Future Supply Chain Solutions has setup operations to provide Logistics Services to FMCG brands to service the Modern Retailers.

Why do Organized Retail or Modern Retail require a different distribution network as compared to the Traditional Retail? Why cannot the same distributor who services the regular stores (mom and pop stores) service the Modern Retail or Organized Retail?
To understand this, let us look at the differences in the logistics of a Traditional Retail channel and Modern Retail or Organized Trade channel

Order Acquisition
Traditional Retail: The sales person goes to the outlet, counts the inventory, explains the promotions (if any) and then suggests an order to the store owner. The store owner then agrees or modifies the order.
Modern Retail: The order would be suggested by the IT system of the Modern Retail chain. This order either would flow to the manufacturer/ LSP (Logistics Service Provider) via EDI or email or fax.
Order Execution
Traditional Retail: The distributor would deliver the order 1-2 days after the order was taken. Or if the model of operation is a ready stock unit [ the salesperson who takes orders travels with a van which carries the stocks] , then the stocks are delivered as soon as the order is taken – the salespersonhands over the order to be delivered to the merchandiser/ delivery boy who travels with the van. They pick the stocks from the van and deliver to the store.
Modern Retail: The delivery slots or delivery windows are fixed by manufacturer. The deliveries to the DC (Distribution Centre) or Stores have to be made within the delivery slots or delivery windows. Any miss on the delivery windows or delivery slots would lead to a penalty or/and going back to the last in the queue (your delivery will be scheduled after all deliveries for the day have been completed) or/and delivering directly to the stores.
Some Modern Retailers may require deliveries in pallets (CHEP  or LOSCAM ). If the Modern Retail / Organized Channel does cross-docking, then packing would have to be done storewise [ 1 pallet per store].
In many cases since deliveries to stores has to be done in van/ trucks the deliveries may have to be done at night when there is no NO-ENTRY restriction on heavy vehicles.
In some cases deliveries are scheduled as per the category – food on a particular day, personal care (soaps, shampoos, toothpaste) on another day, staples on another day etc. If a company operates across categories, the company would have to do multiple deliveries in a week.

Promotions
Traditional Retail: Standard company promotions are executed.
Modern Retail: Promotions would be partially led by the Modern Retailers. These promotions would be unique to the Modern Retailer. Any stickering or customization or manipulation that needs to be done will have to be done by the manufacturer or LSP.
New Launch
Traditional Retail: A manufacturer would have a sales launch for Traditional Retailers to introduce a new product to the market. On the day the product is to be launched, the salesperson would take orders for the new product and the new product would be on the shelves.
Modern Retail: The launch of a new product in Modern Retail is more complicated. The new product launch would have to be informed to the Modern Retail months in advance. It would have to be included in the product master of the Modern Retail. The planogram would have to be modified to include the new product. In some cases, a placement fees would also have to be paid.

In-Store
Traditional Retail: Once the stocks are delivered, the store owner or shop assistant arranges the stocks on the shelf or in the back room. When a customer asks for a product, the shop assistant knows where the stock is kept, gives the product to the customer.
Modern Retail: The stocks maybe taken straight to the shelf or taken to the backroom. One of the most important differences between a Traditional Store and Modern Retail store is that in a Modern Retail store the customer picks up the product from the shelf. If the product is not on the shelf, the customer assumes that it is out-of-stock. The product may actually be available in the backroom. So, one of the important logistics activity in a Modern Retail store is to replenish the shelves regularly so that the shelf is always stocked. Many stores maintain merchandisers whose job is to replenish the shelves from the backroom.

Payment
Traditional Retail: Payment is made to the stockist or distributor immediately or on the next visit of the salesperson. So, the credit period is usually equal to the time between 2 visits of the salesperson.
Modern Retail: Modern Retailers usually demand a long credit period from manufacturers and vendors. Sometimes, a Modern Retailer may ask for a special format for their invoices. They would not accept the standard invoice format of the manufacturer.

Metrics/ Scorecard Measures
Traditional Retail: Usually, Traditional channel stores do not have a formal scorecard to measure manufacturers. They have a general approach which would be regularity of coverage, time between order and delivery, and fill rates.
Modern Channel: Modern retail chains have a formal scorecard to measure manufacturers. The logistics measures would be shelf availability, inventory levels, case fill rates, on-time delivery.
Because the logistics process of Traditional Retail channel is different from the Modern Retail/ Organized Retail channel, manufacturers have a different team for the two channels. This is what the big players do. The smaller players outsource the logistics of the Modern Retail/ Organized Retail to LSPs.

India has the world’s 4^th largest network of railways. India has the largest growth in air travel.  And this is set to grow, given that the economy is growing at ~7%. High speed trains make sense for travel distances upto about 600kms which can be done in about 2.5-3hrs in a high speed train. For these distances, many of the customers who would otherwise have gone by air would convert to the high speed train, because the door-to-door time in trains would be less than by air ( as the airport would be situated outside the city and check-in would have to be done 60 minutes prior to take-off). Some of the passengers who today travel by overnight train on these sectors would also convert to the high speed trains.

High speed trains are already operational in Europe – TGV, Thallys , ICE- Japan – Shinkansen  – China. In fact countries like Turkey and Morocco have introduced high speed trains. So, it seems logical that India should not be left behind.

