The India supply chain revolution (2022)

The India supply chain revolution (1)

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Adjusting to a new tax regime

By Ralf W. Seifert and Richard Markoff

8 min.

October 2017

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India is on the cusp of a supply chain transformation that may end up being nothing short of a major game changer. At IMD, we often discuss the distribution footprint of L’Oréal which had an outsized 15% of distribution centers located in India. This usually leads to a lively discussion as to why companies in India have surprising supply chain configurations. Companies like this may be in for a major change in the coming years.

And it’s a story that begins, funnily enough, with taxes.

A system of poor supply chain incentives

The India tax system is a series of complex state taxes based on origin of goods and a central, federal tax. Different states had different rates and levies for the taxes under their control, and the intricate web created strange incentives for companies, ones that seem very suboptimal from the perspective of the supply chain.

The state-level origin taxes often do not allow companies to reclaim taxes paid on raw materials if the goods were sold to another state. This was meant to incentivize companies to manufacture locally, and indeed many did, either by outsourcing or creating micro-factories in most of India’s 29 states, despite volumes that might have more naturally led to larger economies of scale in consolidated production facilities. Unilever, for example, has 38 factories in India out of more than 300 factories worldwide.

Other companies like L’Oréal have opted to store goods in each state rather than multiply their production sites. The downside for L’Oreal is having a footprint of over 20 distribution centers in India, similar to their footprint for all of Western Europe, even though revenue for Western Europe is six times larger than that of India.

This is due to the significant delays caused by the tax regime. The states have every reason to try to ensure compliance to maximize their tax revenue, and do so by imposing state border controls, where trucks were often stopped, inspected and even unloaded to ensure that the state and central taxes were in order and the origin of goods confirmed. We spoke to Raj Reddy, supply chain VP at Glenmark Pharmaceuticals. Reddy estimates that this increased transit time by about 50% on a high volume transport lane like Mumbai-Delhi. Past estimates from Mumbai-Calcutta have been as high as a seven-fold delay for freight as compared to a passenger vehicle.

These long delays for transport run straight into the very localized and demand distribution market. India is well-known for its sprawling deep trade distribution channel. Manufacturers must work through a very highly fragmented patchwork of small distributors who tap into these networks and manage the complexity on behalf of the manufacturers, explained Reddy.

The distributors demand lead times for orders that are often less than one day. With the state border controls, it is impossible to service the orders from another state, regardless of how close the distribution center may be. Reddy gave the example of Delhi, which encompasses 3 states and requires four distribution centers, whereas one would be enough should border controls be removed. The end result is a distribution footprint dictated by states rather than by demand volume.

Taking these considerations together, companies operating in India carry either a surplus of production sites or distribution sites, weighing on supply chain costs and performance.

A new game

This summer the Indian government announced an extremely ambitious tax reform that began ramping up almost immediately. Indian companies are scrambling to move towards compliance to the new tax regime. The Indian authorities have long recognized that the distortions caused by the tax system were a drain on competitiveness. According to a government official who participated in forming the new tax policy, the topic of reform has been formally on the table since 1996, with several failed attempts to enact a tax harmonization into law since then, starting with the first formal announced in 2006 and subsequent efforts.

He explained that the Indian government was very aware of the impact of the patchwork of state origin taxes on supply chains, and fully anticipates competitive benefits moving forward. Indeed, the official stated that simplifying supply chains was one of the primary goals of the new tax regime. He pointed out how ecommerce had underlined the importance of improving the situation. “Ecommerce companies are not equipped to track the origins of all of their suppliers. They were receiving notices from local tax authorities demanding information that they could not provide, and it was leading to legal proceedings.”

(Video) Celerity Supply Chain e-Conference & Awards 2021 – India’s Supply Chain Revolution - Panel 1

Without going into the intricacies, the state tax systems will be harmonized into a goods and services tax, with different rates for different product categories. The improvements this will bring by extracting revenue out of the black market and improving industrial efficiency have ranged from 0.4 to 2% of GDP. In the short term, however, companies are scrambling to find expertise and adjust their IT systems to prepare the complex and multiple reporting requirements dictated by the new tax system. Reddy explained that this is demanding master data discipline that Indian firms are unaccustomed to.

The impact for supply chains will be an end to the state border controls and incentives to produce and store goods locally within each state. This is the start of what will likely be a profound transformation of supply chain in India. “Supply chain maturity in India is not quite where it is in other countries”, explained Reddy. “This will help bring attention and resources to supply chain performance.”

Investors have been anticipating this step. 1.5 billion USD in investments have poured into India for improving warehousing facilities and technology in the hopes that tax reform will lead to larger regional and national warehouses. They may well be right. Reddy estimates that the tax reform will lead to a 40% drop in distribution centers in the country. One steel company has already announced it will reduce from 20 distribution centers to 5.

