About Interstate Shipping in India

Unable to ship your products on time to your customers? Are your shipments returning to you after getting stuck atInter-State Checkpoints? Having difficulty in understanding the rules and finding the interstate shipping forms?

If these are the kind of questions that are troubling you with interstate shipping, then we have something incredibly awesome to share with you!

Logistics is crucial for any online store. Delivering your customers’ purchases on time reflects on your store’sefficiency and reliability. Delay in delivering the products is a risk you cannot afford as an online store entrepreneur.

But, living in a big country like India, rules change from State to State. Understanding these rules and finding the respective forms can be a very cumbersome task. That’s why, we bring you an exclusive table to help you sort out the necessary forms to be filled while scheduling a shipment.

 

   Interstate Shipping Forms and Requirements

Sr. No. List of destination State Business to Consumer (B2C) or Consumer to Consumer (C2C) Business to Business (B2B)
Type of statutory Levy Who is liable/ can pay statutory levy Road permit /paperwork requirement (INR) DOM paperwork exemption limit Status of statutory Levy Paperwork Requirement State VAT website
1 Andhra Pradesh Nil Shipper Invoice Nil
No Statutory levy is paid upfront
CI + VAT Form x/600 www.apct.gov.in
2 Andaman & Nicobar Nil Shipper Invoice Nil Shipper Invoice www.and.nic.in
3 Arunachal Pradesh Entry Tax Consignee CI +DG -01 (TPT doc) <10,000 CI + DG 01 www.arunachalpradesh.nic.in
4 Assam Entry Tax Consignee CI+Form 62 <20,000 CI + VAT Form 61 www.tax.assam.gov.in
5 Bihar VAT Consignee CI+ Form D IX – on line Nil CI + VAT Form D IX www.biharcommercialtax.in
6 Chandigarh Nil Shipper Invoice Nil Shipper Invoice www.chandigarh.gov.in
7 Chattisgarh Nil Shipper Invoice Nil CI & Declaration from Cnee www.comtax.cg.nic.in
8 Dadra & Nager Haveli Nil Shipper Invoice Nil Shipper Invoice www.dnh.nic.in
9 Daman & Diu Nil Shipper Invoice Nil Shipper Invoice www.daman.nic.in
10 Delhi Nil Shipper Invoice Nil CI + T2 www.dvat.gov.in
11 Goa Nil Shipper Invoice Nil Shipper Invoice www.goacomtax.gov.in
12 Gujarat Nil CI + VAT Form 403 Nil CI + VAT Form 403 www.commercialtax.gujarat.gov.in
13 Haryana Nil Shipper Invoice Nil Shipper Invoice www.haryanatax.com
14 Himachal Pradesh Entry Tax Consignee / Carrier Shipper Invoice Nil Shipper Invoice www.hptax.gov.in
15 Jammu & Kashmir Entry Tax Consignee / Carrier Shipper Invoice <5,000 CI + VAT From 65 www.jkcomtax.gov.in
16 Jharkhand Nil CI + VAT Form 502 Nil CI +VAT Form 504 G www.jharkhandcomtax.gov.in
17 Karnataka Nil Invoice & Declaration Nil CI + e-Sugam www.ctax.kar.nic.in
18 Kerala Nil CI + Form 16 <5,000 Shipper Invoice www.keralataxes.gov.in
19 Lakshadweep Nil Shipper Invoice Nil Shipper Invoice www.lakshadweep.nic.in
20 Madhya Pradesh Nil CI+ VAT Form 50 online Nil CI + VAT Form 49 online www.mptax.mp.gov.in
21 Maharashtra Octroi Carrier Shipper Invoice <150 Shipper Invoice + LBT/Octroi www.mahavat.gov.in
22 Manipur Nil CI + VAT Form 37 Nil CI + VAT Form 27 www.manipurvat.gov.in
22 Meghalaya Nil CI+ Special permit Nil CI + VAT Form 40 www.megvat.gov.in
23 Mizoram Nil CI + VAT Form 34 Nil CI+VAT From 33 www.zotax.nic.in
24 Nagaland Nil CI+ VAT Form 23 CI+ VAT Form 23 (online) www.nagalandtax.nic.in
26 Orissa Entry Tax* Consignee Shipper Invoice Nil CI+ VAT Form 402 (online ) www.odishatax.gov.in
27 Pondicherry Nil Shipper Invoice NA Shipper Invoice gst.puducherry.gov.in
28 Punjab Entry Tax Shipper Invoice Nil Shipper Invoice www.pextax.com
29 Rajasthan Entry Tax Consignee CI + Declaration Nil CI + VAT Form 47/47A ( online ) www.rajtax.gov.in
30 Sikkim Nil CI + VAT Form 26 Nil CI+ VAT From 25 www.sikkimtax.gov.in
31 Tamil Nadu Nil Shipper Invoice Nil Shipper Invoice www.tnvat.gov.in
32 Telangana Nil Shipper Invoice Nil CI + VAT Form x/600 www.tgct.gov.in
323 Tripura Nil CI+ VAT Permit CI+ VAT FROM XXIV www.taxes.tripura.gov.in
34 Uttar Pradesh Nil CI + VAT Form 39 Nil CI +VATe-sancharan comtax.up.nic.in
35 Uttrakhand Nil CI + Vat Form 17 <5,000 CI + VAT Form 16 comtax.uk.gov.in
36 West Bengal Entry Tax* Carrier Shipper Invoice + VAT Form 50A Nil CI + VAT Form 50A www.wbcomtax.nic.in