All this looks good and ambitious. But how can we make this a reality?  And is it feasible?

What are the challaenges?

Land issues: Land acquisition in India is a major bottleneck to any infrastructure project. The Dedicated Freight Corridor also faced issues in land acquisition and hence the project has been delayed.

Indian Railways: The Indian Railways record in creating new railway lines is poor. The Delhi Metro and Konkan Railway projects would never have been executed had it been entrusted to the Indian Railways. And it is for no fault of the Indian Railways; they are meant to run and operate trains that keep this great country moving. And they do a very good job of it. The Indian Railways organization and structure is not geared to infrastructure development.

PPP: The PPP model would be the key factor in the success of this project. There are several good PPP models – Ports, Highways, Airports. These models should be used to create a framework which allows these projects to fructify.

The high speed railway projects are very capital intensive. Any PPP partner will venture into it, only if he is absolutely certain that the government will play the game according to the rules and that the government will not change the rules of the game midway through the concession period.

Pricing:

I was doing some calculations on the costing and pricing of the seats on the high speed trains. It is not cheap.

Infrastructure Capital Cost : Cost of laying a high speed railway line is Rs 100 Cr per kilometre. This includes tracks, overhead traction, signalling and even stations.

Train-set Cost: Cost of a train set is roughly Rs 200 Cr (€ 30 million) for a 600 seat train car.

Maintenance Cost:

Rolling Stock maintenance cost would be about Rs 10 Cr per train set per year.

Track maintenance cost would be about Rs 25 lacs per track kilometre.

Traction Cost:

Electricity costs for traction would be Rs 200 per kilometre [ I have not assumed any regeneration and return to grid due to regenerative braking]

The table below shows the rough calculation of the cost per passenger for two sectors that I took as a sample – Mumbai-Ahmedabad and Chennai-Bangalore. The passenger data is approximate based on the number of flights and Shatabdi trains that run between these cities.

The cost per passenger on the high speed train is higher than flight costs. [ the cost of a one-way Mumbai-Ahmedabad air ticket on a weekday was about Rs 3700 and for Chennai-Bangalore it was about Rs 3500].

How do these costs compare to high speed trains elsewhere in the world. Here is a table on the cost of travel on high speed trains across the world.

The costs that I have calculated seem on the higher side. Some of the costs are approximate costs and that could account for the higher price. Also, the cost is very sensitive to occupancy rate. Any increase in occupancy rate can bring the costs down. I guess that is where the business wizkids will apply their minds and find the optimum price.

The advantages of a high passenger train service are;

Green option: Rail is a much greener option than road or air. Travelling by train versus travelling by air reduces carbon emission by between 85% and 90%!

Instead of spending time and money in bailing out airlines, the Indian government should consider giving that subsidy to a greener and more environmentally friendly option – high speed railways. http://www.thehindu.com/opinion/editorial/article2624710.ece

Let’s hope the National High Speed Railway Authority (NHSRA) does a good job and India get’s its TGV , Thallys, Shinkansen, ICE!

All aboard!!!

But reality sunk in. Rail link with China?!!

We have not even connected all our state capitals with railways. Of the seven sisters in the North-East only 2 state capitals are connected by rail – Guwahati and Agartala. Agartala got connected only 3 ½ years ago. The Indian government does have plans to connect all 7 capitals in the next 5 years.

We have not connected our neighbours, Bhutan and Nepal, which would have been far easier a task than connecting China. Of course we have plans and are trying.

As Indian, our focus on infrastructure is prominent by it’s absence.  We have just about managed to connect the Kashmir Valley with a railway xxxx years after making the plans.

I know that there is a lot of propaganda that the railways build national integration. I am not so sure about it. What the railways surely does is make it easier and cheaper for people and goods to move around. And by doing that it increases volume of goods being exchanged and the number of people who move around. If moving people and goods around is national integration, then surely the railways does contribute to national integration.

So, what are the plans of the Indian Railways to link the remote and unconnected parts of our great country.

Tripura:

Agartala, the capital just got connected with Kumarghat and the Indian Railway network in June 2008. Trains now regularly ply from Agartala to Lumding and Silchar. This line from Agartala would be extended south to Udaipur, Belonia and Sabroom. This line will finally connect with Chittagong Port from where goods can be supplied to North-East India. There is a plan to connect Agartala to Akhura in Bangladesh and create interchange points at Belonia (Belonia), Agartala (Akhura) and Sabroom (Ramgarh).

Manipur:

Imphal, Manipur’s capital is not rail connected. The closest railway station is Jiribam. There is a plan to connect Jiribam to Tupul and then to Imphal. This line would then be extended to Moreh and link up with the Myanmar Railway and connect to Mandalay. China too is interested in the link between Myanmar and India as it will connect China (Kunming) to India.

There is another link being constructed between Diphu and Karong in the north of Manipur.

Having a rail link will prevent the kind of hardships that the people of Imphal (and Manipur) have to undergo whenever the road is blocked by extremists.

Mizoram:

This state has no railways. There is a plan to connect Bhairabi to Sairang, which would be about 35 kms away from Aizwal. Bhairabi is in Assam on the branch line from Katakhal junction.

