Logistics

Conference paper on SMEs in logistics: Bringing value to the changing Indian landscape

Prepared by Deloitte Touche Tohmatsu India Private Limited

Contents

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1. Executive summary 2. Small and medium enterprises 2.1. Introduction 2.2. SMEs global scenario 2.3. SMEs Indian scenario 3. Logistics and supply chain management 3.1. Introduction 3.2. Indian logistics scenario 3.3. SMEs in logistics 3.4. Future trends in logistics 3.5. Regulatory overview 4. Logistics operations via major channels 4.1. Waterways 4.2. Railways 4.3. Roadways 4.4. Airways 5. Technology trends in the logistics industry 5.1. Emerging trends 5.2. Rfid in focus 5.3. Summary chart of technologies used in logistics 6. Growth drivers 6.1. Gdp growth and rise of 3pl services 6.2. Investments in infrastructure 6.3. Qualified work force 6.4. Availability and access to finance 6.5. Merger & Acquisition trends 7. Logistics model 7.1. Indicative logistics model for a soft drink company 7.2. Indicative logistics model for an it hardware company 8. Material handling equipment 8.1. Global scenario 8.2. Indian overview 8.3. Demand for material handling equipment 8.4. Classification of material handling equipment 8.5. Future market trends

List of figures and tables

List of figures
Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17 Figure 18 Figure 19 Definition of SMEs as per MSMED Act, 2006 Growth and development of SMEs Range of logistics services Logistics cost as a % of GDP Elements of logistics cost (India) Strategy emphasis placed by logistics companies Infrastructure at a glance Railway freight earnings Warehouse Management System GPS Receiver ERP System RFID tag Growth drivers in logistics SMEs life-cycle trend Logistics model of a soft drink manufacturer Logistics model of an IT hardware company Types of Material Handling Equipment Fork lift truck Pallet Truck

List of tables
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 SME global comparison Growth of Micro and Small Enterprises SWOT Analysis of Indian SMEs Range of logistics services11 India's world ranking in logistics performance and related indicators Savings estimated with a reduction in logistics cost Characteristics of SMEs in logistics Estimated capacity addition at Indian ports RFID v/s bar coding RFID global overview Summary chart of technologies used in logistics Opportunity for 3PL Players in India Some of the recognized institutes offering courses in SCM in India

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List of abbreviations

Abbreviations
3PL 4PL AAI CAGR CFS CGS CII CLCSS DG DIC EDI EPC ERP FDI FMCG GDP GOI GPS GST ICD IID ISCC LMP LSP MNC Third Party Logistics Fourth Party Logistics Airport Authority of India Compounded Average Growth Rate Container Freight Stations Credit Guarantee Scheme Confederation of Indian Industry Credit Linked Capital Subsidy Scheme Directorate General District Industrial Centres Electronic data interchange Electronic Product Code Enterprise Resource Planning Foreign Direct Investment Fast Moving Consumer Goods Gross Domestic Product Government of India Global Positioning System Goods and Services Tax Internal Container Depots Integrated Infrastructure Development India Supply Chain Council Lean Manufacturing Project Logistics Service Provider Multi National Corporation MSMED NH NHAI NMCP NPA NSIC NVOCC OMS PIB PPP RFID SCM SH SIDBI SIDO SISI SKU SME SOE TEU TMS VAT WASME WMS WTO Micro, Small and Medium Enterprise Development National highways National Highway Authority of India National Manufacturing Competitiveness Programme Non Performing Asset National Small Industries Corporation Non Vessel Operating Common Carrier Order Management System Press Information Bureau Public Private Partnership Radio Frequency Identification Supply Chain Management State Highways Small Industries Development Bank of India Small Industries Development Organisation Small Industries Service Institutes Stock Keeping Unit Small and Medium Enterprise State Owned Enterprises Twenty foot equivalent units Transport Management System Value Added Tax World Association of Small and Medium Enterprises Warehousing Management System World Trade Organisation

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©2009 Deloitte Touche Tohmatsu India Private Limited

1.Executive summary

SMEs occupy an important position in any country's economy, they constitute as high as around 90% of all industries in any country. As of July 2006, around 14 crore SMEs in 130 countries employed 65% of the total labour force. They form the backbone of the Indian economy. Salient characteristics of SMEs in India are as follows Approximately 1.3 million SMEs in India as on 2007 ! Share in GDP around 8 to 9% ! Provide 80% of the total industrial sector employment. ! Account for 45% of total manufacturing output ! Contribute 40% to the total export trade.

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As per a survey conducted by Deloitte, the SMEs in logistics have indicated quality of service, cost effective methods and providing integrated solution as the key differentiators which sets one SME apart from the other. Some of the characteristics of SMEs in the logistics business are as follows ! Focus on outsourcing led growth ! Desire to go global, but lack the vision or / and adequate exposure ! Mostly followers of the successful models set forth by the larger players in the business. ! Lack professionalism in management. The evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exists today. The growth drivers of SMEs in Logistics can be summarized as follows – ! GDP growth and rise of 3PL services – Most companies across industries like automotive, electronics, FMCG and pharmaceutical sectors are increasingly opting to outsource their logistics requirements to specialized 3PLs. This has created a demand for a range of logistics services which will benefit the productivity and efficiency of the customers supply chains.
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According to a World Bank Study, there are more than 60 definitions of SMEs used in 75 countries surveyed. An SME in India is defined on the basis of limit of historical value of investment in plant and machinery, as per MSMED Act Like with most industries in India, the logistics industry is also dominated by SMEs. They play a vital role in the survival and blossoming of the logistics business, and together form an integral part of the Indian economy. Logistics is an integral function for every business organisation. Logistic Service Providers (LSPs) form the backbone of most companies. Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design, inventory management, supply/demand planning, and management of thirdparty logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. Logistics cost in India are estimated to be 13% of GDP, which is much higher than the developed economies like USA which spends around 10% of its GDP as logistics cost and Japan which spends 11% of its GDP for the same. The reason for this high spending is attributed to poor infrastructure facilities, lack of implementation of IT in logistics and unnecessary check points at the National highways which wastefully increases the transportation costs. India can save upto US$ 7.13 bn each year in the event of a reduction in logistics cost by 1%.

Investments in infrastructure – Given the current thrust on infrastructure investments, the growth and efficiency of LSPs as well as their customers will be positively impacted. The government has planned investments in infrastructure development amounting Rs 20,00,000 crore in the next 5 years. This will prove to be a major benefit for the logistics industry. Qualified work force – There has been a sudden transformation in the scale and scope of activities within the logistics sector. This growth rate needs to be supported with a parallel growth of skilled and trained manpower. Attracting and retaining talent is a major problem faced by SMEs in the logistics business. There is a need to incorporate a high degree of professionalism in the functioning and approach of SMEs in this business. Availability and access to finance – As the SME sector emerges to be the nation's economic growth engine, raising finance to power that growth remains

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an impediment for sustained expansion. The government is taking various measures to improve the delivery of credit to SMEs. A policy package for stepping up credit to SMEs has been started by the government. The government has also set up a Credit Guarantee Fund to provide relief to those small entrepreneurs who are unable to pledge collateral security.
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control and often also nurturing a healthy work atmosphere. GPS – GPS system helps logistics companies to track the location of their goods. GPS technology gives the details of the origin and destination of a shipment. During transit, it helps in providing the exact position of a consignment. There are sophisticated GPS maps and technology available through which one can track the movement, and be proactive to customers by informing about the shipment status and expected delivery time. ERP – ERP induces enough visibility in the supply chain so that an efficient work flow can be established. By pulling together and sharing information from functions such as purchase, warehousing, and sales; it helps to control costs. A lot of medium enterprises are installing ERP software due to unprecedented growth in the logistics and transportation Industry. RFID – RFID allows LSPs to track, monitor, report and manage products, documents, assets and people more effectively and efficiently as they move between locations anywhere at any time. An RFID tag is incorporated into a product for the purpose of identification using radio waves. The market size of the global Material Handling Equipment (MHE) industry has been estimated at Rs 3,75,200 crore for the year 2005 and is projected to increase over Rs 4,68,000 crore by 2010. Given the fast pace of economic growth in India, there is tremendous potential for growth in the material handling sector. The traditionally fragmented material handling Industry has been consolidating at a fairly rapid pace in the recent years. However, the growth of the logistics Industry has helped realise the importance of incorporating various material handling and storage equipment. Main types of material handling equipment used by logistics companies ! Fork lifts ! Pallet trucks ! Stackers ! Order picker ! Reach truck

Merger & acquisition trends – While entrepreneurship is on the rise, the reality check is that only few in every 100 new businesses make it past the second year. Given the odds, buying an existing business can be a much less risky and more quickly profitable venture than starting business from scratch. But it’s not entirely risk free and success depends heavily on how wisely one chooses and evaluates the business to buy.

