Logistics Costs: A perspective for the Indian Cement Industry

After posting the poorest show in a decade in 2010-11, the Indian Cement Industry sold 223.02 million tonnes (mt) of the building material inFY12 compared with 209.5 million tonnes in FY11. Production, too, rose to 223.6 million tonnes against 210.5 million tonnes, up 6.2 per cent. The industry had in a way outpaced itself, ramping up production capacity and sparking off a spate of mergers and acquisitions to spur growth. Going forward these drivers will assist the industry’s growth in the next five years. On an average India’s GDP is expected to grow at a positive rate, thereby giving clear visibility of demand.

Yet as the industry continues to grow, costs seem to be on the rise too. Compared to other industries, Cement has the highest logistics cost as a percentage of sales. All freight cost is highly dependent on the cost of transportation which relates directly to fuel prices. In India transportation cost of cement is around Rs. 1.03 or Rs. 1.04 per ton Kilometer. The cost rises high when the material is unloaded and carried on road for further distance and if the material is brought from or taken to hinterlands, transportation cost by road increases. The industry depends heavily on road transport for movement of clinker to cement. The transportation cost by truck transport over a period of last 10 years has increased by nearly 50%. Moreover, the transportation cost to most of the big consumer centers, tier 2 and tier 3 cities and villages have been affected by rising railway transportation cost, both for input materials like coal and gypsum and more glaringly for clinker and cement.


Cement industry needs solutions to get transportation costs under control. And from this perspective, automation of key processes with respect to monitoring and controls can provide some savings in freight expenditure. Some of the initiatives could include; transport planning using intelligent algorithms and smart monitoring of execution operations using GPS technologies. Given a nearly 20% plus cost spend on freight and distribution, as seen in the above graph, a focused approach in this area could yield results. Nevertheless it should be noted that the Indian transportation industry is completely different from the other geographies. Fragmentation of the businesses, infrastructure issues, lack of professionals in operations/ drivers, skill shortages all plague the road transportation industry. Hence at one end, we can have all possible automation interventions for operations and planning on transportation, yet on the other side, the execution of such strategies creates difficult change management issues. Are there other possibilities? Organizations end up handling extra-ordinary amount of paper-work to manage the fragmented transportation industry’s services. The transport bills processing and related operations alone is voluminous and often a de-centralized operation. Freight contracts can be exceedingly complex. Likewise, freight invoices is accompanied by numerous types of required supporting documents. With high fluctuations of fuel costs, low visibility of the future freight costs and high complexity of the freight quotes, organizations conduct cost verification checks to keep a tab on the transportation spend.

Nevertheless it should also be noted that freight cost verification exercises are vulnerable to human and process errors. Instead well thought of freight audit program can ensure that an organization does not overpay for services it used or pay of services it did not use.

3PL Industry in India: A birds eye-view

Third-party logistics (3PL) or logistics outsourcing is gaining importance as more and more corporations across the world, unable to manage their complex supply chains, are outsourcing logistics activities to the 3PL or logistics service providers. The 3PL market in India is less developed and highly fragmented. However, due to the increasing awareness of the Indian firms towards the benefits of logistics outsourcing there is an immense potential for growth of 3PL in India.

The evolution of the logistics industry in India has been slow. While India spends around 13%-14% of the GDP on logistics which is significantly higher than several developed economies like the US (9.5%) and Japan (10.5%), the sector is today nearly a decade behind when compared with global logistics industry.

Globally, productivity enhancement driven by the emergence of intermediaries (3PLs) started in the early 90s. However, in India, penetration of 3PL services which began in the early 2000s is still in a nascent stage at less than 3%, although over 90% of the organizations use 3PL services in specific sectors especially the automotive sector.

According to a recent study released by Amarthi Consulting and CII Institute of Logistics, by 2012-2013 around 110 logistics parks, spread over approximately 3,500 acres, are expected to come up across India at an estimated cost of US$ 1 billion. The logistics sector has been growing at a rate of 8 to 10 per cent per annum since 2002.

While fleet size/infrastructure is one of the key considerations for selecting an LSP, the logistics industry in India is highly fragmented with around 80% of the members having one or two trucks and less than 10% of the members having more than five trucks. Modern warehousing and logistics parks are still in their nascent stage in India. On the other hand, the perception about a logistics park in India has reduced to an extended version of warehousing. The logistics companies have a long way to go to fulfill the basic requirements for a world standard logistics park. They will have to present quality products so that the customers are encouraged to outsource logistics services to 3PLs with strong execution capabilities.