Nagaland:

Nagaland has a railway line with Dimapur being a major station. There is a plan to link Dimapur to Zabza and then to Kohima.

Arunachal Pradesh: There are two lines being planned; one from Murkongsleek to Pasighat and the other from Harmuti to Itanagar, the capital.

Meghalaya:

There exists a plan to link Shillong by rail via Umroi, Nongpoh, Lailad,Byrnihat to Tetelia or Kamakhya. There exists another plan to build a “circular railway” around Meghalaya starting at Goalpara, going all around Meghalaya and ending at Badarpur. There also exists shorter sections from Dudhnoi to Depa and Dudhnoi to Mendipathar.

Sikkim:

Not exactly part of the seven sisters, but a very important, strategic and beautiful part of this great country, there is a plan to link Sevoke Road to Rangpo, the site of a famous distillery. Rangpo is not the capital, but it would provide a rail link to the people of Sikkim.

For more details please click on this link http://wiki.iricen.gov.in/doku/lib/exe/fetch.php?media=11301:vps.pdf

For an excellent photo essay on the railways of north-east India, please click on the link;

http://www.irfca.org/gallery/Trips/east/northeast_001/Silchar+Station.jpg.html

The amount of news and criticism that this Expressway generates is amazing. Of course most of it is just simple “zero IQ” ravings and rantings  about long queues at “Asia’s largest Toll Plaza”.

For me the long queues and waiting times are a result of the design of the toll plaza and application of my Operations Research -101 lessons.

The Toll Plaza at km 24 caters to a stunning 1,90,000 vehicles per day in both directions. That makes it 95,000 vehicles in each direction [I know I am making some assumptions here].

Making a very general assumption that this traffic is evenly distributed throughout the day [I can hear many of you saying…what the hell…but just hold on] 4.12 cars will arrive per minute at each of the toll booths and assuming a very quick service rate of 4.5 cars per minute, the average queue would be 6 vehicles and waiting time would be 1.5 minutes. Not bad at all!

But this was an idealistic situation which maybe happens over weekends or holidays.

Here is what happens in reality.

About  25% of the traffic arrives between 9am and 12pm noon in one direction [this seems to be a reasonable assumption] and between 6pm and 9pm in the reverse direction. That is when chaos occurs and the system breaks down. Vehicles will now arrive at 8.25 per minute, but will be served at 4.5 per minute leading to an “infinite queue”.  To cater to the peak traffic, 30 booths would be required.

What are the solutions or options available to tackle the peak traffic? Have Tandem toll-booths. This typically increases throughput by 25%.

Encourage more vehicles to get TAGs.  TAGs enable a faster thorughput of vehicles. For this, TAG only booths should be strictly enforced. What happens now is that Cash vehicles [vehicles which do not have a TAG, but wish to pay cash] also come on the TAG booth, thereby slowing the traffic  and throughput of the vehicles who have a TAG.

Have the toll amount in easy coinage. The toll is Rs 21, which always involves giving change.

The reason for this post is to reiterate the importance of scientific and logical planing of logistics infrastructure. Many times we do not plan well while developing warehouses, container terminals, logistics parks or creating infrastructure within our plants. The next time you see a queue at an airport, cinema, railway station or when you hear the message “all our customer service executives are busy, your call is important to us, please be on the line, we will attend to you shortly” you know that someone has goofed up by not paying heed to Queueing Theory.

To end this post, I quote what our professor used to say, “you know the the only way to beat queuing theory is to be 1st in the queue, else you will always be subjected to the laws of queueing theory!”

There is a lot of talk in the media about F1 logistics issues. But the logistics that the newspapers and media are talking about are hotel rooms, traffic, parking – not the real hardcore logistics.

I was reading the details of the Formula F1 logistics –“ Five Boeing 747-400F jets will descend at the T2 terminal at Indira Gandhi International Airport” , and this set me thinking into what are the lessons that one can learn from the Formula F1 logistics.  After all the logistics that we handle in our day to day working, is nowhere as stringent and complex as the F1 logistics.

In my humble opinion, the lessons to be learnt are

Detailed Planning: All the 20,000 items required for each race is packed, barcoded and shipped to the race track. Some of the items are shipped in advance by sea. Some of the critical items reach the race track just 24 hours before the race.
The entire route from the port or airport to the race track is surveyed and mapped to ensure that there are no surprises.
This kind of detailed planning is done by many companies. The automobile sector logistics is a good example of meticulous detailed planning. ODC [ Over Dimensional Consignments] carriers also do very detailed route planning before despatching any consignment.

Inventory Management:  The inventory management is smart. Low cost items are shipped in advance. There are multiple items of the low cost items (like kitchens, stationery) which are sent direct to the track rather than shipping the same item straight one race to the next one and hurrying for it. The high cost items (cars) are shipped JIT by air.

Good partners: Formula F1 has chosen DHL as their Logistics Service Provider (LSP). DHL has been chosen because of their expertise, infrastructure and reliability.
Formula F1 must be paying a huge premium for this world class logistics service. But Formula F1 understand the value of logistics and the premium to DHL is worth paying as the financial risk of parts not reaching is huge.
Contrast this how we appoint our service providers. It is based on perhaps lowest cost. Logistics in India is treated as a low-class function, with very little importance given to logistics. It is expected that the logistics will somehow happen – management by muddling around!
Formula F1, I guess  would be treating DHL as a partner, working closely with DHL and sharing with him all the plans and details, so that together Formula F1 and DHL achieve the goal of flawless Formula F1 Grand Prix races.

