INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

WORKING PAPER SERIES

WPS No. 562/ October 2005

A Survey of the Third-Party Logistics (3PL) Service Providers in India

by

Subrata Mitra subrata@iimcal.ac.in

Assistant Professor, IIM Calcutta, Diamond Harbour Road, Joka P.O., Kolkata 700 104

India

1

A Survey of the Third-Party Logistics (3PL) Service Providers in India1

Subrata Mitra2 Indian Institute of Management Calcutta

Joka, D. H. Road, Kolkata – 700104 E-mail: subrata@iimcal.ac.in

Abstract Third-party logistics (3PL) or logistics outsourcing is gaining importance as more and more corporations across the world, unable to manage their complex supply chains, are outsourcing logistics activities to the 3PL or logistics service providers. By outsourcing logistics activities, corporations are able to not only concentrate on their core business operations, but also achieve cost-efficiency and improve delivery performance and customer satisfaction. The 3PL revenue around the world was $141 billion in 2003, and it is expected to touch $300 billion in 2006. The largest market is the U.S., which was about $80 billion in 2003 accounting for nearly 60% of the world market. The 3PL market in India is least developed and highly fragmented. However, there is an immense potential for growth of 3PL in India, about 20% per annum, and if the logistics cost can be brought down from the current level of 13% of GDP to 8.7% (level in the U.S.), the savings would be around $20 billion resulting in a potential 4.3% cut in prices of Indian goods globally making them more competitive. The objective of the current survey was to assess the 3PL market in India, its growth prospects, opportunities and threats. Data were collected to assess the strengths and weaknesses of the 3PL providers in terms of their asset base, services offered, industries served, coverage and IT capability. That the 3PL market in India is fragmented clearly came out from the survey as it was found that 20% of the respondents cornered about 90% of the total 3PL revenue of all the respondents in 2003-2004. The 3PL revenue as well as the volume of cargo handled by the respondents were growing over the years, registering growth rates of 18.25% and 20.33%, respectively, in 2003-2004 over the previous year. The most important roadblock to the growth of 3PL in India, identified by the respondents, was poor transportation and communications infrastructure, and the most important opportunity for growth of 3PL in India was indicated as the increasing awareness of the Indian firms towards the benefits of logistics outsourcing. Keywords: 3PL; third-party logistics; logistics outsourcing; service providers; India Introduction Third-party logistics (3PL) refers to outsourcing transportation, warehousing and other logistics-related activities to a 3PL service provider that were originally performed in-house. More and more corporations across the world are outsourcing their logistics activities due to various reasons, some of which are outlined below. • Due to globalisation, corporations across the world are increasingly sourcing, manufacturing

and distributing on a global scale making their supply chains very complex for them to 1 CMDS project vide work order no. 2355/CMDS:TPLSP 2 Assistant Professor, Operations Management, IIM Calcutta

2

manage. Hence they have to outsource their logistics activities to experienced 3PL providers, who have global operations. Today’s 3PL providers with their sophisticated IT capabilities and state-of-the-art transportation and material handling equipment and warehousing facilities offer complete supply chain solutions.

• Logistics outsourcing is used to complement the logistics activities the corporations do not have competency in, and also to increase the geographic reach. When a corporation expands business overseas, it may not be conversant with the customs duties, tax structures, rules and regulations, import/export policies of the government, and culture of the foreign country. A 3PL provider, who has long been operating in that country, will be better able to carry out the logistics operations.

• Logistics may not be one of the core activities of a corporation. So, inefficiency may creep in if it is looked upon as a secondary activity. By outsourcing logistics, corporations may focus on their core competencies.

• Logistics outsourcing may also reduce costs as the 3PL providers can get the advantage of the economies of scale, which is otherwise not available to the corporations.

• By outsourcing logistics, corporations can reduce their asset base, and deploy the capital released for other productive usage.

• Logistics outsourcing improves cycle time and delivery performance, thereby increasing customer satisfaction.

• Since the 3PL providers are now offering a number of value-added services such as customs clearance, freight forwarding, import/export management, distribution, after sales support, reverse logistics and so on, corporations can outsource all these activities, and concentrate on their core business operations.

• Due to an incredible growth in electronic retailing since the late 1990’s, many firms around the world with virtually no distribution systems rely heavily on the 3PL providers for delivery of the merchandise at the customer’s doorstep. This has resulted in a significant growth in the order fulfilment sector of the 3PL service industry.

Evolution of 3PL The concept of logistics outsourcing can be traced back as far as one goes down the history of mankind. In Europe, a number of logistics service providers can trace their origins back to the Middle Ages1. We restrict ourselves to the recent decades, and trace below the evolution of 3PL from the 1950’s. 1950’s & 1960’s Logistics outsourcing was limited to transportation and warehousing. The

transactions were mainly short-term in nature. 1970’s Emphasis was on improved productivity, cost reduction and long-term

contracts. 1980’s Value-added services such as packaging, labeling, systems support and

inventory management were on offer. 1990’s to present Outsourcing has picked up momentum, and more value-added services are

being offered. Some of them are import/export management, customs

3

clearance, freight forwarding, customer service, rate negotiation, order processing, assembly/installation, distribution, order fulfilment, reverse logistics, consulting services that include distribution network planning, site selection for facility location, fleet management, freight consolidation, logistics audit etc.

