Increased Profitability – Post-GST

Goods and Services Tax (GST) has been envisaged to resolve the erstwhile pre-GST pain points and streamline the supply chain. Most companies are deliberating the need to redesign their after-produce supply chain networks. The biggest advantage which supply chain experts attribute to the implementation of GST is the reduction in inventory. The savings due to the reduction in overall inventory levels are expected to far exceed savings in real estate costs on account of consolidation of warehouses. Companies are constantly striving to optimise profitability by stretching margins, strengthening brand equity and expanding their product portfolios. While these factors are focused on the customer; on the manufacturers’ side, reengineering internal processes to minimise costs is a major factor that not only maximises capital productivity but also dictates the organisation’s survival in today’s competitive environment. Inventory carrying cost is one of the primary metrics which is used to gauge supply chain productivity because it is a measure of how much capital is lying idle in resources that could otherwise be employed for other productive uses. Thus, it is the primary aim of any supply chain manager to minimise the company’s inventory carrying cost without compromising on sales. Companies carry inventory to support business cycles. Inventories help manage the variability of customer demand, the variability of lead times and also forecasting inaccuracies. The level of inventory being carried is linked to the desired Service Level of the company, which in turn balances the companies’ cost of understocking to that of over-stocking. The companies would now be able to maintain pre-GST Service Levels through lower inventory levels on account of faster movement of goods and higher efficiency at the warehouse level, thereby, reducing the overall firm level inventory. The inventory carrying cost is the most significant consideration for the planning of the supply chain for any organisation. The opportunity cost associated with the value of the average inventory being carried by the organisation is one of the major components of the inventory carrying the cost. Organisations look at higher returns through higher inventory turnover and reduction in the average inventory value. Post GST with the removal of interstate checkpoints, reduction in cargo movement time and replacement of multiple state and central level taxes; there is a strong case for consolidation of warehouses. Warehouse consolidation results in averaging out of variability in individual demand and lead time (of individual warehouses), resulting in lowering of risk pertaining to aggregate demand variability. In fact, the average inventory level is directly proportional to the risk of demand variability and hence a lower risk would require a lower inventory level. Warehouse consolidation cases have witnessed up to 30% reduction in inventory levels leading to over 40% increase in inventory turnover thereby leading to increased profitability.

Technology and Shipping

Time-Based competition is intensifying. Delays caused to the ship and its cargo cost a lot to everyone in the supply chain. The inventive use of information technology (IT) will create a benefit equivalent to that of containerization Information technology, especially Internet-based systems, are increasingly being employed in all transport services. As shoppers become more attuned to Maximum usage of sophisticated supply chain management may cause the ports to face both opportunities and threats. IT has brought about a change in the outlook of the ship owners thus making them valued-added logistics service providers. Increased usage of electronics will increase the demand for shipping services by increasing trade volume in general. Most of the Shipbrokers and other intermediaries become a part of the changes, by submitting one-stop freight services, includes providing ocean carriages, port handling, storage, insurance and inland transportation. Ship owners and their suppliers also may soon use the Internet for innovative ideas such as bunker auctions, ship inspections using electronically transmitted data and Internet-based classification society records. The leading area for shipping-related information technology is in ports, especially in terminal operating systems and intra-port communications. A data communication system can handle customs filings, transmittal of manifests, and processing of bills of lading and other documents. The growing use of information processing has brought about a change in the shipping and port industry. The use of e-commerce in ports will increase the efficiency of international trade. Ports are of crucial importance to many countries, as they constitute a critical node in the transport chain linking international transport assistance with regional transport services. The introduction of IT in cargo booking, tracking, clearance and delivery by major shipping lines, as well as in customs clearance, all ports must have to become efficient interfaces for shipping services in a world that are connected with logistics chains. With more changes in the trade arrangements between countries, world trade is expected to continue its rapid growth, thus making the world’s economies more and more interdependent. It is a known fact that ports play a critical role in their countries’ trade growth. There has been a change in the number of ports that have taken steps to improve the quality of their customs services and to give primary transport and communications infrastructure in order to receive the benefits of e-commerce. Information technology, especially Internet-based systems, can be used effectively to
streamline and enhance supply chain processes, enhance cooperation between carriers and customers by providing instant communications, and remove any kind of procedures and regulations. A variety of strategies and policies have been implemented by several countries to develop their information infrastructures. The information systems at the port have now become integrated logistics information systems through interconnected works with other logistics-related information systems.

