Logistics sector and logistics costs are largely driven by many imponderables that occur in the global, national, and regional canvas. Therefore, it will be wrong on our part if we generalise issues and arrive on conclusions, writes S Krishnamurthy.
From a mere transportation or warehousing service provider for big manufacturers, logistics companies have to reinvent their strategies so that they could offer integrated logistics and supply chain solutions to fulfil the growing demands from their customers. Today, a logistics service provider is supposed to deliver value-added services with end-to-end solutions by providing modern warehousing with updated technology. The logistics sector has indeed taken the challenges head-on and there has been marked improvement in service delivery in the last few years. One aspect that continued to be a worrisome he country is the increasing logistics cost. In spite of all attempts, logistics cost in for India is above global average even today. Cost of transportation, inventory management, warehousing, packaging and costs associated with damages and losses are the various components which sum up the overall cost of logistics. While the logistics cost is less than 10 per cent in most of the global markets, the same is around 13 per cent in India. There is scope for reduction of logistics costs which is mainly in the hands of the government - in providing infrastructure, reforming the policies and simplifying the taxation.
Time plays a vital role in controlling logistics cost. Ensuring more turnaround in less time reduces logistics cost drastically. Introduction of highway toll gates and entry restrictions in cities make the logistics players unable to service multiple local deliveries and is struggling to make even a single despatch a day. There is an acute shortage of labour in view of increase in the level of basic education and they are sceptical to do the labour job resulting in high handling cost. In an increasingly competitive environment, process optimisation and cost management have assumed key competitive advantages.
The biggest factor responsible for the escalation of logistics cost is poor infrastructure. Countries like Singapore, Dubai and China could reduce their logistics cost because of their world-class infrastructure. In India, the cost of transportation is rather high and there is a lot of wastage that remains unrecorded. Financing the maintenance of transport infrastructure, managing urban congestion, supply chain disruption on account of poor rural connectivity, and loading of environmental costs as an integral project cost are few of the challenges before the transport industry. A well-developed logistics infrastructure can lead to significant savings in terms of service levels, inventory costs and processing time. But India continues to spend relatively more on logistics due to inadequate infrastructure.
The need of the hour is to have specific infrastructure in the logistics space, from roads and rails to ports and world class logistics parks to sustain the growth. Infrastructure has crucial role to play in speeding up existing processes and in creating new processes for cost optimisation. Infrastructure of customers, dealers, etc, is also a bottleneck now in some areas. Infrastructure plays an important role in the overall development. Road infrastructure is a bottleneck though over 70 per cent of freight transportation in India is via roads. The National Highways form only five per cent of the entire road network in India, but handle over 40 per cent of the national road freight traffic, putting enormous pressure on the highway infrastructure. Therefore, the reduction in the logistics cost can be brought about by improving the logistics infrastructure across the country to facilitate smooth transfer of materials and information.
Accounting for about 22-27 per cent of the total logistics cost, warehousing has become an important focus point in logistics. However, a lot of uncertainties are quite visible in warehousing as there is no proper categorisation of warehouses/warehousing zones and facilities are not up to the mark. While there is a continuous need to compress the cost and time factors, it is always a balancing act between these two. Therefore, the compression of logistical cost often is a cause of make or break for the traders.
Transportation is the most important logistics function for all industries and therefore it has large impact on escalation of logistics cost. Transportation costs have two factors: outbound to customers and inbound from suppliers. Typically, outbound transportation costs drive the total cost of freight due to a higher number of less-than-truckload (LTL) and small parcel shipments.
The industry average for outbound transportation costs is around 70 per cent of the total transportation cost. The inbound shipments are typically truckload and/or rail shipments at lower rates. As a result, a common strategy is to add distribution centres to get closer to customers. It is a matter of concern that quantitative targets will not help as logistics infrastructure should be measured in terms of qualitative targets. For example, a truck which enters and exits a city faces toll tax at a number of check posts along with traffic, which results in low average speed and high cost. A truck hitherto making multiple local deliveries in a day is struggling to achieve one delivery due to toll, entry restrictions and traffic congestion. This has resulted in double the cost on transportation. The road transport cost comprises vehicle operating cost and road related cost. The vehicle operating cost on highways, which is a major component of the total transport cost, is entirely dependent on the condition of the roads. In order to reduce this total transport cost, it is essential to maintain the roads at a good service level. And in this, government is the biggest regulator.
