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The hidden treasure of 15% higher PAT through digital supply chains

Published on - September 2018
Author - Deepak Garg, Founder & CEO, Rivigo

There is an unprecedented opportunity in front of the top management of Indian companies right now. The major shifts of GST, Digital India and infrastructure development are leading to an environment where supply chains can be reimagined to play a pivotal role in steering companies to an era of growth, consolidation and efficiencies. Several companies are leading this transformation and seeing 10-15% PAT increase, 50% lower cash and market share impact through re-engineering supply chains.

GST and Digital India are two major shifts in enabling futuristic supply chains

Goods and Services Tax (GST)

GST, one of the biggest reforms in the Indian indirect tax structure, is revolutionizing the Indian economy in an unprecedented manner. As envisaged, GST is propelling GDP growth to newer heights, lowering income disparity and simplifying decision making for businesses.

By removing multiplicity of taxes across states, GST has created a single national taxation system and a common market. As the need for keeping inventory and warehouse in every state no longer exists, corporates are reconfiguring their supply chains resulting in the need for outsourced, consolidated and faster logistics. This underscores the big role that the logistics sector has to play in ensuring that full benefits of GST flow through the economy. The sector is required to build efficient asset footprints (warehouse and trucks), adopt immense amount of technology and reduce turnaround time with increased predictability.

While India is one of lowest transportation cost markets, it is also one of the most inefficient logistics markets (at 14% of the GDP). The missing piece in the above two seemingly opposite assertions is inventory. In the 1970s, inventory accounted for 55% of the American logistics spend base when the US logistics sector overall spend was at 16% of their GDP. The spend has now reduced to 7-8% of GDP with inventory cost at only 10% of this spend base. Currently, the Indian inventory spend (losses, obsolescence, wastage) can be up to 50-60% of the overall logistics spend. If it were to get to the level of logistics efficiency in the US, significant amount of capital can be unlocked through inventory.

For a USD 2.5-3 trillion dollar economy, this could mean a potential of USD 200 billion wasteful inventory spend being available to deploy in productive value creation and further propelling the economy's growth.

Digitization

Over the last years, there has been a tremendous push for a digital ecosystem by the government. Coupled with the needs underscored by the taxation reforms, a stronger-than ever case for digitization of logistics exists today. For instance, the e-way bill has led to 100% paperless transactions and the toll-tags are also being aggressively incentivized to promote cashless transactions on highways. Adding to this, the digitization wave led by high smartphone and data penetration over the last few years has opened up limitless opportunities in many ways.

First, a great proportion of the trucking community, including truck drivers and unorganized fleet owners, come from the rural population and were previously virtually inaccessible. With unprecedented access to data and its applications, they can now be brought on to a larger digital logistics ecosystem, leading to greater consolidation and overall efficiencies. A significant collateral benefit is economic and social inclusion and upgradation. Secondly, the applications of IoT are exponentially increasing with low cost sensors and high-speed data. All equipment data, GPS, tyre and engine parameters, temperature integrity and safety can now be easily measured and tracked. This opens up a world of possibilities on multiple parameters like cost, safety and predictability. Thirdly, given the exposure to e-commerce and ride hailing experience, the new-age Indian consumer has a high propensity of adoption of a digital logistics platform/ecosystem. This consumer is digital, wants everything (large number of stock keeping units) and wants now in this new age world of “instantaneity”. This is further fuelling the demand of a logistics ecosystem that enables full transparency/visibility, speed and lower inventory scenarios.

Leading companies in India are building fully digital supply chains where complete transportation and warehousing spend can be managed digitally to bring transparency, scale and efficiency. The leaders at these companies realise that next 5-10 years of growth cannot happen without an organized and efficient supply chain ecosystem.

An unprecedented opportunity for Indian businesses

With this momentum in the broader ecosystem, new age supply chain can add 10-15% to PAT, release 50-70% of cash and enable higher growth and market share for Indian businesses.

Let us take an example of a footwear company with an annual turnover of INR 2000 crore and 10% PAT (INR 200 crore). At any point in time, the company maintains around three months of through cycle inventory in circulation - from production to customer (INR 500 crore). It loses 2% of the inventory in obsolescence (fashion cycles change), damages and pilferages in the supply chain. With the new age of supply chain of faster transportation, fully digital and consolidated warehousing - the inventory in circulation could go down to almost half (INR 250 crore), releasing 50-70% of cash in operation. The inventory losses of 2% reduce to 0.5-1% releasing INR 20-30 crore to bottom-line. Further, faster replenishment cycles and reduced time to react to ever changing consumer needs could enable higher growth and larger market share for the footwear brand. This has the potential of making the footwear company nimble and stronger for the 10X growth aspiration for the next decade while keep cash and costs in control. This opportunity exists for all sectors and companies in India right now and if not tapped well, it can also be a limiting factor to growth in the coming decade.

Accessing the treasure: Building a digital, faster and cheaper logistics network

Given the day’s context, this is a ‘once in a generation’ opportunity to change the paradigm of the sector. For any professional or promoter who is keen to reconfigure their supply chain, the following should be on top agenda:

Digitize your supply chain completely:

  • This is now an eventuality and the best time to do a ‘system upgrade’ at network level.
  • Design, plan, order and payment of all warehousing and transportation should be made online through intelligent portals. These portals/apps exist now and are bringing complete visibility and transparency to the transactions
  • Paperless and cashless supply chain through use of digital proof of deliveries (E-PODs), automated reports/dashboards and digital payments
  • Use of GPS/tracking sensors and visual reporting of all warehouses and trucks
  • Automation of decision making through simple algorithms based on SLA and cost to remove manual errors like allocation of loads, dispatch schedules etc.
  • Adoption of new age technologies for plants & warehouses (bots, AI) for further scale up

Build a faster transportation and delivery network:

This is the only way in which the ‘consolidation’ benefits of reforms like the GST will get passed through.

  • Re-design of the supply chain design to ‘pull-based’ and ‘direct to customer’
  • Leveraging larger trucks for transportation and demanding for 50-70% lower transit times(Delhi to Mumbai can be delivered on the second day and Delhi to Guwahati on the third day)
  • A ‘zero’ warehouse mind-set by using value density, customer service and transit times as parameters to re-design the network to as few warehouses as possible

Build a cheaper ‘overall cost’ network:

It is important to look at logistics cost holistically and eliminate inefficiencies.

  • Reduction in inventory and working capital by 80%
  • Reduction in cash blockage due to upfront GST (on origin) by creating ‘pull based’ and faster supply chain
  • Collaboration with peers and competitors in the industry to build a multi-user and shared ecosystem

We are at a unique juncture of unprecedented opportunity that can unlock immense value.

By building digital, faster and cheaper supply chain networks, and creating an overall logistics ecosystem that can propel India into a phase of superlative growth, we can access perpetual efficiencies across businesses.

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