The Mighty Beast

The Indian logistics sector is on a path of transformation. Logistics related Infrastructure will greatly drive efficiencies and boost economic development. It is also the fuel for manufacturing growth in India. As India gears up for the next phase of growth, logistics infrastructure will be the critical enabler.

A recent McKinsey report stated, “Logistics infrastructure, covering the road, rail, waterways and air network of a country, is the backbone on which the nation marches ahead.” The task to achieve the infrastructural level to achieve 7-8% of growth over the next decade is no small task. The 2.5x growth in freight traffic will increase the pressure on India’s logistics infrastructure. There is a huge scope for India to build its infrastructure, as a large part of it is yet to be built.

“Infrastructure is the Blood that courses through the veins of Supply Chain Process connecting all the organs and keeping them vitalized. Just like our bodies need good and healthy blood to survive, so does the industry. India like all developing nations has multifaceted challenges hindering its growth – Infrastructure would be in the Top 3. The others would be good primary education and sanitation facilities for all,” feels Raviraj Rodrigues, Director – Supply Chain, Alstom Transport India Ltd.

Aptly describing the criticality of infrastructure for the steadfast growth of the Indian economy, Milind Tailor, Director – Procurement, Asia Pacific & Supply Chain, India, Diebold Nixdorf, remarks, “India is one of the fastest growing economies in the world and a leading consumer market. In order to sustain the growth and support the ambitious Make In India Plan, logistics sector plays a critical role. Connectivity & convenience in operations are the key for sustainable global trade growth. India’s once shoddy looking infrastructure is looking much better but it still has a long way to go to catch up with China.”

The quality of infrastructure directly determines the quality of logistics from producer to consumer. It is a major determinant of logistics cost and the costs are heavily determined by the availability of the infrastructure itself. It directly influences the inventory levels and consequently the financials of transport for the products. Improving infrastructure not only lowers the costs that companies incur due to the logistics, but also carries a significant impact on the competitiveness of the country. India is currently low on rankings in infrastructure. On the World Bank Logistics Performance Index, India ranks behind countries like Chile and South Africa. It is currently at rank 44, despite the Government’s massive efforts to develop efficient logistics infrastructure. 

Umesh Madhyan, Associate Vice President Logistics, Hindustan Coca-Cola Beverages Pvt Ltd., highlights, “While there is an increased focus on infrastructure by the recent Government, there is no solution on deliveries for metro cities. The average truck running per day in developed countries is 450-600 kms and in India, it is best at 250 kms. If the truck runs with no boundaries in metros, we can complete a typical trip in 6 hours instead of 26-30. So, our requirements of managing scale business with faster turnarounds is the first one to get hampered.”

Additionally, infrastructural improvement needs to occur in the warehousing sector with some FTWZs built around metros to break the bulk and cross-dock scenarios. There is huge room for implementation of laws in the transportation to complement GST and this improvement has been long awaited. Load Utilization Increase or LUI is currently the only implementation that has been successfully made and it may not prove to be enough in the long run- as it only favours the construction industry. Seconding these thoughts, Rodrigues stresses, “In the logistics sector in particular, we have numerous hurdles to cross in infrastructure to be best in class with other nations.” Some of them are:

ROADS: Today, roughly 275,000 kms of National and State Highways exist, connecting cities to ports and more. Around 60% of total freight in India is carried out on roads. One of the primary challenges is the condition of roads. Roughly 50% of the roads connecting cities to ports does not suit the logistics standard, limiting truck speeds to 40 kmph, which is half the international standard. The global benchmark of logistics cost is 9% of GDP, but India operates on 13%. A saving of USD 10 billion can be made by a reduction of 1% of logistics cost and this can come with good quality of surface network to move trucks faster. Some of the ideas include:

• Improvement of truck turn-around times with dedicated connection roads between ports and highways, also dedicated exit points to be included to help trucks move faster.
  
• Enabling the use of greener energy and improving overall efficiency by implementing the RoRo (Roll on-Roll off) models for intermodal transports to make logistics less time-consuming.

WAREHOUSING SPACE: Implementation of more warehouse usage models like pay-per-use or multi-use facilities available in the country, which is an area where major leaps of improvements can be made.

LEGISLATION: GST may have made things simpler, but there still exists a need to register a location for GST before starting a new business. This limits the ability to access multi-user warehouses at short notice.

Sudhir Kadam, Head – Warehouse Logistics, Bombardier Transportation India Pvt Ltd., feels that on-time delivery of materials is being hampered due to inefficiencies in infrastructure. According to Shamsher Dewan, Vice President - Corporate Sector Ratings, ICRA, “The key issue with the logistics infrastructure is the modal mix, which is heavily skewed towards roadways, which is significantly expensive as compared to railways and waterways. This is compounded by the fact that the roadways sector is highly fragmented with the unorganized segment having ~90% share of business, which leads to higher cost by the virtue of low efficiencies.”

