move the same material in a 32 tonner for 200 km, the average spend in Rs 2. Which means there is an exponential benefit of using a larger truck.

Further, as your distances will mostly likely increase post-GST because you are shutting down smaller warehouses, you are going to see a significant drop in how much you spend for the same goods. So much against the popular belief, even though the transportation rates will go up, the cost of use will significantly come down. And you will see the real multiplier effect when you won’t just increase your distance, you will also increase the size of trucks. In India, it is estimated that there are a little over a million registered trucks. A majority of those trucks are sub-optimal in terms of size. Because of GST and restructuring of warehousing networks, we are going to see an uptick in larger trucks, and the benefits in road transportation unit costs as one moves up the truck capacity chain could be as much as big as whopping 70 percent. This is where you will see the real value of GST.

Warehousing: A Contrarian View

I must also do a critical analysis of warehousing with a contrarian view of the theory that exists on warehousing. We outlined four industry verticals, and have evaluated the average size of warehouses for each one of these subsectors. There are two schools of thought – a centralised warehousing approach or a distributor warehousing approach. Keeping in mind that GST has been on the horizon for more than 2 decades, companies had already started to migrate to GST-ready warehousing network. Therefore our view is that post-GST the overall impact on warehousing is going to be modest – that we won’t see a major restructuring now.

From an implementation perspective, make sure that, whether you are a supply chain manager or a 3PL, make sure that you are using larger trucks.  In fact that is already happening as I speak – we see a significant uptick in demand for HCV.

‘Automation Players — Now Is The Time’

The Welcome Address was followed by a CSCO Panel that was premised on Supply Chain Cost Efficiency & Performance Improvement With GST

Panellists included Lt Col. Vijay Nair, VP Logistics, Reliance Digital Retail; Laxmana Murthy, VP Group India Logistics, Legrand; Hemant Sood, Value Chain Head, Raymond FMCG; Girish Pai, Director, Natural Ice Creams, and Anil Sathe, Former Sr GM Supply Chain Blue Star.

Elizabeth Alankara, Principal Consultant, PwC moderated the discussion. Panel highlights contain trends and forecasts that can help you negotiate the post-GST world with better clarity. Presenting, excerpts:

Elizabeth Alankara [Moderator]: What has been happening on the ground in your supply chain in the run up to the GST implementation and
post-GST?

Laxmana Murthy: I represent the electrical switch gear industry. In terms of preparation our company along with most of the suppliers and had started to work since a long time on transition to GST – therefore we had in a minimum blackout period. For us, nationally all the manufacturing points are aligned.

One of the challenges I see is that you get different opinions and interpretations from different consultants that make things complicated. The big concern is that stockists and trading community across India – most of them are still not ready. We have seen across India a huge reduction in inventory to the tune of 30-40 percent. We expected a post-GST spurt in sales but that has not happened so far. They would like to normalise in one or two cycles as we begin to see the return credits, etc. The business volumes have been impacted in the short run.

The good thing is that the govt has been responsive both post and pre-GST. And imports exports have been simplified.

Lt Col. Vijay Nair: The industry had enough time for preparation. That said, there are always that last-minute rush. f you see, most of the GST-related activity – registrations, etc.  – happened during the period between the last week of April to the 31st of May. The smaller vendors were in doubt and had not had taken the step of registering. Perhaps industry bodies could have played a better role. However, I think a great thing that has happened was that in one month’s time most of them got registered.

As regards to the operational aspects, we have been able to transform our network design and have seen our average transportation distance actually came down by about 200 km.  In summary, the transportation cost may have gone up, but the reaction time to market has certainly improved.

Girish Pai: As a manufacturer, GST has made us more disciplined. Post-GST,  our accounts department told us that you need to have your GST number whenever you check into a hotel room. That you even have to have food in a restaurant which is GST-registered [laughter].  I am seeing that GST  is entering in all the pages of our balance sheet.

Hemant Sood:  We started to work on GST preparedness since the last one year and we were ready by May this year. In fact internally we had put together a team comprising of taxation, supply chain and procurement experts which helped in preparedness. The biggest challenge that we have faced is the registration of vendors. The last leg of vendors has still not registered by and large. Must of the vendors started registering in the last week of June which was worrying time for the organisation, however most of them got compliant in the last week, as a result of which we also had a short blackout period which went smoothly.

