Recent Development in Logistics - Case Study Example

21-08-2006. Introduction to Freight Transport and Logistics Q. No Compare & contrast recent development in logistic in either North America or Europe with one of the other parts of the world. Ans. Logistics is one of the oldest and also the newest activities of business management. It involves combining diverse functions and services providers who may be culturally or objectively different. Logistics is about moving materials, information and funds from one business to another or from a business to the consumer. It is an important part of the business economic system and is a major global economic activity. In fact 10-15% of the product costs is logistics related. Worldwide logistics constitutes about $2 trillion a year. For any country the logistics cost is estimated between 9 to 20% of the GDP. Basically the Greeks defined logistics as "the science of Correct reasoning by means of mathematics". The first modern use of the term was in military to identify the process of planning and coordinating the movement of army and weapon support systems. Good logistics brings out the ability to move faster and accurately to the battlefront. If one applies to the same to the business organization, it is one's ability to reach the product to the consumer at the right time, right place, and right quantity and at lowest cost. With the increasing competition in the market place, managements starts focusing on customer services in the early 1950's in the developed markets such as Europe and the U.S. In the late 1960's some of the logistics concepts were tested. Following oil crises is 1976 and the concepts of Just-in-time (JIT) in manufacturing. Customer servicing standards were given more importance and new integrated logistics models and solutions were born. The emergence of organized distribution system by departmental stores and super fast courier services, organizations gave a boost to logistics concepts and strategies. Today all businesses are looking for seamless transaction systems to coordinate their information and material requirements along with the value chain. Michel Porter in his famous book "Competitive advantage" has spoken of the value chain approach and emphasized logistics as one of the most important tools for competitive advantage. The various process and elements that are part of logistics as a discipline are: 1. Inbound logistics: Purchasing, inbound transportation, inventory management. 2. Manufacturing: Production, planning systems, Machine scheduling system 3. Outbound logistics: Order booking processes, Distribution management, outbound Transportation and warehousing management systems. Logistics is key to success in new millennium and going through visible changes nowadays. Various new concepts and applications are taking place in all parts of the world and tried by various organizations. Almost everyone agrees that companies must functions in a global market place, there is far less agreement on how this context translate when it comes to managing the supply chain. Although companies may think globally in scope, when it comes down to actual tactical operations there's a lot of local blending going on. There are certain elements that are required to manage any supply chain regardless of whether it's domestic or global. Things like visibility, technology and flexibility are basic ingredients that need to be incorporated seamlessly in order for the efficient supply chain Management. Now here we compare and contrast between North America and India because India is a growing market and becoming one of the fastest growing economics .The concept of logistics in North America is one of the well known concept by any standard. North American trade market in one of the largest blocks in the world. India's logistics market is approximately around $15 billion, which is less than 0.5% of the total North America logistics markets. The volume of logistics market itself shows that North America logistics market is approaching towards higher side whereas Indian logistics market is still in its initial stages. India's logistics market is estimated to be Rs. 260,000 crores which constitutes around 13% of the GDP where as North America except Mexico have lower logistics cost around 6% of the GDP. A reduction in 1% point logistics cost means saving of 4.8 billion for India, which shows the importance of GDP of the sector. Reduction in logistics cost in NA from 17% to 8% in the last 25 years was due to combination of technology adoption, better infrastructure, application of newer concepts and techniques, Govt. infrastructure investments and high growth, asset light outsourcing, newer and innovative business practices various integrated services and adoption to complete logistics solutions to provide better services to the customers. Technology, the crucial factor for logistics. It speeds the supply chain. Technology is becoming more aligned as standards are coming into place that allows different system to communicate and share information. This is an issue that companies must address whether they operate in any part of the world. In North America, the logistic industry has achieved a relatively high degree of sophistication in terms of technology and infrastructure, which is not necessarily matched in other countries like India or any part of the world. Electronic information flow for most industries in North America has reached a high level of maturity. That's less true when we move around India. In country like India information flow is not well established which ultimately hinders the supply chain and customers can't be sure what they shall be receiving until the shipment actually arrives. This also increases the risk. Due to advancement in technology infrastructure such as Roads/Parts/Air