Reliant Logistics Institute


Increased Profitability – Post-GST


Goods and Services Tax (GST) has been envisaged to resolve the erstwhile pre-GST pain points and streamline the supply chain. Most companies are deliberating the need to redesign their after-produce supply chain networks. The biggest advantage which supply chain experts attribute to the implementation of GST is the reduction in inventory. The savings due to the reduction in overall inventory levels are expected to far exceed savings in real estate costs on account of consolidation of warehouses. Companies are constantly striving to optimise profitability by stretching margins, strengthening brand equity and expanding their product portfolios. While these factors are focused on the customer; on the manufacturers’ side, reengineering internal processes to minimise costs is a major factor that not only maximises capital productivity but also dictates the organisation’s survival in today’s competitive environment. Inventory carrying cost is one of the primary metrics which is used to gauge supply chain productivity because it is a measure of how much capital is lying idle in resources that could otherwise be employed for other productive uses. Thus, it is the primary aim of any supply chain manager to minimise the company’s inventory carrying cost without compromising on sales. Companies carry inventory to support business cycles. Inventories help manage the variability of customer demand, the variability of lead times and also forecasting inaccuracies. The level of inventory being carried is linked to the desired Service Level of the company, which in turn balances the companies’ cost of understocking to that of over-stocking. The companies would now be able to maintain pre-GST Service Levels through lower inventory levels on account of faster movement of goods and higher efficiency at the warehouse level, thereby, reducing the overall firm level inventory. The inventory carrying cost is the most significant consideration for the planning of the supply chain for any organisation. The opportunity cost associated with the value of the average inventory being carried by the organisation is one of the major components of the inventory carrying the cost. Organisations look at higher returns through higher inventory turnover and reduction in the average inventory value. Post GST with the removal of interstate checkpoints, reduction in cargo movement time and replacement of multiple state and central level taxes; there is a strong case for consolidation of warehouses. Warehouse consolidation results in averaging out of variability in individual demand and lead time (of individual warehouses), resulting in lowering of risk pertaining to aggregate demand variability. In fact, the average inventory level is directly proportional to the risk of demand variability and hence a lower risk would require a lower inventory level. Warehouse consolidation cases have witnessed up to 30% reduction in inventory levels leading to over 40% increase in inventory turnover thereby leading to increased profitability.


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