3PL Report - Frost & Sullivan

www.frost.com

Strategic Analysis of the Third Party Logistics

Markets in India

4C77-18

#4C77-18 © 2006 Frost & Sullivan www.frost.com

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Table of Contents

C h a p t e r 1

Executive Summary

Introduction and Overview 1-1

Introduction to Logistics Market in India 1-1

Introduction and Overview of the 3PL Market in the India 1-3

Market Overview and Research Findings 1-3

Total 3PL Market in India Size and Forecasts 1-3

Opportunities for the 3PL Service Providers in India 1-4

Competitive Analysis 1-4

Industry Challenges for the 3PL Market in India 1-4

Drivers for the 3PL Market in the India 1-5

Restraints for the 3PL Market in India 1-5

Implications of VAT on 3PL in India 1-5

Strategic Conclusions 1-6

C h a p t e r 2

Strategic Analysis of Total 3PL Market in India

Introduction 2-1

Introduction and Overview of the Indian Logistics Market 2-1

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Introduction to 3PL in India 2-4

Evolution of 3PL Market in India 2-5

Awareness and Perception of 3PL in India 2-6

Scenario of the Indian 3PL Market 2-7

Overall 3PL Usage in the Logistics Functions 2-7

3PL Usage in Transportation 2-9

3PL Usage in Warehousing 2-10

3PL Usage in Freight Forwarding 2-12

3PL Usage in MIS and Other Value-added Services 2-12

Market Size and Revenue Forecasts 2-13

The Total Logistics Market in India 2-13

Size of the 3PL Market in the India 2-14

Growth History of 3PL Market in India 2-15

Estimated Share of the 3PL Market 2-15

Revenue Forecasts 2-16

Revenue Forecasts Breakdown by Different Logistics Functions 2-18

Revenue Forecasts for 3PL in Transportation Function 2-18

Revenue Forecasts for 3PL in Warehousing Function 2-19

Revenue Forecasts for 3PL in Freight Forwarding Function 2-21

Revenue Forecasts for 3PL in MIS and Other Value-Added Services 2-22

Industry Challenges and Market Drivers and Restraints 2-24

Industry Challenges 2-24

Geographical Size and Diversity 2-24

Stiff Competition and Pricing Strategies 2-25

Multinational 3PL Companies are at a Disadvantage Compared to the Indian Companies 2-25

Integrating Supply Chains and Providing Visibility Along the Entire Chain 2-25

Security Concern is a Critical Issue 2-25

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Market Drivers 2-26

Growth of Multinational Operations Demand Professional Logistics Management 2-26

Growing Inclination to Outsource Logistics to Specialists 2-27

Economic Growth Across Different Sectors Necessitates Smooth Flow of Supply Chain 2-28

Infrastructure Development Facilitates Logistics 2-28

Implementation of an All India VAT System 2-29

Declining 3PL Rates is Likely to Cause More Outsourcing 2-29

Market Restraints 2-29

High Cost of Logistics in India 2-30

Existence of Infrastructure Bottlenecks 2-30

Non-Uniform Implementation of VAT,Complex Laws and Sales Tax Regulations are not Favored by Compines 2-30

Outsourcing to a 3PL Service Provider Attracts a Service Tax 2-31

Competition from the Unorganized Segment 2-31

Major End-Users of 3PL in India 2-31

Implications of VAT on 3PL 2-32

Introduction to VAT 2-32

Challenges for 3PL Service Providers due to VAT's impact 2-33

Reorganization of IT Infrastructure may be Complicated 2-34

Maintaining Large Volumes of Transactional Records Could be a Difficult Task 2-34

Nonuniformity of VAT Implementation Across the Nation and the Co-existence of VAT with the Central Sales Tax

system is Complicating 2-34

Competition from the Unorganized Segment Poses a Significant Challenge to the Growth of these Companies 2-35

Opportunities for 3PL Service Providers due to VAT's impact 2-36

C h a p t e r 3

End-User Analysis—Overview of 3PL Needs and Practices in India

Overview of 3PL Needs and Practices in India 3-1

3PL Usage in the Indian Automotive and Auto Components Sector 3-1

3PL Usage in the Indian IT Hardware and Electronics Sector 3-4

3PL Usage in the Indian FMCG Sector 3-6

3PL Usage in the Indian Pharmaceuticals Sector 3-8

3PL Usage in the Indian Retail Sector 3-10

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C h a p t e r 4

Competitive Analysis of the 3PL Providers in Indian Market

Industry Size 4-1

Industry Size in Terms of Number of Companies 4-1

Industry Life Cycle 4-2

Current Status of the Industry Life Cycle 4-2

Current Status of Market Life Cycle 4-4

Market Share Comparison and Breakup 4-4

Competitive Scenario 4-4

Services Comparison 4-7

National 3PL Service Providers 4-7

Regional 3PL Service Providers 4-9

Local 3PL Service Providers 4-9

Profiles of the Major 3PL Service Providers in India 4-9

AFL Logistics 4-9

DHL 4-11

Dynamic Logistics 4-12

GATI 4-14

Geo Logistics 4-15

Om Logistics 4-16

Patel Logistics 4-18

Reliance Logistics 4-19

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Safexpress 4-20

SembCorp Logistics 4-21

Take Solutions 4-23

TCI Supply Chain Solutions 4-24

Total Logistics 4-25

Transystem Logistics International 4-26

TVS Logistics 4-27

Clientele: 4-27

C h a p t e r 5

Recommendations and Growth Strategies for 3PL Providers in India

Opportunities for 3PL Service Providers in India 5-1

Types of Services with Potential 5-1

Potential of Services during the Forecast Period 5-2

Business Model 5-4

Suggested Business Model 5-4

Pricing and Positioning 5-4

Suggested Pricing Strategy 5-4

Suggested Positioning Strategy 5-4

Strategic Alliances Joint Ventures and Partnerships 5-5

Suggested Strategy for Forming Alliances Joint Ventures and Partnerships 5-5

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C h a p t e r 6

Database of Key Industry Participants

Market Participants—3PL Service Providers 6-1

C h a p t e r 7

Decision Support Database

Comparitive Tabulation of Infrastructure and Industry Figures 7-1

Tabulation of Infrastructural Figures 7-1

Tabulation of Major Industry Sectors Size 7-4

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List of Figures

C h a p t e r 2


2-1 Total Third Party Logistics Market:

Breakup by Mode of Freight (India), 2005 2-1

2-2 Total Third Party Logistics Market : Penetration by Logistics Function (India), 2005 2-7


Revenue Breakup by Type of Logistics Function (India), 2005 2-14


Estimated Shares (India), 2005 2-15


Revenue Forecasts (India), 2002-2012 2-17


Revenue Forecasts for Transportation Logistics Function (India), 2002-2012 2-18


Revenue Forecasts for Warehousing Logistics Function (India), 2002-2012 2-20


Revenue Forecasts for Freight Forwarding Logistics Function (India), 2002-2012 2-21


Revenue Forecasts for Value-added Services and Other Services Logistics Functions

(India), 2002-2012 2-23

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Impact of Top Industry Challenges (India), 2006-2012 2-24


Market Drivers Ranked in Order of Impact (India), 2006-2012 2-26


Market Restraints Ranked in Order of Impact (India), 2006-2012 2-29


Top End-user Sectors (India), 2005 2-31

C h a p t e r 3


C h a p t e r 4


4-1 Third Party Logistics Market:

3PL Industry Structure by Type of Service Provider (India), 2005 4-1


Revenue Breakup by Type of 3PL Service Provider (India), 2005 4-5


Revenue Share Breakup Between National 3PL Service Providers (India), 2005 4-6


Services Comparison between National 3PL Service Providers (India), 2005 4-7

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C h a p t e r 5

Recommendations and Growth Strategies for 3PL Providers in India


Top Ten 3PL Services with High Growth Potential (India), 2005 5-1


Top Ten 3PL Services Ranked in Order of Potential (India), 2006-2012 5-2

C h a p t e r 7

Decision Support Database

7-1 Decision Support Database:

Tabulation of Economic and Infrastructural Figures 7-2

7-2 Decision Support Database:

Value of Major Industrial Sectors in India, as of 2005 7-4

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List of Charts

C h a p t e r 1

Executive Summary

1.1 Third Party Logistics Market:

Market Attractiveness Index by Function (India), 2005 1-2

C h a p t e r 2


2.1 Total Third Party Logistics Market:

Breakup by Mode of Freight (India), 2005 2-2

2.2 Total Third Party Logistics Market : Penetration by Logistics Function (India), 2005 2-7


Revenue Breakup by Type of Logistics Function (India), 2005 2-14


Estimated Share (India), 2005 2-16


Revenue Forecasts (India), 2002-2012 2-17


Revenue Forecasts for Transportation Logistics Function (India), 2002-2012 2-19


Revenue Forecasts for Warehousing Logistics Function (India), 2002-2012 2-20

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Revenue Forecasts for Freight Forwarding Logistics Function (India), 2002-2012 2-22


Revenue Forecasts for Value-Added Logistics Services and Other Services Logistics Functions

(India), 2002-2012 2-23

C h a p t e r 3



Logistics Model followed by Leading MNC Automakers (India), 2005 3-1


Standard Model of Goods Flow in the IT Hardware and Electronics Sector (India), 2005 3-4


Standard Model of Goods Flow in the FMCG Sector (India), 2005 3-6


Standard Model of Goods Flow in the Pharmaceuticals Sector (India), 2005 3-8


Logistics Model followed Leading Retailers (India), 2005 3-10

C h a p t e r 4



3PL Industry Structure by Type of Service Provider (India), 2005 4-2


3PL Industry Life Cycle (India), 2000-2015 4-3

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Market Life Cycle (India), 2000-2015 4-4


Revenue Breakup by Type of Service Provider (India), 2005 4-5


Revenue Share Breakup Between National 3PL Service Providers (India), 2005 4-6

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1Executive Summary

I n t r o d u c t i o n a n d O v e r v i e w

Introduction to Logistics Market in India

The logistics market in India is fragmented predominantly due to the large presence of unor-

ganized service providers. Logistics, which is one of the lifelines of a country the size of

India, has been so far considered as a secondary activity. The industry broadly consists of

freight consolidators, transporters, warehousing specialists, and organized third party logis-

tics (3PL) service providers, in the increasing order of value addition to the service.