Information System: The tracking system with RFID and barcodes allows all parts and pieces to be tracked and accounted for. Without a good IT track and trace system, it would be difficlut to manage the complex logistics of the Formula F1.
Contrast this with our logistics where trucks do not have GPS systems and so there is no way of knowing where a truck is, except if and when the driver calls. In our day to day logistics barcodes usage is not very widespread [ I am not talking about scanning barcodes at checkout counters, but using barcodes across the supply chain from the factory to the retail outlet] are rarely used and RFID is still rarely used.

Logistics Team: There is a central team to monitor the logistics. They have an update of all the parts and ensure that the right parts reach the right place at the right time.

Infrastructure: The Formula F1 hires jets and trucks for their logistics. It invests in infrastructure to support the logistics. Having dedicated infrastructure is important to support the complex logistics.
Contrast this with huge multi-million dollar plants in India that do not have the basic infrastructure to support the logistics to run the plant. All cost cutting and cutting corners is done with logistics infrastructure. Logistics is seen as a necessary evil and an avoidable cost, not as a support to business and something that can be a source of competitive advantage.
You just need to look at our Railways and Ports (and roads in our cities) to understand the importance given to infrastructure in India. Quality of most of our warehouses  is bad.

For more details on F1 Logistics click on the links below;
http://www.dp-dhl.com/en/about_us/campaigns_sponsorship/formel_1.html
http://www.formula1.com/inside_f1/understanding_the_sport/5297.html

I would love to hear from all of you sharing your views and opinions about  lessons and learnings from F1 Logistics.

The art of war teaches us to rely not on the
likelihood of the enemy’s not coming, but on our own readiness to receive him;
not on the chance of his not attacking,
but rather on the fact that we have made our position unassailable.

- Sun Tzu [Art of War]

It is good to have ambitious stretch targets. However, the question we need to ask ourselves is whether India has the infrastructure to support this doubling of exports in the next 3 years.

Ports

Bulk of our exports and imports is handled by the Ports. The ratio of exports and imports is 64:100. Our Ports through which most of the exports and imports are routed, handled 847 million MT last year- 330 million MT of exports and 517MT of imports. Being conservative, let us assume that imports remain at the current level and only exports increase by 330 million MT in the next 3 years. This means that export and imports have to grow at 11.6% and infrastructure to support exports and imports also has to grow at the same rate.

The infrastructure which has to support this doubling of exports are;

• port capacity- bulk and containers
• rail connectivity to ports from the hinterland

The port capacity in India is estimated to be 1000 million MT. Over the next 3 years port capacity is expected to increase by 265 million MT. This is a very optimistic projection based on National Maritime Development Programme (NMDP) projects or which work has at least been firmed up (though they may not yet have been approved and work not yet awarded).

So, on an optimistic note, given that India already has a port capacity of 1000 million MT and 265 million MT more would be created, it can be concluded that port capacity will not be a constraint to meet the “doubling of exports in the next 3 years” target.

Railways

The cargo has to be moved from the hinterland to the Ports. This would require road capacity and rail capacity to be increased by 330 million MT over the next 3 years.

Over the last 5 years Indian Railways has increased it’s Freight Loading by 200 million MT. Growth in rail freight traffic has been 6% CAGR over the last 5 years. Given these statistics, it is highly unlikely that the railways will have the capacity to support the doubling of exports over the next 3 years. This will impact the  transportation of cargo between the hinterland and ports.

Expecting Indian Railways to increase capacity to carry an additional 330 million MT of export and import cargo in the next 3 years seems to be a very tall order. The Indian Railways will also paralelly have to increase capacity in the non import-export routes and sectors. Hence, capacity increase required from the Indian Railways is much higher.

The constraints from the railways would be (i) track capacity from port to the hinterland and (ii) shortage of wagons.

Hence, the Indian Railways is going to be a constraint in doubling the exports in the next 3 years.

Given these issues and constraints what can be done to meet the targets.

The Indian Railways is not adding railway capacity at the rate required to support India’s GDP growth, let alone support a doubling of Exports in 3 years.

The Indian Railways has a limited capacity to execute big ticket projects quickly – both from a managerial capacity and financial closure standpoint. The Indian Railways’ core competency is running trains.

All big railway construction projects were achieved by a separate SPV – Konkan Railway Corporation and Delhi Metro Rail Corporation.

The Indian Railways record in PPP has not been stellar. As per the Xl Plan, Indian Railways will get 19% of investments from Private Partnerships. Contrast this with 34% for Roads, 62% for Ports and 70% for Airports. Even in absolute terms Railways investments from Private Partnerships is higher only than Airports.

It seems that the Indian Railways is not comfortable with PPP. This could be because do not see any advantage of PPP or have not yet developed a strategy on PPP.

The Indian Railways is the Licensor + Regulator + Service Provider + Competitor, all combined into one. Why will the Indian Railways voluntarily allow it’s monopoly to be threatened by private players. One option is to have an independent regulator similar to IRDA or TRAI, which ensures a level playing field and fair competition.

