Introduction to Truck Transportation in India
What Moves your Chhole Kulche
Introduction to Truck Transportation in India
One fine morning, Dharmesh went out from his house in Guna, Madhya Pradesh, to the market near Shri Hanuman Mandir Malpur. Scrolling through the edibles at the general store, Dharmesh picked up a pack of Parle G, a litre pouch of Gemini Refined Sunflower oil, two packs of Adani Wilmar rice and a large pack of Kurukure for the evening.
Then from the vegetable vendors, Dharmesh purchased a Kg of spinach, bananas and kamal kakdi each.
No big deal to realise that each and every item that Dharmesh casually bought, had been exchanged among a large number of institutions, travelled through a vast network, most likely more than any of us have since the lockdown started. Parle G came from Neemrana, Rajasthan, Sunflower oil came from Krishnapatnam, Andhra Pradesh, rice probably from Mundra, Gujarat. And Kurkure, from Mecheda, West Bengal. Even the fresh fruits and vegetables are not local- spinach travelled right from the hills of Assam, bananas from Tamil Nadu and Kamal Kakdi from Jammu & Kashmir. All this, Dharmesh encountered living in a small town, 200 Km from the nearest big city.
India is a vast nation- both in terms of size and population density. This means, densely populated pockets are spread across a large landmass and over a variety of terrains. Ensuring that whatever is available to one place is available practically everywhere else as well, is a complex problem for us. And not solving it very efficiently has been costing us a fortune. According to a 2019 story of the Economic Times, logistics has a contribution of 14% in India’s total GDP. That is, for every ₹100 spent in production, we spend ₹14 just on transporting the products to the right place, with no value addition. This is way more than countries like the USA (9.5%), Germany (8%), Japan (11%). To understand what makes us pay a fine share of our earnings to something that practically adds zero value, we need to understand how and where it all adds up. Let us take the first step towards it. A typical distribution network of a factory produced item may look like the following:
From the source, items are transported to a smaller station, which could be the producer’s own asset, a vendor or a completely independent trader. That station may either serve the terminal station via modern trade, e-commerce, own stores etc., or may service an even smaller station, which may further serve another station. This continues unless the stocks reach the retailer. In this diagram, connections coloured in Green are generally the longest and carry the largest load. In this article, we shall restrict our study to a section of these Green connections only.
Road Vs Rail Vs Everything Else
India has the second largest road network and the fourth largest rail network in the world. Both the networks reach practically every settlement in the country. With large freight carrying capacity of the rail, railway costs ₹1.5 for carrying one tonne freight over a Kilometer (PTPK). While road costs a whopping ₹2.5 per tonne per Kilometer (PTPK). However, despite the cost advantage, rail contributes to only 35% of total freight transportation, while road has a share of 59%.
There are many parameters forming the bias, including the last mile connectivity issues, pilferage, lack of infrastructure at rake handling areas, delay due to lack of rake availability etc. However, all those are beyond the scope of this article.
With an idea about the transport market of India, let us try to deepdive into the truck transportation sector. As already mentioned, here we shall be specifically focusing on the long haul connections. City logistics is in itself another ecosystem and shall be discussed some other time.
The truck sector of India is predominantly unorganised. Although, there have been successful attempts by a large number of players to bring order to it, a lot more is yet to be done to make a dent. Unorganised obviously hinders right and reliable information flow to the right stakeholders. This deeply influences the most desirable outcome- profit.
To earn profits, a truck owner wants the wheels to continuously run and boot to carry load. Any time the vehicle is not moving, or is moving without the load, the owner gets a tough time paying off the EMI, maintenance, salary and ultimately his own personal expenses. Thus, to earn, once an order is received, a truck owner needs to:
(i) reduce any time the vehicle has to spend waiting for load
(ii) get next order as near to the place of delivery of the first order as possible
However, it is practically impossible either for the driver or for the truck owner to directly get in touch with those who need to get their goods moving, as none of them can be present at the right place or know the right people everywhere. This is where the middle layer comes into play
The Broker & Transporter Connection
A broker is a local player who champions some selected lanes, generally starting from his base location. He is expected to know what vehicles entering his home city are looking for to load to these specific locations. The credibility of a broker depends on the successful transactions done in the past, and that depends on the quality of contacts the broker has, and the number of truck owners and truck drivers he is in direct contact with.
