Goods & Services Tax- Decoding the Network Design Opportunities

Introduction

The much awaited Goods & Services tax which was conceptualized 16 years ago finally seems to be a near reality with both houses of parliament giving it a go ahead. GST bill which is expected to be implemented by 1st of April will be bringing plethora of changes across the value chain for almost all the industries. Companies will change their strategies to align with the new system and bring higher efficiency in operations.

image1

Most of the companies are still unprepared for both challenges and opportunities, India’s biggest tax reform is to throw at them. Scope of GST on Indian Business Scenario would be too exhaustive to be covered in a single paper and thus we will be focused on the SCM challenges, Impact on various Industries and Frameworks to define the guiding principles of Supply Chain strategy.

While the organizations will need to quickly act on wide range of business aspects starting from IT systems, regulatory compliance, Business process re-engineering, supply chain revamp and Sales & marketing among many others, we will be solely focusing on how this will be changing supply chains across various industries.

GST Briefed

GST will ensure the emergence of India as a unified market with simple, uniform and transparent tax rates across the country. This will increase ease of doing business, reduce complexity and increase the Supply Chain efficiency. New business models will not be developed to deal with the tax structure but would rather focus on optimization and bringing higher efficiency through the scientific and data based network designs. Another key benefit would be vanishing of cascading effect of taxes and enabling seamless transfer of tax credits across the value chain and across the state boundaries. This will eliminate the situation where taxes are imposed on tax and the cascading effect increases the total burden of tax. While for most of the manufacturing industries the overall tax burden is expected to be reduced from current 24 – 26 percent to anticipated 17 – 19 percent, the service industry may get dearer to 17 – 19 % from current 14 – 15 percent.

Below are the major Indirect taxes to be subsumed in proposed GST.

image2

Removal of entry tax & octroi taxes will reduce the waiting time at numerous check posts and reduce the transit time and increase utilization. Tax benefits and stock transfers will not be considered while designing network and will lead to lesser warehouses and shifting of manufacturing plants to demand clusters.

We will one by one observe the effect of GST on various legs of supply chain and illustrate methodology for achieving an efficient Supply Chain network.

GST – Transforming the Supply Chain Scenario

GST will be changing the traditional way of managing Supply Chain. Procurement patterns, manufacturing, warehousing and transport will be relooked and customized as per the new taxation system

Procurement

Manufacturing companies preferred to source from within the state to avoid CST. Unlike VAT, CST can’t be set off and hence got cascaded throughout the value chain. This used to put additional tax burden on image3manufacturer and hence the inclination towards intra state procurement. Another key criteria considered was procurement from tax exempted units which reduced the cost of raw materials.

Under the new tax regime, CST will be subsumed by GST and companies will be able to get tax credit on interstate purchase. New Procurement policy will have to strike a balance between transportation cost, lead time and cost of raw material. Exemptions will mostly vanish in long term and hence tax benefits will not be a criteria for deciding supplier base.

Another key consideration area will be re negotiation of supplier contracts and price revision based on
GST regulations and benefits which suppliers will draw upon implementation of GST. It is important for manufacturers to understand impact of GST on supplier Industry so that the prices can be reviewed and benefits can be passed down the line.

 Manufacturing

Redesigning Manufacturing footprint can be one of the biggest transformational and cost centric initiative a manufacturing organization can take.

Traditionally all the manufacturers have designed their manufacturing network based on minimum cost model. Per unit manufacturing cost depends on various factors and the uncertainty around these factors keep managers pondering over the best suited Manufacturing footprint network.

image4

Due to complex taxation system and variation in tax/incentive structure across states, Indian manufacturing hubs have developed as per the tax concession policies of states rather than the operational efficiency. In current tax structure, states have the flexibility and incentive of offering such tariff discounts. Going forward as we move to GST which is tax imposed on consumption, states would

neither have flexibility nor incentive to offer such policies. Fate of existing tariff discounts will be decided when the GST council proposes detailed GST legislation. The companies will have to reassess their manufacturing strategy in wake of such changes, which will lead to consolidation and relocation of the manufacturing plants. Such decisions will be backed by detailed analysis of demand and supply patterns, inbound and outbound logistics cost, inventory carrying cost based on lead transportation time, labour cost and other indirect costs.

