FAQ - Supply chain

How is Goods and service tax (GST) relevant for supply chains?

Supply chain costs consist of fiscal costs (central and state taxes) and physical supply chain costs (transportation, warehousing costs, inventory, etc.). Traditionally, the fiscal costs have predominantly determined the supply chain configuration. Hence, organisations tend to have a supply chain structure that is more distributed and fragmented – a warehouse in each state, suppliers in same state as the manufacturing plant, multiple but smaller manufacturing facilities. However, this is expected to change under GST as locations will become tax neutral.
Under GST, largely the supply chain costs and efficiencies are set to drive companies’ supply chain configuration.
Existing supply chains may no longer be efficient or optimal post GST and therefore they can adversely impact cash flows and operation costs if not addressed.

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How do I assess the real impact of GST on my supply chain configuration and operations?

KPMG in India has developed a proprietary 6R framework that provides a systematic approach to assess GST’s impact on supply chains.

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What are the cash flow implications of GST on supply chains?

Most of the planning under the GST regime is likely to focus on optimising the cash flows.

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Cash will be locked up as a result of time gap between GST payment and recovery and will therefore impact the inventory valuation
Organisations will have to re-assess their supply chain design and optimise inventory to minimise the cash lockup
Supply chain velocity will be a key metric to determine the cash flow impact.

How does GST impact the procurement function?

The concept of local suppliers (same state as the manufacturing plant) to lessen the burden of cascading effects of Central Sales Tax (CST) and achieve certain service levels has driven fragmentation in the supplier network. Multi-tiered procurement will have to be re-evaluated to determine true cost saving opportunities within the supplier network. Contracts renegotiations and supplier network consolidation will be some of the opportunities to improve efficiency, cost-savings and risks.
With GST rollout, the suppliers will have an opportunity to consolidate operations to gain efficiencies in their own supply chain.
Manufacturing process redesign to support the above might also be on the cards

How does GST impact the supply chain downstream design?

We currently find distribution centres or warehouses in almost every state to lower the burden of CST. Hence the distribution footprint is largely fragmented with higher operational costs, capital investments and restricted geographies that they serve. With GST’s rollout, the distribution footprint will be a key area to optimise for cost savings and operational efficiencies.
- Identify warehouse locations (latitude/longitude) post-GST basis demand demography Changes in primary and logistics volumes.
- Streamlining the distribution footprint will require organisations to redraw geographies and support an operationally-efficient network
Streamlining the distribution footprint will require organisations to redraw geographies and support an operationally-efficient network
- Map warehouse to market/territories to be covered
- Assess inventory levels for warehouses
Reduction in intra-state inventory transfers, if not eliminated, due to its direct impact to cash flow and associated logistical costs
With consolidation and optimisation of the distribution footprint, serviceability constraints would be key while redesigning the downstream supply chain
GST is likely to impact planning functions in the following ways:
- Currently there is lot of regional/local planning. We foresee the structure and processes to evolve more towards central planning to gain the benefits of GST.
- We foresee organisations putting more emphasis on integrated S&OP with a focus on higher demand accuracy and inventory optimisation.

With GST rollout, can I consolidate and optimise manufacturing plants?

Yes, you can and probably should:

Re-evaluate manufacturing locations
Re-allocate products to manufacturing plants to drive operational efficiency and enable larger batch runs.

How will 3PL/4PL evolve post GST?

GST is likely to enable organised 3PL/4PL players to aim for a bigger play in the market
- 3PL/4PL value proposition through shared service model becomes relevant:
  - Inter-State indirect tax will be eliminated
  - Large warehouses become attractive.
- Elimination of state boundaries
  - Creditable tax
  - Level playing field when evaluated against fleet owners.
Many service providers and end users are likely to revamp their supply chains, realign the locations of warehouses, corridors used and transportation options exercised, thus generating tremendous business opportunities for Fourth-party Logistics (4PL) firms specialising in supply chain reengineering as well as for providers of network optimisation tools such as Transportation Management Systems (TMS).
We foresee the consolidation of primary hubs by 3PLs across core locations and evolution of hub and spoke model.

What is the possible impact of GST on the logistics sector?

Re-organised countrywide networks should decrease the cost of primary freight
3PL players are likely to improve their offering
- 3PLs are likely to focus on owning primary transportation
- Usage of high capacity trucks
- Resulting in improved efficiency.
Secondary transportation will largely be driven by unorganised and regional fleet owners. 3PL might play the role of aggregators.