Roads carry the bulk of the freight in India. The roads in India have a history of being unsafe

and in very bad condition. This is likely to change with the construction of the Golden Quad-

rilateral and North-South-East-West (NSEW) highway networks, traversing the entire

country. The highway infrastructure is highly strained, comprising around 1.4 percent of the

total road network in India, carrying in excess of 50 percent of the country's total freight.

Roads are flexible with easy to own assets and door-delivered consignments. Rail freight

comprises around 670 million tones, which is around 33 percent of all domestic traffic in

India. Even though rail freight is more cost effective in terms of cost per unit distance and per

unit weight, the efficiency of the rail freight system in India has for long been low and it has

been looked down upon as a secondary freight mode. With the Indian Government

announcing plans to open up the containerized rail freight sector to private operators,

companies such as APL Logistics, Maersk Logistics, Gateway Distriparks, Central Ware-

housing Corporation, JM Baxi group, Adani Logistics, and Reliance Logistics are expected to

foray into this segment. The barriers to entry for providing this service are rather low and

intense competition is likely to be witnessed.

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The largely unorganized segment of the logistics industry in India poses a formidable chal-

lenge to companies in the organized segment. The unorganized segment service providers

have lesser overhead costs and are hence in a position to provide extremely competitive rates.

This is expected to have a considerably large impact in the future, posing a challenge espe-

cially to the 3PL service providers. Entry barriers too are low, leading to the possibility of

intensified competition even in the organized sector. Complex tax laws and infrastructure

bottlenecks too are challenging issues to be dealt with.

The growth of in the Indian economy, especially in the manufacturing sector is one of the key

growth drivers for the logistics industry in India. Apart from this, sincere initiatives by the

Government to iron out wrinkles in the logistics infrastructure may also drive the growth in

this sector expected to grow at a compound annual growth rate (CAGR) of 6.4 percent from

2005 to 2012.

Chart 1.1 shows the Market Attractiveness Index by Function for the Third Party Logistics

Market (India), 2005.

C h a r t 1 . 1

Third Party Logistics Market: Market Attractiveness Index by Function (India), 2005

Note: All figures are rounded. Source: Frost & Sullivan

-200.0

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

Market Attractiveness (Based on CAGR)

Mar

ket S

tren

gth

(Bas

ed o

n M

arke

t Si

ze in

200

5) U

S $M

illio

n

Transportation

Warehousing

Freight Forwarding

MIS and Other Value-added Services


Introduction and Overview of the 3PL Market in the India

Companies in India generally outsource only a part of their supply chain requirements to a

3PL service provider. Only a small fraction of companies outsource entirely to a 3PL service

provider. Most of these companies are multinationals that entered the country and didn't

have an established network and have to outsource their logistics due to the lack of assets.

The degree and nature of outsourcing of logistics to a 3PL service provider varies signifi-

cantly between verticals and depends greatly on the nature of the company. In the automotive

sector, the trend of end-to-end outsourcing is beginning to significantly catch up as compa-

nies have realized the benefits of concentrating on core competencies and delegating the

logistics to 3PL service providers.

The penetration of 3PL is very high in the automotive sector. Likewise, the IT hardware and

electronics sectors have also begun outsourcing to 3PL service providers to a great extent. In

sectors such as Fast Moving Consumer Goods (FMCG) and pharmaceuticals, the penetration

of the 3PL concept has been fairly low, owing to already strained profit margins. Added to

this, there is a great deal of decentralization in the supply chains of these sectors, with many

stocking points and strategic distribution centers spread all over the country. This will

demand infrastructure capabilities that the 3PL service providers may not be in a position to

offer. Outsourcing in these sectors has started in warehousing operations, albeit in a small

way. Certain 3PL service providers have their own freight forwarding and customs clearance

capabilities. Those that do not have, hire the services of a local freight forwarding agent to

liaison with the required authorities to have their consignments cleared. Most 3PL service

providers offer good management of information systems (MIS) capabilities to their clients.

The provision of value-added propositions along with a 3PL contract is expected to witness a

growing trend with increasing demands from the clients and 3PL service providers that want

to gain an edge in a highly competitive marketplace.

M a r k e t O v e r v i e w a n d R e s e a r c h F i n d i n g s

Total 3PL Market in India Size and Forecasts

The market for 3PL in India was worth $890.3 million in 2005. The entire 3PL market is

expected to grow at a CAGR of 21.9 percent from 2005 to 2012 and reach $3,556.7 million

in 2012. In 2005, transportation activity outsourced to a 3PL service provider accounted for

a lion's share of the revenues in the market. However, warehousing is expected to grow the

fastest among all the logistics functions outsourced to a 3PL service provider. In 2005, it

accounted for second largest share of entire market. Revenues from MIS and Other Values

Added Services accounted for third largest share of the market revenues with freight

forwarding accounting for the lowest share.


Opportunities for the 3PL Service Providers in India

India has immense opportunities for 3PL service providers. The growth is expected to come

predominantly from warehousing, which is likely to be driven to a very great extent by the

implementation of value added tax (VAT), a uniform tax regime across the country. The

benefits are expected to be witnessed by the year 2010, when the central sales tax is likely to

be completely abolished. In the transportation function, the growth of express transport

could provide opportunities for the service providers. The growth is expected to be driven by

the betterment of infrastructure and increasing client requirements to provide committed and

time-bound services. Express transport has a very small share of the entire trucking market,

and hence presents immense potential for growth. Freight forwarding and MIS and Other

value-added services also present good opportunities in the market. The growth in

value-added services is expected to be driven by the growth in transportation and ware-

housing functions, and as a tool by 3PL service providers to gain a competitive edge in the

market. A majority of the revenues from value-added services in the market is expected to be

generated from growth in the warehousing function.

Competitive Analysis

The 3PL service providers in India are categorized into three tiers of competition namely

national, regional, and local service providers depending on their presence and reach in the

market. The major national 3PL service providers are the Tier I companies and they account

for the largest share of the revenues generated in this market. This can be attributed to the

relatively better rates and value propositions offered by them, which find customers predom-

inantly among large corporations. The regional 3PL service providers, or the Tier II

companies account for the second largest share of the revenues generated in this market.

These service providers offer basic logistics support and generally operate with corporations

and Tier I companies to provide access at a regional level. The local 3PL service providers, or

the Tier III companies that account for lowest share of the revenues generated in this market.

They have small clientele and provide logistics services that does not have a large reach.

Industry Challenges for the 3PL Market in India

Industry challenges are factors that have the potential to adversely affect the market growth

during the forecast period from 2006 to 2012. Though these may not have any direct bearing

on the growth of the market, they can be overcome using suitable strategies:

Geographical size and diversity

Stiff competition and pricing strategies

Security concern is a critical issue


Drivers for the 3PL Market in the India

Market drivers are factors that have the potential to drive the growth of the market during

the forecast period from 2006 to 2012.

Growing inclination to outsource logistics to specialists

Economic growth across all sectors necessitates smooth flow of supply chain

Implementation of an all India VAT system

Restraints for the 3PL Market in India

Market restraints are factors that have the potential to slow or retard the growth of the

market during the forecast period from 2006 to 2012.

High cost of logistics in India

Infrastructure bottlenecks still exist

Competition from the unorganized segment

Implications of VAT on 3PL in India

The implementation of a uniform VAT regime and the elimination of the sales tax model is

expected to indirectly benefit the supply chain management in the country. Previously state

borders were viewed as economic borders, as they posed hurdles to the sale of goods between

states. As a tax saving mechanism, companies operated on a highly decentralized model of

multiple warehouses spread across states. This ultimately led to management of more

resources and manpower, leading to costs that could otherwise have been avoided.

The original intention of the Indian Government behind implementation of VAT was to intro-

duce transparency into the taxation system; however, it has indirectly changed the course of

logistics in the country. The present model poses a problem of cascading taxes, which VAT is

expected to abolish.Companies are expected to move to newer and more centralized hub and

spoke distribution models that will be more convenient with lesser hassles. VAT is expected

to abolish the economic borders between states and enable sales between points with

geographic convenience in consideration, as opposed to the tax planning driven model that

was practiced earlier.


The real benefits of VAT impacting the supply chain management in India are not likely to be

witnessed until the central sales tax is eliminated. At present, VAT coexists with the central

sales tax, which is expected to be phased out by 2010. The persistence of central sales tax

defies the logic behind shifting to the new hub and spoke model, as there is no input tax

credit available against the central sales tax in the case of inter state sales. Input tax credit is

the reimbursement of tax that can be availed under the VAT system, where tax that has

already been paid is reimbursed. This ensures that taxation happens only for the value addi-

tion. The central sales tax is expected to be eliminated by 2010, after which companies are

likely to witness a drastic reorganization in the way supply chains are managed.

The service expected to benefit the most from VAT's implementation is warehousing. Once

the hub and spoke type distribution model sets in, large multi-user zonal warehousing facili-

ties could be seen mushrooming. This could see 3PL service providers operate these facilities

and leverage economies of scale. This was not observed under the earlier sales tax system,

under which the environment was not conducive for seamless logistics

The transition to VAT could pose challenges in the form of integration of IT infrastructure

and maintenance of records. There is also competition from the unorganized sector

comprising clearing and forwarding (C&F) agents, that may reinvent themselves post VAT

implementation.

Strategic Conclusions

The 3PL market in India is poised for significant growth till the year 2012. The market has

been growing steadily at an estimated Compound Annual Growth Rate of 18.3 percent since

2002 and the growth is expected to accelerate further. Changing economic and business

scenarios, along with increasing outsourcing tendencies are expected to be the drivers for the

growth in this market.

Among the services, the warehousing function is expected to witness the fastest growth.

Investing in assets could be important as owning them, could prove to be a healthy competi-

tive edge, particularly in the transportation function. In the warehousing function,

companies could build their own warehouses or operate a warehouse built by a third party to

specification. Iinvesting in new warehouses may not be advised,, considering high real estate

costs. Choice of location of warehouse is also an important factor, considering the constant

need to reduce lead and turnaround times, which will enable clients gain a competitive edge.

The growth in the transportation is expected to be driven by better infrastructure and the

constantly reducing lead times and this is likely to lead to the emergence of express transpor-

tation. Along with this growth in revenues from value-added services, driven by the

requirement of companies to gain a competitive edge, is also expected.


2Strategic Analysis of Total 3PL Market in

India

I n t r o d u c t i o n

Introduction and Overview of the Indian Logistics Market

Figure 2-1 and Chart 2.1 show the breakup by mode of freight in the total Indian third party

logistics market in 2005.


