Fuel Price Rise is GOOD for Logistics Industry- Version 2

 

Consider this-

2008: Crude- USD 148, Diesel at Delhi- Rs. 35

2013: Crude- USD 99, Diesel at Delhi- Rs. 52

 

Imagine the reduced burden of subsidy on Indian Government. This also means that irrespective of how low the crude price goes- high Diesel prices are here to stay.

 

Back in 2008- I argued that this is in a way for good. This makes people think more about cost of logistics and thus helps to drive efficiency. In many ways this has happened- average size of truck capacity has gone up from standard 9 ton to 16 ton and we often see 40 ton plus vehicles.

 

This automatically means more consolidation of cargo is required to fill a truck.

 

Also, the paucity of long haul drivers will mean that it is better to pay him more, give him better comfort and thus make him driver longer. This will of course mean that he should drive larger vehicle- even a 50 tonner !!

 

These dynamics will play out over next 5 years and we will see a great impact on the way supply chains are organized.

 

 

Organized Vs. Unorganized

Indian Logistics sector is supposed to be highly unorganized and entry of MNCs and Corporate houses was supposed to change that.

What happened? A leading corporate is closing down its logistics venture, a leading retailer is rethinking its plan for asset based logistics service, a leading auto group's logistics company yet to decide on a proper software to run its operations !!

On the contrary, the "sethji" driven logistics firms are holding on their own- even expanding in some cases.

The reason to me is that "white collar" businesses found logistics too difficult a terrain. They found that there is no premium in the market for brand name, state of the art technology and most importantly "white collar" manpower.

Logistics is a fierce industry- run largely by hardened people at bottom of the corporate pyramid. It does not offer returns as say real estate does (+ve or -ve: you can't beat realty). It requires dealing with not so nice communities such as drivers, RTO, brokers.

Thus, it is now back to traditional companies- till the next wave lifts all boats up !!

Future of "Logistics"

Logistics industry world wide is relieved that oil is back to $45 (In fact, now we are speculating when it will touch $30!!). I argued some time back that oil at $147 is in a way good for the industry as it will make it more efficient and less wasteful.

So what now? Unfortunately for the industry, oil is where it is because nobody needs to fill their trucks as there is NOTHING TO MOVE !! Even in India, there has been a marked slowdown in trucking activity due to industrial slowdown.

In spite of recent reduction in diesel prices, the short term future of modern logistics is uncertain. There has been a rethink on plans to expand "modern" logistics services. The trend towards transporters becoming logistics service providers has come to a halt. The reason is auto and organized retail- the two drivers of modern logistics are in bad shape.

Both these industries require large scale movement across India and require consolidation/ consolidation services in a timely manner- the very reason for logistics service providers.

Thus, it remains to be seen how the industry responds to the downturn- whether oil is $35 or $147.

The New Gen takes over Indian Logistics

What is your image of a "Traditional Indian Transporter"? Beaten down office with a BMW parked outside, unorganized, unprofessional, cutting corners, happy to corrupt officialdom, pays pittance of a salary and disdain for technology. This image has endured for decades and even today a visit to Masjid Bunder or Bara Bazaar or Roshanara Road will confirm the same.

But a revolution is unfolding in many of these "family driven" companies. Aware of their image, educational limitations and background, the transporter community sent their children to best of business schools- typically in the US and UK (You can not pay your way into IIMs!!).

Now, this generation is ready to take over the reins of their family empire. Almost magically, every major traditional transort company is headed by someone who is 26-38 years old. They are wanting deperately to get out of the old mould and get into LOGISTICS. They are aready to spend- on good offices, on IT, on professional staff and branding. And they have the money and land- accumulated over years by very cash rich parent companies.

As this generation slowly unshackles the past- they will drive Indian logistics into modernity. The so called "unorganized' sector is getting organized- and fast. MNCs and corporate logistics players need to watch out !!

Supply Chain Visibility for Mumbai Locals

Ever seen a Mumbai railway station when a train is late? A sea of humans stretching, anxious and looking for that faint sign of yellow that may be their train. Also wondering how crowded it will be. Should they wait for next one or will that be late too and thus even more crowded?How they wish they had REAL TIME VISIBILITY into movement of all trains with crowd density numbers populated every 30 s on their mobile phones. They can then focus on reading that book or listen to that song carefree !!Supply chain visibility means- for people and industry- a life more certain, less anxious and free to do things that really matter.

WMS Vs. Warehouses

Experts and IT vendor decry lack of use of modern WMS in India. An advanced WMS can improve location management, reduce pick time and pick failure and provide "visibility" within warehouse.

Sounds great but why WMS is not a standard feature in modern India? The reason is that India does not have WAREHOUSES it has only GODOWNS.

A modern WMS requires modern warehousing practices on ground and also assumes certain scale of warehouses. Most warehouses in India are in 3000-10000 SQFT range with some exceeding 25000 SQFT. In such a place, it is not very difficult to find products manually. Also, being less productive in warehouse means adding a couple of more workers, not a terribly high barrier.

The need of the hour is VISIBILITY ACROSS WAREHOUSES. A company can not own ALL warehouses or put up their own ERP at all locations.

How to fill the gap?
The warehouse service providers can use basic but web-based WMS across warehouses. This way, all stock across locations can be captured and viewed online.This will allow decision makers to manage their supply chain better as now they know what is lying where.

For coming few years, the focus will be on visibility. As GST kicks in and local laws as well as real estate prices make it difficult to have warehouses within metros, larger warehouses will be built. These will then house multiple customers and feed into retail within a large city. Modern WMS will find utility in warehouses greater than 50,000 SQFT and more than 1000 SKUs.

Till that time, WMS vendors should focus on value adds such as WSP billing, expense control, inventory visibility and order management rather than automated, PDT driven WMS.

Fuel Price Rise is GOOD for Logistics Industry

Over 90% of goods movement in India is carried out by the unorganized sector-the much awaited shakeout and consolidation have never materialized. But the latest fuel price raise ( and many more to come with oil likely to remain in $130-160 band) can actually be the proverbial "tipping point".

Transport rates are already up 15% plus and by end of 2008 will end up 25% above December 2007 levels. It is but natural that industry will lean hard on transporters to suppress prices as much as it can.

But that may work only in short term. The need of the hour is to have larger transport companies with all India fleet, modern management, superior use of technology and collaborative approach.

But this means heavy capital infusion into vehicles, talent and technology. This is beyond transporters with less than 20 vehicles, let alone single truck operators.

The higher fuel price will lay a premium on services such as load planning, reverse load management, route optimization, variable capacity in line with demand etc.

As regular transporters will fail to offer above, they will be able to compete only by reducing margins. This will lead to many downing shutters or merging to become larger entities.

Thus, fuel price can actually do some good by placing a premium on value added services that can save even a small percentage of fuel bill.

Get ready for the shakeout- no other way at $140 crude.