Integrated Logistics Service Providers and optimization of overall Logistics Life-Cycle costs

Integrated Logistics Service Providers and optimization of overall Logistics Life-Cycle costs

Author:

Dr. Kamal Kishore Sharma
Professor & Head of Centre for Surface and Air Transport
Adani Institute of Infrastructure Management, Ahmedabad

Logistics is essentially about moving commercial goods within a predetermined supply chain. It encompasses two important functions viz. transportation management & warehousing. Transportation management focuses on planning, arranging vehicle resources, optimizing routes and executing the plan to move goods between warehouses, retail locations and customers.  On the other hand, warehousing deals with inventory management and order fulfillment.  The transportation is often multimodal and can include movement of goods through ocean, air, rail, road and inland water.

 

While logistics fulfils the most essential role of ensuring goods and services reach the intended customers, its management is a complex process due to a large inter-dependence among stakeholders amidst constraints and uncontrollable environmental factors.  In context of a developing country like India with poorly developed and often unreliable infrastructure, the complexities get amplified as there are too many uncontrollable factors. So much so that it is often said logistics is such a problem that every time you think a solution would work a new challenge comes up hence the logistics managers are always in search of solutions.

 

The combined effect of these challenges lead to the cost of logistics being very high in case of India. As a percentage of its GDP, logistics cost in India stands at 14% which compares poorly with similar costs in the US (9.5%), Germany (8%) and Japan (11%). This seriously affects the competitiveness of the manufacturing sector in India.  It seriously does not help to have a 30-40 per cent higher logistics cost in India than the global benchmarked logistics cost.  The government is seized of the issue and is planning to invest around ₹100 lakh crore in logistics infrastructure in the next five years with a new National Logistics Policy that will seek to address the challenges of different stakeholders and will focus on technology and data analytics with an aim to bring down the logistics cost in India to less than 10% of GDP over the next few years.

 

While all of that address the overall economic environment, we need to see a little deeper into what ails the logistics function at the unit level. It is often seen that the cost of logistics often makes a business unviable. The cost is not only in absolute terms but also represents those incurred because of unreliability of supply in terms of time and product intactness and the consequent lost opportunities. There are risks of damage, theft, obsolescence due to time lost and the consequent insurance costs. Perishable & essential goods including pharmaceuticals, apart from finding a challenge to maintain continuity of cold chain often do not find suitable storage and transport modes (reefer vans) at reasonable costs that leads to adverse cost competitiveness in exports.  The prime problem thus is not as much of reducing costs of individual parts as much it is about reducing wastage & optimizing resources in order to reduce overall life-cycle costs. If it is about reducing costs then in a lighter vein, shutting down the business leads to zero logistics costs.

 

A deeper look into how firms treat logistics in their respective set-ups throws up the fact that it is often seen as a service function and as a cost centre. Often it is about how to save money on costs especially those that are low hanging opportunities which is a very short term perspective. The way they look at parts where they could save some money and not look at the complete supply chain costs is like missing the woods for the trees. Focus is more on cost savings through negotiations, streamlining shipping & receiving practices and outsourcing to 3PL through competitive negotiation.  There is also an increasing trend towards use of technologies like ERP, transportation management system (TMS), yard management systems (YMS), warehouse management system (WMS) etc.  Sandeep Mehta, Sr. VP, at Adani Logistics is of the strong opinion that it is not that the firms are not wanting to see, but it is more about the poor market awareness of the alternative modes that look at optimizing the entire logistics costs than the fragments. 

 

What ails logistics industry in India is that it is mostly unorganized with a poorly enforceable contract environment. Combined with a poor infrastructure, not enough control over the nuts and bolts of the logistics chain, a poor sense of professionalism prevails in this sector and the logistics partners often cannot ensure deliveries to the promises made.  The advent of demonetization and GST did not help matters in the short term in an already fragmented industry and a challenged economic environment in the recent past.  Dealing with multiple logistics agencies at each stage of the business life-cycle further adds up to the costs due to multiple documentation & poor technology use in an unorganized industry.  Coupled with these firms often also lose out due to a poor sense of awareness about the inventory costs when one does not see the entire supply chain costs together.

 

At the larger economy level, the industry is dealing with poor pattern of distribution of logistics service providers across geographies and concentration of industry infrastructure such that in a number of instances, it is a case of logistics service not being available at the right place and right time.  An example in case is the presence of very large number of small facilities and service providers in a radius of 150 km around NCR Delhi region.  This results into cargo fragmentation and related wastages and inefficiencies.  Post container rail sector privatization in 2006, different assets and rolling stocks came into being, with container terminals located too close to each other, raising questions on each other’s business viability during tough economic times.  Jawaharlal Nehru Port (Nhava Sheva, Mumbai) has a large number of container freight stations (CFS) sorrounding the port. Around the world and specifically in more efficient economies, the container handling (activities carried out by CFS) is done by the ports themselves. Another hand in value-chain obviously increases the cost.

 

So what is a possible solution? Is there a case in favour of large specialized logistics firms that provide all services under a single contract, who co-invest in developing logistics handling facilities if given a long hand in terms of time-period of contract, say 15-20 years, and who because of their size have a better control over the ecosystem of stakeholders (equipment/vehicle owners) and related service providers and hence are in a better position to reduce the entire life-cycle costs of logistics.  That would also lead to economic gains for the economy due to economies of scale and scope and better tax flows due to organization of the industry. Simultaneously, the users will be dealing with a single agency with formal contracts in place and better visibility & transparency with reduces risks and reduced wastage of goods and time.

 

Till recently there were not many integrated integrated logistics players in India. In the recent decades though, the industry is slowly and steadily organizing itself with better infrastructure investments in the economy.  The logistics industry is now poised to grow to $650B by 2025, at a CAGR of 8%.  Companies like CCIL, Allcargo, Adani Logistics, Gateway Distriparks, Future-Reliance Group, TCI Express, VRL Logistics, TCIL, Mahindra Logistics, Aegis Logistics have shown the way that integrated players are here to stay and increasingly driving the consolidation and professionalism in the industry.  There are though not enough case studies and real use cases to address poor awareness around looking at the integrated logistics life-cycle costs.

 

Is there a dearth of expertise or there is an issue with the way the business development and hence awareness is being built?  A deeper look into of how the logistics service firms do business development throws that there are two different modes. One, where the firm looks to approach the logistics department heads of the customer firms who are primarily concerned at reducing costs during their tenures. Two, is where CEOs are approached who, if properly explained, could look at the entire cost cycle and the efficiencies that could arise out of engaging a single agency that would be in a better position to deliver the entire solution at an overall lesser cost. That could mean a shift from a logistic service provider being seen in a vendor-customer relationship terms to one of a partner who co-invests and has a better cost & risk control due to its size and control over key elements of logistics chain.

 

Sandeep Mehta, Sr. VP at Adani Logistics throws a very interesting example to throw light on the above arguments. Adani Logistics inked a long term deal with Maruti Suzuki Motors to be their Logistics Infrastructure Partner where they handle the logistics of the main raw material i.e. Steel Coils and the finished product i.e. the Cars. The Steel Coils are handled & managed at ports, transported to a logistics facility close to manufacturing site where specialized warehouse is built by the Logistics partner and supplies are effected when needed. The cars are transported in containers from the manufacturing site through rail by Adani Logistics and are loaded on to the ships ex. Mudra port through a Ro-Ro facility for export purposes. Maruti ends up in having to deal with just one integrated logistics service provider who invests in the supply chain because there is visibility (long term deal) and scale, a win-win for both companies fostering a spirit of partnership that leads to mutual gains for both companies.