When small and medium enterprises consider implementing supply chain management initiatives, they often find themselves facing a unique set of challenges that larger companies typically do not face. While these challenges should not deter companies from implementing supply chain management, SMEs should be aware of them and formulate tactics for responding to them. The most common challenges faced by LSPs are as follows ! Decentralised supply chain management ! Lack of consistent business processes ! Limited training and skill development ! Lack of significant capital for investment ! Increased technology demands Technology in the transportation and logistics industry is quickly transforming business management and operations. Leading edge wireless applications are helping logistics managers to improve the metrics of their freight in the supply chain. In order to keep pace with the growth in the logistics business, implementation of new technology is of prime importance. WMS – A well designed WMS helps in reducing inventory levels, lowers costs, promoting customer satisfaction, giving real time updates, improving quality

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Benefits of using material handling equipment are as follows ! Better inventory control ! Faster throughput ! Less time for changeover ! Less defects during material handling ! Better utilization of space i.e. floor space as well as the space up to ceiling Demand for material handling equipment has been increasing in the last few years. Manufacturers of material handling equipment state that in the last 5-6 years demand for MHE has increased almost 3-4 times. One of the primary reasons fuelling this growth is that companies are increasingly feeling the need to lower their logistics cost. Also, due to the presence of large number of players in the Industry, use of equipments helps to keep up with increasing competition. In the next few years, the Material Handling Industry in India is expected to grow steadily. The principal factor fuelling gains will be improved Indian economy, which will result in the accelerating demand for goods movement and create opportunities for suppliers of goods-handling products and services of all types. Due to ambitious plans for the rapid globalisation of the Indian economy, cargo and freight traffic is likely to maintain the current upward trend for the next few years. As the need for material handling equipment is directly related to the amount of cargo and freight traffic, India will see a major pull in the demand for these equipments.

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SMEs occupy an important position in any country's economy, they constitute as high as around 90% of all industries in any country. As of July 2006, around 14 crore SMEs in 130 countries employed 65% of the total labour force. They form the backbone of the Indian economy.

©2009 Deloitte Touche Tohmatsu India Private Limited

2. Small and medium enterprises
2.1 Introduction Small and Medium Enterprises (SMEs) occupy an important position in any country's economy and contribute immensely to the industrial development, exports and forex earnings, creation of employment opportunities etc. They constitute as high as around 90% of enterprises in most countries worldwide. SMEs are the driving force behind a large number of innovations and contribute to the growth of the national economy. Also their contribution to poverty reduction and wider distribution of wealth in developing economies cannot be undermined. The SME segment has developed in parallel with large scale and MNC corporations. A continuous growth and development of the companies in this segment ensures a balanced growth of the economy and acts as a facilitator towards entrepreneurial development, employment generation business ownership and related wealth creation. As of July 2006, around 14 crore SMEs in 130 countries employed 65 percent of the total labour force. 2.2 SMEs global scenario Overview SMEs are one of the principal driving forces in the economic development of every nation. They stimulate private ownership and entrepreneurial skills, they are flexible and can adapt quickly to changing market demand and supply situations, help diversify economic activity and make a significant contribution to exports and trade. Many transition economies have acknowledged that SMEs are crucial for industrial restructuring and have formulated national SME policies, programmes and enterprise development policies. Most governments have policies that encourage the growth of SMEs because they facilitate in alleviating poverty by increasing income levels and creating jobs. The underlying table gives a global comparison of SMEs.

Table 1: SME global comparison
Country Definition Number of SMEs (in units) Employment generated by SMEs Percentage of total business

China

Defined on the basis of fixed assets and number of employees Defined on the basis of limit of historical value of investment in plant & machinery, as per the MSMED Act of 2006. Defined on the basis of number of people employed in the enterprise. Defined on the basis of capital size and number of employees Defined by the number of employees

0.43 crore (2007) 1.30 crore (2007)

75% of the country's employment 4.1 crore

99.0%

India

99.7%

European Union

2.30 crore (2005)

8.5 crore

99.0%

Japan

0.57 crore

2.9 crore

99.2%

USA

Not Available

Not Available

Not Available

Source: Government websites of SMEs of respective countries

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China In China there are two definitions being used: one, on the basis of fixed assets that is, the level of fixed assets(small industry is up to $1.8 million in book value of fixed assets); and the other definition is in terms of the number of employees (small enterprises are between 10 and 50 employees). The actual industrial census shows that the average size for small enterprises is about 15 employees; that of medium enterprises are 893 employees; and that of large enterprises is 3,755. India SMEs form the backbone of the Indian Economy. The SME segment in India has come into the limelight, with increased focus from several government institutions, corporate bodies and banks, and is viewed as agents of growth. Apart from the policy focus and government's thrust towards promoting the SME segment, globalisation and India's robust economic growth has opened several latent business opportunities for this segment. The classification of SMEs in India is discussed in the next section. The European Union (EU) SMEs play a central role in the European economy. They create wealth, foster new ideas and are a key source of new jobs. According to the EU definition, an SME is defined as a company, which – ! Employs fewer than 250 people ! Has a turnover of less than € 40 million per annum or net balance sheet assets of less than € 27 million ! Must be less than 25 percent owned by larger company/companies which do not qualify as an SME themselves. Japan SMEs are the economic base of the industrial value chain and the underpinning of the Japanese economy. 99.2% of all businesses are SMEs and these enterprises have provided a safety net by covering 70-80% of total employment. 60% of SMEs in Japan have direct or indirect transactions with large enterprises in the manufacturing industry. United States In the US, a Government Department called Small Business Administration (SBA) sets the definition of small business. In the United States, small business is defined

by the number of employees and it refers to those businesses with less than 100 employees, while medium-sized business often refers to those with less than 500 employees. 2.3 SMEs Indian scenario Overview The Small and Medium Enterprises (SMEs) constitute an important segment of the Indian economy in terms of their contribution to the country's industrial production, exports, employment and creation of an entrepreneurial base. According to a World Bank study, there are said to be more than 60 definitions of small and medium industries used in 75 countries surveyed. In some other countries, annual turnover of the company determines the size of an enterprise, whereas certain countries define SMEs on the basis of number of Employees. In the Indian context an SME is defined on the basis of limit of historical value of investment in plant & machinery, as per the MSMED Act of 2006.

Figure 1: Definition of SMEs as per MSMED Act, 2006

Definition of SMEs as per MSMED Act

Manufacturing (Investment in plant & machinery

Services (Investment in equipment)

A micro enterprise
Does not exceed Rs.25 lakhs

A micro enterprise
Does not exceed Rs.10 lakhs

A small enterprise
More than Rs.25 lakhs but does not exceed Rs.5 crores

A small enterprise
More than Rs.10 lakhs but does not exceed Rs.2 crores

A medium enterprise
More than Rs.5 crores but does not exceed Rs.10 crores

A medium enterprise
More than Rs.2 crores but does not exceed Rs.5 crores

Source: Ministry of Micro, Small and Medium Enterprises, GOI

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Some of the salient features of SMEs are as follows1 ! Approximately 1.3 million SMEs in India as on 2007 ! Share in GDP Around 8 to 9 % ! Provide 80% of the total industrial sector employment ! Account for 45% of total manufacturing output ! Contribute 40% to the total export trade. ! Second largest employer of human resources after agriculture, employs around 41 million people. ! SMEs produce about 8,000 items from very basic to highly sophisticated products. Growth and development of SMEs in India The period during 1948-1991 was characterised by protection given to the sector through reservation of

items, access to bank credit through priority sector lending, excise exemption etc. With the introduction of the New Industrial Policy, 1991, the protection given to SMEs was replaced with a competitive approach to infuse more vibrancy and growth to SMEs. Small industry in India were compelled to cope up with an increasingly competitive environment because liberalisation of the investment regime favoured Foreign Direct Investment (FDI) and also formation of World Trade Organisation (WTO) in 1995 which forced India to drastically scale down quantitative and non-quantitative restrictions on imports. Hence the period from 1999 onwards focussed on technology up gradation, investments in infrastructure and quality improvement.

Figure 2: Growth and development of SMEs

1948-1991

1991-1999

1999-2006

2006 onwards

! ! ! ! !

Recognition given to micro and small enterprises SIDO set up in 1954 NSIC established in 1955 SISI set up for entrepreneurial and skill DICs set up at state level

! !

