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Airtract Abhinav Sudhendra A story in the making

Supply Chain in Railways: Ways to proceed Post Corona 20 April, 2020   

Corona Virus epidemic is changing the way business will be done in the future. After the introduction of Information Technology, it is speculated that corona epidemic will be the single most important event which will revolutionize the very core of every business around the world.

The biggest fallout of corona is the rethink it has forced upon the existing supply chain management. One obvious feature visible across India during lockdown is the astonishing comeback of the local kirana stores. In this difficult time, where supply chain of the big players failed to provide uninterrupted services to customers, the local kiranas have saved the day for countrymen.

So, what does this actually means for business in future? Which factors helped local kiranas to get immunity from corona assault? One, the longer the supply chain, the greater is the risk of failure. In such testing times as now, the number of factors adversely affecting the supply chain also increases with its length. The shorter the supply chain, the more reliable is the service. Local kiranas with their local sourcing and hence short supply chain were able to replenish their stocks easily. They were able to get more predictability in demand since the number of customers and their choices were known to them. This also helped them to create a more responsive supply chain.

In context with Railways, what exactly are its implications on Railway material supply chain? And what responses are expected by industry experts within the Indian Railways and the companies operating in the extended supply chain network of the Railways?

One idea is clear – for better response of supply chain and to shield it from the corona like situations in future – supply chain has to be shortened.

This shortening of supply chain can be achieved by making following two basic changes in existing Indian Railway purchase and warehouse policy –

a.      The percent of purchase done from the local sources in comparison to purchases done from non-local sources need to be increased. There must be a guideline to ensure that a certain minimum percent of purchase is reserved for local sources in every tender floated by different railway zones.

b.     The warehouses to store and distribute inventory need to be decentralised. It has two benefits – one, the response time to the ultimate consignee will decrease due to shortened supply chain length and lesser uncertainties associated with it. Two, difficulties of interstate material transfer, during the times when state wise policy differentials exist, can be avoided. Railway zones are not divided according to the state boundaries. One Railway zone may include areas of multiple states. But the policy decisions by the central and state governments are taken considering state boundaries. This creates unnecessary hurdles in corona type situations where every state government may have imposed different rules for the respective states. Hence, each railway zone must have a minimum of one warehouse in every state that the zonal area covers. This will help negate the effect of policy differences among states.

But is there any empirical evidence to show that the localisation of sources actually works in Railways?

Pulling out sample data from the available purchase order details of South Eastern Railway (SER) in public domain (ireps.gov.in) , the statistics indeed proved the same point.

DATASET 1: For a period of 6 months i.e. from 15 December 2019 till 15 March 2020, the data of purchase orders above Rs 5 lakhs were collected.

It showed – Total orders placed in 6 months from SER headquarter was 362. And total number of orders placed on local sources (in and around Kolkata) was 146. Hence, it can be generalised from the sample data that around 40% orders are placed upon local sources.

DATASET 2: For the same period of 6 months, the data of purchase orders were analysed where the supplier had failed to supply material within the original contractual period.

It showed- Out of all placed purchase orders, in 83 purchase orders, the firm had failed to supply material in time. Out of these 83 failed orders, the number of purchase orders where the supplier was a local source was only 19. That means, 23% of the failed orders were local source orders.

If we compare this percent from DATASET 1, this proportion should have been 40% in a random sample assuming source of purchase should not determine the failure of supply of material.

So, essentially it can be empirically established from a small dataset of South Eastern Railways, that the failure to supply items within contractual time is low among the local sources of supply.

Source

Failure rate for supply of material within the original delivery period

Local

13%

Not Local

29%

Total

22%

 

Interestingly, this data pertains to pre corona period. If the academic discussions on this topic are any indications, the percent failure rates for non-localised sources will take further increase during the corona times.

This is not a lesson meant exclusively for railways. All the industries where supply chain is their core activity, the sourcing needs be localised and warehousing needs to be decentralised. This is an important lesson from corona epidemic.

If the Railways changes its sourcing and warehousing strategy as discussed, then the suppliers doing business with railways in particular will gain immensely. They will take lesser hit in difficult times. The other benefits for suppliers can be enumerated as below:

a.      The client will be local and their requirements can be easily understood and fulfilled.

b.     The demand from client will become more stable as they will be forced to place certain amount of orders on local sources. It will ensure a more reliable business stream.

c.      Fulfilment of orders and receipt of payment will get lesser effected by lockdown type of situations.

Apart from minimising uncertainties of the supply chain for both internal and external stakeholders of Railways, this push for local sourcing will also create new opportunities for medium and small-scale industries.

It also resonates well with the strategy to diversify vendor base for each item. Let’s hope that such strategy change decision is taken in Railways which in turn will help strategy formulation of hundreds of depended companies.

And of course, we need to thank corona for exposing us to such vulnerabilities in our Supply Chains.

Railway Coronavirus Supply Chain

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