F i g u r e 2 - 1

Total Third Party Logistics Market: Breakup by Mode of Freight (India), 2005

Mode Percent Contribution (%)

Roadways 51.0

Railways 33.0

Pipeline 8.0

Inland waterways 8.0

Total 100.0


C h a r t 2 . 1

Total Third Party Logistics Market: Breakup by Mode of Freight (India), 2005


In 2005, the Indian logistics market was worth an estimated $15.5 billion. The transporta-

tion logistics function contributed the largest share of the market followed by warehousing.

The logistics market in India is fragmented predominantly due to the large presence of the

unorganized service providers. Logistics, which is one of the lifelines of a country the size of

India, has so far been considered as a secondary activity. The industry broadly consists of

freight consolidators, transporters, warehousing specialists, and organized third party logis-

tics (3PL) solutions providers, in the increasing order of value addition to the service

Warehouse management in India follows more of a clearing and forwarding (C&F) agent

model. Most of the warehouses are in the form of depots or stocking points managed by

agents for companies on a contractual basis. These warehouse are not managed very profes-

sionally. This segment also forms a significantly large portion of the entire market, as

multiple warehousing is a very important cost saving requirement in the Indian scenario.

Warehousing has been considered as a storage function, with most companies overlooking it

as a secondary activity, neglecting the complexity of the operations involved, and the cost

benefits that can be derived. Most of these C&F depots are used by companies to facilitate

transfer of goods between stock points. Concepts such as automation, vertical space utiliza-

tion, and the use of warehouse management systems were quite unheard of; however, these

are slowly but steadily gaining prominence.

Railways33%

Pipeline8%

Roadways51%

Inland waterways8%


Professional management of logistics in the form of 3PL has begun being adopted since the

last decade. These 3PL service providers have the capacity to offer a wide array of services to

their clients and help them better manage their supply chains. The 3PL service providers

assume end-to-end responsibility to manage a part or the company's entire supply chain. The

growth of 3PL service providers in India has introduced the use of global supply chain

management standards in the country. However, the 3PL service providers form a very insig-

nificant part of the entire market, comprising around 3 percent of the Indian logistics.

Roads carry the bulk of the freight in India. The roads in India have a history of being unsafe

and in very bad conditions. This is changing with the construction of the Golden Quadrilat-

eral and North-South-East-West (NSEW) highway networks, traversing the entire country.

The highway infrastructure is highly strained, comprising around 1.4 percent of the total

road network in India and carries in excess of 50 percent of the country's total freight. Roads

are flexible with easy to own assets and door-delivered consignments. Even though rail

freight is more cost effective in terms of cost per unit distance and per unit weight, the effi-

ciency of the rail freight system in India has for long been low and it has also been considered

as a secondary freight mode. Previously, rail was the most preferred mode of freight;

however, bad pricing and inflexibility have resulted in the railways experiencing a downturn.

With the Indian Government announcing plans to open up the containerized rail freight

sector to private operators this is expected to change. Companies such as APL Logistics,

Maersk Logistics, Gateway Distriparks, Central Warehousing Corporation, JM Baxi group,

Adani Logistics, and Reliance Logistics are expected to enter into this segment. The barriers

of entry for providing this service are rather low. Companies need to have a minimum turn-

over of around $22 million (INR 1 billion) in India. To get a permit license for 20 years they

need to pay the Government between $1 million and $10 million, depending on whether they

want to operate on a specific route or an all India basis. Rail freight comprises around

670 million tones, which is around 33 percent of the total domestic traffic in India. Compa-

nies in the metals, heavy machinery, and engineering and cement sectors are expected to

benefit from the opening up of the railways to private participants as these carry bulky cargo

over long distances. Previously, costs of trucking were very high as the final destination could

be in a remote corner of the country, where a backhaul arrangement would be nearly impos-

sible. In sectors such as these, costs of transportation in the entire logistics spending was as

high as 75 percent. Long distance transportation by rail can help cut costs in these sectors.

With the Railways Department mulling a separate freight corridor, this sector is likely to

experience a growing trend. This is keeping in mind that passenger trains get higher priority

over goods trains and the new corridor can run parallel to existing lines to places of heavy

activity such as ports.


The large unorganized segment of the logistics industry in India poses a formidable challenge

to companies in the organized one. The unorganized segment service providers have lesser

overhead costs and are hence in a position to provide extremely competitive rates. This is

expected to have a considerably large impact in the future, posing a challenge especially to

the 3PL service providers. Entry barriers are also low, leading to the possibility of intensified

competition even in the organized sector. Complex tax laws and infrastructure bottlenecks

are also challenging issues to be dealt with.

The growth of the Indian economy, especially the rise in the manufacturing sector is one of

the key growth drivers of the logistics industry in India. Apart from this, sincere initiatives by

the Government to remove bottlenecks in the logistics infrastructure are also drivers for

growth in the sector that is expected to grow at a compound annual growth rate (CAGR) of

6.4 percent from 2005 to 2012.

Introduction to 3PL in India

3PL services in India is a relatively new concept compared to other parts of the world. The

Indian 3PL market is still in its infancy stage, though it is expected to grow at a significantly

fast pace. The major end-user verticals of 3PL services are the automotive and auto compo-

nents, machinery and heavy engineering, IT hardware and electronics, consumer durables,

pharmaceuticals, fast moving consumer goods (FMCG), and organized retailing industries.

The 3PL service providers have introduced a dimension of professionalism that was previ-

ously lacking in the industry. The Indian business houses have a better established setup in

the 3PL market. This is due to existing business relations that were there between the service

providers, an already established logistics network, and a better knowledge of the local busi-

ness environment and processes. Service providers with a prominent presence include

multinationals such as Sembcorp Logistics of Singapore, domestic service providers such as

Safexpress, GATI, Om Logistics, and TVS Logistics. Service providers such as Caterpillar

Logistics have recognized the opportunity for growth and have entered India for setting up

operations in partnership with the local service providers. Companies such as TNT, Kuehne

Nagel, Schenker, Federal Express, and Panalpina have a global presence; however, they do

not have a notable presence, or in some cases, do not operate in the Indian 3PL market, as

their main focus may be on international air express or sea freight.


Evolution of 3PL Market in India

The growth of multinational operations has been one of the key drivers in the Indian logistics

market, especially in 3PL. The 3PL services concept was originally introduced by multina-

tional 3PL service providers that entered India to manage the supply chains of their key

global clients. With the emergence of India as a global manufacturing hub, there was require-

ment for seamless supply chains with time-bound deliveries in a cost-effective manner. A

number of companies such as Transport Corporation of India, Om Logistics, Total Logistics,

and Patel Logistics that were previously pure transporters realized the opportunity for

growth in 3PL services and have included it as a part of their portfolio.

The evolution of 3PL services has not been rapid; however, the market has been growing at

an expected CAGR of 18.3 percent since 2002. The growth has been spurred on as certain

companies have had to outsource logistics to remain competitive. Warehousing, a logistics

function that was previously unprofessionally managed, has witnessed noticeable growth

since 2003. Concepts such as mechanized warehousing and vertical space utilization, which

were quite unheard of in India, have now started gaining prominence. 3PL service providers

operating such warehouses have been able to significantly reduce the number of employees

per warehouse.. The transportation logistics function is also witnessing a gradual shift from

pure trucking to containerized transport with vehicle tracking solutions such as a global posi-

tioning system (GPS) or GSM mobile telephony network. Though at present GPS is not

greatly used due to prohibitive costs of equipment, GSM mobile telephony network is being

used.

Outsourcing of integrated logistics has not happened to a very great extent in India. Instead,

companies have outsourced individual or partial services to a 3PL service provider. There are

certain companies that have outsourced their entire supply chains to a 3PL service provider;

however, these are few in number. Integrated logistics outsourcing is expected to be imple-

mented in a major manner once the demand for 3PL services grow. This is expected when key

industry verticals grow, and sourcing patterns shift from price driven sourcing to sophisti-

cated sourcing that focuses on long-term vendor relationships, larger vendor bases, and

technology-driven supply chain innovation.

At present, 3PL services have grown as capital, information, and physical movement. These

three key aspects of any supply chain are being focused on as very important. The market for

3PL services in India is still in its infancy stage. It is expected to see a strong CAGR of

21.9 percent till the year 2012. Though the unorganized segment will not be completely elim-

inated, compared to the rest of the total Indian logistics market the share of 3PL is expected

to increase as the segment is growing significantly faster.


Awareness and Perception of 3PL in India

The concept of 3PL was quite unheard of in India until the mid-1990s. It is still in its infancystage in India compared to the other parts of the world. However, at present there is anincreased awareness about 3PL services than in the past. Users of 3PL services have varyingperceptions about their service providers. Companies in the automotive sector consideroutsourcing logistics to a 3PL service provider as an important cost-saving tool. The samemay not be witnessed in the other industry verticals. FMCG companies still follow the dealer-stockist distribution model to a very large extent. Outsourcing takes place in individual logis-tics functions such as warehousing or freight forwarding but not to a very great extent intransportation. This is primarily because FMCG companies opine that for high volume,low-value goods such as FMCG such as personal care products, transportation to a 3PLservice provider may be an expensive option. Added to this, for a country as geographicallydiverse as India, with a large consumer base, companies opine that a single 3PL serviceprovider will not be able to offer an end-to-end solution. Retail firms consider working witha 3PL service provider a very viable option as the key to low cost modern retailing lies ineffective supply chain management with electronic surveillance to prevent damage andpilferage in transit. Some companies manufacturing IT hardware and electronics consideroutsourcing to a 3PL service provider a very convenient option, as prior to this quite a fewcompanies were facing problems with huge sums of money locked up in inventories andlonger lead times.

Cost and quality of service are the prime factors companies consider while choosing a 3PLservice provider. As a result of this, there tends to be a trade-off quality and cost. MostIndian companies that have started outsourcing consider cost as the primary factory, unlikemultinationals that have derived cost benefits from outsourcing. Outsourcing to a 3PLservice provider does attract a cost, which may be significantly higher than outsourcing to atrucker and C&F agent; however, companies that focus more on quality do not mind theextra spending to have quality delivered, as it can provide better margins by enabling costcutting. This is more the case with the larger companies that want to possess sophisticatedsupply chains to remain abreast with global competition. Companies may hence be willing tohire top quality services that have a commitment to deliver at the highest standards. Whilecost is a concern for outsourcers, companies, especially multinationals consider it as along-term proposition to work with a 3PL service provider, considering the total cost oflogistics in the whole product life cycle. The reputation of the 3PL serviced provider does actsignificantly on the outsourcer's choice of service provider. A known 3PL service provider ismore preferred giving importance to the requirements of the company.

