Hedging Currency and Crude Risks

Many a time, executives are focused on sales, operational efficiency etc but crude and currency also bring a lot of risks and can damage the bottom-line significantly. With billions of dollars being turned in and out daily on a global basis, it is extremely critical for treasury functions to hedge currency and crude risks.

It is typical to offer CAF and BAF riders but that ultimately is like passing on the costs to the customers and that can erode the dwindling customer base. The next major wave of business boom will help those corporations that can keep input costs locked in for customers regardless of market fluctuations. This is extremely critical because majority of the export volumes come from emerging markets, where currency fluctuations are far more volatile compared to USD / EUR / GBP

Coming to India specifically, the rupee is going through free fall and although things are expected to turnaround soon, a lot of importers, shipping and aviation companies are reeling under losses due to currency and bunker prices. The only ones who are relatively safe are the ones that hedged their risks appropriately.

In fact once the Rollar went beyond the 53-54 levels, treasury managers and business heads should have raised alarm bells; what really transpired is either passing on the costs to the customers and / or relying on taxation provisions that allows a firm to book losses on forex accounts.

The simple task was to ensure that there was a special purpose fund for hedging and the following positions should have been created

LONG USD-INR Futures + Long USD-INR 53 Put
This would have locked in a price of about 54.25 should any further weakening in the rupee and on the other hand, had the pullback taken place as expected, then there would be more reason to cheer.

I am attaching 2 charts;
This first chart has the daily USD-INR prices from 1st May 2013 and how a treasury position of Long Future / Long Put would have kept the input cost constant

Now I have put in fictitious data showing the rupee appreciating by 2 rupees that still ensures that benefits continue to accrue to the treasury position

Many a time, business professionals ignore this aspect, considering 'financial speculation'. We need to realize that this is an option available in the market specifically for locking in input costs and keep the P&L healthy. This is precisely the reason why the world's leading coffee chains keep a fund aside for coffee futures, corn flakes manufacturers keep a fund aside for corn futures and so on.

The other aspect has been some of the aviation companies taking a unidirectional position at peak crude prices only to find that they ended up with a double whammy; first being unhedged [and taking a hit when crude prices tripled] and then taking a unidirectional position [long only] assuming that prices will go up north perpetually.

Managing the hedging for large turnover companies is a combination of decision science and business skills. Moreover, in a country like India, accounting for such trades needs a separate 'arms-length' structure with robust auditing procedures. The hedging activities must strictly take place within parameters of 'Value At Risk' and ensure that the hedging activities do not cross the line for speculation as it is very tempting to cross this line when positive results start trickling in.

The fund manager needs to take into account a variety of factors like quantum of hedging, technical analysis and sound business economics. Most treasury managers at this point of time only look at the bigger picture and identify when and where funds need to be swept in; it is high time to do something unique that helps customers. This will be the next major winning factor for shipping and logistics companies in India and the ones who do this first will have 'First Mover's Advantage' to set new standards.

Your profit-centric analyst

Emerging Distribution Megatrends

When I started this blog, I had mentioned about how trucking function operates in silos in most firms in India.  With diesel price deregulation, now the base freight for trucking has moved to almost 14 rupees per MT per KM going all the way to 40 rupees per MT per KM for project cargo and cold chain transportation.

India comes within the top 10 countries in the world for road transportation networks given the sheer length and breadth of the country. The challenges are compounded by the multiple warehouse setup to cater to the multi-layered tax regime. Freight procurement therefore remains one of the biggest challenges for logistics managers on both manufacturing ends and service provider ends.

IT is one of the key enablers to help bring more productivity and efficiency into this complex maze of activities. With cloud computing and proliferation of GPS in hardware and Software as Service engagement model in software, the scope for optimizing trucking costs / lead times is tremendous.

We all know about how scale brings in economies due to volumes. One major evolving trend will be demand / supply pooling. The basic concept is similar to that of car pooling that working professionals in general talk about. The first movers in this space will stand to gain tremendously in the long run. Just as in the case of multi-user warehousing facility, there is ample scope for aggregating trucking requirements on a multi-client basis.