SIDBI set up in 1990 IID scheme introduced in 1994 ! Introduction of technology development and modernization fund in 1995

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Ministry of MSME came into being in 1998 ! CLCSS launched to encourage technology upgradation ! CGS started to provide collateral free loans to entrepreneurs ! Performance and credit rating scheme introduced in 2005

MSMED Act introduced in 2006 ! The Act defines medium enterprise for the first time ! The Act provided the first ever legal framework for recognition of the concept of ‘enterprise’ which comprises both manufacturing and service entities

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Source: Deloitte analysis (2008)

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Ministry of Micro, Small and Medium Enterprises, GOI

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Table 2: Growth of Micro and Small Enterprises

Parameters

1990-1991

2000-2001

2005-2006

Total SSI units (lakh no.) Fixed investment (Rs crore) Production (Rs crore) Employment (lakh persons)

67.87 93,555 84,728 158.34

101.10 1,46,845 1,84,401 238.73

123.42 1,88,113 4,18,884 294.91

Source: Ministry of Micro, Small and Medium Enterprises, GOI

Indian SMEs future trends With the growth of SMEs the business environment have now started demanding improved servicing standards and a faster cycle time for achieving business success. The future of SMEs can be briefly explained as follows: ! SMEs in future aim to concentrate on lean manufacturing systems in order to keep up with the rising competition. ! National Manufacturing Competitiveness Programme (NMCP) plans to launch a lean manufacturing project worth Rs 2,30,000 crore. The project is scheduled to cover 7,000 to 10,000 units by 2012.2 ! 10 new tool rooms are to be set up under Public Private Partnership (PPP) as training needs of SMEs are rapidly rising. 2 ! Policies that create an enabling environment for SME growth are devised for the future. Cluster based financing approach and encouragement to credit ratings, are some of the initiatives to be undertaken to double the flow of institutional credit towards SMEs by 2010.

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Ministry of Micro, Small and Medium Enterprises, GOI

SWOT analysis of SMEs in India A SWOT analysis of the Indian SMEs is presented below depicting the various factors that would help SMEs to capitalize on their strengths, overcome their weaknesses, grab opportunities as and when they come and beware of threats that are likely to affect their business.

Table 3: SWOT Analysis of Indian SMEs

Strengths
Self reliance - Flexible and self managed business ! Manufacturing flexibility Production as per requirement ! Availability of cheap labour - Extensive use of unskilled labour which is easily available in India
! !

Weaknesses
High cost of input material - Concentration on high quality raw material to keep up with intense competition ! Lower productivity - Lack of specialization and skilled work force resulting in poor efficiency ! Technological obsolescence - Deployment of outdated technology and excessive dependence on manual operations
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Opportunities
End of quota regime - End of quota regime replaced protection with competitiveness to infuse more vibrancy and growth to SMEs in the face of foreign competition and open market ! Shift in domestic market Due to globalisation and liberalization, manufacturers can increase production and export surplus, thereby increasing overall profitability ! Increased disposable income - Resulting in an increase in purchasing power and consequently an increased demand for goods and services ! Emerging economy and expansion - Growth in sectors like manufacturing, retail, automobile etc resulting in higher domestic and international trade
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Threats
Stiff competition from developing economies China poses as a serious threat as they manufacture in bulk and enjoy large scale economies in manufacturing and distribution of goods and services ! Pricing pressure - SMEs are forced to sell at lowest possible prices in order to keep up with competition from other SMEs as well as from established players in the industry. ! Locational disadvantage Compelled to set up manufacturing units in rural areas, due to high cost of land and labour in urban areas ! International labour and environmental laws - These laws pose restrictions on functioning of SMEs

Source: Deloitte Resources (2008)

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3. Logistics and supply chain management
3.1 Introduction Logistics involves planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption so as to meet customer requirements. It includes procurement, maintenance, distribution, and replacement of personnel and materiel. In simple terms, it is all that goes into ensuring that the right material reaches the right place at the right time. Logistics management is a part of supply chain management (SCM) that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements. Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design, inventory management, supply/demand planning, and management of third-party logistics services providers.(3PLs) . To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution strategic, operational and tactical. As shown in the figure below, the logistics value chain consists of three key functions or segments Transportation, Warehousing and Value Added Services. Traditionally LSPs (Logistics Service Providers) concentrated mainly on transportation and logistics as they form a major share in logistics. However, in order to keep up with rising demands and customer expectations, companies now also concentrate on value added services like packaging, custom clearance, inventory management and labeling.

Figure 3: Range of logistics services

Channels of logistics

Components of logistics

Surface transport

Freight transportation

Roads

Warehousing

Railways

Logistics Service Provider

Packaging

Air transport

Inventory management

Water

Labelling

Source: Government websites of SMEs of respective countries

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Table 4: Range of logistics services
Range of logistics services Mode of Transportation Transportation Warehousing Value added services

Road

Trucking and related services like fleet management, network optimization, route planning etc. Railway cargo transportation

Warehousing related to inland distribution whether inbound or outbound shipments, transshipment centers ICD / CFS multimodal Warehousing

Services bundled around road transportation and warehousing like express, cold chain, track and trace, packaging, consulting etc. Services bundled around rail transportation and warehousing like dedicated rail container services, stuffing /de-stuffing, consolidation etc. Freight forwarding, freight consolidation, NVOCC, customs Clearance Express and courier services, freight forwarding, customs clearance

Rail

Water

Shipping operations, port operations etc.

ICD / CFS port based warehousing, tank Farms

Air

Air cargo operations i.e. ownership and operation of cargo Aircraft

Air cargo transhipment, warehouse

The size of the logistics sector globally is around Rs. 1,48,50,000 crores, making it one of the largest sectors of the global economy. The US expenditure on logistics currently stands at around 10% of its GDP i.e. Rs.

45,00,000 crore. In comparison, India with a GDP of about Rs 27,64,000 crore spends 13% of its GDP on logistics creating an industry size of around Rs. 4,00,000 crores.

Figure 4: Logistics cost as a % of GDP Logistics cost as a % of GDP 20 16 12 8 4 0 China India EU Japan USA

Source: Industry Reports (2007)

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3.2 Indian logistics scenario The Indian logistics structure is witnessing a paradigm shift. The industry is expected to grow at 16% upto 2010. Being driven by rising export and import, government investment on infrastructure and the entry of private players, the industry is undoubtedly on a high growth path. With the market becoming more competitive especially for the manufacturing sector, outsourcing of logistics activities is the preferred option. A consistent good performance of the economy is the key force, driving the growth in the logistics sector. A sustained economic performance has catalysed the activities of this sector. India's GDP is expected to grow at almost around 8% per year, the Indian logistics industry which is pegged at Rs 3,60,000 crore as of 2007 is at an inflection point, and is expected to reach a market size of over Rs 5,00,000 crore in year 2010.3 The industry has generated employment for 4.5 crore people in the country compared to IT sector which employs only approximately 0.43 crore people.4 The Indian logistics industry is currently very disorganised. The major players can be broadly categorised as pure transport providers, transporters providing certain value added services such as warehousing, and completely integrated players providing 3PL services. The major elements of logistics costs for Indian Industries include transportation, warehousing, inventory management and other valueadded services such as packaging. The figure on the right shows that transportation and inventories account for 35 % and 25 % of logistics cost respectively, indicating their importance in logistics.

Table 5: India's world ranking in logistics performance and related indicators
Parameters World ranking

Customs Infrastructure International shipping Logistics competence Domestic logistics cost
Source: World Bank & CII (2007)

47 42 39 31 46

Figure 5: Elements of logistics cost (India) 6% 9% 35% 11%

14%

25%
Transporatation Packaging Losses Inventories Handling & warehousing Customers shopping

Source: Cygnus Research (2007)

3

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India Supply Chain Council, Article – March 19, 2007 Confederation of Indian Industry, Dewan Chopra Report – 2007

Table 6: Savings estimated with a reduction in logistics cost
Functions At 13% of GDP US$ bn At 12% of GDP US$ bn Amount saved US$ bn

Transportation Industry Warehousing Packaging Others Total

32.45 23.18 10.20 8.34 18.54 92.72

29.95 21.40 9.41 7.70 17.12 85.58

2.50 1.78 0.78 0.64 1.43 7.13

India's spending on the logistics industry is much higher than the developed economies. The reason for high spending on logistics in India is attributed to poor infrastructure facilities, lack of implementation of IT in logistics and unnecessary check points at the National highways which wastefully increases the transportation costs. The table below shows that India can save upto US $ 7.13 bn each year in the event of a reduction in logistics cost by 1% 3.3 SMEs in logistics Like with most industries in India, the logistics industry is also dominated by SMEs. The industry is characterized by dominance of the unorganized players, primarily the small truck-fleet operators and single office logistics providers. The unorganized segment accounts for over 80% of revenues across the value chain. In freight transportation, predominately in road movements, the market is highly fragmented with individual truck owners and small companies holding majority market shares. However, as the business environments have started demanding better servicing standards, improved cycle time has become the key factor for business success for SMEs. In fact, logistics is what connects local trade and business part and parcel of global business. SMEs play a vital role in the survival and blossoming of the logistics business and together form an integral part of the Indian economy. Characteristics of SMEs in the logistics business are as follows – ! Focus on outsourcing led growth ! Desire to go global, but lack the vision or/ and adequate exposure ! Mostly followers of the successful models set forth by the larger players in the business. ! Lack professionalism in management

Source: Credit Analysis and Research Ltd (2007)

Table 7: Characteristics of SMEs in logistics
SME Manpower strength Capital Service provided Training and skills

Start ups

Very less

Limited capital availability. Do not qualify for most Venture Capital (VC) funds Moderate capital. Qualify for VC funds. Yet most of the VCs ignore them. Beneficiary of most banks, VC funds and policies implemented for SMEs.