Another issue of concern is the security of the supply chain of a company, considering thehigh incidences of pilferage and damage in transit in the Indian industries. An efficient supplymay in many cases be the difference between some companies being more successful than theothers. Some companies may be wary of third party intervention in their supply chain andhence be unwilling to outsource their logistics to a 3PL service provider. This though, is aconcern that is greatly unfounded. Meeting service commitments is a concern for a fewcompanies. Flexibility in services and compatibility and scalability of operations are factorsthat companies focus on when it comes to service-level determination.


S c e n a r i o o f t h e I n d i a n 3 P L M a r k e t

Overall 3PL Usage in the Logistics Functions

Figure 2-2 and Chart 2.2 show the penetration by logistics function of 3PL in the total logis-

tics market in 2005.


C h a r t 2 . 2

Total Third Party Logistics Market : Penetration by Logistics Function (India), 2005


F i g u r e 2 - 2

Total Third Party Logistics Market : Penetration by Logistics Function (India), 2005

Service Penetration (%)

Transportation 9.0

MIS and Other Value Added Services 4.5

Warehousing 4.0

Freight Forwarding 3.0

0

1

2

3

4

5

6

7

8

9

10

Transportation MIS and Other ValueAdded Services

Warehousing Freight Forwarding

Pene

trat

ion

(%)

Service Function


The penetration of Transportation service outsourced to a 3PL service provider is only

9.0 percent of that in the entire logistics market. This is significantly higher than the penetra-

tions in other services. The fact that transportation function outsourced to a 3PL has such a

low penetration and is still the most penetrated services shows how nascent the 3PL market

in India is. The penetration of Warehousing outsourced to a 3PL is only around 4.0 percent

of the Indian warehousing market. This is because, warehousing is still predominantly

considered a pure storage function. Organized 3PL warehousing is a concept that is new to

the Indian market, and hence the low penetration.

In India, most companies outsource only a part of their supply chain requirements to a 3PL

service provider. There may be only a small fraction of companies that outsource entirely to a

3PL service provider. Most of these companies are multinationals that have entered India and

do not have an established network and have to outsource their logistics due to the lack of

assets.

The penetration of 3PL in the total Indian market is only 5.7 percent. The degree and nature

of outsourcing of logistics to a 3PL service provider varies significantly between verticals and

depends greatly on the nature of the company. In the automotive sector, the trend of

end-to-end outsourcing is beginning to gain acceptance significantly as companies have

begun realizing the benefits of concentrating on core competencies and delegating logistics to

3PL service providers. Concepts such just-in-time (JIT) delivery to the assembly line have

gained acceptance in this sector, thereby requiring companies to hold only a few hours of

inventory. Even companies that have traditionally been known to adopt a very conservative

business outlook have started outsourcing their logistics to 3PL service providers. The pene-

tration of 3PL services is very high in the automotive sector. Likewise, the IT hardware and

electronics sector has also begun outsourcing to a 3PL service provider to a great extent. In

sectors such as FMCG and pharmaceutical industries, the penetration of the 3PL service

concept has been fairly low, owing to already strained profit margins that these companies

are experiencing. Added to this, there is a great deal of decentralization in the supply chains

of these sectors, with many stocking points and strategic distribution centers spread in

different parts of the country. This will demand infrastructure capabilities that 3PL service

providers may not be in a position to provide. Outsourcing in these sectors has started in

warehousing operations. Sector giants such as Hindustan Lever Limited, Marico Industries,

Terumo Tenpol, and Dr.Reddy's Laboratories are outsourcing their warehouse requirements

to 3PL service providers.

Certain 3PL service providers have their own freight forwarding and customs clearance capa-

bilities. Those that do not have hire the services of a local freight forwarding agent to liaison

with the required authorities in order to have their consignments cleared. Most 3PL service

providers provide good MIS capabilities to their clients. The provision of value-added propo-

sitions along with a 3PL contract is expected to witness a growing trend with clients

increasingly demanding the same.


3PL Usage in Transportation

Transportation is the most outsourced service in the Indian 3PL market. In 2005,

71.7 percent of the revenues generated in the total market were from the transportation

logistics function. This is considering the fact that in any logistical activity, the prime focus is

on moving physical goods along the chain. Investing in vehicles may be a very expensive

option for a company. Outsourcing transportation to a 3PL service provider hence obviates

the need to invest in them. The 3PL service providers can afford to own vehicles, or

outsource vehicles from a local trucking service provider. According to Frost & Sullivan, the

transportation logistics function is expected to still be the most outsourced service to a 3PL

service provider till the year 2012.

At present operating margins in transportation are greatly strained. The reason is that, since

2002, while international oil prices have observed a surge in excess of 150 percent, freight

rates have seen an average increase of just over 40 percent. Along with this, severe competi-

tion in the market has forced competitors to cut rates to retain clients or acquire the

competitors' clients. For this purpose 3PL service providers have had to practice back-

hauling, sometimes at extremely low rates, where break even has to be obtained to stay from

making losses.

The traditional mode of transportation has been trucking. Outsourcing transportation to a

3PL service provider has been implemented in a major manner only in a few sectors such as

automotive. In a sector where disruptions in the supply chain can drastically affect manufac-

turing schedules, outsourcing to a 3PL service provider to have consignments delivered

just-in-time (JIT) in order to save costs is a viable option. This trend in the automotive sector

has been growing since India established itself as an important destination for automotive

component and vehicle manufacturing.

The express mode of transport is not employed to a very great extent in this market. Only a

few sectors such as IT hardware and electronics and retailing, where stocking on shelves is of

utmost importance to avoid opportunity costs use express transport. While trucking is

expected to still be the most preferred mode of transport, the express mode is likely to expe-

rience good growth. This will help companies reduce stocking points along the supply chain,

thereby reducing lead times and inventory holding costs drastically. Companies are likely to

start preferring the express transport to traditional methods if there are clear cost benefits

that can be derived such as reduced lead times and lesser inventories in the pipeline. The

growth in this sector is likely to be driven by the needs of the clients.

Industries such as pharmaceuticals and FMCG may prefer the express mode of transport to

traditional trucking; however, the profit margins are already strained in these sectors. Even

though these sectors will prefer shifting to the express mode, the capacity of 3PL service

providers to manage the large volumes generated by them is likely to be a constraint. At

present, India lacks the type of road infrastructure that can permit companies to use express

transport in a cost-effective manner. More than 60 percent of revenues in the express segment

in India still come from document couriers. The 3PL activity in express transport account for

a very insignificant part of the entire transportation in 3PL services.


Most supply chain managers in the Indian companies have to negotiate freight rates and

track a multitude of trucks from different fleets. With the emergence of lead logistics players

(LLPs), this responsibility is now gradually shifting, reducing the number of agencies to

manage and thereby saving cost and time.

The use of Global Positioning System (GPS) to track vehicles in transit is being employed by

selected companies such as Safexpress in a limited number of vehicles, as technology of this

nature is expensive. Most 3PL service providers do provide their clients with track and trace

facilities, but these are through mobile communication networks such as GSM and CDMA

networks. This requires a demonstration effect of the clear economic benefits for companies

to start using these services more. Reliance logistics has an in-house telematics division that

develops software for enabling vehicle tracking through their own CDMA network. Compa-

nies are taking initiatives in this regard; however it is in its early stages of adoption.

3PL Usage in Warehousing

Warehousing is the second most outsourced logistics function to a 3PL service provider in the

Indian market. In 2005, It accounted for 16.5 percent of the revenues generated in the Indian

3PL market. It is also expected to be the logistics function where competition. will be the

stiffest. In the past warehousing was considered as just another storage function. This is

changing with companies beginning to focus on outsourcing warehouses to a 3PL service

provider as an effective measure to handle large volumes. Companies increasingly beginning

to outsource warehouses, at an expected CAGR of 23.7 percent from 2005 to 2012. One of

the reasons companies are willing to outsource to a 3PL service provider is the need for

real-time information regarding inventories that are locked up along the supply chain and to

provide flexibility in scaling of operations.

Warehousing is not as established in India as it is in the developed economies of the west, as

each state in India has a different tax regulation. This is expected to change once a nation-

wide value added tax (VAT) system is implemented, eventually resulting in the growth of 3PL

managed warehouses. The 3PL service providers are likely to shift to a new hub and spoke

type warehouse model with regional master warehouses feeding the smaller warehouses and

depots. This will be in stark contrast to the present system of state wise C&F depots necessi-

tated as a cost saving measure due to the present sales tax system in the country, which is

expected to be replaced by a uniform VAT. Once VAT is uniformly implemented, consolida-

tion in warehousing is expected to occur, which can help 3PL service providers leverage

economies of scale. Once this takes place and consequentially warehousing costs decrease,

technological improvements such as robots and conveyor belts can be possible, resulting in

better warehousing. However, this trend is not likely to be witnessed across all sectors.

Some verticals such as FMCG operate with a mixed model, persisting with the traditionalC&F agent model, as companies they want to retain a strategic distribution hub within astate, in order to avoid opportunity costs. Ultimately, even for the C&F agents to staycompetitive, they have to upgrade existing facilities similar to 3PL warehouses.


The outsourcing of a company's warehousing logistics function to a 3PL service provider isbecoming a growing trend. This trend is expected to be a direct fallout of companies realizingthe complexity involved in a warehousing logistics function. The automotive sector has beenwitnessing outsourcing in warehousing logistics function to a great extent, where inventoriesneed to be replenished on an hourly basis than on a daily basis. Companies such as TataMotors have outsourced their warehousing logistics function to professional 3PL serviceproviders. Maintaining a large number of stock keeping units inside the warehouse, spreadover large areas is likely to lead to complexity in operations. In many cases, lead times insidethe warehouse can be very critical to a manufacturing or distribution operation, requiringquick retrieval. Moreover, investing in real estate may not be feasible for a company, andhence the best option for them to use a 3PL service. For example, Om logistics, a leading 3PLservice provider in India, is providing warehousing logistics function to a leading manufac-turer of refrigerators since 2003 at their warehouse in Mohali, in Punjab. Previously, thecompany had its warehouse in near Mumbai, with material not being able to be trackedeasily, effectively wasting around 30,000 sq. ft. of floor space.