The basic model is very simple
1 - Identify specific clients that have intense trucking needs
2 - Procure trucking freight in bulk across high density traffic sectors on round-trip basis
3 - Engage with the trucking service provider to ensure GPS adoption takes place

Start aggregating various client volumes on the first leg to ensure truck positioning happens as per client desired outbound schedules. Simultaneously ensure that demand for the truck's return haul is pooled at the other end. Why will this model have multiple benefits

A] It helps procurement of freight in bulk, thereby lowering trucking costs
B] It helps trucking firms minimize idle time between each haul and ensure optimal utilization of the asset i.e. the truck
C] It ensures a supply chain network that is actively engaged as per the factories' loading schedules

Given that majority of India's trucking fleet operates in the 9MT to 12MT load capacity and the fact that a truck moves an average 600-700 kms per day for long hauls, there is tremendous dead weight loss caused by fragmented ownership of fleets. The average truck manages about 100 days of utilization due to this fragmented nature. Taking a transit time of 2 days for an average haul of 1200 kms, it still leaves about 1/3rd time un-utilized for the trucker [fixed cost of which is transmitted to the end users]

The fragmented network still brings challenges to manufacturing firms as the production lines are optimized but lead times / inventories are raised because of the uncertainty in lead time to simply 'position the truck' for the load.

The GPS adoption will provide visibility of availability of fleet on real-time basis and adopters of the 'aggregated demand' model will get trucks positioned as per their schedules, thereby reducing 'positioning lead time' and a reduction of safety inventory holding

The trucking companies benefit from greater asset utilization with assured loads and perhaps the dead weight loss can be dropped to as low as 40-50 days per truck per annum. The benefits of this can be straight away transmitted to the end users of services without any erosion of margins for the trucking service provider [or perhaps even margin enhancement due to asset utilization]

So far so good and the concept seems like a no brainer quick win solution for trucking intensive operations. If only ground realities were as simple as they seem on paper............and that too in the Indian market!!!!

First and foremost, implementation of this model needs a very strong collaborative approach between truckers / trucking companies. Most often than not, due to the low education and awareness levels of drivers, adoption of GPS technology itself is a major challenge. They need to explained in their own language that the GPS model is not to police them but to ensure better utilization of their prized asset i.e. the truck. The trucking companies need to be made aware that whilst this model may seemingly reduce marginal profit per haul, the volume benefits over a period of time will actually increase profitability due to higher asset utilization

Most important, manufacturing firms will always be vary about sensitive information getting leaked out due to the shared model and / or the cargo variance leading to materials management challenges for their specific product. Indeed these are valid constraints and that is where the role of IT will be very handy. Logistics Service Providers need to build those engagements in a very sensitive manner so that data security is not compromised upon. Also manufacturing firms need to remember that shared utilization is so common in the international air-freight and sea freight portions of transportation. So they should not be too worried about the multi-user model on the trucking front.

As far as constraints with materials management are concerned, today there are adequate technologies in place to ensure that system checks are built in while allocation of trucks for loading [it is obviously known that food-grade equipment should not be mixed with dangerous goods loads and that napthalene carriers should not be utilized for transportation of garments] All such constraints can be built into the trucking system by the logistics service providers.

In my personal opinion, this model is the one that will actually kick off big time in the Indian industry and the greater the utilization of this model, greater will be the reduction in logistics costs and lower administrative head aches for freight procurement functions. This model is all about 'Doing More with Less' that is spoken by many firms; implemented by only a handful few. This model also will bring in a lot of organized fashion in the trucking industry and not to forget significant savings on the bottom-line

PS: Some of the leading Fortune 500 Indian companies are already utilizing this model that is ensuring that end-product cost is maintained constant despite hyperinflationary trends [and yes they are multi-nationals in the consumption space] It is the turn of core Indian manufacturing firms to step up the ante against hyperinflationary freight component in Indian trucking space........

Illustration of Pooling Demand / Supply Model

In the next article, I will discuss the potential opportunities to lock in fuel costs for the year regardless of market fluctuations of fuel costs

Revenue Leakages - Dynamic Yield Management Strategies For Carriers

It is an open secret that carriers have been losing money to consolidators and losing big time over the last 5 years. The reason is simple and straight forward; myopic vision from carriers, relentless thirst for flooding market with capacity and almost complete lack of customer focus. This is also true for air carriers but the major ones leading the lag are the ocean carriers.

