Creating more agile supply chains

The new GST regime could make supply chains faster, better and simpler. Will businesses step up to the opportunity?

There was much trepidation when the Goods and Services Tax (GST) came into effect on the midnight of July 2017. Will businesses adjust to the new tax regime? Will consumers get the benefit of lower prices? Will the government see more buoyancy in tax collections? 

The answers aren’t entirely clear. Tax revenues have not yet stabilised. There are still some concerns around the fact that the government’s GST revenue dipped in January. It may take a few more months for the system to settle down. Consumers saw the benefits of lower taxes resulting in prices of FMCG and auto products coming down.

But for businesses though, there is serious work up ahead. To not just tweak, but to entirely redesign supply chains — something that has been in the offing for more than half a decade.

There’s plenty to be optimistic about. For the last decade or more, road infrastructure has gradually improved across the country. Larger, new generations trucks are starting to hit the roads. Significantly bigger and more tech-enabled modern warehouses are being built. Much of it is aided by large dollops of capital pouring in from private equity players, who see logistics as the next big thing. Digitisation too is starting to play a big part in strengthening the data backbone.

So what are the big shifts that are on the anvil? Let’s take a whistle-stop tour.

In the past, sourcing, distribution and warehousing had to be decided keeping in mind state boundaries. Every time goods moved from one state to another, the firm had to pay inter state tax. That forced firms to operate with a warehouse in each state. Now, with one composite market, that constraint is no longer relevant. And the design can be redrawn keeping in mind what is operational efficient. Each business can now look for an optimum solution based on location and economies of scale. 

Already, a few logistics specialists are investing in integrated logistics parks of nearly 1 million sq ft each across the country, supported by automated warehousing solutions. Investing in automation is understandably difficult in a small warehousing operation.

Consolidation of suppliers: The trend of supplier consolidation will continue to grow. For instance, General Electric recently announced it was reducing its supplier base in India. Fewer, bigger suppliers and distributors will make supply chains more efficient and cut down transaction costs. 

Vendor selection will become a lot easier. Businesses can pick their best vendors, even if they are located in a different state. And by consolidating supplies with the best vendors, the increased volumes will lead to a significant reduction in logistics costs, without the attendant headaches of maintaining small warehouses.

Improved tracking and monitoring: The upcoming e-way bill regime is arguably the most crucial leg of the GST regime. An e-way bill is an electronic way bill for movement of goods which can be generated on the e-way bill portal. Once it becomes effective from April 1, the transport of goods of more than Rs 50,000 in value in a vehicle cannot be made by a registered person without an e-way bill. When an e-way bill is generated, a unique e-way bill number (EBN) is allocated and is available to the supplier, recipient, and the transporter. The e-way bill will also help the Centre and the states to electronically match a specific consignment to a truck. 

When a truck enters Tamil Nadu (TN) from Karnataka, the tax authorities in TN will know beforehand what the truck is carrying. Earlier, this would result in long incessant delays at the checkpoints. Logically, no truck carrying a bonafide an e-way bill will now need to be stopped anywhere across the country, unless there is room for suspicion. If a GPS-enabled truck has a smart tagging system installed, it could pass through a toll-naka without having to go through any checks. The time saved will be enormous-and minus the headaches of dealing with the discretionary powers of the local tax authority. This could bring greater predictability to the supply chain, triggering another round of productivity gains. On the other hand, if a truck is seized for under-invoicing, it will mean heavy penalties for the sender, receiver and the transporter.

Integration of cash flows, data flows and credit: Once the invoice data is digitised in the GST system, it could become the basis for establishing business flows. If banks get access to this digitised data, a distributor or a supplier could get working capital loans, without having to provide collateral. Even within an enterprise, the transaction data (accounts receivables and accounts payable) and the data on inventory tend to sit in separate silos. Once this is tightly coupled — and it needn't be such a complex task — it could make it easier for distributors to get faster despatch, as long as they are within the credit limit — and make the process of reconciliation a lot simpler.

The writer is co-founder at Founding Fuel