The 3PL service providers in India have started investing on increasing warehouse capacitiesand the number of warehouses in the country. This is due to the intention to cash in on theopportunity provided by the implementation of a uniform national VAT system, where it isexpected that the present multistage warehouse model will shift to a model with fewer andlarger warehouses spread across the country. The 3PL service providers are also trying toexpand their warehouses vertically in order to increase the capacity, and hence shift to a'cubic feet' type one, as opposed to the 'square feet' type that is predominantly present inIndia. Sembcorp Logistics has four warehouses at Bhiwandi, Chennai, Pune, and Jamshedpurcatering to the needs of its clients. GATI has also announced plans to upgrade its warehousesat certain facilities. Companies such as MICO have also clearly drawn out plans for changingits supply chain structure after VAT is fully implemented.

A purely variable cost model was not considered a viable option in India when organizedwarehousing first entered the market around 2001, as manufacturing patterns were notsuited to that. In a pure variable cost model, Company 'A' managing inventory turns betterthan another Company 'B', which keeps a large inventory and tries to respond to marketdemand, should logically speaking be paying lesser for using lesser warehouse space. That iscompanies should be paying proportional to space utilization. Lack of uncertainty indemand, lack of proper forecasting, and rigid manufacturing patterns were primarily respon-sible for this costing model not doing very well. Even today, C&F agents follow acombination of a fixed and variable cost model, where companies pay for rent andmanpower at the warehousing facility even if no space is utilized. This is because many facil-ities are not shared and hence economies of scale are not being created. The 3PL serviceproviders are likely to practice a purely variable cost model once VAT is implementeduniformly.


The use of information technology has been implemented to a good extent in warehousing.

They come in the form of special application warehouse management system This is used to

get real time data about stock availability in the warehouse. Along with this 3PL service

providers are focusing on the automated storage and retrieval systems (AS/RS) to facilitate

easier handling in the warehouse premises. This helps in storage and retrieval of bins, identi-

fying them, and sorting accordingly. Along with it, usage of robots and stacker cranes that

move on rails is also expected. These are particularly useful in case of warehouses with

vertical space utilization and those that handle large volumes and many stock keeping units

such as in the FMCG, pharmaceutical, and apparel verticals.

Improvements are expected in the technology used in a warehouse that can reduce human

interference and thereby increase warehouse efficiency. At present, in India global technology

standards such as radio frequency identification (RFID) have not been implemented to a

great extent. These have a great potential to increase warehousing efficiency and security.

There is also the possibility of hi-tech automated warehouses with zero human interference in

the future, where companies are expected to save a lot in terms of reduced, or at times nil

power consumption in the form of zero air conditioning, illumination, and manpower. At

present, this is observed in extremely few companies in India, as the cost of technology of

this nature is considered to be prohibitive at the present time.

3PL Usage in Freight Forwarding

In 2005, freight forwarding logistics function accounted for 2.2 percent of the revenues

generated in the Indian 3PL market.. The 3PL service providers that offer the freight

forwarding logistics function to their clients either possess the capabilities themselves or

employ the services of an agency that liaisons with the authorities locally. There are multina-

tional freight forwarders such as Panalpina & Kuehne Nagel that offer freight forwarding

services to 3PL service providers; however, theses are far outnumbered by the local freight

forwarding agents. Complex laws and procedures and at Indian Airports and seaports often

require 3PL service providers to outsource their freight forwarding requirements to a local

service provider, who in most cases is better acquainted with local authorities and

procedures.

3PL Usage in MIS and Other Value-added Services

In 2005, MIS and other Value-added Services accounted 9.6 percent of the revenues gener-

ated in the Indian 3PL market. Since 3PL service providers offer—added services, clients can

concentrate on their competencies. The growth of these services has been mainly driven by

the growth of outsourcing to a 3PL service provider. At present, the provision of these serv-

ices has become imperative to companies considering that service differentiation is a must in

a highly competitive atmosphere.


After sales support, customs clearance, reverses logistics, kitting, packaging, repacking, labe-

ling, rate negotiation, order management, network planning, site selection, fleet

management, vendor management of inventory, and supply chain consulting are among the

many value-added services offered by 3PL service providers in India.

Vendor managed inventory (VMI) service has witnessed a strong growth in the automotive

and auto components, IT hardware, and retail sectors. Companies such as Menlo Worldwide

have set up VMI operations in the country to provide services to companies such as General

Motors. In the IT hardware sector, VMI services have helped companies decrease inventory

levels significantly, thereby helping companies cut costs. VMI provides companies with total

visibility about inventories at all points along the supply chain and help in the company

maintaining just enough merchandise required along the assembly line or by the customer.

However, not all 3PL service providers are in a position to offer all these MIS and other

value-added services, placing the ones that cannot offer them at a clear competitive disadvan-

tage when compared to companies that offer them.

M a r k e t S i z e a n d R e v e n u e F o r e c a s t s

The Total Logistics Market in India

The total logistics market in India is estimated at $15.5 billion. A vast majority of this

market is still in the unorganized segment. Companies such as VRL transporters and Navata

transporters are very good regional participants but do not have a pan-India presence. Other-

wise, the transportation is highly unorganized, with varying fleet ownership patterns. The

small fleet owners do not have operating policies and operate at extremely competitive rates.

They are generally in the form of open trucks, with no assured time schedules and improper

handling of consignments. Warehousing also has for long been in the form of C&F depots

and stocking agents, spread across the country in order to gain maximum benefit out of the

redundant sales tax system. These depots have usually been positioned more out of obtaining

tax benefits than for geographical convenience. There are a very few companies that operate

out of a single warehouse or few warehouses in the country. In the Indian warehousing

scenario, it is more of a storage function being performed and it lacks sophistication in

service.

The cost of logistics in India is very high, estimated at around 13 percent of the country's

gross domestic product (GDP). Transportation forms a predominantly large part of costs

incurred for logistics. The other two most significant cost components of logistics are ware-

housing and inventory holding costs. Together these three compose around 90 percent of the

costs incurred for logistics in the market. The other components involved are administrative

and order processing costs.


The organized 3PL service providers account for a very insignificant share of the market.

These are very professionally managed, being able to offer end-to-end logistics solutions for

their clients. The concept of a 3PL service is still in its infancy stage in India and is expected

to observe a strong growth till the year 2012.

Size of the 3PL Market in the India

Figure 2-3 and Chart 2.3 show the size and revenue breakup by type of logistics function in

the total Indian third party logistics market in 2005.


C h a r t 2 . 3

Total Third Party Logistics Market: Revenue Breakup by Type of Logistics Function (India),

2005


F i g u r e 2 - 3

Total Third Party Logistics Market: Revenue Breakup by Type of Logistics Function (India),

2005

Service Percentage Contribution (%) Revenues ($ Million)

Transportation 71.7 638.3

Warehousing 16.5 146.7

MIS and Other Value Added Services 9.6 85.7

Freight forwarding 2.2 19.6

Total 100.0 890.3

Transportation71.7%

Warehousing16.5%

MIS and Other Value-added Services

9.6%Freight Forwarding

2.2%


In 2005, the 3PL market in India was worth $890.3 million. It has grown at CAGR of

18.3 percent since the year 2002. Transportation is the most outsourced service to a 3PL

service provider. It accounted for 71.7 percent of all service revenues in 2005. This is greatly

due to the fact that companies need not invest in vehicles and manage complex transporta-

tion activity. Moreover, India is geographically a very vast country with a large vendor base.

Clients are increasingly focusing on better and more secure transportation, with real-time

data availability. Soon 3PL companies are likely to witness a healthy growth in the transpor-

tation logistics function. The logistics function that contributed the next largest share after

transportation in the Indian 3PL market was warehousing, that accounted for 16.5 percent of

the revenues in 2005. The market for warehousing is not as mature as it is in the developed

economies of western Europe or North America, making the potential for growth immense.

Revenues from freight forwarding accounted for 2.2 percent of all revenues in the total

market. Value-added services and others accounted for the remaining 9.6 percent of the reve-

nues in 2005.

Growth History of 3PL Market in India

The 3PL market has been growing in India from the year 2002 to the year 2005 at a CAGR

of 18.3 percent. The market was worth $538.2 million in 2002 The growth has primarily

come from the usage of 3PL services in key industry sectors such as automotive and auto

components and IT hardware and electronics where the lead times have to be extremely short

to decrease manufacturing and opportunity costs.

Estimated Share of the 3PL Market

Figure 2-4 and Chart 2.4 shows the estimated share of the Third Party Logistics Market in

the entire logistics market (India), 2005.


F i g u r e 2 - 4

Total Third Party Logistics Market: Estimated Shares (India), 2005

Category Market Share (%)

3PL Service Providers 5.7

Others (Trucking, C&F Agents, Depots) 94.3

Total 100.0


C h a r t 2 . 4

Total Third Party Logistics Market: Estimated Share (India), 2005


The Indian logistics market is estimated at $15.5 billion. The Indian 3PL market was worth

$890.3 in 2005 and had a share of 5.7 of the total logistics market. This is significantly lower

than that recorded in developed economies, where the share of the 3PL market may be much

higher. In 2005, the national companies had a 2.7 percent share in the entire Indian 3PL

market. The regional companies accounted for 1.9 percent and the local companies

accounted for a meager 1.1 percent share of the entire Indian 3PL market in 2005. The share

of the national 3PL companies in the total logistics market in India in 2003 was 2 percent.

This share grew to 2.7 percent because the 3PL market has been growing at a CAGR of

18.3 percent as opposed to a CAGR 6.4 percent for the entire logistics market. This share is

likely to increase further with greater growth and consolidation that is expected to take place

in the industry by 2012.

Revenue Forecasts

Figure 2-5 and Chart 2.5 show the revenue forecasts of the total Indian third party logistics

market from 2002 to 2012.