The Shipping Industry

The shipping industry has been achieving spectacular growth in container trade, along with the globalization process and large-scale adoption of the container. Worldwide containers throughput increased from 36 million in 1980 and 88 million in 1990 to about 535 million in 2008. Around 60% of the world’s port involves laden containers, about 15% are empty containers. The remainder consists of transshipped containers. Sea-sea transhipment shows the strongest growth: it has more than tripled in the last 15 years World container traffic, the absolute number of containers being carried by sea, has grown from 28.7 million TEU in 1990 to 152 million TEU in 2008- an average annual increase of 9.5%. The ratio of the container traffic over evolved from 3 in 1990 to around 3.5 in 2008; i.e., a container on average is handled (loaded or discharged) 3.5 times between the first port and the last port of discharge. The changing liner service networks are at the core of the rise in the average number of port handlings per box. Apart from the year 2009 when there was a decline in world container traffic of about 12% to 478 million TEU, the container shipping business has always witnessed moderate-to-strong year-on-year growth figures. The pace of growth even accelerated in the period 2002- 8, partly as a result of the “China effect” in the world economy. The absolute rise of container traffic is the result of the interplay of economic, policy-oriented and technological factors. World trade was facilitated through the mitigation of trade barriers and the introduction of market liberalization and deregulation. Market liberalization brought about a lot of development in logistics throughout the world. The centre of gravity of the container business is shifting to Asia. During the last twenty years, the transatlantic container trade has gradually lost its dominance to the transpacific and Europe-Far East trades, with large volumes moving from Asia to North America and Europe. The container ports in East Asia handled 19.8% of the global container throughput in 1980. In 2008, their share had increased to about 37%. Ports in Southeast Asia saw a steep rise in their joint market share, from 4.8% in 1980 to around 14% in 2008. In contrast, Western Europe saw its share fall from 30.3% (then the highest in the world) to about 18% in the same period. North America also witnessed its share declining, from 24.5% (then the second-highest in the world) to less than 10%. The dominance of Asia is well understood in the world container port rankings. In 2009 most of the container ports came from Asia, mainly from China. In the mid1980s there were only six Asian ports in the top twenty, mainly Japanese load centres. The best container ports represented 46% of the worlds container ports in 2009, the top five an elevated 21.3%. The share of gateway traffic in total container throughput tends to differ quite significantly between the gateway regions. Certain regions primarily function as a hub, not as a gateway, whereas the seaport system which is a true multi-port gateway region, gives access to vast service areas in the Delta. Moreover, some multi-port gateway regions feature a high density of port terminals in a small geographical space, while other regions cover larger areas with interpreting distances of up to 350km. The major container-handling region in the world until the early 1990s was in the Europian region. From that moment on Asia took over the leadership. One out of every ten containers handled worldwide is handled in ports of the Pearl River Delta. The joint cargo throughput of the ten port.

The transformation of the Logistics Sector

During the year 2018, the overall absorption of logistics during the year touched close to 24 million sq. ft., which was a growth of about 44 per cent compared to the prevailing year. Nearly every city in India witnessed growth in space take-up on an annual basis. Following the expected trend, 3PL, e-commerce and engineering & manufacturing drove demand during the year contributing about 35 per cent, 23 per cent and 15 per cent to overall take-up respectively. There was an appreciation in micro markets owing to increased demand coupled with limited investment-grade supply. E-Commerce has been a major contributor to the demand in the logistics sector, by leasing about 10 million sq. ft. of space across various cities. The growing focus on expansion into the tier II and tier III cities by e-commerce players will give a further push to this demand.