Cargo/Rail attains higher level of sophistication and speed and reliability. This increase the efficiency of the logistics system as a whole warehouse and inventory management in completely developed and technology added to its efficiency. Due to technology, the whole system has been integrated and information flow between the system is speedy and smooth in North America where as in India where logistics is in nascent stage, application of technology is minimum and due to this logistics cost around 13% of the GDP which is much higher than in North America which is around 7% of the GDP. In India logistics management become complex in nature with about 10 million outlets to cater the needs of more than I billion people use of traditional technologies and cater to stand alone services like transportation, warehousing, clearing and forwarding adds to problem. There is tremendous scope to upgrade technology, integrate the supply chain, improve productivity levels and bring down operating costs. Any technology that can improve transportation operations will be a great boon to the economy both directly and indirectly with opportunity for reduction in cost upto 1% or more. In transportation, which is the most vital part of logistics, India cannot be compared with North America on various grounds. In North America & India most of the freight has been carried through roads. If we compare the roads condition in North America and India we get for more difference. Though India has road length of 3,315,231 k.m. in which main roads are 6,65,231 km. The density of India's highway network at 0.66 km. of highway per sq. km. of land is similar to that of U.S. (0.65 km.) but most of the highways in India are narrow, congested and have poor surface quality. Only 20% of the surfaced roads are in good condition where in North America 80% of the surfaced road are in good condition. In India 2% of the highways are four lane, 34% are two lanes and 64% are single lanes. As far as national highways are concerned in India 5% of their length in four lanes, 80% are two lanes and 15% continues to be single lane. Similarly, the technology used for trucks and other carriers are far older and mostly trucks are single axle whether in North America the technological development in heavy automobile industry in far more superior. Even though India has achieved a highly competitive freight rates compared to North America, which is around 0.019- to 0.027 dollars per ton per km. where as in North America it is around 0.025 to 0.050 dollars per ton per km., which is due to highly competitive, and market driven transportation industry. Globally inventory management and warehousing management becomes highly professional and competitive use of information technologies revolutionalized the situation. In North America the concepts of just-in-time inventory management reduced the inventory and carrying costs. Flexibility in logistics is the key words. In North America all the concepts and theories has been applied to the good use which results in reducing the cost of logistics in the cost of the product. In North America adoption to new technologies such as inter model freight containers, computerized system and information technologies, bar coding, Radio frequency identification tags and satellite communication by shippers and carriers significantly improved the productivity and reliability. The second most important development in logistics is out sourcing. Outsourcing the supply chain function to play globally is one of the most essential parts of logistics. To penetrate globally logistics providers using third party logistic (3PL). In the North American Market Third Party Outsourcing (3PL) is much more penetrated and approximately at 10% where as in Indian market 3PL sector represent only 3% of the total logistics market. A core reason for this low penetration in the Indian market is low efficiency. In North America logistics providers move towards more integrated services. Companies to expand their operations technological capabilities and their services to meet the increasing number and complexity of demands by their costumers. 3PL is a form of outsourcing supply chain management so that the processor can concentrate on in-plant operations and even reduce costs. As businesses diversify and their supply chain becomes increasing complex and fragile, more and more of them are out sourcing their logistics, in order to ensure economical reliable and efficient deliveries from the suppliers and to the market. It has become almost a maxim of commerce that a 3PL should not be merely a contractor but in much sense almost a business partner. In recent years, cooperation between manufacturers, shippers and logistics service providers has become long-term in nature and has been combined with a high level of integration in the organizational structures and informatics a development that is being termed as 4PL. Another trend is increasingly require contract logistics providers to be able to supply a fuller range of services including the traditional outsourced 2nd tier functions such as warehousing and freight forwarding. These services are provided by what are being called "Lead Logistics providers" which provide full supply chain management from sourcing to consumption, providing consultancy services, re- engineering and supply chain as well as executing operations. In North America the newer concepts of integrated logistics management and now the supply chain management has been established whereas in India these concepts are now just taking shapes. Relationships with customers are deepening as logistics providers taking an increasingly active role in the management of supply chain. Providers have to interface with and understand all parts of their customers supply chain. In North America, where capacity in still an issue and stronger relationships can help ensure quality and supply. It appears that Global and Domestic supply chain are coming closer together. Extending supply chain beyond borders exposes supply chain to greater variables. These variables include border crossing, Multiple Modes of transportation and multiple hands off, different govt. System, technological and security issues. Each variable presents opportunities for errors that can stall the entire supply chain. 