The need for MSME Supply Chain digitisation in a post Covid Paradigm

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By Yash Bhansali

Today, the tsunami that is the COVID-19 pandemic has rocked the flimsy foundations of most MSME supply chains. Mass exodus of labour supply from business clusters, with the World Bank putting the number at over 40 million, means that many players have been forced to cease operations indefinitely. In fact, a recent study by the All India Manufacturers Organisation revealed that 35% of Indian MSMEs surveyed had a pessimistic outlook on their recovery post pandemic.

The fear is that given the hemorrhaging of cash that most small businesses have suffered through, even the few that can reopen will be unable to operate at full capacity and meet trade commitments. The consequent strain on business relationships will likely further disturb already fragmented networks. Even if the current disruption forces the emergence of new B2B partnerships, the disorganised nature of the sector and trust-based business approach mean that, for a long time, many micro enterprises will find themselves in a limbo, unable to reconnect to the iterated supply chains.

Considering that the digital economy is becoming the order of the day encompassing ordinary citizens, governance, businesses and what not, it will be useful to see how MSMEs can gain by using digital systems and facilitate their business better. Also, the peg of government policy to promote both SMEs and Digital India is an ideal place to hang the coat.

Noticeable work has been done on MSME digitization in India previously, with an expanding spectrum of platform providers such as Instamojo and Shopmatic that aim to bring Kirana stores online. However, there are still some impediments to large scale digitisation. This is in spite of an uptake in digital payments, which has been aided by government UPI–BHIM.

Acutely aware of their limited trade transferability, most businesses are apprehensive about abandoning the trade relationships they have nurtured over many years for a completely new digital experience. Additionally, many of the private platforms that currently exist have created their own digital walled gardens. This has resulted in the formation of virtual supply chain clusters, limiting B2B discoverability, dividing up the market and making it difficult for businesses registered on separate apps to connect and interact.

Acknowledging these issues reveals the need for a shift away from siloed platforms towards an integrated open network. Through the use of Application Programming Interfaces, one could connect to a distributed digital architecture that facilitates end to end supply chain digitisation. The aim is for some regulatory body to become a de facto market enabler and regulate the platform. Private players can then offer services that assist with the interest alignment of different market participants. This transition from closed market digitisation, towards an interoperable architecture would enable those invaluable business relationships to be transferred to the digital realm irrespective of which platform different players chose to list with.

Additionally, increased data availability on intermediate product offerings could make it easier to ascertain the quality of goods being sold over the platform while also improving visibility across the supply chain. According to a 2019 IBM global C-suite study, 84% of chief supply chain officers stated this as their biggest challenge from a supply chain management perspective. For instance, the ability to marry legacy in-house data with new inputs from supply chain systems, can help smaller players run ‘what if’ simulations and consequently address key risk areas by diversifying distribution channels or supply partners. Improved data access and analysis capabilities could mitigate the trade risks associated with disorganised supply chains.

Moreover, this sort of digitisation improves discoverability of the micro players, who were otherwise unaccounted for. Through supply chain digitisation of large ‘introducers’ like Amul or Mother Dairy an increasing number of their informal micro partners can be identified and plugged into the formal network. This, subsequently, improves the micro entrepreneur’s access to distributors, alternative suppliers and ancillary service providers as well as to government financial aid schemes and private credit facilities. Through initiatives such as the SME Bridge–ideated during the Covid-19 pandemic–the government can expand the scope of its fiscal net and target cash infusions, tax concessions, EPF waivers and other stimulus measures directly towards small businesses.

Furthermore, real time data on micro-enterprises helps develop a digital footprint and makes it easier for private loan providers to discern the credit worthiness of MSMEs. This should increase access to commercial credit and reduce MSME dependency on a limited range of informal and only semi regulated loan providers.  In fact, a 2019 TransUnion CIBIL-SIDBI MSME Pulse Study reported that the Turn Around Time for MSME segment underwritings has continuously improved from an average of 32 days in 2016 to under 26 days in 2018. This further corroborated the notion that the digitisation of the space is positively correlated with the increased efficiency in commercial lending markets.

While the present pandemic may have exposed some of the fault lines in the MSME network, it could also be thought of as a phase of Schumpeterian phenomenon of Creative Destruction that will enable the emergence of a new and more efficient system. The level of innovation and focus to be seen within this vertical, as digital infrastructure rapidly catches up with the ever-evolving thought leadership of policy institutions, such as NITI Aayog, and entrepreneurs makes this a digital renaissance for the MSME space. With the right level of institutional enablement, intellectual collaboration on the B2B conundrum and a healthy risk appetite on the part of Micro Businesses, the post Covid paradigm could create a new and frictionless business environment for the sector.

Yash Bhansali is studying Economics and Statistics at Yale University, USA and Intern at CUTS International, a global public policy think tank.

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