A transporter is a larger player who deals with the demand side as well as brokers. However, a transporter is less likely to have as deep influence with drivers and truck owners as a broker has. A major difference between a transporter and a truck broker is that a transporter can afford to invest huge sums in the market and wait for the returns, while a broker runs cash cycles on a day to day basis. Eventually, successful brokers turn into transporters and successful transporters gain influence among truck drivers and owners to bypass brokers
Understanding The Cycle - One End to End Order
Let us go through one example of end to end order to understand how the nexus (not in any negative sense, though) works. Here the key players are the broker Brijesh, transporter Tarun and the transportation manager of a flour mill Mithun. They all live in Kolkata, West Bengal. The flour mill is located in Kharagpur, West Bengal.
Mithun has to service a distributor located in Phoolpur, Uttar Pradesh, with 17 tonnes of packed flour his employer produces:
Mithun checks for the right transporter for this lane, among the transporters his organisation has agreements with. He finds Tarun, who has significant hold on entire East India to North India connections
Mithun calls the transporter Tarun and demands a 20 MT vehicle for Kahragpur- Phoolpur route. Contracted rate between Mithun and Tarun for the quarter is ₹2,000 per MT. Thus, Tarun has to arrange a vehicle and cannot raise a bill of more than (₹2,000*20=) ₹40,000
Tarun calculates the amount he should earn from this transaction:
(i) Once the vehicle is arranged, it shall take at least 1 day for the placement and loading, after which the journey could start. 1 day
(ii) It takes around 4 days for the truck to reach Phoolpur from Kharagpur. 4 days
(iii) It takes 1 day to unload, considering inefficiencies, no entry restrictions etc. 1 day
(iv) After unloading, the driver sends the Proof of Delivery (PoD) to the transporter, which takes 2 days to reach via courier. 2 days
(v) He can raise the bill only after receiving the PoD
(vi) Once the bill is raised, it takes 2 days for it to reach through the courier and get marked as “Received” at Mithun’s organisation. 2 days
(vii) As per the agreement with Mithun’s organisation, Tarun should receive the payment within 45 days of receiving the bill. He knows from his experience that it never reaches him earlier than this. 45 days
(viii) Summing all the days mentioned above, Tarun knows that he shall receive his payment after (1+4+1+2+2+45=) 55 days. Tarun rounds it up to 60 days to cover any other risks and inefficiencies. 60 days
(ix) At the rate of 11% per annum, Tarun is anyway going to lose ((11/365)*60=) 1.8% of his earnings as carrying cost. He needs to build this into his profits.
(x) 98.2%*₹40,000= ₹39,280 is the maximum amount which he can afford to offer for the vehicle. For anything higher, he would incur a loss
(xi) Expecting a profit of at least 15%, he should spend on the transaction an amount of (85%*₹39280=) ₹33,400
(xii) Considering night stays, food etc. he plans to pay the truck driver ₹300 a day (₹300*6 days= ₹1,800)
(xiii) Building that into cost, Tarun knows that he should arrange for the vehicle in (₹33,400- ₹1,800 =) ₹31,600Tarun checks his records for the suitable broker dealing with Kharagpur- Phoolpur route. He finds Brijesh, who specifically has a hold on the vehicles going from Kharagpur to Phoolpur, Allahabad, Jaunpur, Gyanpur and neighbouring areas in the Purvanchal (East UP)
Tarun calls Brijesh and informs him about the demand. He informs Brijesh that he cannot afford to pay more than ₹31,600
Brijesh expects to get the amount instantly from the transporter, so he does not need to build in any carrying cost.