3PL can play a key role in helping companies to manage and mitigate the risks that exists in both global and domestic supply chain by developing strategic supply chain solutions. Though newer concepts and techniques has already taken place in North America. Indian market is new to the changes in the logistics management and relatively newer concept of supply change management is taking place very fast in India. The newer concepts are being adopted by various MNC's as well as Indian companies. Even then at the infrastructure level and technological level much has to be done in North America and even more has to be done in India. Due to cheap labour and highly technical manpower outsourcing from various parts of the work and even from North America has been done to India and in future it will increase. Therefore logistics management has to play very vital role in that development. In North America logistics industry is also facing some bottlenecks to develop. Specifically in North America transportation industry is facing shortage of both equipments and operators. This is compounded even further by deficiencies in the road and rail infrastructure. As Global supply chain management poses different kind of problems such as security, Tax & Tariffs, partnership with local experts, cultural differences, technological ability and capabilities, risk management etc. Even congestions on Road & Traffic, emergencies, energy and environmental issues, financial issues, Human and intellectual capital, infrastructure, institutions are the main issues which North American logistics managers are facing today. Similarly Indian logistics mangers are facing little bit different problem and very basic issues to be resolved here. The main bottleneck is being infrastructure. No proper roads are one of the main issues to be addressed immediately. Shortage of financiers in infrastructure sector and almost no FDI in Roads is the main bottleneck in improving logistics in India. Though manpower is in abundance in India and economy of India is growing at the rate of 6-7% average for the last 10 years. So there is an opportunity for growth in Indian market for logistics. Now shippers have an advantage of lower transportation cost, and to outsource production in India because of it lower labour cost. Implementation of the concepts such as JIT inventory management to reduced cost of holding inventory. The speed of transportation may reduce cost in transition, which ultimately support larger, more effective, regional warehouse and reduce distribution costs. These changes has hastened a broad shift in business logistics practices from manufacture to supply or inventory based logistics. These concepts are taking place in India also. But due to non-integrated logistics practices in India, It has not much effect on costs. In this way, if we compare North America with India, the investment wise as well as quantity wise North America is one of the largest blocks in world in logistics and supply chain management where as in India it is just the starting point. Presently the investment in percentage terms may be high but it needs much-much more. In North America logistics management has achieved its considerable position but in India it has to move forward quite a long distance. For logistics, infrastructure, technology use, and policy always play a bigger role. As far as North America is concerned from Jan 1, 1994 NAFTA is working and the policy and administrative barrier are diminishing. Technology of highest standard available is being used may it be information flow, location finding, Automobile, road construction, freight handling so on. Information technology and computers are easily be seen and used. Infrastructure facilities have to be upgraded marginally and developed according to the growth. In contrast India is a growing market having lots of scope to grow and outsourced due to its low labour cost, technical & English friendly environment and work force. Infrastructure in India is one of the grey areas needed to improve. Policy are not uniform and vary state to state create problem. Govt. Rules and Regulations to be amended accordingly. Technological adoption in the area of transportation is what immediately needed. Integration of all services and new concepts is to be applied here also so that logistics in India may improve and have major impact on business. Q. No.2 Assess the future of Road freight Transport in one country of your choice. Ans. Indian logistics market is of 15 billion and growing @ 7% per annum and announced plans for investment of $17 billion in transport infrastructure sector between 2006-2010, which is 23% of the annual logistics market. The cost associated with moving cargo in India are some of the highest in the world at 11% of the landed cost compared to the global average of 6%. It is virtually inconceivable in today's economy for a organization to function without the aid of transportation. Transportation is an essential and a major sub function of logistics that created time and place utility in goods. In fact the backbone of the entire supply chain is the transportation management that makes it possible to achieve the well known seven R's - the right product, in the right quantity and the right condition, at the right place at the right time, for the right