From this table, find the State to which you are shipping your products. Cross check the conditions to know what form is required. Get the forms from the links given in the table. The links to the state government have been provided in the table.

How and when do you use these forms?

You will need to provide the filled forms to the person arriving for the pick up. The logistic company will produce this form for you at the check points. Rest assured, as your products travel safe to reach your customers at far off places.

Thus, you can now send your products to your lovely customers with ease and make sure the shipments don’t return because of a lack of documents. Happy selling! 🙂

Did we miss anything? Do let us know.

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The Five Major Flows in Supply Chain

Supply Chain is the management of flows. There are Five major flows in any supply chain : product flow, financial flow, information flow, value flow & risk flow.

The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements. The information flow involves product fact sheet, transmitting orders, schedules, and updating the status of delivery.

THE PRODUCT FLOW :

Product Flow includes movement of goods from supplier to consumer (internal as well as external), as well as dealing with customer service needs such as input materials or consumables or services like housekeeping. Product flow also involves returns / rejections (Reverse Flow).

In a typical industry situation, there will a supplier, manufacturer, distributor, wholesaler, retailer and consumer. The consumer may even be an internal customer in the same organisation. For example in a fabrication shop many kinds of raw steel are fabricated into different building components in cutting, general machining, welding centres and then are assembled to order on a flatbed for shipment to a customer. Flow in such plant is from one process / assembly section to the other having relationship as a supplier and consumer (internal). Acquisition is taking place at each stage from the previous stage along the entire flow in the supply chain.

In the supply chain the goods and services generally flow downstream (forward) from the source or point of origin to consumer or point of consumption. There is also a backward (or upstream) flow of materials, mainly associated with product returns.

THE FINANCIAL FLOWS:

 

The financial and economic aspect of supply chain management (SCM) shall be considered from two perspectives. First, from the cost and investment perspective and second aspect based on from flow of funds. Costs and investments add on as moving forward in the supply chain.  The optimization of total supply chain cost, therefore, contributes directly (and often very   significantly) to   overall profitability.  Similarly, optimization of supply chain investment contributes to the optimisation of return on the capital employed in a company. In a supply chain, from the ultimate consumer of the product back down through the chain there will be flow of funds. Financial funds (Revenues) flow  from  the  final consumer, who  is usually the only source of “real” money in  a  supply  chain,  back  through   the other   links  in   the   chain   (typically retailers,  distributors,  processors  and suppliers).