To earn his own share of profit of 10%, Brijesh plans to offer the truck owner, whosoever he finds, a maximum amount of ₹28,440
Brijesh checks his records for the vehicles that have entered the Kharagpur area and are yet to exit. His information is not complete, since it comes from the people he knows, rather than any well setup structure.
Brijesh raises the request within his network of brokers and truck owners, for a vehicle to Phoolpur in anything less than ₹28,440, within 24 hours
Brijesh finds a vehicle. But the driver is willing to go to Madurai, Tamil Nadu, rather than Phoolpur, Uttar Pradesh. Brijesh shares his contact details with a broker within his network, who deals in trucks to Madurai.
After many hours and some similar transactions, Brijesh gets the details of a truck owner who wants his vehicle in Azamgarh, a town near Phoolpur. Vehicle is currently vacant and in Kharagpur. Brijesh directly deals with the owner. He just expanded his network
The truck owner is paying an EMI on the truck. Also through his contacts, he is not able to ensure round the year utilisation of the vehicle. So he is not willing to negotiate under ₹31,000
Brijesh informs Tarun. Keeping his gains the same, he requests for ₹33,600. Tarun agrees
Since Tarun is bound to provide the vehicle to Mithun at a fixed cost, he has to cut down his own profit. He transfers ₹33,600 to Brijesh and asks him to arrange for the vehicle at the mill address
Next day, the vehicle is loaded at the mill. Before departure, Tarun’s local agent hands over ₹1,800 to the driver as 6 day transit expenses. Fuel charges, as already agreed between the driver and the owner, are borne by the owner himself
After the transit, the driver unloads the vehicle, gets the Proof of Delivery signed by the distributor along with comments. The driver then sends the PoD to the Tarun’s address
Tarun verifies and immediately sends it to Mithun’s office address
It is a simplest example of connections, as the movement happened directly from the factory to the distributor. It is called a Point to Point (P2P) transition. Also, it is a happy flow, with practically no hurdles. Despite that, the vehicle was placed at (₹31,000+₹1,800=) ₹32,800. 18% of the total logistics cost was earned by the middlemen. Besides, a large number of inefficiencies inflated the cost. For 15Kg packed flour carried in this case, the cost paid to the middlemen increases the final price by ₹6 per packet in the first leg of the logistics itself. Now the distributor, wholesalers and retailers shall add their own share of expenses, profits and inefficiencies into the chain and further inflate the cost. How much do they inflate, is left for the reader to estimate. The rule is - Smaller the order size, higher the cost inflation per packet.
Transporter’s Pricing Strategy
From the example mentioned previously, one can infer that a transporter shall not work if he does not earn a profit. However, there could be cases where market prices shoot up beyond the contract rate. In such seemingly bad transactions, a short term transporter would default on the commitment to the client, earn bad repute and eventually won’t survive in the long run. A transporter with a longer period vision, however, would seat commitment over the profit in the transaction and earn a repute. Adding experience and wits to it, the long term transporter would develop a pricing strategy to trade off between business and transactional losses, in order to maximise his profits over a period of time.
Considering that the negotiated contract price has a major role to play in the business a client is willing to offer a transporter, the transporter has to keep it low enough to get the most of it. But high enough to ensure he earns profit without compromising over the commitment to provide vehicles in time and within the contracted rate.
This can be understood better by one month pricing cycle of a transporter in a tough month.
Following is comparison between the contracted price a fictitious transporter has with a fictitious client (BLUE), and the actual price the transporter paid for the placement of the vehicle (RED).
This example is set on Ludhiana - Mandi lane, before the onset of spring. Himachal Pradesh’s local Doongri Fair falls next month.