Logistics demand to remain higher in 2019

Since the government took some effective steps to nurture the sector there has been a rapid demand in the logistics. Post the implementation of GST, the demand for warehousing facilities has witnessed a significant surge. The growth in leasing activity in 2018 versus 2017 was observed to be close to 44 per cent, the annual absorption in 2017 was approximately 17 million sq. ft.; in comparison to 2018 which recorded absorption of close to 24 million sq. ft. With the introduction of the latest technology, demand for quality space is increasing and corporates over segments are opting for generous, modern warehouses. Latest introductions in technology, especially automation help in improving the specifications and operations of logistics assets, thereby forcing older, lower grade properties down the market pyramid. Also, we expect that the trend for e-commerce platforms to own and operate their own facilities will result in more built-to-suit facilities, thereby taking off some “pure” leasing from the market. In the longer-term, the gradual normalisation of e-commerce increase and influence on the profit margin of 3PL players for faster and affordable delivery will result in the stabilisation of demand. In order to cut costs and to improve efficiency, there will be an increased interest in e-commerce players/retailers to share fulfilment centres. There will be a growth of small-scale warehouses, especially in close proximity to highly-populated residential catchments. In order to increase the demand, the major focus will be on fresh produce/groceries delivery. As the segment witnesses increased traction, we expect players to display interest in cold chain facilities and temperature-controlled warehouses. The government’s ambitious Make in India initiative is expected to act as a catalyst for growth in the logistics sector. Currently, the manufacturing sector contributes about 19 per cent of the GDP as per Q2 2018-19 (2011-12 prices) estimates. To further increase this contribution to 25 per cent by 2025, the government is working on a new industrial policy with a focus on three pillars – competitiveness, sustainability and inclusion.

What are the ways to minimise losses from misdelivery?

Letter Of Indemnity From Reputable Financial Institutions

Although a letter of indemnity does not excuse a carrier from his obligation to deliver the cargo against bills of lading, nevertheless, they provide the carrier with an avenue to recover his losses from the party granting the letter of indemnity. In this regard, letters of indemnity should be obtained from reputable financial institutions. It is quite risky to obtain a letter of indemnity from a party whose financial strength is unknown to the carrier. The wording of the letter of indemnity is important: it should be as widely couched as possible to cover all situations of misdelivery without production of bills of lading.

Statutory Right Of Warehousing Pending Taking Of Delivery

As aforesaid, there is a statutory right under Singapore and English merchant shipping legislation for the carrier to warehouse the goods. This reduces the needs for the master to discharge and deliver the cargo hastily without insisting on bills of lading in order to achieve a quick turn around time. Under this legislation, the warehouseman is not to release the cargo without production of bills of lading.

Control Over Discharge Port Agents

Very often, misdelivery problems arise because of the misconduct of discharge port agents. These agents are the parties usually responsible for handling the cargo after it has been discharged from the vessel. There is, therefore, a need to be selective in the appointment of discharge port agents as well as to educate them on the fundamental importance of insisting on bills of lading when giving delivery of cargo. Discharge port agents should also be warned about the risk of accepting letters of indemnity issued by the party whose financial strength is not established.

Not Delivering To A Party Claiming To Be The Owners Of The Cargo

This is another common reason for the delivery without production of bills of lading. Sometimes, carriers’ discharge port agents are tricked into delivering cargo to a party who is able to prove that he is the owner of the cargo but who do not present bills of lading. As discussed above, such a delivery is wrongful and exposes the carriers to claims. Masters, chief officers as well as discharge port agents should, therefore, be alerted to this fact.

Establishing A System For Post Discharge Treatment Of Cargo

Ideally, every carrier should have a prescribed procedure for its masters, chief officers and discharge port agents as to what is to be done with the cargo during and after discharge from the vessel. This may minimise the possibility of persons not taking the proper precautions when faced with a demand for delivery of cargo.

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