THE DEVIL IS IN THE DETAIL

A recent study by Maersk Group brings to the fore the significance of indirect costs which often go unnoticed in the total logistics costs. Cutting down on these can bring significant benefits to the exim community

While there is often much debate about the direct logistics costs, such as terminal rates, freight rates and inland transport costs, the most significant costs can be the indirect costs stemming from delays and inefficiencies. Reducing these costs is a significant source of potential savings and improved competitiveness.

Long and unreliable lead times

 The time it takes to ship the goods from the supplier to the buyer add significantly to the costs of trading for importers and exporters in India. If an importer is not sure about the arrival time of his cargo, he will need to keep higher inventory in order to prevent interruptions in production and/or in the supply to customers. Higher inventory is expensive, particular for middle to high-end manufacturing sectors in which many Indian exporters are positioned today. Thus, for high value goods, hedging inventory to avoid out-ofstock situations can be tsingle most important cost item.

For exporters, long and unreliable lead times give rise to higher inventory for their customers or their distributors abroad, making them less attractive as a sourcing partner and/or their products less competitive. In addition, late delivery of their products often give rise to penalties, while delays cause loss from spoilage.

A recent study by Maersk across four sectors – pharmaceuticals, garments, electronics, and auto components – finds that the indirect costs of trade accruing from delays and unreliable transportation services amounts to as much as 38 – 47 per cent of total logistics costs. For each container transported to and from India, there is a high variation in lead times of 38 – 66 hours. Reducing the costs of trade by 10 per cent has the potential to generate additional exports of up to 5 – 8 per cent. This means that within each of the four sectors, making trade 10 per cent more efficient could potentially generate between $0.2 billion to $3.1 billion in extra exports per sector.

 Garments

The main challenge for garment manufacturers is inland transportation: From Shanghai to Delhi can take up to 25 days with inland delays. In case of prolonged delays, the only option for the manufacturer to retain the customer can be to switch from shipping to airfreight. In the garments sector average logistics cost for exporting a 40 foot container is $7,463, of which 62 per cent is direct cost and 38 per cent is indirect cost. If the logistics cost are reduced by 10 per cent to around $6,716, it can trigger the exports currently valued at $38.6 billion to rise by 5-8 per cent, reaching approximately $ 40.5-$41.7 billion. Pharmaceuticals

Average logistics cost for exporting a 40ft container is $8,409, of which, 53 per cent is direct cost and 47 per cent is indirect cost. If the logistics cost is brought down by 10 per cent to $7,565, the sector’s exports that are currently valued at $11.7 billion have the potential to grow by 5-8 per cent reaching $12.2-12.6 billion. Electronics The average logistics cost for exporting a 40ft container is $6,833, of which, 37 per cent is direct cost and 63 per cent is indirect cost. If the logistics cost is brought down by 10 per cent to $6,151, the exports currently valued at $9 billion can be increased by 5-8 per cent to $9.5-10.2 billion.

Auto components

 The average cost for exporting a 40 foot container is $6,410, of which, 58 per cent is direct cost and 42 per cent is indirect cost. If the logistics cost is reduced by 10 per cent to $5,768, then the sector’s exports currently valued at $4 billion can increase by 5-8 per cent to $4.2-4.3 billion.