War Effect: Logistics Complicated And Costlier

Chennai: Indian exporters and supply chain providers are still reeling under the pressure of higher freight rates and insurance premiums, longer transit times, rerouting of cargo and higher inventory requirements due to the war in West Asia. From getting geopolitical resilience inbuilt into the system, to multi-modal transport, keeping buffer stocks and using technology to track cargo, the industry has incorporated several changes. However, all these are adding to the working capital needs, and the logistics industry has become even more complicated since the start of the war, says Jitendra Srivastava, CEO, Triton Logistics and Maritime.

The closure of the Strait of Hormuz has disrupted global supply chains. How much additional cost has this created for Indian exporters and the logistics industry?

The entire industry is going through a major disruption. But this time, the quantum of disruption and, more importantly, the uncertainty have become the real challenges for logistics professionals. The longer the war continues, the longer the disruption remains and the higher the costs become.

For most Indian exporters, working-capital requirements have surged by around 15-25%. Insurance premiums have also increased dramatically. At one point, premiums were around 0.15-0.25%, whereas they are now in the range of 7.5-12.5%. That represents an enormous increase.

Freight rates have also gone up, with additional surcharges. The increase has been in the range of $2,000-$4,000 per container. Longer transit times mean that cargo remains in the supply chain for much longer, requiring exporters to maintain larger inventories and, consequently, more working capital.

Taken together, these factors have increased the working-capital requirement by around 15-25%.

Who has borne most of this additional cost—the exporter or the importer?

Initially, the exporter had to bear most of the cost. But with greater awareness of the disruption, new contracts are either being delayed or renegotiated so that the additional cost can be shared between sellers and buyers.

However, Indian exporters have certainly borne a substantial part of the initial shock.

Has the supply chain returned to normal now?

I don't think anything has returned to normalcy. The supply chain continues to remain in a state of severe and active disruption.

One day the route is open, another day it is closed. The Hormuz chokehold continues to restrict commercial vessels. There are attacks, and therefore there is also a considerable element of fear.

The Red Sea and Suez routes are also being avoided because of the continuing threat of attacks. As a result, vessels are taking the longer route around the Cape of Good Hope. The Red Sea disruption itself has continued for more than 1,000 days.

I don't think the situation will return to normal this year, and possibly not even by early next year.

What is happening to freight rates and insurance premiums? Are they beginning to come down?

They are fluctuating, but they are not really coming down. Freight rates remain extremely high and insurance premiums remain elevated.

The multiplier may come down somewhat—from 40-50 times to perhaps 30-35 times—but the underlying costs remain high. Securing cargo and securing the voyage have become extremely important.

What are the biggest lessons the industry has learnt from this crisis?

The biggest lesson is that resilience, particularly geopolitical resilience, has to be built into the supply chain.

Earlier, cost minimisation was the primary metric when designing a supply-chain network. Today, that has changed. The question is no longer simply how much cost can be saved. The question is how much disruption the network can absorb without breaking down.

Inventory management is another major area of change. Industries such as automobiles earlier operated with zero-buffer or just-in-time inventory models. That model is effectively being questioned now.

Companies are maintaining at least 15-30% safety stock to deal with sudden shutdowns and disruptions.

Another major change is the development of multiple routing options or Plan B corridors. Companies are asking: What are the alternatives if one route becomes unavailable? Can cargo be moved through another port? Can ocean transport be combined with surface transport or rail? Can cargo be split between the west and east coasts?

Supply chains now need dynamic routing capabilities.

But all these measures—larger inventories, alternative routes and additional warehousing—must themselves increase costs. How much more expensive are resilient supply chains becoming?

Anything that doesn't move in the way it was originally planned introduces an additional cost.

Depending on how complex and diversified the supply chain becomes compared with the original direct route, costs can increase from around 15-20% to 30-35%.

But companies increasingly recognise that paying for resilience may be preferable to having the entire supply chain disrupted.