Externally though, we saw a big VUCA world.  Most of the retailers in modern trade began to destock and also brought down days of inventory significantly, which has had an impact on the supply chain and production. We had to quickly realign with the demand.

Early this year, the industry saw a production slowdown to readjust to the whole new demand pattern, which was the biggest challenge. We are entering the luxury segment and our tax structure has gone up from 14 to 28 percent so half of the profit was wiped out – which has had a high impact on some of the companies.

The biggest advantage we have seen is in terms of the costing. Now it’s simple, you have COGS and there is a simple rate [of tax] and you are done.

Currently, FMCG industry is still adjusting to a revised demand especially from the modern trade. Most of the general trade  retailers are still apprehensive of holding high inventory because they have an impression that they will have to register and all their turnover will be accounted for which they have to pay taxes. Therefore some of them were destocking which is impacting FMCG a lot. For an industry that has been growing by 6 percent annually, perhaps in this quarter I’d say that the growth will be sluggish.

Anil Sathe: The biggest challenge that I see is that tax exemptions to industrially-underdeveloped areas will be gone. Manufacturers and supplier in areas like Baddi (HP) are still confused about their tax compliance. Imports have been relatively smoother – but the rest of the supply chain network is taking time so it is early to see the impact.

Elizabeth Alankara: How do you see a change in the manufacturing footprint in the post-GST world? Is your industry see a shift of manufacturing bases to locations which may promise better quality, lower cost of manufacturing or labour?

Hemant Sood: A lot of manufacturing in FMCG and pharma  is located in excise benefit zones such as Jammu, Guwahati and parts of Uttaranchal. In my earlier assignment I saw that 60 percent of manufacturing was done in Guwahati – so we were sending stocks all the way from Guwahati to Delhi and Mumbai, still we had good benefits.  Such a type of manufacturing footprint will continue till the sunset of the excise happens. In that regard, manufacturers need clarity from the government. If the Excise-benefit changes, then we will see a definite disruption in the current manufacturing footprint where it will move closer to the demand centres. And then you will see revaluation of suppliers and contract manufacturers.

Geographically speaking, most of the demand comes from the Western and Northern parts of India and you may see more manufacturing moving closer to that part of India.

Elizabeth Alankara: Col Nair, Would you be able to through some light on how do you manage consolidated warehouses in your industry? What are the key requirements from a capability point of view in terms of people skills, technologies, etc.?

Lt Col. Vijay Nair: Earlierthere was a compulsion that we maintain a warehouse in every state. Now that compulsion is no longer present. Earlier, we could not get into big-ticket automation, which is now going to be possible. Since the GST was always on the cards, we had started to work on moving distribution centres closer to the markets – we have not yet implemented the entire network plan but what we see is that we are going to go for larger warehouses — we are going to go for large-scale automation. This is certainly going to augment accuracy and the speed of operations.

When earlier, large service providers – the MNCs – used to come they used to talk about big things that could never be implemented. I think now is the time. Now with the scales that are come in with large warehouses, automation is a possibility, especially in grocer retail where FMCG’s numbers are very big. From one single warehouse from where destruction will be possible to all the points, automation will be a big driver of that transition. Robotics and even pick-to-light, aisle technologies will all come in now.

Hemant Sood: I also see the warehousing numbers will go down perhaps by 20-30 percent. This will be governed by two things; one is the proximity to the demand centres, and two, infrastructure.  With improvement in infrastructure, I can further reduce my warehouse footprint by 40 percent. Some FMCG companies have reduced the number of warehouses by about 50 percent. This will tend to create new transportation line-hauls. India’s busiest line is Delhi-Mumbai, which could, as an example, change to Delhi-Hosur. And these kinds of adjustments will happen in the next 12-18 months.

Elizabeth Alankara: There are certain industries that talk about postponement strategies where you’d locate smaller hubs closer to demand centres. There are certain other industries that are today questioning the very need of warehousing. This is typically the feedback when we speak to CFOs who are constantly at loggerheads with supply chain departments to understand why do we even need a warehouse – can’t we ship directly to manufacturing? Mr Murthy, could you throw some light on why warehouses would not go away and is there a possibility of every looking at shipping directly from manufacturing?

