Tech driven ‘elastic’ logistics network: India First Business Model
Discovery of wheel in the 4th millennium BC is considered as one of the greatest inventions in the history of mankind. Since then the humble wheel has been the driving force behind industrial revolution, and logistics has been the backbone of economic growth across the world. Logistics spend now commands a considerable share of the world’s GDP at ~10%. Logistics spend in India stands at 13% of GDP (for US it is 8.5%). India’s larger spend is due to inefficiencies arising out of lack of organized players, 65% of logistics volume being through road (which is less efficient than air, water and rail) and poor last mile connectivity.
A healthy and robust logistics industry is a vital pillar of a growing economy, more so for India which is seeing significant growth in both domestic demand and supply. The government is doing its bit through various policy initiatives which will boost the logistics sector — GST rollout (consolidated hub and spoke warehouse network will reduce transit time by ~30%), ramping up road transport capacity (83K km of road network to be built over 5 years which will increase transport speed by ~25%), dedicated rail freight corridors and giving ‘infrastructure status’ which will allow private companies to avail credit at competitive rates. Although all the above initiatives are good and necessary, they will take time to show results and will be capex intensive. Hence, there is a need for new business models to emerge.
One such emerging business model uses the new generation ‘shared economy’ concept. It is a virtual logistics network. This network has no fixed assets but leverages the existing assets such as the abundantly available kirana (retail) stores for delivery, small warehouse for storage and sorting, and the unused capacity in the trucking ecosystem for transportation. In India, average utilization of trucks is at 40% while in developed countries this number is 65%+. Although it may sound simple, such a virtual network is possible only through a strong technology platform. A platform which can ensure control, availability, visibility and scalability across each leg of the network and yet operate on six sigma process excellence levels. The advantages of such an asset light tech driven virtual network are immense:
1. Solving for variable demand: Ecommerce sector which currently is ~$20B is expected to be $75B+ in 2025. Ecommerce has a saw tooth demand pattern where seasons like Diwali see very high peaks (3x the normal demand) while in some months the demand is very low. So businesses like Flipkart, Amazon either need to build high fulfilment capacity (which is under-utilized in low demand months) or lose revenue in high demand months due to lower fulfilment. The above virtual network is able to match capacity in tune with varying demand. This eliminates any capacity wastage in lean periods and loss of business due to spikes in demand. Even though this network has high per-unit variable costs, the net spend on the logistics is lower than the fixed cost networks, because there aren’t any fixed cost losses in lean periods. The tech platform is responsible for its customers for the business metrics while it works with its vendors (kirana stores and truck owners) to deliver the operational metrics. Customers use this shared network on demand, and on a pay-per-use basis.
2. Catering to the rising tide of demand from Tier 2+ towns: It is estimated that 45–50% of the consumer spend by 2025 would be through tier 2+ towns.
Ecommerce: In Ecommerce, for example, out of the 2 million (peak) shipments a day in 2017, metros and Tier 1 cities accounted for 85%. The total number in 2025 is expected to rise to 15 million shipments a day, out of which 5 million (~33%) are expected to come from Tier 2+. Demand from Tier 2+ is highly disaggregated because it originates from more than 4500 small cities and towns.
Existing Ecommerce players like Bluedart, Delhivery, Ecom Express etc. serve ~4,000 pincodes, while demand in the future shall arise from the next 15,000 pincodes. Building capacity for existing Ecommerce fulfilment players will be time consuming and capital intensive (need an army of delivery boys) and most likely will result in lower ROI. Further, cost of delivery is higher in India due to cash on delivery, higher return rate (~25%) with logistics cost of returns being ~1.5x than forward logistics. The above virtual network makes Ecommerce fulfilment in Tier 2+ towns scalable, cost efficient and sustainable.
FMCG: FMCG companies, are bullish on demand from Tier 2+ towns, riding on a wave of awareness stemming from TV and smartphone penetration. According to CRISIL, 30–40% of current FMCG sales come from rural centers, and rural demand is outpacing urban in growth. For FY’18, rural FMCG volumes rose by 9.7%, faster than the 8.6% growth in urban areas, according to market researcher Nielsen. Sales in the same period grew by 15.1% (rural) versus 12.6% (urban).
However for FMCG companies, distribution into Tier 2+ towns is expensive. They ideally are looking for solutions which provide reach, and store level engagement and control but at cheaper cost. The above mentioned virtual network can be the solution. In addition, it can also provide cash collection or third party credit services.
3. Maintaining high SLAs: In India, it is estimated that a package is handled by ~20 people before reaching its final destination while in developed countries a package is handled by 3–5 people. The above tech driven virtual network substantially reduces the manpower requirement (as low as 1/15th of the traditional logistics network). Further, it is able to accurately trace and control the package till its final destination (even in very remote locations) thus providing a good customer experience.
4. Making logistics a revenue function than a cost function: The above virtual network provides improved sales, reduced costs and increased market share through deeper reach, coupled with superior operational metrics around reliability.
One of Kalaari Capital’s portfolio companies, Elasticrun, has been successful in building such a tech driven virtual network. This has enabled the company to provide reliable fulfilment at low rates and scale capacity in tandem with changing demand cycles. It has resulted in exponential growth in fulfilment volumes for both Ecommerce and FMCG clients translating into rapid top line increase without compromising on the bottom line.
This truly is an India first business model innovation in logistics!
