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:
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