3PL market Currently, the logistics cost around the world is about $2 trillion. For any country, the logistics cost is pegged between 9% and 20% of GDP. For India, the figure is about 13%. Considering a GDP of over $475 billion, the logistics cost in India turns out to be about $62 billion2. The 3PL market across the world is increasing at a rapid rate. According to Armstrong & Associates, the world 3PL revenues in 1992, 1996 and 2000 were $10 billion, $25 billion and $56 billion respectively. According to another research firm IDC, the 3PL revenue was $141 billion in 2003, and it will touch $300 billion in 2006 growing at a compounded annual rate of 17%3. The world’s largest 3PL providers are headquartered in Europe (Top seven 3PL providers in terms of revenues are European-based, UK-based Exel plc being the largest in the world with $8.3 billion in revenues), but the largest market is the U.S., which was about $80 billion in 2003 accounting for nearly 60% of the world market4. The 3PL market in India is least developed. The market is highly fragmented, and there are very few service providers, who generate substantial revenues (more than Rs. 50 crore). A survey conducted by Frost & Sullivan estimates the logistics market in India at $298.7 million in 2003 or 0.48% of the logistics cost in that year5. Compare this figure with 7% across the world and 9% in the U.S. considering a GDP of over $10 trillion and 8.7% of the GDP being the logistics cost. There is an immense potential for cost savings for India if it can bring down its logistics costs from the current level of 13% of GDP to 8.7% (level in the U.S.). The savings would be around $20 billion resulting in a potential 4.3% cut in prices of Indian goods globally making them more competitive, a Logistics Institute Asia-Pacific study estimates2. Problems in the growth of the 3PL market in India There are some operational and regulatory roadblocks to the growth of the 3PL market in India. The major problems are outlined below. • The Indian firms are still wary of outsourcing their logistics activities due to lack of trust and

awareness. The 3PL activity is less than 10% of the total logistics operations in India, whereas the corresponding figures for the U.S., Europe and Japan are 57%, 40% and 80% respectively2. According to a TCI-MDI survey6 of 130 Indian firms, 55.4% respondents indicated that their firms use 3PL services. The mostly used 3PL services are inbound and outbound transportation and customs clearing and forwarding. Outsourcing of other value-added services such as warehousing, inventory management, distribution and order processing is yet to pick up.

4

• The poor infrastructure of India acts as a deterrent for attracting investments for the logistics sector. The national highways constitute 1.4% of the total road network, but carry 40% of the total freight movement by roadways. Owing to a bad condition of roads and inadequate communications infrastructure, 3PL providers would not be able to provide quality service to their clients, and hence would not be able to attract business from the Indian firms. The unwillingness of the Indian firms to outsource logistics operations due to lack of trust and awareness and the unwillingness of the 3PL providers to bring in more investments due to a poor infrastructure constitute a vicious cycle and act as a major roadblock to the growth of the 3PL market in India.

• The logistics firms offer limited services. In order to attract more business, they have to offer more value-added services, namely packaging and labeling, order management, order fulfilment, distribution, customer support, fleet management, freight consolidation, reverse logistics and logistics consulting.

• The 3PL providers in India are caught on the wrong foot because of the differential sales tax policy of the Indian Government. Currently, the 3PL providers have to set up warehousing facilities in a number of states to avoid double taxation, thus losing the advantage of the economies of scale.

• Outsourcing logistics to a 3PL provider will attract a service tax, which was increased in the last budget from 8% to 10%, thereby increasing the outlay in service taxes should a firm decide to outsource its logistics operations. In the changed scenario, the firm may find it cost-effective to keep logistics operations in-house.

Prospects of the 3PL market in India Despite the problems mentioned above, the 3PL market in India is poised to grow at over 20% compared to the average world growth rate of 10%7. Some of the large Indian corporates such as Reliance, Tata, Mahindra and Mahindra, TVS Group and Essar Shipping have already forayed into the logistics business. Initially these corporates formed divisions to handle internal logistics, but sensing the potential of the market, they have started offering logistics solutions to other Indian corporates and have already turned these logistics divisions into profit centres8. Some large express cargo and courier companies such as Transport Corporation of India Ltd. (TCIL), Gati, Safexpress and Blue Dart have also started offering 3PL services. Owing to the large asset base and distribution networks that are already put in place, it was just a matter of time for these companies to venture into the logistics business. Some of the reasons for the prospects of the 3PL market in India are given below. • Indian firms increasingly realize the importance of reducing cost and staying competitive in

the world market. One of the means of reducing cost is through outsourcing logistics, which also improves delivery performance and customer satisfaction.

• The Indian GDP is growing steadily at 6% compared to the world GDP growth rate of 3%, which even beats the GDP growth rates in the U.S. (3.3%), U.K. (2.6%) and Japan (1.3%)9. This eventually will translate into more outputs and more demand for specialized logistics services.

• The Indian Government has focused on infrastructure development. One of the initiatives is the golden quadrilateral project of the National Highway Development Programme, which

5

will connect all the four metros and will act as East-West and North-South corridors. Once completed, it will give a boost to the road transportation network in India.

• 3PL services come under the purview of the BPO sector. The BPO sector in India, mainly IT and ITES, is growing at a rapid rate, and the Indian Government has declared many sops including allowing 100% FDI though with certain restrictions in some cases. This is in contrast with China where foreign investment in domestic logistics is still not permitted. Almost all the large global 3PL providers have their presence in India doing mainly customs clearance and freight forwarding for their international clients. With the logistics market growing at a rapid rate and infrastructure developing, it is just a matter of time before global 3PL providers invest in domestic logistics. The possible routes may be acquisitions, quick and easy for the fragmented logistics market, and forming wholly owned subsidiaries or joint ventures.

• The Indian Government is working towards a uniform VAT regime. Once implemented, it will enable the 3PL providers to consolidate the warehousing facilities currently maintained in different states bringing in economies of scale.

