Defining CFA road map post GST scenario

Abstract

Company X has about close to 3000 retail outlets, ‘Y’ numbers of CFAs (Carrying & Forwarding Agents) for the supply of its products from ‘T’ numbers of factories in India. The CFAs are placed in such a way to avoid inter-state taxes in current Central Sales Tax, and Value Added Tax Regime. However, post GST implementation, a unified tax structure would be followed i.e. the dual GST structure with Central GST and State GST. This dual GST Structure will club all other taxes such as Excise Duty, service tax, VAT, customs duty and CST. Both components would have to be necessarily paid to include all other previous taxes. Therefore, the whole of the supply chain for Company X will become Tax neutral. Hence, it would be prudent for Company X to reduce its cost by optimizing its supply chain and reduce the number of CFAs (to avoid the fixed CFA running costs). The scope of this project was to redesign the CFA network post GST implementation. There were a lot of different views about GST. However, for convenience we have considered the final version GST structure for our analysis, i.e. GST would be around 20-24% of the final selling price with no intermittent taxes. The data provided by Company X had sales data of all the CFAs and all other miscellaneous CFA related costs (like transportation, maintenance, staff salaries, electricity, rent, etc.) for nine months of April-December, 2014. These ‘Y’ numbers of CFAs were categorised in 5 clusters (containing 5 - 8 no each) depending on their proximities so that existing service level would not be disturbed. Then a linear programming was executed on each cluster using the logic of reducing the overall fixed cost and transportation cost by altering the number of CFAs in the cluster. Based on the analysis, the LP model suggest there can be a reduction of ‘N’ numbers of CFAs and the overall decrease in cost would be about 17%.