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Supply Chain Cost Management: A Necessity for Future?
- Siddharth Paradkar, Principal - Logistics, Tata Strategic Management Group
- Manish Panchal, Practice Head (Chemical, Life Science & Energy industry), Tata Strategic Management Group
- Sangeeta Mishra, Associate Consultant, Tata Strategic Management Group
The chemical industry has been on a fast growth trajectory in the past decade, resulting in increasing revenues and growing profits. However, due to changing business environment, increasing competitive intensity and need for increased focus on QSHE are raising costs and putting pressure on product margins and overall profitability. Adding to these woes is increasing logistics and supply chain cost. Going forward supply chain cost management will play a crucial role in addressing these challenges for chemical companies, say Manish Panchal, Siddharth Paradkar and Sangeeta Misra of Tata Strategic Management Group.

The Indian chemical industry is estimated to be the fifth largest in the world and second largest in Asia after China. The fact that the industry contributes about 10 per cent of the output of the Indian manufacturing sector, 13 per cent of IndiaĘs total exports and 9 per cent of the countryĘs total imports underlines its criticality for the national economy.

The chemical industry is very diverse with close to one lakh products across a range of categories. The end-use customer segments are also diverse and have varied requirements. Industry structure ranges from highly fragmented in some segments to highly consolidated in others. Products exist in solid, liquid or gaseous forms, with some being inflammable and hazardous, and hence each product comes with different handling, storage and transportation needs.

The western coast of India has been the key hub for chemicals and petrochemicals industry accounting for 60 per cent of trade. Gujarat and Maharashtra alone account for ~65 per cent of chemical and ~80 per cent of petrochemical production in India. Since production clusters are concentrated in one particular region, better infrastructure and logistics are required to supply chemical products across the country. The lengthening of supply lines makes the distribution of chemicals more transport intensive.

The involvement of a large number of stakeholders (shipping lines, transport agencies, environmental agencies, etc.) in the transportation of chemical products further increases the logistics and supply chain complexity of the chemicals industry.

Given the complexity of the industry and nature of chemical products, the challenges in chemical logistics are myriad. It has been observed that the logistics burden of all chemical product segments in India has been growing at a faster rate than the sales. As seen in the chart (see figure 1 on next page), logistics cost as a percentage of sales has increased by 8 per cent in the past 4 years.

The inventory levels as a percentage of sales have also increased by 7.5 per cent in the same period, which will further add to the supply chain costs for chemical companies. Apart from the direct elements of transportation, warehousing and handling, many other indirect elements contribute towards the overall cost burden including packaging, inventory, inventory holding costs and spend on QHSE.

Respite for the chemical industry from rising logistics cost burden is not expected in the near future.

Factors Expected to Inflate Future Supply Chain Costs for Chemical Industry in India
Logistics spend in India is around 13 per cent of its GDP, which is high as compared to developed countries (7-8%) due to inadequate infrastructure and inefficiency. In the future, there is high probability for the cost to further escalate, driven by the following factors:

Challenges in Inventory Planning: Due to uncertain transit times and volatile markets, companies carry excess safety stock in order to avoid losing sales due to stock-outs.

Also, in the chemical and petrochemical industry, co- and by-products are common, which often lead to a complex and sometimes cyclic flow of materials. The diversity of product segments and Stock Keeping Units (SKUs) makes inventory management very challenging. Most chemical manufacturing processes involve continuous production, requiring assets to be run at steady levels of production, which makes it difficult to implement lean solutions.

Expansion of Chemical Industry: As the chemical industry is expanding across the country, complexity of supply chain and logistics will increase. New routes and locations for transportation will be added to the existing network. Each new link will bring its own local complexities regarding the availability of logistics assets, local laws and regulations, and infrastructure, further compounding the logistics cost burden on chemical companies.

Increased Focus on QHSE: There is increasing political and public pressure to reduce industrial risks and accidents. End consumers are also becoming more and more quality conscious. Environmental and sustainability concerns will gradually push chemical companies to increase spend on QSHE to meet customer demands. Shift to greener transport modes, adoption of safety standards/ culture and putting security procedures in place will incur additional expenses for companies. Adoption of green logistics without incurring incremental costs will be challenging.

