Cement companies can realise major savings in freights by conducting periodic...
The cement industry is yet to appreciate the full potential of freight audits. The industry must allow a third party auditor to look into their processes and come up with saving estimates. There is huge scope for savings in logistics and a thorough freight audit will show you where it lies, says Venkatesh Hariharan, Director and Co-founder of Audex Solutions & Technology. In an exclusive chat with ICR, Venkatesh elaborates on the efficacy of freight auditing to reduce logistical expenses.
Tell us about your organisation and your services.
Audex as an organisation is fairly young; we have been in this field from last three years. Audex Solutions is primarily a logistics consulting and a software applications provider. As consultants, we can conduct audit programs of logistics operations to identify areas of improvement. Audex Solutions provides business process strategies to control and save on the monthly spend on freight bills, especially when the transaction volumes are high.
On the technology front we offer apps such as warehousing solutions, transportation solutions, fleet management , GPS based vehicle tracking and freight forwarding solutions to our clients. We also offer customer billing solutions to 3PL companies across all their services offerings, which makes us unique amongst all the Indian vendors in the market in the sense that we carry all the execution related applications well suited to the logistics service providing industry.
What is the current level of logistics processes automation in the industry?
Several companies are mistaking financial process automation to be logistics automation. There is a lot that happens between an order and the payables. Automating financial processes alone cannot improve efficiency of the logistics processes. Automation of logistics execution processes including services vendor contracting, when combined with good monitoring, will yield fantastic results.
What are the pain points of managing a cement supply chain?
Today the logistics industry is in a highly fragmented state. There are many players in the field that subcontract logistical activities to other vendors. These logistics companies actually act as service aggregators. Typically, a company outsourcing logistics services too, has to tie together several vendors to serve separate functions in a supply chain. Management of these functions is a mammoth task. Billing and documentation becomes a big challenge since half the solution will be with you and the other half somewhere else. You have to keep a track of your own in-house assets as well as your subcontractor assets. When tonnes of paperwork are generated and you have to churn them out of the system as soon as possible, you will not have sufficient time to investigate each and every bill. Another challenge is to organise the transportation service providers.
Besides this, the cement industry has its own set of peculiar troubles. The industry has been growing well in the last decade. Unfortunately, the cost of manufacture and transport too is on the rise. Compared to other industries, cement has the highest logistics cost as percentage of sales. The cost of freight has been rising due to the increase in oil prices. The transportation cost by truck over a period of the last ten years has increased by nearly 50%. In India, the transportation cost of cement is around Rs. 1.03 or Rs. 1.04 per tonne kilometer.
Last mile delivery too, is a challenge in the whole SCM. In India, cement is transported in 50 kg bags. Bags are generally available in developed economies in retail or wholesale DIY kit shops; India probably is amongst the few countries where cement is distributed in bags for commercial use, a mode of distribution that is slow, cumbersome and expensive. The loading and unloading of bags, unavailability of labour force, etc slows down the processes significantly. The cost rises when the material is unloaded and carried on road for further distance. If the material is purchased from or taken to the hinterland, transportation cost by road increases further.
Dependency on the railways network has gone up considerably due to the hike in the diesel prices. The delivery cost of the cement to most of the big consumer centres, Tier 2 and Tier 3 cities and villages have been affected by rising railway transportation cost, both for input materials like coal and gypsum and more glaringly for clinker and cement. There is dire need to set up transportation and logistics hubs near cement loading and unloading areas. Infrastructure is very weak in India.
In the cement industry, goods move in one direction. Clinker is carried from the mines to the plant and the cement is carried from the plant to the market, and the trucks are empty on their return journey. How can we benefit from the return journey, too?
While dealing with products from FMCG or let's say from automobiles industry, we can try to maximise returns on all trips. We can carry multiple types of goods in the same vehicle to cash in on the return journey. However, one has to choose only materials that would not have compatibility issue.
