The Importance of Logistics in the Expansion of Indian SMEs

Logistics is a critical component of any business. Goods are produced in one or some selected locations but are sold all over a country as well as in parts of the world. How goods manufactured in one place reach other places for local consumption? Only because of logistics people can afford the luxury of using products manufactured at a distant location, say, for example, an iPhone manufactured in the USA, ends up in the hands of someone living in a nondescript village of Bangladesh or Nepal. Logistics essentially involved the movement of goods and their warehousing. Not only giants like  Apple Inc. or Samsung, logistics, undeniably, is crucial to the growth and development of all businesses including smaller and medium-sized businesses. In any country, small and medium-sized enterprises (SMEs) function as the driver of the economy. In India as well, the SME sector contributes significantly to the GDP (Gross Domestic Product) and employs nearly 40% of the Indian workforce. According to some estimates, SMEs including micro enterprises (MSMEs) contribute nearly 37% to India’s GDP.

The towering presence of SMEs as a behemoth in the Indian economy is a combination of many factors viz., business ideas, cheap production, innovative product concepts, availability of cheap labor, financial resources, management and marketing skills, long-term strategic planning, customer relationship, and logistics. Some of these factors work at the enterprise level while others are more inward-looking in nature. Marketing, customer relationship management, and logistics are outward-looking. Out of these logistics is an important factor that plays a make or break role for enterprises. Even if a company produces high-quality goods and does exceedingly well in product marketing, it will fail to reap the rewards in the event of badly managed logistics. This article takes a close look at the importance of logistics for the success of Indian SMEs and their expansion in the years to come.

Logistics is one of the key determinants of the success of Indian SMEs and their ceaseless expansion in the last few decades. SMEs are the backbone of the Indian economy and logistics is the mainstay of small and medium enterprises. Without streamlined transportation and storage, businesses stand to suffer and in the end, fizzle out despite a promising start. A company’s ability to transport goods on time at different locations demonstrates its efficiency. It involves a number of tasks that also highlights the company’s managerial skills and optimum knowledge of the current and impending demands. So, why is logistics so important for the success of businesses especially SMEs and why is it a fast-growing industry? Let’s begin with ‘what logistics means.

What is logistics?

Logistics relates to the movement of goods from one place to another. It entails mainly two functions: transportation and warehousing. Apart from its primary connotation, logistics also refers to raw material procurement logistics, production logistics, recycling logistics, and recovery logistics; transportation and warehousing pertain to sales logistics. Logistics is sometimes equated with supply chain management though the former is only a part of the latter. A supply chain includes all the organizations and business units working in synergy, and the workflow includes various processes, including logistics, to manufacture and distribute products. In a supply chain, all the parties concerned are related to each other directly or indirectly, hence, the name, ‘supply chain’.

Advantages of Logistics

Logistics ensure better inventory and transportation of all the manufactured goods on time. Enterprises need to create strong logistics in order to meet the client's demands on time in the domestic and international markets. Poorly managed logistics result in inventory mismanagement, product loss, increased transportation costs, and loss of profit margins. Better logistics management entails efficient use of the warehouse, better inventory management, high productivity, overall cost reduction, enhanced efficiencies, and customer and supplier satisfaction. This translates into the success of start-ups and the sustained growth of businesses.

What are the costs of delay in transportation?

SMEs in India contribute 40% to the overall exports. Goods manufactured in different parts of India are transported to the different inland cargo depots, and air and sea cargo terminals on their onward journey to the respective international destinations. Likewise, goods are also transported for consumption in local Indian markets. Transportation, however, inadvertently faces delays due to poor road infrastructure, congested railway routes, and numerous checkpoints in different states. In India, roads are the preferred mode of transportation. Nearly 60% of freight is moved via roads while 32% is transported through rail routes. Frequent halts and poor road conditions result in financial losses. According to a study jointly conducted by IIM-Kolkata and Transport Corporation of India (TCI), the country suffers a loss of $21.3 billion every year due to delays in transportation and additional fuel consumption due to frequent stoppage and bad roads.