Motivation and objective of the survey The benefits of 3PL and the prospects of the logistics market in India were essentially the motivation behind conducting this survey. To the author’s knowledge, there has been no survey of the Indian logistics service providers so far. The objective of the survey was to assess the 3PL market in India, its growth prospects, opportunities and threats. The strengths and weaknesses of the 3PL providers in terms of their asset base, services offered, industries served, coverage and IT capability were also to be analysed. Research Methodology The research methodology was based on collection of data from primary and secondary sources. The primary sources were the 3PL providers, and data collection was through questionnaire surveys, telephonic interviews and personal visits. The secondary sources were books, published reports, journal articles and the Internet. The details of the questionnaire design and the process of administering the questionnaire to potential respondents are outlined below. Design of the questionnaire The questionnaire had 10 sections. The questions asked in each section are given below. Section I: General information The respondent was asked to give the contact information. The respondent was also asked to mention the countries of operation other than India and tie-ups, if any, with global 3PL providers. This was to assess the extent of global reach of the respondent. In addition, the respondent was asked to mention the year of starting 3PL operations and the number of employees in India to see how old it was in the business of 3PL and to assess its size in terms of staff strength.

6

Section II: Financial information The respondent was asked to list the 3PL turnovers and total turnovers for the last 5 financial years, from 1999-2000 to 2003-2004. The objective was to assess the 3PL turnover growth rate and the trend in the 3PL turnover as a percentage of the total turnover over the last 5 years. Section III: Services offered A whole range of services starting from transportation, warehousing, inventory management, freight forwarding and customs clearance to order processing, invoicing, distribution, reverse logistics and consulting were listed, and the respondent was asked to tick the services that it offered. The objective was to assess the breadth of service offerings of the respondent. Section IV: Industries served A number of industries were listed and the respondent was asked to tick the industries that it catered to. The respondent was also asked to list its major customers and competitors. Section V: Asset base and volume of cargo movement The respondent was required to list the different types, numbers and total capacities (in tons) of vehicles and material handling equipment that it owned. The number of warehouses/godowns and the total capacity (in sq. ft.) were also required to be listed. The respondent was also asked to mention the volumes of cargo handled (in tons) in the last 5 years to assess the growth of cargo volume. Section VI: Extent of coverage The entire country was divided into 6 regions: North, South, East, West, North-east and Central India, and the respondent was asked to tick the regions that it covered. The number of states covered and the number of branches and offices that the respondent had were also asked for in order to ascertain the reach of the respondent. Section VII: Information systems The respondent was asked to tick the Information Technologies that it used among Bar coding, Electronic Data Interchange (EDI), Mobile Communications, Satellite-based tracking system, Geographic Information System (GIS) and Global Positioning System (GPS). The respondent was asked to mention the percentage of operations computerised and list the logistics softwares, databases, ERP packages and web-based applications used by it. The respondent was also asked to mention the investments in information systems as % of total investments in the last 5 years. Section VIII: Threats to the growth of the 3PL industry in India Five factors were identified by the author as the possible reasons for the low growth of the logistics market in India so far, namely lack of trust and awareness among the Indian firms, poor transportation and communications infrastructure, limited value-added services offered by the 3PL providers, diseconomies of scale due to differential sales tax structures and cost-inefficiency due to imposition of service tax. These factors were listed and the respondent was asked to assign a score, on a scale of 1-5, to each of these factors where ‘1’ indicated very important and ‘5’ indicated not at all important. Also, space was provided for the respondent to mention any other factor(s), which, it felt, was (were) important.

7

Section IX: Opportunities for the growth of the 3PL industry in India Five factors were identified by the author as the possible reasons for the growing logistics market in India, namely increasing awareness towards logistics outsourcing, demand for more specialized services as a result of a steadily increasing GDP, development of infrastructure, possibility of investments by global 3PL providers and uniform VAT regime likely to be effective from April 1, 2005. These factors were listed and the respondent was asked to assign a score, on a scale of 1-5, to each of these factors where ‘1’ indicated very important and ‘5’ indicated not at all important. Also, space was provided for the respondent to mention any other factor(s), which, it felt, was (were) important. Section X: Size of the 3PL market in India and growth forecasts The respondent was asked to indicate its estimate (in Rs. crore) of the size of the 3PL market in India, and the average annual growth forecasts for the market and its own 3PL business in the next 5 years. Administering the questionnaire Upon designing the questionnaire, the next step was to locate the potential respondents for administering the questionnaire. This was not an easy task since the 3PL market in India is least developed and the author could not lay hands on a formal directory of Indian logistics service providers. The author could gather the references of some of the well known Indian 3PL providers from various published materials, and could go to their websites directly for the contact information. For information on other potential respondents, the author referred to the directories available on the following websites: http://www.azfreight.com, http://dir.indiamart.com, http://www.logisticsworld.com and http://www.logisticsfocus.com. The author is also grateful to some of the respondents for providing information on the Indian 3PL providers. From all the sources, about 200 potential respondents were identified and each of them was sent a questionnaire along with a self-addressed envelope and a covering letter, addressed to the Chief Executive of the company, explaining the background of the survey. Some of the respondents were kind enough to send back the filled-in questionnaire within one week of despatching. Some of them required clarifications and wanted more time to respond due to pressing job demands and the detailed nature of the questionnaire. The author started sending e-mails and calling the potential respondents about two weeks after despatching the questionnaire. Some of them denied receiving the questionnaire. So, it had to be resent by e-mail. Some of them said that they would not respond to the survey. The rest promised that they would work on the questionnaire and send it back as early as possible. In the process of calling the potential respondents, many a time the author had to explain the meaning of the term 3PL, as it was new to them, and convince them that the services they offered were nothing but 3PL services. This shows that 3PL is still in its early stage in India. The author had to call the potential respondents more than once, sometimes 4-5 times, to remind them to send back the filled-in questionnaires. But despite all the efforts, the author could finally receive 32 filled-in questionnaires, which corresponded to about 16% response rate. Had all the potential respondents, who promised to send back the filled-in questionnaires, responded, the response rate would have been extremely good. However, compared with the data on response rates available for other similar surveys, the 16% response rate is perceived to be reasonably good6. One of the reasons why a higher response rate could not be realized might be the fact that many