India's export numbers have been showing growth. Are these additional logistics costs also reflected in the export figures?

Yes. Most contracts and negotiations today factor in these additional charges. When shipping lines quote freight rates, the various surcharges and additional costs are increasingly bundled into the freight rate.

Therefore, the cost implications are being incorporated into the final price. These costs are also becoming part of negotiations between buyers and sellers.

So, when we look at export values, they can include some of these additional logistics costs.

Which sectors are particularly vulnerable to these disruptions?

Low-margin, high-volume sectors are especially vulnerable because freight costs are determined significantly by the volume of cargo rather than simply its value.

Perishables are badly affected because exporters are dependent on global carriers and cannot afford lengthy delays. Textiles, garments and apparel are also vulnerable because delays increase inventory requirements. In some cases, exporters have had to shift cargo from sea freight to air freight simply to meet delivery deadlines, and that increases costs dramatically.

Some engineering goods and chemicals, particularly lower-value products, have also had to absorb significant additional costs.

Agricultural exporters have faced difficulties as well. Some companies initially slowed down shipments because they expected the disruption to be temporary. But as inventories accumulated, they had to resume shipments.

Have MSMEs and smaller exporters been able to build the resilience required to deal with this prolonged disruption?

This is one of the biggest concerns. Most MSMEs and small exporters do not have the financial or technological capacity of large conglomerates to build extensive contingency plans.

The crisis has hit them particularly hard. Many are still trying to negotiate with buyers and sellers to share the additional costs rather than investing in comprehensive resilience measures.

They are also facing a working-capital crunch because cargo is being held up. Small exporters operate with limited working capital, so prolonged inventory holding becomes a major burden.

There are additional warehousing costs. Access to credit is limited, interest rates are high and many small companies cannot afford to invest in advanced technology.

Some smaller exporters may even have exited the business. Those that remain are hoping that normalcy returns quickly. The real problem now is that we don't see a clear light at the end of the tunnel.

Which countries have managed the disruption better?

China has managed it relatively well, using diplomatic leverage, security guarantees and alternative transport corridors. Chinese carriers also played a role in ensuring continuity of supply chains. Cargo was shifted from sea freight to the China-Europe railway when that provided a viable alternative to air freight.

Saudi Arabia also managed the disruption well by using land routes to bypass the Hormuz blockage. Its East-West pipeline provided an alternative route for oil movement.

The UAE relaxed administrative bottlenecks and used alternative hubs when Jebel Ali faced difficulties.

Mexico was also relatively less affected because of its proximity to the US and Canada and the benefits of its trade arrangements.

India, too, managed the situation relatively well, particularly for essential supplies. The Indian Navy provided escorts for several oil tankers and India's diplomatic and defence mechanisms helped maintain essential supply chains.

What role should the government play in building greater resilience?

India needs to become more self-resilient, particularly in critical areas of logistics and shipping. The government has an important role to play, especially in supporting MSMEs that cannot access global capital or expensive infrastructure.

A national shipping line is one important area. Having our own container ships can provide greater strategic resilience. China has demonstrated how national carriers can help during disruptions.

Geopolitical and diplomatic relationships are equally important. Corridors such as the India-Middle East economic corridor need to be strengthened.

The government could also provide financial buffers, emergency working capital and support through institutions such as ECGC. Such mechanisms could help smaller exporters survive prolonged disruptions.

Technology is another important area. Platforms such as the National Logistics Portal and unified digital logistics systems can allow smaller companies to benefit from tracking, artificial intelligence and other technologies without having to make large investments themselves.

The government could also facilitate shared warehousing facilities at subsidised rates. This would allow smaller exporters to store cargo during periods of disruption without bearing the full cost themselves.

Ultimately, logistics has always been complicated, but geopolitical disruptions have made it far more complex. Today, there may be multiple routes between point A and point B. The future of supply chains will therefore depend not merely on how cheaply goods can be moved, but on how reliably they can be moved when the unexpected happens.