GST: Looking beyond taxation

Business Standard December 6, 2016

Regulators often overstate the seriousness of the work they do to defend every measure adopted in regulations, however flawed

As we move toward the implementation of the goods and services tax (GST) in India, corporations are forming task forces to assess the impact and update systems to conform to the proposed taxation structure. Of course, modifying IT systems is a priority and should be completed before the GST is implemented but we at Bain believe that the GST legislation provides an opportunity to consider a strategic and zero-based revamp of the entire inbound and outbound supply chain.

After recent discussions with CEOs of top companies, it has become increasingly clear that left to operational executives, businesses will simply conform to GST requirements. It is imperative, however, for the leadership team to view this as a transformational opportunity with possible implications in the competitive environment.

Companies should not simply seek to gain short-term cost reduction but rather recognize that supply chain optimization will need to factor in future industry scenarios. Today’s suppliers and raw material sources are not likely to remain the same in five years. For example, for mined raw materials, much would depend on the life of the current mines and new sources that may emerge. For traded products, such as consumer durables, in which much of the manufacturing is outsourced, the footprint of suppliers can significantly change as excise and tax benefits for specific locations are eliminated. Similarly in manufacturing, the footprint that serves today’s demand points may not be optimal for the future. All of these emerging scenarios will need to be understood, and appropriate actions and migration plans would need to be defined and implemented.

India is not one country when it comes to demand growth, and different states are expected to have significantly different rates of growth. In addition, there is a trend toward urbanization that can impact demand patterns. Outbound logistics and related infrastructure would need to be revamped, possibly consolidating stocking points and warehouses. Benefits of scale and availability of innovative technology solutions will enable automation across the entire supply chain, which could be a game changer.

Therefore, the changes to be made to the operating model of the business could be pretty significant, and thinking these through in a timely manner will be the key to future competitiveness.

But how does one go about this? Bain has developed a framework for supply chain design that recommends a strategic zero-based approach. The framework encompasses five steps toward developing the blueprint for a GST enabled supply chain. Understand the business strategy. Define the implications of the business strategy, and establish the metrics around which the supply chain will be configured.

Establish the point of departure for the current supply chain. Configure the supply chain. Detail the operating model.

Understanding the business strategy would require insight into future customers, the value chain and the differentiators that top management has defined. Is the business model going to change, or are new customer segments, products and services going to become part of the strategic mix? In addition, we would recommend a specific discussion concerning the competition. Which competitors will gain or lose relative to our business? Some may be strategically advantaged because of their existing supply or manufacturing base. How are we going to react? Are we expecting any service level changes in the supply pattern to the channel or to customers? The output is a clear articulation of the likely imperatives for the proposed supply chain.

The next step is to define the implications for the supply chain. Typically, these are determined through a specific set of metrics, such as agility, service levels, cost, customer satisfaction, reliability and capital efficiency. Working capital requirements may increase with GST compliant systems that would require a greater emphasis on operational efficiency. These metrics also serve as the parameters to measure the efficacy of the proposed supply chain.

In parallel, establishing the point of departure is important as it will be the starting point for any change. What is the supplier base, manufacturing and distribution footprint? What is the capacity, organizational structure, IT and application software backbone? Also, there may be some practical impediments due to some contractual obligations.

Configuration of the supply chain would involve developing the revised network (supplier, manufacturing and outbound). In addition, the use of technologies that provide greater visibility into the supply chain would have to be evaluated as well as possible new and innovative vendors for services such as logistics and warehousing.

The final step would be to detail the operating model, which would involve laying out the basics for how the proposed supply chain would work, including people, organizations, processes and technologies. Organizational changes could be quite significant, and change management issues regarding location closures or new skill requirements would have to be addressed. Specific operating procedures and instructions would need to be developed. This step would also establish the implementation plan, which would then be monitored by what one might call a GST-enabled supply chain programme office. After all, time and resources are finite to achieve this transition to the new environment.

In summary, whatever the approach that companies eventually decide to follow to get to a GST-enabled supply chain, we would strongly recommend looking beyond the pure taxation elements. Your competitors could be several steps ahead of you.

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