On July 1, 2017, India implemented Goods and Services Tax (GST), the country’s biggest tax reform in 70 years. The GST is a kind of indirect tax, similar to Korea’s value added taxes, designed to simplify the country’s complex indirect tax regime and to unify different tax rates across the 29 states.
In the past, different tax rates ranging from 15% to 40% were imposed on goods and services of each state. And there were a lot of different taxes to pay, like manufacturing taxes (manufacturers), VATs (retailers) and service taxes (service providers). Each state imposed entry taxes on goods coming in from other states, which often caused long delays and inefficiencies. On average, 16% of trucking hours had to be spent to stop by the tax collection at every state border. As much as 30~40% of the total transport hours were spent in tax administrative work. Because of this tax barrier, India was failing at creating a single market in the nation.
This was a huge obstacle for foreign companies to enter the market. For this reason, the unified GST was essential to realize ‘Modinomics’ which aims to enhance India’s infrastructure with foreign investments, promote its manufacturing sector and create jobs. Now, with tax rates unified, companies will face less tax burden. India’s economy will grow, attracting more foreign capital and companies to the country. The National Council of Applied Economic Research (NCAER) projects India’s GDP to expand by 0.9~17%p while HSBC estimates 0.4%p rise in GDP over the next 3 to 5 years.
This white paper takes a look at India’s GST tax reform designed to unify different tax rates across the country’s 29 states and its impact on India’s logistics industry.
Expected Changes in Supply Chain and Warehousing after GST
Direct Shipment and Hub & Spoke Model
In the pre-GST era, companies designed their supply chain, focusing on how they can avoid taxes, instead of customer demand or logistics cost efficiencies. In order to avoid CST1) whose rate is 2% of the total sale price, they built small warehouses in each state closer to customers, and this led to increase in logistics costs.
However, with GST in place, different state taxes have now been integrated into GST, and this has enabled companies to directly transport goods from its point of manufacturing to customers. This has resulted in transportation and operation cost reduction, lowering its logistics costs as a whole.
1) CST: Central Sales Tax, It is a tax imposed on sales or purchase of goods occurring in the course of inter-state trade. (2% of the total price of goods)
Factors to Consider in Warehouse Consolidation
Research shows that a number of companies in India today operate a total of 20 to 30 warehouses in each state and that they are working or planning to consolidate them into 10 or 15.
When companies consolidate warehouses and build larger facilities, they would enjoy cost and inventory reduction as they get to share resources required to operate a warehouse. They can further maximize the effects of consolidating by employing an expert to redesign their warehouse layout and process to make the warehouse operation efficient as their larger warehouse would involve longer distance for goods-in, goods-out and storage.
In order to efficiently handle increased volumes after the consolidation, companies need to automate the current system that is heavily dependent on manual work and adopt Warehouse Management System (WMS).
Ideal Location for a Consolidated Warehouse
Now, under the new GST regime, where can those consolidated warehouses be ideally located when companies reorganize their warehouses from the perspective of supply and demand?
Considering that road transport accounts for more than 60% of India’s entire transport market, we need to look at the National Highways Development Project by the NHAI5). It is highly likely that warehousing hubs will be developed around the Golden Quadrilateral, a network of highways that connect the four major metropolitan cities of India in four directions of North, South, East and West. According to JLL, a global real estate services firm specializing in commercial property and investment management, eight cities – Delhi NCR, Mumbai, Bengaluru, Pune, Chennai, Kolkata, Hyderabad, Ahmedabad – are emerging as top new warehousing hubs.
2) NHAI : National Highways Authority of India, It is an autonomous agency of the Government of India similar to Korea Expressway Corporation.
Warehouse Consolidation Case
After you finish a network analysis and select which warehouses to consolidate, you get to analyze what benefits the consolidation will bring. In cases of India where warehouses are usually spread across states, you analyze the consolidation largely in three aspects of logistics cost reduction, inventory reduction and operational efficiency from automation and system adoption.
First is logistics cost reduction. As shared space such as aisle or office area is merged after consolidating, the total area required becomes smaller than the sum of the existing warehouses combined, which would decrease rent. Also, it takes less costs to operate the consolidated warehouse as less workers (such as warehouse managers or office workers) and equipment will be needed. Total transportation costs would also decrease because goods volumes grow while distances are likely to decrease from manufacturing to customers. However, because shipping distance from the warehouse to some customers can increase, you need to calculate carefully when negotiating pricing utilizing increased volumes you handle.
Second, in terms of inventory reduction, because the consolidated central warehouse is going to stock the same goods used to be scattered across multiple warehouses, the total safety stock will be reduced thanks to inventory pooling6). The number of total safety stock can be calculated by multiplying the total inventory by the square root of the number of future warehouse locations divided by the current number.
3) Inventory Pooling: Inventory pooling or risk pooling is the concept that the variability in demand for raw materials is reduced by aggregating demand across multiple products. Lower variability leads to reduction in safety stock, which results in lower average inventory levels.
Although it’s been less than a year since the introduction of GST in India, there are already signs of changes among businesses to optimize their logistics network and bring down logistics costs, such as expanding direct shipping or consolidating warehouses in logistics hubs.
However, many logistics service providers and companies in India have been too used to manual operation in small warehouses scattered across the country. Thus, it remains to be seen whether they will be able to find their optimal logistics network satisfying the balance between cost and service quality and to operate larger warehouses efficiently by redesigning the existing layout and establishing a new operation process.
With the implementation of GST, India, a land of opportunity, has just started its first step towards a big transformation. It will certainly not be easy for companies to shift from manual operation in small warehouses in each state to automated and systemic operation in large logistics hubs. However, it can be a good opportunity for them to improve their supply chain and make a leap forward.
To help prepare companies in India for the post-GST era, Samsung SDS has done a multiple of consultation projects for network optimization, using Cello NOS (Network Optimization Solution). Today, a number of its logistics consultants are working on warehouse consolidation projects around the world. Further, Samsung SDS supports customers to innovate their logistics operation by adopting its own Cello TMS (Transportation Management System)/WMS(Warehouse Management System).
To find out more about logistics of Samsung SDS, visit Cellologistics.com and download the white paper.