8

of the potential respondents were freight forwarders and custom house agents with very small-scale operations for whom the significance of 3PL was irrelevant. The author could convince some of them over phone, but the rest of them chose not to respond. The author also personally visited some of the respondents to have a discussion on the data they provided and the 3PL scenario in India, in general. Results of the Survey Based on the data provided by the respondents, an overall analysis of the respondent firms was carried out. Given below is an analysis of data collected, followed by a summary of findings. Analysis of data A section-wise analysis of data is given below. Section I: General information Most of the respondents’ headquarters are located in National Capital Region (NCR) (32%), Mumbai (25%) and Chennai (22%). The distribution is shown in Exhibit 1. 56% of the respondents have global tie-ups and 41% have operations outside India. Exhibit 2 shows the percentage of respondents having operations outside India in different continents. As regards to the year of starting 3PL operations, 29 out of 32 firms provided data on this. According to the data given, 24% of the respondents started their 3PL operations in 2000 or later and 59% started operations in the last 10 years. This shows the relatively young age of the Indian 3PL providers. Exhibit 3 shows the distribution of the respondents in terms of the year of starting 3PL operations. With respect to the number of employees, 72% of the respondents have less than 200 employees, but at the same time 22% have 900 or more employees, which shows the fragmented nature of the respondent firms. Exhibit 4 shows the distribution of the respondents in terms of the number of employees.

Exhibits 1, 2, 3 and 4 around here Section II: Financial information Out of 32 respondents, 23 furnished financial information. The remaining 9 respondents did not want to divulge financial data. Out of these 23 firms, 13 (56.5%) were only 3PL providers, i.e., their 3PL turnovers and total turnovers were the same whereas the remaining 10 (43.5%) had other business interests apart from 3PL. The total 3PL turnover of these 23 firms in 2003-2004 was Rs. 1187.66 crore. The distribution of these firms according to their 3PL turnovers in 2003-2004 is shown in Exhibit 5. It can be seen that 62% of the firms earned less than Rs. 10 crore and for 8% of the firms, the 3PL turnover exceeded Rs. 100 crore. It was also seen from the data that 20% of the firms contributed to about 90% of the total 3PL turnover of the firms in 2003-2004, which again shows the market is fragmented. Exhibit 6 shows the year-on-year growth rates of the total 3PL turnovers of the firms in the last four years. In 2003-2004, the total 3PL turnover grew by 18.25%, which is in line with the industry forecast for 3PL growth of 20%. However, the 3PL turnover as a percentage of the total turnover was found to steadily decrease over the years probably because the other businesses that the 10 firms were in grew faster than their 3PL businesses. It is to be mentioned here that out of 23 firms that furnished financial information, 2

9

firms started operations in 2003-2004. Hence 3PL growth rates for these firms could not be computed. Among the remaining 21 firms, the maximum 3PL growth rate observed in 2003-2004 was 153.16% and the minimum 3PL growth rate was –11.74% (negative growth). 14 firms (66.67%) recorded a higher 3PL growth rate than the overall 3PL growth rate of the firms in 2003-2004, i.e., 18.25%.

Exhibits 5 and 6 around here Section III: Services offered Exhibit 7 shows the services offered by at least 50% of the respondents. The top slot is occupied by warehousing, which is offered by 84% of the respondents, followed by Full Truck Load (FTL) transportation (81%) and freight forwarding (75%). Other services offered by at least 50% of the respondents and the corresponding percentages of respondents offering these services are the following: Less than Truck Load (LTL) transportation (69%), multi-modal transportation (69%), consulting (69%), customs clearance (69%), freight consolidation (66%), reverse logistics (59%), break bulk operations (56%), distribution (53%) and freight brokerage (53%). An exhaustive list of services and the corresponding percentages of respondents offering these services are shown in the Appendix. Exhibits 8 and 9 show the services offered by the respondents engaged in reverse logistics and consulting activities, respectively. Exhibit 8 shows that 68% of the respondents engaged in reverse logistics activities handle the return of products damaged during transportation. Return of packaging, containers etc. and warranty returns/returns for repair are each handled by 63% of the respondents. Other reverse logistics services and the corresponding percentages of respondents offering these services are the following: product returns for recovery/recycling/remanufacturing (53%), product recalls by manufacturers (47%), return of products shipped in excess (37%), return of seasonal products (37%), return of products whose expiry dates are over (32%) and return of products after the expiry of the lease/rent period (16%). For consulting services, we observe from Exhibit 9 that 82% of the respondents engaged in consulting activities offer logistics and supply chain consulting. 45% and 41% of the respondents offer consulting services for optimizing the modes of transportation and distribution network planning, respectively. Other consulting services and the corresponding percentages of respondents offering these services are the following: supply chain strategy development (32%), supply chain reengineering (32%), Fourth-Party Logistics (4PL)10 (32%), site selection for facility location (27%), logistics audit (14%), customs clearance (9%), education and training (5%) and risk management (5%).