The subject transporter starts the month with profits on each transaction for the first two days. However, on the second day, a landslide happens on the way to Mandi, forcing the trucks to take a longer route. Prices suddenly jump and the transporter has to place vehicles at loss. By the fourth day, the landslide is cleared and the route is again open for traffic. Prices gradually decline and from the sixth day, the transporter is again able to arrange vehicles earning profits in each transaction. For the next few days, regular events continue to affect the supply and demand of the vehicle, fluctuating the daily market prices. However, as the festival approaches, truck demand gradually increases, while more and more drivers go back home for the festival. Vehicle prices gradually increase throughout the rest of the month, and after the 24th day, the transporter is no longer able to arrange vehicles at prices lower than the contracted price, and thus loses on each transaction.
A smart and experienced transporter would be aware of the impact of the festival on this particular lane, and thus, would negotiate the price accordingly. He would know that he might have to arrange for the vehicles at loss, but that is not important as long as the month, or in fact, any specific period of time finishes with net profit. For other less predictable events like landslides, strikes, bad weather etc. the smart transporter would keep a cushion, considering the geographic, political and historical situation (Hope you guessed it! We, the consumers pay for the protests, strikes and unchecked landslides!)
It must be observed that all the truck brokers the subject transporter dealt with did not have to go through these tough decision making, since they run their cash cycles daily, that is, they earn their sum daily and have a more or less direct cut in the sum, rather than a fixed promised contract. However, the dynamics could change from broker to broker, based on their own strategies.
Projected Demand Inflation
Shiv Kumar, the owner of a small Kachi Ghani mustard oil packing unit situated in Ajmer district, Rajasthan suddenly gets an order of 100 MT from Shimoga, Karnataka. The packer has never dispatched more than 30MT to Shimoga in one week, and thus, this order is a really big deal. As a regular practice, Shiv communicates the requirement of five 20MT trucks to the transporter with the least contracted price on this lane (Designated as L1 transporter). Designated L1 transporter fails to arrange the vehicles in 24 hours at the contracted rate of ₹64,000 each, as the available vehicles were costing too much
Panicked, Shiv immediately communicates the requirement to designated L2 and L3 transporters as well, at contracted rates ₹70,800 per truck and ₹81,000 per truck respectively. And in the next 24 hours, designated L3 transporter places three vehicles, at ₹81,000 each, with a commitment of two more vehicles as and when available. For five trucks, Shiv ends up paying ₹85,000 extra for transportation- an additional cost of ₹850 per MT. In the edible oil industry, this most likely means that Shiv Kumar shall have to bear net loss on this transaction.
An interesting part of this transaction is that had Shiv waited a little more with designated L1, he would have earned a huge profit. Or, in the worst case, inflation would have been much lesser than the whopping 27% that Shiv now had to borne. Let us get deeper into this to understand!
Ajmer to Shimoga is a low traffic lane for the industry. There is neither huge demand nor huge supply. Thus, there are not too many reliable truck brokers working on this lane.
When the designated L1 transporter raised the requirement to the expert broker, the broker was aware of three available vehicles. But they could not zero down on the prices and thus, L1 missed the 24 hour deadline. Negotiations could have been closed on some mutually agreeable rate within the next 24 hours, when designated L2 and L3 transporters approached the same broker individually. The broker now had the availability of three vehicles, while the demand of fifteen! Transaction, which was already skewed towards the broker, now turned 3 times more favourable. Guess who gets to decide the price now!
The inflation of the projected demand against the actual increases with the number of orders and size of the service spread. Comparing the actual demand with projected demand makes the curve look like a whip:
Such discrepancies are more frequent in the industry than one could imagine. Results, sometimes are, that more than required trucks show up and either they have to be adjusted somewhere else, or have to be hired for a day without returns.
Conclusion
In 2016, Maruti Suzuki transported a batch of vehicles from Varanasi to Haldia, in a vessel via National Waterway 1. The following year, Emami Agrotech Limited transported edible oils and fats to Agartala, Tripura, via the inland water network passing through Bangladesh. With the promises to establish a suitable infrastructure by the government and development towards it, more and more organisations are trying out this less explored, cleaner and cheaper mode of transportation. We hope that all these efforts bear fruit and our supply chains become greener, cheaper and more efficient. However, in 2020, trucks are ruling the primary transport of India and don’t seem to be losing any ground for the next few years.
