Executive Insights is a series by Shipping and Freight Resource that provides ongoing insights and thoughtful analysis..
This series features selected individuals from the industry and is aimed at enriching the knowledge of the readers with what is happening in the shipping, freight, maritime, logistics, and supply chain industry..
Executive Insights also gives you a chance to pick the brains of these industry veterans, leaders, and enablers..
In this edition of Executive Insights, we caught up with Pritam Banerjee, Logistics Specialist at Asian Development Bank (ADB) on the topic of Governments, regulations and logistics structure..
SFR : Can you give a brief background about yourself and your entry into the industry..??
PB : After my Ph.d, I joined World Bank in Washington DC, where most of my work was related to trade policy, especially what is called trade facilitation…focusing on customs and other regulatory reforms that are very relevant for logistics operations.
I was then recruited by Confederation of Indian Industry (CII), a national industry association to head their Trade Policy division based out of New Delhi. It was during that time industry folks saw me engage with Government on issues related to their business, and I was recruited by Deutsche Post DHL Group.
SFR : There are a lot of questions from people in the industry about formal education.. How much has your Masters and PhD helped you in understanding the industry and its nuances..??
PB : I think that a background in economics helps you approach problems in a certain way. If you undergo a doctoral program, you add certain analytical skills in your tool box. That perhaps helps you see things in slightly different light.
So in a room full of experienced colleagues who have spent all their years in operational and commercial roles, you can bring in a different and sometimes valuable perspective. Having said that though, my most productive learning years were those spent in DPDHL Group.
And my best professors were guys with years of operational experience in warehousing, customs brokerage, line haul.
Formal education can give you a 20,000 feet view, but it is your industry experience that grounds you, makes you real as a professional.
SFR : Do Governments really have a practical understanding of the requirements of the logistics sector and what kind of support do they really provide to this sector because generally there is a lot more interest in the maritime sector..
PB : I think the essential challenge for governments is they are organized in silos. So within a department, there is a specific focus on maritime and ports, or regulating civil aviation, or developing highways, or managing borders etc.
On the other hand, logistics is essentially a network of services using different transport modes. So, governments depend on the logistics industry for practical feedback. The governments that have developed strong institutions for such a feedback loop do a better job than those who haven’t.
What has changed in the last decade or more is the focus of policy-makers on logistics, and on the supply chains, they serve.
Global indices such as the Logistics Performance Index (LPI) and other such measures of connectivity and supply-chain performance are taken very seriously.
Maritime sector gets a lion share of attention, even in these surveys and rankings because it is still responsible for moving the bulk of trade that governments are interested in.
However, with the rise of e-commerce (B2C), and greater degrees of customization of products requiring you to move smaller packet sizes of bespoke goods for individual customers in B2B, air-cargo is getting a lot of attention.
Multi-modal solutions, take the China-Europe rail product, which in turn is connected to Japan or Vietnam via maritime and road connections are all getting a lot of focus by policy-makers as viable alternatives providing important solutions to supply-chains for these economies.
SFR : What are some of the common pitfalls faced by companies who have not bothered to create a proper logistics structure or plan..??
PB : We can sum it up in two words “going bust”. In a globally competitive eco-system, supply chain management, and the logistics that support it is one of the key drivers of your competitiveness. It makes and breaks you as a business.
Even your brand equity depends on it. After-sales service depends on the logistics of spare parts and components, on reverse logistics for defective parts.
Only firms that enjoy near-monopoly or are State-Owned Enterprises that live off budgetary support can afford to be casual about having effective logistics management.
To bring greater nuance to this response, I think there are degrees to which firms get this logistics structure right. And even then, one has to keep evolving as the firm’s needs expand, or supply chains have to be rejigged to meet new customer expectations.
As firms grow larger, they look to the professionals-logistics service providers (LSPs) to come up with the right structure.
The entire 3PL business has grown exponentially for this reason. Economies of scale and technology has allowed LSPs to price their solutions more reasonably over time, allowing even middle to smaller size enterprises use their services.
This has been one of the less told stories of how globalization and global value chains were build in the last three decades.
SFR : Are there any regulations or policies in general that is currently causing more harm than good to the global supply chain industry..??