Fragmented, may provide only road transport or specific shipping services

No specific initiatives taken to train manpower

Strugglers

Medium

Provide few of Limited training the main logistics services

Survivors

Medium to high

Provide end to Place end solutions and Importance on not just services. training and professionalism in work.

Source: OECD conference on enhancing role of SMEs in Global Value Chain (2007)

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Primary survey observations and findings Deloitte conducted a primary survey in order to understand the growth pattern, future trends and challenges faced by the logistics companies. The main aim of the primary survey was to understand the issues and challenges faced by the logistic companies and the ways to overcome these problems. The following are the observations made during the primary survey conducted ! The logistics industry is growing @ 18 20 % p. a. Consolidation, mergers and acquisitions have been observed in the last few years. ! LSPs are now expanding their banquet of services e.g. Custom house agents to transportation, liners to forwarders. ! The increase in customer expectations has resulted in more professionalism in the functioning of service providers. Due to the need for a one stop shop; companies have now started providing end to end solutions. This has led to reduction in transaction time and faster cargo movement. ! Earlier LSPs provided only services, now they are striving to provide complete solutions. A few years back businesses were largely scattered and fragmented; now there is certain degree of consolidation

The following are the findings of the survey ! There are certain key differentiators which set one SME apart from the other. Though most SMEs in the logistics business by and large provide similar services, it is the degree of professionalism and emphasis they place on certain strategies that set them apart from the rest. ! In the survey conducted, each and every service provider rated quality of service as absolutely essential, since customers now rate the quality of service as the minimum qualifying criteria required from a service provider. ! The next most important differentiator is cost effective methods and providing integrated solutions. Companies are now striving to utilize seamless modes of transportation to get the work done. It's no longer important how the goods move from A to B, so long as they do so safely, on time and in the most cost effective way. ! Logistics service providers are leveraging IT as a strategic tool. Deployment of effective IT tools for logistics applications can put an enterprise ahead in the race for a contract. Ability to invest is important for growth and development of the SMEs in logistics ! Establishing strong relationship with other service providers and emphasis on training and development are some of the other strategies SMEs adopt to differentiate themselves.

Figure 6: Strategy emphasis placed by logistics companies

Quality of service Cost effectiveness Integrated solutions Use of information and IT technology Ability and willingness to invest Relationship with other service providers Training to employees Referrals Brand image 0
Source: Deloitte study (2008)

10

20

30

40

50 %

60

70

80

90

100

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©2009 Deloitte Touche Tohmatsu India Private Limited

Logistics companies therefore need to concentrate on the following areas within their organizations in the future to stimulate future growth ! Investing in IT hardware and software ! Fostering a service mindset ! Controlling costs ! Developing products and services that can demand higher prices ! Integrating functions within SMEs ! Nurturing and training manpower ! Educating customers about services and its benefits. ! Understanding customer needs ! Ensuring data integrity and security ! Meeting and exceeding customer expectations at all time at lowest possible prices The Indian logistics industry is currently growing at a good pace. However, if the industry wishes to sustain this progress, it is crucial for the government and the players of this Industry to help remove obstacles and introduce world class infrastructure. 3.4 Future trends in logistics Currently, most small and medium logistics enterprises are driven by function-based logistics services such as storage, transportation and documentation, whilst fully integrated value-added services are only provided by far and few. The need for these logistics service providers is to now elevate the level of involvement with the client from the traditional one-time transaction level to that of a strategic partnership one. The SME logistics service providers are now consciously striving to move up the value chain and are placing more emphasis on the strategic approach to obtain new business. The following interdependent factors are expected to shape Indian logistics industry over the next 5-10 years: 1. Growth of multimodal logistics - In an era of intense competition where just-in-time deliveries have become crucial, efficient multimodal logistics will spell the difference between success and failure in the market. The growth of multimodal logistics is resulting in a radical transformation in the logistics business and is certain to bring down the logistics cost and time by around 20-30 % in the near future.

2. Globalization and consolidation - Mergers and Acquisitions are creating firms that have the capability to provide a 'single point of contact' that can handle global supply chains for their clients. Globalization of traditional businesses is driving the logistics industry to address considerations like market expansion, new sources of supply, international trade, etc. 3. Increased outsourcing - Supply chains are becoming complex to manage; companies are focusing more on core competencies. In order to increase flexibility and responsiveness in their supply chain, companies are increasingly utilizing logistics outsourcing. 4. Security and risk management - Supply chain security and risk management will be a key area to prevent disruptions due to factors like weather, labour issues and strikes or terrorist attacks. 5. Technological advancements - Rapid advancements in supply chain technology enablers (like RFID) will lead to increased functionality and greater potential to improve performance of supply chain. 6. Increased customer expectations - Customers will be moving away from tactical transactional based service outsourcing to solutions that are more strategic in nature and supported by leading edge technology and systems.

The SME logistics service providers are now consciously striving to move up the value chain and are placing more emphasis on the strategic approach to obtain new business.

©2009 Deloitte Touche Tohmatsu India Private Limited

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3.5 Regulatory overview Taxes and duties pertaining to the logistics industry Important components of logistics cost include tariff such as central sales tax, local sales tax, entry tax, octroi, turnover tax, etc. Many of these taxes are state subjects. Traditionally, there have been no mutual consultations or agreement among the states on making taxes uniform. The local sales tax rates vary significantly between states. The states have also been competing with one another in offering sales tax concessions to attract investment proposals, making decisions such as the location of manufacturing facilities, warehouses, etc, dependent on these taxes. However, the situation is likely to undergo a paradigm shift soon. Legal enactments of transportation The following are the acts/enactments that specify the laws relating to the logistics industry ! The Carriers Act, 1865 ! The Carriage of goods by Sea Act, 1925 ! Sale of Goods Act, 1930 ! The Merchant Shipping Act, 1958 ! Custom Act, 1962 ! The Marine Insurance Act, 1963 ! Major Port Trust Act, 1963 ! Carriage by Air Act, 1972 ! The Railways Act, 1989 ! The Multimodal Transportation of Goods Act, 1993 ! Central Road Fund Act, 2000 ! Carriage by Road Act, 2007 MSMED Act The Micro, Small and Medium Enterprises Development Act, 2006 (MSMEDA, 2006), aims to facilitate promotion, development and enhancement of micro,

small and medium enterprises competitiveness, and has come into force from 2nd October, 2006. It aims to facilitate promotion, development and enhancement of the competitiveness of micro, small and medium enterprises through skill development, technological up gradation, and preference in procurement by government, public sector enterprises and government aided institutions. The Act also seeks to provide protection to such enterprises by making provisions for timely release of payments due to these organisations.

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4. Logistics operations via major channels
India's transport system has expanded manifold since independence, both in terms of spread and capacity. Along with the increase in quantity, there have been several developments of qualitative nature, such as emergence of a multi-modal system, improvement in the self-financing capacity of the sector etc. Impressive as this progress is, the country's transport system is far from adequate and suffers from a large number of deficiencies and bottlenecks . Figure 7: Infrastructure at a glance

India's transport system has expanded manifold since independence, both in terms of spread and capacity.

Source: PPP in India (2008)

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Table 8: Estimated capacity addition at Indian ports
Capacity addition in million tonnes Ports Capacity as of March 2007 Capacity by March 2012

Major ports Non major ports Total

509 228 737

1,002 573 1,575

Nehru which is the largest container port in India is severely congested. The port reported a backlog of roughly 5,500 import containers in June 2007 due to shortage of trains. It is estimated that India looses about Rs 48,000 crore each year because of higher transaction costs at its ports. The transaction cost at Indian ports is about 10 percent, compared to 6 percent in developed countries; resulting in a number of problems faced by logistics companies. The main issues are ! Higher turnaround time ! Port congestion ! Inadequate use of information technology ! Shortage of dredging capabilities ! Shortage of trained personnel at ports. 4.2 Railways The Indian Railways freight earnings for fiscal 2007-08 have gone up by 13.86 per cent driven by a combination of higher freight volumes and tariff hikes. Railways recorded Rs 47,558.78 crore of freight earnings during the fiscal 2007-08, up 13.86 per cent from Rs 41,768.35 crore in 2006-07. The Rail budget 2008-09 shows that freight loading has been increased by 10% and the cargo in the railways are expected to be monitored online in the next two years i.e. by 2009-10. In order to cope up with the increasing freight volumes, projects like the Dedicated Freight Corridor have been sanctioned. The Dedicated Freight Corridor (DFC) project was conceived mainly due to the capacity constraints faced by the existing railway network. At present the freight and the passenger trains are using the same tracks causing delays. The Construction for Phase I of the project is proposed to be completed by 2012. The Phase I of the Dedicated Freight Corridor (DFC) is envisaged to be completed by 2012.