In any organization, the supply chain has both Accounts Payable (A/P) and Accounts Receivable (A/R) activities and includes payment schedules, credit, and additional financial arrangements – and funds flow in opposite directions: receivables (funds inflow) and payables (funds outflow). The working capital cycle also provides a useful representation of financial flows in a supply chain. Great opportunities and challenges therefore lie ahead in managing financial flows in supply chains. The integrated management of this flow is a key SCM activity, and one which has a direct impact on the cash flow position and profitability of the company.

THE INFORMATION FLOW :

Supply chain management involves a great deal of diverse information–bills of materials, product data, descriptions and pricing, inventory levels, customer and order information, delivery scheduling, supplier and distributor information, delivery status, commercial documents, title of goods, current cash flow and financial information etc.–and it can require a lot of communication and coordination with suppliers, transportation vendors, subcontractors and other parties. Information flows in the supply chain are bidirectional. Faster and better information flow enhances Supply Chain effectiveness and Information Technology (IT) greatly transformed the performance.

THE VALUE FLOW:

A supply chain has a series of value creating processes spanning over entire chain in order to provide added value to the end consumer. At each stage there are physical flows relating to production, distribution; while at each stage, there is some addition of value to the products or services.  Even at retailer stage though the product doesn’t get transformed or altered, he is providing value added services like making the product available at convenient place in small lots.

These can be referred to as value chains because as the product moves from one point to another, it gains value. A value chain is a series of interconnected activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various product services), delivery to final customers, and final disposal after use. That is supply chain is closely interwoven with value chain. Thus value chain and supply chain are complimenting and supplementing each other. In practice supply chain with value flow are more complex involving more than one chain and these channels can be more than one originating supply point and final point of consumption.

In chain at each such activity there are costs, revenues, and asset values are assigned. Either through controlling / regulating cost drivers better than before or better than competitors or by reconfiguring the value chain, sustainable competitive advantage is achieved.

THE FLOW OF RISK :

Risks in supply chain are due to various uncertain elements broadly covered under demand, supply, price, lead time, etc.  Supply chain risk is a potential occurrence of an incident or failure to seize opportunities of supplying the customer in which its outcomes result in financial loss for the whole supply chain. Risks therefore can appear as any kind of disruptions, price volatility, and poor perceived quality of the product or service, process / internal quality failures, deficiency of physical infrastructure, natural disaster or any event damaging the reputation of the firm. Risk factors also include cash flow constraints, inventory financing and delayed cash payment. Risks can be external or internal and move either way with product or financial or information or value flow.

External risks can be driven by events either upstream or downstream in the supply chain:

  • Demand risks – related to unpredictable or misunderstood customer or end-customer demand.
  • Supply risks – related to any disturbances to the flow of product within your supply chain.
  • Environment risks – that originate from shocks outside the supply chain.
  • Business risks – related to factors such as suppliers’ financial or management stability.
  • Physical risks – related to the condition of a supplier’s physical facilities.

Internal risks are driven by events within company control:

  • Manufacturing risks – caused by disruptions of internal operations or processes.
  • Business risks – caused by changes in key personnel, management, reporting structures, or business processes.
  • Planning and control risks – caused by inadequate assessment and planning, and ineffective management.
  • Mitigation and contingency risks –  caused by not putting in place contingencies.

