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Collaboration to Transform Logistics: From Cost-to-country (CTC) to Benefit-to Country (BTC)

LOGISTICS SECTOR: HIGH CTC 

Contrary to popular perception, costs of transporting goods from production sites to the end consumer are significant compared to producing them. The logistics sector costs accounted for 14% India’s GDP and amounted to USD244 billion in 2013-141 which compares unfavourably to developed countries such as USA where logistics cost stand at 9% of GDP. Businesses in India spend anywhere from 5% to 25% of their sales on logistics.

 

INADEQUATE INFRASTRUCTURE…

India ranks 54th (out of 160 countries) on the World Bank Logistics Performance Index (LPI)2  2014 with a LPI score of 3.08 (Rank 1 Germany with LPI score of 4.123 ).  The existing transport infrastructure in the country is plagued with over loading/excessive capacity utilization, poor quality, multiplicity of taxes, lack of use of multi-modal logistics solutions etc. The table below illustrates the key gaps with each of the existing modes of freight transport in India. 

TABLE 1: Comparison of different modes of freight transport

…LEADING TO HIGH FINANCIAL AND ENVIRONMENTAL COSTS

Existing Inefficiencies in logistics and the current modal mix of freight transport is not only a cause of concern in terms of financial costs but also environmental costs. The transport sector in India accounts for 7.5% of the GHG emissions (142 million tons of CO2 eq.) and is the largest emitter of GHG after energy and agriculture.

TABLE 2: Financial And Environmental Cost Comparison Of Different Modes Of Freight Transport In India
 
Even though road is the most inefficient mode of freight transport both in terms of cost and time taken, it accounts for the highest share (~62%) in modal mix of India’s freight sector and is also responsible for a disproportionately high level of emissions (87% of total transport sector emissions).
 
 
NEED TO MOVE TO SUSTAINABLE LOGISTICS TO MEET THE 400% EXPECTED INCREASE IN FREIGHT TRANSPORTATION DEMAND
 
Considering India’s growth trajectory, energy demand is expected to increase by a factor of 4 over the next 20 years; subsequently, domestic coal production is expected to increase by about 2.5 times thereby tremendously increasing the demand for transportation. Freight transport demand is expected to increase 400% in the next 20 years, from 2000btkm in 2011-12 to 10,500-13,000 btkm12  in 2032.
 
 
 
SUSTAINABLE LOGISTICS = IMPROVED BTC 
 
The objective of sustainable logistics is to effectively reduce the environmental impact of logistics activities while improving efficiency and decreasing cost. It implies internalizing the externalities associated with logistics such as cost to environment (caused by air pollution, waste, water pollution etc) as well as society (accidents, health etc) while choosing the lowest cost option. 
 
Sustainable logistics implies working on improving effectiveness of multiple elements such as transportation and warehousing related infrastructure, distribution model and route optimization, increasing efficiency and integration of processes, control and systems, developing new technology related to IT as well as fuel and modes of freight transport (trucks, rail, airplanes, ships etc). The logistics sector is driven by both, Government and private sector and requires both segments to act in order to increase its sustainability quotient. Some of the key initiatives/interventions required in each of these elements are indicated below.
 
Infrastructure
 
Government expenditure in transport i.e railways, roads  and bridges, and other transport, is expected to increase from Rs 2.2 trillion ($45 billion) in 2011-12 to Rs 3.8 trillion ($70 billion) during the 12th Plan, Rs 6.3 trillion ($110 billion) in the 13th Plan and rising to about Rs 14 trillion ($250 billion) in the 15th Plan period13.  The core area of focus for this investment needs to be:
  • The proposed network of dedicated freight corridors needs to be completed on priority, with the 1839km long Eastern Freight Corridor (Ludhiana (Punjab) – Dankuni (West Bengal14)) being accorded maximum importance. 
  • Port Infrastructure should be enhanced – both in terms of port-side infrastructure (sea locks, port basins, material handling infrastructure etc.) as well as creation of new ports (at least 4-6 mega ports) to increase the number of origin-destination pairs and decrease the burden on the existing 13 major ports and 187 notified minor and intermediate ports (4 out of 12 major ports had more than 100% capacity utilization rates in 2011-1215). Interconnectivity between ports and railway stations needs to be improved significantly.
  • Logistics Parks need to be established in order to facilitate use of multi-modal freight transport and improve logistics efficiency in terms of traffic handling, containerization, shipment sorting, warehousing etc. These parks can be at major points of the DFCs and/or near major industrial clusters. 
  • Containerisation should also be promoted in order to boost coastal shipping in India. Additions to the existing 41 Exim Terminals16 need to be completed in a fast and effective manner.  
  • Warehousing which accounts for almost 20% of the logistics cost is predominantly an unorganized sector in India. Both government and private players (3PL and 4PL) need to work towards increasing the warehousing infrastructure in a sustainable manner. This includes:

-Position warehouses in a more optimal geographic location based on distribution needs rather than tax considerations after implementation of GST. 