Exhibits 7, 8 and 9 around here Section IV: Industries served Exhibit 10 shows the industries served by at least 50% of the respondents. The leading industry is pharmaceuticals, which is served by 72% of the respondents, followed by automotive and engineering/industrial, each of which is served by 66% of the respondents. Other industries and the corresponding percentages of respondents serving these industries are the following: textiles/apparel (59%), computers and electronics (53%), telecommunication (50%), FMCG (50%) and consumer durable goods (50%). An exhaustive list of industries and the corresponding percentages of respondents serving these industries are shown in the Appendix.

10

The respondents mentioned many major Indian manufacturers as their customers. As competitors, they mentioned other 3PL providers, especially the multi-national logistics companies, which give them a tough competition in the freight forwarding business.

Exhibit 10 around here Section V: Asset base and volume of cargo movement 50% of the respondents have their own vehicles while the rest outsource their requirements. Among the respondents owning vehicles, 43% have substantial capacity (in high 100’s and 1000’s of tons), 13% have medium capacity (in the lower side of 100’s of tons) and the rest 44% have low to medium capacity (in 10’s of tons). With respect to the material handling equipment, 38% of the respondents own them while the rest outsource their requirements. Among the respondents owning material handling equipment, 42% have substantial capacity, 8% have medium capacity and the rest 50% have low capacity. 59% of the respondents own their warehouses while the rest outsource. Exhibit 11 shows the distribution of the owners based on the capacities of their warehouses. We can see from the exhibit that 47% of the owners have warehouse capacities less than 30,000 sq. ft., but at the same time 26% of them have warehouse capacities more than 500,000 sq. ft. With respect to the volume of cargo handled, 21 firms provided data for 2003-2004. The total volume of cargo handled by these firms in 2003-2004 was 32,79,416 tons. Exhibit 12 shows the year-on-year growth rates of cargo volumes handled by these firms in the last four years. In 2003-2004, the cargo volume growth rate was 20.33%, Among the 15 firms for which growth rates in 2003-2004 could be computed, the maximum growth rate recorded was 166.67% and the minimum growth rate recorded was –27.55% (negative growth). The growth rates for 6 firms (40%) exceeded the overall growth rate in 2003-2004, i.e., 20.33%.

Exhibits 11 and 12 around here Section VI: Extent of coverage Exhibit 13 shows the extent of regional coverage by the respondents. The northern part of the country is covered by the maximum (81%) number of respondents, followed by the southern (78%) and western (69%) regions. The eastern, central and north-eastern regions are covered by 47%, 44% and 34% of the respondents, respectively. Exhibits 14 and 15 show the distributions of the respondents, based on the data provided by 29 respondents, in terms of the number of states covered and the number of branches and offices, respectively. From Exhibit 14 we can see that 45% of the respondents cover less than 10 states, but at the same time 24% of the respondents cover 25 or more states. Similarly, Exhibit 15 shows that 70% of the respondents have 10 or less number of branches and offices while 20% of them have 200 or more branches and offices. These figures again indicate the fact that the Indian 3PL market is still fragmented.

Exhibits 13, 14 and 15 around here Section VII: Information systems Exhibit 16 shows that 78% of the respondents use mobile communications, followed by EDI (56%), bar coding (31%), satellite-based tracking (9%), GPS (9%) and GIS (3%) in terms of

11

usage. Exhibit 17 shows the distribution of the respondents in terms of per cent computerisation of operations. The average investments by respondents in information systems as a % of total investments in the last five years are shown in Exhibit 18. The upward trend in investments in information systems is worth to note.

Exhibits 16, 17 and 18 around here The respondents reported the use of logistics softwares such as WMS, TWL, GEMS, Ice Gate, Logistics Plan, Express IT, i2, Baan, Win Cargo, Red Berry, Agrani etc., databases such as Oracle, DB2, SQL, FoxPro, MS Access, Ex, Tally etc., ERP packages such as SAP, Oracle, MfgPro, JD Edwards etc. and web-based applications such as Intranet, Java, VSAT, GPS, Track- n-Trace etc. They also reported using customised and in-house developed software packages. Section VIII: Threats to the growth of the 3PL industry in India Exhibit 19 shows the average scores of the threats to the growth of 3PL in India. Poor transportation and communications infrastructure was identified by the respondents as the most important criterion in this respect with the lowest average score (2.06). It is followed by the lack of trust and awareness (2.29), diseconomies of scale due to differential sales tax structures (2.42), limited value-added services (2.58) and imposition of service tax (3.03). These five criteria were given by the author. The respondents also mentioned the lack of skilled manpower, lack of good 3PL providers, high costs of operations and government control as other deterrents to the growth of 3PL in India.

Exhibit 19 around here Section IX: Opportunities for the growth of the 3PL industry in India Exhibit 20 shows the average scores of the opportunities for growth of 3PL in India. The respondents identified the increasing awareness towards logistics outsourcing as the most important factor in this respect with the lowest average score of 1.42. This is followed by the demand for more specialized services as a result of a steadily increasing GDP (2.13), development of infrastructure (2.16), uniform VAT regime likely to be effective from April 1, 2005 (2.16) and possibility of investments by global 3PL providers (2.84). Some of the respondents also mentioned about government support towards the growth of 3PL in India.