Prahlad Tanwar, Executive Director – Transport & Logistics, KPMG India, agrees “Significant share of goods in India is moved via road, and over the years this has created a heavy dependence on road infrastructure of India. It costs INR 2.5/tonne per km to transport goods by road, compared with INR 1.06/tonne per km by water and INR 1.36/tonne per km by railways, making road the most expensive, polluting and unsafe mode for moving goods. However with projects like dedicated freight corridor (DFC) across the eastern and western corridor, waterway projects like Sagarmala, Bharatmala and Inland waterways are expected to bring some structural changes in the way in which goods are handled in India.”

The high cost of logistics is primarily due to these two reasons- mode of transportation and hidden costs. Roads are the least effective mode of transportation and using road as the primary mode of transportation leads to inefficiencies. The logistics industry in India is highly skewed towards road transport, boosting costs, as compared to rail/water transportation in developed countries. A balance needs to be established in modal transport networks to optimize logistics costs.

Tailor highlights some of the most challenging issues being faced by the logistics industry:

HIGH INVENTORIES: Firms across the world maintain high levels of inventories to account for contingencies, which proves expensive because it ties up the overall capital which carries a high cost.

SALES LOSS: Loss in sales makes a huge impact on the costs that firms have to incur, as they have to carry higher as well as suffer due to the dip in sales due to transportation interruptions.

TRANSPORTATION COST: In the Indian logistics sector, road has become the prominent mode of transport despite rail being well-organized and more efficient. The reason for this may be that rail networks are saturated and the transit times are uncertain, along with rail being inflexible in handling products of different types.

Working towards higher efficiency in logistics infrastructure

Madhyan shares, “In an economy growing at this rate with opportunities of GST just envisioned to harness, it is imperative to think about a holistic strategy. GST, to me, is just the beginning of the change and there is a lot to be done to leverage it.” Some critical components are:

A TRANSPORT PLAN TO COMPLEMENT IT: GST alone cannot grant enough flexibility for today’s logisticians. Road infrastructure needs to be upgraded as well to facilitate movement in an urban city.

CHANGING TRANSPORT LAWS: There are laws that exist in the logistics sector that prove prohibitive to efficiency and flexibility. For instance, a Karnataka registered truck is prohibited from picking up and distributing orders inside the state of Telangana.

A STRONG WAREHOUSING PLAN: The implementation of FTWZs outside metros could be a great plan if the complications around serving metros continue.

SKILL DEVELOPMENT: A strong emphasis needs to be paid to develop certain skill sets that help companies keep up with rapid technological advancements.

AVAILABILITY OF DRIVERS: A lack of drivers has the potential to undo all the efforts being made to advance the logistics sector, as they are the most important element of the entire ecosystem.
The Government aims to establish as many as 35 MMLPs in the coming years. The key in this implementation is to have them well connected with the various modes of transport. As a country, it is critical to think in the direction of building such vital infrastructure, since it is a requirement for a better tomorrow in the industry.
Talking about the crucial role of 3PLs in the entire scene, Tailor shares, “Indian logistics industry has been unorganized and fragmented for a long time. Interestingly, it is a business, which is under massive reorganization to serve the ever-increasing need of the modern businesses. Also, being touted as the country’s ‘sunshine industry’, the Indian logistics sector is readying itself to move from its present unorganized, fragmented business model to an organized, regulated structure. This clearly indicates the government’s vision to monetize the infrastructure sector. The GoI is playing a proactive role in the development of the sector, 3PLs would give the required further impetus by investing in smaller & service focused infrastructure.”

WAREHOUSING INFRASTRUCTURE: The warehousing industry in India is highly fragmented. Roughly 90% of the warehousing sector is controlled by unorganized sector. Most warehouses have an area of less than 10,000 sq. ft. Fragmented warehousing not only results in higher inventory holding, it also results in higher storage and handling losses due to lower level of mechanization. 3PLs can play a crucial role in developing modernized warehousing facilities with a view to bridge the gap between cost and efficiency of operations.

