Of late, logistics is being looked upon in a different light. Better technology is being used for truck movement, and greater attention is being paid towards ease of working for drivers.
The distribution of cement to the end user from the manufacturer is a major cost factor in the landed cost of cement at the user´s end. Approximately 30-35 per cent of the cost of cement can be attributed to the cost of distribution, which begins at the gates of the cement facility. Currently, for every 50-kg bag of cement, the logistics cost comes to around Rs 19-25 by road and Rs 14-17 by the Railways, depending on the distance involved.
For example, the country´s third-largest cement maker, Ambuja Cements, opted for sea-routes to transport its cement from Gujarat to its southern market. Today, 70 per cent of the cement movement worldwide is by sea compared to just 3-4 per cent in India. However, the scenario is changing, with most of the big players like Ambuja, UltraTech, Sanghi and ABG Cement having set up their bulk terminals.
The most inexpensive method of moving cement is in bulk by water, but the optimum solution is always a combination of methods. In today´s technologically advanced world, it is possible to use the power of information technology to arrive at such optimum solutions using mathematical modelling and algorithms. About 3 per cent of the gross revenue is spent on inward logistics while outward logistics accounts for another portion of 15 per cent.
Inward logistics includes coal and limestone transportation, while outward logistics is mostly the final product, cement. Some companies also incur outbound logistics cost of transporting clinker to their grinding plants. For plants that are closer to the collieries, the inbound transportation costs are less. For plants located far away from the collieries they have the option to import coal.
In case of final product, the costs of handling and secondary movement are very high. Although transportation by sea is the cheapest option, unless there is right connectivity from the port to the consuming centre, the gains are minimal. In the past, the freight cost could be optimised on imported coal but the case no more exists since import of coal is a matter of the past. The costs of handling and secondary movement are very high in cement transport. Although transportation by sea is the cheapest option, unless there is right connectivity from the port to the consuming centre, the gains are minimal. In case of final product, companies which have plants located closer to the markets as well as to the source of raw materials have an advantage over their peers, as this leads to lower freight costs. Also, plants located in coastal belts find it much cheaper to transport cement by the sea route in order to cater to the coastal markets such as Mumbai and the states of Gujarat and Tamil Nadu.
GST and Logistics cost
The new GST regime will drive efficiency in logistics, and yield tax savings. Complex and cascading indirect taxes have been one of the key reasons impacting the competitiveness of Indian manufacturers over the years. Alongside operational efficiency, tax avoidance has influenced the supply chain decisions of corporates, resulting in small and inefficient warehouses and high logistics costs. Once the GST is introduced, ´tax avoidance´ will no longer influence decisions concerning distribution network and total warehouse space can be reduced partially.
As far as tax savings are concerned, elimination of the cascading effect of taxes will be taken more seriously. There will be phasing out of the 2 per cent CST for companies who move goods across state borders for sale. There will be optimisation of warehouses and consolidation of inventories for companies which historically choose to set up multiple warehouses across states so as to avoid paying CST. Elimination of check posts offers additional cost savings - while most states have replaced octroi with a local body tax (LBT), it has still not reduced the waiting time for vehicles. Similarly, at check posts on state borders, different requirements for documentation and tax payment lead to considerable delays.
While GST will subsume taxes such as octroi and LBT, a parallel dismantling of check posts too will ensure faster transit of goods, and in turn, reduce companies´ need to maintain buffer inventories.
Dismantling of check posts will boost logistical gains. Estimates suggest that a quarter of the journey time is typically spent at check posts, state borders, city entrances, and other regulatory stoppages. This adds to the cost of transporting goods and forces companies to maintain buffer inventories. Dismantling of check posts is critical to maximise benefits from the GST rollout. Such a move will structurally benefit firms, especially those which have a large, pan-India distribution network.
To ensure faster transit of goods through check posts, implementing e-permit/e-tolling systems could be one alternative. Such systems work on radio-frequency identification technology, where the tax status of goods being transported is automatically scanned as the vehicle passes through the check post. Pilot studies are already being conducted in states like Haryana and Gujarat. The relevance of automation is also highlighted by some stark statistics. While vehicles at one of India´s major check posts (Walayar, Kerala) spend at least 6-8 hours in transit (going up to a full day if traffic is heavy), Karnataka provides a breather by allowing vehicles to be moved in less than an hour by opting for online declaration of goods and electronic scanning of vehicles.
Broadly, CRISIL Research believes that eliminating check post delays will cut transportation costs by 10-15 per cent and trim inventory carrying costs, owing to more certainty in transit times. This will result in additional savings of 0.4-0.8 per cent of net sales for players across sectors. This, including the direct cost savings, will take the overall logistics costs savings to up to1.5-2 per cent of sales for companies. However, the proposed additional tax of 1 per cent by states on supply of goods in lieu of CST for 2 years could delay dismantling of check-posts.
Sales of high-tonnage, high-performance trucks will get a fillip. Realigning supply chains and dismantling of checkposts is expected to take at least two-three years after GST is implemented. This will drive demand for larger, more efficient trucks such as multi-axle vehicles and tractor-trailers as loads consolidate on primary routes. These vehicles will carry heavier cargo per trip and reduce overall shipment costs for companies on primary routes. Accordingly, we envisage a faster shift to 31-tonne MAVs from 25-tonne MAVs and to 40-tonne trailers from 35-tonne trailers.
We also expect players to shift from traditional, low-cost trucks to slightly mid-premium trucks (higher-powered trucks with better cabin comfort that cost at least 15 per cent higher but aid in faster turnaround times). While most commercial vehicle manufacturers began launching mid-premium and premium trucks four-five years ago (like Tata´s Prima series, Mahindra´s trucks, Eicher´s Pro range, etc.), these models failed to gain significant market share (they still comprise just 5-7 per cent of total revenues in the MHCV segment) as faster transportation was required to make these models a viable option. Consolidation of truck loads and dismantling of check posts can aid seamless transport and drive demand for such trucks.