Exhibit 20 around here Section X: Size of the 3PL market in India and growth forecasts That 3PL in India is still in its infancy is evident from the estimates of the size of the 3PL market in India given by the respondents. The estimates varied from a few hundred crores of rupees to several thousand crores of rupees pointing to the fact that most of the respondents do not have a clear idea about the size of the market. If it is assumed that the bigger players have a better idea about the size of the market, then according to the estimates given by them, the size of the 3PL market in India should be at least Rs. 5000 crore. Based on the data provided by 26 respondents, it is estimated that the average annual growth of the 3PL market in India for the next 5 years would be 18.21%, and the average annual growth of the 3PL business of the respondent firms for

12

the next 5 years would be 25.58%. Out of these 26 firms, 16 firms (61.5%) are likely to exceed the average annual growth of 3PL in India estimated by the respondents, i.e., 18.21%. Summary of findings It is clear from the survey that the 3PL market in India is relatively new and fragmented where a few large players dominate the entire market. One of the most important factors plaguing the growth of 3PL in India is poor infrastructure, as also evident from the respondents’ feedback. Slow movement of cargo and congestion at the seaports due to insufficient infrastructure, bureaucracy, red-tapeism and delay in government clearances coupled with unreliable power supply and slow banking transactions add to the woes of the exporters and make it difficult for them to meet the deadlines for their international customers. To expedite shipments, the exporters have to book their consignments as airfreight rather than seafreight, which adds to the cost of the goods making them uncompetitive in the international market. Many large shipping liners avoid Indian ports in order to avoid delays in loading and unloading, and hence the Indian exporters have to resort to transshipments at ports like Singapore, Dubai and Colombo, which again adds to the cost of shipments and delays the delivery of export goods. In domestic transportation of goods by rail, which accounts for 35% of the total cargo movement, Container Corporation of India (CONCOR), a subsidiary of Indian Railways, has a monopoly. The global 3PL providers have to depend on CONCOR for containerised transportation of goods by rail from one part of the country to another. This adds to the transaction costs of the service providers, and also affects their service. Moreover, due to insufficient number of rakes and Inland Container Depots (ICD), CONCOR is not being able to manage the growing volumes of exports from the country. All these facts ultimately point to the suggestion that the monopoly of CONCOR should be done away with and private participation in development of infrastructure should be allowed11. Another important factor responsible for the slow growth of 3PL in India so far, perceived by the respondents, is the lack of trust and awareness among the Indian firms. On the one hand, the Indian firms have not been aware of the benefits of 3PL. On the other hand, they do not trust the 3PL providers and do not want to share with them sensitive organisational information. One Delhi-based respondent said during a personal interview that many firms do not want to outsource logistics activities because of vested interests. They always want to put pressure on the transporters for material benefits which otherwise they could not do with the 3PL providers. They do not want to interact with knowledgeable persons. Another disadvantage of the 3PL business is that it is a high-cost, low-margin business. Different sales tax requirements in different states, numerous other taxes, octrois, multiple check posts, police harassment and bribes paid by the truckers add to the woes of the 3PL providers. The same Delhi-based respondent mentioned that the money that the truckers have to pay as bribes at different points on the route is a substantial portion of the shipment cost. For example, he pointed out, if a shipment from Delhi to Mumbai by a 9-ton truck costs Rs. 9000, Rs. 2000 or about 22% has to be paid as bribes along the route. He also mentioned that the clients look for quality assets owned by the service providers and prefer to deal with a single service provider rather than many for fulfilment of logistics needs. According to another Mysore-based respondent, the 3PL business is operating with 5-year old costs and the profit margins are wafer thin. Apart from quality assets, the clients also look for world class information systems, but they do not want to

13

match them with increased billings; rather they give low priority to payments adequately supplementing their working capital. The Indian 3PL providers are facing stiff competition from the multi-national 3PL providers, especially in international freight movements. The multi-national 3PL providers are mainly into freight forwarding, but they are also into domestic logistics where they have made little or no investment. They outsource all the domestic logistics activities like transportation and warehousing to small operators so that they can squeeze cost advantage out of them. This also happens because right now no information on the fragmented logistics market is readily available. With respect to freight forwarding, the multi-national 3PL providers enjoy several advantages over the Indian 3PL providers. Because of their size and operations in many countries, they are able to offer lower freight rates. Also, their multi-national clients prefer to deal with a single service provider across all the nations. As such, since Samsung is dealing with Bax Global in other countries like the U.S., it also uses Bax Global’s service in India. Since the multi-national 3PL providers have financial muscle, they can give extended credit to their clients, which the Indian 3PL providers cannot give as they do not have volumes as well as access to cheaper capital. Finally, most of the shipments from India are on the FOB (Free on board) basis where the freight is paid by the client at the destination. The client, in this case, specifies the forwarder for shipping of cargo, and the multi-national 3PL providers through their contact with the clients are able to corner most of the business from India. This is sort of a non-tariff barrier imposed on India by the developed nations, opined a Chennai-based respondent. Despite the bottlenecks mentioned above, the Indian 3PL business is poised to grow at about 20% in the coming years, as evident from the respondents’ feedback. The Indian firms have started to realise the benefits of 3PL. By outsourcing logistics activities they are able to not only reduce costs and focus on core competencies but also receive services from specialists in this field. One point worth mentioning here is that 53% of the respondents offering reverse logistics services are engaged in the return of products for recovery, recycling and remanufacturing. This is especially important in the context of growing awareness towards environmental pollution and stringent government regulations in many of the developed nations that hold manufacturers responsible for taking back their products and packaging after use for recovery or disposal. Though India is lagging way behind in this respect, the survey indicates that at least some initiatives towards product recovery and recycling have been started. Initiatives for infrastructure development such as the golden quadrilateral project have been undertaken by the government. In the recently announced Foreign Trade Policy 2004-2009, it has been decided that Free Trade and Warehousing Zones (FTWZ) will be established in line with Special Economic Zones (SEZ). The policy allows 100% FDI in these FTWZs, which would create the necessary trade-related infrastructure to facilitate the import and export of goods and services12. However, to expedite the development process and to relieve the government exchequer from bearing the huge expenses towards developing world class information systems and automating transportation and warehousing facilities, private investments in the infrastructure sector should be permitted. Today, in order to make the supply chain more flexible and responsive to customer needs, significant investments in technologies such as Radio Frequency Identification Devices (RFID) are required to track shipments in real

