Transforming the Supply Chain Model
Post GST, the design of the supply chain is expected to shift to an operational efficiency-driven model. Transforming the distribution model will be the most powerful change in the industry supply chain in the next few quarters. Individual company stocking could consolidate, and large multiuser warehouses could emerge as third party services. The advent of one tax -one borderless market will lead to the emergence of flexible distribution models.
Traditionally, more than 80 percent of sales take place outside the state of manufacture. The movement of goods occurs through direct sales to dealers or through stock transfers to depots across the country. Till recent times stock movements did not incur any tax apart from the loss of an input tax credit in the originating state. As a result, manufacturers have set up warehouses in every state. This scattered warehouse arrangement avoids direct interstate transactions and discourages predetermined orders, thus attracting tax arbitrage at the cost of operational efficiency.
With the GST, diminishing interstate boundaries and the absence of incentives for moving stock could encourage manufacturers to dispatch products based on predetermined orders. Also, they may find it beneficial to consolidate their distribution channels and warehouses. Thus, operational efficiency will drive the outbound supply chain.
The following new supply chain models could emerge:
Hub & Spoke Model
Major Goods Distribution hubs could emerge close to customer geographies. These hubs could stabilize at a zonal level that serves multiple states. This model will prevent inventory from piling up at the manufacturing center and will improve efficiency because there will be fewer stocking points. Such transformation will require corporations to plan for increased stocking capacity at hubs.
Direct to Retailer Model
For large and medium-size retailers, dispatches from manufacturing units could go directly to retailer’s stock points. Large to medium-size dealerships will be able to comfortably provide advantage of scale through full truckload, especially for regular consumer goods. By circumventing the Master distributor warehouses, direct dispatch to retailers could lower taxes because of fewer stages of movement. This model could also reduce logistics costs by shrinking the distance for transporting goods. Robust demand planning on both the manufacturer’s and retailer’s end should strengthen this model.
Third Party Multiuser Model
Primary stocking points close to customer demand clusters could evolve into multiuser warehouses. Multiple dealers of a Manufacturer may collaborate to own a large warehouse. This shared warehouse could create even more benefits of scale. Logistics players can enhance this collaboration by owning and managing shared stock points.
Manufacturers will have the flexibility to transport orders from multiple dealers in bulk to the zonal warehouse, which can then support inventory from multiple dealers, taking advantage of the benefits of scale. This proximity to demand will shorten lead times and improve service levels.
The ideal distribution model will depend on demand patterns and logistics efficiency of each manufacturer’s existing supply chain.
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