The so-called peak season surcharge will dwindle as time passes by and there will be little differentiation between peak and lean season charges as the market continues to have excess capacity. Today there are major revenue leakages for ocean carriers vis a vis weight and console cargo.

Weight Restrictions: Typically these are the metals and scrap linked clients who simply tend to overload the containers. Just because they provide base volumes, most carriers have been extremely lenient on these customers in quest for volumes. Business dynamics have changed and it is extremely critical that businesses pay for what they use. In the earlier days, when freight was on the higher side, the leniency was justified but not anymore. Metals and Scrap create a lot of damage to containers and hence make them under-utilized over the span of 1 year [if the average utilization for 20' containers is about 5 times for general cargo, it tends to be a shade below 4.5 or so for metals and scrap related containers!!!]

Moreover, these commodites apart from Granites, Marbles and Stones demand a significant share of Heavy Duty containers. Heavy Duty containers should attract at least a 100 dollar premium over regular containers. Also the fuel surcharge must be higher on heavy duty containers. Yes it is challenging the status quo that was there for almost 40 years now. Shipping Lines must also remember that the Baltic Dry Freight Index is at lifetime lows adjusting for inflation and hence, the status quo must be challenged. Every innovation or best practice will challenge the status quo and that is how industry standards change. Had Sealand not challenged the status quo of Bulk Shipping, then we would never have containerized shipping at all!!!

Also, the free-time awarded to such commodity corporations is significantly high. Yes, granted that the Steel industry is going through its cyclical downturn as well but all businesses are run for profit. Do these companies compromise on the freight rate for trucking ore or for that matter trucking the container loads to the port? Obviously not because diesel price deregulation and steady wage bill increases force people in the business to accept the higher costs. Yes all shipping lines have the tendency to say 'Yes, we would like to have this but who will bell the cat???' It is critical for shipping lines to come together on this issue and collectively raise the bar [as is done for BAF, CAF levies]. Volume share without Yield Management is futile and unhealthy for the longer term.

State run shipping lines can afford to play such under-pricing games at the expense of the tax payer but private corporations answerable to share-holders cannot. So in the longer term interests of shareholders, shipping lines must come together and start a dynamic yield process that enhances the gross earnings by at least 200 dollars per TEU. 100 Dollars by levying a surcharge on Heavy Duty Containers, 100 Dollars for the excess load [which ends up burning more fuel] and lowering free time. Also indirect subsidy for repairing containers must stop. If the loading and unloading of metal scrap, metal rolls damage the floor of the container, the repair bill for the same must be borne either by the shipper o the consignee.

Business leaders must shed the myopic vision of loss of bookings for 3 to 4 months and look at the longer term benefits over a 5 year time horizon. If it means letting go of some bookings for the short term so be it. How much can any competitor absorb given the demand for such containers. At some point of time, there is bound to be excess demand and short-supply in this regard. Lion-hearts in the leadership team are needed for this and shareholders, tax payers and all critical stakeholders in shipping lines will eventually punish weak profitability rather than sheep-hearted leaders who follow the 'herd'

The other major area of revenue leakage is Console Cargo segment. Consolidators are just preying on carriers as well as shippers and taking in a lion's share of the pie. The freight rates for console cargo should be significantly raised along with service prices for documentation of console cargo. Consolidators must remember that both the asset owning carrier and NVOCC need to have a fair share of the console pie segment. Nobody is stopping consolidators from making a killing in that business but gains from such trades need not be at the expense of shipping carriers. Shipping lines equally deserve a share in the pie because it is the shipping line that actually makes it happen.

Pricing needs to be dynamic and segment based as well. Freight, THC, Documentation all needs to be higher for console cargo segments. By shipping lines taking this step in unison, it will send a strong message to the consolidators that they need to be more prudent with their freight procurement rather than take it for granted that shipping lines will bow to pressure and help consolidators grow at expense of shipping lines. This will also change the equilibrium dynamics of shippers who tend to use consolidators for 8 to 10 CBM of cargo as well. The idea is to entice shippers having 6-8 CBM cargo or more to go for a regular FCL shipment than LCL shipment [currently the equilibrium still lies between 10-12 CBM depending on the commodity] LCL Consolidators are needed for sure and they need to have multiple shipments of 5 CBM cargo or less.