14

time. Arvind Mills, Gillette and Barista use these technologies to switch the already-shipped consignments between locations based on changing demand patterns13. Recently a few multi-national 3PL providers have invested in domestic logistics. Sembcorp Logistics (India) Pvt. Ltd., a 100% subsidiary of Sembcorp Logistics, Singapore, started their Indian operations in mid 1990’s and since then has heavily invested in assets. The company controls over 1 million sq. ft. of warehouse space, which is available for sharing on a pay-as-you-use basis. Menlo Worldwide, based in Redwood City, California, U.S., which is managing the factory and spare parts stores of General Motors in India, has been granted permission by the Foreign Investment Promotion Board (FIPB) to offer Vendor Managed Inventory (VMI) services. The company also handles over-dimensional cargo and offers tailor-made services to suit specific industry needs14. Recently DHL, the world’s fourth largest logistics company, has taken over Blue Dart, a leading express cargo and logistics service provider of India. DHL, so far a sales ally of Blue Dart for international distribution of express cargo, will now be able to provide domestic logistics services through the network of Blue Dart. The Indian logistics sector will get a boost if more and more multi-national 3PL providers invest in domestic logistics. Conclusion Third-party logistics or 3PL is growing around the world as more and more corporations prefer to outsource their logistics operations to the 3PL or logistics service providers. The 3PL market in India is still in its infancy and is highly fragmented. However, there is a high potential for growth of the market, which was evident from the survey of the Indian logistics service providers. The respondents held the poor infrastructure and the lack of awareness and trust among the Indian firms responsible for the low growth of 3PL in India so far. However, more and more Indian firms are becoming aware of the benefits of 3PL and outsourcing a part or whole of their logistics-related activities to the service providers. With respect to developing the infrastructure, the Indian Government has already taken some initiatives, which may be facilitated by allowing private investments in this sector. The Government should identify investments in infrastructure that will lead to the growth of 3PL, as one of the thrust areas as this would not only contribute to the GDP, but also generate employment. The policies and procedures also have to be simplified to speed up the process of service delivery. That the Government is moving in the right direction and the Indian firms are becoming more knowledgeable about 3PL were evident from the respondents’ feedback as these factors along with a steady growth in the GDP were identified by the respondents as opportunities for growth of 3PL in India. Acknowledgement I express my deep gratitude to Mr. Sharad Jobanputra of Fairdeal Distribution, Mr. S. Rajkumar of Sequel Logistics, Mr. S. M. Ganatra of SMG Spacers, Mr. S. L. Ganapathi and Mr. Vineet Garg of Logistics Plus, Mr. C. D. Bhandari of BIC Logistics, Mr. P. Ravi Menon of Interfreight Services and Mr. G. Ranganathan of Friendly Logistics for providing me with valuable information on the 3PL scenario in India. I would also like to thank all the respondents of the survey.

15

Appendix List of services and the corresponding percentages of respondents offering these services

Service Respondent (%)

Service Respondent (%)

Service Respondent (%)

Warehousing 84 Distribution 53 Order processing 31 FTL 81 Freight brokerage 53 Payment collection 31 Freight fwd 75 Cargo insurance 47 Systems support 31 LTL 69 Customer service 41 Sales promotion 28 Multi-modal 69 Packaging/Labeling 38 Order fulfilment 25 Consulting 69 Inventory mgmt 34 Vendor management 22 Customs clr 69 Import/export mgmt 34 Fleet management 19 Freight cons 66 Invoicing 34 Assembly/Installation 19 Reverse logistics 59 NVOCC15 31 Chartering of vessels 13 Break bulk ops 56 Port operations 31 Cross docking16 9 List of industries and the corresponding percentages of respondents serving these industries

Industry Respondent (%)

Industry Respondent (%)

Industry Respondent (%)

Pharmaceuticals 72 FMCG 50 Oil and gas 16 Automotive 66 Consumer durable 50 Bank/Financial Inst. 6 Engg/Industrial 66 Food & beverages 44 Precious metals 6 Textiles/Apparel 59 Chemical/Fertilizer 38 Defense 3 Computers/Elect. 53 Retail 31 Dry flower 3 Telecommunication 50 Healthcare 28 Poultry 3

16

References and Notes 1. Lynch, C F, 2002, “3PLs: the state of outsourcing”, Logistics Management, Vol 41, No 6, pp

T47-T50. 2. The Economic Times, October 7, 2003. 3. The Economic Times, December 18, 2003. 4. Foster, T A and R Armstrong, 2004, “Top 25 third-party logistics providers extend their

global reach”, Global Logistics and Supply Chain Strategies, Web magazine available at http://www.glscs.com.

