GST Impact on Supply Chain

Presented By: Sachin Jagtap

Technopak Workshop Series

Management Consultants

9 September 2009
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Evolution of GST

GST

CST Reduction CENVAT

VAT MODVAT
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Key Characteristics of GST that Will Affect The Supply

Chain
All the characteristics are widely expected and speculated guesses the exact
shape of GST will only be clear when the final draft and mechanism is releases
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Impacts of Extended Central GST Chain

At present logistics services consumed post factory are not

off-settable against CENVAT

Extended Central GST chain will allow the

offset in post distribution networks

This will lower the cost of logistics outsourcing as the 10.3% service tax charged by
logistics companies can be largely offset against the Central GST liability

This will boost outsourcing in supply chains and provide greater impetus to 3PL’s
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Impacts of Subsuming Octroi & Entry Tax

Local taxes such as octroi are a major source of revenue for the corporations and
state taxes such as entry tax are mired in legal cases. Thus it is not known whether
they will go and not return in some other form, if they go.

Octroi and entry tax are not in line with the spirit of GST
although in some cases entry taxes are VATable

They impact the warehouse location decisions

besides also the decisions on inventory and
replenishments

This will lower the cost of logistics outsourcing as the 10.3% service tax charged by
logistics companies can be largely offset against the Central GST liability

This will boost outsourcing in supply chains and provide greater impetus to 3PL’s
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Removed Tax Barriers on Cross-border Sales and

Supplies
There are two possible scenarios through which tax barriers would be removed

Scenario 1: CST rates would reduce to Scenario 2: Stock-transfers are

zero with no carry-over of input credit disallowed/taxed and inter-state sales
across states are taxed with carry-over allowed

In both cases it would be no more required to have a warehouse in

every state just to facilitate stock transfers and avoid CST

Organisations can and should design their networks purely on supply chain
considerations and not tax considerations
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VAT & CST Revisited

When it comes to VAT we are a nation of 35 smaller nations (states & union
territories) as the prohibitive CST tax discourages cross-border sales.

State A State B

Case 1, Cross –border sale
2% CST (against form C) payable to

State A (off-settable against input VAT credit in State A)

Case 2, Stock Transfer

No CST incidence but with breakage of VAT
chain

• Most companies have a warehouse and C&FA in every state to avoid paying CST.
They employ Case 2 above to do a stock transfer before invoicing in a different
state.

• CST has come down from 4% a couple of years ago to 2% at present.

• With GST, either CST would come down to zero or inter-state sale would be taxed
without breakage of the VAT chain. Thus eliminating the need for a warehouse
only for avoiding CST and doing stock transfers.
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Commercial Impact - Zero CST

Stock Transfer Sale
Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 14.1 - 114.1 0% 0% - - 114.1
Depot 114.1 - - 114.1 12% 0% 13.7 13.7 127.7
Distributor 127.7 6.4 13.7 120.4 12% 0% 14.5 0.8 134.9
Retail 134.9 13.5 14.5 133.9 12% 0% 16.1 1.6 150.0
16.1

2% CST Sale
Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 11.8 - 111.8 0% 2% 2.2 2.2 114.1
Depot
Distributor 114.1 6.4 - 120.4 12% 0% 14.5 14.5 134.9
Retail 134.9 13.5 14.5 133.9 12% 0% 16.1 1.6 150.0
18.3

Zero CST Sale

Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 14.1 - 114.1 0% 0% - - 114.1
Depot
Distributor 114.1 6.4 - 120.4 12% 0% 14.5 14.5 134.9
Retail 134.9 13.5 14.5 133.9 12% 0% 16.1 1.6 150.0
16.1
All figures in Rs/Unit except VAT & CST which are in %
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Commercial Impact - Inter-state Tax with Offset

Allowed
Current - Stock Transfer Sale
Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 14.1 - 114.1 0% - - 114.1
Depot 114.1 - - 114.1 12% 13.7 13.7 127.7
Distributor 127.7 6.4 13.7 120.4 12% 14.5 0.8 134.9
Retail 134.9 13.5 14.5 133.9 12% 16.1 1.6 150.0
16.1

GST - Stock Transfer Taxed with Offset Allowed

Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 14.1 - 114.1 12% 13.7 13.7 127.7
Depot 127.7 - 13.7 114.1 12% 13.7 - 127.7
Distributor 127.7 6.4 13.7 120.4 12% 14.5 0.8 134.9
Retail 134.9 13.5 14.5 133.9 12% 16.1 1.6 150.0

16.1

GST - Inter-State Taxed with Offset Allowed

Landed Cost Margin Input VAT Credit Price Before Tax VAT CST Tax Net Tax Final Price
Source 100.0 14.1 - 114.1 12% 13.7 13.7 127.7
Depot
Distributor 127.7 6.4 13.7 120.4 12% 14.5 0.8 134.9
Retail 134.9 13.5 14.5 133.9 12% 16.1 1.6 150.0
16.1
All figures in Rs/Unit except VAT & CST which are in %
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Detailed Impacts of GST on Networks

With GST your organisation can have fewer but larger distribution warehouses and hubs
with significant savings in logistics costs and inventory holding costs

 Technopak estimates between 5-10%

net savings in logistics + inventory
carrying costs of an organisation.
Cons Pros
 A redesigning of the distribution
network would be required to deliver
optimal logistics and inventory carrying
costs without compromising on service
levels to customers.