Yes these measures are challenging status quo significantly but that is exactly the order of the day. Last but not the least, I would reiterate the same message that I had put forth in December as well. Shipping lines must collectively ensure a level playing field in the asset itself. the current scenario gives an unfair advantage to shipping corporations using fleet more than 25 years old over shipping corporations using fresh and young fleet below 15 years of age. With more and more young and efficient fleet being inducted at relentless pace, it is important that shipping corporations lobby at the right places to ensure that fleet older than 20 years old are out of the system completely for international trade. Otherwise the glut of ships will continue, the unfair advantages will continue and competent carriers doing the right thing by providing high quality vessels get raw deal due to the higher costs they incur and give an unfair advantage to shipping corporations in the Med region who use vessels as old as 35 years with near zero depreciation costs and higher profitability.

Quality comes at a cost and this cost needs to be realized in the form of financial gains. Unfair advantages caused due to system nature should be countered with aggressive lobbying as the majority lies on the quality fleet side and just one major carrier on the unfair advantage side!

So I hope that this message trickles to the leaders in the shipping industry and I would be more than happy to  contribute the Game Theory aspects on getting this done for interested shipping carriers. Things will not change overnight but there is a larger game at play as usual; the situation seems depressing with no light at the end of the tunnel for shipping lines at the moment. If the game is played well, the situation is still not as depressing as bears in shipping markets including ship brokers are pointing out towards. The game if well played can turn the tables in favor of shipping lines over a period of 3-5 years.

Your Logistics and Profitability friendly analyst.................................

Megatrends For Retail and Automotive Sectors in India

Retail In India
So the much awaited FDI push into the retail segment has finally taken place in India. However, one need not get too excited immediately as the scaling up of operations perhaps will not happen before a new government is elected in India in 2014. What the current move has done is help the companies involved in developing the organized retail segment ramp up backend operations.

The first and foremost requirement in this segment is an adequate surface transport network and good cross docking facilities. The government, NHAI and private players have a lot of ground to cover on this. Moreover, with the diesel price deregulation, there will be a tremendous cost pressure on surface transport in India moving forward. The use of pallets, structured inventory management and world class pick and pack operations in India are very rare to find. Except for certain blue chip firms, the warehouse is nothing but a godown and as long as materials inside have protection from rains, people are fine with it. On the other hand the entire business model of organized retail depends on operational efficiencies and sound logistics. So the logistics companies have to pull themselves up big time on this one. Here, one must also point out that the average willingness to pay for sound warehousing and logistical operations is very rare in India, even with the so-called India Fortune 100 companies. Whilst rapid strides have been taken in areas like marketing research, corporate office culture, the outlook towards logistics functions is anachronistic to say the least. Volumes are on the rise and FMCG wants to ensure that logistics operations costs not exceed 30 paise to 50 paise per case!

If the Retail segment has to grow as per projected business cases and presentations, there have to be the following things in place

1] Uniform VAT / GST without too many variations in local levies, that will ensure rapid development of large distribution centres to gain economies of scale.

2] Multi-user, palletized cargo handling with optimal cubic utilization of warehouse space will be the next major ask. Today, the 'godowns' are not very much focused on utilizing cubic space because material handling equipment [forklifts, small-scale reachstackers etc] is not in place in majority of the 'godowns'.

3] Containerized trucking will be the next critical success factor. As more and more cargo will get into palletized storage and transportation, there will be a high demand for containerized trucking and rapid fork-lift driven loading and unloading operations

4] Separation of Engine-Chassis Unit: In the current trucking scenario, the trailer and driving unit cannot be moved separately. This means that even if loading and unloading operations take 4 to 8 hours, the driver and the engine unit are forced to stay idle at the location. On the other hand, in the developed markets, the chassis and engine units are 2 separate entities allowing greater asset utilization of the engine unit [called the horse and carriage in local Indian terminology literally and figuratively!]