We can't do this with cement. You cannot carry anything else in containers or trucks used for cement. Contamination of the material or even visible marks on cement bag from previously carried material will not be accepted by the buyer. When it comes to transportation by road, the trucks are dedicated and the amount is paid up to posses the vehicle for transportation. These are basically rented vehicles from a transport service provider. The amount is not dependent on whether the truck was used or not. It is paid up for a specific period.
So how can we utilise the fleet effectively?
Improving visibility goes a long way to help fleet utilisation. Let me elaborate. You must have seen that several cement companies have a long queue of trucks parked at the gates. Only half of those would be paid up by the company and belong to the company's dedicated fleet, the rest are for what we call æspot buying.' These trucks are used when the dedicated vehicle is not available and an urgent delivery has to be made. The logistics manager decides based on the cost and benefit of sending the consignment via the non-fleet truck. The truck hired from the market will charge more but if the consignment has to go, then the manager has no other option. Here is the opportunity for improvement. Managers are rarely aware about the location and availability of their own dedicated fleet. This forces the manager to opt for what is visible to him at that particular point. If logistics managers can track their trucks, they can use the fleet effectively. They will be able to gauge when they will have free trucks at the warehouse and which truck is at what stage in transit. They can even re-route the consignment when needed. In India, that average utilisation of the dedicated fleet is around only 60 per cent. 40 per cent of the paid for fleet remains unused due to lack of visibility.
Although cement sector is seen as a modern and technologically well developed industry, we have a long way to go when it comes to modernization of logistic processes. Very few encourage GPS based systems for tracking vehicles or for freight payouts
So having GPS system is the way to go?
Having GPS alone is not going to help. Apart from having geo-tagging devices, one needs to have well-trained staff to monitor the movement and take action on events monitored. Imagine hundreds of vehicles as dots on the map. You will have to know what is coming, what is going and where is it going. GPS solutions provided by us show more than just a mere dot on the map. If a vehicle goes off-the-grid or diverts from the planned route, an alert is sent to the regional manager, transportation manager in every state and also to the head office. You should have a good monitoring group to have good monitoring mechanism in order to reap real benefits from the tracking system. The visibility will help managers to know the exact number of vehicles available to them at any given point. Even a 10 per cent rise in fleet utilisation makes a huge impact on the bottomline. Managers must realize that efficiency could be built by having more visibility, not only by having more vehicles. Another aspect to GPS based tracking is whether it is linked to vendor payables. The vendor payout process if linked to kilometers traveled can get completely automated, can be error free - if integrated to GPS based tracking systems.
What are your expectations from the government?
There are certain government interventions that can help reducing the unnecessary spending on logistics. We are facing acute shortage of logistics parks. Logistics parks are large open spaces where logistics companies can have their warehouses, their fleet. Some of the logistic parks also have container depot, customs- bounded warehouses, and so on.
The number of kilometers and the quality of roads should improve. The number of roads built from 2000 to 2010 is less than those built in 1991 and 2000. On the other hand, our dependence on road has increased significantly. Either way we must have a good road network and a good rail network. Our infrastructure when it comes to road, rail and waterways is very weak.
Speaking of waterways, how feasible is it to use the inland waterways for cement transport?
In developed nations such as in European countries and in the Unites States, there are dedicated waterways for freight. There is hardly anything done in order to exploit the inland waterway transport in India. The primary problem is extensive blockages of river ways. The depth of rivers too, should be increased at certain places to make it feasible. At times, rivers run through different states and these different states must come together to have a common policy and goal. More importantly, there has to be a mechanism to ensure that the decongested rivers are not getting blocked again. Using rivers for cargo transport will mean removal of fishing nets from the water body. The government will have to work out ways to ensure that the livelihood of the fishermen is not affected.
Why go for freight audits?
