Improving efficiency, reliability, flexibility and innovation should be the focus of our slow-growth, high-demand logistics systems, writes Vivek Kumar.
The importance of an efficient logistics operation is now well recognised by the Indian industry. However, a formalised and structure approach to logistics is a recent phenomenon. As manufacturing processes become more complex, the customers become more widespread and demanding and the competition becomes more intensified, the need for a planned approach to logistics is increasingly being recognised.
While the need for efficient logistics is accepted, India as an economy has a lot of ground to cover. The World Bank Logistics Performance Index (LPI) 2012 report ranks India at 46 behind China, Brazil, Thailand and a number of emerging economies. The low ranking clearly outlines the need to improve the logistics networks in the country significantly, not just in terms of its physical infrastructure but also in terms of its processes, skills and capabilities in order for India to maintain and grow its global competitiveness.
The challenges for logistics industry in India are both external and internal. The issues of inadequate physical infrastructure, complex indirect tax regime, cumbersome regulatory procedures, multiple legislations and a lack of a national logistics agenda creating a bottleneck for the growth of the country are well recognised. These would need to be dealt with on a priority basis if the Indian economy has to maintain a high growth trajectory. India can perhaps take a leaf out of Morocco’s approach which has seen its LPI ranking improve from 113 in 2007 to 50 in 2012.
The logistics industry itself needs to respond to a large number of internal challenges. The manufacturing process has increased in complexity due to increase in product variants, shorter product cycles and widespread supplier and customer base spread across multiple geographies. The distribution channels have increased and grown manifold along with emergence of new channels like modern retail and e-commerce.
In order to remain competitive, companies need to constantly improve their speed of service and increase reliability of their service delivery. These changes are putting unprecedented amount of pressure on the existing logistics networks. The logistics industry is further constrained by lack of an adequate pool of trained manpower.
The logistics service providers (LSPs) have emerged as solution providers in the developed markets. However, the Indian LSPs have yet to reach the scale to provide strong solutions for the Indian industry’s logistics needs. Most of the logistics service providers are small, with even the largest LSPs big enough to be counted only among mid-sized corporate. The scale limits the ability of the LSPs to provide services across regions or invest in assets. In turn, this limits their ability to provide end-to-end solutions to their clients who have to depend on multiple service providers and maintain large in-house teams to meet their requirements.
Significant progress in recent years
While the challenges on the logistics front remain daunting, the Indian industry has taken a lot of initiatives and shown considerable progress in recent years in logistics management. While the external challenges are to being dealt at the policy and government level, the industry has also taken steps to meet the internal challenges.
A major step has been the recognition of the challenge and the need to deal with the challenge in an integrated manner. An indication of this is appointments of dedicated senior level resources in most companies for managing logistics and supply chain operations. These growth-oriented companies realise the need to co-ordinate their manufacturing, sales, finance and other operations with logistics operations. Some companies have gone a step further and integrated their systems with that of their supplier and customers so that enable seamless flow of information and facilitate a faster response time.
For outsourcing contracts, aspects of service quality are getting into the consideration. The typical requests for quotation (RFQs) now require service providers to have strong systems capability, ability to track goods movement and provide for penalties on shortfall in service requirements. While the direct cost of services remains the most important and the driving parameter for decision making, the considerations to other factors in the logistics decision making process is a positive trend.
The adoption of modern management techniques like lean manufacturing, total quality management, and just-in-time inventory management has brought out the need to look at the different aspects of operations, including logistics operations, in an integrated fashion. However, implementation of such practices has been limited to automotive and a few other industries.
The Indian industry has significantly invested in new technologies. These include tools like information technology, communication technology, bar-coding and other such technology for managing logistics operations as also investment in better vehicle, warehouses, and material handing equipment. These investments have helped increase the capability of the industry and improve the efficiency of logistics services for the industry.
Considerable improvement required
A logistics network needs to address the requirements of efficiency, reliability, flexibility and innovation. While looking at efficiency, not only direct costs but indirect costs and opportunity costs need to be considered for a proper evaluation. The element of innovation is important as requirement changes with time and it is necessary for a network to adapt to the requirements.
The logistics industry needs to make considerable improvements in respect of all the four parameters. The direct costs are typically higher due to greater reliance on road transport versus other cheaper modes like rail or road. In addition, there are indirect costs due to wastage, time lost in transit, slow speed of movement etc, make the cost of logistics in the country go up significantly and pulling down the efficiency of operations. The factors affecting the efficiency also have a bearing on the reliability of the logistics network. The adaptability of the logistics network is limited due to the presence of multiple bottlenecks restricting the ability of the network to react in a short time frame.
The industry has shown considerable capability to innovate and adapt to the fast changing requirements, however, the same would need to be enhanced as adaptation to future changes would continue to be required in the future.
While some segments like automotive logistics may be in better condition, and individual companies may be in a relative better position, considerable progress needs to be made by the industry as a whole.
The potential for demand growth for the industry continues to hold well, though there are short-term concerns. The external challenges are expected to be resolved only in the medium term. Therefore, the industry has to focus on internal challenges to improve the overall performance. However, given the track record of the industry in the past, the level of on-going activities and the competitive forces, the logistics management in the country is expected to witness a major change in the next five years.
The industry will adopt better processes and use technology more extensively in its pursuit of better performance. The Goods and Service Tax (GST), when it is passed, is expected to provide a strong impetus to trade, increase demand for the industry, facilitate scaled up operation and prepare the ground for consolidation in the industry. The GST thus is expected to be a major game change for the logistics industry. While the cost element will continue to be most important metric, the industry will have also to view logistics from a value-added perspective. The movement towards an integrated and structured approach to logistics management is expected to only get stronger in the coming years.
The author is Associate Director, Transport & Logistics Practice, CRISIL Infrastructure Advisory.