In an interview with the Indian Economic Times [03/03/12] Marc Llistosella, CEO of Daimler Commercial Vehicles (India), made it clear. His company would support a hike in diesel prices and an increase in excise duties on diesel vehicles. In other words, India’s logistics infrastructure is poor; policy measures to remove interstate taxes and create a single internal market are log jammed and post-harvest losses are over 40% on the route to market. The list goes on. The hike in diesel will help to bring matters to a head. India has to sort out its supply chains or risk losing out to global competitors. Let’s look at this in terms of costs.
Indian transport costs at 13 per cent of GDP are higher than the USA, 9% GDP and the EU, 11% [2010 figures]. Mind you, China’s figures are far higher but this is distorted by the sheer scale of their manufacturing industry. It costs more on transport to be the factory than the office of the world. The real numbers come from each individual supply chain in its proper context benchmarked against peers.
It is not as simple as saying that Indian logistics costs are too high. Whilst many studies talk of waste in the supply chain; walk around the streets and hawkers are not selling rotten fruit or vegetables. Go to Temples and see the array of fresh flowers and go to farmers markets to see what is available. Transport in India works – after a fashion. It is the same with traditional retail. Few modern retail models can match the home delivery and credit services that are out there. But India is entering a different phase. Even the kirana stores can benefit from better logistics. Look at those that now benefit from cash and carries – their very own regional distribution hubs! Logistics and supply chains are not just about big business.
For a moment let’s imagine that all the players are the same but, we change a few of the rules for a better game – see how cricket overtook hockey and now, how hockey is fighting back. No one can stand still. In India, policy – the rules of the game – plays a big role in success or failure. The delays on the GST (Goods & Services Tax – otherwise known as VAT) tax are costing the country badly. GST is a long overdue change in the rules that will level the playing field. This is India’s most far-reaching tax reform and aims to integrate the country into a common market by dismantling fiscal barriers between states.
A study published last year by the trade body the Associated Chambers of Commerce and Industry of India concluded that a national GST system could increase economic growth in India by 1.4% to 1.7% with an annual revenue boost of INR1.2 trillion (USD24.4bn) projected. The National Council of Applied Economic Research concurs with these estimates.
These are big numbers but everyone needs to understand what this means on the ground. A Bollywood movie could make real drama out of the tales of corruption and delays at State border crossings. It is estimated that trucking operations in India alone pay $5 billion in bribes annually and the queues there is a loss of up to 45% of time of trucks as they move goods across the country at state borders. And businesses galore highlight the crazy position where they are forced to have warehouses in every state to optimise their tax position when a warehouse network that ignored the political map and located warehouses according to networking logic would cut costs and improve operating efficiency overnight. Now, business has to carry buffer stocks and higher inventories throughout the system. For example, the average inventory level of grocery stores is 45 days of sales in India, compared to a range of 11 to 22 days in developed countries.
If we look at the import and export position, global fuel prices are making this even worse. Shipping lines have slowed ships down to reduce fuel consumption and this puts even more pressure on port turnaround and, the last mile to and from the port to move goods is critical. Establishing standards across the country is difficult because of the fragmentation of the industry: 70 per cent of trucks are 2.9 million trucks are owned by 500,000 operators the rest by single operators.
Policy and Governance are costing India badly. The governing coalition spends billions of dollars – more than 2% of its gross domestic product – on helping the poor. But a World Bank report (2011) says aid programmes are beset by corruption, bad administration and under-payments. As an example, the report cites grain: only 40% of grain handed out for the poor reaches its intended target. This is quite apart from the inefficiencies in the end-to-end supply chain.
Look closely at the movements on the roads and the inefficiencies are clear. Trucks can manage no more than 250 kms per day – versus over 600 kms elsewhere. This is not surprising with 38% of the National Highways single lane only. Then, there are the trucks themselves: the majority are over 10 years old and this means high fuel consumption and, over 90% are single or double axle trucks only. And this contributes significantly to accidents caused by a combination of poor roads and overloading – 10 times more accidents are caused by this than in the EU. In the USA, the crash of a Retail truck can mean over $1 million in insurance costs.
Stop and watch a warehouse for a few hours. You will see the inefficiency caused by the different heights of the rear doors of the trucks and what this means at loading bays. Have a look at the pallets – there are no standard sizes in use and this can cause havoc with any move to racking systems. I have heard people say that racking is too expensive – but they have not factored in the increasing real estate costs that will force cubic utilisation over footprint fast. Remember, logistics common sense says that inventory is waste it is not an asset.
Then, look even closer at the boxes on the pallets. I spent an afternoon recently taking photographs in a warehouse. There are too many examples of packaging so thin that the boxes cannot last long and fail to protect the products they are supposed to be carrying. Far too many boxes are 5 ply when more robust packaging would reduce waste – 9 ply is standard in the UK where poor packaging results in product being turned away at the gate!
Look even closer at what happens and then refer back to International Standards – after all, India wants to build exports and will have to do this. World class food factories do not allow wooden pallets (they carry termites AND, are a significant fire risk leading to high insurance costs) or non-standard size pallets to cross the threshold! India could do with leapfrog thinking and move to innovate on pallets.