The DFC has been in the offing for long, but not much progress has been made. This has to be speeded up. The Western Corridor of the DFC from Dadri to JNPT will help container traffic on the Northern hinterland – Western Ports (JNPT, Pipavav and Mundra) route.

The general who loses a battle makes but few calculations beforehand.

Thus do many calculations lead to victory, and few calculations to defeat:  how much more no calculation at all!

It is by attention to this point that I can foresee who is likely to win or lose.

                                 -  Sun Tzu in the “Art of War”

Not much calculations have been done, before setting the goal of doubling exports in the next 3 years. Will India achieve it’s goal of doubling exports in the next 3 years? If Sun Tzu is to be believed, the answer is apparent.

Given the constraints of logistics exports can utmost increase by 15%-20% in the next 3 years.

Doubling in the next 3 years would require a miracle. And I see no evidence of a miracle.

But logistics tasks, nearly as mighty and monumental as the census, is undertaken everyday by scores of companies and organizations – .

The principles used in the Census of India 2011 and used by these companies is similar.

The census is done once in 10 years. What is phenomenal and magical is that these companies and institutions do this daily and everyday.
In the census Enumerators reach out, meet and count everyone of the citizen of India, however remote and inaccessible the place is. Great!

But in these same remote and inaccessible places you will find toothpaste, soaps, shampoos, noodles, soft drinks, blades, tea being sold. How did these products reach there?

Journey of FMCG and daily commodities
FMCG Companies have a depot in each state. Products are despatched from the Plants to Distribution Centres. From the Distribution Centres, products are despatched to the Depots. From the Depots, stocks are despatched to the Stockists. Stockists then distributes these stocks to wholesellers. From these wholesellers the product is bought by the shopkeeper (retail outlet owner) who then carries them to his village. The consumer then purchases these products from the retail outlet in a remote village or hamlet.

The time taken from the time the product gets produced to the time a consumer picks it up could be as much as 90 days. This is termed as supply chain velocity. Some companies measure supply chain velocity from the time the raw material was produced. Supply chain velocity is primarily dependent on the inventory levels at each pocket (Plant, Distribution Centre, Depot, Stockist, Retailer). Inventory is in turn dependent on forecast accuracy, transit times, frequency of replenishment, frequency of salesmen visit. Supply chain velocity impacts the freshness of the product and in case of a new product launch, the timing of the launch.

Letters and Post
India Post is another organization that has a very wide reach and distribution. A letter posted from any corner of India to any other corner manages to reach the correct door 1000s of kilometres away. Truly magical! The principle here is that consolidation happens at the source and then again distribution happens at the end.

A letter from Tuticorin to Darjeeling would fisrt go to Tuticorin Main Post Office. From Tuticorin the letter would be sorted out as going to West Bengal Circle (Calcutta). The letter would travel from Tuticorin to Chennai and then onwards to Calcutta. From Calcutta the letter would be combined with all letters going towards Darjeeling and sent to Siliguri from where it would be sent onwards to Darjeeling. At Darjeeling the letter would get sorted by Postman and delivered to the correct door.

A courier company follows a similar process.
Cash
ATMs have become ubiquitous! How does the cash reach the ATMs in remote locations. The key to success here is the micro-planning of the route and beat of each of the vans which carry cash.

Each route is planned in meticulous detail as the amount of cash that the van can carry has to be balanced with the time taken to complete the route replenishing all the ATMs. To illustrate this, assume that a van can carry cash for 20 ATMs. If the ATMs are spaced far away, the van may be able to cover only 15 ATMs in the 12 hours shift. And the van has to come back at the end of the shift. So the van capacity (of 20 ATMs’ cash) is underutilized as it covers only 15 ATMs. On the other hand there could be a situation where the ATMs are densely packed close by and the van covers the 20 ATMs in 6 hours. The Van then has to travel back (spending time and fuel) to reload the cash and then go for another round. This leads to a sub-optimal utilization of the van as it has wasted time coming back and reloading.

The pulse-polio campaign worked on a similar model. Pulse polio volunteers are distributed the oral vaccines at a central place. The volunteers then fan out and do their noble cause of vaccinating children against polio. The vaccines are sent to hub. From the hub the vaccines are collected by volunteers and taken to different villages and towns.

There are lot many more examples. The intent here is to help you appreciate the magic which happens everyday; something that we take for granted and do not even spare a thought for.

The next time you go on a trek or visit a remote village or holiday on a remote island the Andamans and find your favourite brand of tea or coffee or chocolate or noodles or fizzy drink, think about the magic that brought it there.

Mr. Manmohan Singh, our Prime Minister, gave a speech on how supply chains should become efficient so that inflation can be contained.  I can argue ad-infinitum about how inflation is not about to be controlled easily and has to be corrected by some major structural changes. (economy is overheated, too much money in circulation, low interest rates, food supply issues et al)
But let us stick to logistics and supply chains about which I have some idea, than wander onto macro-economics, which I last studied during my MBA days.
Yes, efficient supply chains can reduce the costs which in turn can be passed onto consumers as lower costs of goods.
Exhorting the industry to use IT and the latest technology to reduce costs is good. But there are lots more that the honourable Prime Minister do to from a government policy standpoint to reduce the logistics costs.
Let us start at the beginning.
At the peril of repeating what many experts say, India’s logistics costs are 13% compared to 9% of the USA. The table below shows the logistics cost as a % of GDP for a few countries.