INTEGRATION OF FLOWS IN SUPPLY CHAIN :

 

Supply chain management integrates key business processes from end user through original suppliers, manufacturer, trading, and third-party logistics partners in a supply chain. Integration is a critical success factor in a dynamic market environment and is prerequisite for enhancing value in the system and for effective performance of the supply chain by sharing and utilization of resources, assets, facilities, processes; sharing of information, knowledge, systems between different tiers in the chain and is vital for the success of each chain in improving lead-times, process execution efficiencies and costs, quality of the process, inventory costs, and information transfer in a supply chain. Integration leads to better collaboration for synchronized production scheduling, collaborative product development, collaborative demand and logistic planning. Also with increased information visibility and relevant operational knowledge and data exchange, integrated supply chain partners can be more responsive to volatile demand resulting from frequent changes in competition, technology, regulations etc. (capacity for flexibility). Integration is required not only for economic benefits but also for compliances in terms of social and community, diversity, environment, ethics, financial responsibility, human rights, safety, organizational policies, industry code of conduct, various national / international laws, regulations, standards and issues.

 

To achieve superior supply chain performance (cost, quality, flexibility and time performance) require multi-lateral integration :  Internal / External integration;  Functional integration, Geographical integration; Integration in Chains and networks; and Integration through IT. The integration even goes beyond to include supplier’s supplier and customer’s customer to leverage the power of the “network,” beyond their own.

The Bullwhip Effect in Supply Chain

The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as you move further up the supply chain.

bullwhip effect.jpg

Causes of Bullwhip effect

The bullwhip effect is mainly caused by three underlying problems: 1) a lack of information, 2) the structure of the supply chain and 3) a lack of collaboration.

The three causes can be identified in an interactive session with the students by discussing the beergame experiences and then be corroborated with insights from practice and the literature.

1) Lack of information

In the beergame no information except for the order amount is perpetuated up the supply chain. Hence, most information about customer demand is quickly lost upstream in the supply chain.

With these characteristics the beergame simulates supply chains with low levels of trust, where only little information is being shared between the parties.

Without actual customer demand data, all forecasting has to rely solely on the incoming orders at each supply chain stage. In reality, in such a situation traditional forecasting methods and stock keeping strategies contribute to creating the bullwhip effect.

2) Supply chain structure

The supply chain structure itself contributes to the bullwhip effect. The longer the lead time, i.e. the longer it takes for an order to travel upstream and the subsequent delivery to travel downstream, the more aggravated the bullwhip effect is likely to be.

With traditional ordering, the point in time where an order is typically placed (the order point) is usually calculated by multiplying the forecasted demand with the lead time plus the safety stock amount, so that an order is placed so far in advance as to ensure service level during the time until the delivery is expected to arrive.

Hence, the longer the lead time is, the more pronounced an order will be as an reaction to an increase in forecasted demand (especially in conjunction with updating the safety stock levels, see above), which again contributes to the bullwhip effect.

3) Local optimisation

Local optimisation, in terms of local forecasting and individual cost optimisation, and a lack of cooperation are at the heart of the bullwhip problem.

A good example for local optimisation is the batch order phenomenon. In practice, ordering entails fix cost, e.g. ordering in full truck loads is cheaper then ordering smaller amounts. Furthermore, many suppliers offer volume discounts when ordering larger amounts.

Hence, there is a certain incentive for individual players to hold back orders and only place aggregate orders. This behaviour however aggravates the problem of demand forecasting, because very little information about actual demand is transported in such batch orders.

And batch ordering, of course, contributes directly to the bullwhip effect by unnecessarily inflating the orders.

How to Minimize the Bullwhip Effect

The first step in minimizing the bullwhip effect is understanding customers’ demand planning and inventory consumption. Lack of demand visibility can be addressed by providing all key players in the supply chain with access to point of sale (POS) data. Suppliers and customers must then collaborate to improve  the quality and frequency of communication throughout the supply chain.

They also can share information through an arrangement such as vendor-managed inventory (VMI). Eliminating practices that cause demand spikes, such as order batching, also can help. The higher order cost associated with smaller or more frequent orders can be offset with Electronic Data Interchange (EDI) and computer aided ordering (CAO).