5] Temperature Controlled Logistics Infrastructure: Currently, cold chain logistics infrastructure is by and large restricted to the food business in both B2B and B2C segments. The current cold chain infrastructure can barely cope with 30% to 40% of the actual demand. Here again its a bit of the chicken and egg scenario; the investments in cold chain infrastructure have been directed towards the segment with higher willingness to pay rather than create infrastructure for futuristic needs. On the other hand, this very lack of cold chain logistics infrastructure that is resulting in over 30% of agricultural produce of India going to waste!!!

With adequate government support, there will be enough incentives for cold chain logistics infrastructure to scale up for the booming trend, thereby decreasing marginal costs for this segment and get a higher proportion of people under the service umbrella as the willingness to pay segment will grow

6] Upgrades in IT Infrastructure: Whilst a lot of ground has been covered by firms in developing ERP systems, WMS systems etc, there is a genuine lack of investment in Network Optimization software, Middleware systems helping better track and trace abilities within the domestic logistics segment. Such development has been by and large restricted to the express business segment. Thankfully, due to the advent of e-commerce space, some very positive development has been seen in the middleware segment. However, the core of the issue i.e. better network optimization software, easy to use warehouse management systems has been limited due to high setup costs.

We now have a lot of experience to pick upon from the developed world. The last 3 decades has seen a lot of research, trial and error in these aspects of IT capabilities by major retail corporations. It is becoming increasingly clear that only the high market-capitalization companies can use the full-scale software and enhance RoI in IT infrastructure. Even in highly mature markets like UK, US, Australia etc, the trend among Small and Medium Enterprises has been to use SaaS [Software As A Service] components for finer aspects. SaaS allows a firm to take a 'Pay As You Go' approach for many IT requirements, eliminating need for high setup costs and a lot of these modules are quite flexible and customizable to a firm's requirements.

It would be an over-simplification to say that all critical factors have been covered in the points above. All that I can say is that the points above are basic foundation blocks and that  unless these foundation blocks are put in place  the retail segment expansion in India can derail and the faster stakeholders meet and agree on mechanisms to take this forward, the greater the probability will be that the retail segment will kick-off as expected. Failing to get these in place will result in more Subhiksha like cases turning up [sound operations but negative profitability leading to shut-downs] or too much financial engineering to keep the ball rolling [Future Group for instance]

Automotive Logistics
The other critical segment that deserves attention today is the Automotive space. India has rapidly grown in this space both in domestic consumption segment and export markets. The Euro-crisis can soon question some of the volume projections in the export space and the automotive industry needs to be very aware and alert on this possibility. Should there be an event like Italy, Spain moving out of the Euro-zone and returning to their old currencies, the probability is very high that these locations will become far more cost-efficient than India. These locations already have sound logistics infrastructure and technology competent labor that can easily bring down marginal costs of production

Nevertheless, in the status quo scenario, India has not lagged behind developed peers in manufacturing domain and after-market segments. The real inefficiencies in India pop up in the In-bound and Out-bound segments especially for Finished Goods segment of automotive logistics. This has more to do with government regulation and the logistics infrastructure than lack of interest by most automotive industries. Whilst volume growth in the car segment has almost tripled over the last decade, the best practices from developed countries have not come in.

Cars are still transported in specialized trucks called 'Car-tainers'. One must recollect that there is only so much that a car-tainer can carry in one load and also move at speeds no greater than 40kmph. Taking into account the number of toll gates a truck has to go through in a 1000 km haul and the stoppages the truck has to take to cool down the engine, the transportation costs for cars is very high. Moreover, with the business volumes these days, the demand for car-tainers is increasing significantly [with 2 major beneficiaries; trucking firms themselves and the RTO agents placed at toll gates to harass the drivers and extract unreceipted payments to let the truck pass] According to the book '10000 Kms on Indian Highways', a haul from Chennai to NCR with a car-tainer load, the tolls and bribes alone suck out INR 50k in one haul. This increases costs for the automobile firm, it increases costs for the end-customer and the truck owner perhaps makes almost the same as what he used to make earlier.

