How MSMEs can keep at bay latest jump in logistics cost that seems to be steady and long-term

Logistics for MSMEs: The MSME sector was particularly hard hit due to the pandemic, as several companies were unable to keep up with increasing customer and industry demands for digitalisation and tech-adoption. With the pandemic wreaking havoc on supply chains, logistics in MSMEs took a major hit. Unlike larger companies who have power in the market to and over their vendors, MSMEs had a tougher time managing the disruptions in their cash flows and operations. As an industry where the adoption of tech-enabled logistics planning has been relatively slower, the recent rise in logistics costs has no doubt worsened the situation. Considered to be the backbone of the Indian economy, MSMEs contribute a total of 30 per cent to the country’s GDP. The threat of inflation also looms large, leading to an increase in prices at a time when demand is just recovering for most MSMEs, who play a critical role in enabling economic recovery.

Rising logistics costs

To understand how MSMEs were impacted with rising logistics costs, it is important to understand the breakup of logistics costs. In the logistics industry, 65 per cent of the cost is out of control of logistics providers. This includes fuel costs, toll charges, and EMIs. Fuel costs have gone up substantially over the last couple of years and have piled pressure on the sector, leading to a cascade effect down the supply chains of all companies. There has been a hike in toll charges of 5 to 7 per cent, which gets passed on to the customers. Two other cost elements which have driven costs upwards are the increase in truck EMIs and service and maintenance. The pandemic pushed a lot of small trucking companies out of the long-distance logistics market and has resulted in a reduction in truck supply. These factors together meant that there has been over 40 percentage points increase in truck hire costs over the last couple of years for MSMEs.

Impact on MSMEs

When the logistics cost fluctuations are short term, companies rearrange production and shipping schedules to tide over the same. But the current cost increase seems to be steady and long term, with companies having to absorb and reassess how they operate. The cost change affects the operating margins, ability to ship on time, and the cash flow of MSMEs. While this is felt across industries, the impact is disproportional on MSMEs who have lesser power in the market.

Potential impact of government policy

Government has brought to focus the need to reduce overall Logistics costs from 14 per cent down to under 10 per cent for competitiveness of the economy. The government focus on (a) infrastructure build-up for multi-modal logistics hubs (b) railway’s freight corridors and private freight terminals (c) upgradation and extension of highways across the country and (d) providing warehousing sector infrastructure status will all contribute in a significant fashion toward reducing the overall Logistics cost.

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These investments in infrastructure can have both a short term and long-term impact on MSMEs. In the short term, the government is expected to mandate that a certain percentage of products and services in the infrastructure upgrade should use MSMEs, bringing cash injection to the sector. In the longer term, the impact could be on a different set of companies and could be a much deeper one – reduction in logistics costs and complexity and faster shipping. All these would have an effect only in the medium and long-term impact – but the fact that it is the focus of today makes it a very promising future for the competitiveness of India with respect to Logistics costs.

Apart from this, MSMEs in the logistics sector can also benefit from government support such as the recently- announced National Logistics Policy that aims to create a single-window e-logistics market, focus on skill development and employment generation, and making MSMEs more competitive.

The way out of rising logistics costs

With lower ability to pass on costs to their B2B customers or to the B2C consumers, MSMEs are forced to absorb some of the additional costs till everyone in the market does the readjustment in terms of their costs. The impact will be visible in the bottom lines come the end of 2021 financial year. Tighter operations, better planning, and working with steady partners are some of the ways for MSMEs to reduce the impact of logistics cost increases. Finding newer markets using the digital and direct to market routes may be a leverage that MSMEs can explore to have better negotiation and price control that may allow them to pass on the rising logistics costs on to their customers.

Technology adoption in logistics

One good thing that came out of the pandemic is that it has accelerated the adoption of technology. Logistics sector is undergoing a transformation and consolidation, organizing the highly fragmented industry. Organizations are today better prepared for disruptions with new and efficient protocols at the plants. Companies are adopting digital technologies to be more resilient and agile in the face of disruptions. Late deliveries, lack of visibility and control, and manual errors have pushed organizations for technology adoption like never before.

Transport companies, which are fundamentally technology-driven, and have features like real-time tracking and high-quality customer service are finding favor with more manufacturing companies. Organizations are increasingly favouring technology enabled organized players to entrust their transportation with. Through the enablement of technology, organizations can have better visibility and control over their operations which in turn results in mitigation of logistics costs in the long term.

MSMEs are somewhat limited in their ability to digitise since the state-of-the-art enterprise products are out of their financial reach. But the adoption of cloud-based technologies and working with startups could be one way to overcome this problem. MSMEs will also face talent and know-how issues when it comes to identifying and adopting the latest and most suitable tech for their business.

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What the future holds

The excellent vaccination rates in India have ensured that the deeply feared third wave of Covid has not yet materialized. Businesses are looking forward with cautious optimism as the workforce and economy are getting back to business as usual. There is expected to be growth in the economy from the lacklustre situation in the last two years, and this could be the time for MSMEs to bounce back. Companies need to weigh their logistics options carefully and adopt more direct-to-consumer routes, better vendors, and a changed transport mix to account for the rise in long distance road transport costs.

With their B2B and B2C customers going digital, MSMEs must come to terms with the new age needs for better transparency and traceability in their logistics. And the rising costs mean that there is a need for better visibility within organisations as well. Technology adoption is no longer an option for MSMEs as it is being demanded by the market. The companies who adopt technology quicker than their competitors will see newer and better opportunities opening within their market context.

Anjani Mandal is the CEO of Fortigo Logistics. Views expressed are the author’s own.