Third Party Logistics in India

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Third Party Logistics in India 26/07/2007 Overview, Challenges & Prospects

Issue Date : 26/7/2007

Introduction Third party logistics (3PL) refers to service providers offering part or full logistics support to companies such as transportation, warehousing and other logistics related activities. 3PL industry has been growing in importance owing to reduction in total supply chain costs enabled by it. Outsourcing trends are more popular, especially in cargo movements. The major growth driver for this is the role of large operators, striving to render their services for the entire supply chain. Outsourcing logistics activities has not only enabled the companies to concentrate on their core business activities but also in achieving cost efficiency, improving delivery performance and ultimately, customer satisfaction. According to Frost & Sullivan, a leading research organisation, the 3PL market size in India was approximately US$890.3m in 2005, growing at a compounded annual growth rate of 21.9%. The industry is expected to touch US$3.56 billion by 2012. Its immense potential for growth is evident from its more than 20% growth rate per annum since 2004-05. Evolution of 3PL in India Table 1 outlines the evolution of 3PL market in India. The services offered by Indian 3PL service providers have been expanding over a period of time due to the paradigm shifts in customer requirements. Types of 3PL providers Standard 3PL providers: These are the basic 3PL service providers who perform activities like pick and pack, warehousing and distribution.

Service developers: These 3PL providers offer advanced value-added services such as tracking and tracing, cross-docking, specific packaging or providing a unique security system. These providers perform the tasks with the help of a strong IT base and focus on economies of scale. Customer adapters: This category of 3PL service providers take over complete control of the company’s logistics activities. The 3PL provider improves the logistics dramatically, but does not develop a new service. Customer developers: This group of 3PL service providers constitutes the highest level services that a service provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over the entire logistics activities. Services offered by 3PL providers With the entering of multinational companies (MNCs) like Suzuki, Hyundai, Honda and Ford in the Indian market, the 3PL market is booming in India. In view of the significant benefits of cost reductions and just-in-time delivery gained by the MNCs, a large number of domestic small and medium enterprises are also gearing up, to use 3PL services in their logistic functions. The 3PL providers are offering an increasing array of logistics services to their customers. Following are some of them: Outbound Transportation Warehousing Inbound Transportation Freight Bill Auditing/Payment Customs Brokerage Freight Forwarding Customs Clearance Factors Driving the Indian 3PL Market Growth Concentration on cost-cutting measures by domestic as well as multinational companies in core activities The Government of India’s implementation of Value Added Tax regime is driving the industries towards using more 3PL services since a full implementation of this uniform tax regime would necessitate huge investment for establishing centralised large warehouses and cold storages. Most of the domestic companies are outsourcing these functions, which in turn is creating demand for 3PL service providers. Indian Government has invested US$17 billion for the upgradation of National Highways under two major projects—the Golden Quadrilateral Network and the North-South-EastWest Corridor. The government has also decided to spend about Rs14 trillion across the sectors such as roads, railways, aviation, ports, urban infrastructure, power and telecom from 2005-06 to 2011-12. The increased focus on improving logistics infrastructure had a huge positive impact on the growth of 3PL market in the country. Apart from the above factors, the entry of multinational companies such as BMW,

Flextronics and Wal-Mart into the country is expected to fuel the growth of 3PL market and increase the usage of 3PL services in their respective sectors. Challenges in the Growth of 3PL in India There are some operational and regulatory challenges for the 3PL industry in India. The major challenges are: The penetration of 3PL services is very low among Indian business firms due to lack of awareness. In India, the total share of 3PL operations is less than 10% of the total logistics operations, whereas it is 60%, 55% and 80% in the US, Europe and Japan respectively. Poor logistics infrastructure such as roads, airports, lack of adequate railway wagons and seaports is also a major challenge before the Indian 3PL market growth. The problem of congestion at roads and seaports and the resultant delays in movement of cargo, is significantly affecting the performance of 3PL service providers. In India, at present, there are about 1,300 cold storages and most of them are under utilised. Most of these storage facilities are concentrated in the major cities of the country. This could be a major challenge. Outlook for Indian 3PL Market The outsourcing of logistics operations has been on the rise (Chart 1) due to the continuous efforts of the companies for improving the efficiency, reliability and for reduction in the total cost of supply chain management. The use of 3PL services by the MNCs, starting their operations in the Indian market, is increasing. In addition, strong foreign direct investment inflows in automotive, capital goods, electronics, retail and telecom is expected to increase the market opportunities for 3PL providers in the country. Outsourcing of logistics functions to 3PL service providers in India is seen only in a few sectors such as the automotive sector. Other sectors that have contributed substantially to 3PL market include the IT hardware and electronics, fast moving consumer goods, textiles and retail. Lastly, end-to-end outsourcing is becoming popular as companies are realising the benefits of focusing on core competencies. The concept of just-in-time delivery is also gaining acceptance in this sector.

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