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Tweaking the transport and logistics strategy

LiveMint logoLiveMint 11-06-2014 P.R. Sanjai

Mumbai: In 2008, the concrete business unit of India’s second largest cement maker ACC Ltd was battling losses, and fighting challenges ranging from labour management to the high cost of raw material. The crisis-like situation at the unit led to extensive damage control, a large part of which was an overhaul of its transport and logistics process.

The changes led to a turnaround in the unit by 2011-12, and for fiscal year 2013-14, the unit reported a profit of `33.17 crore.

ACC is not alone in its tweaking transport and logistics strategy. Godrej Industries Ltd, Essar Ports Ltd, GlaxoSmithKline Pharmaceuticals Ltd, and the Food Corp. of India (FCI) have revisited their processes and in turn achieved significant benefits.

A poor road network, and lack of warehousing facilities and alternative modes of transport have led to an escalation of costs, and forced companies to rework their processes. This is particularly true for companies engaged in manufacturing, where the spend on material handling and supply chain management is high.

As per a McKinsey study conducted in 2012, inefficiencies in logistics infrastructure would cost the Indian economy an extra $45 billion, about 4.3% of the gross domestic product (GDP), every year during 2012 to 2020. It warns that a 2.5 times growth in freight traffic demand by 2020 (as compared with 2010 levels) will put further stress on India’s infrastructure.

For instance, for ACC’s concrete business, transporting the manufactured product to the client needs to be done within three to four hours of production because of the small shelf life of concrete. Even a delay of one hour can render the product non-usable. To reduce wastages due to delays in delivery, the company installed a global positioning system (GPS) -based tracking system in its truck fleet.

“This basically helped us to see if the drivers are using longer routes or taking prolonged halts during delivery hours,” Anil K. Banchhor, chief executive, concrete business at ACC, said in an interview on 12 May.

The company also moved most of its transportation to night time to cut the duration of travel, since there is less vehicular traffic during these hours. All these efforts resulted in a 15-20% reduction in logistics costs for the unit.

Essar Ports has also tweaked its transportation strategy by using the sea route instead of the road route to bring cargo into the Nhava Sheva port in Mumbai.

According to Rajiv Agarwal, managing director and chief executive officer, Essar Ports, the company evaluates various modes of transport to reduce costs and inefficiencies.

Most of the goods that the company handles come from Hazira port in Gujarat. Transporting the goods from Hazira to Nhava Sheva and vice-versa by road was costing the company approximately `20,000 per twenty-foot equivalent unit (TEU).

As an alternative, the company started transporting goods via the sea route through a tie-up with rival port company Gujarat Pipavav Port Ltd. In other words, Essar Ports used different modes of transport to cut down on costs and offer better services to its customers.

The change resulted in direct savings of more than `5,000 per TEU for Essar, apart from saving about a week’s time in transportation (including stuffing, transporting, custom clearing and loading containers on to the ship).

“Several Indian companies have benefited from optimization of their warehousing and transport network and savings have been up to 15-20% of logistics costs including inventory carrying,” said Manish Saigal, managing director with Alvarez and Marsal Holdings Llc, an advisory firm.

Earlier this year, state-run FCI started moving 20,000 tonnes of rice every month from Kakinada to Kochi via coastal shipping instead of using road transport. This was done primarily because coastal shipping was cheaper and also due to the unavailability of rakes and heavy congestion on roads.

Saigal cited several instances, like a large speciality chemical company using ISO (International Standards Organization) containers by rail, instead of carrying chemicals such as methanol and acetic acid by road in bulk tankers from Gujarat to the National Capital Region (NCR). This has resulted in lower transportation costs and contamination, and eliminated pilferage.

Meanwhile, Godrej Consumer Products Ltd saved `200 crore in capital expenditure in fiscal year 2013 by tweaking its transportation strategy, including starting night transport movement to skip traffic. This allowed the facility at Malanpur in Madhya Pradesh to work at near-full capacity, following which plans to set up a new capacity at a cost of `200 crore were deferred.

“Boards will listen to supply chain officers if they can positively contribute to the top line, bottom line and cash flow,” said Rakesh Kumar Sinha, chief operating officer, global supply chain, Godrej Consumer Products.

Sinha, in an interview on 15 May, said his firm has also accomplished 99% fill rate (stock availability) by reconfiguring the supply chain and transportation structure. “We started taking feedback from the market and ignored forecasting agencies. Now, we can ensure 99% fill rate which is tremendously helping the company,” he said.

Inventory fill rate is the percentage of customers that are satisfied or can be satisfied with the inventory at hand.

GlaxoSmithKline Consumer Healthcare Ltd has gone a step further with supply chain executives assisting salesmen in forecasting demand. Demand estimation is becoming “10% more precise” with the involvement of supply chain officers, a senior company official said on the condition of anonymity.

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