Wading through Uncharted Waters

The potential convergence between contract manufacturers and 4PL logistics providers can fundamentally change the way manufacturing supply chains are structured in times to come. Through this opinion piece, Anish Tripathi, Entrepreneur and Management Advisor, decodes what’s in store for the Supply Chain community in 2020, and onwards!

The Indian supply chain community stands on the cusp of momentous change as the year 2019 ends. The last three years have brought about transformational changes in the Indian economy, from Demonetization and GST, to IBC, the effects of which are still playing out. This combined with the impact of the massively disruptive changes that technology is bringing about (AI, autonomous driving, disintermediation, fractional ownership, etc), will have a major impact on the supply chains of companies. The effects of these changes may play out in the Indian economy in ways that we cannot even imagine now.

The removal of state-level barriers to movement in the form of checkposts brought about by GST has not only sped up the movement of goods, but also increased the utilization of trucks and other transportation vehicles. Demonetization combined with GST-linked E-way bills has broken the back of fly-by-night, cash-only, off-the-record transportation service providers. This will increasingly facilitate the formalization and scaling up of the logistics sector. Doing away of constraints that forced companies to maintain wasteful warehouse presence in multiple states just to get CST benefits, will lead to a consolidation of the supply chain. Big data and data analytics will drive supply chain decisions, thereby creating the need for a qualitative shift in the skills profile of the manpower involved in the logistics sector.

Unless supply chain efficiency is a core competence or strategic imperative (like in FMCG or Retail), companies should start preferring to outsource their logistics operations to 3PL / 4PL operators – frankly there are really no 5PL operators around) and stick to their core competence. Companies will also realize that the core strategic processes that you should not outsource are customer acquisition/experience, and product design & development. Increasingly, more and more of everything else will get outsourced to aggregated service providers. The potential convergence between contract manufacturers and 4PL logistics providers can fundamentally change the way manufacturing supply chains are structured.

What remains to be done?

One under-appreciated area is the need for reviewing and restructuring contracts between customers and vendors. The nature of the relationship itself is likely to change, where it will almost become difficult to define who the customer, or who the vendor is, or whether it is a principal-principal, or principal-agent relationship. Besides the end-consumer, everything else will become hazy, and most likely take on the characteristics of a consortium, collectively servicing the consumer, and sharing the pie proportionately. Given that the contract act itself is an underappreciated and often misunderstood law in India, lawyers will need to develop new skills in drafting complex yet watertight contracts. Simple linear supply chains are likely to take on the shape of networks. Unfortunately, despite the positive pressure of GST, every transaction might not see the flow of money, despite the flow of value. The one-to-one flow of money correlating with every transaction might morph into a one-to-many distribution of money, based on who collects money from the end-consumer, who all have contributed to value creation, and what is the proportion in which they will split revenue amongst themselves.

These are not problems that we have grappled with before. Supply chain professionals have not really educated themselves on tax optimization, let alone legal optimization through efficient contract drafting. These are uncharted waters and supply chains need help from a wide variety of professionals to manage the challenges that are likely to be thrown by technologies of the future. The industry would be well advised to go back and re-read that old management classic – “Lateral Thinking” by Edward DeBono, as a lot of lateral thinking would be required to survive in this new world.