3PL Billing Challenges

3PLs face many challenges, particularly when they want to implement a solid billing process. The ultimate goal is to integrate each customer’s unique set of circumstances into one cohesive process that tracks and captures costs in an efficient streamlined manner.

Customer’s appreciate the difficulties and complexity in agreeing on an acceptable billing method – one in which both companies can profit.

For the 3PL, understanding the client’s obstacles, addressing them, and implementing the right operational procedures; is one step towards success. The second step is finding the right software solution to standardize billing processes with configurable services and rates components to centrally manage billing operations.

Listed below are some of the key challenges faced by the industry today:

A. Supporting multiple customers and distinct billing schedules: Every 3PL customer has different billing rates. No matter how hard a 3PL tries to make billing rates uniform, it is rarely a realistic or profit optimizing strategy. In the 3PL world, custom pricing and pricing flexibility are mandatory.

B. Handling multiple warehouses, spaces and variable labor costs: Customers often manipulate their shipments to minimize inventory, reduce on close storage charges adding to the woes on the 3PL operational processes during month end.

C. Value added services: Customers often kit, bundle, add price or quality stickers just before the actual shipment. These types are services are charged extra or billed separately. Keeping a track of all such transactions becomes imperative for the 3PL companies.

D. Freight Fees: It primarily means transportations charges. Regardless of whether the 3PL owns the fleet of trucks or outsources transportation, it is standard practice to charge for these activities. There are a lot of hidden costs that your customers may not see including driver pay, fuel, vehicle maintenance, tolls, insurance and rentals.

E. Prompt Invoicing: 3PLs are scrambling through paperwork and sticky notes every month trying to make sure they don’t miss all of the billable activities before you close your period, you are not alone. Many 3PLs – through no fault of their own – are just too busy to investigate better solutions to help them with closing their billing periods. It is recommended that if 3PLs are still using a spreadsheet to help close your billing cycles, it is time to find a better solution. Competitors are using it and the customers are demanding it.

F. Data accuracy and communication: A time-consuming task for most 3PLs is customer invoicing. A best practice is to provide billing visibility to customers throughout the month so when the monthly invoice arrives there are not any surprises. Providing access for a 3PL customer is not only instrumental in collaboration; it can be a deal-breaker when a 3PL is entertaining new business, especially if the 3PL can’t offer web visibility. In fact, it’s just not enough to provide access to view inventory; today’s savvy customer wants to be able to run billing reports, view current billing charges and download or export these charges. With this type of access in the market today, the 3PL is bound for trouble if spreadsheets or legacy systems are still in use.

Collaborating for adding value

We were attending a Logistics and Supply Chain Management event in Mumbai recently. Wherein there was an interesting thought which was put up by one of the panelists regarding collaboration. Collaboration as the panelist said can be explored to win deals too and not just restrict oneself to bringing about execution efficiency. his is an interesting thought

And wouldn’t it open possibilities for the logistics service provider as well as the customer?

Imagine distinct service providers having independent strengths: one in milk runs in local cities and the other running dedicated routes across cities; and then there is a prospect who needs both the services – local distribution as well as inter-branch transfers. Service providers leverage on their strengths and provide a common platform to offer services to the customer. There could be many more examples. A warehouse service coupled with transportation service.

Possibilities of such nature can exist if certain ground-rules are followed when service providers come together.

Competency transparency: Claims should be met with hard facts on the ground. Movable assets availability should be match with the claim, similar to the lines of dedicated warehousing space should be met with availability.

Price transparency: The service providers would be better-off in knowing, acknowledging and accordingly acting on who is the prime vendor in taking the lead in customer contracting.Coming together also would entail absolute transparency in understanding the price points of each other’s services. The lead negotiating party should be empowered with data on price-break points and provided with an ability to take quick decisions.

Execution transparency: Coming together entails smooth handshakes at every operational step. It should encompass operations, billing and collections processes.

There is much achieved when service providers collaborate to provide integrated services to customers. Nevertheless the underlying premise in all collaborations is trust.

A few good thoughts on selecting a WMS (Warehouse Management System)

I have been often surprised by the analysis done by professionals and consultants when choosing a warehouse management software application. The rich content with respect to the functions, features and performance measures; for sure indicates deep knowledge the logistics industry in general possesses, nevertheless for the big budgets and half-baked implementations; the question still remains – did one make the right choice? Here are some of the attributes, not often sought in the myriad of parameters, which could prove to be significant in the selection of a warehouse management application.

