BHAVEN SHAH is Co-founder at Freightbazaar.com
TRUE COST OF TRANSPORTATION
The Indian road transportation sector serves as the backbone of the Indian economy. As per the 2013 estimates, the country’s total road length was 4.7 mn km. It is the world’s second largest road network after the US. Roads constitute the most important mode of transportation in India carrying 60 % of the country’s total freight traffic and 85 % of its total passenger traffic.
Transportation is an important link in the supply chain. Freight cost is just one element of transportation cost. One has to consider other factors such as modes of transportation, obsolescence, packaging, insurance, breakages, pilferage, deterioration, etc., which will help a firm improve its bottom-line & top-line.
A World Bank study says that the Indian logistics cost is much higher as compared to other countries. Logistics cost in India is 6-8 % of the total value of goods, while in China this cost is estimated to be 10 %. Congestion cost, transaction cost and demand-supply are three factors responsible for India’s high logistics cost.
It is essential for both truck suppliers & truck users to estimate their transportation costs. For truck suppliers, it is crucial to know the cost of each mile their truck drive; if they do not know the best per-mile rate then it becomes tough for them to charge their suppliers. The same goes for truck users; they should know whether they are paying fair rates or not for transporting their material. Truck suppliers bear transportation costs like fuel, driver’s salary, maintenance, insurance and many more. It is essential to estimate this cost in advance.
Inventory cost (the cost of holding goods in stock, including capital, warehousing, taxation, depreciation, shrinkage, etc) affects transportation cost. Inventory and transportation cost have a direct relationship; when inventory cost increases, transportation cost also increases and this will affect the economy.
India’s trucking industry is dynamic, and the truck population is estimated to have been growing at a rate of 7 % per annum, thus intensifying competition. Most truck owners do not focus on service quality. Competition in the sector is cost-based rather than service-based. This results in low service quality for customers. The service quality also deteriorates when transportation cost increases.
The market rates tend to get deflated due to intense competition, thus prompting truck owners to drive and earn more. There is a direct relationship between timely delivery and increase in orders. Truck owners try to delivery more goods owing to competition and if they ensure timely delivery, there is a good chance of bagging more orders. If they are unable to compete with their competitors, they are out of the market. This competition may lead to corruption as truck owners resort to overloading, overspeeding, violating rules, etc.
INCONVENIENT TRUTH ABOUT FREIGHT COST
Every transport supervisor or coordinator is looking for a better freight rate or a new supplier, who can reduce their freight cost. But people higher up in the organisation such as a Supply Chain Director, General Manager or CFO will have a different set of requirements. The GM or CFO would be keen on reliability as well as scalability of the transport division to support the company’s growth and may also insist on transparency in billing/accounts reconciliations. Even a Supply Chain Director would be concerned with poor visibility of shipments, damages & delays, high inventory cost and in some cases even obsolescence cost. From a marketing perspective, poor customer service resulting from lack of delivery visibility and missed orders affect the company’s brand image. In addition, such grievances and cancelled orders pose a huge opportunity cost, in terms of repeat business from existing customers.
One must wonder, despite so much riding on having a good, reliable and efficient transport system in place, why do transportation supervisors only care about reduction in freight rate? The reasons may vary from company to company; there could be broadly two main reasons – firstly, the supply chain function is treated by most firms as a cost centre. Consequently, the annual performance targets of logistics and transport heads are linked primarily to the reduction in freight cost. Secondly, most transport operations in Indian companies are handled without any proper system, processes or automation in place. It is not uncommon to see junior folks without much professional experience managing daily delivery schedules. These staffers try to anticipate when the deliveries will be scheduled and coordinate with transporters.
Proper coordination and communication with transporters for sending material on multiple routes and tracking inter-city deliveries on a daily basis are critical tasks, but are also quite time-consuming. Transport handlers have little time or motivation to focus on anything else besides executing the orders given to them and are not equipped to put forth new ideas for process improvement, efficiency or innovation. Many firms struggle to fulfil even basic inter-city delivery requirements given the dynamic nature of customer demand patterns and disconnected production schedules. These are the reasons logistics becomes one of the key bottleneck preventing firms from scaling up their business.
FOCUS ON TCO
So, what steps should companies take to scale up operations, while managing their freight cost better? Firms in India spend a lot on logistics relative to the other countries. According to one report, India spends around 14 % of its GDP on logistics as compared to around 8 % spent by developed countries. However, most firms use a single metric – reduction in freight cost – for the transportation department for performance assessment and budgeting. Such a singular focus leads to a paradoxical situation, where the overall company performance suffers because customer service, reliability and service quality are sacrificed at the expense of freight cost.
Companies need to set performance targets for their logistics divisions based on the total cost of ownership (TCO), which should include freight cost, coordination cost, communication cost, obsolescence cost as well as opportunity cost resulting from poor customer service. Only then firms can drive efficiency and effectiveness to scale up their logistics operations. The company’s reliability and service quality can also improve by changing the way companies treat their transporters. Many transporters express dissatisfaction working with even well-known branded companies because of delayed payment or unreasonably long delays in loading & unloading. This leads to poor service from transporters and companies have to look for different transporter options. Companies should use a transporter relationship management system that tracks the performance of transporters, measures a company’s own performance against commitments made to transporters and has a certain incentive system to build long-term loyalty with transporters. Various large companies around the globe have been able to grow this way and achieve scale despite facing stiff competition.
In today’s hyper competitive world, meeting or exceeding customer expectations is the best way to stay competitive. This can happen only if a firm manages its logistics and fulfilment operations with reliability and consistency. Firms will have to start using technology-based systems and processes in addition to setting goals based on the TCO concept. When such a thing starts happening, the benefits will be visible to everyone in the firm, from logistics to supply chain to marketing and business heads. By adopting such systems and processes, firms will not only experience reduction in the TCO, but will also start seeing increased sales due to better customer service and reputational enhancements with repeat customers. CEOs can view logistics not just as a cost-centre but a hidden lever to kick-start companies’ top-line growth.
(Freightbazaar is the winner of the Auto Tech Review IATIA Automotive Tech Start-up of the Year award in 2017)