Highlighting the significance of warehousing infrastructure, ASR Prasad, Head CoE (Centre of Excellence), FSC, says, “Warehouse Infrastructure covers a broad spectrum of physical infrastructure, automation and amenities to facilitate smooth, efficient and responsive operations in the Distribution Centre (DC). In terms of the physical warehouse infrastructure, it mainly covers areas like Flooring, Insulation, Air Turns, Lighting, Roofing etc. Proper flooring is a critical factor for seamless operations over a long period of time. FSC uses FM2 standards for all its large boxes. In case of DCs with Mobile Racking, FSC specifies FM1 standards. This coupled with Hardener being incorporated into the flooring and Densification wherever required ensures longevity of the flooring.” Various additions such as the availability of wide roads on four sides of the DC, safety during transit and security equipment ensure the safety of both, labour and materials at all times. Improved visibility through appropriate lighting also aids the efficiency and power saving. Both of these are a part of FSC’s green initiatives.

Rajeev Mehta, Vice President Material Handling Division, Nilkamal Ltd., shares, “Considering the relatively lower labor costs in the Indian context, effective warehousing infra means optimization of storage density by usage of heights combined with semi automation for faster picking and sorting of goods, adaptation of palletized storage & movement within the warehouse. Clients have moved from on-ground Single level storage to palletized Highbay Racking Systems for multilevel storage with Narrow Aisle Retrieval Equipment, thereby optimizing storage density.” He adds, “Our FLC (Foldable Large Container) range, for example, is an intelligent, re-usable solution for transport and storage that gives 5X savings on reverse logistics. This system is engineered to be durable up to a 1000 usage cycles with its injection-molded lid and base and the sleeve made of Nilkamal’s revolutionary BubbleGUARD.”

Striking a growing acceptance of sustainability being a key driver of growth, Tanwar avers, “We generally see a lot of companies moving towards sustainability. More and more customers / buyers of the service are conscious of their carbon footprint and expect their service partner to take initiatives to be green complaint. Realizing the need to be carbon neutral if not negative, most logistics companies have taken initiatives to this direction, right from small steps like reusing packaging material, optimizing loads across roads, companies are investing in infrastructure that is environmentally friendly, eg., electric vehicles, installing solar panels on warehouses, higher ratio of natural lighting and ventilation, etc.”

LOGISTICS PARKS: The concept of Logistics Parks has gained increased traction in the recent years from both, public and private players. The development of a large number of SEZs or Special Economic Zones has also been a driving reason for the development of logistics centres for domestic markets as well as for trade purposes.

Offering insights on the nuances of an efficient infrastructure, Tanwar shares, “The Government of India recently kicked off a program to develop Multi-Modal Logistics Parks or MMLPs. These parks, to be set up under the Logistics Efficiency Enhancement Program, aim to reduce logistics costs, improve freight aggregation, distribution, storage, and warehousing; and create various value-added services, including labeling, packaging, tagging, and crating.”

LAST MILE DELIVERY: The growth of the e-commerce sector and omni-channel distribution has made last-mile delivery more and more relevant in the recent years. Increased package volumes and their impact on the time and space constraints are major pain points pertaining to last-mile delivery. There are several issues that may occur in the last-mile delivery processes like delayed deliveries, product damage, pilferage or product loss. 3PLs may help counter these issues with improved internal processes, positively impacting overall efficiency.
“For our Express & LMD Business, we continuously assess customer data to align our routes and the hubs and spokes to minimize transit times or build cost efficiencies as per business needs from time to time. It’s a continuous iterative process,” adds Prasad.

IT CAPABILITIES – A KEY DIFFERENTIATOR: In the recent times, technology is being used as one of the major drivers to ensure a range of efficiencies like load planning, warehouse optimization and more. Many 3PLs are making significant investments in technology that allows them to make deeper analysis into shipping operations. As the amount of data increases, shippers will require better technologies to be able to make the available information relevant.
Sounding affirmative on the scope and expanse of IT adoption, Tailor shares, “Technology can facilitate agility on several fronts, including demand planning, network optimization and real-time visibility throughout the supply chain. As underlying inputs are changed, the entire supply chain plan is refreshed right away, so plans are always current and exceptions are generated in real time as soon as any metric exceeds a set tolerance level. Plus, predictive analytics and scenario modelling capabilities help enable swift what-if analysis, which is beneficial for those looking to make changes within the supply chain.”

Union Budget 2019-20 in the making

Companies are viewing the 2019-20 union budget as a potential game changer for infrastructural improvement. Kadam shares that industries should be allowed to suggest developments and improvements to the Government, as the industries are directly impacted by the infrastructural improvements that are chalked for the coming years. More emphasis should be paid to environment-friendly budgets where solar and electric power may be used more effectively. Madhyan outlines the need of today and feels that the upcoming Budget should address these if not more:

• Changes in Transport CMVR Regulation to complement GST
  
• Workplace rights for drivers – mandatory AC cabins for current and old vehicles
  
• Standardization in truck dimensions from 720 to 50 – every truck type to have definitive length, height and width
  
• Warehousing inputs costs in GST could be another big benefit and boost to outsourcing & 3PLs
  
• FTWZs closer to the metro locations.
  

