VAT Hike in Saudi Arabia: How to prime your supply chain for survival
On Monday Saudi Arabia announced that it was tripling taxes on basic goods, raising them to 15% on 1 July, and cutting spending on major projects by around $26 billion as it grapples with blows to their economy, from the Coronavirus pandemic and subsequent smash of oil prices.
Citizens will also lose a bonus cost-of-living allowance as of 1 June that had been in place since 2018, according to the country's finance minister.
"These measures that have been undertaken today, as tough as they are, are necessary and beneficial to maintain comprehensive financial and economic stability.”
- Saudi finance minister and acting minister of economy and planning, Mohammed Al-Jadaan
The measures to fight the impact of Coronavirus are expected to slow the pace and scale of economic reforms launched by Crown Prince Mohammed bin Salman.
Last year Saudi Arabia raised a record $25.6bn in the initial public offering of shares in state-owned oil giant Aramco in Riyadh. The share sale was at the heart of Crown Prince Mohammed bin Salman's plans to modernise the economy and wean it off its dependence on oil.
Despite these efforts to diversify the economy, the Brent crude price now hovers around $30 a barrel, far below the range the Saudi Arabian budget expectations.
There was additional lost revenue from the suspension of pilgrimages to the holy cities of Mecca and Medina, which were closed to visitors due to the COVID 19 virus forcing travel bans.
The new measures are the most drastic yet by a major Gulf Arab oil producer since oil prices plunged by more than half in March, signalling that neighbouring countries may also seek to impose higher taxes on residents this year.
What does the tax increase mean for Saudi Arabian supply chains?
If businesses weren’t already looking for ways to streamline their operations and relook at their budgets, now is the time to do so.
How the VAT increase affects your customers
The International Monetary Fund projects that all six energy-producing Gulf Arab states will be facing economic recession this year, and will need to adapt accordingly.
Your end-customer won’t be able to afford as much as they used to, seeing cutting back on household budgets, unnecessary retail expenditure, and frugal spending, with consumers in the lower income brackets feeling the effects the most.
This will, however, cause a ripple effect in the market: with consumers feeling the pinch, they’ll be looking to get more value from brands at a lower cost. This means that when you’re selling, you need to find clever ways to sell at a cheaper rate.
What can businesses do to combat the effects of the VAT increase?
In a nutshell, companies need to find clever ways to be more efficient and reduce costs, so that they can keep their retail prices affordable to consumers.
The current supply chain disruption is extreme, but it is by no means a standalone event, nor will it be the last disruption we see.
Here are 6 steps you can take now to make sure you can protect your supply chain to weather any storm:
1. Start now.
Your company will face unpredictable and unavoidable challenges in the future, which is why it’s so important to develop contingency plans before disaster strikes. But it’s never too late to start planning. If you didn’t already have a strategy, invest in one now. Anticipate different phases of disruption and be ready to activate multiple contingencies based on the gravity of the situation.
2. Put the right people and systems in place.
You need an established crisis management team that can take the lead and guide the rest of your company through challenges. Think carefully about the essential roles you need to fill in leadership, operations, logistics, procurement and communications. Determine how the team will centralize information and communicate with full visibility during a crisis.
3. Be familiar with all aspects of your supply chain.
It’s crucial that you develop in-depth knowledge of your supply chain across all levels and tiers. Do regular, in-person supplier audits to understand what each one is capable of in high-stress situations. Identify any possible vulnerabilities that you need to address.
4. Diversify your suppliers.
Diversification will help you safeguard your supply chain against instability. Create a network of diverse suppliers, both local and overseas, that you can use to reduce risks and major disruptions in your supply chain. Establish backup suppliers that you can turn to if your primary suppliers are suddenly compromised.
5. Build a safety net.
Take precautions to ensure your company has both the inventory and the budget to survive a serious supply chain disruption. Increase your safety stock, and consider storing it in multiple strategic locations. Consider your company’s finances, as well as those of your suppliers. If you don’t have a contingency budget already, set one up now so you are financially covered in times of crisis.
6. Optimise Your Warehouse
One of the first places you can begin streamlining your operations to reduce costs is in your warehouse. Optimising your warehouse processes helps you to reduce expenses, increase revenue, free up working capital, and provides your customers with a better, seamless purchasing experience. By reducing costs in your warehouse, you’ll be able to avoid raising retail prices to account for the increase in VAT.
Optimising your warehouse processes should include:
- Streamlining your picking strategy
- Maximising your use of storage space by relooking at the physical layout of your warehouse
- Optimising your labour distribution
- Introducing automation where possible
- Improving your customer service levels
We are in the middle of an unprecedented global supply chain crisis, and we have several more months of volatility ahead of us. Think of this challenging time as an opportunity to gather insights about your supply chain and develop new strategies to strengthen it so it can withstand the next emergency.
The right warehouse management system (WMS) will help you achieve maximum efficiency and productivity in your warehouse. Your WMS will provide you with valuable data to help drive your decision making, reduce any excess stock on hand and help you meet your business goals, despite a tough economic climate.
Start now, and reap the benefits: