With the right policy push, we would see our version of UPS/ FedEx/ DHL in next 5-7 years, says E&Y

Logistics policy needs to mandate end-user-industry (EUI) compliance with respect to their supply chains and eliminate hidden costs to make EUI globally competitive, Divyanshu Tambe, Executive Director, E&Y, told BusinessLine. Excerpts from an interview:

Since early 2014, the government has been chanting India’s high logistics cost of 14-15 per cent of GDP compared to other nations, to craft many policy initiatives. Is this claim validated by proper study? What is the factual position?

One of the biggest problems we face in revamping logistics, considered the backbone of the economy, is that there is no accurate sizing of the sector, even volumes. We must understand that we can only fix something, if it is measured reliably to assess the issues, and bench-marked appropriately to arrive at right goals. Unfortunately, we lack in both as far as logistics is concerned.

Fourteen per cent of GDP as logistics costs has been talked about since early 2000s and has become a mainstream narrative since ― without adequate validation.

At $3-trillion GDP, logistics would be about $420 billion (14 per cent). However, our bottom-up analysis suggests ~$180 billion as the size of the sector in terms of revenues for logistics service providers (LSPs). In terms of cost to end-user-industries (EUIs), there is an additional element of “hidden costs” like pilferage/ inventory cost/ detention, etc, which is estimated at ~35 per cent of LSPs’ revenues. With this, logistics cost to EUIs would go up to $240 billion. Even then, logistics cost works out to ~8 per cent of GDP ― a respectable benchmark.

If the logistic costs are indeed high, as claimed by the government, why is it not getting reflected in the financial metrics of logistics companies?

This point further contradicts the myth of high logistics costs. Financial metrics of the Indian logistics industry, except probably ports, are way lower than their global peers, in terms of EBITDA/ PAT margin, return on capital employed (ROCE) and scale of business. In an industry which is so fragmented like logistics, EUIs enjoy higher negotiating power, resulting in one of the lowest cost of delivery of logistics.

Even the inefficiencies like slower truck speeds and detention of trucks at warehouses are largely absorbed by LSPs, resulting in higher cost structure for them, without appropriate pricing from EUIs. This is changing, though, with LSPs getting organised and offering integrated solutions. With these changes, LSP revenues would grow faster than GDP, while the hidden cost for EUIs would go down, thus, making LSPs healthier while reducing costs for EUIs. Our target should be to bifurcate the $60-billion of hidden cost into $30 billion of additional earnings for LSPs and $30 bn of savings for EUIs.

What are the key factors in decoding logistics costs?

The right matrix to discuss and benchmark is the cost to EUIs instead of comparison with GDP, and it’s the best strategy to arrive at the right number, given the inherent nature of sub-contracting in the logistics industry, leading to double counting.

In our estimates, for most finished products like FMCG, FMCD, auto, and pharma, logistics costs range from 3 per cent to 5 per cent of sales. A similar matrix for coal/ iron ore would be more than 10 per cent as it’s a low-value product. Geographical spread is another factor to consider, as transportation alone forms ~40 per cent of overall logistics spend.

And…

Given the criticality of logistics, it’s imperative that it be not looked at as a pure cost item but more of a strategic partnership to deliver (i) sales growth, (ii) no loss of sales due to material non-availability, (iii) reduction in inventory and financing cost, (iv) minimise damages, and (v) lowering returns for existing businesses.

What are the repercussions of policy planning based on unvalidated assumption of high logistics costs?

The policy needs to focus not on reducing the cost of logistics, as that is not a problem, but on ways to get the logistics sector to help eliminate the “hidden cost” for EUIs to make them globally competitive. The policy needs to aim at (i) removing bottlenecks, and (ii) focus on mandating compliant supply chains. These two measures will help speed-up the shift to organised from unorganised.

Lack of adequate loading/ unloading facilities at warehouses and factories mean that trucks are detained for ~two days/ trip (vs maximum four hours in e-commerce warehouses), and hence, running only ~12 days in a month vs ~24 days a month. Additionally, detention rates paid to trucks are ~₹1,000/day vs ₹20,000/day that a truck earns. We need a healthy logistics sector for a healthy economy and global competitiveness.

Such a policy of prioritising infrastructure investments and mandatory EUI compliance on their supply chain would help drive investments in the sector, so that LSPs can build deep management teams capable of designing solutions and weed out unreliable operators. I believe that with the right policy push, we would see our version of UPS/ FedEx/ DHL in the next five to seven years.

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