Pricing strategies and policies can also help reduce the bullwhip effect. Eliminating incentives that cause customers to delay orders, such as volume transportation discounts, and addressing the causes of order cancellations or reductions can help create smoother ordering patterns. Offering products at stable and fair prices can prevent buying surges triggered by temporary promotional discounts. Special purchase contracts can be implemented to encourage ordering at regular intervals to better synchronize delivery and purchase.

Aggregation Methods in Supply Chain – temporal, spatial and product

In supply chain, there are broadly three types of demand aggregation:

Temporal Aggregation: Suppose you are a hyper local grocery retailer, say Big Basket. If the demand from certain area is not enough for you to deliver it every day, then you will aggregate the demand across multiple days and say that you will deliver in this area only every two days.

Spatial Aggregation: For the same hyper local retailer, say Big Basket, a spatial aggregation is about aggregating demand from two to three areas and serving it together instead of serving these areas separately. This is because there is not enough demand in each area individually.

Product Aggregation: Aggregating multiple products in a single order is a popular phenomena to reduce transaction costs. Order aggregation is a cost-effective way to deliver to simple low value products to multiple people.

Service Output Demands and Sales Channel Design

Channel design is a crucial element in any product’s marketing plan. It is sometimes the most crucial factor for success. A channel designed properly will bring in customers and increases your market share. Most of the times a channel is designed by the marketing teams and the structure and the maintenance is done by the operations teams.

A channel delivers service output demands. Some of the examples of service output demands are: bulk breaking, spatial convenience, waiting time, delivery time, payment options such as credit,  assortment/variety and customer service and information provision.

Step 1: Segment the consumer/customer segments based on service output demands (SODs)

Step 2: Identify some of the consumer/custoemr segments

Step 3: Design a zero base optimal channel such that the SODs are satisfied. The channel can have multiple routes through which the SODs are satisfied

Step 4: Gap Analysis

If an existing channel is present, then compare the zero base channel with the existing channel and come up with the gaps. Evaluate whether these gaps are caused due to demand or supply.

The attached word document contains one such exercise for HUL. HUL_ChannelAudit

Inventory Management, Inventory Costs, Newsvendor vs. EOQ

Different models are used to manage inventory for products that are continually available (like milk) or products available for limited time (like seed).The Economic Order Quantity (EOQ) model determines the least cost level of inventory to carry, as well as costs. News Vendor models are used for products only available for a single period.

EOQ and News Vendor models have proved useful for managing inventory for many years, analyzing tradeoffs among major cost components. These models are robust and easy to customize to particular industries. Their approach to costing is similar reflecting levels of inventory, as well as shipping costs or quantity discounts.

Inventory costs fall into three classes:
1) carrying costs of regular inventory and safety stock;
2) ordering or setup costs;
3) stockout costs. Inventory control systems balance the cost of carrying inventory against the costs associated with ordering or shortfalls
Firms carry extra inventory to guard against uncertain events. Known as safety stock, the purpose of this inventory is to provide protection against stockouts. Safety stock is costed just like regular inventory, it is an interest rate times the level of safety stock.
If less is sold than expected during the 10 days or if the shipment arrives early, we will still have inventory on the 10th day and no customer service problems are encountered.
Managing the uncertainty surrounding safety stock is the key to reducing inventory levels.
stockout costs involve lost sales when no inventory is on hand. Such costs fall as inventory (and customer service) levels increase. The relationship between stockout costs and inventory depends upon the accuracy of the demand forecast and the ability of the firm to recognize and react to a change in demand.
One way to evaluate an inventory management policy is to choose a service level target. From this target, the inventory policy will determine the inventory requirements and associated costs of providing that level of service. A higher service level implies that more inventory will be held as safety stock.

Newsvendor Model

From sweatshirts in EOQ to summer dresses in Newsvendor. The big difference is that while sweatshirts were continuous selling items, the demand for summer dresses is limited to summer months. Once the summer season is over, the unsold dresses must be heavily discounted. You are a local design firm that designs northwest-accented summer dresses, sources them from China and sells them through retailers here.