 New or enlarged warehouses will have to

be designed/re-designed. Modernisation
of key warehouses is strongly
recommended because of
 Large sizes and more complex
operations.
 Increasing level and variety of
service required by customers
especially organised retailers.
 Increasing scarcity of skilled labour
and real estate requiring vertical
and mechanised warehouses.
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Impact Illustrative1 - Re-Organizing Warehouses

Shift Warehouse from Dharwad (Catering to North-West Karnataka) to Belgaum (Catering
to North-West Karnataka and Southern Maharashtra) with overall savings in freight costs

Before After

Maharashtra Maharashtra
Pune Pune

Belgaum Belgaum

Dharwad Dharwad
Goa Goa

Karnatak Karnatak
a a
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Impact Illustrative2 - Rationalizing Warehouses

Remove Warehouse from Ghaziabad (Catering to West - UP) and serve from Delhi
Warehouse (Catering to Delhi and West-UP) resulting in savings on warehousing &
inventory holding costs

Before After

Haryan Haryan
a a
Ghaziabad
Delhi Delhi

Uttar Pradesh Uttar Pradesh

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Illustrative Impact on an Organisation’s Network

The illustrative firm is a mid-sized FMCG firm with annual sales of around
1800 Cr.

Current Probable
Hubs 6 Hubs 4-6
Warehouses 34 Warehouses 22-28

• The illustrative firm has around 34 warehouses. The number of

warehouses could get reduced to a range between 22-28 and yet allow
the firm to serve majority of it’s customers within 24-48 hours.

• Hubs are not affected directly by GST considerations but their size and
perhaps their numbers may get reduced as larger warehouses require
less aggregation and routing of supplies through hubs.
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Illustrative Impact on Organisation’s Costs &

Investments
LOGISTICS COST INVENTORY
0 Cr

1 Cr

2 Cr

3 Cr

4 Cr

5 Cr
• Assuming that inventory at hubs and warehouses is 15 days and that 25% of it is
safety stock and in a scenario of around 25 warehouses, rough calculations using
the inverse square root law predict inventory reduction of around Rs. 2.6 Cr.

• Logistics cost of the firm’s FMCG businesses is guesstimated to be at around Rs.

72 Cr assuming 4% logistics cost on Rs. 1800 Cr of sales. At 5% cost reduction
(due to improvements in legacy network and opportunities from GST), the
logistics cost savings come to around Rs. 3.6 Cr annually.
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Impact on Service
Contrary to popular belief fewer warehouses can actually improve service if
design and implementation of the new network is done carefully

New Network Impact on Implication/Sol

Characteristics Service ution

Fewer warehouses
would mean longer
distances between
warehouses and
customers
Network modelling to
Longer lead times,
incorporate maximum
higher lead time
distance constraint
variability and
between warehouse
reduced order
and customer
flexibility
linkages

Aggregation of stock
in fewer warehouses Increased primary
Higher fill rates to
results in greater sales & customer
customers
assortment and satisfaction
quantity availability
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Impact on Freight Cost

The increase in freight costs is expected to be small and there could even be
a small reduction if all the freight cost reduction opportunities are exploited

• Overall secondary freight cost could increase

due to fewer warehouses

• Overall primary freight cost could reduce due to

fewer warehouse
• Rs/tonne-km primary freight cost could go down
due to larger scale and better rate destinations
• Rs/tonne-km secondary freight cost could go
down due to larger scale
• Savings due to reduced back-tracking
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Illustrative Impact on Freight Cost – Backtracking

Reduction
Case 1: CST at 2% State Border Old
Warehouse
1000 kms

100 kms
Plant Customer 1 Customer 2

Illustrative freight distance (and hence cost) savings of 400 kms for Customer 1

Case 2: GST State Border Old

Warehouse
1000 kms

500 kms 200 kms

Plant Customer 1 Customer 2

New Warehouse

Key Challenges & Risks
Risk/Challenge
GST Implementation delay
Resistance to change from staff, CFA’s
& vendors
Paucity of time and internal resources
Integration with other supply chain
initiatives
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Mitigation
Rigorous & event/trigger based transition planning
Change management planning well in advance
before execution to enable change within contract
stipulations and allow execution in a streamlined
manner
Assistance from outside experts/consultants
First step of the project should incorporate study of
all current and planned initiatives & interviews
with all stakeholders
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Why Prepare for GST Now

It’s not too late to make use of the GST opportunity as long as you ACT
NOW!!!

2% CST, GST,
2009 2010

• 5-10% savings in logistics + inventory holding costs possible by re-engineering the

supply chain to make use of GST. Key fallout would be a simplified distribution
network.