PB : The list is endless if fact in my opinion one can write a book to just list them all! But the short answer would be that such regulations fall under five broad categories.
- Border measures: Related to the whole gamut of customs and other border agency-related issues. Despite the enormous progress, challenges remain.
- Anti-competitive measures: These refer to preferences for national or flag carriers, right of first refusal (ROFR), FDI restrictions, state-aid or support etc. Especially relevant now with ‘bail-outs’ and preferences by governments due to COVID-19 crisis for both airlines and liner shipping, the full impact of such state aid to their firms will be felt in months to come.
- Access limitations/restrictions critical infrastructure or operational restrictions: These are often critical to an efficient operating environment. Take for example a particular cargo airline receiving the juiciest slots at an airport, or restriction on being able to use your own ground handler of choice or denial of self ground-handling to an aggregator.
- There are unique challenges arising under this category in terms of data privacy and security. Insistence on data localization, or use of scanners of a particular firm and specification mandated by the state, or demanding employee records and putting in place intrusive electronic surveillance in facilities.
- Discretionary powers leading to unpredictable business environment: Over-riding regulatory powers to set prices, or suspend an operating license, or renegotiate terms of the contract for a private terminal in state-owned port are just some examples of complications that arise under this category of issues
- Procedural and enforcement issues: These are the day-to-day that is the bread and butter of regulatory and compliance guys in logistics firms. Approvals, clearances, valuation and interpretation by customs and GST/VAT authorities, warehouse inspection compliance….I can go on and on.
SFR : Is there a direct correlation between profitable trade flows and structured supply chains..??
PB : Not always. Profitability can be driven by technology or resource monopolies or oligopolies that allow firms/countries to make profits, independent of having well-structured supply chains.
But such profits are not sustainable. Sustainable profits require having well-structured supply chains that minimize costs, while at the same time meet the expectations of your trade partners in terms of predictability of the supply chain and its ability to manage quality and security.
SFR : What role does public policy and regulations play in a country’s trade growth..??
Enormous amount. The interface of regulations and public policy is essentially a conversation on ease of doing business. We live in a world where capital, high-end skills and technology are extremely mobile.
So manufacturing and services activities cluster around regions/countries where it is easy to do business. When industry professionals engage in conversations around this topic, and governments actually listen, you end of creating the business-friendly eco-system that investors like.
Almost every investor today has a choice, even MSMEs. And I think despite COVID-19 crisis-induced protectionism, firms would continue to exercise that choice and locate where it makes economic sense, and it is relatively easy to do business because in those locations you would have a responsive government that takes this conversation on public policy with business seriously.
SFR : Do you think the international regulatory authorities like IMO, IATA, WHO etc. are doing a good job because while they are creating the regulations, they are still dependent on the various Governments to implement and police them..
This has always been the case. International Organizations (IOs) depend on member country governments to implement their regulations and protocols.
Since these regulations and protocols typically evolve out of a consensus among member countries, these are enforced quite rigorously on the ground by member country governments. Has the COVID-19 crisis seriously undermined this? In my opinion, not yet.
But yes, the enforcement ability in some parts of the world has been compromised as government machinery itself is impacted due to COVID-19 crisis. In the coming months, we might even see the credibility of some of these IOs being challenged (for e.g. the WHO), and member countries less inclined to take directions from them.
SFR : How do you see the tariff wars progressing – are we in for a rough ride or have things calmed down a bit on the back of the impact of COVID-19..??
I think this is the calm before the storm. And I am speaking not just in terms of tariffs, but in the overall context of trade wars. The COVID-19 crisis has hurt all economies, there is a lot of unemployment all around. Governments will try to hunker down and protect jobs.
This is bound to lead to protectionist measures. Tariffs are the least efficient measure in the tool-box, but the least complicated for governments to use.
But other Non-Tariff Barriers would also proliferate. Some of these measures will add huge operating costs and efforts for LSPs, especially those who also provide customs brokerage and customs clearance services.
Anti-dumping duties added compliance requirements for product standards and certifications, stringent requirements for the provenance of origin, all of these would add to the challenge.
There would be supply chain impacts in the medium term as well, as firms chose to re-locate production to adjust to the new trading regimes.