Logistics: Rescued by the Minister

Nitin Gadkari, the Indian Minister of Roads announced a path breaking change in the Logistics space- increasing load carrying capacity of trucks on the road, the full implication of this is yet to be understood by one and all. That it will increase GDP is yet to be appreciated.

When more than a decade back our ex-Railway Minister did the same exercise on Railway Wagons, it turned out to be a game changer for Railway revenues and prosperity, ultimately landing as a case study at Harvard.

Moving more stuff through the same vehicle is a unique experiment in India, but the implications are path breaking.

Logistics is about moving stuff efficiently and most of the puzzles in logistics involve pure mathematics, optimization, theory of constraints involving bottlenecks, capacity, idle assets, waiting times, etc. Moving stuff efficiently in a constrained system is a difficult proposition.

If more goods move, which is not able to move today, being stuck somewhere, we have an idle inventory, the cost of which is borne by the entire system, raising the cost of logistics. Not only does the country need higher cash to make its goods flow, it also has other consequences. Lack of supply dampens demand as well. For solving the puzzle of logistics which practically is one of the root cause of a dampened GDP, we must understand some basics.

Let me start with the basic puzzle, if you have a constrained infrastructure, whether road or rail, do you think adding more wagons or trucks is your best solution?

You are wrong, reducing wagons and trucks would ease the flow if your constraint is line capacity for rail and road capacity for trucks. Both these entities move through multiple constraints on their journey, each one created due to mismatch in holding capacity and flow.

In one of my projects at Hindalco, we moved more stuff with less railway rakes, not more; had we ordered more rail rakes we would have made the constrained system be more constrained and our internal efficiencies of loading and unloading would have been that much more worse.

When the internal system is made more efficient by taking more vehicles out, the loading and unloading times only improve.

Take the easiest example of turnaround times of trucks in plants- to make a truck enter the premise, go to the unloading point or loading point and leave the plant after loading or unloading could take anything between 4 hours to 5 days. If a truck waits for queuing it will add to inefficiency of the system and we deal with multiple loading and unloading points in the truck's journey from one place to another.

The fastest turnaround in the plant where inside holding capacity, including loading or unloading capacity, is the constraint, if more trucks are pushed into the plant, due to queuing alone the time taken to turnaround would disproportionately increase.

So reducing the queuing of trucks would improve the turnaround time, which effectively means taking out the number of trucks from the system to match the times of the items that constrain the system. Unfortunately to increase flow in a constrained system of holding capacity we wrongly increase the number of trucks.

When you increase the carrying capacity of the trucks, as the Minister has done, he has effectively reduced the number of trucks from the system, making the flow that much better, improving factor efficiency.

But in the process he has actually killed two birds with one stone. He has not only improved the flow by improving turnaround with less trucks needed for the same quantity of movement, he has also increased the overall movement as there are going to be more idle vehicles at every center, which can be gainfully employed to additional destination points, sometimes taking the load of rail as well.

This additional movement will happen at fraction of the costs, the marginal cost of 18% of the additional flow, which he has ensured is hardly 15% of the original cost.

That supply finds its own demand in a supply-constrained system, is a no-brainer. So by this move he has improved the GDP of the country.

The additional movement will generate higher revenues for the government and that should be entirely spent on maintenance of the roads, which should not be lost sight of. Our focus on making roads should not prevent us from maintaining them as well.