Traditionally, in military operations, the infantry, cavalry and artillery focused on the battle; the logistics people procured, supplied, and maintained materials, personnel and facilities for and to these formations. It was a more efficient arrangement through the division of labour. The use of the term logistics in business and economics is relatively new.
The last 100 years have witnessed remarkable changes in the way business logistics is organised.In the early 20th century, Henry Ford conceived and implemented a revolutionary idea: the assembly line.Ford brought iron ore and coal to his vast Rouge Plant and by 1927, had all the steps in the manufacturing process from refining raw materials to final assembly of the automobile in one big factory.
By the early 21st century, the assembly line started to shatter into a 1,000 pieces and get scattered to multiple locations. In a car, on average, 5,000 pieces may come from across many countries. To remain competitive, companies search for the lowest-cost place to make each component. An efficient supply chain became critical for profitability. In the words of Robyn Meredith: "Each step in the production process is now like one link in a flexible chain, which is hooked to the next piece, then to the next, and so on."
In the supply chain, logistics essentially involves everything that goes on in between the producers involved in the physical transformation of natural resources and raw materials into components; then components into finished products, and ultimately from the producers of finished goods to the final consumer.
Given the well-known efficiency gains from division of labour, there are companies who specialise in providing logistics services. Li & Fung is the world's leading consumer goods sourcing and logistics company, headquartered in Hong Kong. It had a turnover of over $19 billion and 25,000 employees in 2014. It provides sourcing services across multiple product lines to retailers and brands across the globe.
India has moved a long way from self-sufficient villages. The apples consumed in Kochi come all the way from Kullu or Kashmir. Hundreds of components for cars get transported across the country by logistics companies.Yet, for all its progress in recent years, the logistics sector is at its nascent stages - and, more worryingly, rather inefficient.
According to one estimate, India spends about 13 per cent of its GDP on logistics management, compared to seven per cent in developed countries.This relatively high spend on logistics implies wastages, leakages and inefficiencies: spending too much for too few services. As the economy grows and supply networks become more complex, the country needs to significantly improve its logistics management and dramatically reduce costs.
There is a demand in some quarters for granting the logistics sector "industry status" to solve some of the problems. But this demand has considerable ambiguity.The term "industry", etymologically connected with diligence, was defined in Clause (j) of Section 2 of the Industrial Disputes Act, 1947 as "… any business, trade, undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or a vocation of workmen."
The classification of the economy in popular parlance into three sectors, namely agriculture, industry and services, has become imprecise in a modern economy. Industry is no longer a factory with a chimney belching smoke. Now, most countries, including India, accept and follow the internationally accepted International Standard Industrial Classification of All Economic Activities (ISIC) Revision 4, 2008, brought out by the United Nations. In India, the Central Statistical Organisation (CSO) currently classifies the activities according to National Industrial Classification (NIC)-2008.
Under ISIC-2008, the set of statistical units classified into the same ISIC category is often referred to as an industry - such as the "construction industry", which would refer to all units classified in ISIC Section F (Construction). Such categorisation of the complete set of producing units in an economy makes ISIC an important tool for socio-economic statistics.The categories at each level of classification are mutually exclusive and the principles and criteria used to define and delineate these categories are based on the inputs of goods, services and factors of production; the process and technology of production; the characteristics of outputs; and the use to which the outputs are put.
Except for in the context of defence, the word "logistics" applies only twice at the four-digit level in ISIC-2008: for (i) "logistics activities, i.e. planning, designing and supporting operations of transportation, warehousing and distribution" regarding "other transportation support activities" (5229) under Section H entitled "Transportation and Storage"; and (ii) "logistics for others on a contract or fee basis" regarding "combined office administrative service activities" (8211) under Section N entitled "Administrative and support service activities."
It will be difficult both conceptually as well as practically to change the NIC-2008 classification, which is based on ISIC-2008. However, beyond the ISIC's standard way of grouping, it is always possible to have a need for data on other sets of economic activities that may cross the boundaries of existing high-level ISIC categories. Logistics may be one of them. But, the "need"for having such a category has to be defined.
Will "industry status"help logistics in procuring bank finance?There does not appear to be any RBI guidelines on lending to "industry." RBI's master circular on Loans and Advances dated July 1, 2015, provides guidelines for infrastructure and housing. Grouping a set of activities under the "logistics sector" and declaring it as an industry will not be enough for getting longer term or cheaper loans or loans with more liberal provisioning norms in case of delinquency. The same is the case with concessional taxes or stamp duty rates under Central or State laws. For a more concessional dispensation, declaring logistics as an industry will not suffice; an adjective such as "infrastructure" will be needed before the term "industry".
Logistics covers a long list of activities embracing planning, implementing and controlling the efficient and effective forward and reverse flows and storage of goods, services and related information between the point of origin and the point of consumption. It is doubtful that all the components in this definition need special dispensation under institutional finance or taxation.Hard physical support for the logistics sector, say, roads, are already included under infrastructure and thus eligible for preferential financial and tax treatment. The arguments in favour of enlarging the list look less than compelling. Having a lot of priorities will dilute the focus and shift it to the less important goals.
The writer is an economist
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