Simple to use: Warehousing operations by nature is often repetitive. How much navigation does one do to submit or save or just complete a transaction? To mail a ‘Goods Receipt Note’, to print a ‘Pick Slip’ or simply to initiate a ‘Cycle Count’: what does one do? Usability matters. Can the fields be re-labelled to suit sensibilities? Would it entail a high degree of customization?

Easy to set-up: Products, packages, aisles, bays and areas for receipts or dispatches could cover ‘the most’ when it comes to the initial set-ups. I would also agree to an extent that the different strategies deployed for picking or put-away matter. Set-up as an activity by itself shouldn’t take-up significant time of the project. An additional point – when new product lines or new categories get introduced, how much should one go back to configurations or to the application administrator? Or can it be handled as part of routine operations?

A simple process test: Call it the G2G test or the Gate to Gate test. Simply put: how much time, how many entries and how many clicks in all does it take to start from gate entry for a single line item to its final dispatch. It may sound silly but often and in many demonstrations – one loses patience much before the goods reaches the dispatch bay!

Spreadsheet friendly: It is rare indeed to see one not using spreadsheets to analyze data. An application handling stocks in volumes, providing sophisticated and configurable reports – does it also allow data exports to a spreadsheet for analysis? And then imports, can an ‘Advance Shipment Notice’ or say a ‘corrected Stock on Hand’ be uploaded to the application from a spreadsheet format?

The man on the ground: And incidentally did he or she get to see or use the apps’ shortlisted? Why not some points for operator sensibilities? Another question: How does the application handle change of staff or change in role?

Need v/s Desire: I came across a rather too detailed ‘request for proposal’ for a warehousing system from a company wherein the consultants had incorporated certain functions – which were perhaps done to highlight possibilities with an application but clearly lacked relevance to the industry the warehouse served.

Bar-code support: Relying on manual data entry to manage your warehouse compromises worker productivity and inventory accuracy. Application supporting bar-codes with read and generation capabilities can significantly improve receiving, put-away, picking, packing and shipping functions in the warehouse.

Intent here is to serve as an eye-opener to those who get lost in over scrutiny. The best applications are those which serve the purpose it’s intended to serve and most of its features are put to use. It’s easy to get lost in fluff. It is good sometimes to do a serious check on why you need a WMS? And the why part is better answered if there are robust business processes in place operating within the four walls.

A guide to evaluate new transporters or carriers

Logistics managers today often are confronted with a situation of choosing new carriers. Whatever are the reasons for addition, good decisions are typically based on reasonable ground-work using what I would call as the essentials for choosing. Following are a set of useful/ essential parameters perhaps can be used to create a weighted criterion based matrix and arrive at a carrier of choice.

What are your load volumes and often traversed destinations? Most logistics managers would carry these numbers. But what is important is note is how current is the data and how much of it provides an ‘anticipated’ plan for future. Broadly a high level load plan can weed out carriers on either side of the spectrum – meaning they are too small or a bit too big!

What is the strength of carrier’s fleet? Is the carrier a demand aggregator or do they own their fleet? How much of capacity can be spared towards your operations. Capacity could also include the space availability at trans-shipment points, number of personnel in the operations team by branch etc.

Where are the carrier’s primary service locations? Service locations typically could entail a transshipment warehouse, a local liaison office to provide fleet maintenance support services, customer support services and vendor management.

How does the carrier measure the efficacy of his operations? Check on simple measures like on-time pick-ups and deliveries, missed pick-ups, vehicle uptime or driver performance parameters.

Evaluate the ease of working with each carrier’s service or operations personnel Are they knowledgeable about your account? Do they express concern for your needs?

Know the carrier’s price: Price often being one of the more significant reasons for picking carriers, an understanding of all factors affecting the net transportation cost is vital. When reviewing each carrier’s pricing, compare key factors such as tariff base rate, discounts, diesel escalation percentages/ formulas, loading, unloading charges or similar accessorial charges etc.

How mature is carrier’s technology landscape: Can the carrier provide you with freights bills on time? Are all the trans-shipments points connected for online updates with respect to shipments passing through? Can the carrier provide you with detailed status and real-time status update on any pick? These are some of the questions logistics managers can seek answers to.

It is important to note that much of the parameters listed above are necessarily not in any order of priority. It is only to serve as a guide when evaluating new carriers. There could be more factors coming in play with specifics.