Inventory management costs are also high. Inventory management implies not only managing inventory at the manufacturing point, but all through the supply chain. Variable vessel charter costs, fluctuating fuel prices, exchange rates, non-availability of return loads and high haulage rates are some of the other logistics cost inflators. In addition, the use of advanced technology and hardware and skilled manpower, have a crucial role to play in enhancing the visibility for the areas of optimisation of cost and unrecorded wastages.
Multiplicity of taxes is a major concern for all industries. There are a lot of duplication between state level taxes and central taxes. Although GST is projected as a panacea for all ills in the taxation front, the government is yet to arrive at a consensus before it is fully implemented. This should help in bringing uniformity and convenience to the sector at large. GST will do well to end-users and also to service providers as they will be in a position to bring to the table some of the robust logistics and distribution solutions avoiding duplication of warehousing and handling. This will drive enormous efficiency in managing inventory. At this time with the best of abilities, one still has to maintain stocks at various levels at the ground. The implementation of GST is a major milestone for the Indian Tax System, which will bring about changes in the way manufacturing, warehousing and distribution is carried out in India.
Organisations have to restructure their supply chain strategy to overlook tax boundaries and position their warehouses and distribution networks more focused on cost and time. With GST coming in, the key advantage will be re-aligning/merger of the smaller warehouses to most productive and logical locations, without having a tax burden to think of, which when automated will give excellent cost benefits.
The fragmentation in the market has also a large impact on high logistics cost. Over 95 per cent of the annual logistics costs in India are accounted for by the unorganised sector such as owners of less than five trucks, small warehouse operators, custom brokers and freight forwarders. Most of the companies operate from small warehouses. They do not operate in larger shared warehouses. Therefore, consolidation has to happen in the warehouse segment, by which the average space per square metre goes up and hence the average cost comes down. According to the studies of The Associated Chamber of Commerce and Industry of India (ASSOCHAM), the current policies prevailing in the logistics sector are complicated, lengthy and cumbersome which result in higher transaction cost.
In order to reduce logistics costs and focus on core competencies, Indian companies across verticals are now increasingly seeking and using the services of third-party logistics transportation and logistics as they form a major share in logistics. However, in order to keep up with rising demands and customer expectations, companies now also concentrate on building larger, modern distribution centres, along with introduction of high-calibre warehousing practices, which have directly or indirectly impacted on logistics cost. Some of the large players are investing in multi-user facilities across India. These services will help in improving efficiency with increased visibility, the cost will certainly reduce.
Logistics service providers, as they operate for multiple clients, have greater knowledge about the ways to optimise costs by negotiating and renegotiating contracts, load optimisation, efficient route scheduling, working capital management and inventory cost control among others, to overcome the burgeoning logistics cost.
Load optimisation refers to judicious selection of cargo by going for the right combination of weight and volume cargos so that total capacity is optimally utilised. Efficient route scheduling involves evaluation of available routes between the source and destination and selecting the most appropriate route which will optimise cost and delivery, proper selection of load and discharge points and deciding on what quantities to be picked up from where.
Experts in the industry are optimistic about the rapid improvements. They feel that the country would be able to reduce the logistics cost remarkably in the coming years if the momentum on the infrastructure development front is continued with. Logistics cost should figure around 10 per cent in 3-5 years time frame. However, everything will depend on oil prices.
Logistics sector and logistics costs are largely driven by many imponderables that occur in the global, national, and regional canvas. Therefore, it will be wrong on our part if we generalise issues and arrive on conclusions. But, there are definite signals, which we feel are positive.