The truck transport market is still largely dependent on the relationship based brokers and transporters. For the forward and return load, a truck owner is mostly dependent on the people he knows personally. And if anything skips the happy flow, like an accident, theft, or the hijack by the driver, the truck owner again has to rely on the network he knows to get the information, lodge complaints or to get the insurance claim. And for the driver, who carries assets worth of lakhs of rupees, for his personal security he mostly prefers to travel to the locations he knows, at the times he feels safe, rather than travelling to a destination that carries market demand. All this results in the wheels rolling less and thus, the driver and the truck owner earning less, while the customer paying more.
Developing IT based solutions for the stakeholders in the truck transport industry, by the way it is happening, seems to be drastically transforming this. Consider the second example we discussed- the one with the transporter Tarun, broker Brijesh and transport manager Mithun. With the right billing IT tools, the distributor could raise an e-PoD on his phone on the receipt of load, and the driver could approve it immediately. Transporter Tarun could also validate it online, and raise the bill against the contract rates. Mithun, whose IT tool could have already calculated the liability against this transaction at the contracted rate, only had to validate Tarun’s bill against the liability, mark the deductions, if any, and confirm. This could have easily cut down the cycle by 40 days, resulting in 1.2% direct reduction in the negotiated price or ₹27.6 per MT on the final product, just in the primary transport leg.
Using the tools that could provide the information of available trucks and desired destinations, the transporter Tarun could find more vehicles, completely bypassing the broker Brijesh, reducing Brijesh’s cut of ₹3160.
Using the same tool as the transporter Tarun, the truck owner could get more trips much quicker, and thus increasing his gains. He could invest his gains to rent another driver for his truck, thereby ensuring practically 24 hour hauling. This could cut down his TAT by 25%- 30%, thus, ensuring the availability for even more trips in a month, and thus, higher profits. Bringing all this into a picture, with little IT literacy, all the stakeholders could earn more, while the end consumer could save ₹3 to ₹4 per packet, from the primary connections itself. And the driver, with better navigation tools, could travel the most used route, and thus, the safest route and quickly reach the destination.
In the next example discussed, any simple IT feature could consolidate all the previous transactional rates, negotiated rates, vehicles placed etc. by the transporter, allowing him to compare the trends month on month, quarter on quarter or year on year. This could allow him to plan the rates better.
While all this may look like a fantasy, the markets are currently flooded with the IT tools that provide exactly the capabilities mentioned above. So as you read, these things are actually happening, and people are gaining from it.
Not only into pure operations, IT enabled solutions into associated sectors could directly benefit the driver and other logistics stakeholders. Introduction of GST and e-waybill - a solution into taxation, has remarkably improved the transportation efficiency, and thus, reduced cost. As per a 2018 report of Financial Express, after one year of introducing GST and standardised e-waybills, truck TAT was reduced by 20% in 5 states most infamous for holding inbound trucks at their borders for tax collection- Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar. This means, in a good business steady state, the driver earns 20% more in the same period of time. By the way, when was the last time your employer gave you a 20% hike?
Thankyou for the time you gave to the document!
References
Top 5 largest rail networks: https://www.railway-technology.com/features/featurethe-worlds-longest-railway-networks-4180878/
Share of road & railway in India’s logistics: NITI Aay og Report for Global Mobility Summit, September 2018, Section 2.2.1, Page 16
Inland Waterway PTPK: http://www.maritimegateway.com/multi-modal-terminal-to-come-up-at-varanasi/
Reduction in TAT:
https://www.financialexpress.com/economy/one-year-of-gst-turnaround-time-for-trucks-cut-significantly-in-these-5-states-heres-full-story/1219000/
https://economictimes.indiatimes.com/news/economy/policy/post-gst-travel-time-of-trucks-has-reduced-by-a-fifth-government/articleshow/59831749.cms?from=mdrFirst and fourth photos: source unknown
All other photos: Clicked by the author
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