According to Prasad, “Budget 2019-20 will be the second Budget after the implementation of the Goods and Services Tax and the grant of infrastructure status by the Government of India. So, it’s quite apparent that the entire industry will be expecting many interesting policies being included during this Budget announcement. We can expect sector-specific policies to be announced and an increase in the allocation of budget for logistics infrastructure. However, we could also expect improvement in the existing infrastructure, procedures, identification of bottlenecks, gaps and introduction of technology-based interventions in the sector.”
Mehta avows, “Logistics efficiency and automation have far-reaching effects on the overall growth of the nation. We hope the 2019–20 Budget incentivizes logistics efficiency with higher FSI, single window clearances for setting up of warehouses with optimal utilization of height. As we move towards automation, the government needs to invest in education and skill development of labor. On the taxation front, we would like to see lower taxes for plastic pallets vis-à-vis wooden pallets, which do more harm to the environment than good during their production.”
Tanwar quips, “In addition to simplifying the process for GST, e-way bill and improvisation in various government agencies – commerce ministry and finance ministry, the government should focus on introducing training and skilling programs for the sector. With programs like Make in India, exponential growth in e-commerce, 3PL and transportation, we expect the country is going to see a shortage of skilled workforce across the industry. The government must come up with some very strong measures to attend to this immediate need.”

Towards positive horizons

To make the logistics infrastructure a good opportunity for private players to enter, we will need to look at the following key aspects, shares Rodrigues:

• A well-defined financing model that addresses issues like ownership, pricing, approvals etc.
  
• Strategies defined by the Government as per sectors, with timelines and backed by tax reductions if projects are completed in the stipulated timelines.
  
• A strong review system to ensure timelines are met and imposing penalties for delay.
  

Some of the above issues can be addressed by the private sector, barring a few, given the long gestation period for making these initiatives profitable. Towards enhancing efficiency, Prasad mentions these important pointers:

• In terms of automation, FSC uses suite of technologies like WMS, TMS, VTS, Put-to-light, Cross belt sorter and Voice Picking as per need of the customer at various sites.
  
• Verticalization leads to optimized space utilization, thereby increasing labor efficiency, asset utilization and inventory accuracy. The use of vertical space (racking/shelving) increases storage density and also reduces damages during internal movements.
  
• CCTV cameras facilitate a foolproof system minimizing pilferages and shrinkage cost.
  
• Proper flooring helps reduce the cost of damages to equipment (especially MHE’s wheels) and also eliminates safety issues like slipping and tripping.
  
• Thermal insulation helps in maintaining ambient temperature for the workforce to effectively operate.
  
• Tested and well-maintained fire safety equipment ensures prevention from huge losses that can occur due to fire hazards.
  

Mehta adds, “Utilization of Height increases storage density, i.e., higher quantity of material storage/square meter of Warehouse, which reduces overall infrastructure cost. This combined with automation increases overall efficiency, helping in further optimization of costs. Nilkamal’s high bay racking, narrow aisle retrieval systems enhances the overall unit of material store per square meter, thereby reducing the cost.”

Tanwar states, “Due to the multiple initiatives taken by the government, the sector is starting to see a structural shift in the way goods are handled.” Below are some of the trends that we are observing and believe are here to stay:

• Verticalization: Higher number of industry-focussed solutions and specializations.
  
• Polarization: Improvement of the overall bargaining power of the industry through improved consolidation despite the fragmented nature of the industry.
  
• Distribution: Higher implementation of the Hub and Spoke system.
  
• Multi-modal Transportation: Increased efforts by the Government to ease pressure on road transport. A seamless integration of different modes of transportation on the horizon.
  
• Standardization: With growing complexities in supply chain, we expect service providers moving towards standardization of infrastructure and processes. Eg. – Truck Sizes, Warehouse size and dimensions, uniformity in pallet sizes etc.
  

Dewan asserts, “We believe that a 5% decline in road logistics’ share of total freight volumes could lead to savings of US$ 5-7 billion. Increased penetration of technology such as track & trace, telematics, route planning and route optimization will lead to a faster turnaround time.”
Highlighting the crucial importance of private sector participation, Tanwar concludes, “India is witnessing sweeping changes in regulation and processes, this creates an opportunity for early movers and players that are able to think differently. All these changes are leading to an interesting environment for the industry, which at the end is beneficial to the end consumer who is going to see better service at a more compelling price.”