The problem is that for a particular summer dress, total demand during the summer season is hard to predict. All you can do is to make a guess, that is, develop a probability distribution of demand. Let us generate our demand with the throw of a regular dice; it can be any number from 1 to 6, each with probability 1/6.

On the supply side, the lead time from your Chinese supplier is long. There is no possibility of making multiple orders. You make one order before the summer season starts, sell as many as you can during the season and then whatever is left is discounted. Let us say that per unit purchase cost c is $80. For any units that you are able to sell per unit revenue r is $100. For the units you are not able to sell during the season, let us say that you can discount them and are able to sell them at a per unit salvage value s of  $30.

The big decision is the order quantity S of dresses you should order from your Chinese supplier at the beginning of the summer season.

The Trade-off

If you order a very large quantity, there is a bigger chance that you will not be able to sell all of them. There will be excess units at the end of the season that you will have to discount. You will lose money on them. On the other hand, if you order a small quantity, there is a bigger chance that you will be short. That is, there will be some demand you will not be able to satisfy. You will not be able to make as much money as you could have.

The order quantity decision resolves this trade-off between the expected cost of having excess inventory and the expected cost of falling short. We will call the sum of these two costs as Mismatch cost. The optimal order quantity will minimize mismatch cost.

Marginal Costs

To resolve this trade-off, we start with defining marginal costs of excess and shortage.

Marginal Cost of excess Ce  is defined as the cost of  having one unit excess. You bought this unit for purchase cost of c=$80, were not able to sell it during the season and then had to discount it down to the salvage value of s=$30. The cost to you is $80-$30=$50. That is, in this setting, Ce=c-s.

Marginal Cost of shortage Cs is defined as the cost of having one unit short. Had you bought this unit for purchase cost of c=$80, you would have been able to sell it during the season for a revenue of r=$100.  We say, that the cost to you for being one unit short is $100-$80=$20. That is, in this setting, Cs=r-c.

 Service Level

Service level is the chance that you will be able to meet all the demand in a single period (summer season). Suppose you bought an order quantity S=3 units. Recall that demand is any number between 1 and 6 with equal probability 1/6. In this case, you will be able to meet all the demand only if demand is either 1 unit,  2 units or 3 units. That is, the probability that demand is less than or equal to S=3 units. This probability is known as cumulative probability and is given by the sum of the probabilities that demand is 1, demand is 2, and demand is 3 = (1/6)+(1/6)+(1/6)=3/6=1/2. That is, if you buy S=3 units, you will provide a service level of 50%.

Here is a quick table to provide cumulative probabilities in our case:

Demand 1 2 3 4 5 6
Probability 1/6 1/6 1/6 1/6 1/6 1/6
Cumulative

Probability

1/6 1/6+1/6

=2/6

2/6+1/6

=3/6

3/6+1/6

=4/6

4/6+1/6

=5/6

5/6+1/6

=6/6=1

 

Optimal Service Level and Optimal Order Quantity

Single-period model tells us that, given the marginal costs of excess and shortage, Ce and Cs, the optimal service level is given by (Cs/(Cs+Ce). In our case, the optimal service level is equal to 20/(20+50)= 0.2857.

Optimal order quantity S* is the minimum size of the order that will be able to provide the optimal service level. Going by the above table, if you buy, for example, S=1, you will be able to provide a service level of 1/6=0.1667 which is less than the optimal service level we wish to provide. If we buy 2, service level is 2/6=0.3333 and we will be able to satisfy the optimal service level requirement of 0.2857. Therefore S*=2.

Rule: compute optimal service level and find the minimum value of demand for which cumulative probability, for the first time, equals or exceeds optimal service level. That is the optimal order quantity.

Summary of Formulas for Continuous Demand: Normal Distribution

The demand distribution we considered above is a discrete distribution because demand can only take a limited number of values. In some real settings, it is easier to work with the assumption that the demand follows Normal distribution with a given mean and standard deviation. Normal is a continuous distribution because demand can take any value. In this case, we can use the following formulas:

Given per unit revenue r, per unit purchase cost c and per unit salvage value s:

Marginal cost of excess Ce=c-s; Marginal cost of shortage Cs=r-c.