Source: Planning commission (2007)

4.1 Waterways The importance of maritime infrastructure in facilitating international trade is well recognized. It is observed that about 95% by volume and 70% by value of the country's foreign trade is carried on through maritime transport. India's ability to achieve rapid economic growth via the export route therefore lies in improving its major international trade gateway, viz the ports. India has 12 major ports, six on the west coast and six on the east. The 12 major ports handled 519 million tonnes of cargo in 2007-08.5 All the Major Ports are administered by Port Trusts which are managed by the individual Port Authority under Central Government jurisdiction except for the newly constructed Ennore Port which is run by a company named Ennore Port Limited registered under Companies 96 Act, 1956. There are also around 187 non major / intermediate ports dotted along India's 7,517 km of coastline. Issues Faced by LSPs Due to severe congestion at Indian ports and inadequate infrastructure, Logistics Service Providers are finding it difficult to manage the increasing growth in the consignment shipments. For instance, the Jawaharlal

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India Supply Chain Council, Article April 2008

The Western Rail Freight Corridor would comprise of 1483 km of a double line diesel track from JNPT to Dadri via Vadodara-Ahmedabad-Palanpur-Phulera-Rewari. The Eastern Corridor encompasses a double line electrified traction corridor from Sonnagar on the East Central Railway to Khurja on the North Central Railway (820 Km), Khurja to Dadri on NCR Double Line electrified corridor (46 Km) and Single electrified line from Khurja to Ludhiana (412 Km) on Northern Railway. Issues faced by LSPs ! Railway congestion ! High incidence of loss of goods in transit ! Fear of damage to goods ! Long waiting period for booking cargo space on railways 4.3 Roadways Roadways are the most preferred mode of freight transport due to their cost efficiency and assurance of door to door service. 70% of the total freight in India is carried by roadways. Indian road network of 33 lakh km is the second largest in the world. Out of this total network, National Highways (NH) comprise of 66,590 km and the length of State Highways (SH) is 1,31,899 km. National Highways constitute only 2% of the total road network but carry 40% of the total traffic. Most Indian roads were built with the primary aim of moving passenger traffic. Due to the increased containerized movement of the freight, container trolleys are replacing trucks. Most Indian highways do not have the adequate bearing capacity for multi-axle and tandem trucks. This has led to rapid deterioration of road surface quality in much geography. Keeping in view the demand of the road traffic, the National Highway Development Programmes (NHDP) is being implemented by NHAI in the following phases ! Phase I- 4-laning of National Highways connecting four metropolis of Delhi, Mumbai, Chennai, Kolkatta and Delhi, namely Golden Quadrilateral (G.Q), ! The Phase II (NSEW) - mainly comprises North-South

Figure 8: Railway freight earnings Rs.crore 60000 45000

30000 15000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*
* - budget estimates Source: CMIE (March 2008)

! ! ! ! ! !

and East-West Corridor connecting Srinagar to Kanyakumari and Silchar to Porbandar Phase III - 4-laning of 10,000 kms of National Highways Phase IV - 2 laning with paved shoulders of 20,000 kms of National Highways Phase V - 6 laning of 6,500 kms selected stretches of National Highways. Phase VI - Development of 1,000 kms of expressways. Phase VII - Construction of ring roads, flyovers and bypasses on selected stretches Port Connectivity - include improvement of links to the major ports.

Issues faced by LSPs ! Roadways have been built keeping in mind passenger vehicles and not freight movement through heavy vehicles. This causes high number of truck accidents on Highways. Roads are being damaged due to the high axle load of the cargo carriers. ! The poor condition of roads translates directly to higher vehicle turnover, which increases operating costs and reduces efficiency. ! Average speed of trucks in India is only 32 km per hr, compared to 60 km per hr in developed nations.

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Roadways are the most preferred mode of freight transport due to their cost efficiency and assurance of door to door service. 70% of the total freight in India is carried by roadways.
©2009 Deloitte Touche Tohmatsu India Private Limited

4.4 Airways The air cargo Industry acts as an engine of growth for the economic development of a country. Aircrafts carried 2% of international trade by volume, but 40% by value in 2007 - 08. They are an integral part of supply chains of any manufacturer and retailer who operate in lean inventory environment. In order to keep up with the increasing demand, India’s Civil Aviation Ministry plans to increase the number of airports in the country. It has set a target of 500 operational airports by 2020.6 Issues Faced by LSPs ! India has only 80 fully functional airports and 368 landing strips that function as makeshift airports for limited purposes. Airlines are facing infrastructure constraints due to limited landing slots, inadequate parking bays, and congestion during peak hours... ! Due to regulatory restrictions and time consuming procedures such as excessive physical examination of cargo by customs, there is usually delays in customs clearance.

The present cargo handling complexes need a drastic facelift in the overall infrastructure, operations to accommodate the growing potential of air cargo transport. ! The need to improve perishable cargo handling facilities also becomes imperative for a booming organized retail sector ! Lack of a reliable Electronic Data Interchange (EDI) system that offers proper co – ordination between Airport Authority of India (AAI) and customs officials to help streamline the documentation procedure of logistics service providers ! Lack of up-gradation of the IT hardware and support system at the cargo complex.

!

6

Center for Asia Pacific Aviation Report, 2008 ©2009 Deloitte Touche Tohmatsu India Private Limited

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5. Technology trends in the logistics industry
5.1 Emerging trends Warehouse Management System (WMS) In India warehouses typically operate at 65% of their capacity.7 The primary reason behind this is the precious time that is lost between tasks. An appropriately customized WMS helps in reducing inventory receipts, send-outs and storage, along with manpower and resource handling in an optimum way. Thus, a well designed WMS helps in reducing inventory levels, lowering costs, promoting customer satisfaction, giving real time updates, improving quality control and often also nurturing a healthy work atmosphere. A 3.5% improvement in inventory accuracy and a 10-35% reduction in warehouse operating expenses are usually anticipated post the implementation of a WMS.8 WMS is currently used only by well established logistics companies which have a large warehouse at multiple sites and carry a large SKU. Global Positioning System (GPS) GPS technology gives the details of the origin and destination of a shipment. During transit, it helps in providing the exact position of a consignment. There are sophisticated GPS maps and technology available through which one can track the movement, and be proactive to customers by informing about the shipment status and expected delivery time. GPS system helps logistics companies to track the location of their goods. However, GPS has low adoption among the SMEs in the logistics business in India. Around 25% of LSPs currently use the GPS system. This is due to high ongoing capital investment. Though each GPS receiver costs upwards of 40,000 rupees, however the service charges are high at around Rs. 20,000-Rs. 25,000 annually has restricted the use of GPS in India. Customers also face issues like service, geographical coverage, support, updates and integration with backbone system. At present mobile phones are vastly used to track and keep record of shipment. Figure 9: Warehouse Management System

Figure 10: GPS Receiver

7 8

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Survey conducted by ARC Advisory Group, 2007 Logistics Management Magazine, June 2007 Deloitte Findings, 2008

Enterprise Resource Planning (ERP) ERP systems integrate several data sources and processes of an organization into a unified system. A typical ERP system uses multiple components of computer software and hardware to achieve the integration. ERP induces enough visibility in the supply chain so that an efficient work flow can be established. By pulling together and sharing information from functions such as purchasing, warehousing, and sales it helps to control costs. A lot of medium enterprises are installing ERP software's, due to unprecedented growth the logistics and transportation Industry. 5.2 RFID In focus Radio-frequency identification (RFID) is an automatic identification method, relying on storing and remotely retrieving data using devices called RFID tags or transponders. It allows LSPs to track, monitor, and report and manage products, documents, assets and people more effectively and efficiently as they move between locations anywhere at any time. An RFID tag is incorporated into a product for the purpose of identification using radio waves. Some tags can be read from several meters away and beyond the line of sight of the reader. These RF Tags can be active or passive and they require a reading device and interface computer to process information. Importance of RFID in logistics Allows the service provider to track items at each supply chain location, from plant to consumer ! Protects against copying and counterfeit of goods by embedding a unique Electronic Product Code (EPC) code into each item ! Proves the origin and improves the handling of goods. Shippers can use RFID tags to show a sterile supply chain and enable better quality in security processes. ! Tracks the amount of goods in the supply chain and helps to save capital required for distribution and warehousing storage costs
!

Figure 11: ERP System

Figure 12: RFID tag

Savings that can be enjoyed by a LSP using RFID technology includes ! Reduces the manpower requirement of the company considerably ! Saves time as scanning of cases/items takes place rapidly. RFID can scan upto 1000 boxes in a second whereas bar coding would take a few hours to scan the same number of boxes ! High level of security as data cannot be hacked

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Reasons why RFID as a technology has not yet penetrated in India The high cost of installation is one of the primary reasons why RFID is not used much in India as compared to other countries. Incorporating a basic RFID technology for a medium enterprise in the logistics business costs around Rs 0.50-0.60 Crores.10 This is because the technology requires 100% customisation. The service provider has to study the entire functioning of the enterprise in detail to incorporate use of RFID.

