Author: Juzar Mustan
India is already a heavyweight globally in the services sector. Manufacturing still makes up only a relatively small proportion of GDP—about 20 per cent compared to China’s 45 per cent—but it is growing, both in terms of domestic focus and exports. India’s container trade has been growing at around 15 per cent over the past five years. That means the logistics services business will be growing at a multiple of the box trade, probably around 20 per cent and more per year. The growth in demand presents significant opportunities for the logistics industry, as also challenges.
Looking ahead, India is going to play an increasingly important role in driving world economic trade, maybe even rivalling the phenomenal growth and transformation of China a manufacturing superpower.
India’s current trade profile provides important clues about the development of logistics industry.
The US is the biggest origin and destination market for both import and export and China is rapidly rising on both fronts. But the key fact is that a big chunk of India’s trade remains confined to textile products and apparel, low-end manufacturing, with imports naturally dominated by raw materials. A big part of the manufacturing sector has been focused on the domestic market.
In some areas, notably, apparel exports, there is vital emphasis on logistics and speed to market for the delivery of time-dependent ‘perishable’ goods. For the bulk of trade into and out of India, it is not the case; relatively inefficient, individual transport services can be cobbled together to get goods to the market. This will change. As the trade profile changes, so will the need for more reliable, seamless supply chain solutions that offer real-time visibility along the pipeline.
We have seen in other locations globally that the key driver of demand for world-class logistics services is a critical mass of MNCs whose bottomline success requires low-cost manufacturing locations, connected to highly efficient supply lines. Secondly, some pieces of hardware are either missing or not up to the global standards. Ports, for example, are for the most part choked up or not set up for increased container transportation. Road and rail connectivity is patchy and waterways, while exciting, are not yet big on the radar screen as far as volumes are concerned. Add to that a lack of capabilities or competition in some segments of the supply chain, absence of common standards for equipment and technology, and intra-provincial barriers.
These are the key factors playing on the minds of MNCs looking for alternative lower-cost sourcing locations or wanting to reduce their dependence on China and other Asian countries.
Broadly, the elements of integrated supply chain include:
* Supply chain management design
* International ocean/air transportation
* Document delivery
* Deconsolidation distribution
* Multimodal transportation
* Warehousing and DCs
* Delivery to point-of-sale
An effective logistics provider should have the expertise and global connectivity to manage cargo through an integrated network from the time it leaves the warehouse to delivery at destination to customer locations and distribution centres. Expertise in freight analysis, audit and payment, plus service-level reporting is the customer’s weapon in the everyday battle to move freight more efficiently.
Each country has its particular challenges and opportunities, when it comes to logistics.
The intra-state tax regime has been a significant issue for logistics operators along with India’s known red tape. For example, the current procedural delays in getting MTO (Multimodal Transport Operators) licences approved impedes the ability of true international players to operate and provide Indian importers and exporters with cutting-edge and competitive logistics service. And there is currently little in the way of quality DCs capable of value-add, and transport services remain fragmented.
On the positive side of the ledger there is significant money being pumped into new and improved infrastructure: the Golden Quadrilateral, airports, terminal expansion. India’s soon-to-be-expanded national highway network needs to be supplemented by an efficient rail cargo network. This will be key to lowering costs for automotive distribution, for instance.
The national tax regime that has been planned for next year will bring changes in terms of network designs for companies distributing in India. There is a sea change in the domestic distribution landscape resulting from a neutralisation of inter-state taxes.
There will be a need for larger ‘real’ DCs, as compared with the current small size and lager number of warehouses facilities mostly operated by transport companies or clearing and forwarding agents. Secondly, the consolidation of smaller warehouses means transport companies will begin to take advantage of the Pan-India coverage that will become possible. There will be some buy-out of existing clearing and forwarding agents by larger logistics companies, possibly by MNCs.
We can expect a major impact on warehousing and distribution trends: In future, suppliers and manufacturers will pick out the most central and convenient warehouses/DCs for their needs, as opposed to having one in each state/location. There will be economies of scale derived from the DC scenario post-April 2005, allowing rationalisation of logistics and supply chains. This will be increasingly important in post-textile-quota environment where efficiency and time will give Indian manufactures a crucial competitive edge.
Along with improvement of the physical aspects of logistics services, there is an ongoing need to rationalise and improve the regulatory environment.
The formation of the ‘Investment Commission’ is a huge step forward for India, breaking down some of the current barriers and creating a more favourable investment climate in India. But the government could do more to encourage the development of special economic zones by ensuring that designated zone authorities have the budget to develop these zones, instead of seeking only private companies investments, which would mean India could attract foreign investment and develop faster.
Need for integration
There is a vital need for integration so that our customers can achieve their transportation requirements while maximising the value of money spent in getting their goods to market. This requires better use of existing assets and industry cooperation, and greater competition. Companies aiming to be an integrated solutions provider have to tackle this by extending their supply chain capabilities.
Every point of service along the chain must have the capacity for cargoes to flow through efficiently—at the lowest cost and greatest velocity—or it will become a bottleneck and has a cost or time impact on customers. Having bigger ships may ease the shortage of space at sea, but shift the pressure on to the next point in the chain.
The global transportation companies of tomorrow must be able to offer highly integrated and flexible solutions that take into account the increasing cyclicality and volatility in operations across industries. This is making companies vulnerable to interruptions in their supply lines.
A weak or weakening US dollar, lack of consumer confidence in the West, surge in world oil prices, terrorism or geopolitical concerns—these are all very real factors influencing the design of supply chain solutions in today’s economically-connected world.
New technologies such as RFID, standardised data processing formats and new supply chain tools and e-commerce capabilities will, undoubtedly, open up new ways to mange movement and storage of goods
(Juzar Mustan is Managing Director of APL Logistics India. The above article is excerpted from his presentation ‘Distribution and Supply Chain Logistics’ at the Indian Ports & Shipping 2004: Port Connectivity in India, held in Mumbai.)