-Efficient layout of warehouses in order to have effective logistics for commodities

-Use of ‘green’ construction materials in new warehouses such as recycled concrete, steel, asphalt, fly-ash bricks etc.

-Reduce energy consumption within warehouse by using maximum day lighting energy efficient lighting fixtures

 
Route and Network optimization:
  • Distance travelled by a product should be minimized in the supply chain
  • Empty miles/empty runs need to reduced to the maximum possible extent
  • Distribution networks to be formulated and managed effectively to ensure optimal load (and therefore capacity utilization of the transport mode) and optimal speed (decreased through re-routing and/or multiple stoppage points).
 
Technology
  • Resource use should be reduced through effective use of ICT to measure the environmental impact (GHG emissions), integrate existing systems, increasing efficiency of logistics operations. 
  • RFID (Radio Frequency Identification Device) technology need to be adopted to monitor and track goods and help in creating more effective supply chain management strategies. 
  • Improved vehicle technology (both in terms of components and fuel) need to be adopted to increase efficiency and reduce costs and environmental impact. Tighter emission control norms should be enacted. Use of blended bio-fuels may also be explored if feasible.
  • Electronic tolls and smart cards for tax collection could be explored as options for improving the time efficacy of the road freight sector.
 
Product and packaging
  • Reduced packaging, light-weight packaging, and ‘green (recyclable or biodegradable)’ material packaging should be encouraged to reduce the impact on environment. 

Process control and systems

  • Simpler and faster processes need to be adopted at ports to reduce turnaround and berthing time of ships and thereby make coastal shipping more cost effective and competitive. 15-23 containers are handled per hour on Indian ports on an average compared to 30 in Singapore.
  • Supply chain processes and systems both within the companies as well as for co-ordination between logistics service providers need to be improved.

While there are different entities recognizing the need and working towards adoption of sustainable logistics, it will remain a piece meal effort till there is extensive collaboration and co-ordination amongst them. Collaboration should not only be limited to that between public and private sector but also within the private sector (industry, logistics service provider and technology providers). At the government level, logistics (or at least transportation) should be viewed by a single authority instead multiple ministries (Road transport and Highways, Shipping, Railways, Civil Aviation, Water Resources) leading to lack of holistic policy outlook towards the freight sector. 

 

In the private sector also, initiatives, technologies and practices that have helped balance financial, environmental and social concerns should be integrated and made accessible to the stakeholders.  Industry and policy makers need to work together in a collaborative and co-ordinated model in order to develop the sustainable logistics sector in India.

 
Opportunities for sustainable logistics initiatives are increasing in India, however these are predicated on progressive increase in use of rail and coastal shipping, shift from non-renewable to renewable sources of energy, increased attitudinal and mind set change of the users of logistics services as well as the service providers. The onus is on the private sector to act on its own and improve the sustainability quotient of the logistic sector in India.
 
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[1] Logistics cost =14% of GDP (12-15% as per NTDPC report), GDP (2013-14 as per planning commission = Rs 10472807 cr). 1 USD= Rs 60.

[2] PI analyses countries on 6 components: efficiency of customs, infrastructure, ease of arranging shipments, quality of logistics services, tracking and tracing and timeliness

[3] LPI score = 1 is the lowest and 5 the highest

[4]India Transport Report, National Transport Development Policy Committee (NTDPC)

[5] India Transport Report, National Transport Development Policy Committee (NTDPC)

[6] India Transport Report, National Transport Development Policy Committee (NTDPC)

[7] For 2011-12, India Transport Report, National Transport Development Policy Committee (NTDPC)
[9] Cost of Inland waterways freight

[10] McKinsey logistics infrastructure 2020 report

[11] IWAI

[12] Btkm – billion tonnes Kilometres 
[13] India Transport Report, National Transport Development Policy Committee (NTDPC)

[15] India Transport Report, National Transport Development Policy Committee (NTDPC)