The game changer is going to be containerized rail transportation for cars. In France, Germany etc, it is very common to see freight trains carry 4 to 6 containers of cars along with other containerized rakes that make the entire logistics process very cost efficient. I am personally very confident that this will be a major trend in India as well - it is only a matter of time. The rising diesel prices, other input costs for automotive firms and current operational inefficiency will only compound problems. The government on the other hand will be very lethargic to get these changes in place [regardless of which political party is responsible to pass this bill] The need of the hour is for automotive companies and logistics service providers to lobby with the government to implement rail transportation for cars, be it for domestic consumption or for exports in RO-RO vessels. The faster and greater the adoption of this policy, the more price competitive the industry will be.

The positive aspect of the Indian automobile segment is the agility with which world class manufacturing and operations processes have been implemented with the help of their foreign counterparts. Within the last 10 years, concepts like JIT, Kan Ban, Greenfield Operations, VMI, Kitting, Binning etc have become a part of the industry's DNA and this is a very encouraging sign.

The more disturbing trend is the excessive SKU proliferation that extends product lines for sure but raises questions on profitability. Rationalization of SKUs is more a marketing related issue than logistics related issue so I will leave it at that here. All the good practices that firms have adopted like JIT, TQM, modular production etc may need complete revamp should there be a drastic change in the Euro-zone economy. That will certainly not  knock the death bell for the Indian automotive industry. What that move would do if it indeed happens on expected lines is that add many layers of sub-processes and increase in-bound and out-bound transactions in the Raw Material Inventory / Work In-Progress Inventory.

My reading of the current trend is that most firms have ignored this possibility. It is very critical to keep in mind the sudden need to change and hence the entire organization and logistics fraternity must be on their toes for this mega trend. As of now, logistics service providers are being selected on extreme basis; one end of the spectrum is the low-cost small players being contracted by firms. Whilst such practices may bring in short-term benefits, there are real risks of greater losses. Also trying to do automotive logistics in-house may not be the right thing to do. Time and again, it has been seen across the globe in various industry verticals that such experiments are hardly successful over a 5 to 7 year horizon. The logistics operations must be outsourced to competent logistics service providers as much as possible.

The need of the hour is consolidation and using scale effects through logistics service providers. If automotive firms can have strategic alliances for branding / manufacturing the product, there should not be a problem to deal with capable service providers on alliance basis. There will be a shared cost benefit that firms can derive from their logistics service providers. I have seen leading brands trying to venture out in this space and taste limited success so far. All that I can say is that I see light at the other end of the tunnel!!!

If we just think about the aviation industry, there was a time when East-West Airlines, Damania Airlines, Modiluft etc crop up in India in the 1990s and they vanished as fast as they came in! There was nothing wrong in the business model these companies adopted but it was just that the market as still not ready for the change. If you see the operational model of Jet Airways, erst-while Sahara, they are pretty similar to the models used by East-West Airlines or Modiluft; the only advantage that firms like Jet Airways and Sahara Airlines had was 'time to market'.

So all the good work that logistics service providers have put in automotive logistics, in India have so far not proven very lucrative in terms of finances. It was just that these services were a bit ahead of time. In the next 2 to 3 years, all these activities will be on the verge of a positive pay-off and it would be a good churn where-in the fundamentally and operationally strong players will shake out the weaker ones. The last thing that strong players would do is to abandon these activities for lack of profitability. If a pull-back was to be made it was during the last recession in 2008. Now that the activities have chugged along for 5 years with a drag, and just when the industry is on the cusp of a change, it would be detrimental to give up. One may choose to keep such operations in 'Cold Idle Stage' and simply pick the wage bill as usual and gear up employees for the future. The amount of severance pay that a firm would have to pay now only to pick up hiring 2 years down the line does not make sense.

In the next article, I will cover the challenges of revenue leakages in the Indian Shipping and Logistics, Lack of Willingness To Pay from clients and potential sources of revenue and yield generation for 2013.

Human Resources Challenges in Shipping and Logistics in India

Well it is commonly known that business leaders always mention human resources as sources of strength when the companies are doing well and the lack of genuine talent as one of the key factors in turbulent times apart from business externalities.