Others (Trucking, C&F Agents, Depots)

94.3%

3PL Service Providers5.7%


Note: All figures are rounded; the base year is 2005. Source: Frost & Sullivan

C h a r t 2 . 5

Total Third Party Logistics Market: Revenue Forecasts (India), 2002-2012


F i g u r e 2 - 5

Total Third Party Logistics Market: Revenue Forecasts (India), 2002-2012

Revenue

Revenues Growth Rate

Year ($ Million) (%)

2002 538.2 ---

2003 634.0 17.8

2004 749.4 18.2

2005 890.3 18.8

2006 1,063.9 19.5

2007 1,287.5 21.0

2008 1,563.7 21.5

2009 1,896.2 21.3

2010 2,326.2 22.6

2011 2,868.9 23.3

2012 3,556.7 24.0

Compound Annual Growth Rate (2005-2012): 21.9%

0

500

1000

1500

2000

2500

3000

3500

4000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

Rev

enue

s ($

mill

ion)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Gro

wth

Rat

e (%

)Revenues ($ million) Growth Rate (%)


In 2005, the total 3PL market in India was worth $890.3 million. It is expected to grow at a

CAGR of 21.9 percent from 2005 to 2012, and reach $3,556.7 million by 2012. The market

for 3PL is growing significantly faster than the entire Indian logistics market, which is

growing at an annual rate of 6.4 percent.

Revenue Forecasts Breakdown by Different Logistics Functions

R e v e n u e F o r e c a s t s f o r 3 P L i n T r a n s p o r t a t i o n F u n c t i o n

Figure 2-6 and Chart 2.6 show the revenue forecasts for the transportation logistics function

in the total Indian third party logistics market from 2002 to 2012.

Note: All figures are rounded; base year is 2005. Source: Frost & Sullivan

F i g u r e 2 - 6

Total Third Party Logistics Market: Revenue Forecasts for Transportation Logistics Function

(India), 2002-2012

Revenue



2002 389.5 ---

2003 457.8 17.5

2004 539.7 17.8

2005 638.3 18.3

2006 763.9 19.7

2007 924.1 21.0

2008 1,120.2 21.2

2009 1,353.2 20.8

2010 1,655.0 22.3

2011 2,035.7 23.0

2012 2,518.7 23.7



C h a r t 2 . 6

Total Third Party Logistics Market: Revenue Forecasts for Transportation Logistics Function

(India), 2002-2012


In the 2005, the transportation logistics function outsourced to a 3PL accounted for

71.7 percent of the revenues in the market, valued at $638.3 million. It is expected to grow at

a CAGR of 21.7 percent from 2005 to 2012 to reach $2,518.7 million in 2012.

R e v e n u e F o r e c a s t s f o r 3 P L i n W a r e h o u s i n g F u n c t i o n

Figure 2-7 and Chart 2.7 show the revenue forecasts for the warehousing logistics function in

the total Indian third party logistics market from 2002 to 2012.

0

500

1000

1500

2000

2500

3000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year

0

5

10

15

20

25Revenues ($ Million) Growth Rate (%)

Gro

wth

Rat

e (%

)

Rev

enue

s ($

Mill

ion)



C h a r t 2 . 7

Total Third Party Logistics Market: Revenue Forecasts for Warehousing Logistics Function

(India), 2002-2012


F i g u r e 2 - 7

Total Third Party Logistics Market: Revenue Forecasts for Warehousing Logistics Function

(India), 2002-2012

Revenue



2002 81.7 ---

2003 98.8 20.9

2004 120.0 21.5

2005 146.7 22.2

2006 175.1 23.7

2007 215.9 23.3

2008 267.3 23.8

2009 330.9 24.5

2010 413.6 25.0

2011 517.4 25.1

2012 650.2 25.7


0

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s ($

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Warehousing is expected to grow the fastest among all functions outsourced to a 3PL service

provider. In 2005, it accounted for 16.5 percent of the revenues of the entire market, that was

$146.7 million. The warehousing operations to a 3PL company are expected to grow at a

CAGR of 23.7 percent from 2005 to 2012, to reach $650.2 million in 2012.

R e v e n u e F o r e c a s t s f o r 3 P L i n F r e i g h t F o r w a r d i n g

F u n c t i o n

Figure 2-8 and Chart 2.8 show the revenue forecasts for the freight forwarding logistics func-

tion in the total Indian third party logistics market from 2002 to 2012.


F i g u r e 2 - 8

Total Third Party Logistics Market: Revenue Forecasts for Freight Forwarding Logistics

Function (India), 2002-2012

Revenue



2002 15.7 ---

2003 16.9 7.7

2004 18.2 7.9

2005 19.6 7.9

2006 22.9 8.0

2007 24.9 8.7

2008 27.6 10.8

2009 30.8 11.6

2010 34.6 12.3

2011 39.3 13.6

2012 44.9 14.2



C h a r t 2 . 8

Total Third Party Logistics Market: Revenue Forecasts for Freight Forwarding Logistics

Function (India), 2002-2012


In 2005, the freight forwarding operations outsourced to a 3PL accounted for 2.2 percent of

the market, that was $19.6 million. It is expected to grow at a CAGR of 12.6 percent from

2005 to 2012, to reach $44.9 million in 2012.

R e v e n u e F o r e c a s t s f o r 3 P L i n M I S a n d O t h e r

V a l u e - A d d e d S e r v i c e s

Figure 2-9 and Chart 2.9 show the revenue forecasts for the value-added and other services

logistics functions in the total Indian third party logistics market from 2002 to 2012.

0

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C h a r t 2 . 9

Total Third Party Logistics Market: Revenue Forecasts for Value-Added Logistics Services

and Other Services Logistics Functions (India), 2002-2012


F i g u r e 2 - 9

Total Third Party Logistics Market: Revenue Forecasts for Value-added Services and Other

Services Logistics Functions (India), 2002-2012

Revenue



2002 51.3 ---

2003 60.5 17.8

2004 71.5 18.2

2005 85.7 18.8

2006 102.0 19.0

2007 122.6 20.2

2008 148.6 21.2

2009 181.3 22.0

2010 223.0 23.0

2011 276.5 23.9

2012 342.9 24.0


0

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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enue

s ($

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ion)


In 2005, revenues from the value-added and other services logistics functions were worth

$85.7 million and is expected to grow at CAGR of 21.9 percent from 2005 to 2012, to reach

$342.9 million in 2012

I n d u s t r y C h a l l e n g e s a n d M a r k e t D r i v e r s a n d

R e s t r a i n t s

Industry Challenges

Figure 2-10 shows the impact of the top industry challenges for the total Indian third party

logistics market from 2006 to 2012.

Source: Frost & Sullivan

G e o g r a p h i c a l S i z e a n d D i v e r s i t y

India is geographically the seventh largest country in the world, with over more than

25 states and a consumer base spread all over the country. With the Indian economy

booming, virtually every region in India is witnessing growth in economic activities,

requiring seamless supply chains. Incidences of disruptions in supply chains may be relatively

higher than in the other developed economies. Manufacturing industries source from a multi-

vendor base from various parts of the country, sometimes even from one end to the other. For

example the General Motors factory in the western Indian state of Gujarat sources a lot of

components from vendors in South India. Vehicles carrying these components may in most

cases have to pass through multiple states, each having different tax laws. Managing supply

chains and providing a good geographical reach is likely to be one of the biggest challenges

3PL service providers face.

F i g u r e 2 - 1 0

Total Third Party Logistics Market: Impact of Top Industry Challenges (India), 2006-2012

Rank Challenge 1-2 Years 3-4 Years 5-7 Years

1 Geographical Size and Diversity High High High

2 Stiff Competition and Pricing Strategies High Medium /High Medium /High

3 Multinational Companies are at a Disadvantage Compared to the Indian ones

Medium /High Medium Low/Medium

4 Integrating Supply Chains and Providing Visibility along the Entire Chain

Medium /High Medium Low/Medium

5 Security Concern is a Critical Issue Medium Low/Medium Low


S t i f f C o m p e t i t i o n a n d P r i c i n g S t r a t e g i e s

There is stiff competition among 3PL service providers in the Indian f. Service providers

would be willing to offer extremely competitive rates to companies to seize existing busi-

nesses held by their competitors. Pricing may be one of the key issues companies consider

when choosing 3PL service providers. In order to stay competitive companies may have to

constantly monitor pricing strategies.

M u l t i n a t i o n a l 3 P L C o m p a n i e s a r e a t a D i s a d v a n t a g e

C o m p a r e d t o t h e I n d i a n C o m p a n i e s

Indian 3PL service providers, by virtue of better knowledge of the local markets dynamics,

are at an advantage when compared to multinationals. Local 3PL service providers have a

better know-how of the processes and can liaison better with 2PL service providers to

provide their clients with better services. Moreover, domestic 3PL service providers have

better network access than their multinational counterparts, giving them a greater presence.

I n t e g r a t i n g S u p p l y C h a i n s a n d P r o v i d i n g V i s i b i l i t y

A l o n g t h e E n t i r e C h a i n

Companies are beginning to demand increased visibility along the supply chain to get infor-

mation about their inventories in the transit and storage points. Though service providers do

provide information services to their clients, there is definitely a lot of room for improve-

ment. This can specifically be the case where clients operate with more than one service

provider at different points along the supply chain. Enabling the smooth flow of information

from one service provider to another and provision of IT integration remains a key challenge.

S e c u r i t y C o n c e r n i s a C r i t i c a l I s s u e

Considering that supply chains are a very key area in gaining a competitive edge, companies

may prefer managing them in-house, rather than outsource it to a 3PL service provider. Other

concerns such as product theft and improper handling continue to be the dominant issues to

be addressed. Addressing these issues and reassuring the client about product safety and

confidentiality are key challenges. This is not a very formidable challenge though and over

the years the impact of this is expected to gradually wane as the market is poised for healthy

growth.


Market Drivers

Figure 2-11 shows the market drivers ranked in order of impact for the total Indian third

party logistics market from 2006 to 2012.


G r o w t h o f M u l t i n a t i o n a l O p e r a t i o n s D e m a n d

P r o f e s s i o n a l L o g i s t i c s M a n a g e m e n t

With the opening up of the Indian economy to foreign companies, entrants may not consider

it a very viable option investing in logistics infrastructure. Hence,they are likely to outsource

their logistics operations in the country to a 3PL service provider. Local 3PL service providers

such as GATI, AFL, Safexpress, and Om Logistics have excellent expertise in providing solu-

tions for a variety of industry verticals. In certain other cases 3PL service providers holding

key global partnerships with multinationals enter India together, thereby making an attempt

to establish a base in the country. Moreover, companies entering the country may not be

conversant with the complex business and tariff laws and so they require a 3PL service

provider with a grasp on such aspects.