Also Read: Impact of GST on Small and Medium Enterprises (SMEs)

How can the government help the logistics industry?

The cost of logistics in India is a shade higher than the bigger economies, like the USA or China. In India, logistics costs 10-15% of the cost of the product. These countries have a far better road and rail network that ensures faster freight movement thereby reducing costs on logistics. In India, an over-saturated rail freight line and poor road infrastructure cause an increase in costs. Apart from this, the logistics industry faces multiple challenges. Some prominent challenges have been summed below:

Taxation And Warehousing Issues

Multiple center and state taxes regimes cause significant loss of time during transit. This increases costs. Though the government rolled out the Goods and Services Tax (GST) in the year 2017 to do away with various indirect taxes but the hassles of tax complications are still to die down completely. Poor warehousing infrastructure also mounts challenges to logistics companies. Warehousing facilities are quite limited and scattered which engenders cost management issues for low-margin products. It, therefore, discourages the creation of integrated storage.

Fuel Costs

Due to the frequent increase in fuel prices, freight carriers face problems with profit margins. It leads to a recurrent revision of prices that work as a deterrent to the suppliers and eventually causes lag on the demand side. A relentless increase in prices dampens the revenue of the transporters and hits the frequency of freight loading.

Constraints At The Ports

Weak facilities at the ports in India are a major hurdle to expedited coastal shipping and international freight forwarding. The entry of large vessels at Indian ports is constrained by a lack of depth at the ports. It restricts the optimum use of ports for freight movements. Another issue is the high turnaround time because of delays in the evacuation of freight unloaded at vessel berths and also because of long waiting for berths at the ports.

Government Regulations

Freight carriers come across veritable compliance regulations imposed by the state governments and other competent authorities. This also poses a challenge to the logistics sector.

Logistics companies face these persistent challenges that inevitably result in increases in logistic costs to SMEs and other large corporations. The government can bring in structural changes by targeting such specific challenges to ensure ease of business.

How can the government support the logistics industry to boost SMEs growth post-pandemic?

The logistics industry has been hit hard because of the Coronavirus pandemic. However, due to effective government measures, a vaccination drive and a continuous downward trend in the Covid-19 cases after the second wave hit India in March and April of 2021, the logistics industry is slowly coming back on track. Nevertheless, it will still take a lot of time to recover from the shocks of the pandemic. The government on the other hand is making all possible efforts to revive the economy by framing sector-specific policies. Apropos of this, the government is mulling over framing a National Logistics Policy (NPL) which may become a reality very soon. It will have a positive impact on the logistics industry.

The logistics industry also expects expedited completion of connectivity projects, such as the ambitious dedicated freight corridors (DFCs) of the Indian railways, Delhi-Mumbai expressway, and other major expressways across India. These projects, once completed, will strengthen the rail and road infrastructure, and will significantly augment goods transportation capacity.

The Eastern and Western DFCs will prove to be a game-changer as far as transportation and warehousing are concerned. The government has planned industrial corridors along these dedicated freight corridors featuring multi-modal logistic parks. This will eventually assist in faster transportation of goods, and modern warehousing facilities. Time reduction in transportation and better warehousing facilities would lead to lesser costs on logistics. The cost and benefits of logistics would then result in improved productivity.

The importance of logistics for SMEs

The Indian logistics sector is valued at $150 billion and contributes 14.4% to the GDP as per the Logistics Skill Council. According to the consulting firm, Redseer, road logistics is expected to reach $330 billion by 2025 at an annual compound growth rate of 8%. In the post-pandemic phase, the sector needs an appropriate set of incentives and support from the Indian government to fast-track its recovery. Without the proper incentives and support, the sector that keeps trade and commerce moving will get stuck. The 2022-23 Indian budget has shown promise for the sector and is expected to bring it back on the growth track.

Logistics, therefore, is a critical cog in the vehicle that carries the growth momentum of Indian SMEs. Sustenance and growth of the logistics sector are significant to the growth and expansion of Indian SMEs. This will not only enable an efficient supply of goods in the domestic markets but also expedite the growth in the exports of goods to international destinations.