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The Rediff Business Interview/Joachim Miebach

'Product costs in India could have been 50% less but for an efficient transport system'

Joachim Miebach, founder-chairman, Miebach Logistics of Germany, impressed the gathering at Logistics 99 in Madras -- it is a conference on integrated logistics and supply chain management -- with his views on coping with growth in manufacturing and infrastruture shortage in India.

Mieback Logistics, founded in 1973 in Frankfurt, provides logistics consultancy and engineering service to large and medium-sized companies, and has offices in Europe, North and South Americas and India. Shobha Warrier interviewed him.

In your address, you said there is no such thing like 'world class logistics'. Please elaborate.

There are so many different aspects in logistics that it becomes difficult to say, "This is really world class." You find companies which are very good in inventory control but very lousy in service.

Others may give perfect service to the customers but their supply chain cost may be average. So, to find companies that are perfect in everything is very difficult. Each company has its focus on different issues.

But there is no benchmark in logistics so that you can say, this is good and this is bad. For example, in fast moving consumer goods, some say world class is an inventory level of five days of stock. Or, is it three days, or, is it two days? So, what is world class?

Does the standard change with location?

Yes, it depends on the location. It also depends on the products, on the customers you have, and on the country too. In India, for instance, you cannot cope with only a few days of stock.

Is it because of the size of the country or the lack of good infrastructure?

Both. The size of the country and the road system result in stock-in-transit. This is what we have seen in India: stocks-in-transit! It doesn't make sense. Infrastructure in India is very costly. The cost of the products could be much cheaper if we had a much efficient transport system.

The professor (from the Indian Institute of Management, Ahmedabad) who spoke before me said that the delays in harbours cost a lot to the Indian economy. I think the cost of the delays in road transport is much, much more. So, what happens is, all the companies have their stocks on the road, in transit for many days. It not only takes a lot of time but becomes unreliable too. The forecast error has to be covered by inventory again.

Warehousing and transportation are two major issues in supply chain management.

Warehousing, we feel, is a field where there is the biggest demand. Physical treatment of goods in India in the warehouses is at a very, very low stage. It leads to several complications like delays, errors, broken cartons, etc, and only a few warehouses in India have palettes.

Mostly, you have an old shed and in the old shed, you have cartons on the floor. There is no first-in, first-out and there is no inventory survey. A guy marches through the warehouse with a piece of paper, mostly printed by a high-class computer and then looks everywhere to collect the items listed in the paper. Sometimes he finds them, sometimes he doesn't. There is quite a gap between physical handling standards and the information handling standards.

You have a tie-up with Madras's supermarket chain, the Foodworld. How have you changed the system in Foodworld?

In Foodworld and Escorts, and the other companies that we deal with, we try to improve the physical handling as well. All of them have beautiful warehouses now. It needs a lot of innovative and positive thinking from the management. They should say, okay, we are going to invest in it.

Surely, the old system does not require any capital. But somehow it works. It is cheap but it does not provide good service. Your customer says, "No, I want it the next day." In the old warehouse, you cannot do it. You don't find things fast. The process takes a longer time.

The cost argument is that modern warehouses are not more cost-efficient than the old sheds. The only argument for the new warehouses is, they give better service to the customers. Better service leads to more sales, more turnover, and more income. And this is what you have to believe in. This is something you cannot prove in advance. So, positive thinking from the management is necessary.

Manufacturers in India, say in the southern region, sometimes find that demand for their products comes from other parts of the country. Is it not cost-effective for them to have a warehouse somewhere in the middle of the country than near the production site or at various places?

Yes, it is cost-effective but the issue is sales tax. The sales tax issue does not normally allow this central warehouse principle. Regional warehouses for sales tax reasons are more costly. What you find now is national distribution that is more tax-driven than cost-driven or service-driven. But as long as the tax differences between the states continue, I don't think this will change.

It is much more economical to centralise and then distribute when you really know where the demand is. Instead what you do now is, you spread your inventory all over the country and then say, I put the goods there but the demand isn't there. So, the two important government conditions that affect cost-efficiency are sales tax and infrastructure. Improvement of railways and road conditions are absolutely necessary for good logistics. The government has made note of these issues now. Let us see what the outcome will be.

This conference has highlighted that not all customers are equal and that they need not be treated in a similar manner..

In marketing, a good customer and a bad customer are treated equally. In logistics, we don't. In logistics, we say that price policy differentiates a good customer from a bad customer. Normally, there is an outcry that all customers are equal. But what we say is, you have already differentiated them in your price policy. The reason for this is, very few companies really know the logistics cost of treating a good customer and a bad customer. If you don't differentiate, the cost per order, is almost the same for a good customer and a bad customer but your bad customer purchases only a little volume but incurs huge logistics cost. The good customer gives you a good turnover.

A good customer is one who orders huge quantities and regularly. You should treat such customers promptly with delivery the very next day. You should double-check his consignment. You should put his things in beautiful cartons. You should give separate invoice for each carton. If he insists, a carton inscription too. You barcode the entire items, if he wishes to. If you do all this for a bad customer who buys only a few items, your service cost goes up and the turnover will be less.

If you look into the sales statistics of the companies, you always find the ABC characteristics; that is, 20 per cent of the customers being responsible for 80 per cent of sales.

You said that in Europe and the US, producers get immediate response to their products at supermarkets from consumers. But in India, there are more corner shops than supermarkets.

We think that retail structure in India will change only slowly. Big supermarket chains are coming to India but the development is slow. What we have suggested to one of our customers is to set up a terminal at the producer's cost to get a statistical sample and then make extrapolations. The statistic material is good enough if it is extrapolated in a good way so that the producer will know how the end-user really feels about the product. The conventional retailer also can provide the data as well but not all of them. It is also true that the producers need only the response from one per cent of the consumers.

In India, middlemen play a major role in all business activities. Do they have any place in logistics?

No. they create extra steps!

How did the countries or companies which follow good logistics, get rid of middlemen?

Just by finding out that they were only adding to cost and not to value. It doesn't make sense to have steps that do not give any service.

Why did you say that in India, producers lead the supply chain while in the US and Europe, the retailers are the leaders?

Five or six supermarket chains in the US and Europe have great market power and they hold 50 per cent to 60 per cent of the retail business. So, their marketing power is immense and they dictate to the producers where to deliver and when to deliver, whether the stocking has to take place at the producer's premises or the central warehouse of the retailer, how to barcode, etc. This is what I mean by leadership in the supply chain.

You talked about horizontal differentiation and vertical integration as important steps in good logistics management. What kind of cost-cutting do the concepts enable?

I think, by good differentiation, cost can be reduced by 20 per cent to 25 per cent. By vertical integration, cost can be further reduced by another 20 per cent to 25 per cent.

So, you can reduce the cost by half if you follow both the concepts.

Yes, you can, if everybody is doing it by himself and following the steps properly. If you make transportation efficient, if you properly do the handling, picking, packing, barcoding, etc, and if there is no differentiation, you can reduce the cost by 40 per cent to 50 per cent. This is what we have experienced in America and in Europe. The logistics cost per sales unit of the last fifteen years, in fact, has been cut half! Yes, we have managed to cut the cost by half!

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