• Many companies such as HUL, Nestle, Marico, Cadbury’s etc have already taken
concrete steps to make full use of GST benefits.

• If you start now then you will be in time to be GST ready in optimum state.

• Not acting now will lead to losing out on the cost saving opportunities and allow
your competition to gain supply chain cost advantages.
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Network Design & Implementation Methodology

Impact
Analysis
• Audit of
current Warehouse Implementation
setup Engineering • Warehouse
• Future • Design & commissioning
scenario 4 Weeks Layout 2 Weeks • Change
impact • Modernisation management

2 Weeks 6 Weeks 6 Months -

Distribution Change 1Year
Setup Design Management
• Network Planning
modelling based • GST transition
on Mixed Integer planning
Linear • Vendors
Programming • Employees
• Minimise cost • Systems &
subject to processes
service level &
other constraints
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Distribution Network Design

Use of cutting edge network design tools for best-fit results

• Logistics Costs (transportation,

handling, warehousing)
• Constraints (service levels, VAT, full
truck load requirements)
• Forecasted demand locations &
Inputs demand patterns
• Sourcing alternatives

• Mixed Integer Linear Programming

construct
Planning & • Scenario building & sensitivity
Design analysis

• No., location and size of stocking

points
• Transportation modes
Output • Optimal source – destination paths
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Network Transitioning
Transitioning will take place keeping the final GST scenario in mind. Preference will be
given where transition benefits are present in 1% CST as well

WWWWWWWWWWWWWWWWWWWWWWWWWWWWWW
Ware
H H H H H H H H H H H H H H H H H H H H H H H H H H H H H H
houses
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

CST 2%
(26
WH’s)

CST 1%
(23
WH’s)

GST (20
WH’s)

No change Change on high Priority

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Implementation Support

Change Management New Network Rollout

New
Closure and Internal warehous Project
C&FA manageme
re-location change Warehous e and hub
and Site- nt of
of managem e and hub design
logistics selection & warehouse
warehouses ent of re-design and
vendor negotiation commissio
(stock, people, wherever commissi
re- ning/re-
assets & processes applicable oning
alignment engineering
equipment) & systems wherever
applicable
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Benefits Beyond GST

Besides the benefits from re-organization of the network around GST, there are a lot of
other benefits that are expected to stack up as a result of the exercise

Robust design to support Optimal realisation of Back

growth over next 3-5 years haulage and direct
despatch opportunities

Savings from optimisation Transport mode

of legacy network optimisation in the re-
designed networks

Evaluation and factoring of Improved service levels to Defining of optimal network

opportunities arising from all or key customers flow paths for goods, hub-
GST and entry tax spoke connections and
rationalisations feeder depot concepts
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Technopak Workshop Series 9 September

Case Exercise: Introduction 2009

• There is a product which is manufactured in 2 locations: Baddi & Mumbai

• The company has 2 hubs, one located in Ghaziabad (served by cluster of factories in
Baddi) and the other one in Mumbai (served by a cluster of factories around Mumbai)

• Additionally, there are Warehouses in Delhi, UP, MP & Maharashtra serving to

different regions in each state

• This is the legacy network: because of the CST, the company has Warehouses in
each of the 4 states, plus the distribution structure is highly aligned with the sales
function, i.e. East UP sales areas has its WH, West UP sales areas has its own, and
so on

• However, with the CST going away, there is a huge opportunity to scientifically
optimize the network according to the supply chain point of view rather than tax or
sales organisation point of view
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Case Exercise: Existing Network

From To

Factory to Hub Baddi Ghaziabad

Factory to Hub Mumbai Mumbai

Baddi

From To
Delhi Gzbd Hub to Ghaziabad Delhi, Ghaziabad,
Lko Warehouse Lucknow, Varanasi,
Gwalior Var Gwalior
Hub to Mumbai Indore, Jabalpur,
Indore Jabalpur Warehouse Nagpur
From To
Nagpur WH to Demand location Delhi Delhi
Mumbai WH to Demand location Ghaziabad West UP
WH to Demand location Lucknow Central UP
WH to Demand location Varanasi East UP
Factory WH to Demand location Gwalior North MP
Hub WH to Demand location Indore West MP
Warehouse WH to Demand location Jabalpur East MP
WH to Demand location Nagpur North MH
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Case Exercise: The Task

By intuition, what should the new supply chain network look like, if tax
barriers on cross border sales were to go?
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Case Example: Optimized Network

From To

Factory to Hub Baddi Ghaziabad

Factory to Hub Mumbai Mumbai

Baddi
From To

Hub to Ghaziabad Ghaziabad,

Gzbd Warehouse Allahabad
Hub to Mumbai Indore, Nagpur
Albd
Warehouse

Indore From To
WH to Ghaziaba Delhi, West UP,
Demand d North MP
Nagpur location
Mumbai
WH to Allahabad East & Central UP,
Demand North-East MP
location
WH to Indore West MP & South
Factory Demand West MP
Hub location

Warehouse WH to Nagpur South East MP,

Demand East MH
location
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