In speaking to the Asia supply chain Director for a multinational FMCG company, this view was confirmed. He projects that his company may close as many as half of the more than twenty distribution centers in the country. In addition to the cost savings, this executive pointed out the non-negligible decrease in inventory working capital by eliminating so many stock positions. There is also a significant simplification in the planning process for replenishing the distribution centers. He went further to explain that the small distributors that feed the deep trade channel in India are always cash-constrained, so having large, delayed deliveries would be unsustainable for these companies. This imposes a limit on how much distribution consolidation can occur.

For those companies that produce in local micro-factories, time will tell what direction they take. India’s road infrastructure is poor and even after the removal of border controls transportation will likely remain less productive than in other countries and may lead to some companies preferring the increased cost of multiple production sites rather than increased transport costs.

While these are open questions at least the key, classic decisions of make/buy and localized/centralized manufacturing will be driven by true operations considerations like material, labour and transport costs and sustainability rather than by tax optimization. A refreshing change indeed.

Takeaway

India is not unique in having tax, tariff and economic variables structurally impact the supply chain network. For example, Singapore has become a prominent hub due to its trade agreements in the region. Another notable example is Brazil, where tax arrangements between states and the federal government impact the location of manufacturing and distribution sites in important ways, much like in India. Even in North America, the reopening of negotiations of the NAFTA treaty could have unexpected results for supply chains that have now become fully integrated across the United States, Canada and Mexico, making them virtually one market. Understanding of tax, tariffs and customs changes will continue to be a critical competency for supply chain professionals.

The coming months will reveal how supply chains in India adapt to the new tax regime. It is not fully in place yet, and firms are understandably putting all of their current attention towards compliance and upgrading their IT systems and employee skill sets. Only then will they be able to take stock and begin building roadmaps to take full advantage of the potential gains. It will be exciting and instructive to revisit India’s supply chain and see what paths have been taken. A major change is in the air.

Ralf Seifertis Professor of Operations Management at IMD. He directs IMD’s newDigital Supply Chain Managementprogram, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies.

Richard Markoff is a supply chain researcher, consultant, coach and lecturer. He has worked in supply chain for L’Oréal for 22 years, in Canada, the US and France, spanning the entire value chain from manufacturing to customer collaboration.

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FAQs

What is food chain revolution in India? ›

There has been a rapid transformation of food supply chains in India over the past two decades. Modern retail sales are growing at 49 percent per year and quickly penetrating urban food markets and even rural markets.

What is the significance of first revolution of supply chain? ›

In the first revolution, the concept of supply chain, as opposed to logistics, was put forth. Constraint based optimization tools for the extended supply chain were developed to support the new philosophy.

What are the four 4 stages of supply chains? ›

Integration, operations, purchasing and distribution are the four elements of the supply chain that work together to establish a path to competition that is both cost-effective and competitive. Communicating and collaborating with all parties is a business strategy that eliminates errors and saves money.

What is the evolution of supply chain management? ›

The evolution of supply chain management has been characterized by increasing integration of separate tasks, a trend underlined in the 1960s as a key area for future productivity improvements since the system was highly fragmented.

Why is food supply chain important in India? ›

To answer this we need to understand the country's food supply chain. India with its billion-plus population provides a large and growing market for food products. Food products are the single largest component of private consumption expenditure, accounting for as much as 49 per cent of the total spending.

How can we improve food supply chain in India? ›

If India has to offer the world a rich and healthy food basket, it has to build proper cold chain infrastructure, invest in applied research in post harvest technologies, get food processing plants working in various sectors and develop its food retailing sector.

What is the significance of second revolution of supply chain? ›

The Second Revolution: 1960-1970: TheToyota wayTowards the end of the first revolution the manufacturing industry saw manychanges including the trend towards a wide product variety. Supply chain needs flexibility & efficiency so as to deal with wide varietyholding least or few inventory.

What are the three phases of the evolution of the supply chain concept? ›

development process of supply chain concept has gone through three phases, which are logistics management phase, value chain phase, and supply chain network phase (see Figure 1).

What is the significance of third revolution of supply chain? ›

The third revolution of supply chain occurred because of technological development. At present. We have much more excess to gather information. It is possible because of technology.

What are the 7 supply chain functions? ›

The functions of a supply chain include product development, marketing, operations, distribution, finance, and customer service. Today, many supply chains are global in scale. Effective supply chain management results in lower costs and a faster production cycle.