Laxmana Murthy: We have a mix of all types that you are mentioning – we have manufacturing units across India starting from South to the Hilly regions in the North. I don’t see an immediate change in the manufacturing strategy. We also have manufacturing units at all excise free zones. From our industry’s perspective – warehousing is going to stay. We have two types of product categories – one of them is custom-made – we have already shifted these production point closer to demand centres.

Another after-effect of GST that I want to point out is that we will see a relocation of job opportunities. With relocation of warehouses, we will need more skilled human resources at the new places.

The real saving in supply chain, I believe, will come from consolidation in transportation — when you move from multiple level of transportation to direct line. Two, it will significantly improve my service levels.  Three the inventory is going to decrease with the decrease in the number of warehouses.

Girish Pai: In our case, we sell ice-cream which is a perishable good, so we don’t require warehouses. We only need them for the [inbound] semi-finished product, raw material and packaging material. For example, we have a signature flavour of tender coconut – the pulp is produced in Mangalore, the packing material is in Gurgaon. Now we are planning warehouses only for the packing material and the semi-finished products in Taloja or somewhere else – though the [Gurgaon] warehouse will exist.

Elizabeth Alankara: What are your key asks from the 3PL players – for example, do you prefer asset-heavy or asset-light 3PLs?

Hemant Sood: If I have a choice, I would lean towards asset-heavy service provider because of better predictability, higher service levels, and more cost benefits.

Lt Col. Nair: An asset-heavy 3PL would be preferred because your cash flow is reduced. But from my experience I’ve seen that even an asset heavy provider will not have all his resources deployed to your satisfaction –  at times you may find that he may have deployed someone else’s asset for you. So we haven’t seen any significant service improvement when using asset-heavy 3Pls – we have got both asset heavy providers and we have very lean service providers.

Elizabeth Alankara: We have seen the emergence of multi-customer sites where there are 2 lakh-3 lakh sq ft facilities. And there are talks of up to a million sq feet of warehousing the likes of which you see in the West. These warehouses are shared by customers from different industries, with the benefit of managing peaks and extra buffer space to expand. Would you be comfortable using multi-customer sites?

Laxmana Murthy: Ofcourse, as a policy, I will always prefer a multi-client service provider – that’s where there will be a compensating effect – managing demand flux is one of our huge challenges where we see up to 17 percent of our sales during one month. Warehousing service providers should always be able to ramp up at a short notice as you see in places like Singapore.

Lt Col. Nair: It varies from one industry to another. In retail, we will definitely want an exclusive facility. But I agree with Mr Murthy – in our industry’s scenario where the growth is absolutely unpredictable, it is very difficult for a 3PL to decide the capacity of a warehouse. But when you enter into a contract – the person who is managing the facility will have the responsibility of looking for additional space. What GST will do is perhaps encourage some big players to enter into this business – then we will have larger warehouses. Today, I don’t think a 3PL singularly holds more than a 2 lakh or 3 lakh sq ft warehouse. Companies like Amazon or large FMCG companies own [or operate on lease] large warehouse up to the size of 7 lakh ft. But you will very rarely see a 3PL managing a large facility independently where he is renting out space to multiple customers. That said, we are primed for this kind of stage and that’s where costs will come down especially for companies that see fluctuating demands.

GST Officials Engage With Industry Reps in a First

GST Officials interacted with supply chain industry representatives assured them continued support in dealing with GST-related challenges

Shri Sandeep Puri Commissioner (West), CGST, Mumbai said that once taxpayers understand the basic concept of GST, they can figure out the answers to most questions themselves.

The intention of the govt is – you pay your tax and you take credit for the taxes you have paid. In the earlier tax regime, a lot of people were going out of or going under the ambit, but here is an opportunity to pay the tax and take credit and that’s the theme behind it. The guiding principle is that GST works in the furtherance of your business.

Mr Jaishankar Upadhyay, a senior GST official, and a member of Mr Puri’s team said that the GST officials are accessible 24/7 to address GST-related issues. “We run our GST Seva Kendra in our offices. And after office hours you can reach us through our email ID [helpdesk@gst.gov.in], facebook [https://www.facebook.com/gstsystemsindia/], and Twitter [https://twitter.com/askGST_GoI].

This Article was Published in Dynamic Manufacturing India Sep – Oct 2017 issue