Logistics: The next big growth driver

V Shunmugam & Ritambhara Singh

The Hindu Business Line, March 29, 2008
(http://www.thehindubusinessline.com/2008/03/29/stories/2008032950110800.htm)

Creating an effective logistics environment requires continuous improvements and regular participation of all stakeholders who can contribute to and benefit from concrete improvements in terms of performance. Particularly is this so for farmers, whose incomes can be raised by creating good warehouse infrastructure.

Wars have been won or lost on the strength of logistics capability or lack of it. Although quite an old concept, logistics has been becoming efficient only since the globalisation wave of the early 1990s and hence, the businesses supported by it, worldwide, have been pushed for competitive balance-sheets, providing consumers a better product/service and yet adding value to its investors.
Triggering intense competition, globalisation, coupled with liberalisation, forced both private and public firms to commit themselves to making available to their customers the right material of right condition, at the right time and place at the lowest cost — be it a product or a service.
The World Bank, in a recent survey Connecting to Compete: Trade Logistics in the Global Economy, has developed a Logistics Performance Index (LPI) that can serve as a benchmarking tool for measuring performance of businesses along a country’s logistics supply chain. The Bank study asserts that countries that are able to connect to the global logistics web would not only have access to vast new markets but also remain a part of the global trade growth.
The report avers that it is not the income of nations but their undergoing trade expansion that determines their logistics efficiency, as the survey shows that nations with increasing trade (imports and exports) to GDP emerged as the out-performers on the LPI scale relative to their income levels.
It also warns that those countries whose links with the global logistics chain are weak are bound to face large and growing costs of exclusion from international trade. India trails behind China on important indices such as customs procedures, overall infrastructure quality, international shipment, logistics competence and tracking of shipments, but is ahead of the latter on the domestic logistics efficiency front.
Logistics: The ills and the cures
With India’s GDP growing at over 9 per cent a year and its manufacturing sector clocking double-digit growth, the country’s logistics industry is at an inflection point and is expected to reach a market size of over $125 billion in 2010, according to a study done by Datamonitor Inc., US.
The fact that the logistics cost accounts for over 13 per cent of its GDP vis-À-vis less than 10 per cent across the Western Europe and North America. The major functions of the logistics sector include transportation, warehousing, freight-forwarding, and other value-added operations, including Management of Information Systems (MIS).
The huge diversity in geographic conditions, consumer habits, and infrastructure conditions across the country makes it a major challenge for the Indian industries to efficiently manage their supply chain.
Light at end of tunnel
What portends well for the country’s logistics sector — and the markets, in general — is that the Government has, of late, intensified its focus on improving logistics infrastructure. Almost $17 billion has been pumped in to upgrade highway networks, with the implementation of two major projects — the Golden Quadrilateral network and the North-South-East-West (NSEW) corridor.
Besides, in a landmark infrastructure-related move, the Government has thrown open rail freight operations to private players, thereby creating opportunities for cheaper and faster movement of goods. Transportation by rail, rather than by road, is expected to help domestic logistics players offer more cost-effective services to their clients, and this, in turn, is likely to boost industries’ use of logistics.
The opening up of the Indian economy to foreign investments, luring more and more MNCs into kick-starting their operations in India, is also fuelling growth in the country’s logistics market.
With India being touted as the ‘Destination Future’ among world logistics service providers, domestic logistics players are pulling up their socks which has already started with the growth the courier segment making the flow of documents and financial instruments move quicker. Creating an effective logistics environment requires continuous improvements and regular participation of all stakeholders who can contribute to concrete improvements in terms of performance.
Efficient linkages and NBHC’s role
Although logistics-related problems are rather specific, the ability to tackle them depends largely on a nation’s overall governance and institutional discourse.
Newly developed electronic commodity markets, such as Multi Commodity Exchange of India Ltd. (MCX) have played an instrumental role here. Creation and development of warehouses followed the emergence of these markets or exchanges.
MCX’s collateral management arm National Bulk Handling Corporation Ltd (NBHC), a national-level end-to-end solutions provider in warehousing, bulk handling, grading and inspection, commodity care, pest management and collateral management of commodities, is playing a key role in taking logistics and, hence, markets closer to the producers.
Sticking to their mandate, commodity derivatives markets have proved to be extremely beneficial to farmers.
The gap between prices (many of the commodities) in the post-harvest season and those in any lean season has narrowed down significantly over the past few years.
Earlier, during the pre-futures era, when prices would slump immediately after harvest, farmers would have to make distress sales. But today, with the opportunity to sell for a better price at futures markets, they stand to benefit enormously.
While growers can store (hold back) their produce in NBHC-monitored warehouses in anticipation of realising higher prices later, they can avail of loans against warehouse receipts (WRs), to help them carry on with their crop operations for the next season.
In the few years of its existence, NBHC has built a rather strong and wide logistics network with professionally managed scientific warehouses armed with market-approved quality-testing techniques. And this has attracted investors and participants from various backgrounds, creating better linkages among the markets.
The development of logistics by creating good warehouse infrastructure would surely go a long way in lifting farmers’ incomes. Such infrastructure is expected to get a fillip with the recent passage of the Warehousing (Regulatory & Development) Bill and its effective implementation.
Both public and private enterprises’ participation in equal measures is required for developing logistics and improving supply chain management.
Very importantly, the lesson for private investors is that it is not just about creating efficient business to thrive in the logistics sector, but also about exploring and revamping other areas by way of diverting energy, costs and time that were otherwise wasted in a weak logistics system.

(The authors are with the Multi Commodity Exchange of India. Their views are personal. E-mail: v.shunmugam@mcxindia.com)