RFID tags are not manufactured in India and have to be imported. This escalates the price of the tag due to taxes levied on imports. The tags cost around Rs 9-Rs 60 in India which is very high as compared to countries like North America and Europe where the price ranges from Rs 2-Rs 4 per tag.15. RFID technology however represents the next generation bar code and promises to deliver additional benefits.

Table 9: RFID v/s bar coding

RFID

Bar Codes
! ! !

Plus

! ! ! ! ! !

4Communicates through radio waves, line of sight not required 4RFID tags store significantly more information 4RFID is dynamic and information can be added or deleted at every steps in a process 4Increased functionality; covert and difficult to counterfeit 4Fully automated and nearly error free Tags are more durable and can operate in harsh environments

4Involves lower cost tags and infrastructure 4Has widespread utilization Tags are human readable

Minus

4Higher costs but dropping, $0.05 tags on the horizon ! 4Uncertain “universality” of systems ! 4Tag reading is presently very much dependent on environmental conditions ! 4Tightly linked to the infrastructure

!

! ! ! ! ! !

4Transmission of data is performed opticallyclear line of sight required. 4Information storage is limited 4Reads only, one tag at a time 4Read capability can be affected by dirt, water and scuffing 4Can only be written once; No updating Human intervention opens possibility for errors.

Source: Deloitte Analysis (2008)

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Deloitte Findings, 2008

Table 10: RFID global overview
RFID global overview North America Europe Asia Pacific India

Tag Costs

Unit Price of Rs.2.8 (US$ .07) for passive tags. EPC-Compliant, Generation-2 tag

Approaching Rs 4 (US$ 0.10 per tag)

China: Rs 10-Rs.12 (US$ 0.25 US$ 0.30) per tag Japan: Hibiki Project to reduce costs to Rs.1.6 (US $ 0.04) per tag China: Government wants its own standard Japan: 950-956 MHz (UHF)

Rs 9 (US$ .22) to Rs.10 (US$ .25) per tag to about Rs.50 (US$ 1.2) to Rs.60 (US$ 1.5 per tag)

Tagging Radio Frequency

915 MHz (UHF)

868 MHz (UHF)

Wireless Planning Commission, GOI has permitted the use of 865 867 MHz (4 Watt ERP) for UHF in India In India Consumer Privacy issues have never been raised as there very little instances of RFID implementation at consumer level.

Consumer Privacy

United States: Significant issue Supreme court case “Kyllo v. United States” 533 US 27. Consumer rights advocates spreading “spychip” idea. Canada: Formation of GS1 Canada Public Policy Forum to address RFID policy issues

At issue, but consumers are being educated and can opt for tag removal. Article 29 of Directive 95/46/ec provides data protection and platform for consumer protection.

Not an issue because most Asia Pacific Governments favour collective rights over individual rights

Standards

EPC Global / ISO

EPC Global / ISO

China: NPC (National Product Codes) Standard Japan: UID Ubiquitous ID

EPC Global / ISO

Distribution Network Alignment

Use centralised DCs strategically placed nationwide.

Leading efforts to use Item level tagging

Network developed to source large percentage of goods from local suppliers

At nascent stage of mapping to US and Europe distribution networks

Source: Logistics Management (June 2007)

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5.3 Summary chart of technologies used in logistics

Table 11: Summary chart of technologies used in logistics
RFID global overview Parameters Bar Coding CRM ERP MIS GPS RFID

Launched

1990

1990s

1995

Mid 1980s

2005

2006 (used by major companies like DHL and UPS)

Installation cost

Each barcode scanner cost Rs. 50,000

Approx Rs 4 lakhs

Rs 9 lakhs for complete solution

Rs 3 lakhs for complete solution

Rs 40,000 and upwards for GPS receiver.

Around Rs 50-60 lakhs

Maintenance cost

20% of the instrument cost per annum

Around Rs 1 lakh per annum

Around Rs 1.5 lakhs per annum

Upto Rs 1 lakh per annum

Around 30 to 50% of Avg. installation Cost

Differs for each and every enterprise

Service charges

NA

Rs 1.5 lakhs per annum

Rs 2 lakhs per annum

Upto Rs. 1.5 lakhs if required

Rs 20,000 to Rs 24,000 per annum

Around 20% of installation cost per annum

Skills required to operate

Minimal

Skilled personnel or need for training

Skilled personnel or need for training

Skilled personnel or need for training

Minimal

Skilled personnel or need for training

Industry where technology is used

Retail, logistics

Mainly used in BPO, call centre, banks & retail industry

All industry verticals

All industry verticals

Logistics, tourism industry, Infrastructure and communication.

Retail, logistics, courier companies

Source: Various

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6. Growth drivers

The evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exists today. For example, rapid growth of organized retail and the need to reach out to the large untapped rural markets in India are necessitating development of strong back end and front end supply networks.

The government is demonstrating a strong commitment towards providing an enabling better infrastructure and creating conducive regulations. Hence, players now have the opportunity to leverage economies of scale, complemented with better infrastructure, to provide integrated logistics solutions which are cost effective.

Figure 13: Growth drivers in logistics

GDP growth (high trade + EXIM business)

Mergers & acquisitions

Rise of 3PL services

Growth drivers of logistics sector

Availability and access to finance

Enhanced infrastructure investments

Qualified workforce

Source: Deloitte analysis (2008)

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6.1 GDP growth and rise of 3PL services Most companies across industries like automotive, electronics, FMCG and pharmaceutical sectors are increasingly opting to outsource their logistics requirements to specialized Third Party Logistic Service Providers. This has created a demand for a range of logistics services which will benefit the productivity and efficiency of the customers' entire supply chains. It is estimated that 3PL solutions are slated to grow at a CAGR of over 16% from 2007-10. Consequently, 3PL service providers are expected to corner an increased share of the Indian logistics pie, from 6% in FY06 to 13% in FY11, at a CAGR of 25%.11 The table on the right shows that there is an inverse relationship between logistics cost and the share of 3PLs in overall logistics. The greater the share of 3PLs in logistics the lesser is the logistics cost. This highlights the importance of 3PLs in logistics. 6.2 Investments in infrastructure The logistics industry in India is currently suffering due to poor infrastructure. This has resulted in inefficiencies and delay in deliveries, which in turn affects overall productivity of logistics business. However, given the current emphasis on infrastructure, the growth and efficiency of LSPs as well as their customers will be positively impacted. The government has planned investments in infrastructure development amounting Rs 20,00,000 crore over the next 5 years.12 This will prove to be a major benefit for the logistics industry.
!

Table 12: Opportunity for 3PL Players in India
Capacity addition in million tonnes Country Logistics cost as a % of GDP Share of 3PL in Overall Logistics

India China USA Europe Japan
Source: Logistics in India, SSKI (2007)

13.0% 18.0% 9.9% 10.0% 11.4%

Less than 10% Less than 10% 34% 54% 80%

!

Air cargo movement is expected to grow at over a CAGR of 11.5 % from 2007-08 to 2011-12. This will give a boost to the activities of LSPs. The air cargo business has overtaken the ocean freight and rail freight market by expanding at nearly 19 % from 2006 to 2008, as against 10.3% growth registered by ocean freight and 9.2% by railways in the same period.13 The industry is estimated to grow in road segment by 13%, port segment by 9.5% and rail segment by 6%. This will be possible with the improvement in road infrastructure, implementation of National Maritime Development programme and introduction of dedicated freight corridors in rails.

!

The NHDP projects including the Golden Quadrilateral road project and the East & West Rail corridors are expected to positively alter the response of Indian firms through shorter lead times as well as lower maintenance costs on the transport equipment. They will also reduce the procedural delays on highways by reducing the number of checks and related stoppages of vehicles.

11 12

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13

Confederation of Indian Industry, Dewan Chopra Report – 2007 Planning Commission, GOI – 2008 Planning Commission, Air Cargo Agents Association of India Report – April 2008

6.3 Qualified work force There has been a sudden transformation in the scale and scope of activities provided by the logistics sector. This growth rate needs to be supported with a parallel growth of skilled and trained manpower. Attracting and retaining talent is a major problem faced by SMEs in the logistics business. There is a need to incorporate a high degree of professionalism in the functioning and approach of SMEs in this business.

However, there is a dearth of practical skills, knowledge and expertise on the functioning of this Industry. Courses in supply chain management and logistics management are not yet the preferred career option for many students. Also, there are only a handful of institutes offering specialised courses in this field. Most courses offered are generally very theoretical and elusive. It is important to design a course structure which is an ideal mix of theory and practice.

Table 13: Some of the recognized institutes offering courses in SCM in India
Institute/University
! !

Courses

An elective course offered under quantitative skills and operations management, a part of two years Post Graduate Diploma in Management.

Indian Institute of Management (Ahmedabad) Symbiosis Institute of Operations Management (SIOM), Nashik ! SP Jain Institute of Management and Research, Mumbai

A three year-full time bachelor's course. Degree awarded by West Bengal Technical University (WBTU)

!