What are the 3 types of supply chain? ›

The three levels of supply chain management are strategic, tactical and operational.
  • Strategic Planning. This level of supply chain management is responsible for developing long-term plans that outline the company's overall objectives and goals. ...
  • Tactical Planning. ...
  • Operational Execution.

Who developed supply chain? ›

The term "supply chain management" was first coined by Keith Oliver in 1982.

Why is supply chain management important? ›

Supply chain management is important because it can help achieve several business objectives. For instance, controlling manufacturing processes can improve product quality, reducing the risk of recalls and lawsuits while helping to build a strong consumer brand.

What are the types of supply chain management? ›

The Six Models of Supply Chain Management
  • Continuous flow.
  • Fast chain.
  • Efficient chain.
  • Agile.
  • Custom-configured.
  • Flexible.
7 Jul 2021

What are the advantages and disadvantages of supply chain management? ›

Advantages and Disadvantages of Supply chain management
  • Advantages of Supply Chain Management. Cost efficiency. Enhance output. Avoids delay in process. Easily identify problem areas. ...
  • Disadvantages of Supply Chain Management. Expensive to implement. Complicated. Lack of co-ordination among departments.

What is the food supply channel in India? ›

The supply chain involves formers, seed producers fertilizers, financial institutions, millers, Government, warehouses, fair price shops, retail shops, railways, trucks, transport companies etc.

What is mean by food supply channel in India? ›

A food supply chain or food system refers to the processes that describe how food from a farm ends up on our tables. The processes include production, processing, distribution, consumption and disposal. •

What are the advantages of food supply chain? ›

More Operational Efficiency

You depend on your supply chain to maintain efficiency in the daily operations of your business. Traceability helps to improve communication between you and your suppliers, which keeps everyone on the same page and helps improve efficiency.

How can we improve food supply chain? ›

Ways for safeguarding your food products during supply chain process:
  1. Implement FIFO. FIFO, short for first-in and first-out, is an invaluable principle in supply chains dealing with food. ...
  2. Increase Speed. ...
  3. Utilize Inventory Positioning. ...
  4. Implement IoT. ...
  5. Control the Temperature.
4 Jul 2018

How can the food chain be improved? ›

3 ways to build a more resilient food supply chain
  1. Get food to where it's needed most. ...
  2. Support diversification across the supply chain. ...
  3. Accelerate resilience through public policy.
11 May 2020

When was supply chain first introduced? ›

In the late 1920s, the introduction of mass production along assembly lines laid the foundations for supply chain management. First successfully implemented by Ford, the idea of producing consistent products on a large scale with increased efficiency changed trade and supply chains irreversibly.

When did the supply chain begin? ›

Keith Oliver coined the term 'supply chain management, using the term in an interview with Arnold Kransdorff of the Financial Times, on 4 June 1982.

What are the 8 supply chain processes? ›

The Supply Chain Management Process includes the building blocks of Supply Chain Management are Strategic Planning, Demand Planning, Supply Planning, Procurement, Manufacturing, Warehousing, Order Fulfillment and Transportation business processes.

What are the top 3 elements of supply chain? ›

Generally the key aspects of Supply Chain management are Purchasing (sourcing), Planning (scheduling) and Logistics (delivery).

When did supply chain problems start? ›

Supply chain problems emerged during COVID-10 lockdowns due to shifts in demand, labor shortages and structural factors. Evolving geopolitical factors are now causing new risks and pockets of stress.

What is an example of supply chain that has evolved over time? ›

A clear example of a supply chain that has evolved over the years is the Walmart case. In its transition from regional retailer to a global market, Walmart has become synonymous of success in terms of supply chain management.

What is the scope of supply chain management? ›

The scope of supply chain management is quite broad. Since the supply chain encompasses multiple aspects such as manufacturing, warehousing, packaging, transportation & delivery, IT, logistics, etc., it creates numerous job positions across different sectors.

What are the 5 types of supply chain? ›

The Top-level of this model has five different processes which are also known as components of Supply Chain Management – Plan, Source, Make, Deliver and Return.

What are the 5 main goals of supply chain management? ›

The top five supply chain management goals include the following:
  • Ensure efficiency.
  • Optimize and standardize logistics.
  • Focus on improving quality.
  • Increase flexibility.
  • Monitor financial success.
1 Mar 2022

What is the most important part of supply chain? ›

Planning

This is one of the most important stages. Before the beginning of the entire supply chain, it is essential to finalise the strategies and put them into place. Checking the demand for the product or service, checking the viability, costing, profit, and manpower etc., are vital.

What is supply chain example? ›

Examples of supply chain activities include farming, refining, design, manufacturing, packaging, and transportation.

