The transportation industry is continually growing at a CAGR of 15 per cent. With over nine million goods vehicles moving around the country, the freight volume has reached 1,425 billion, a figure that is supposed to double by 2025. In India, we spend almost 14 per cent of our GDP on transportation and logistics, whereas in developed countries the spend is around 6-8 per cent. However, the industry remains heavily fragmented, unorganized and very rough in nature. In order to gain a better understanding of the issues, we must understand the day-to-day operations in the industry and its key stakeholders.
In the trucking industry, spot market plays a pivotal role, especially in the Indian context. No matter how big or small a player is one has to reach out to the spot market to fulfil their daily transportation requirements. The info below clearly explains the workings of the spot market.
Shipper, the owner of the goods, transporter, broker (demand & supply), and truck owner (players reaching out to the daily spot market for vehicle).
The key players in the trade are:
Shipper: The shipper is the primary owner of the goods, who needs it to be shipped from a location to the destination. At times, the goods shipped might have single or multiple loading and unloading points. Shipper is a manufacturer, distributor, stockiest, retailer or some other firm, likes of ITC, HUL, TVS Group, MRF, other manufacturers of paints, steel, cement, automobile spares, tyres, electronic & electrical goods, FMGC, textile, motors & machinery, food products, etc., that needs to move goods on a regular basis.
Transporter: The transporter takes the risk (investments / credit) of transporting the goods and it is his responsibility to place the vehicles at the loading point, ensure that the necessary paperwork is done, and pay the advance money of lorry hire to the vehicle supplier so that the goods can be shipped. Transporters typically have to pay 90 per cent of the hire charges in advance and the remaining on the receipt of the proof of delivery, and they cannot raise transport freight bill to the shipper unless they receive a proof of delivery, which is in minimum 15 to 20 days from the day the goods are delivered. Once the freight bills are submitted, the shipper, typically, takes 30-60 days and above to make the payment. So the role of the transporter is heavily capital dependent.
Truck supplier / broker: As the name suggests the broker (vehicle supplier) is a known local liaison who heads the supply of truck. The broker exists so that a vehicle can be rerouted back to its origin. If anything goes wrong with the vehicle during the transit period, it is the broker’s responsibility to ensure that the vehicle is placed by him for the goods are shipped in a particular truck. The broker exists because it’s impossible for the transporter or shipper to directly transport to find the fleet owner as he is not present locally.
Truck owner: The owner of the truck and his primary goal is to ensure maximum utilization of the vehicle. For every day the vehicle is not engaged he has to bear the cost or loss. Truck owners at times do not approach the transporter directly. However, they approach through the broker and in such cases, there is a guarantee for reasonable hire and loading the truck. The fleet owners are heavily fragmented in India, with more than 80 per cent of the fleets owned by people having less than 10 vehicles, which gives birth to the intermediaries.
Assigning a load to a vehicle is not an easy process, as there are multiple entities involved in the entire transaction and multiple activities happen in the background before the vehicle can be in transit. The nature of spot market is such it is heavily time bound (i.e.) a shipper requires a vehicle urgently and reaches out to the transporter who, in turn, reaches out to the live spot market (brokers and fleet owners) to get the current rates, and since these transactions are bound by time, this leads to huge price volatility. The shippers have multiple modes of agreements carried out to manage truck load operations. Shippers typically use a combination of multiple types of relationships to manage their truckload operations.
Truck industry operations
In a transport company leads start queuing up at the beginning of the day (i.e.) the shippers confirm the requirement of truck load movement for the day. At the same time the vehicle suppliers get a true check on the inventory of vehicles available as most of the vehicles are done with unloading and are ready for its next trip. Parallels can be drawn between the spot market and the trading floor at the stock market (i.e.) they are both governed by the demand and supply. By 11 a.m., the vehicle availability is made open by the suppliers and the assignment starts. However, the suppliers hold their cards close to the chest and the assignment does not happen until after a fair round of negotiation on the daily pricing happens. Something as innocuous as multiple phone calls for a specific route can drive the price up drastically as it throws an indication that the demand is high.
All the above activities take place with minimalistic or no technology and because the market is large, fragmented and unorganized, the truck load assignment has been subjected to a large number of first-generation procurement mechanisms.
Once the load vehicle assignment is done, the transporters have a final check to ensure that the drivers understand the loading point correctly and are on route. The vehicles are loaded, documentation process is completed, and the transporters pay out the advance money to the vehicle suppliers. In this trade 80-90 per cent of the money is paid out to the vehicle supplier as advance and the rest is paid on delivering the goods.
Technology for development of the industry
There have been numerous attempts made to build an exchange that can recreate the spot market in the online world. Moreover, a number of shippers have tried to move to electronic mode to manage their truck load operations, however a handful have been able to move successfully in India. A number of shippers have used auctioning platforms to assign lanes, routes, or volumes to transporters. However, even though the shippers have chosen the online path, the transporters, brokers and fleet owners have to come down to the spot market to fulfill the daily loads. Technology can play a significant role in bringing the spot markets online. However, the following aspects need to be addressed carefully.
Trust: The transportation industry is very rough in nature and players typically are not comfortable transacting with one another unless they know who they are dealing with. There are issues such as pilferage of money or goods or both at various layers that cannot be determined beforehand. Moreover, the payment cycles are not very great, accompanied by bad debts, which increase the financial liability and can lead to players shutting shop. We are not dealing with tech-savvy people here. The exchanges need to be simple, with multi-language support and should bring in ease-of-doing business and at the same time should potentially grow the business.
Middleman involvement: There needs to be some cut down in the number of layers involved between the shipper and the receiver. Only then the pricing would get better and the fleet owners would get their true remuneration.
Awareness: The industry needs to be educated about a lot of issues, such as fleet optimization, road safety measures, timely deliveries and making the best use of the infrastructure. The more a vehicle moves the better it is for the economy.
We still believe that technology has a long and a major role to play in this field, especially in the Indian context. However, this is a long marathon and a huge market, and will take years of hard work before some substantial impact can be brought in the industry.
By Peer Mohamed, Former President – Pondicherry Goods Transporters’ Association, and General Secretary – Puducherry Transport Federation