Then have a look at Agriculture. There are many areas to look at but one major policy decision that seems to be moving is the introduction of electronic warehouse receipts. Currently, warehouse receipts are issued in paper form. The electronic facility will help create more options and lead to better price recovery for the farmer – this is all part of moves to cut out the intermediaries and reduce waste in the supply chain. The same goes for moves to speed up registration and accreditation for temperature controlled warehouses like cold storage. Of this more later.
Indian waste levels are unacceptable. It is said that over 40 per cent of the harvest is wasted on the route to market. Look closely and a fair bit of this is recovered in terms of other uses such as cattle fodder or, compost. Look at this another way and the point is that premium prices happen when the product reaches market in good condition and as fast as possible. This is the real waste – the failure to add value and high levels of opportunity cost. Don’t forget, Brazil moves 70 per cent of the harvest to Agri Processing and India 3 per cent.
Note. Food is lost or wasted throughout the supply chain, from field to fork. A point that needs to be made here is that there is significantly MORE waste in developed countries – but this occurs at the consumer level. See the Post on this Blog about UK waste where food is discarded that is perfectly suitable for human consumption – the point being that more added value activities have occurred. I mention this to be realistic but it does not remove the fact that Food security is a major concern in large parts of the developing world. Food production must clearly increase significantly to meet the future demands of an increasing and more affluent world population. The supply chain will be the key to this – no doubt.
Of course all of the above has to be placed in its context. And yet, that context should not be left at “India is different”. India has to compete at the world logistics top table IF India wants inclusive and sustainable growth. There is a real need to understand all key supply chains and look for improvements in:
- Infrastructure. This means hardware (roads; ports etc) and in particular the last mile that connects rural markets to inclusive growth as well as ports to the hinterland. Vested interests are bottlenecks in themselves. We need to consider:
– Hard: Ports (is the last mile thought through); Roads (how will they cope with the monsoon);
– Intermediate infrastructure: Warehousing through to truck fleets.
– Connectivity: eChoupal and now smart phones can deliver information on harvests; prices as well as aggregating demand and supply.
- Logistics and Supply Chain Flows. This means the physical movement of goods; information and connectivity and, cash. Constraints need to be understood and dealt with. Manual handling as well as state-of-the-art equipment has its place; the use of mobiles for the aggregation of demand as well as the transmission of funds and, the application of low-capex cost cloud computing.
- Target markets. India is a vast country with, as Amartya Sen puts it, some places like Sub Saharan Africa, others like California. Then, there is the urban / rural split and within urban all sorts of variations from Metros through to various tiers. Each supply chain has to be aware of these different contexts.
- Packaging and design. Shelf ready packaging moving from harvest to the shelf are being used and more needs to be done to develop this. Equally, packaging has to be coordinated from the individual item through to pallet size. A failure to grasp this may make economies per unit but not of scale. Damages are a problem all along the supply chain.
- Life time costs. Mercedes estimate that for a truck, the initial price is no more than 15 per cent of total life time cost. This thinking needs to be factored in for all asset purchases and must extend to the availability of spares and effective maintenance.
- Skills. Everything we have highlighted so far comes down to people. At one level, it is about investing in equipment AND the skills to optimise their use. At another level it is all about the behaviours that go with it. This means setting up simple measures (Key Performance or Value Indicators) to understand performance and monitor over time so that improvements and their impacts can be measured; tracking accidents at work and dealing with their causes. It means the layout of factories and the implementation of practices that improve performance. More on this later.
- Sustainability. We must guard against seeing this as yet another silo – but a green one – sitting apart from the rest of the business model. This is not CSR – this is a transformation of the way of doing business. Any business needs to look at resources used to make product and, the waste produced with every effort used to reduce, reuse and recycle waste. India has a unique opportunity to use the green agenda as a catalyst for leap frog technologies. We have cited issues all along the supply chain that can benefit from a sustainability perspective: standardisation from GST to trucks; pallets to boxes will make a difference and skills can add even more value to the green effort. But the big issues are energy mix; waste and water. This is not just the use of water in the process but the embedded water in the product itself. More on this later.
- Jugaad. I have championed the Indian “can do” mentality typified in this word but strengths can become weaknesses. Just muddling through will not beat right first time and, using old equipment that breaks down because it is overloaded with burst boxes on highly inflammable pallets crawling with termites is not the way to impress the export markets. Jugaad is a mental attitude it doesn’t have to be the only club in the golf bag.
Marc Listosella is right. India needs the wake up call on logistics waste and inefficiencies and the prize is big. If Policy can make things happen then, logistics flows can be made better, cheaper and faster for the common good to transform livelihoods and ensure that growth is sustainable. If there are further delays on GST, companies will continue to build more warehouses than they need and postpone other investments that will improve performance. Cricketers don’t go into bat without the right equipment and time in the nets. So, why do businesses persist in sending their workers into bat without the right safety equipment and performance guidelines when the benefits of right first time are so clear. And why is the government dragging its heals on policies, like GSA, that will improve the game?