Debugging the Conventional

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Supply Chain Leaders

Debugging the Conventional

“As more and more specialists emerge in different parts of the supply chain, the most difficult challenge for companies will be to withdraw from parts of the value chain, which they felt was their exclusive domain. Fundamental redesign of supply chains based on core competencies and shared destinies will be the future change that companies will have to deal with, and the race is just about starting,” asserts Anish Tripathi, Vice President – Strategic Initiatives, NRB Bearings Ltd.

What are the interesting changes shaping up in the supply chain space?

Most Indian manufacturing companies have historically been highly integrated vertically, preferring to control the entire Supply Chain from within the Company, and thereby capture most of the value within. The primary constraint for structuring the Supply Chain was tax optimization. This led to inefficiencies and delays. With the coming of GST, the tax justification for constructing supply chains has gone out of the window. Now supply chain components can be constructed purely based on operational efficiencies, so decisions can be made on the basis of factors like proximity to market, cost of supply, etc.

This change will now force companies to go back to the drawing board, take a fresh look at their core competencies, and question who is best able to best deliver on what part of the value chain like it happened in the telecom industry, it could lead to a fragmentation of the value chain, based on competencies. We could see the emergence of specialist logistics providers (4PL+) who could do this job better, and companies might want to focus their energies on core activities, like product development, manufacturing, customer acquisition, branding, etc. It is this fragmentation that will lead to investment opportunities, as players will be incentivized to scale, induct technology, etc. India’s manufacturing sector is probably 3-4 years away from the emergence of such players, but the seeds of such innovation have already been sown somewhere – it’s just that we don’t know where!

What do you think are the barriers to scale?

One of the biggest barriers to this is the cost of creating new capacity. With India having amongst the highest interest rates in the world (REER rates), economic viability of projects gets pushed further away. Companies have become more circumspect about making investments, and delay capacity creation further. With the improvement in the logistics infrastructure, if cost of creating capacity can come down, which along with interest rates would include cost of capital goods (Customs, GST, etc.), we could see the beginnings of a manufacturing revolution in India. There is also a long overdue consolidation of players for true economies of scale, in most sectors. This will take time, as valuation expectations of even failed / under performing companies are still sky-high.

What can be the foreseeable challenges in supply chain optimization?

For me, skills, technology and disruption are the biggest challenges. Besides FMCG, and to some extent the white goods sector, many companies have not really invested in their people as well as technology for supply chain optimization. There is a lot of new technology being developed, and much old technology that has long held promise (like RFIDs), might finally start delivering on their promise. However, many technology vendors are small players, and might not have wherewithal to stay the course as the inevitable shakeout in the tech platforms. Companies that took bets early, might be left with tech that does not become standard. Funnily enough, it’s the last-adopters here who might stand to benefit.

Many have also not been able to attract the best talent into their supply chain functions. To top it all, attrition levels are pretty high. Skills are getting obsolete at a frightening pace, and most supply chain departments have aging staff. Not having visibility on the nature of the supply chain of the future is also making the task of selecting people as well as tech platforms even more difficult. 

There is too much of infrastructure development happening in India and at a fast pace, be it the freight corridors, national waterways, trackable trucks and new highways, domestic air freight industry, etc. Each of these will force logistics planners to redesign supply chains almost continuously. The process of optimization will play out over a period of 3-5 years. Costs will initially go up, as lot of investments will need to be made, and will come down only when they get amortized over a period of time. Like they say, these are interesting times, and full of challenges, the oft-repeated holily, that we will not see companies competing with companies, but supply chains competing with each other. For this to happen, many sectors will need to get fundamentally restructured, and it will not necessarily be smooth or easy.

What are the things that need to be considered while selecting a 3PL?

While the logistics sector is already preparing for the move from 3PL to 4PL, and maybe even to 5PL, this has not been and more so is not going to be as smooth as one would wish it to be. There are many new players who have entered the logistics sector. Old players are trying to learn new tricks under the influence of the new generation. The market is very fragmented and will see a consolidation in time. The problem is that players who appear very promising today on paper might not be around a few years down the line. This is a difficult decision for supply chain professionals because changing a logistics supplier in the future is a very disruptive activity.

Having said that, one must take a call on who one wants to work with based on three factors, technology, people (not the promoters only) and financial stability. If a player satisfies these three criteria, the likelihood of taking a wrong decision comes down significantly. Of the three, being comfortable with the people who are going to be servicing you is the key. That’s also the biggest problem that the sector is facing currently.

What are the ways in which collaboration between partners and suppliers can best be achieved?

In sectors like the auto industry, deep and abiding partnerships are built between the Auto OEMs and the vendors. This includes investment of time, money and effort in capability building, technology absorption, process improvements, etc. This philosophy has to become ubiquitous across sectors. The only way the logistics sector can build the solutions that these disruptive times require, is if they know that they have long-terms partnerships with their key customers. Companies need to select no more than 1-2 suppliers, do a 70:30 split in business volume between them, and invest heavily in improving them, giving them better visibility on plans, and develop long-term partnerships. This is time consuming and difficult work but needs to be done.

What steps should companies take to enhance their supply chain efficiencies?

There are multiple steps that need to be considered to enhance supply chain efficiencies. There is a massive convergence taking place between supply chain practices across sectors. Old traditional mind-sets and ways of working need to change. As more and more specialists emerge in different parts of the supply chain, the most difficult challenge for companies will be to withdraw from parts of the value chain, which they felt was their exclusive domain. For example, it must have been torturous for telecom companies to come to terms with the fact that telecom towers were best handled by specialized tower companies, and not they themselves. Similarly, it is difficult for e-commerce giants to accept why they cannot be neutral marketplaces for others and be ‘privileged sellers’ against their competitors on the same platform, at the same time. The other area, which has been largely missed out, is that companies do not put the same amount of focus on improving their backward supply chain as they do on their forward supply chain. This is a costly error. The main point seems to be that after almost two decades, operational efficiency is back and how; and most companies are woefully under-prepared.

What has been the GST impact? How smooth or challenging has been the transition process?

The core impact of GST on supply chains is yet to play out. Working capital requirements and other costs have gone up, although this has not really impacted overall performance significantly. However, most companies have got only rudimentary supply chain benefits until now, of improved transportation times due to the elimination of check posts, closing and opening some warehouses, etc. These were the low hanging fruit. The real benefits are yet to play out, as companies come to terms with what this freedom to redesign the supply chain entails. Fundamental redesign of supply chains based on core competencies and shared destinies will be the future change that they will have to deal with, and the race is just about starting. This transition process has been relatively smooth till now but does not promise to necessarily remain so in the future.

Where should the government focus its attention?

The government is helping by disproportionately focusing on infrastructure development, which also helps in building the logistics sector. They should leave the rest to the industry to develop on its own. One long-pending reform is, like in the roads and air sector, the role of the government can be limited to providing the basic infrastructure (like rails and the operating regulatory mechanism), but allow private players to own and operate the rolling stock, it will change things significantly.

What are the transformations yet to be witnessed?

It’s difficult to do crystal-ball gazing in any sector, but the impact of eMobility, Autonomous driving, etc., will have a deep impact in the logistics space, like the usage of drones for making last-mile supplies. All of these will demand regulatory changes as well, and the government seems to be proactively working towards this, e.g. the new drone policy, which has been announced.

All I can say is that we have not even moved into second gear in terms of the kind of changes that we are likely to see over the next 5 years. While we need to fasten our seat belts, let’s also remember that it’s not necessary that the leading players of today, will also be the leading players in five years’ time. Get ready for major disruption in supply chains and the logistics sector!

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