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Why better roads and GST not translating to reduced logistics costs in India ?

by | Nov 18, 2019 | Blog

It is well known that Indian logistics sector has one of the highest costs in the world as a proportion of GDP. It is also widely accepted that industry is inefficient owing to poor infrastructure and bad government policies. However, evidence suggests that even after the improvements in National & State highways and advent of GST, the efficiency is not visible in material ways.

Why is it so?

Firstly, customers inadvertently encourage oligopoly in the vehicle procurement operations. The key reasons for the same is bandwidth issues with the logistics team and comfort with limited set of transporters. The transporters thus can collude and the advantages of efficiency is not passed to the customers.
Secondly, logistics teams do not have strategic insights to correctly design vehicle procurement process. It is not uncommon to see that in the same industry, different companies use different vehicle procurement policy. For example, a company in the cement industry might go for spot procurement and another company in the same sector may opt for annual contract.
Lastly, most of the tasks involved are still handled by humans. Vehicle planning, indentation, loading , tracking , billings etc tasks are undertaken by human efforts with or no integration & automation.
The problem of inefficiency is also persistent due to lack of preparedness by transporters and lack of visibility of loads at different times in future to them. I call that Information Obscurity or IO . Because of IO on return loads, the transporter adds a premium on forward leg which increases the transportation costs.

What is the potential solution?

The key approaches to optimize logistics costs involve automation, transparency and analytics. Modern technology combined with clever algorithms can automate the tasks involved in logistics management. The processes can be integrated to reduce the human involvement and curtail the amount of errors significantly.
Technology can increase the reach by allowing customers to reach as many transporters as possible with ease, thereby, increasing competition. Increased competition, it has been proved, reduces possibility of collusion and helps in discovery of true market clearing prices.
Technology also enhances transparency with clear audit trails.
Automation of process will also have a very important side effect in collecting the relevant data with accuracy. The high quality data can then be utilized further to derive strategic insight through meaning analysis. For example, customers can base their planning and develop different strategies for vehicle procurement process based on routes, seasonality and so on.
The analytics can also be utilized by the transporters to plan vehicle trips. For example, the analytics can provide inputs on the available return load at various times thereby reducing costs. Moreover, predictive analytics can make decisions more robust.

Why are companies not doing right things?

There may be multiple reasons for the same. Few of the reasonable assumptions are that supply chain and logistics function is not seen strategic in nature by the companies. Many companies combine transportation services procurement with general procurement function. The main focus of the function is on local optimum such as negotiating down the transport costs. In fact, it is unheard that organizations have CXO level position for supply chain. To provide a perspective , a supply chain position at CXO level is expected to give equal or more value than a CFO in many types on industries. The value is not only created through reduced costs but also via positive impact on many other processes which affect top-line as well.
Another reason is high development and maintenance costs of developing technology system. This can be particularly daunting for small and medium size companies.
Yet another reason may be skill related. Designing a system for the industry requires both the deep understanding of technology and sector knowledge. The person driving the product should have good understanding of technology and industry which is rare.

End note

Although India has witnessed development of better roads and GST has eliminated state and octroi area borders, better turnaround and efficiency of vehicles has not translated in improvement in logistics costs.
The reasons may be attributed to the way transport management is handled which has not changed with times. The resultant effect is human errors, opaqueness and little fact-based insights.
Technology has the potential to transform the transport management. However, developing technology in-house is difficult due to variety of issues.
Yet new models will surely be unleashed and disrupt the industry to solve these problems. It is high time that the companies must view supply chain technology as a strategic function rather than a cost centre. Incumbents rooted with traditional ways of handling logistics and supply chain functions are likely to face existential risk.



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