Freight management is a highly document intensive process. Every month, tonnes of paperwork related to dispatch challans and bills are generated. These bills are processed at several points in the supply chain and are checked in a decentralised mode at different manufacturing plant and depots. Organisations end up handling extraordinary amounts of paperwork to manage the fragmented transportation industry's services. The transport bills processing and related operations alone is voluminous and often a decentralised operation. Freight contracts can be exceedingly complex. Likewise, freight invoices is accompanied by numerous types of required supporting documents.
Once the bills are submitted by the local transporter, they are cleared locally and sent to the head office for clearance. As several of these vehicles are employed based spot-buying decisions, their rates will vary. Different transporters will charge differently for additional services such as for unloading and loading vehicle, for holding the consignment in possession for more than the contracted period, etc. There are high fluctuations in fuel costs. Costs and quotes will vary significantly. Validating the costs is a complex process. Organisations do conduct cost verification checks to keep a tab on the transportation spend. Nevertheless, it should also be noted that freight cost verification exercises are vulnerable to human and process errors. Instead, a well thought out freight audit programme can ensure that an organisation does not overpay for services it used or pay of services it did not even use.
What is your approach?
We begin our work with a testing process on a pilot scale. We select a small representative region and review the paper work related to it. We decide on the intervention steps required and the checkpoints necessary. Once we execute it on a pilot scale, we move on to do verification and efficacy measurement of our new system. We project the impact the new method on the entire freight programme, the contract, the transportation and on the execution cost. Once satisfied with the findings and having made necessary improvements if any, we move on to implement change on a bigger scale.
What are the benefits of this?
Cement companies can realise major savings in freights by conducting periodic freight audits. Auditing gives clarity as to where the majority of spend went for the entire shipping processes. Organisations can also use this information to develop cost cutting strategies that reduce the transportation costs. A best-practice freight audit provides a closed loop process to ensure contract compliance, ensure that freight invoices are paid exactly as prescribed by logistics contracts. Organisations can review and determine if another carrier would have provided more cost-effective transportation service.
How much savings can one expect after conducting a freight audit?
In the cement industry, the biggest cost next to power and fuel is from freight and logistics, accounting up to 18 to 20 per cent. If we are able to reduce this cost even by few per cent, it will make a huge difference. We are spending around 14 per cent of our GDP on logistics. In the United States, it is 9.7 per cent. Imagine the scope for savings in this. The possibilities are huge but I will refrain from quoting big numbers. For many cement companies, the cost of logistics runs in hundreds of crores. Even a two to three per cent saving is a very big deal. A complete audit will reveal the approximate amount of saving one can expect from the revamp.
How much is the expected expense in implementing the new process?
None to insignificant. The cost of having the freight audit done from a third party is very less. However, the returns are very high. You don't have to install costly gadgetry to get more from the system. Just the insights gained from the audit results and the consultancy given will make a big difference on your company's bottomline. The finance auditor will only check how much was paid, what are the debts your balance sheet etc. But who will check if the cost was worth it or whether the service had the quality expected? Consulting intervention from logistics experts - adds to efficiency and increases savings.
Tell us about your team. How do you build the capability to audit the process?
First of all, bringing efficiency to logistics processes across industries is our core business. We have garnered our experience from several companies ranging from several industries. We have chartered accountants, logistics business process experts and tech guys who can assist in crunching voluminous data in less time and most of all it should be noted that the most productive audits are accomplished when done methodically and by professional teams. Our people, experience and practices can help organisations realise savings and develop better insights in planning and executing transportation operations.
Despite such benefits, not many companies have tried it. Why?
Freight audit is a very common offering in the US and we are not doing something very exclusive here. In India, however, the situation is different. Even the large companies do not use it. It seems that the industry is yet to appreciate the full potential of freight audits. The industry must allow a third party auditor to look into their processes and come up with saving estimates. There is huge scope for savings in logistics and a thorough freight audit will show you where it lies.
The transportation cost by truck over a period of the last ten years has increased by nearly 50%. In India, the transportation cost of cement is around Rs. 1.03 or Rs. 1.04 per tonne kilometer.