Warehousing & Transportation

As GST subsumes CST levied on interstate movement, organization will move towards consolidation of warehouses. In current tax structure, organizations have scattered warehouses in most of the states to benefit from stock transfers and avoid the CST.

The new tax environment will see network redesign based on optimization and efficiency, making way for consolidation into large scale warehouses which will bring economies of scale, improve scope of automation, impose better control and drastically cut the costs. Inventory carrying cost will be decreased as the stock points will consolidate and transit time will be reduced.

Average size of warehouses will increase four to five folds which will let companies invest in automation and more robust IT infrastructure. Fewer nodes will increase the control and lower administrative cost and overheads.

image5

Transportation routes will need to be re defined due to consolidated factories and warehouses. Removal of entry tax and octroy will reduce the wait time of trucks at check posts and will considerably reduce the lead time. In current scenario the trucks are idle for more than 40 % of times due to state barriers which is expected to be reduced by half. Consolidation of warehouse will shift the transportation towards higher tonnage trucks as load carrying requirement per trip would increase.

image 6

Current logistics network in India is largely scattered with localized hub and spoke models. GST will shift the network to consolidated Hub and spoke model with fewer hubs and larger circumference.

Route of trucks will have to be relooked in advent of change in logistics design. Better route planning and ensuring high truck utilization through well strategized milk runs will ensure that the outbound logistics cost is kept at the current level. Network consolidation, lesser lead time & delays, higher truck utilization and vanishing of state boundaries for tax purposes will reduces the logistics cost by 20 %.

3PL will gain the most from these changes and as the volumes will grow, they will be able to offer better services at lesser costs. There will be increased outsourcing of logistics to 3PL as they  would be able to give cost effective solutions due to economies of scale and more focused approach.

Companies can cut cost by 1.5 – 2 % of total sales after implementation of GST but this will depend on how quickly and efficiently these organizations can adapt to the new business environment and bring changes into their business processes and modify the supply chain network.

GST & International Trade

Import of goods or services would attract both CSGT and SGST. GST on imports will be levied on destination principle and SGST will accrue on the consuming state. GST would be subsuming Countervailing Duty (CVD) and Special Additional Duty (SAD). This tax paid on imports will be available for input tax credit. Apart from GST, imports will also attract Basic Custom Duty (BCD) under GST regime.

Exports however will attract no GST. However GST paid by exporters on procurement of Goods and Services will be refunded. This will increase the competitiveness of Indian products in International markets.

Supply Chain Network Assessment and Design

Network design is part of core strategy for any manufacturing company. The entire process is capital intensive, time consuming and needs major investments. Many of the key decisions are irreversible in short term and have long term implications. It is important to have an effective and verified approach to ensure that organizations can smoothly undergo transition to the post GST scenario in a timely manner. Below is the Holisol’s approach of network design re-engineering.

image7

Summary

Implementation of GST will catalyze lot of changes in the Indian supply chain environment. Managers will have to question the processes and existing design at every level and will have to revisit the whole strategy. Changes required will be investment heavy and will have long term effects. Given the short time frame, managers will have to act fast and devise new strategies suiting their business needs. There will be considerable changes in physical footprint of organization and GST will initiate sequence of relocation, consolidation and closing down of manufacturing plants and warehouses.

Most of the companies are unprepared and need to gear up as soon as possible to reap maximum benefits of the new tax legislature and keep pace with the competitors.

About Holisol Logistics

Holisol is a leading supply chain services organization providing solutions in Retail (end to end fulfilment), Auto & Engineering (packaging & supply chain) and Consulting. Holisol works on value proposition of Design-Implement-Manage to offer customers an experience of working like their own extended team, with affordable strategic and operational expertise.

Headquartered in Delhi, Holisol has a workforce of 200 plus supply chain enthusiasts who are continuously building value through leadership, innovation and long term relationship.

For glimpses of the kind of projects we have executed, follow our case studies