In India, the shipping and logistics industry has been in a very tight spot and perhaps, in the near future will continue to do so. There is genuine lack of good educational institutes that impart holistic training in shipping and logistics. The only good one that I personally know of is NITIE School of Management that only takes in engineers and most of the talent from this business school ends up in logistics departments of FMCG and Automotive companies. A couple of reputed business schools did try to bring in specializations in Supply Chain Management either in the Indian campuses or their branches in Middle East or Singapore, but based on my interactions with people in the industry, there is no formal institute as of now that imparts holistic shipping and logistics training at bachelors and masters level.

The reasons for this come from the fact that there is genuine apathy to the logistics industry in India overall and lack of industry experienced faculty in educational institutes [Finance, HR, Marketing segments don't face this challenge usually] In fact, even in the crowded 'head-hunting' space, you will find executive search consultants not knowing the difference between shipping, contract logistics, freight forwarding, 3PL/$PL and many still consider supply chain management to be different from logistics!!!

As mentioned in the earlier post, the shipping and airline [both asset heavy industries] are in bad shape and this trend is expected to continue for at least 3 more years before some meaningful turnaround takes place. So there won't be much recruitment in 'carrier' firms and there will be a lot of focus on operations strategies to drive value in corporations' operations and thereby balance sheets.

On the logistics front, be it contract logistics or freight-forwarding firms, there is ample entry and exit of players including private equity firms and this trend is expected to continue over the next decade or so. Over a period of time, there will be consolidation in this space as well but this front has a lot of potential to grow and add value to an organization.

The most disturbing trends in the human resources side has been the lack of culture of meritocracy. Over the last 5 to 8 years, so much activity has taken place that there has been a lot of movement of people from one organization to the other but neither do the profitability of the firms reflect the volume growth nor do people at large seemed to have grown in terms of product / market knowledge.

My personal take is that 3 critical factors stand out for this
 'People join corporations but leave managers' as echoed by Narayan Murthy of Infosys fame and it holds true for most industries in India including logistics and shipping. First and foremost, this is the major reason for the lackluster HR resources in the logistics industry in India. Most of the designated managers in this industry in India are so extremely logistics focused that they have lost touch with the changing realities of the world [read stuck to glory of the past] or are so engrossed in chasing salary packages that they don't have time to groom and mentor people reporting into them.

That the executives at the top got the industry analysis wrong is also a major factor as mentioned in the previous post. This is also not surprising because a lot of hot money flows into India with the India shining story but what holds true for IT or FMCG does not hold true for the logistics industry. In the relentless hunger to fill in open positions and unrealistic excel modelling of the future, most business plans do not reflect any sense of ground realities and chunks of people including top management are confused about their own careers and where they want to take the business over a longer term horizon.

Third, the lack of meritocracy and performance measurement has been largely missing. Over the last few weeks, my interactions with people from the industry have vindicated the belief that in the Indian shipping and logistics industry, most organization structures have created the following culture

[illustrative image from images.google.com]

The most important metrics for an executive are
1] Value Created For the Organization [Be it listed or non-listed, market capitalization and tangible enterprise values are critical]
2] Value Generated / Cost To Company [How much one gives back to the organization]

Over the last decade or so, barring a few corporations in the Indian industry, there has been constant value destruction and an exponential rise in Cost To Company. When an industry is booming, there is no doubt that employee benefits should rise but people in commercial and business development positions at a minimum need to generate value equal to at least the Cost To Company [ideally 3 times or more]

The other aspect has been that in many organizations, the organization structures have continued to remain extremely complex, very executive-heavy and a there is lack of sustainable growth strategies. The need of the hour is strict elimination of non-performing talent and leaner and meaner organization structures. In this area as well, there has been a significant challenge; in many organizations, the headcount rationalization exercise has brought down headcounts but not changed the Cost to Company significantly.

