The Currency Bills Supply Chain in India – a noble plan and an execution fiasco ... 2016

In this day and age of the plastic surrogate to currency bills and online transactions, I would have never thought that the supply chain of currency bills would be a matter of any interest … until a few days ago.

On November 9, the Government of India demonetized, in a surprise swoop, the two largest currency denominations (INR 500 ~= USD 7.50 and INR 1000 ~= USD 15) with the long-eluded objective of paralyzing the parallel “black” economy – the tax-evaded income stashed away by people and used for undesirable purposes including dowry, drug trafficking and terrorism.

The objective, without doubt, is noble. Its “shock-and-awe” implementation, though, was wrought with poor execution. When a supply chain substitutes one product for another, it is a no-brainer that the substitute product has to be prepositioned in the supply chain in sufficient quantities at the right places to not cause a stock-out with a likelihood greater than an accepted, small threshold.

There can be many reasons why this multi-echelon inventory problem can go awry. First and most importantly, the demand has to be reasonably forecasted. In this example, there was no precedent to go with, that the Government could have extrapolated. However, I am sure the Government knew the magnitude of the problem they were trying to solve – not the magnitude of the ill-gotten money, but the magnitude of hard-earned money in the hands of commoners that existed in the two denominations that were made defunct. It is another no-brainer that it is this amount that will be offered for exchange for other denominations – the lower denominations still in circulation (INR 100 ~= USD 1.50) and new bills of higher denominations being introduced.

Recognizing the challenge of the demand forecasting problem, it can be alleviated by having super-responsive logistics to move currency inventory from higher echelons to the retail “points of service”, that is, the branches of banks. There can be forgiveness for not knowing the unknown, but not for not putting in place dynamic measures and not anticipating the panic and herd behavior under such conditions.

There is no dearth of operations research, inventory optimization, and logistics professions in India and within the diaspora the world over.

In the meanwhile, tens-of-millions including my 87-year-old father are making the rounds at neighborhood banks day after day and standing in long lines to exchange a few old bills for new ones. It was decades ago, that there used to be such lines for the cooking medium kerosene, and groceries such as wheat, rice and sugar under the nightmarish institution called “rationing”. Now it is old wine in a new bottle!