NSHM, Kolkata

Elective included in a 1 year general management programme for working executives.

!

Xavier Labour Research Institute, (XLRI) Jamshedpur

Two year Post graduate Diploma in Business Administration through distance learning programme. The last 2 semesters contain specialization related subjects wherein Supply Chain Management specialization is available.

!

Prin L. N. Welingkar Institute of Management Development and Research, Mumbai ! ICFAI University, Tripura

Four semester post graduate diploma in Supply Chain Management

!

CII Institute of Logistics, Chennai

Executive post graduate diploma in Supply Chain Management 1 year weekend programme
Source: Deloitte study (2008)

!

Loyola Institute of Business Administration, Chennai

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6.4 Availability and access to finance As the SME sector emerges to become the nation's economic growth engine, limited ability of raising finance to power growth remains an impediment for sustained expansion. Venture Capital firms are generally wary of investing in relatively young or unproven technologies. Banks too are unable to provide debt financing. In addition, there is no formal mechanism for SMEs to raise investment from capital markets. It is also important to understand that it is not very easy for banks to assess credit requirements of SMEs and providing them with timely credit. The main reasons for this are ! Highly fragmented nature of SMEs in logistics ! Information asymmetry ! Lack of transparency ! Limited financial disclosures in financial statements of SMEs ! Non Performing Asset (NPA) legacy effect Financial hurdles faced by SMEs Financial reforms and financial prudence ! Information opaqueness ! Lack of proper accounting practices and documentation ! Inability to provide collateral as required by banks ! High transaction cost for small sized firms ! High risk perception by lending institutions
!

6.5 Merger & acquisition trends While entrepreneurship is on the rise, the reality check is that only few in every 100 new businesses make it past the second year. Given the odds, buying an existing business can be a much less risky and more quickly profitable venture than starting business from scratch. But it's not entirely risk free and success depends heavily on how wisely one chooses and evaluates the business to buy. M&A among SMEs in logistics The challenge facing many SME logistics companies in India is how to expand. Organic growth often requires high investment with slow returns. The alternative approach is through mergers or acquisitions. These are considered as a risky and potentially costly option. But the fact is that mergers and acquisitions if done strategically and diligently can be low risk, and can also attract funding from institutional investment companies whose long term interest is to facilitate growth. The challenges are actually in finding the right acquisitions, understanding restructuring options to minimise risk and cost, and finding the most suitable investment partners when additional funding is required. Figure 14 shows that though a number of SMEs crop up in India, many of the businesses shut down, due to lack of adequate knowledge and skills required to run an enterprise. Figure 14: SMEs life-cycle trend

As a result, SMEs either raise money through informal means, or scale back on their product and service offerings. However, if SMEs have easy access to institutional credit at competitive rates they are more likely to significantly increase their contribution to GDP and they would also be in a better position to take on the global competitive pressures. The government is taking various measures to improve the delivery of credit to SMEs. A policy package for stepping up credit to SMEs has been started by the government. The government has also set up a Credit Guarantee Fund (CGF) to provide relief to those small entrepreneurs who are unable to pledge collateral security.

Survivors

Period of existence

Strugglers

Start-ups

Source: Deloitte study (2008)

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In order to survive in the competitive environment, small enterprises come together in order to provide a larger basket of services and also to take advantage of economies of scale. Mergers and Acquisitions help enterprises to survive and grow. This highlights the importance of Mergers and Acquisitions among SMEs. A number of factors like globalization, positive cash positions, increased customer expectations and higher rewards make this the right time for supply chain players to merge. ! Globalisation - Shippers are increasingly likely to source and sell goods outside their own borders. Moving shipments across oceans and continents is inherently more complex than moving shipments domestically, so LSPs are required to build or buy international shipping expertise. This has resulted in tie-ups with various shipping service providers. Shippers turn to 3PLs to solve a multitude of challenges, most of which extend their services well beyond the traditional capabilities of warehousing and transportation.

!

Positive Cash Position - Availability of finance has been a major obstacle to the growth and expansion activities of SMEs in logistics. Hence in the Indian logistics space, Mergers and Acquisitions are turning out to be the most favored route, helping companies to emerge as stronger and more competitive players in the industry. Investors are now finding 3PLs particularly inviting because they have recorded good compounded annual growth rates and low market penetration. They are growing faster than the economy. Meeting customer demands - Today, customer needs are changing. Customers are now looking at complete range of end to end solutions through a single provider. Logistic industry in India is predominantly fragmented, hence there is tremendous opportunity for players to integrate and enhance the quality of service provided.

!

Factors that LSPs must take into consideration before finalizing an M & A deal ! Know the market and the risk ! Always devise an alternative plan ! Use service level agreements ! Study the benefits and growth prospects before entering into a merger

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7. Logistics model

This section indicatively depicts the logistics model followed by soft drink companies and companies dealing in IT hardware. The soft drink companies use a single mode of transportation i.e. trucks for all their transportation activities. IT hardware companies on the other hand are an example of multi-modal logistics.

are kept in crates where each crate carries 24 bottles. There are two channels of distribution, direct distribution and indirect distribution. The logistics movement from the mother plant to the distributors is called primary freight / load. Direct distribution - Here the entire distribution of the product is done by the company's own distributors.

Figure 15: Logistics model of a soft drink manufacturer Direct distribution (10%)

Indirect distribution (90%)

Manufacturer

Mother plant

Distributor

Retailer

Consumer

Reverse logistics for empty bottles
Source: Deloitte study (2008)

Reverse logistics for empty bottles

Reverse logistics for empty bottles

7.1 Indicative logistics model for a soft drink company Unlike most FMCG companies which follow a one way business pattern, soft drink manufacturers follow a 2 way business pattern. In India soft drink manufacturing is viable as manufacturers make use of Returnable Glass Bottles (RGBs) instead of plastic disposable bottles. It is more viable to adopt a two way business pattern due to the tremendous cost saving on bottles, as the glass bottle is used 8 times in its life. Companies invest in a certain amount of glass every year known as glass float. At any given point of time there must be a certain fixed number of bottles in the market. The company has its own set of manufacturers who make these bottles as per the specifications and requirements. These bottles are sent to the main plant called the mother plant in trucks. The liquid is filled up at the plant and then transported to the distributors using trucks. The bottles
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The company has its own staff, owns the trucks and other assets and bears 100% responsibility for the entire distribution procedure. The top 10% of the Companies account is usually handled by the Direct Distributors. Indirect distribution - Here the company appoints distributors who are completely responsible for the entire logistics activity. The appointed agents use their own vehicles and have their own staff. Distributors use trucks to transfer the bottles to retailers. This process of transfer from the distributor to the market is called secondary freight / load. The filled bottles are delivered to the retail outlets and the empty bottles are taken from the retailer and taken back to the plant where they are washed and refilled. Retailers pay a deposit on every crate they purchase so that in case of damage, breakage or exchange of bottles the company deducts the amount from the deposit.

7.2 Indicative logistics model for an IT hardware company

Figure 16: Logistics model of an IT hardware company

Suppliers (international)

Warehouse

Transshipment points

Country-wide distribution centers (Dcs)

Retailers Suppliers (international) PC assembly plant Suppliers (international) Transshipment points Suppliers (international) Port Country-wide distribution centers (Dcs)

Transshipment points

Retailers

Retailers

Country-wide distribution centers (Dcs)

The model shown above is an example of multi-modal logistics used by global IT hardware companies. The goods are transported from the suppliers to the assembly plant. The products that need to be exported are taken to the warehouse by trucks. From the warehouse they are taken to the port and the consignment is shipped to its destination. On reaching the destination, the goods are stocked in warehouses called transshipment points. From each warehouse goods are taken to Country-wide Distribution Centres (DCs) by trucks. Once again trucks are used to transport the goods to the Retailers from where final purchase takes place by consumers. This logistics model does not include reverse logistics.

