Re-engineering the Supply Chain in Nepal

08.19.2020 | Articles | Sujeev Shakya

Context

Landlocked and Difficult Terrain: Nepal’s geography and topography has impeded efficient supply chain management. Nepal has historically been predominantly dependent on India for sea access, although since October 2018, China has emerged as an alternative – albeit at quadruple the distance. Combined with the difficult terrain of hills, mountains and mighty Himalayan rivers, this makes inland transportation a challenge. Natural disasters like floods and landslides continue to create challenges. Nepal is struggling to keep up with the growing interdependency between each of the components of the modern supply chain. Nepal also faces storage problems as it is still stuck in the ‘godown’ concept of storing goods, with no systematic segregation of items. There needs to be a shift towards increasing the visibility and availability of the stock of goods.[1] Since these steps have not been taken, significant issues have been arising in the supply chain.

Logistical Challenges: Logistics is one of the most important aspects of supply chain management. Nepal ranks 114th out of 160 countries in the World Bank’s latest Global Logistics Performance Index (LPI) Report. Per the report;

“The logistics component has escalated in rankings due to progress witnessed in customs procedures, trade logistics quality, timeliness delivery, and tracking and tracing system. However, the lack of organized transportation routes, increasing traffic at ports, lack of full-fledged operation of check posts and excessive documentation process are still the main drivers behind the delay as these issues hinder the possibility of change and socio-economic growth of manufacturing industries.”[2]

Transportation Challenges:  Transportation costs in Nepal are amongst the highest in South Asia due to strong cartels in the form of powerful transportation syndicates. The existence of numerous small operators in the surface transportation sector is apparent. The market for these operators is divided in terms of location and size, i.e. only the cartel members are allowed to use designated routes, despite the 1997 Consumer Protection Act which outlawed such cartels. There are twenty-four truck syndicates in Nepal who control the good carrier services and do not let any new trucks ferry goods in the country without their consent. Truck syndicates have led to the exorbitant rise of transportation cost in the country, unreasonably increasing fares for carrying goods and protesting if the government fails to meet their demands.  Consequently, the prices of all other goods in the economy have also increased as they require transportation services, the costs of which are passed to the consumer. Consumers have no other option than to go with monopoly prices from operators located in their own towns.[3]

Lessons from Earthquake: The gaping holes in the supply chain were very evident after the April 2015 earthquake. Studies showed that reconstruction became a big concern because a gap started to emerge between the demand and supply of construction materials.

During this time, the major weaknesses in the supply chain management (SCM) strategy of Nepal noticed were threefold. First, there was a shortage of trained workforce and government engineer-inspectors, as well as knowledge regarding earthquake-resistant technology because it had never been considered as an integral part of the general engineering/ supply chain education in Nepal.[4] Second, a poor distribution system led to price increases. A large fraction of the supply of manufacturing goods in Nepal (like cement, TMT bars, etc.) is generally done to regional construction companies, followed by district and local suppliers such as the small hardware shops. However, due to the poor distribution system within the country, supply chain components like transportation and margin of regional suppliers raised fares haphazardly. Moreover, the inability of transport unions to accommodate all transporters also pushed transportation costs to NPR 125/km.[5] Finally, the practice of not insuring goods while travelling through the supply chain posed a third challenge. For instance, around 46.2% transporters are not members of transport unions and the union has accommodated not all transporters. Thus, bad road conditions accounted for around 2% of transportation losses.[6] No major interventions occurred post-earthquake to strengthen the supply chain.

 

[1] Maharjan, Nasala. “Supply Chain Management Hassles in Nepal”, Nepal Economic Forum, 14 August 2019. Retrieved from- https://nepaleconomicforum.org/neftake/supply-chain-management-hassles-in-nepal/

[2] Ibid [1]

[3] “Understanding the cartel economy”, Nepal Economic Forum, 10 January 2018.

[4] Sharma, K., KC, A., Subedi, M., & Pokharel, B. (2018, August 25). Challenges for reconstruction after Mw7.8 Gorkha earthquake: A study on a devastated area of Nepal. Geomatics, Natural Hazards, and Risk, 9(1), 760-790. Retrieved from https://doi.org/10.1080/19475705.2018.1480535

[5] Practical Action. (2016). Supply Chain of Construction Materials in Earthquake Affected Districts: An assessment in Nuwakot and Rasuwa.

[6] Ibid [1]