Risk Management in Supply Chains: The Logistics Dimensions

Risk Management in Supply Chains: The Logistics Dimensions

This article focuses on logistics as the key attribute in Supply chain risk management programs. This is my second article in the series, "Risk Management in Supply Chains".

But I would start with some unusual suspects.

Could a country export without importing, or could there be a huge gap between export and import? What are the risks and costs for such an eventuality?

Do exchange rates play a dominant role in supply chain risk management? How does this create logistics bottlenecks not only across borders but also in the interiors of the country? Do the industry specific policies impact logistics? Does the logistics plan of railways take into account the changing requirements of trade of bulk goods inside the country?

Export and Import of any country is driven by comparative advantage, but if there is a huge gap created between the two, the costs rise and balance must be restored by some means. One of the major factors that balance the equation is logistics cost; so comparative advantage must preclude logistics cost.

Let me start with the exchange rate question. The most extreme example of exchange rate fluctuations is to be found in countries like Russia or Brazil, the wild swings created havoc for these economies. The root cause for such swings is that when the principal commodity being exported fluctuates in value the country has no other option but to accept depreciation of the currency when the value of the commodity goes down in dollars. The reverse holds true when the value rises. So one would see that when Oil and gas prices went through the roof, the ruble appreciated or when the ore prices shot up the Real had a dream run. Thankfully India is not a net exporter of such bulk commodities in value terms otherwise exchange rate fluctuations would have been far more severe.

But the interesting connection with logistics is that the depreciation of the currency works against the import of goods into the country as the country, including the specific importer, is not able to pay higher for the goods. In such a scenario the domestic production of that commodity gets a boost.

It is again a balancing act. Whenever we have seen currencies depreciating, it has been good for domestic production, which could well be consumed domestically or could be exported as well.

This is one of the reasons why the U.S. dollar appreciation has not helped U.S. domestic production whereas it has helped the prospects of Imports.

What has all this to do with risk management in the logistics space? It has because the rising number of reasons why logistics bottlenecks plague the prospects of a nation’s growth is embedded in this very simple question. Imagine a steady state of imports and exports which happen through Ports or cross border entry points. Any change from this steady state would create a ripple effect on the holding capacity of road, rail and waterways traffic for that country.

What is the holding capacity? The holding capacity of a rail-road is the ability to allow a certain number of movements of either rakes or cars or wagons on that link. It would depend on number of lanes, which could either be single or multiple. If any of the links connecting two points has a change in holding capacity the entire link is disturbed. The holding capacity would depend also on the warehousing capacity in that link or the ability to process and forward goods. It would also depend on the personnel managing the pipeline in terms of checks and documentation. Sometimes the personnel count could make things go awry.

Most logistics bottlenecks happen when we fail to create the same holding capacity across the entire chain of links. It could also be that one single point in the chain could have small delta change in terms of inwards versus outwards and the whole link could be disturbed because of that.

Cross border transactions by rail, waterways and road have this perennial problem that it is never possible to modulate the flow according to the holding capacity. It would need additional storage, forwarding and processing facility or additional lanes of movement. This is never that easy as fixed infrastructure cannot be expanded; country where land is fertile has additional challenges of land acquisition and productive fertile land cannot be diverted that easily for infrastructure.

Infrastructure holds the center piece in logistics bottlenecks, but is not the only piece. Access to value added services and ability to use Information technology network for easing flow is an important determinant. These services could be in form of express clearances for valuable cargo or taking help of scanners for checking cargo, which could be expeditious.

Rarely do we look at logistics cost of a bottleneck and factor delays in the total cost. If the value of the cargo is high these costs could well topple the applecart, the competitive advantage could be lost just in delivering the item as working capital could be impacted enormously.

Coastal waterways or connecting rivers per se is a good strategy to ease domestic congestion, but it is the inter-connectivity of road and rail with waterways that makes such a suggestion far more challenging. The reason why European supply chain could be de-bottlenecked is because the Rhine-Danube system could be inter-connected with the rail and road network seamlessly. No one will gain by moving stuff by waterways if the stuff has to wait at the loading and unloading point because of connectivity issues.

It is always the first mile and last mile which is missed. That is because the logistics plan of rail road is not connected with the industry specific expansion plans. It is like working on a chess board where the opponent is invisible and his next move is not connected with your; the winner at the end loses at the cost of winning.

Logistics plan of rail and road and waterways needs to be connected with the expansion plans of the top ten commodity producing industries, where the first and last miles also need to be connected. That is like central planning on a gigantic scale. This task is made no easier by the tariff changes or trade deals or currency movements.

The most recent case in India has been the coal policy shift which changed the logistics plans of railways completely.

But for India, the biggest risk would be drivers of vehicles as the demand always exceeds supplies and the parity could only return with higher pay. This is the reason why road costs appear to be moving at a faster trajectory compared to other modes and perhaps the only solution would be to increase load-ability of vehicles to bring them close to the international standards which again would need infrastructure solutions.

Understanding the nuances of logistics helps to take guard against the supply chain risks of disruption. Factoring the costs of disruption and taking appropriate proactive action should be the topmost priority of any logistician.

As far as individual industries are concerned, it is still horses for the courses.

I love Logistics because it connects continents

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Thomas Marino

Cintas Facility Services Sales and Service Representative

7y

7

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Pravesh Prajapati

Student at Atma Ram Sanatan Dharam College

7y

unrelated 🤔

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Swathi Chaturvedi

Humanity | Kindness | Operations | Strategy | Analytics | Marketing

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