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8. Material handling equipment

8.1 Global scenario The market size of the global Material Handling Equipment (MHE) industry has been estimated at Rs 3,75,200 crore for the year 2005 and is projected to increase over Rs 4,68,000 crore by 2010. The industry is expected to grow 4.5% annually through 2010.14 The growth is being led by developing countries such as China, India, Turkey Mexico, and Russia. While USA, Germany and Russia are the world's largest producers of material handling equipment, Germany and Japan are the major exporters of material handling equipment although China is expected to become an increasingly important global supplier in the coming years. 8.2 Indian overview Given the fast pace of economic growth in India, there is tremendous potential for growth in the material handling sector. The traditionally fragmented material handling Industry has been consolidating at a fairly rapid pace in the recent years. The major product segments are conveying equipment, unit load formation equipment, and storage equipment. The sub product segments include industrial trucks and lifts, hoists, cranes and monorails. The material handling sector is totally dependent on the growth of other sectors. Demand for material handling industry is likely to continue to increase dramatically due to the combined effect of the following factors ! Private sector participation and foreign direct investment in infrastructure ! The removal of barriers on the import of various consumer products and the emphasis on exporting goods ! Constant focus and incentives for the food processing sector and grain handling Material handling equipment used by logistics industry include forklifts, pallet trucks, stackers, reach truck,

order picker, overhead travelling cranes etc. These are primarily devices of mechanization. Traditionally, a lot of manual intervention was involved in the logistics business, as a result of which they were delay in deliveries; products were more prone to damage due to poor handling and transit time taken was much longer. This resulted in low speed, handling problems like scratches, chipping, breaking and difficulty in monitoring the material flow. However, the growth of the logistics Industry has helped realise the importance of incorporating various material handling and storage equipment. With transformation of manufacturing systems to be lean, agile and highly automated, things are changing. Increased competition has lead to a further increase in the variety of components (for product customization), lead to reduction in lot size and continuous varied product mix. Since the logistics pattern is now becoming more complex, there is a tendency to integrate material handling systems so that they can communicate with each other - as well as with processing machines, inspection devices, assembly stations etc. With the addition of on-line data capturing devices, it is now possible to monitor the entire flow of all materials within the plant-and have real-time information on inventory level, status of material processing etc. There is a variety of material handling devices available in the market. What is important is the ability to integrate them into an efficient system. This is plantspecific, and can be done best by the organizations itself. The benefits include ! Better inventory control ! Faster throughput ! Less time for changeover ! Less defects during material handling ! Better utilization of space i.e. floor space as well as the space up to ceiling

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14

Cargo Talk, September 2007

8.3 Demand for material handling equipment Demand for material handling equipment has been increasing in the last few years. Manufacturers of material handling equipment state that in the last 5-6 years demand for MHE has increased almost 3-4 times.15 One of the primary reasons fuelling this growth is that companies are increasingly feeling the need to lower their logistics cost. Also, due to the presence of large number of players in the Industry, use of equipments helps to keep up with increasing competition. As a result of which there is a shift from manual operations to use of electric and battery operated equipments, especially in warehouses to improve efficiency and save time. Reasons for this shift are ! Low maintenance requirement ! One time investment ! Long life of equipment ! No diesel / petrol requirement

8.4 Classification of material handling equipment Figure 17: Types of Material handling equipment

Fork lifts

! ! !

Electric fork lifts Battery operated fork lifts LPG/CNG powered forklifts

Pallet trucks

! ! !

Hand pallet truck High lift pallet truck Electric powered pallet truck Manual stacker Electric stacker Counter balanced stacker

Stackers

! ! !

Order picker

Reach truck

15

Deloitte study, 2008

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Forklift trucks Forklift truck is a powered industrial truck used to lift and transport materials. These trucks are available in many variations and load capacities. In a typical warehouse setting, most forklifts used have load capacities between one to five tons. However, machines of over 50 tons lift capacity are also manufactured. In addition to a control to rise and lower the forks (also known as blades or tines), the operator can tilt the mast to compensate for a load's tendency to angle the blades toward the ground and risk slipping off the forks. Tilt also provides a limited ability to operate on non-level ground Some machines also allow the operator to move the tines and backrest laterally, allowing easier placement of a load. In addition, a few machines offer a hydraulic control to move the tines together or apart, removing the need for the operator to get out of the cab to manually adjust for a differently sized load. Following are the various types of forklifts – Electric forklifts - These are a good choice for warehouses, manufacturing applications and other indoor use. They produce zero emissions which is an important consideration since the truck is being used

indoors. Also, they have a lower cost per hour of operation than any of the internal combustion (IC) models. This helps to offset the disadvantage of their higher initial cost. Electric forklifts are an economical and more environmentally friendly alternative to traditional gasoline powered forklifts Internal combustion (IC) forklifts - IC forklift is a common choice for outdoor use as electric forklifts can’t be safely used in the rain. In addition, IC forklifts are capable of handling the largest loads i.e. greater than 15,000 lbs capacity. They are cheaper to buy than electric forklifts, but cost more per hour to run. Narrow aisle forklifts - These are essential to modern warehousing operations. By allowing aisle widths as narrow as 6 feet, they greatly increase the number of aisles that can fit in a given warehouse, and that, in turn, increases warehouse capacity. Standard lift trucks need aisles that are 11' wide or larger to be able to operate and turn around. Narrow aisle forklifts (NA) are capable of operating in aisles 8' to 10' wide; and very narrow aisle forklifts (VNAs) can work in aisles as little as 6' wide. Battery operated forklifts - Battery operated forklifts are of compact design fitted with the latest microprocessor based electronic controls. Battery operated forklifts are available from 1 ton to 3 ton capacity. These forklifts are largely used in the food & beverages and pharmaceutical industries where maintenance of clean environment and low noise levels are important. High visibility mast and hydrostatic steering are standard features. Traction batteries of higher capacities are also made available by some manufacturers as optional for longer duty cycles. Battery chargers are available as an independent unit. LPG/CNG powered fork lifts - LPG forklifts are widely used for indoor applications for their low pollution and low noise levels while not compromising on demanding duty cycles. LPG/CNG forklifts are available with either automatic transmission with power shift or with fluid coupling transmission. High visibility mast and hydrostatic steering are standard features. LPG forklifts are maintenance friendly and easy to operate.

Figure 18: Forklift truck

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Pallet trucks Hand pallet truck - The hand pallet truck is a basic material handling equipment, used for transportation within short distances. The hand pallet truck is used in small warehouse or plant operation that handles a low pallet volume. In this type of low pallet operation the pallets are moved a short travel distance. The basic advantages of the hand pallet truck are ! Low capital investment ! Low maintenance and easy to operate ! Useful for short travel distances in warehouses ! Easy to use on an elevated floor Battery operated pallet truck - The battery powered ballet is considered a good vehicle for use in several warehouse and plant functional areas. It is used in the receiving and shipping dock areas to load and unload delivery vehicles. The main advantages of battery operated trucks are ! Low cost and easy maintenance ! Require the shortest area for a right angled turn ! Easy to train employees ! Require a narrow travel path Electric powered pallet truck - The electric powered truck is a three wheeled vehicle. These vehicles are either walk behind or rider models. For maximum efficiency and minimum damage if the vehicle has palletized and secured loads a full trailer can be unloaded in around 1-2 hours. The main advantages of electric pallet truck are ! Moderate investment requirement ! Ability to handle high volumes ! Reduces employee injuries ! Suitable for multiple warehouse activities. Stackers Stackers are large machines used in material handling applications. Their main function is to stack bulk material stored in warehouses onto a stockpile. Stackers were originally manually controlled machines with no remote control. Modern machines are typically semi automatic or fully automated, with parameters fully set. Most stackers used are now electrically powered by way of a trailing cable.

Figure 19: Pallet truck

8.5 Future market trends In India in the next few years the Material Handling industry is expected to grow steadily. The principal factor fuelling gains will be improved conditions in the Indian economy, which will result in the accelerating demand for goods and create opportunities for suppliers of goods-handling products and services of all types. Due to ambitious plans for the rapid globalisation of the Indian economy, cargo and freight traffic is likely to maintain the current upward trend for the next few years. As the need for material handling equipment is directly related to the amount of cargo and freight traffic, India will see a major pull in the demand for these equipments.

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Bibliography

Public sources ! http://msme.gov.in/ ! http://www.ciionline.org/ ! http://www.supplychains.in/ ! http://www.indianrailways.gov.in/ ! http://www.acaai.in/ ! http://www.nhai.org/roadnetwork.htm Private sources http://www.pppinindia.com ! http://economictimes.indiatimes.com/ ! http://www.thehindubusinessline.com/ ! http://www.gati.com/02_investors_chairman_ speech2.jsp ! www.wikipedia.org ! Cygnus Research Report-Feb 2008 ! Dewan Chopra Report-2007
!

Magazines Logistics Management June 2007 - “A worldwide look at RFID” ! Logistics Management June 2007 - “In search of the right warehouse management system” ! India Supply Chain Council 19 March 2007 “India Logistics Industry: $125 Billion Goldmine” ! Cargo Talk September 2007 - “Cargo handling equipment: The crucial element of smooth operation ! PASCHEEM - A newsletter of the CII Western region September- October 2007 “SME sector in India - A brief profile” ! India Supply Chain Council - 30 April 2008 “India loses $12 billion per year on higher transaction costs at sea ports “
!

!

Other sources Online articles ! India Supply Chain Council-September 1, 2006 “Logistics sector has hidden potential” ! The Economic Times February 6, 2008 “India to have 500 airports by 2020”

Deloitte research Deloitte Research Report “Growth Opportunity for Indian SMEs”- April 22, 2008

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Contacts

For further information, please contact: Mr. Hemant Bhattbhatt Senior Director Deloitte Touche Tohmatsu India Pvt Ltd 31, Nutan Bharat Society, Alkapuri, Baroda - 390007 INDIA Tel : +91 (0) 265 2333 776 Fax : +91 (0) 265 2339 729 Email: [email protected]

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