Supply Chain in India: Then and Now

The supply chain industry has become the backbone of modern-day businesses. Traditional and linear value chain models and archaic practices in the industry are fast changing.

They are making way for revolutionary and cutting-edge new solutions and models that are infusing great efficiency and cost-effectiveness and driving tremendous value for businesses. Several factors are contributing to these revolutionary changes in the supply chain industry.

 

We interviewed one of the SCL mentors, Mr. P. Sreevathsa – Founder and CEO of Servify with over 20 years of experience in CX, technology and management – to take a closer look at the impact of each of these factors on the supply chain scenario in India in the past 10 years. Here are the key takeaways from the interview.

 

Impact of regulatory changes in India on the supply chain scenario

One of the major regulatory changes affecting the supply chain space in India has been the introduction of GST which standardizes the tax regime across the country.

These variations in tax rates (especially VAT and octroi) across states which led to widespread corruption and inefficiencies in the system, were eliminated as a result of such standardization.

“The tax reforms have given the supply chain industry a big boost and have significantly impacted the supply chain on an end-to-end basis. They have brought about greater transparency and therefore, simplicity in the supply chain process.-to-end basis. They have brought about greater transparency and therefore, simplicity in the supply chain process.”

They have enabled businesses to come closer to customers and ensure seamless experiences. For instance, all warehousing distribution for Mumbai would happen in Bhiwandi, Maharashtra in the pre-GST era as it is outside the city limits and so, saved octroi. With the tax reforms, businesses can maintain warehouses even within their own offices and better track them.

 

Changes in the service provider’s offerings and their impact on the supply chain scenario

The level of corruption and under-the-table dealings in this space in the pre-GST era meant no transparency in the process and made the costs unpredictable. For instance, octroi collection in Maharashtra every quarter was about Rs. 24,000 crores.

However, this was estimated to be only around 25% of the actual-ideal collection. The remaining Rs. 75,000 crores were grey transactions happening across the value chain.

This sort of corruption led to many so-called service providers to come into the system as consultants who would bribe on behalf of the larger corporates.

“Standardization in the tax regime removed these multiple layers of corruption and eliminated these middlemen in the garb of tax consultants, octroi consultants, recovery consultants, etc. ”

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The result has been large scale optimization and higher predictability for businesses. Core service providers such as warehousing parties, supply chain branding partners, distribution company, etc. have been able to flourish.

 

The changing corporate supply chain and its holistic impact on the current supply chain scenario

Corporate players understand that they need to focus on the core of their business. As a result, the need for supply chain services and solutions by larger corporates have reduced significantly except in cases where physical products are involved.

For example, a large software company like Infosys does not need supply chain services but a pharma company like Sun Pharma still has a greater need for supply chain services even though it is not their core business activity; their core business is R&D and development of drugs while supply chain is something they need to run their business.

The influx of large corporate players, 3PL & 4PL players and several startups in the supply chain space that operate across the spectrum right from planning and design to warehousing, distribution, etc. and the significant standardizations over the last 10 years have enabled such companies (like Sun Pharma) to focus on their core business rather than getting into the supply chain and leverage the efficiency of these services.

“The fast-evolving business models which have shifted from fixed pay for services to pay-as-you-go models which have enabled corporate players to leverage the economies of scale for cost-efficiency.”

Corporates do not have to maintain fixed warehousing spaces (irrespective of usage) or be forced to transport only full truckloads to move materials or pay unviable and unreasonable prices to transport smaller quantities.

 

Digital transformation and it effect on India’s supply chain scenario

The other major transformation that has impacted the supply chain space in the past 10 years has been technology and digital transformation. Earlier, there used to be super stockists who bought large volumes of inventory from the corporate players and stored it in bulk in their warehouses. They would do the supply chain planning and warehousing.

They then sell to sub-distributors who sold to sub-distributors and who, in turn, would sell to the city-level distributors or retailers. The retailer, in turn, would typically have a warehouse and maintain inventory to sell immediately to their customers when there is a demand.

So, there were 3-4 layers of supply chain and each level paying the costs of supply chain services which ultimately is drawn from their margins.

Today, with the digital transformation and technological advancements, the retailer can actually access the virtual inventory available with the stockist, place the order on demand and remove the middlemen (who may be large corporates themselves).

The retailers also do not have to maintain their own warehouses (with exceptions such as FMCG) and cut down on large amounts of supply chain costs. For instance,

“Asian Paints which earlier had 6 stockists, 180-200 distributors and 3000 + sub-distributors in the country has now gone down to 10-12 distributors in the country by leveraging technology.”

The realization that customers are willing to wait for a couple of days to get the paint order and that the order can be directly sourced from the distributor or super stockist led the company to take this step. This has ultimately led to infrastructural changes.

The emergence of tech-led startups like Uber and e-commerce giants like Amazon have made it indispensable for traditional companies to look inward and make changes so as to remain competitive. This is because Amazon relies on technology-led efficiencies and has reduced the multiple layers of distribution and therefore, able to give competitive prices and huge discounts.

 

The challenges that persist in India’s supply chain industry and the way forward

One of the major challenges in the supply chain space in India has been the narrow investor focus and siloed interests on logistics and trucking. There is not enough investment in cutting-edge and next-gen solutions in warehousing, supply chain planning, software solutions, etc.

The way forward for the supply chain industry to flourish is for investors to explore the multiple opportunities available for investment and support grassroots innovations to thrive.

“It is important for businesses to remain focused on their core business. However, if there are weak links in the supply chain, they will affect the core. So, they must solve for the weakest links in the supply chain, either through in-house solutions or by outsourcing it for economies of scale. ”

The bureaucratic bottlenecks in getting permits and documents still remain. Standardization also needs to come about in the licensing and documentation requirements in the supply chain space, similar to the standardization in taxation.

Having seen these changes take place in India, Lumis Partners feels that this is the right time to start evaluating the Supply Chain startup ecosystem.

Thus, we have launched our 2-month long accelerator program catering to early and growth stage supply chain startups called supply chain labs (www.supplychainlabs.in).

This is our small contribution to the ecosystem, surely a lot more will be required for major disruption.

Note: Content authored by team Lumis partners.

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