The primary reason being retention of employees who fit the bill of 'Ay Ay Sir / Yes Madame'  no matter what the cost to company and elimination of talented resources [which does not improve the cost side!!!]. In fact most organization restructuring has been so detrimental to long-term growth prospects of corporations that neither talented people in the lower rungs are motivated to perform nor is the organization able to generate meaningful value for shareholders [regardless of whether the entity is publicly listed or privately owned]

The longer the industry overall takes to rectify and move to the policy of meritocracy, the harder it will be to turn around the fortunes of the corporation. The other major aspect is on training and development. Due to pressures on the short-term value creation front [that is easy to manipulate with some financial engineering], many companies are pulling the plugs on training and development. This is not a healthy sign as training and development is the most crucial element, considering the developing industry trends. A major challenge here has been allocation of training budgets [the ones who receive, receive significantly whilst a major chunk is ignored]. The other area of faulty human resource management has been excessive emphasis on  hiring professionals from business schools and ignoring talent from regular graduate streams.

By and large the shipping and logistics industry comes with a set of working environmental challenges; most of the action takes place not in air-conditioned corporate offices but in remote locations [industrial areas, port locations etc] and also demands a lot of physical work. In an action packed day, a logistics professional has to interact with blue collar workers taking care of loading/unloading cargo to truck drivers to logistics and sales professionals of the client. A logistics professional has to be able to swiftly juggle thinking caps, adapt to different language and communication styles. Moreover there are nuances attached to different kinds of materials handled i.e. what is best practice for automobile cargo is completely different from what is good for foodstuffs and likewise for apparel and footwear.

A good shipping and logistics professional is expected to seamlessly navigate through processes of bonded warehousing, non-bonded warehousing, surface transportation, consolidation and multimodal transportation. The last 2 decades have seen a lot of silo-based processes where the shipping professional just thinks in terms of containers whilst the bonded warehousing professional just thinks in terms of stuffing/destuffing of cargo whilst the consolidation professionals just work with the SLAs and KPIs set by their clients. Well every professional as to start with something and it takes a good 6 months to 1 year to be able to talk about one aspect of logistics with conviction before moving on to any other segment. A good shipping and logistics professional needs at least 4 to 6 years just to get familiarized with different aspects of supply chain and carve a niche for himself/herself.

It is really unfortunate that the attitude towards training and development has been well below global standards in India. Even large organizations with sizeable chunks of training budgets have ended up paying lip-service to real training and development. Now don't get me wrong that Im trying to say that money has not been invested in training and development. A lot of money has been invested in training by most organizations but sadly, the allocation of training budgets and development of subject matter expertise has been the real issue. If this emphatic statement sounds abrasive or over the top ranting, ask any person who has spent about 5 to 8 years in the industry the following 10 questions

[Assuming that the reader does not google up the answers!!!]
1] What is the average trucking cost per Metric Ton per Kilometer today and how much was it 10 years ago?

2] What are the risks and costs associated with the major incoterms CIF, FOB, DDU, DDP and Ex-Works i.e. whose rights and interests are protected in each leg

3] What is the average speed of a cartainer on the national highways?

4] What is the average utilization of 1 20' Container in a year and what is the average dwell time of a 20' container in non-freight earning mode?

5] What is the rake capacity of a single-stacked container train?

6] What are the 3 crucial variables to be controlled in a refrigerated container of cargo?

7] What is the average productivity of gantry cranes in modern ports of West India [JNPT, NSICT, Pipavav, Mundra etc]

8] Identify the geographic trade hubs in India for the commodities 'footwear', 'basmati rice' and 'sugar'

9] Which is the gold standard system for airfreight settlements with carriers?

10] What is last-mile distribution optimization in a 3PL setup and why is it complicated in India?

You can compare your answers and scoring guide in the sheets below links

Answer Key: Please Click Answer Key to Download the same

Scoring Guide: Please Click Scoring Guide to Download the same
The scoring legend in the excel file is just a joke; please take it in good humor. The main point Im trying to drive here is the desperate need in Indian logistics personnel to develop LQ [Logistics Quotient] of themselves and their team members.

So to conclude a rather abrasive note for many readers and people managers in the logistics domain, the need of the hour is a strong operations strategy focus, meritocracy culture and LQ [Logistics Quotient] building time for the long-term growth strategies of the corporation serious about making it big in the logistics domain. There is one concept of employee stock options and proper incentivization that I will cover perhaps in the 2nd half of March 2013

The next article will deal with megatrends for the automotive and retail sectors from an India perspective.
As usual, questions, criticism, feedback are all welcome; comments are only moderated for decorum purposes.