Unlocking opportunities in India’s long haul logistics market
Growing faster than the overall economy, long haul logistics as an industry currently stands at a massive figure of $160 Bn. Over the last 5 years, e-commerce, rising customer expectations and known inefficiencies in the value chain have been the reasons behind multiple stakeholders challenging its status quo. Additionally, technological developments, upside growth potential and regulatory changes such as GST, electronic waybill are giving tailwinds to the sector. Therefore, it is not quite surprising that the sector saw a total investment of $1.7 Bn over the said time period.
One of the segments that has seen a lot of innovation in the last decade has undoubtedly been Intercity trucking. For e.g. the driver daisy chain approach by Rivigo, the tech enablement of cold storage supply chains, the tech based marketplaces for mass aggregation etc. But in our opinion, as of now, we are scratching only the surface of how technology can be leveraged in long haul logistics. In a sector that is so fragmented and geographically widespread, technology can play an extensive role in impacting the cost and quality of the services in the future. This blog outlines some of our theses on the key impact areas.
Real time visibility across the chain
Logistics for shippers is no longer a black box where you merely insure your consignment and then hope for the best. Tracking devices are fast permeating the Indian trucking market and businesses as well as transporters are adopting IoT solutions to have a better control over outcomes using real time visibility and insights for decision making.
Being able to track the real-time location of a vehicle on the road helps manage delays and optimize downstream activities. Apart from GPS tracking, many other sensors also are increasingly being used – fuel sensors, temperature sensors, advanced drivers-assisting systems, video analytics etc. These devices find multiple uses across activities such as administration of good driving practices and dealing with issues like pilferage, security, dispute settlements, off-routing and quality assurance.
The true value proposition in the IoT enabled solutions, however, lies beyond the hardware. The real power would be to identify the use cases across various industries, to use analytics to optimize operations and to reduce buffers/ inventory across the supply chain by decreasing the turnaround times of goods – including transit as well as dispatch.
Disruption of the working capital cycles:
Working capital financing remains one of the biggest challenges in the intercity logistics business which leads to multiple intermediaries, thereby eroding margins and hampering scalability. In India, Days Sales Outstanding (DSO) is as high as 70 to 80 days, almost double than that in developed economies. This is primarily due to the high credit period with corporates.. Moreover, invoicing process has its own delays. Coupled with the need for physical Proof of Delivery (PoD) to raise invoices, this can delay the process by additional 8 to 15 days depending on the transit time.
What makes the system more economically inefficient is that this upfront capital cost is currently being borne by the brokers or transporters whose cost of capital, we argue is much more (anywhere between 4% to 10% points higher) than if the same was taken by a corporate or a large shipper. For instance, for an interstate delivery that costs Rs 40,000, approximately 80% advance is paid by a broker/ transporter. Quick calculations show that the value lost with cost of capital arbitrage, depending on the credit terms, would be anywhere between Rs 500 to Rs 900 per trip! This is massive considering that intercity logistics itself operates at 5-8% margin.
There are two layers in which technology can be used to address the challenge of working capital-
First is the reduction of the working capital cycle.
E- way bills are a step in the right direction. Indian trucks spend an enormous amount on time at check posts and toll booths, sometimes spending as much as 48 hours on these check-posts. E-way bills and use of electronic tolls are helping in reducing the transit time.
In addition, integration with ERP/ TMS platforms of large shippers can help reduce the process related overheads and delays. For example, digital PoD can be used to raise invoices faster and e-signs can make process smoother.
Secondly, the cost of working capital can be reduced through technology enabled lending platforms, by keeping into account the credit rating of the shipper and not just the transporter/ trucker.
Sector specific credit models, harnessing arbitrage opportunity between different stakeholders in the value chain and blockchain-backed services to introduce more transparency in the supply chain are some of the ways in which cost of capital can be reduced by the technology backed lenders.
Backhaul or reverse optimization has been one of the much touted and anticipated impacts of technology in this industry, though we think that these network effects will take time to manifest itself in a more meaningful way. The idea behind network optimization is to use technology and the data available on an extensive scale to enhance the efficiency of load matching, planning and routing.
For example, after travelling from point A to B, a truck might not be able to get an immediate load from B to A. This leads to idle time and revenue loss due to lower asset utilization. But with visibility over the larger network, one might be able to identify loads from B to C & C to A leading to better utilization of the asset (truck).
In theory everything sounds right but reality is tricky. The market is not so homogenous. There is variability in several factors including the type of truck required (body type, tyre type etc.) Further, aspects like route preference, and non-uniform distribution of demand/supply centers in the country make the network optimization a much more challenging problem which is yet to be solved.
Building for scale is one of the ways to reach network effect. However, given the heterogeneous distribution of demand and supply, building micro networks backed by technology might be an approach worth exploring . Identifying micro-networks where the variables of the supply chain can be controlled and driver behaviour can be influenced can help unlock network effects at a much smaller scale. Such networks would allow for better visibility of the supply chain and higher asset utilization.
Just to highlight the magnitude of impact, let’s consider an example. Today a long-haul truck in India has 12-17 billable days and spends the remaining time in loading/ unloading, maintenance, waiting for loads or doing sub-optimal loads. In the process, an average truck driver takes home anywhere between Rs 20,000 -Rs 30,000 after working 16 hours a day in very unpredictable and harsh working conditions. An optimized network with 20 to 24 days of utilization can help push up the revenue of these vehicles by about 40% to 60% and will at least double the income of the driver cum owners.
(*This is because, once a truck has been purchased, bulk of the cost is fixed cost for the driver cum owners in the form of EMI, insurance etc.)
Tech enabling less than truck loads (LTL) – Uber pool of this market
LTL services still remain an underserved market in India and a tough tech problem to solve. While a lot of attention has gone to Full Truck Load (FTL), the surface has barely been scratched when it comes to LTL. Companies like Gati and Safe express have been serving customers on a consignment basis, but technology can play a strong role when it comes to creating LTL businesses which could be equivalent of Uber-pool for cargo.
But unlike Uber-pool/ Ola- share, neither the cargo space within a truck nor the goods are standardized when compared to passengers hailing the cabs! Matching demand ( cargo) and supply ( truck types) based on availability has been a problem that we have been attempting to solve using technology. Adding to this, the volumetric analysis of the demand and supply which would feed into the pricing and allocation engine makes it a pretty complex problem which has attracted little resources so far.
We believe, LTL/ PTL can be a game changing value proposition, especially for the SMB market in India, helping subvert delays in loadings and removing cost of warehousing. This will enable a more economical channel for one of the large demand centers for the sector which is underserved right now and might even help reduce inventory in the supply chain for the large shippers.
We are very excited by the opportunities today, across various sub-sectors in logistics, where technology can be leveraged to unlock value. Logistics, as an industry offers a vast canvas of possibilities and we believe that we are far from done in the long haul. If you too are an aspiring entrepreneur or just an enthusiast for Indian logistics tech ecosystem, let’s meet up and exchange notes on the unlimited potential of this sector.