5. Businessline, February 27, 2004. 6. Sahay, B S and R Mohan, 2004, “Third-party logistics practices: an Indian perspective”,

Unpublished. 7. Foster, T A, 2004, “Global trade drives third-party logistics providers’ expansion”, Global

Logistics and Supply Chain Strategies, Web magazine available at http://www.glscs.com. 8. The Economic Times, September 23, 2004. 9. http://www.worldbank.org. 10. Fourth-Party Logistics or 4PL refers to the service rendered to manage the 3PL providers on

behalf of a company. A 4PL provider does not necessarily have to be a 3PL provider. It might, for example, be a consulting firm brought in to provide these management services.

11. The Economic Times, October 8, 2004. 12. “Foreign Trade Policy 2004-2009: Preparing India for the world”, Cargo Times, Vol 4, No 7,

September 2004, pp 5-6. 13. “3-D Logistics”, Cargo Times, Vol 4, No 7, September 2004, p 42. 14. “Menlo Worlwide: Double celebrations”, Cargo Times, Vol 4, No 7, September 2004, p 8. 15. NVOCC or Non-Vessel Operating Common Carrier is a wholesaler of freight. The operator

obtains bulk rates from the carriers and sells the same to the shippers and other small freight forwarders at a premium. His risk, however, is to ensure that the shipment finally tendered to the carriers exceeds a minimum load. This is also advantageous to the shippers in the sense that if they go directly to the carriers, they have to pay higher freight rates.

16. Cross docking refers to the shipment of goods from the ports directly to the destinations without storing, bulk breaking or routing through a hub for consolidation, thus reducing the lead time for shipping.

17

Exhibit 1: Location of HQ of the respondents

32%

25%22%

9%

6%

3%

3%

NCRMumbaiChennaiKolkataAhmedabadMysoreSecunderabad

Exhibit 2: % of respondents having operations outside India in different

continents67

42

42

8

Asia

N.A.

Europe

Africa

Exhibit 3: Year of starting 3PL operations

24%

35%17%

10%

7% 7%2000 and after1995-19991990-19941985-19891980-1984Before 1980

18

Exhibit 4: Number of employees

63%9%

6%

16%

3%

3% 100 or less

Between 100 & 200

Between 500 & 600

Between 900 & 2000

Between 2000 & 3000

More than 4000

Exhibit 5: 3PL turnovers in Rs. crores in 2003-04

62%17%

13%4% 4% Less than 10

Between 10 & 20

Between 20 & 100

Between 100 & 200

More than 200

Exhibit 6: Year-on-Year 3PL growth rate

5.6410.1

14.0118.25

05

101520

2000-2001 2001-2002 2002-2003 2003-2004

Year

Gro

wth

rate

(%)

over

last

yea

r

19

Exhibit 7: Services offered by at least 50% of the respondents

84

81

75

69

69

69

69

66

59

56

53

53

Warehousing

FTL

Freight Fw d

LTL

Multi Modal

Consulting

Customs Clr

Freight Cons

Reverse Logistics

Break Bulk Ops.

Distribution

Freight Brokerage

Exhibit 8: Services offered by respondents (%) engaged in reverse logistics activities

68

63

63

53

47

37

37

32

16

Damaged product

Pkg./Container

Warranty/repair

Product recovery

Product recall

Shipped in excess

Seasonal product

Expiry date over

Lease/rent over

20

Exhibit 9: Services offered by respondents (%) engaged in consulting activities

82

45

41

32

32

32

27

14

9

5

5

L&SC Consult.

Opt. Trans. Mode

Dist. Net. Plng.

SC Strategy Devl.

SC Reengg.

Fourth-party Log.

Site Selection

Logistics Audit

Customs Clr.

Education/Trg.

Risk Mgmt.

Exhibit 10: Industries served by at least 50% of the respondents

72

66

66

59

53

50

50

50

Pharma

Auto

Engg/Ind

Tex/App

Comp/Elec

Telecom

FMCG

Durables

21

Exhibit 11: Warehouse capacity (sq. ft.) of owners

26%

16%11%

47%

At least 500,000

Between 100,000& 500,000Between 30,000& 100,000Less than 30,000

Exhibit 12: Year-on-Year cargo volume growth rate

6.479.91 10.02

20.33

05

10152025

2000-2001 2001-2002 2002-2003 2003-2004

Year

Gro

wth

rate

(%)

over

last

yea

r

Exhibit 13: Coverage of the respondents (%)

81

78

69

47

44

34

North

South

West

East

Central

North-east

22

Exhibit 14: Number of states covered by the respondents

24%

14%17%

45%25-2920-2410-19<10

Exhibit 15: Number of branches and offices of the respondents

3% 7% 10%

3%

7%70%

More than 1000

Between 400 & 500

Between 200 & 300

Between 50 & 100

Between 10 & 50

10 or less

Exhibit 16: Information systems usage by the respondents (%)

78

56

31

9

9

3

Mobile com.

EDI

Bar coding

Satellite tracking

GPS

GIS

23

Exhibit 17: Per cent computerisation of operations

32%

36%

20%12% 90 or more

Between 70 & 90Between 50 & 70Between 20 & 30

Exhibit 18: Investment in information systems as a % of total investments

8.17 10.38 11.8816.13 16.5

05

101520

1999-2000

2000-2001

2001-2002

2002-2003

2003-2004

Year

Inve

stm

ent (

%)

Exhibit 19: Average scores of threats to the growth of 3PL in India

2.06

2.29

2.42

2.58

3.03

Poor infra.

Lack ofawareness

Diseco. ofscale

Ltd. valueadds

Service tax

24

Exhibit 20: Aveage scores of opportunities for growth of 3PL in India

1.42

2.13

2.16

2.16

2.84

Awareness

GDP growth

Infra. devl.

VAT

FDI