Logistics cost as per cent of GDP

 
China 14.5%
India 14.0%
Singapore 12.5%
United Kingdom 12.2%
France 11.7%
Japan 10.5%
United States 8.7%
Source: IMD (2003). 

 
GST (General Sales Tax) – Implement GST and abolish CST
For any goods sold across state boundaries the government levies, what is called a Central Sales Tax (CST). The CST has been reduced from 4% to 2% currently.

Without GST, there is a 2% CST on inter-state transfer of goods.
Because of this 2% CST, most companies have a depot in each state to avoid invoicing across state boundaries. This is because goods are 1st transferred to a depot as stock transfer from a Plant or Distribution Centre. Then the goods are invoiced from the depot. This saves 2% in CST.

However, having a depot has a direct cost attached to it – warehouse, people, electricity etc.

Having multiple depots also leads to higher inventory holding as there are now piles of inventory at each depot across the country. Higher inventory has a cost element in terms of blocking working capital. Also, it results in obsolescence and adversely impacts new product launches.

In the event of GST being implemented, companies will have big regional warehouses and distribute from there. This would reduce the cost of multiple-handling and backtracking. Let me illustrate with a few examples;

- Today, most companies have 3 depots in NCR – one for Haryana (usually in Faridabad), one for UP (usually in Ghaziabad) and one for Delhi. With CST these depots can be consolidated to 1 depot.

- Hosur is an industrial hub just 30kms from Bangalore. But it is supplied from Chennai 250kms away, because Hosur happens to be in Tamilnadu.
 
I am sure there are many more examples. The intent here is to explain the loss of efficiency on account of GST not being implemented.
An added advantage of implementing GST would be that the warehousing industry would get a fillip as companies would migrate to large distribution centres. These large distribution structures would be state of the art warehouses as the scale would support it.
But here is where GST implementation is headed.
 
Coastal shipping – Modify coastal shipping laws to make it more cost efficient
India has over 7516kms kms of coast,~16 major and ~200 minor ports. Coastal shipping can be a low cost transportation method. This is because fuel consumption by coastal shipping at 4.83 gm/tkm is just 15% of consumption by road and 54% of that by rail.
Gms/Tkm
·         Road 31.3
·         Rail 8.9
·         Coastal shipping 4.8

Coastal shipping is still a protected market and not an open market. Only Indian flag carriers are allowed to take cargo from one Indian port to another Indian port. And since the coastal shipping market is insulated, the policies for coastal shipping are different. These policies, whatever be the logic, right or wrong increase the cost of coastal shipping in India.
 
The policy issues with coastal shipping, which raise the cost are;
1.      Coastal shipping vessels have the same specification as ocean going vessels. This raises the capital cost of coastal vessels.
2.      Bunkering, spare parts is done at local prices, which are unsubsidised and subject to customs duty.
3.      Coastal shipping crew, the qualifications being the same for coastal and sea-going vessels, have to pay the extant Indian income taxes.

In September 2010, the qualifications for coastal shipping staff, has been reduced. Ocean going seafarers, are treated as NRIs and do not have to pay income taxes. This increases the manning cost of the coastal vessels.
 
Coastal shipping is used in shipping cars from Mundra to the South. But the scope and potential for coastal shipping is much more.
 
To be fair, the government has already taken certain initiatives – coastal vessels get a 40% discount on berth charges and THC.
 
The government also has plans to implement a coastal shipping policy.
 
Inland waterways – Develop inland waterways
Inland waterways can be developed further. Some progress has been made. But more needs to be done.
 
Rail and road connectivity from the inland waterways jetties have to be strengthened. Moving cargo by  inland waterways is just one part of the logistics chain; the goods have to reach the end-user and this is possible only by road or rail.
Inland waterways have the advantage of lower fuel consumption (the same advantage as coastal shipping).
 
Railways – Ask them to get their act together
The Indian Railways play a large and important role in the logistics of India.  In a large country like India, it is more economical to move goods by rail than by road.

Beyond ~700kms and for heavy cargo, rail is the more efficient than road. Yet rail has lost share from 89% in 1950-1951 to 40% in 2000-2001.
 
Passenger traffic in India is subsidised by the extortionate freight tariff charged by the Indian Railways. Passenger tariffs are not increased as any increase is seen is as unpopular and politically unwise. So the burden comes on freight traffic, which bears the brunt of all the cost increases. This increase the logistics costs. So the passengers, who enjoy the subsidised rail travel, end up paying much more for all the goods they buy! A zero-sum game!

There is a severe capacity crunch on the railways. For an economy which is growing at 8%+, the Indian Railways have to grow at least 10%. The Indian Railways has grown only 6.8% CAGR between 2004-2005 to 2008-2009, while the economy has grown 8.2% in the same period. The Indian Railways has not even kept pace with the GDP growth.