Rising Fuel Prices: Diesel price has increased by 26 per cent in the last year which directly affects the cost of transportation. The trend of rising crude oil and natural gas prices will have a two-fold impact on the chemical industry with respect to fuel cost and feedstock cost. (See figure 2 above)

Though rail freight rates have increased by just 1 per cent in the last 3 years, with the adoption of the dynamic Fuel Adjustment Component (FAC), rail freight rates will no longer remain insulated from hikes in fuel and energy prices. Railway, which has been the preferred mode of transport for bulk commodities accounting for ~50 per cent share in bulk transportation, will get costlier.

The upward trend is expected to continue in the coming years, which will only add to the logistics cost for the chemical industry.

Process Inefficiencies and Lack of Infrastructure: Apart from rising fuel prices, the transportation cost burden on chemical companies in India is heightened due to higher transit time and lower turnaround of vehicles because of multiple check-points. Bad road conditions, oversaturated railway network, unsuitability of rail wagons to carry different types of cargo, port congestion, shortage of CFSs and insufficient draft at ports to handle large vessels are the major infrastructural issues that Indian companies face in logistics. Moreover, there is a shortage of 3PLs specialized in transportation of bulk liquids and gases, especially hazardous materials.

Key Levers for Managing Supply Chain Given the above factors, the logistics cost burden in the Indian chemical industry is here to stay. The chemical industry in India needs to focus on supply chain as a key lever to manage their business and develop solutions towards optimization of logistics costs to remain competitive in the global marketplace.

A thorough analysis of global best practices in chemical logistics and comparison with India suggests that the following levers need to be managed for reducing logistics cost.

Replenishment Models: Differentiated Replenishment models along with increased visibility and reverse/re-transfer logistics is an imperative for the future. Traditional demand planning and forecasting methods are not conducive to today’s volatile environment. A small error in the process results in magnifying the problem and saddling the distribution network with high volume of inventory for some items and stock outs for others.

Route Planning: Network and Route planning has to take into account real time events like traffic and availability of equipment and personnel for loading/ unloading, materials handling and flexibility to switch between modes. The traditional view of lowest cost model for transportation is long outdated. The actual cost of the service is fairly insignificant in comparison to the product values, cost of carrying the inventory and more so loss of sales or opportunity. There is a need for a more dynamic approach and having options to enable you to select the most appropriate solution.

QHSE Norms: Adopting and complying with QHSE norms and related asset development is going to become a necessity for the industry as customer and consumer become more aware. While it could involve a complete overhaul of operations, the benefits far outweigh the cost. While today the number of incidents is far and few, this is not by design. The collateral damage on account of a mishap can be significant and far greater than the lifetime cost of adopting good practices.

Technology and Skill Development: The logistics workforce in India, predominantly operational front-line staff (drivers, goods handlers and workers for loading/unloading) who are minimally educated, lack knowledge of the hazards of the products and the necessary skills for handling. There is a need to undertake skill development initiatives at the lowest levels and adopting latest technologies and IT systems. Improper handling of chemical products will lead to wastage and add to the handling costs. Training the manpower in these aspects will lead to significant reduction in damages, delay and cost.

GST Readiness: Implementation of GST would standardize tax rates on a pan-India basis and lead to consolidation of logistics and warehousing units at central locations. A gradual changeover to a hub and spoke supply chain model is expected. Chemical companies will then have to determine their supply chain network on the basis of logistical considerations rather than taxation. This could imply changes like a shift towards larger vehicles for transportation. For example, there could be a transition from road to rail as rail is better suited and more economical for bulk volumes and longer distances

. Recent Experiences in Supply Chain Management
Many companies in the sector have already recognized the importance of supply chain and have initiated steps in addressing the issues in the right earnest.

Tata Strategic has helped multiple clients across sectors facing supply chain challenges. It has been instrumental in transforming their supply chain operations spanning procurement optimization, logistics network planning, order fulfillment optimization and managing organization readiness for change.

Case Study – Tata Strategic recently helped a leading agrochemicals company in transformation of their supply chain by redesigning their order fulfilment process through a pull based replenishment model. The organisation was facing challenges on account of increasing logistics cost and inventory in the system coupled with frequent cases of stock outs and non-availability of products leading to lost sales. The existing warehouse network was redesigned to introduce hubs and regional warehouse. The order and product flow was modified to support the new system. This intervention identified inventory reduction of ~10% of the total sales across the supply chain.

• Tata Strategic Database • Primary interaction and Industry Experts • Industry Reports