The current pandemic impact clearly shows that the long-awaited structural reforms to make logistics a formal, streamlined sector have become more necessary than ever. The pandemic has exacerbated the sector’s long-term problems, write Dr. K. Ganesh, and Ramanath KB, Consultants, India.
THE COVID-19 pandemic continues to hamper business operations in every sector an every part of India. Logistics is hit hard, and without logistics, only cottage industries can function—and not even all of them. So far, the pace of recovery is not entirely clear. It is predicted that India’s logistics sector would expand at a CAGR of more than 10%, from $200 billion in early 2020 to at least $320 billion in 2025. The sector may still reach this level in four years’ time, but that is more uncertain now. The picture is constantly evolving, but now, as always, there are things that we know and things that we do not know.
The known unknowns, such as the pace of the recovery, will become less opaque over time. No doubt the sector also faces unknown unknowns, but that is always true, so that should not prevent Indian companies from assessing the problems and acting to correct them.
THE IMPACT OF COVID-19 AND THE NEAR-TERM PROGNOSIS
One thing we do know is the pandemic’s immediate impact on the key functions of the logistics sector: warehousing and transportation. Times are still hard for both these functions. In the near term, estimating demand, allocating capacity, and distributing products across sectors and regions are difficult challenges.
Even in good times, very sophisticated and difficult inventory management decisions are needed to manage inventory in warehouses effectively. Ordering and maintaining appropriate quantities at warehouses is harder than ever because traditional forecasting techniques are now ineffective: experienced buyers oversee and make decisions to purchase materials, but that experience now counts for less in a radically changed country and world. Given these strong headwinds, most companies should consider shrinking their product mix to allocate warehousing to the most essential SKUs. Producers of nonessentials, in particular, should continue to minimize their inventories, which significantly increase their holding costs and clog up valuable warehouse space. But, for essential items, the ongoing uncertainty around supply means that it might make more sense for producers to keep inventories high than to risk stock-outs. In any case, just-in-time approaches to scheduling may not work, at least in the near future.
Meanwhile, India’s warehousing industry may enjoy higher demand as producers shift their focus away from China and towards other Asian countries. But one thing is certain: warehouses must reduce the amount of human contact involved in handling materials, so demand for innovative packaging and materials-handling processes is rising throughout the supply chain. Companies that lease space in warehouses demand more streamlined and automated processes. Those that have their own facilities must implement such processes as well.
Trucks dominate transportation in India’s logistics sector. However, COVID-19 has restricted free flow of goods by road across India, increasing the use of suboptimal routes. Meanwhile, a shortage of drivers has increased truck-rental costs by a staggering 56% to 74%. For these and other reasons, logistics functions must remain open to all options during and after the pandemic, so they will have to act nimbly. In the near term, strategically choosing when and how to use LTLs, FTLs and milk runs is one of the key decisions that organizations need to make efficiently – the principles that guide these decisions in the pre- COVID-19 era have now been rendered invalid.
One saving grace of the current crisis is that it has given India its best opportunity to shift towards multimodal transport. The government could encourage the transport of aggregated assortments of goods by rail not only to promote cheaper, faster multimodal freight transport but also to ease the pressure on road networks.
The top three external pain points in logistics function are the small number of formal transport companies that can use efficient technologies, India’s overstrained highways, and a severe shortage of drivers. Although the pandemic has exacerbated all these problems, individual companies can do relatively little to solve them.
Companies can do much more about the top internal pain points identified: the failure of most logistics functions to use best practices, as well as the insufficient degree of coordination and collaboration among the materials-management, warehousing, and transport functions. Overcoming these two problems could help India’s economy, and the companies within it, to recover from the pandemic and prosper in the next normal. The solutions involve not only technology but also organizational structure and practices.
TECHNOLOGICAL CHALLENGES, OPPORTUNITIES, AND STRUCTURAL REFORMS
For as we have seen, COVID-19 has devastatingly revealed the weaknesses and inefficiencies of India’s current logistics system. Only a shift to more formal, technologically capable organizations will allow the sector to meet the challenges yet to come. The pandemic has made agility, and demand for technological sophistication, a necessity for survival, not just a competitive advantage. It is estimated that advanced technology could not only reduce logistics costs by as much as 25% but also help companies offer better service and free up internal capacity for other purposes. But almost all the small, informal logistics players in the country’s supply chains (for instance, the firms that operate 75% of India’s trucks) cannot adapt to rapid technological change. Even many of the larger logistics companies will find it a challenge. All these organizations, large and small, face serious and possibly mortal threats. Many technologies are transforming logistics.
Most of them are already in use around the world and fairly mature. These are the most important ones:
Integrated logistics platforms are online marketplaces where companies buy and sell logistics services. Telematics helps companies monitor vehicles and cargo digitally, in real time.
Digital logistics control towers serve as nerve centers for supply chain operations by capturing data at all levels, providing end-to-end visibility, and facilitating strategic decision making.
Blockchain helps companies develop systems to verify and rate the transactions that truckers and shippers complete, so manufacturers can generate smart contracts that automatically pay vendors when shipments reach their destinations.
Cognitive logistics process automation uses artificial intelligence to automate responses to changes in logistics networks by processing a range of data on the status, health, and performance of supply chains and giving stakeholders real-time recommendations.
Real-time re-planning makes supply chains visible from end to end and fully integrates them into IT systems.
Augmented reality devices superimpose computerized data on the user’s field of vision, improving pickup rates and reducing picking errors.
Exoskeletons—robotic clothes— increase the physical capacity of their users, cut the number of injuries, and raise productivity.
Autonomous mobile robots (AMRs) navigate through warehouses and move racks to pickers, pick and move items from baskets, deliver shipments to packers, and the like. AMRs can reroute themselves dynamically when they meet obstacles; the more common automated guided vehicles (AGVs) cannot.
Some solutions do not necessarily involve high tech. To give consumers confidence in the sector, for example, companies must change the way they handle materials, to ensure minimal contact by loading staff and truck drivers. Training and monitoring the loading staff will be relatively easy. Educating drivers to follow safety protocols will be a lot harder, since most of them, in this predominantly informal sector, are uneducated and digitally illiterate. Digital innovations might therefore be necessary to monitor drivers, and that could be a problem for smaller firms.