The growth is constrained by track and infrastructure capacity. Railway lines in the golden quadrilateral , golden diagonals and mineral rich belts of East India already run at 100% + capacity utilization. The work on increasing the capacity (3rd line, 4th line) is progressing although at a very slow pace. The DFC Western and Eastern are at least 3-4 years away.

The issue with the Indian Railways is that they have no clear, open and transparent PPP policy. is protected at the cost of the investors and partners.

Without PPP, the Indian Railways finances do not allow creation of capacity at the rate India needs.

Wherever, private investment has come in like private container train operators, the experience of the investors has been negative. This is because the Indian Railways is in the unenviable position of being the Licensor (the Ministry of Railways staffed exclusively by officers from the Indian Railways), Regulator (Railway Board), Competitor (Indian Railways) and a Service Provider (Indian Railways as they provide the locomotive and path)! So obviously, the commercial interests of the Indian Railways

In addition, the Indian Railways focus is on operating trains and construction of tracks is done at a slow pace. Konkan Railway became a reality because there was a separate agency Konkan Railway Corporation which took up the construction. The Pipavav (Pipavav Rail Corporation Limited) Kutch(Kutch Railway Company) rail link became a reality because it was construed as a separate SPV.
Rail connectivity to Ports is another issue. Port capacity has expanded with a commensurate increase in rail capacity to the hinterlands.

Grand finale – !!!!
And finally, one last reason for inflation and where the government the responsibility lies 100% with the government; just click on the link and read ahead. [One hint..the reason is the fashion of the season!]

So dear Prime Minister, while it is good that you have spoken of supply-chains and logistics, it would do well to ask your team to start working on action steps that the government can itself do to improve the efficiency of logistics in India and thereby control inflation.
 
Ask not what the country can do for you,
Ask what you can do for the country.
 
                                                            John F Kennedy
 
 

On this occasion, just thought I would write something of national importance and jingoistic!

In 2007, India set itself up a plan to get electric power to 100% of its population.
By itself, a great and noble task. From a planning and logistics standpoint, it is a humungous task! Especially, given that 75% of this electricity would be generated by coal.

To meet this ambitious target involves more that just setting up a Power Plant.  It involves the logistics of getting coal from the mines to the Power Plants or in the case of imported coal, the logistics of getting coal from the Ports to the Power Plants.

CURRENT SITUATION

India currently has an installed electricity generation capacity of 150323MW. Of this 78459MW (52%) is coal based.

How much coal does this translate to?

Coal required per year

78459 MW x 80% Plant Load Factor x 2450 kCal/kWhr Heat Rate x 24hours x 365 days  / 3300kCal Gross Calorific Value of coal= 408million MT per annum¹

¹ Have assumed no losses and wastage

Coal required per day

408 million MT per annum / 365 days = 1118397 MT/day

Trains to be loaded per day

Assuming that 90% of this coal moves on the Indian Railways network; the balance moves on private Merry-Go-Round network or by road.

90% x 118397 MT/3750 ² MT / rake=268 rakes (train loads)/day

² Assumes carrying capacity +6 loading

FUTURE PLANS

India plans to add 78557MW of electric power generation capacity in the 11^th 5 Year Plan (2007-2012) by year 2012.

Out of this 78557MW that would be added, 75%,  58644MW would be generated by coal. 

Coal required per year

58644 MW x 80% Plant Load Factor x 2450 kCal/kWhr Heat Rate x 24hours x 365 days  / 3300kCal Gross Calorific Value = 305million MT per annum

Coal required per day

305 million MT per annum / 365 days = 835616 MT/day

Trains to be loaded per day

Using the same assumption as above,[10% of this coal moves on private Merry-Go-Round network or by road]

90% x 835616 MT/3750 MT / rake=200 rakes (train loads)/day

200 rakes x 3 days average turnaround³ = 600 rakes = 600 x 59 wagons = 35400 wagons + 5% maintenance = 37170 wagons

This calls for an investment of Rs 4000 Crs @ Rs 20Crs ( 1 Cr = 10 million) per rake

³ Wagon Turnaround Time on Indian Railways is 5.2 days. I have assumed 3 days because coal rake lead distance is less as many power plans would be  situated close to the pit-head.

SOME PERSPECTIVES ON THESE NUMBERS

India currently produces about 375million MTPA of coal. The balance demand is met via imports. By 2012, if the plans fructify, India requires an additional 305 million MTPA of coal which is a 81% increase in coal mining capacity in 2 years!!!

305 million MTPA of coal that has to be transported represents a 34% ⁴ increase in rail freight traffic that has to be carried by the Indian Railways!

⁴ Assuming Indian Railways will carry 900million MT in 2009-2010

For perspective, freight traffic on Indian Railways for all commodities grew by 280 million MTPA in the 5 years from 2003-2004 to 2008-2009! And if the electricity generation plans have to be achieved, coal traffic alone would increase by 305million MTPA and this has to be achieved in next 2 years!

To generate an additional 58644MW of electricity, an additional 305 million MTPA of coal will have to be transported which implies an additional 200 rakes per day which implies an additional 37170 wagons! This represents a 16% increase in the Indian Railways wagon fleet.

Indian Railways would add 18000 wagons of all types in FY 2009-2010⁵.

⁵ As per Railway Budget Speech

Most of the coal in India is found in the eastern part of the country served by Eastern Railway, South-Eastern Railway, East Coast Railway and South-East Central Railway.

