Goods and Services Tax (GST) is now officially 2+ weeks old in India. Now that the crackers have been burst and celebrations completed, most companies have just adapted their internal ERPs to suit the new GST regime. While the real test to the system will be witnessed between August 10th-20th (when all the returns will be uploaded and payments made), the preliminary indicators are that most organizations have a hold on the compliance requirements.
This article analyses the impact of GST on the Indian Consumer Durables Industry, from THREE perspectives.
DRY PIPELINE & INCREASED TRADE MARKETING SPEND
Considerable confusion/misunderstanding prevailed in the minds of channel partners (stockists/ distributors/retailers) as to how input credit for tax (VAT) paid would be carried forward into the GST regime. Though the Government clarified about the same, most retailers were on stock-liquidation mode. As a direct result, consumers were treated to an out-of-line barrage of discounts from all (online and offline) retailers.
This has led to a relatively dry pipeline as of July 1st, which companies are now competing to fill in the month of July. For relatively low-market share companies, this has opened out a golden opportunity to increase their shelf space, through attractive trade schemes, hoping that inertia will help them retain this disproportionate shelf space. As a consequence, retail outlets have seen an increased trade doles from several brands in return for better display and visibility for their products. In the short run, there has been an upswing in trade marketing expenses for brands, which is only expected to stabilize in December, post the peak-Diwali season.
AREA BASED EXEMPTIONS
From about 2010, most consumer durables companies had started manufacturing/procuring their products from the Northern states of Himachal Pradesh and Uttaranchal, to avail benefits of exemption of Central Excise Duty. Typically, companies in the Consumer Durables space face about 10% of their top-line as Excise duty (paid on a portion of MRP, post abatement).
Under GST, the Government has tuned the exemption into a refund based system, where companies pay the GST upfront, and claim refunds through the state/centre. Given that each state would individually decide on the portion of the SGST to be refunded, many companies have been left confused on how effectively the refund processes would work. There has also been a feeling that the Government has back-pedalled on a promise of clear-exemption till 2020, based on which the investments were originally made.
Moreover, availability of seamless credit of all input tax (which was not available in the erstwhile regime) has narrowed the benefits of manufacturing in these specified areas. Thus, most companies have decided/are inclined to shift out their production centres to other areas closer to their bases/ markets.
WAREHOUSE CONSOLIDATION? NOT REALLY!
Perhaps the most obvious benefit of GST for the consumer products industry was the ability to consolidate warehouses. Fewer – and larger – warehouses were supposed to replace the maze of “godowns” the companies operated across each state, to save tax loss. This was supposed to lead to cost savings in primary transportation (larger lots to fewer locations), warehousing (reduced total footprint) and inventory carrying (consolidation leading to lower inventory) for companies. India was supposed to be served by just 4-5 strategically located warehouses, against 20-25 "godowns" in use today.
Perhaps this turned out to be a little over-rated for this industry. The durables (and first cousin FMCG) industry have a very unique supply chain setup. The uniqueness of this industry arises from the following factors:
- Increased Modern Trade / Direct Retail Supplies -> Small batch orders -> Swifter replenishment requirement.
- Week Skew (last 2 days of a month contribute to ~30+% of the month sales).
- Savings on primary transportation + warehousing < Increase in cost of secondary shipments
For instance, a company with low dependence on Modern Trade/Direct Retail and centralized manufacturing/procurement might find it viable to consolidate their warehouses; while companies that serve retailers directly and manufacture across various locations might not find it viable to completely consolidate. While some amount of consolidation is indeed possible, the extent of the same depends on the sales profile of each company.
Yet, our study indicates that companies have an opportunity to save about 6-8% on their supply chain costs, on average.
However, this requires a detailed mapping and understanding of the industry and company requirements.
This exercise calls for a detailed study of the sales/production patterns of each company. Concepts hitherto alien to the Indian logistics industry – like Weighted Distance Travelled (WDT) and Handling Indices (HI) – are very useful in taking such decisions.
Each company’s sales network being unique, it requires an approach of custom –built solutions rather than a one-size-fits-all methodology. And this is exactly where expert advice would be hugely beneficial to companies.
We at H&S Supply Chain Services specialize in helping companies optimize their Supply Chain Networks. With advanced software programs to optimize factors like WDT and HI (among various others), we bring technical expertise and knowledge to the Consumer Products Industry, like no other.
As pioneers in the 3.5PL space in India, we help our clients by custom-building and operating optimized supply chains at pre-agreed costs with complete visibility (track & trace). We build and manage your complete supply chain, letting you focus on areas of your core competence. Write to email@example.com to get in touch!
(The Author is the Co-Founder & CEO of H&S Supply Chain Services Private Limited. You can read more about the company here)