Challenges faced by MSMEs in digitising supply chains

Author: Rohit Chaturvedi, Partner, Transport and Logistics, Government, Infrastructure and Development sector Advisory Services

Efficient logistics and supply chain operations are crucial for any manufacturing company, but they are even more important for MSMEs (Micro, Small, and Medium Enterprises). Efficient operations in these domains could reduce the disadvantages of lack of scale & reach faced by MSME. Bigger companies enjoy higher bargaining power with respect to their suppliers and customers and hence can afford to be relaxed in terms of operational excellence.

MSMEs contribute to around a third of manufacturing output in India. But the proportion pales in comparison to Mittlestand, small and medium sized enterprises in Germany. The Mittlestands’ contribution to the German GDP is more than 50%. This comparison illustrates that Indian MSMEs have the potential to effectively compete with larger rivals. One of the key levers of unlocking the potential of MSMEs lie in digitalization & automation of business processes.

Digitalization’s potential span from tracking customer behaviours, effectively managing procurement, ensuring productivity of employees, making movement of goods more efficient and much more. The key to unfolding the potential lies on myriad aspects, however a variety of challenges hinder the widespread adoption of digitalization within MSMEs. These challenges, discussed in the following sections, have an outsized impact on the digitization of logistics for MSMEs. 

Core Challenges in Digitizing Logistics for MSMEs

  • Capacity & skill issues
    MSME’s are often characterised by a promoter driven culture and employment of low skilled employees. Adoption levels of any digitalisation initiative is greatly dependent on the presence of skills in the organisation, which can slow down the pace and extent of digital adoption. The steeper the learning curve, the more difficult it becomes to adopt and merge digitalisation into existing business processes. In fact, in my experience many digital initiatives fail because of time taken to learn despite the substantial benefits from digitalisation. Duration to learn new system reduces the energy and enthusiasm with time as the benefits are slow to come by.  

    Moreover, lack of managerial bandwidth and push fails to provide the initial momentum to overcome the inertia during the beginning of implementation.
     
  • Infrastructure Gaps
    Many MSMEs still work in conventional manner with even basic IT lacking in the organisation. IT infrastructure is still seen as a cost by a substantial segment rather than the enabler and investment.

    This view is reflected in the productivity disparity between MSMEs and larger organizations.
     
  • Lack of awareness
    Despite numerous government policies, both at central and state levels, the awareness of the benefits of digitalisation is woefully low across the MSME landscape. Among other things, MSMEs will be exposed to the impact of digitalisation on their businesses. It is estimated that MSMEs in business-to-business, ideal for exchange of best practices have a 40% lesser productivity gap than the MSMEs in business-to-customer space with little opportunity of osmosis of ideas and best practices.

Opportunities for MSMEs in Logistics Digitization

Despite these challenges, MSMEs now have greater opportunities to bridge the digitalization gap than ever before. Fast evolving technologies & conducive technology landscape in India is enabling digitalisation in every aspect of business.

It may be noted that start-ups are offering cost-effective and high impact solution across the entire value chain including the supply chain. The solutions exist for procurement process, compliance management, inventory management, customer analytics, warehousing, tracking& tracing of goods, invoice payments and others.

Many of these solutions are available easily and can be used without large computing power. Mobile apps or web-based apps allow access to the best-in-class solution from anywhere. Availability of cloud-based apps have reduced the need for expensive computing for the organisations which is the boon for MSMEs.

Furthermore, many modern technology solutions are available under the Software-as-a-Service (SaaS) model enabling MSMEs to pay on monthly basis and without draining the cashflows with upfront investment. Another advantage offered by many modern technology solutions are that the companies need to pay proportional to the number of employees. MSMEs with tight cash cycles will benefit from such solutions as they have to pay in proportion to their size.

The recent development on Generative AI and Agentic Solutions will also provide a leg up to MSMEs more than the large organizations. The solutions will fill the skill gaps in the organisation & equip the employees to more updated. The impact is higher for organisations with low skilled workforce. Natural Language Processing ( NLP) based systems will work on the normal voice or word prompts without the need to understand the underlying technologies.  Employees can converse with the systems in the language of their choice and through the preferred mode of communication (verbal commands, typing or even gestures).

Agentic supply chain solutions (ASCS) have the potential to become one-stop platform  for the entire  supply chain needs, eliminating the need to combine and analyse data from various sources.

Overcoming Challenges

  • Increasing awareness
    MSMEs can benefit from greater interactions between peers, technology start-ups and large companies in their respective sectors. Policymakers can encourage large companies to initiate formal discussions with MSME.

    In addition, responsible government departments may administer a series of programs to spread awareness about digitalisation & help them understand the economics of digitalisation. For this to be effective. departments themselves need to upskill in digital technologies.
     
  • Infrastructure incentives
    Policymakers can devise innovative ways to enhance digitalisation for MSMEs. That may include fungible credits to use cloud-based solutions. These credits can be used by MSMEs to take services from their preferred vendor., with technology providers competing to offer the best solutions. A strong governance process is required to ensure credits are used in intended ways.
     
  • Capacity building
    Online training programs & gamification can be used by the policymakers to enhance the productivity of workforce in MSME sectors. Using GenAI, training program maybe made accessible and interactive in ways easily absorbed by unskilled and semi-skilled workforce.

 

MSMEs are the backbone of Indian economy, contributing to a large share of GDP and manufacturing output of India. They also provide more than 60% of total employment. Increasing the impact of MSMEs will ensure that India reaches its goal of Vikshit Bharat before 2047. The productivity gap between MSME and large organisation is the major roadblock to make MSMEs more competitive and the key reason for this gap includes capacity constraints (managerial and skills related), infrastructure unavailability and lack of awareness.

However, new technologies and rapidly evolving tech ecosystem in India offer cost effective and easily implementable opportunities for MSMEs. With the right policy interventions and government support, MSMEs can overcome the digitalization barriers and improve their competitiveness drastically.