F i g u r e 2 - 1 1

Total Third Party Logistics Market: Market Drivers Ranked in Order of Impact (India),

2006-2012

Rank Driver 1-2 Years 3-4 Years 5-7 Years

1 Growth of Multinational Operations Demands Pro-fessional Logistics Management

High High Very High

2 Growing Inclination to Outsource Logistics to Spe-cialists

High High Very High

3 Economic Growth Across Different Sectors Necessi-tates Smooth Flow of Supply Chain

High High High

4 Infrastructure Development/ Facilitates Logistics Low/Medium High Medium /High

5 Implementation of an All India VAT System Low/Medium Medium Medium /High

6 Declining 3PL Rates is Likely to Cause More Out-sourcing

Low Medium /High High


G r o w i n g I n c l i n a t i o n t o O u t s o u r c e L o g i s t i c s t o

S p e c i a l i s t s

Frost & Sullivan observes an increasing trend toward outsourcing of logistics operations of a

company to professional 3PL service providers. This is a positive trend for the 3PL service

providers and it is taking place because companies have realized the importance of concen-

trating on their core competencies, leaving logistics to the experts. This trend is still in a

fairly early stage. At present the level of outsourcing of services may vary between industrial

sectors, with some of them opting for either a partial or a full service depending on the need.

In the Indian FMCG sector, outsourcing of warehousing operation is likely to grow. This is

due to the industry giants such as Hindustan Lever and Marico Industries outsourcing a part

of their warehousing to multinational 3PL service providers such as Exel logistics and

Sembcorp Logistics. In the Indian automotive sector though, professional logistics manage-

ment is likely to witness a fairly strong growth, with concepts such as JIT delivery becoming

standard. The retail sector is also experiencing a trend in logistics outsourcing. With the

opening up of the Indian market? to foreign investment in the retail sector, it is expected that

international giants such as Wal-Mart, Carrefour, and TOPS are likely to make it mandatory

for their suppliers to supply to them through a dedicated 3PL service provider. In fact,

existing retail chains such as Lifestyle International have outsourced the vast majority of

their supply chain to dedicated 3PL service providers such as Exel and Om Logistics. It may

not be long before the entire supply chain management process is outsourced, as the volumes

handled by the retail chains are massive. In the IT hardware and electronics sector also

outsourcing is expected to be on the rise with the multinational companies such as Thomson

Electronics and Samsung and even Indian business houses such as the Apcom Group

outsourcing their logistical requirements in part or in whole.

Outsourcing of logistics to a 3PL service provider is beginning to be regarded as a move in

the right direction as companies focus on cutting costs and reducing product delivery times

significantly, thereby increasing customer satisfaction.


E c o n o m i c G r o w t h A c r o s s D i f f e r e n t S e c t o r s

N e c e s s i t a t e s S m o o t h F l o w o f S u p p l y C h a i n

The Indian economy has been consistently growing at 7 to 8 percent annually for the past

couple of years. The sectors that have been driving the growth to a very great extent include

the automotive and auto components and engineering, which are the biggest users of 3PL

services, considering the criticality of time involved in their operations. The use of 3PL serv-

ices in the automotive sector is expected to grow in excess of 20 percent annually. In the

engineering and auto sectors, the vendor base is large, and is likely to possibly result in

greater logistical activity. India, along with China and Thailand is expected to be an attrac-

tive destination for manufacturing industries. In other sectors such as FMCG, even though

growth has been relatively stagnant at an annual rate of around 4 percent, a trend in

outsourcing individual services such as warehousing is witnessed. The Indian pharmaceutical

sector is expected to be one of the more promising in the world. The large volumes generated

by the pharmaceutical companies are likely to need a professional logistics management

system in the near future. There have been several instances in the past where large consign-

ments of spurious drugs have been recovered, necessitating the use of 3PL service providers

that have the necessary technology and expertise to tackle fake drugs and manage the

consignments. Another area of growth is Textiles. Textiles find a very large market in India

itself and the country is one of the top exporters in the world. A lot of the textiles reach

supermarkets and hypermarkets around the world, requiring very complex supply chains that

need to be managed efficiently and professionally. Other sectors such as IT hardware and

consumer electronics have a great potential for outsourcing as these are in the high-value

category. The Government of India has opened up cargo transportation by rail to the private

sector also, ending the monopoly previously enjoyed by Container Corporation of India

(CONCOR) a subsidiary of the Indian railways. Rail freight in India is expected to grow at

around 20 percent annually and 3PL service providers such as Reliance Logistics an APL

Logistics have expressed a keen interest in setting up inland container depots and operating

trains.

I n f r a s t r u c t u r e D e v e l o p m e n t F a c i l i t a t e s L o g i s t i c s

The present day Indian roads meet international standards. Though this is confined to only

the national highways and certain state highways, an initiative by the Government to

upgrade infrastructure is likely to be taken as a step in the right direction. The building of the

Golden Quadrilateral network of roads, connecting the four major metropolises of India

along with other major cities, and the NSEW corridor, which traverses the length and the

breadth of the country, has facilitated easier and quicker transportation. The roads in the

country are a lot safer than what they were previously. The communications infrastructure

has also made major improvements enabling services such as vehicle tracking, which are now

becoming trends across the industry. Patel Logistics has tied up with a leading mobile phone

service provider to use the existing setup available for enabling tracking through SMS.


I m p l e m e n t a t i o n o f a n A l l I n d i a V A T S y s t e m

The Indian Government decision to repeal the existing sales tax system and replace it with a

uniform nationwide VAT is expected to alter the way supply chains are managed.Companies

are likely to move from an existing setup of multiple warehouses to larger and fewer ware-

houses, with even multiple companies using a single warehouse. The reorganization of the

warehouses needs professional management and this provides an opportunity 3PL service

providers.

D e c l i n i n g 3 P L R a t e s i s L i k e l y t o C a u s e M o r e

O u t s o u r c i n g

As competition increases between the 3PL service providers in the Indian market, pricing of

services becomes a key issue. Even today, clients are not hesitant to show a 3PL the rates they

have been offered by competitors. This may lead to stiff competition in the industry, with

companies reducing service rates significantly to stay competitive. These declining rates are

likely to increase outsourcing. Reducing rates may greatly strain profit margins; however,

this can be well offset by a larger customer base.

Market Restraints

Figure 2-12 shows the market restraints ranked in order of impact for the total Indian third

party logistics market from 2006 to 2012.


F i g u r e 2 - 1 2

Total Third Party Logistics Market: Market Restraints Ranked in Order of Impact (India),

2006-2012

Rank Restraint 1-2 Years 3-4 Years 5-7 Years

1 High Cost of Logistics in India High High Medium /High

2 Existence of Infrastructural Bottlenecks High Medium /High Medium

3 Non Uniform Implementation of VAT, Complex Laws, and Sales Tax Regulations are not Favored by Compines

Medium /High Medium /High Medium

4 Outsourcing to a 3PL Service Provider Attracts a Service Tax

Medium Medium Low/Medium

5 Competition from the Unorganized Segment Medium Low/Medium Very Low


H i g h C o s t o f L o g i s t i c s i n I n d i a

The cost of logistics in India is relatively higher than the developed economies of Europe and

North America. It is estimated at 13 percent of the GDP of the country, and even a small

reduction can lead to major savings. The cost of logistics in Europe and North America is

generally around 7 to 8 percent of the GDP. The rising fuel prices, improper management of

resources, and lack of initiatives have been responsible for this to a great extent.

E x i s t e n c e o f I n f r a s t r u c t u r e B o t t l e n e c k s

The development of infrastructure by the Government of India may have started; however,

the country still has certain troubles with its logistics infrastructure. The national highways

that carry the bulk of the country's freight comprise less than 2 percent of the total road

network but it carries in excess of 40 percent of the country's freight. Due to this 3PL service

providers may not be in the best position to serve the needs of their clients. With regard to

the rail networks, until very recently, before the sector opened up, there were not many

inland container depots to cater to the need of companies. Moreover, companies that sent

consignments over long distances had to wait days before they knew the status of their ship-

ment as they were not in a position to track their delivery. Though these are concerns on the

short term, a growing economy such as India is expected to leaven out these issues in the long

term.

N o n - U n i f o r m I m p l e m e n t a t i o n o f V A T , C o m p l e x L a w s a n d

S a l e s T a x R e g u l a t i o n s a r e n o t F a v o r e d b y C o m p i n e s

The existing octroi laws in the country are not favored by 3PL service providers. This can be

observed in the Indian state of Maharashtra, where octroi is applicable to goods entering an

octroi zone. Moreover, a state can have multiple octroi zones resulting in unnecessary cost

addition. This tax is regressive in nature and has a relatively low restraining effect as states

that continue having the tax are likely to repeal it very soon. Moreover, it is not also not

practiced in many states. The present day 3PL service providers are forced to maintain ware-

houses in multiple states, thereby losing the advantages they can derive by achieving

economies of scale. The impact again is expected to be low as the sales tax system is likely to

be eliminated.


O u t s o u r c i n g t o a 3 P L S e r v i c e P r o v i d e r A t t r a c t s a

S e r v i c e T a x

Outsourcing to a 3PL service provider, especially services such as Express Transport attracts

a service tax. Express transport, which is a very efficient mode for time bound safe shipment,

attracts a service tax of 12 percent. However, this is not the case with traditional trucking

services. Express transport therefore tends to become more expensive, and companies that

wish to outsource the service to a professional party may have to reconsider their decision to

outsource. This is extremely disadvantageous for 3PL services as these have tremendous

potential for growth. However, the same service tax is not applicable to rail freight and tradi-

tional trucking, hence putting 3PL service providers at a disadvantage.

C o m p e t i t i o n f r o m t h e U n o r g a n i z e d S e g m e n t

Companies in the unorganized sector do not offer sophisticated services or have human

resources with a great amount of technical expertise. These may own real estate or vehicles

and provide trucking and storage to companies at extremely competitive rates. Though this

may not be very professionally done, it still greatly serves the customers purpose. For

example, a trucking agency with just five trucks could be on a contract with a local FMCG

company for local distribution. The rates may be extremely competitive and overloading of

the vehicle may be permitted, which in certain cases may not be legal. These are not appli-

cable with a 3PL service provider as it would be violation of policy issues such as using only

containerized trucks. Instead, if the above needs to be done, 3PL companies may use the serv-

ices of a local 2PL provider, to make processes more convenient.

