A lot has been spoken about the effects of Covid-19 on the economy. The government, large corporates, and the MSME sector are keen to reboot activities that have come to a halt due to the lockdown. Logistics, including transportation, warehousing, order management, and other value-added activities, would be critical for the revival of economic activities. One may have to look at numerous aspects of each of the logistics functions.
According to a report, over 20 per cent of the trucks are stuck on the roads across the country. Drivers and support personnel could be anywhere around 30 lakh. Most of them face a loss of income. One can categorise trucks as those with large operators (either 4PL or 3PLs) as part of a contract engagement and those running as market vehicles.
It is important to note that their commercials for the load on the road would not have factored Covid. Hence, they, including project cargo, will have to renegotiate the same. Maybe one learning is to include a variation or compensation clause in contracts under force majeure conditions.
Secondly, there are vehicles owned or placed with leading fourth-party and third-party logistics service providers who are on long hauls across the length and breadth of the nation. Such vehicles typically have aggregators (also known as market intermediaries or brokers) who have contracted a group of vehicles and placed under their aegis. They will bill with the 3PL operator and, in turn, pay the vehicle owner who bears all the operating expenses.
When the vehicles are on the move, they have designated pit-stops and other support mechanisms every 300-600 km in all major routes. When the lockdown was announced, most of the vehicles could park in the pit-stops, and the drivers were reasonably taken care of by the owners. When the system came to a halt, the number of vehicles required to be parked increased phenomenally, and the drivers used nearby villages as well to park. However, the drivers did not have the wherewithal to stay on and take care of the vehicles.
Once the vehicles resume operations, money for variable expenses to continue travel would be required. This needs to be provided at whichever place the drivers are. One may argue that with digital pay and ATMs, they may be able to handle the same. If not enabled till now, the contractors of the vehicles in coordination with 3PL operators may have to support the drivers and vehicle owners. Else, cash transfer can be made once they find nodal points.
Cash required would be higher than during normal business because once the clog is released, traffic may pile up at terminal points. There is likely to be a delay in turnaround time. It is estimated that the delay would be anywhere between five and seven days for the first four weeks.
In large projects, it would take time to mobilise the unloading contractors. In such projects, delays can go up to 30 days with the pile-up of vehicles. There are likely to be delays in organising return loads as well. These shouldn’t be a problem for 3PL provided the business conditions return to normal quickly. Hence, 3PL operators will have to provide for asset inefficiency. One may, however, have to see how the costs are recovered over time.
In the overall freight payment system, after a trip is completed, 3PL operators raise an invoice. As the truck delivers, the proof of delivery (POD) is signed and returned by the customer. Then an invoice is raised. It takes three to four weeks for bills to be consolidated and to raise an invoice. The customer takes 45-60 days to pay. After delivery, it takes 60-85 days for the payment of service. An advance of 60-70 per cent is paid by 3PL to drivers. Things are likely to worsen until the efficiency parameter improves as under normal business conditions.
Policymakers must bring in alternative systems. One may suggest dynamic discounting or factoring of bills, which could be expensive for these operators. Supply chain finance is one possible solution that is yet to evolve in India.
The emotional health of many truck drivers have been affected . A lot of ground-level support through counselling will be required. NGOs and professionals can be engaged in providing comfort to this group of employees and getting them back on board.
In India, the rail transport is supply-driven. The government and related agencies use rail for the movement of crude and petroleum, coal, minerals, and so on. Since the user companies are not operating in full capacity, it will return to normalcy. It is likely that the railways is using the lockdown for optimal redistribution of foodgrains. Analytics can be deployed for better capacity utilisation of cargo movement when the lockdown is in force, and passenger movement is restricted.
Ports have been operational, but the business may not be “as usual”. This sector again requires a reboot for efficiency loss as it has been unutilised for some time and would continue to be less utilised for some more time. Further, ports may need working capital for the restart of business. Also, there is going to be bunching of businesses for some time once the lockdown is lifted, leading to increase in costs.
The impact of the lockdown on warehousing operations can be seen by analysing three important aspects of warehouse management — utilisation of space, equipment, and employees. Space utilisation is dependent on stock availability and movement of stock. 3PL operators are likely to be affected to the extent that both space utilisation and turnaround would be plugged into their business model.
Their clients will be paying a basic rate for space and an additional amount for handling and despatching. Since there is no activity, 3PL operators could be incurring expenses, including depreciation and maintenance of equipment and labour, as mandated by the Ministry of Labour and enforced by State governments as well. It must be seen if they could pass them on to their clients.
Inventory management challenges are likely as raw materials, components, and work-in-progress (in case of engineering industry) and finished goods pile up by a month’s level. Stock per se is not an issue. There is another likely component of inventory cost. Such costs could arise because of adjustment for component and material availability during the revival period. This problem is likely to be more common in the components-based industry, where some critical low-value components are to be supplied by MSMEs.
Such a situation can lead to several adjustments in the production schedule, and more frequent change-over for want of the right set of components. Two areas that need focus would be to check the production plans and ensure appropriate inventory adjustments and ordering for smooth system flow.
Second, MSMEs that supply critical components or involved in product support need to be financed on priority. They must receive funds through the supply chain finance mode or a larger entity for efficient deployment of funds.
The logistics sector may have formidable challenges in the trucking business. Areas that need attention are: many of them may not have working capital limits and must be discounting bills. One may have to see how such costs can be addressed. Second, capital may be required to cover inefficiencies which occur during this period. One may have to study the incidence and impact of such inefficiencies.
In the supply chain, most of the time, inefficiencies are passed on to the customers. When demand is sluggish, such a luxury is not available. How much can costs be absorbed and capitalised and managed through reduced cost of capital? Lastly, the logistics operators may have to get workers, namely truck drivers or warehouse employees, back to their job.
The writer is Professor, Operations Area, IFMR Graduate School of Business, Krea University. The views are personal