Economy & Market
How logistics value adds to the country’s GDP
Published
9 years agoon
By
admin
Supply creates its own demand, at least that is entirely true for India, where we run a constrained system. Logistics could add a full percentage point to GDP.
If more rail-rakes are allocated to the coal sector, one would assume that more coal rakes would move. But not so; the logistics puzzle, especially when we deal with multi-commodity, multi-zonal rail movement under constraints ranging from line capacity and safety norms on one hand and zonal coordination on locomotives and crew, guard, on the other, is far more complex to comprehend.
So against the first quarter 2018, in the second quarter India moved less coal rakes although the clear allocation was to move more coal rakes. The overall movement of rakes across all commodities also came down in the second quarter over the first quarter of 2018. This clearly shifted many commodities from rail to road, thus raising the cost of the system and therefore impacted GDP.
Why is it so? Three factors came in the way:
- Empty movement increased as out of turn rakes moved into coal which were earlier moving to other commodities, increased the empty rake run. Every rake moving an extra empty run reduced the overall rake movement with load.
- Optimising rake movement with constraints need multi-commodity handshakes, a rake moving the first leg with iron ore could end up with coal in the second leg and slag i the third leg. When the allocation changes to coal in the first leg, the whole optimisation puzzle changes to new constraints and new solutions.
- Inter-zonal and intra-zonal coordination for maximising rake movement precludes exchange of information so as to deliver one single objective function, which is maximising overall movement. When this objective function is changed to maximising coal rake movement, the coordination needs to move at two levels, which at times becomes impossible to handle as constraints increase.
India’s GDP is tied to higher production and output in the core sector, which can only happen if more commodities move; among all, coal, iron ore, steel, clinker, slag, cement and manufactured goods constitute the bulk. If one happens without the other, we create disparities of several kinds.
So the logistics spillover to road movement is a reality, but this surely comes at a cost. In the US, where 70 per cent of the movement is by road, no one moves bulk goods by road, other than the first or the last mile, this is sheer factor-advantage that cannot be relegated to wasteful economics.
Raising cost of movement due to a switch to road displaces factor advantages and raises the cost of the overall system. It impacts GDP as costs rise, it reduces consumption or when firm profits are impacted, the alternatives are not necessarily those that would add to the GDP.
Logistics is one of the most value adding components of GDP, this is better understood if we replace the country GDP with the firm GDP, which is net value added for the firm. When you raise cost of the system, the value added comes down whereas when you aid the flow, the value gets unlocked in higher EBIDTA.
Going back to our coal movement example, by attempting to increase the flow of coal, we ended up improving neither the coal movement nor the overall movement of all other commodities by rail and created the spillover effects in road, which added to overall cost of the system, thus impacting GDP negatively.
Spillover effects are generally negative to GDP, shifting from rail to road for bulk materials is one of them.
Is this a solvable puzzle? Of course it is, surely the puzzle would get sorted out but a lost GDP will remain a lost opportunity forever.
It is like the sale loss, could it be ever made up, I am not sure. To look at it differently if we would have added all the lost opportunities of moving stuff, the loss in value added would have knocked out a full percentage point from GDP.
Moving stuff efficiently is logistics, not just moving stuff any which way we can. The former adds to the net value added, whereas the latter destroys value.
By shifting rail to road for bulk goods, we could be doing the same for GDP.
The logic similarly could be extended to road as well, if we think by adding more vehicles we can move more stuff efficiently, we would be making the same mistake.
Optimisation is about solving these inter-connected puzzles, but the best we can do is demonstrating that we are keen to exchange more information and remove barriers that come in the way of transparent data.
Exchange of information in a constrained based system and along organisational interfaces where conflicting objective functions clash with each other, is one area of development in India. While digital information systems have improved and we have far higher transparency, we still lack the organisational reinforcements needed to deal with this.