customer, at the right cost. Studies reveal that in India the total logistics cost constitute nearly 10% of GDP out of which 40% in due to transportation. India has one of the largest road networks in the world (over 3 million kms.). The road network in the country is an under: Category of Roads Lengths in Kms. Percentage of the Total lengths National Highways 52,000 1.58 State Highways 1,28,000 3.88 Major District Roads 4,70,000 14.24 Village & others Roads 26,50,000 80.30 Total length 33,00,000 100.00 Indian Road transportation is the dominant part of transportation. It carries almost 65% freight. Road freight industry has rapid growth in past years and have most economical and highly competitive. Highway freight rates are lowest not in the region but worldwide. This is due to market driven freight rates and having private controlled industry. Indian Road Freight industry growth was due to confined development in Railways, air and shipping. The industry comprises of small road operators, which are as much as 85% of total fleet. The fleet sizes are also very small as compared to other developed countries Road freight industry in India is highly fragmented and deregulated. Freight transport has risen from 6 billion tones kms to approximately 1000 billion tones kms in the last 50 years. Commercial vehicles in India are able to run only 250 kms to 400 kms where as in developed country it is about 600 km. Almost 60-70% of the total freight movement in India is by roads. Even the bulk material is shifting towards road. Road freight industry is deregulated and fragmented consists of Transporters which primarily contacts with shippers and receiving customers. The solicit freight largely on annual price quote, responsible for cargo loss, damages and perform other customer service functions; Truck operators as individuals often called owner- operator typically own very small sleet of trucks and contact transporters to operate & Borker Agents who mediate between operators and transports. Road freight industry in India in completely market driven. Customers need a substantial party to be their transporter because of the need for cargo loss protection, stable freight prices, reliable supply of hauling capacity. The labour laws, road delays and predominance of live loading make small truck operators a lower cost alternatives to big company owned fleets. So low freight rates and market driven rates are the features of Indian Road freight industry. Freight rates vary with interplay of commodities, size of shipment and volume freight to be moved between any pair of point on a given day in relation to the supply hauling capacity available. Govt does not regulate rates. It is completely market driven. Due to imbalances in freight demand rates also vary with direction. Indian road freight industry is suffering from low profits. Freight Rates are so low due to competitive market that it is around $0.215 per truck per km. Industry operates with very thin margin of 10-15% in which bad debt cost, cargo claims, solicit bills, investment in driver's, slow account receivables of average 60 days plays havoc to their profits. Transporters may have some profits but the small owner/operator may not have. Quality of services is one of the main issues the industry is facing i.e. of speed, frequency, reliability and security. Normally trucks have speed and distance covered per day is approximately in 250 km to 400 kms maximum where in U.S. it is around 600 kms Annual kilometers run by intercity trucks varies between 60,000 kms to 1,00,000 kms having unit of one or two driver and one helper whereas Two driver unit in U.S. covers 4,00,000 km annually. Productivity in freight transport industry in India is very low. It may have some reasons. The condition of the roads is one of the main reasons. Even low fleet vehicles and use of 2 or 3 axle trucks with open freight box of 30 to 40 cubic mts. reflects the present freight market. 75% trucks on national highways are 2 Axle 9 tone having older 135_165 HP engines. The two principal manufacture of trucks viz. TELCO & Ashok Leyland accounts for more or less entire fleet of heavy vehicles in India owing to their monopoly in technology and pricing. Govt. taxes such as octori, nearly absence of any uniform laws to govern road transportation also one of the most important factor which is hindering the growth of the Road freight industry. But now the road freight industries importance has been understood and the Govt. and has planning and implementing the different policies to invest in infrastructure such as roads mainly. Govt. is announcing incentives and tax holidays in its efforts to invite and encourage private sectors in road infrastructure development of National Highways. Govt. has announced and started development of Golden quadrilateral corridors connecting the country East-west & North-South. The high-density corridors attracting the private sectors but the rural & district roads remain the prime responsibility of the Govt. The no. Of vehicles expected to double in another 5 years but the public sector outlays are dropping from 6.7% to merely 3% in 50 years. In India Road development sector doesn't have any strong lobby so roads have limited and uneven, scattered growth and often ignored at a great cost of economy. The backbone of the macro logistics is the roads and unless the anticipated growth of vehicle is accompanied by the super highways, National highways & state highways. It has been estimated that the economic cost of bad roads ranges from Rs.20,000 crores to 30,000 crores annually. In India hardly 30% to 40% of revenue realized from Roads are ploughed back into roads development while in advanced economics like Japan the entire amount has ploughed back into roads development as these countries realized that the expenditure