Over last few years, we have seen several innovations in India’s transportation and logistics space. Some of the smartest entrepreneurs and technology minds are putting their efforts into fixing the enormous and fragmented Indian logistics ecosystem. Roll out of GST has further boosted these efforts, with more and more innovations happening, among others, in FTL/LTL movements, last mile delivery optimizations, Online-2-Offline integrations and IoT in Logistics space.
Each of these is a great idea and solves specific local problems. But are these enough to enthuse the business leaders who are consumers of the logistics services? How does a business leader responsible for the top line, bottom line, and market share look at logistics? How can logistics be made into a key competitive advantage for them? Can it ever be more than just a cost-centre?
Here is a stab at working backwards from the customer’s point of view –
- RS is the sales director at a large FMCG player in India. His products invite impulse purchase. RS is fighting for every basis point of his market share. While he has improved his market share by a couple of percentage points in last year, his distributor fill rates are in the low eighties. i.e., his distributors can fulfil only up to 80%-85% of the orders placed by retail stores. In RS’ view, this is criminal because while he has created a market and been able to generate demand, order fulfilment remains poor. This is a direct loss for him and adversely affects the top line as well as his market share. RS now wishes to access a fulfilment network that can execute the fulfilment part of things on six sigma efficiencies (99.99966%). Then, he would instantly gain more market share from same marketing spend.
- MK is sales director at a major beauty brand. His brand has one of the highest market shares in the top 200 cities. There is limited opportunity for him to grow the business in these cities now. And while he would like to penetrate deeper into upcountry markets, his current distribution structure would not support the move. The small business size would not make it lucrative for the distributors to launch the business. And the disproportionately higher logistics costs to serve these markets would not make the rural markets any viable. MK has his doubts on the distribution service qualities as he goes deep into the country. MK would like to have access to a fulfilment network that can offer standardized services at defined unit economics to any region irrespective of the distance and business volumes.
- VR is the supply chain director at a large pharma company in India. His products are costly, and hence inventory costs are a significant concern for him. His distributors carry up to 7 days of inventory and are still unable to match the full sales requirements. He is losing sales daily due to missing inventory. Distributors are unwilling to carry more inventory due to higher costs, and VR is reluctant to push them as it will increase his distribution costs. The only option for VR is to reduce the inventory in transit, i.e., from manufacturing to the retail outlet. VR wishes for a fulfilment network that could move his inventory ‘Just in Time’ with near zero days of anticipatory storage. This would deliver improved top line due to better availability and improved bottom line due to reduced inventory in transit.
- SK has a great selling food product in Ahmedabad. She would like to make it a national brand. With her customer feedback, she is aware she can do it. She looks for similar small brands that made it big in India but hardly finds any. At the same time, she sees a list of small brands in USA (Califa Farms, Ripple, Bulletproof, Stumptown etc) that made it big in the national markets. In India, the only new names coming up are from the large FMCG players. What’s stopping small Indian players from going national? Soon SK realizes that all that a USA brand had to do was innovate on the product and then crack a deal with a large retailer who could ensure national distribution. They get national distribution and retail as a bundled offering. But in India majority of the retail is fragmented and there are no organized national distributors to provide access to the widespread retail outlets. Each of the large FMCGs has built their distribution empires over decades to cover the millions of outlets, and that’s now the critical entry barrier for small players. SK wishes only if there could be a fulfilment network that she can plug into for accessing the millions of retail stores
While we have used FMCG/Food/Pharma examples above, the problem statement is similar for several industries such as auto spare parts, fashion, beauty etc.
In a nutshell, for the business leader, an efficient logistics organization needs to provide improved sales, reduced costs and increased market share through deeper reach, coupled with superior operational metrics around reliability and scalability. Only then can logistics become as crucial to the success of a product as product innovation and marketing.
With these inputs, how can such a shared national fulfilment network be built? The key ingredients of the solution include
- Physical layer: A national transportation and storage network that can operate on six sigma process excellence levels.
- Technology layer: A technology layer that will ensure control, availability, visibility and scalability at each level across the network.
- Services layer: An offering layer on top of the physical infra and technology that will enable several services such as order collection, last mile delivery, merchandizing, credit extension etc.
The traditional approach for building such an organization would entail building warehousing and transportation assets across the country. And then creating a services organization on top of this infrastructure to deliver the distribution services. While this is an excellent approach to building a standardized network, it needs significant capital investment and a large people organization. Asset-heavy, fixed costs networks tend to suffer given the changing demand cycles. During low demands, the network loses money due to underutilization, and during high demand, it loses business beyond its fixed capacities. This makes the fixed cost network financially unviable or takes very long to break even.
The new generation ‘shared economy’ concept may have the answer. Can there be a virtual distribution network, i.e., a network which has no fixed assets or teams of its own, but leverages the assets and teams of existing sources? It would have to be able to deliver the full customer requirement by aggregating the supply as well as the teams from multiple channels. Such a virtual network would be responsible for its customers for the business metrics while it works with its vendors to deliver the operational deliverables. This network would operate purely on variable costs, significantly reducing the capital requirements to build a national level network. Because this would be an aggregated network, it would be able to match the capacity in tune with varying demand cycles. This would eliminate any capacity wastage in lean periods and loss of business due to spikes in demand. Even though this network would have high per-unit variable costs, its net spend on the logistics would be lower than the fixed cost networks, because there would not be any fixed cost losses in lean periods.
Role of technology
Technology would form the backbone of this platform. It would be the connective tissue for pulling together the efforts of all connected partners. It would have to ensure the availability of resources on demand from existing resources. Cloud computing would be critical for real-time information sharing and coordination between partners involved. Technology would also have to generate real-time feedback on vendor performance to improve their operational efficiencies and reliability.
China has seen similar networks emerging. While Best Logistics offers all the services explained here, it seems to have followed the asset-based model. Cianiao has followed the asset-light aggregation model, but it has connected existing large-scale logistics players and tied them together with a uniform technology offering. This is not necessarily similar to aggregating individual assets.
Given the unorganized nature of the vendor base in India, we may need a platform that would aggregate capacities from fragmented small individual players. These players would need support for operational processes and technology.
Customers would be able to use this shared network on demand, and on a pay-per-use basis. Plugging into such a network would significantly reduce the time to market for the brands. Brands would reduce the fixed costs for managing the logistics and distribution organizations. The technology and process would ensure the operational excellence needed to deliver JIT fulfilment and six sigma level fill rates. The variable capacity nature would allow the network to provide services into deep upcountry areas without concern for distance or volumes.
E-commerce transportation has already paved the way for building such variable cost, variable capacity aggregated networks. Can we take this forward and transform the traditional logistics industry?