One such neglected area is the inbound transportation versus the outbound transportation and the synergies mostly are never fully harnessed as the two are looked after by two different organisations. This is far more acute sometimes within the same supply chain where multiple commodities are moved using the same infrastructure and the missing synergies are not fully captured and acted on. Horizontal collaboration within supply chains where the same route is frequented by different commodities has a lot of scope to improve efficiency but the sharing of advantages is not fully garnered due to lack of organisational effort. This is not about technology, but the softer areas of barrier-less organisation must follow through with the efforts needed to transform.
Logistics, remains one of the most neglected functions in India, but things need to change fast as supply bottlenecks would continue to constrain the system.
Logistics alone could add a percentage point to GDP, such is the potential.
Infrastructure holds the center piece for logistics, but it is not the only piece of the puzzle. Factors that bring in efficiency and reduces wastes in the system is where the logisticians play the most important role. Simple things like empty haulage, return loads, less stops on the road, optimised loading programme, ease of movements at check points, multi-modal movements, last mile and the first mile connectivity are few of the areas where substantial gains could be achieved.
Logistics is no more the just the tail, it is time it starts to wag the dog.
ABOUT THE AUTHOR: Procyon Mukherjee, Chief Procurement Officer of Lafarge Holcim
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Praveen Vashistha, Founder, Gxpress Solutions, speaks about building a holistic logistics network that encompasses latest technology and current challenges faced by logistics service providers.
Logistics may seem to only entail transporting a package from one location to another. However, there is more to this term than just that. Logistics refers to the entire process of controlling all movement, transfers and decisions in the correct way at the right time and cost and with the desired level of visibility.
People nowadays want to receive more than just the delivery. They want quick, efficient, reliable and transparent logistics service. On the other hand, companies are facing higher operating costs, broken supply chains, congested cities, changing habits of consumers and growing complexity of logistics services. In this situation, a full logistics package is gaining importance not only as a competitive advantage but also as a necessity for a successful business.
The main challenge lies in uniting the first mile, the middle mile and the last mile into one seamless process.
The journey begins before the package moves
First-mile logistics may be the least recognised part of the logistics chain, but they have a crucial influence on all that follows.
This stage starts from the moment the shipment leaves the manufacturer, supplier, farm, warehouse or distribution centre. Depending on the industry, first-mile logistics may involve grouping shipments from multiple suppliers, compiling paperwork and checking the inventory before sending the shipments to a central hub.
Flaws in first-mile logistics produce effects later down the supply chain. Delays in cargo pickup can affect warehouse operations; improper packaging can damage goods in transit; and incorrect inventory information may cause stockholding or unnecessary replenishments.
This is why building a reliable network involves simplifying the operations done at the beginning of the supply chain.

Companies require accurate demand forecasts, supplier visibility, standard procedures, and software to capture information from the moment a shipment enters the supply chain. Route planning and fleet management are also important at this stage, especially as it may involve contacting multiple suppliers.
The main goal is simply to make the first mile predictable.
The middle mile: Where scale meets complexity
When products leave the original site, they travel through the ‘middle mile,’ which connects fulfilment centres, warehouses, sorting centres, and regional distribution points. In this phase, logistics networks begin operating on a large scale. A shipment can pass through several facilities before reaching the final destination. Each additional transfer entails the risk of delay or damage and information losses. Accordingly, the ideal solution is not to minimise the number of transfers but rather to optimise them. The use of hub-and-spoke networks, regional distribution centres, and strategically placed distribution centres can help companies shorten transportation routes and optimise distribution costs. Besides, data can be used to determine the optimal placement of inventories.
For instance, a retailer may find that it takes more time and is more expensive to deliver goods to customers if everything is stored in a central warehouse. Meanwhile, regional distribution helps meet the customer’s needs quicker and more efficiently.
The last mile is where the customer judges you
When it comes to the logistics experience, the customer experience comes down to the delivery. While the last mile might comprise a small part of the entire journey in actual distance, it could also entail expensive and difficult processes. Delivery runs through densely populated cities, through traffic jams, through unsuccessful delivery attempts, and through changing consumer preferences and narrowed time frames.
Customers want to have control over their delivery. Delivery means that customers expect to know the exact moment when their order is delivered. They need to receive current updates about their orders and the ability to decide whether they want scheduled deliveries, or whether they want their order to be dropped off at a designated location far from their house.