The railway lines and sections which would be used to transport the coal are HDNs (High Density Networks) which are already critical i.e. these lines are already working at more than 100% capacity utilization. These sections are on the Howrah-Mumbai for coal sent from MCL and SECL to the West and North, Howrah-Chennai for coal sent from MCL to South and Howrah-Delhi for coal sent from BCCL and ECL to North.

To bridge the gap between India’s coal production and demand, coal will be imported. This too will be transported by rakes from the Port. Rail connectivity  between the Ports and Indian Railways network is a weak link. The railway network will not be able to support the imported coal traffic.

There is one more reverse supply-chain that has to be considered. Once the coal is burnt, the flyash has to be disposed off. Indian coal has ~40% ash. Environmental laws would come up soon, which would forbid dumping of ash in flyash ponds. This flyash would have to be transported to cement plants, flyash brick manufacturers et al.

OPTIONS AND SOLUTIONS

The options and solutions are;

• Washeries: Invest in washeries to increase capacity of washeries.so that washed coal is transported. This would reduce the transportation requirements and consequently reduce load on the Indian Railways. As a thumbrule, washed coal becomes economically viable at leads greater than 1000kms.
• HCWs:Induct high capacity wagons with higher payload to tare ratios. Current payload to tare ratio is in the region of 2.0-2.5. Indian Railways has a plan to increase this to 3.5 by introducing Aluminium wagons. BEML has already produced a prototype
• DFCs: So to move the additional coal train the Indian Railways will have to lay additional railway lines. A DFC [ Dedicated Freight Corridor] for coal traffic alone would be required!

General Rommel, the “Desert Fox” lost the Afrika campaign in World War 2, despite fighting brilliantly because of his weak supply chain.

We in India, have to develop a strong infrastructure and a solid strategy (involving Coal India, Indian Railways and Power Utilities) before we truly win the war on “Electric Power”

It is that in war the victorious strategist only seeks battle after the victory has been won,

whereas he who is destined to defeat, first fights and afterwards looks for victory.

                                                                                                                   Sun Tze – Art of War

About 2 years back there were numerous articles on how Reliance Fresh was about to revolutionize and streamline the farm to fork supply chain agrarian supply chain by removing all the inefficiencies and middlemen.

So this talk of the Walmart CEO seemed like déjà vu!

I want this to happen and would love to see the vegetable and fruit supply chain streamlined.

But Walmart should look at a different role model and emulate a model which suits the Indian conditions and has already proven to be immensely successful.

In my humble opinion, the most successful agrarian supply chain is the AMUL model which drove the white revolution. A supply chain which handles a highly perishable commodity like milk in huge quantities and over a vast area requires a thousand bows!!

In rural India to be successful you have to go the grassroots and develop models with the involvement of the people and specially tailored and customized to their needs. The Panchayati Raj is just such a model – governance at the grassroots. It is a simple but very effective model.

In rural India, banking did not do well, but micro-finance is catching up. Big packs don’t do well but sachets do well. The list of innovations, specially tailored to the Indian Rural Market and which are successful, could go on.

Conversly, ideas and products plonked from urban markets without tweaking it to suit the rural markets have been failures.

One big failure in the Indian governance system are the schemes to benefit the rural poor. They are not conceived taking the grassroots into confidence or consideration. They are developed in Delhi and other State Capitals with nil or minimal grassroot involvement. The results are plain for all to see.

Amul is a cooperative. The milk suppliers are the shareholders. The owners decide what they should pay themselves for the raw material they supply. A unique situation where the owners of the company are also it’s largest vendors!

In the Amul system milk is collected at the collection centres. These collection centres are in the village, where the milk quantity is measured, the quality is checked and payment is made.

The milk is then transported by vans doing a “milk run” (literally and figuratively) and gets the milk to a chilling centre within 2 hours. At the chilling centre the milk is pasteurzied and then packed. Some surplus milk is sent to a factory to be converted to other milk products. A simple hub and spoke system.

The marvel is that all this was done 40 years back, when road and infrastructure was primitive.

AMUL has successfully used this model for vegetable oil – DHARA.

For the fruit and vegetable supply chain to be successful, the farmers need to organize themselves into cooperatives. That way they will have the bargaining power with the buyers and transporters. Instead of a multitudes of cooperatives, there should 1 per district or state

Next the cooperatives would have to invest in Cold -Storages.The number and location of the cold storages could be decided keeping in view the shelf life, the transportation costs and the investment in cold storages. A good Operations Research problem.

The collection of fruits and vegetables has to be organized. For this the truck routing has to be decided. The Milk Run concept can be applied here. The capacity of the collection vans, the length of the route, the amount of vegetables and fruits to be collected are the variables that need to be taken into consideration to draw out the routes.

The onward distribution of the fruits and vegetables to cities, retail stores can then be organized by trucks or railway parcel vans.

So Mr Walton, if you are really serious and want to revolutionize the Indian “farm to fork” supply chain it would be worth your time and effort to meet Dr Verghese Kurien - the father of white revolution in India and the brain behind AMUL- and learn or lesson or two from him.

Just calling on the Prime Minister and promising things without understanding India seems very hollow and could be painful.