on roads is an investment leading to accelerated growth in every other sector. State Govt. earning huge taxes from the roads. There is certainly a need to relook at the entire taxation structures if the govt. wants the roads and freight industry infrastructure to support logistics in India. By the year 2015, there is an urgent need to develop new highways/ super highways around 10,000 kms and 1,45,000 kms of state highways to be upgraded. The movement of containers of the Indian Roadways is limited not only by design, condition of Roads and traffic congestion but also by non-physical barriers to moving containers out of the port. The load limits of the trucks legally is 10.2 tonnes per axle whereas highways constructed for axel load of 8.16 tones leads to deteriorating condition of the roads. Road transport in any part of the world facing congestion and in India also because of the roads geared only to the needs of the urban economy so in India most of the roads passes through urban areas and have larger population creates congestion. Also the National highways, which are less than 2% of the total roads in India, have max no. Of vehicle and freight creates congestion. Mostly highways in India have 2 lanes also creates problem of congestion. Govt. checkpts. And formalities and administrative requirements create congestions. Old technology trucks having low speeds also creates problem. Due to non-safety measures, no. Of accidents rising which cost $11 billion per year. Also the drivers have less education and untrained formally. They are unknown to new technology and training needs huge amount of funds. Strengthening of roads costs around Rs.20,000 to Rs.30,000 cr. Whereas the other mode of freight transportation is through ports. Long coast line of India is dotted with 11 major ports that are managed by Port trust of India under central Govt. Jurisdiction and 139 minor operable ports under the jurisdiction of the respective state Govt. The major ports handle 90% of the all India through put. The total cargo handled by major ports was approximately around 370 billion tons normally registering 8-9% growth per year. Dry and liquid bulk makes up around 80% of the port traffic volume. Major increase in traffic food grains, liquids and containerized cargo ships have to wait long in the channel for berthing and productivity in loading and unloading is low. The national average turn around time of vessels for liquid, dry bulk & gen. Cargo is estimated respectively 3.4 days, 9 days and 3.6 days. The composition of traffic has undergone significant changes in recent years Berth in India very often are occupied. It is a labour intensive process. Mechanization process is non-existence or slow. Night vision navigation is not available and ships have to wait for daylight. Restriction in navigation channel does not allow bigger vessels. The road links to ports are insufficient and badly maintained. If India has to achieve export target of 1% of the world trade it has to improve its transportation facilities. The two-way trade must reach upto $200 billion and total projected sea traffic will reach around 4 million tons assuming average growth of 9% annually. The additional capacity requires around Rs.100 crores per million tones with present capacity of handling 270 million tones. So by comparing other means of freight transportation in India i.e. trains and Airfreight we come to the conclusion that in the road freight transportation the growth prospects are much. Though trains freight in India especially in bulk freight is again improving due to some central Govt. policies. Monopoly in Railways freight system has been partially with drawn. Private players could participate in Railway freight system. Airfreight consists of very low volume and only major international airports are licensed to handle airfreight. So in this situation due to subsidized diesel rate policy and uniform freight movement policy in the future, the area of Road freight in India may grow. In the future Govt. of India heavily investing in Constructions of new Roads, quality of roads, maintenance of roads which are the essential part of Road freight transportation. Location system, use of latest information technology and satellite communication and global positioning will improve the speed and productivity of the freight industry and cut the logistics cost of the products. Govt. plans to rationalize the tax system and implementation of VAT in the whole country is the step in the right direction. Way side amenities and safety measures are being improved. Super highways, four lane highways are proposed and some work has been started in different part of the country. So looking at the various steps taken by the Govt. of India in present and proposed in future will certainly improve the quality as well as quantity of the services provided by the Road freight industry. ********************************************************* References: 1. World bank study on "India road transport services efficiency study": Nov.1, 2005. Retrieved from http://www.worldbank.org on 18-08-2006. 2. An initial assessment of freight bottlenecks on highways White paper prepared by Federal highway administration office of transportation policy studies (2005). Retrieved from on 18-08-2006. 3. Directions in development, Integration of transport and trade facilitation: Selected regional case studies retrieved from http://www.worldbank.org on 18-08-2006. 4. Macdonald, A. (July 6,2006), an article " Managing global Vs. Domestic supply chain", World trade magazine. 5. Vijayraghavan, T.A.S. (Jan-march 2001), Impact of transportation infrastructure on logistics in India, Logistic spectrum, US, published by SOLE- the international society of logistics, special issue: Transportation volume. 35, Issue1, pp12-16. Read More