As a result, last-mile logistics must incorporate both efficiency and experience. The technology may be used to ensure timely and accurate delivery, through such products as route optimisation and real-time delivery tracking.
However, technology is not enough to guarantee success in terms of last-mile delivery. Knowledge of the local area is still an important aspect that contributes to successful delivery.
One network, not three separate operations
First, the common mistake that organisations can make is treating the first mile, the middle, and the last mile separately.
An effective first mile of logistics does not matter much if the shipment waits in a hub for many hours. A perfectly working warehouse does not make a happy customer if the last-mile delivery fails. Therefore, even the fastest last-mile delivery can become an expensive operation if the supply is not well geographically positioned.
The three moments should work together as one whole system.
This implies having a common view on inventory, transport capacities, shipment statuses and demand. The Transportation Management System, Warehouse Management System and order management system should give information to each other instead of acting like separate islands.
That is where real-time information comes into play!
If something happens, such as a vehicle gets delayed, the company has to know that from the start. If not, someone from Customer Service should be informed about the situation.
Visibility is the new infrastructure
Previously, companies had to rely on physical assets, such as warehouses, trucks, and sorting facilities, to create their logistics networks. Today, they have an additional layer of technology providing visibility.
Command-and-control systems now include GPS tracking, Internet of Things devices, bar-coding, RFID, cloud computing, artificial intelligence, and analytics, which allow companies to know what the goods are doing, how well they are doing, and what is going to happen next.
Predictive analytics reveal possible delays. AI-powered forecasting increases availability. Digital dashboards enable the manager to monitor all operations in one place. The efficiency of such technologies is not measured in the amount of information they gather, but rather in their capability of converting data into knowledge.
Logistics managers should be able to answer the following questions: Where is it? When is it supposed to arrive? What causes the delay? What impact does it have? Can it be delivered some other way? How much will it cost?
The sooner the answers are given, the more resilient the logistics system is.
Resilience must be designed into the network
The events of recent years have highlighted the vulnerability of interconnected supply chains. Geopolitical tensions, bad weather, a lack of labour, poorly developed infrastructure and an unexpected spike in demand are some events that can cause problems for logistics systems without prior notice. Thus, companies should create an end-to-end network not just for normal times but also capable of functioning quickly in problematic situations. In order to create such a network, it is necessary to find alternative suppliers, use several means of transportation, create several routes of delivery, and establish inventory. It is also important to use scenario planning to define what to do if the main hub becomes unavailable or any means of transportation is blocked.
Sustainability: Part of the delivery equation
The future of logistics will also be shaped by environmental considerations.
As delivery volumes rise, businesses are under increasing pressure to reduce emissions without compromising service. Better route planning, load optimisation, electric vehicles, alternative fuels, renewable-energy-powered warehouses and consolidated deliveries can all contribute. The most sustainable shipment is often the one that does not require unnecessary movement in the first place.
Better demand forecasting and inventory placement can reduce empty miles and avoid repeated transportation. Consolidating deliveries can improve vehicle utilisation. Reverse logistics can ensure that products, packaging and materials return efficiently instead of becoming waste.
Sustainability, therefore, should not be treated as a separate initiative. It should be incorporated into network design itself.
The future belongs to connected logistics
An end-to-end logistics network ultimately seeks to close existing gaps between various processes.
Every mile of the process should be interconnected with the other miles. Warehouses should be aware of the restraints imposed by transportation. Delivery crews should be able to know at every moment the inventory at their disposal. Clients must have access to this useful information.
Companies that will be successful in this area will not necessarily be the ones with the biggest fleets or the most warehouses. They will simply be the ones that can employ their resources in the most effective manner.
The future of logistics will be represented by an ecosystem consisting of the combination of the physical aspect, digital intelligence, and personnel decisions. Every mile in the process of delivery is important. However, the key advantage here is getting those miles to work together.
For companies, it means having minimal resistance, enhancing their efficiency and improving customer care. For clients, it means simply having the right product delivered at the right time.
About the author: Praveen Vashistha, Founder, Gxpress Solutions,
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