What are the 6 supply chain models? ›

Here are six types of supply chain models that can drive supply chain management for a business:
  • Continuous Flow. This is one of the most traditional models on the list. ...
  • Fast chain. The fast chain model is one of the new names in supply chain strategies. ...
  • Efficient Chain. ...
  • Agile. ...
  • Custom-configured. ...
  • Flexible.
10 May 2022

What are the two main types of supply chain? ›

The 2 Types of Supply Chains
Reactive Supply Chain StrategyData-Driven Supply Chain Strategy
Operational improvements based on guesswork or imitating competitorsA data-driven approach helps even best-in-class manufacturing operations find new ways to improve efficiency[iii]
5 more rows

What are the 4 components of supply chain management? ›

What are the components of your supply chain you should be focusing on right now?
  • INTEGRATION. Integration starts at your strategic planning phase and is critical throughout your communications and information sharing and data analysis and storage. ...
  • OPERATIONS. ...
  • PURCHASING. ...
  • DISTRIBUTION.

What are the challenges in supply chains? ›

the three critical challenges facing global supply chains: labor shortages, equipment availability, and the ripple effect of global bottlenecks. how companies are navigating a climate of persistent unpredictability.

What is supply chain principle? ›

Supply chain management is the process of planning and coordinating all of the people, resources, and technology that contribute to a company's value creation. Negotiating prices, scheduling manufacturing, and managing logistics all impact a company's value equation and are vital components of a supply chain.

What are the 5 basic steps of supply chain management? ›

The 5 Components of Supply Chain Management
  • Component 1: Planning. ...
  • Component 2: Sourcing. ...
  • Component 3: Inventory. ...
  • Component 4: Production and Transportation. ...
  • Component 5: Return of Goods.

Which company has best supply chain? ›

The Gartner Supply Chain Top 25 Companies for 2022
RankCompany
1Cisco Systems
2Schneider Electric
3Colgate-Palmolive
4Johnson & Johnson
21 more rows
26 May 2022

How supply chain affect the economy of a country? ›

The growth of global supply chains has changed the distribution of incomes across countries. Participation in these supply chains, initiated by the successful completion of low value-added manufacturing tasks, contributed to industrialisation and high rates of economic growth in several Asian developing economies.

What is a good supply chain? ›

The characteristics of a good supply chain are visibility, optimization, having the lowest cost possible, timeliness, and consistency.

What is supply chain planning tools? ›

Supply chain planning software provides tools to help plan and organize the different parts of a supply chain. Supply chain planning software allows companies to streamline and accelerate supply chain processes by detecting supply chain issues and forecasting supply and demand from customers.

What stage is important in supply chain management? ›

Stage 1: Plan

It is one of the most critical phases since it includes a wide variety of activities. Every company needs a plan or a road-map and businesses must first decide on their operations strategy and put them into action. A big decision is whether to make a product or part or purchase it from a supplier.

When did the Indian government use the state trade of food grains? ›

In 1965, under the Food Corporation Act, 1964, the Food Corporation of India (FCI) was set up in the Department, as the country was facing major shortage of food grains, especially wheat.

How has Covid affected the food supply chain? ›

COVID-19 resulted in the movement restrictions of workers, changes in demand of consumers, closure of food production facilities, restricted food trade policies, and financial pressures in food supply chain.

Who started rationing system in India? ›

Public distribution system in India-evolution, efficacy and need for reforms. Evolution of public distribution of grains in India had its origin in the 'rationing' system introduced by the British during the World War II.

Which sector is the backbone of Indian economy? ›

There are 63.4 million MSMEs in India which contributes around 29% of India's GDP, 49 % of exports, MSME sector is considered as the backbone of Indian economy, as it provides employment to 111 million people, said Shri Reddy.

How did India become self-sufficient in food? ›

In the 1960s, it was disgraceful, but unavoidable for the Prime Minister of India to go to foreign countries with a begging bowl. To avoid such situations, the government motivated agricultural scientists to make India self-sufficient in food grain production. As a result, high-yield varieties (HYV) were developed.

What caused supply chain issues? ›

Supply chain problems emerged during COVID-10 lockdowns due to shifts in demand, labor shortages and structural factors. Evolving geopolitical factors are now causing new risks and pockets of stress. Affected sectors include metals and mining, chemicals, automotives, semiconductors and technology.

What is future of supply chain management? ›

“Given today's volatile and disruptive environment, supply chain organizations must become more flexible, and the solution is digitalization.” In the next three to five years, we will see an increase in the adoption of digital supply chain technologies, as well as technologies that improve human decision making.

Will we run out of food by 2050? ›

Humanitarian organization Oxfam has predicted the world will run out of food around 2050 when a growing world population exceeds food growing capacity.

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