Optimal service level = Cs / (Cs+Ce)

Given a normally distributed demand with given mean and standard deviation

compute z = spreadsheet function Normsinv (required service level)

Order quantity that can provide required service level = mean + z*standard deviation

 

Alternatively, given an order quantity S, the service level it can provide =

Spreadsheet function = Normdist (S, mean, standard dev., TRUE)

 

For Normal distribution, we can also compute the following:

Expected shortage = Std. Dev.*{ Normdist(z,0,1,false) -z +z Normdist(z,0,1,true)}
Expected excess = S – mean + Expected shortage

Expected mismatch cost = Cs*Expected shortage + Ce*Expected excess

Expected profit = (r-c)* mean – Expected mismatch cost

How much to order and when to order?

One of the major objectives of any supply chain is to cater to the demand in the most efficient manner. One of the ways of having achieving such efficiency is: cater to the demand by minimizing the inventory levels as much as possible.

Essentially, there are two fundamental decisions that help us manage inventory. They are:

  1. How much to order?
  2. When to order?

 How much to order?

Newsvendor Model

We decide on how much to order depending on the cost of over-stocking and the cost of under-stocking. For example, say you are company that sells cakes. A cake costs you $1.24 to prepare and you sell the cake at $2.49. But, if you cannot sell the cake within 24 hours, then you have to sell it to another local vendor at $0.99. In this case, the

Cost of under-stocking (Cu) is: $1.25 (the profit that you lose in not being able to sell the cake)

Cost of over-stocking (Co) is: $0.25 (amount that you lose because you have to sell at a discount to a vendor)

The optimal service level (SL*) is: Cu/(Cu+Co). The optimal quantity that you need to order is the smallest quantity Q at which the service level exceeds the optimal service level (SL*).

How can I get the service levels? You can get the demand distribution and the service levels from the past data.

The above formula is also called the newsvendor formula. This is used when the product has a limited shelf life and inventory cannot be carried over.

Economic Order Quantity Model

The other approach to determine quantity is called the Economic Order Quantity model.

Let us make two assumptions:

  1. Demand will be steady (no variance)
  2. Lead time for delivery order is zero. The order is immediately delivered whenever an order is issued.

In such a scenario, I will always order whenever the inventory goes to zero. Immediately the order comes and my inventory reaches Q again. The rate at which inventory goes to zero is the throughput rate (R) itself.

So, the time between two orders is Q/R

Therefore, the order frequency is R/Q.

Every order has certain fixed costs associated with it. For example, even if you order 1 unit of an AC there will be some $2000 of fixed costs (assume fixed cost will be a step cost). So, therefore you want t order as many units as possible so that the fixed costs of an order are spread over large number of units.

But at the same time, if you order more number of units then you have to bear more costs for the inventory carrying costs. Let’s look at what is an optimal solution for under this trade-off situation.

Fixed cost paid per period = S*R/Q (S is the fixed cost for every order)

Cost of holding inventory (H) = cost of keeping one unit in inventory for a certain period

The sum of both fixed cost and the cost of holding the inventory has to minimum. Under such conditions the optimal quantity to order is the Economic Order Quantity (Q*) = sqrt (2RS/H). If you centralize your inventory, then it helps in inventory optimization because: if demand increases by 2 then quantity increase by only sqrt(2).

This can be rounded off to the nearest packaging standards that are required for your supplier.

Now, let’s negate one of the two assumptions we made in the EOQ Model.

Let’s say we have a lead time of 3 weeks before the order comes.

——————————————-

A table for reference to understand which order quantity is better

OrderMgmt.png

 

 

How Price Undercutting happens via Wholesale Trade?

Wikipedia defines price undercutting as: ‘Price cutting, or undercutting, is a sales technique that reduces the retail prices to a level low enough to eliminate competition‘. It is obvious that price under-cutting happens mostly to boost volume sales. This article is about how undercutting works in the context of Indian FMCG.

Brief Overview of the supply-chain and the trade schemes

As mentioned in earlier posts, the typical distribution line for an FMCG product in your area looks like: Stockist -> Company Distributor -> Wholesaler -> Retailer  Or  Stockist -> Company Distributor -> RetailerTypically, the distributor gets a margin of about 6-8% and the retailer gets a margin of 10-15%.

Just like the way the FMCG company brings out various promotions to the end consumer, the company also introduces various trade schemes or trade promotions as incentives for all the partners in the supply-chain. Typically, the incentives are based on the quantity of the volume purchased or the value purchased. There are many different types of incentives such as, but the major ones are:

1. Quantity Purchase Schemes (QPS)

A few examples are below:

a).     Buy 25 pieces, get one piece free;  50 pieces, get 5 pieces free;  100 pieces, get 12 pieces free;  200 pieces, get 25 pieces free
b).    Buy 25 pieces, get 1% discount;  Buy 75 pieces, get 3.5% discount;  Buy 150 pieces, Get 7.5% discount

2. Value Purchase Schemes (VPS)

Example: Buy Rs.5000 get 4% discount,  Buy Rs.8000 get 7% discount, etc.

So, the formula seems simple: the more somebody buys a particular product the more the discount. Bargaining Power!

But, this is where the problem starts.

Undercutting by the Wholesaler

We shall walk through a common scenario of how undercutting happens.  For simplicity of math, lets say, a product has an MRP of Rs.15, and the retailer gets it for Rs.13.50 and the distributor gets it for Rs.12.50. Lets say the wholesaler also is getting at Rs.13 as he typically buys more. So, simply just say the distributor margin is Rs.1, the retailer margin is Rs.1.5 and the wholesaler has a margin of Rs.0.50.

Lets say Mr. Lal Babu is a a very big wholesaler who caters to certain number of retailers locally. When the distributor goes to Mr. Lal Babu he says there is a new scheme. Lets say the scheme is:  Buy 75 pieces, get 3.5% discount;  Buy 150 pieces, Get 7.5% discount.

So, Mr. Lal Babu decides to buy 150 pieces. So, apart from his actual cost, he gets a bonus 7.5% discount. So, instead of buying the product at Rs.13, Mr. Lal Babu buys it at Rs.12 (7.5% discount over Rs.13). So, now instead of selling it to the retailer at the usual price of Rs.13.5, assume Mr. Lal Babu sells it to the retailer at Rs.12.50, taking his usual margin.  The company distributor is selling the same product at Rs.13.5 to the retailer. So, you see what the problem is?

The retailer would be attracted to buy from Mr. Lal Babu as he gets more margin compared to the company distributor. One might think it is only Rs.1, but when they buy a couple of cases, it translates into good savings for the retailer.

Is undercutting only relevant to wholesale?

The answer is No. The philosophy of under-cutting is the same, but it can be done by anybody in the supply chain. So, the salesman himself, in order to reach his target, can make this happen. He makes an invoice against one such large wholesaler Mr. Lal Babu and he passes the benefits to his retailer. But, this is going to be a problem in future for the salesman, as the retailer will get used to these benefits and he stops buying in normal situation. In a way, the brand or the particular product starts to become more driven by the wholesalers.

Various channel partners do under-cutting to boost volumes at his/her own level. Territory Sales Officers who will be in-charge of certain stockists too sometimes bill it against a certain stockist ABC, but he actually sells it to a big wholesaler. The distributor too can have his own share of price undercutting to attract the retailer.

Undercutting is a very common phenomena in the field. Though FMCG companies have various strict mechanisms to curb them, new loopholes are invented continuously to take advantage and undercut. After all, price matters to everybody.