Major End-Users of 3PL in India

Figure 2-13 shows the top end-user sectors for the total Indian third party logistics market in

2005.


F i g u r e 2 - 1 3

Total Third Party Logistics Market: Top End-user Sectors (India), 2005

Automotive and Auto components Sector

IT Hardware

Consumer Electronics and Durables

Pharmaceuticals

Healthcare

Retail


The industry sector that generates the maximum revenue for the 3PL market in India is theautomotive and auto components. The need of this sector for seamless logistics have caused arelatively higher penetration of 3PL services as opposed to others. Concepts such as JIT andKanban have caught up fairly well with automobile manufacturers. Outsourcing in thissector is mainly considered as an important cost-saving measure, as manufacturers do notwish to maintain more than a few hours of inventory along the assembly line. With Indiabecoming the next manufacturing destination for global automobile manufacturers such asBMW, Honda, and Suzuki, the growth potential in this sector is very good. Most of thepresent day automobile manufacturers partly or fully outsource their logistical requirementsto 3PL service providers.

After the automotive and auto components sector, the revenues generated in the Indian 3PLmarket is highest in the IT hardware and electronics sector. The level of outsourcing to a 3PLservice provider in this sector is very high. The logistical challenges faced by the sector makeit imperative to outsource to a 3PL service provider. A lot of companies have benefitted fromoutsourcing to a 3PL service provider in this sector.

Other sectors that employ 3PL services in India are the consumer durables, pharmaceuticals,FMCG, and retail sectors.

I m p l i c a t i o n s o f V A T o n 3 P L

Introduction to VAT

The recent decision of the Government of India to implement a nation wide VAT system, asopposed to the existing system of sales tax, may be seen as a step in the right direction.

The sales tax system in India until now was highly regressive in nature. There were two typesof sales tax namely the local sales tax and the central sales tax. The local sales tax had to bepaid for a sale made within a state, while the central sales tax had to be paid in the case ofinter state sale of goods.The local sales tax may vary from state to state. The company canaccordingly bill the goods in a state depending on the tax saving it can obtain. Hence, goodsmanufactured in one state are shipped to a depot or a warehouse in the state where the sale isto be made. This system has had a negative effect on supply chains in India. It has forcedcompanies to maintain warehouses or depots in several states spread across the country withan intent to save tax. Hence, the supply chain management in India has for long beengoverned by tax saving motives than geographical convenience. For example a company thatneeds to transfer goods from a depot to a retail outlet in cities close to each other but indifferent states, may find it more economical to do the same from a depot in the same state,even if the distance is greater. This is with a motive to avoid the applicability of the centralsales tax. This is also not desirable as a large number of warehouses will hold more invento-ries, more manpower and resources to be managed, thereby leading to costs that mayotherwise be avoided. The whole system has contributed to high levels of inventories in themanufacturing sector, resulting in the working capital getting locked for long durations oftime, and reducing inventories by even a small amount can release capital that is hard tocome by. A company's IT infrastructure will also need to be in position to synchronize thevast pool of resources spread across the country.


Transportation, inventory, and warehousing account for the three largest cost components in

any supply chain activity. In India there are a number of taxes such as central sales tax, local

sales tax, octroi, and entry tax. Many of these taxes are governed by individual states in

India, and may hence vary between them. State borders in India are notorious for being

centers of illegal trafficking and harassment by corrupt authorities. Trucks drivers have to

wait long hours at borders for completing inter state formalities and paperwork, in the

process consuming a lot of precious corporate resources and time. The system has necessi-

tated the presence of C&F agents that are an extra step in the supply chain.

At present, the sales tax system requires that tax be paid at every stage of the value chain,

resulting in a cascading tax effect. Transactions within a single company do not attract sales

tax and hence cascading can be avoided. This would require the company to integrate back-

wards thereby, making it less efficient as compared to a value chain containing multiple firms

working in harmony. The elimination of the sales tax system and consequentially, the imple-

mentation of VAT can help in making changes to the present scenario.

The system of VAT is expected to replace the redundant sales tax system in the near future.

Though VAT has been implemented in certain states in the country, it is yet to take effect in

the others. This is likely to take place in the near future. The VAT system is expected to elim-

inate the inherent deficiencies in the Indian tax system. Tax at any point along the value

chain may be charged only for the value added at each stage, as opposed to a whole taxation.

This would make taxation more transparent, with companies requiring and recording a sale

in order to benefit a tax credit from the government. This also helps the Government to

prevent tax evasion by traders. On the whole the supply chain management in the country is

expected to benefit from the implementation of VAT.

Challenges for 3PL Service Providers due to VAT's impact

The transition to a uniform national VAT system is expected to be chaotic and it is likely to

be surrounded by a significant degree of confusion. At present, many 3PL service providers

are still in the process of gathering information on VAT. This has prompted many companies

to have multiple tax modules in place, in order to comply with the VAT system right from the

day it is implemented. Once complete, the transition is expected to set supply chains of the

country in perfect working order.


R e o r g a n i z a t i o n o f I T I n f r a s t r u c t u r e m a y b e

C o m p l i c a t e d

One of the challenges that 3PL service providers may face during the transition to a fully

VAT compliant system is the reorganization of the IT infrastructure in order to maintain

records and transactions to meet VAT standards. Companies will need the right IT infrastruc-

ture to track transactions at every stage along the supply chain to gain maximum advantage

from VAT. Synchronization of IT systems on a national level may pose a formidable chal-

lenge.The sales tax departments in various states will also need significant IT restructuring to

cope up with the new tax system.

M a i n t a i n i n g L a r g e V o l u m e s o f T r a n s a c t i o n a l R e c o r d s

C o u l d b e a D i f f i c u l t T a s k

The VAT system taxes only the value addition at each stage along the value chain, as opposed

to whole taxation under the previous system. To avail input tax credit for a transaction there

needs to be proof that a sale has been made by maintaining records of same. This will entail

additional paperwork that poses as a considerable challenge. The new system will require

companies and dealers to maintain two separate records of sales and purchases. Ensuring

minimum flow of documents and paperwork could be one by enhancing IT infrastructure

which could ultimately replace all document flow. Moreover, states have varying require-

ments to maintain records under the new system. With the non-uniform implementation of

VAT across the country, the documentation requirements can vary between states, requiring

companies to maintain two sets of documents. All these will affect 3PL service providers

offering invoicing services to their clients as record keeping costs have to reach new highs.

N o n u n i f o r m i t y o f V A T I m p l e m e n t a t i o n A c r o s s t h e

N a t i o n a n d t h e C o - e x i s t e n c e o f V A T w i t h t h e C e n t r a l

S a l e s T a x s y s t e m i s C o m p l i c a t i n g

VAT has not been implemented throughout the nation uniformly, with some states reluctant

to implement the system. These states are continuing with the outdated local sales tax

system. As a result, there exist certain confusion about the VAT system. These include

deciding the appropriate supply chain model for sales between states. For example, for a sale

to be facilitated from state A to state B, one complying with VAT and the other not

complying, supply chain models that enable maximum profitability need to be worked out.

Certain states may have shown a reluctance to implement VAT as it has not been very

popular among the trading community. This is likely to change after elections in states going

to the polls, as political parties in power may not want to invite the wrath of the traders.

Change is likely to be expected and by 2008 the country is expected to have a uniform VAT

regime.


At present the central sales tax payable for a sale has not been eliminated. It continues to

exist along with the VAT in the states where it has been implemented. This defies the logic

behind shifting to a new warehousing model as the motive behind having C&F agents in each

state was to avoid the applicability of the 4 percent central sales tax on the invoiced amount.

Input tax credit is presently available on purchases made; however, it cannot be claimed on

central sales tax payable on inter state transactions. Central Sales Tax is expected to be

completely phased out by 2010.

C o m p e t i t i o n f r o m t h e U n o r g a n i z e d S e g m e n t P o s e s a

S i g n i f i c a n t C h a l l e n g e t o t h e G r o w t h o f t h e s e

C o m p a n i e s

The unorganized segment that predominantly comprises the C&F agents may be seen consol-

idating gradually and moving into organized 3PL service providers. The threat from this

segment though may not be significant considering the fact that 3PL service providers have

greater technical expertise than the former. The only real competition may be in the form of

pricing strategies employed by the C&F agents, which could also be offset by the quality of

services the 3PL service providers offer. Even though a nationwide implementation of VAT

could witness reorganization in the distribution of warehouses from plenty to just a small

number of zonal warehouses. In certain industries such as pharmaceuticals and FMCG, the

C&F model is likely to be used for some more time. This is due to the fact that companies

will want to maintain a state wise strategic distribution point to stay ahead of competition.

Apart from the challenges mentioned above, there could be certain sentimental issues associ-

ated with shifting to the new system. Long-term relationships with C&F agents could come

to a halt, resulting in loss of employment. Added to this, many C&F agents have service-level

agreements with companies and shifting to the new system will be gross violation of the

agreements. In many cases, C&F agents are also distributors for companies and cannot be

removed within a short time frame for strategic reasons.


Opportunities for 3PL Service Providers due to VAT's impact

The implementation of VAT is expected to witness 3PL warehousing specialists move into a

space perviously occupied by the highly unorganized C&F agents.

With the implementation of a nationwide VAT expected to be completed very soon by

2008,and the abolition of central sales tax by 2010, many companies may try to reorganize

their supply chains in order to cut costs. Previously, companies maintained stocking points at

multiple locations across the country as the sales tax gains obtained outweighed the costs of

setting up and running additional stocking locations. Multiple stocking points meant extra

usage of resources and hence additional costs in terms of manpower, resources, and invento-

ries. With the elimination of central sales tax expected to take place in the near future,

companies are moving fewer zonal warehouses, as it is more economical. Companies are

expected to start consolidating their warehouses and possibly try to outsource some of their

warehouses. The 3PL service providers can take advantage of this opportunity. Companies

can also gain by outsourcing their warehousing to 3PL service providers as they have the

required expertise in maintaining warehouses and can handle fluctuating volumes. The

present system of C&F agents, who have been thriving under the previous sales tax system,

are likely to remain for some more time. Eventually, it is expected that they will ultimately

upgrade the existing facilities to a 3PL warehouse or consolidate with 3PL service providers,

or get eliminated from operating in certain sectors. Companies are likely to find it more

convenient to manage one or more 3PL service providers compared to the past.

Post implementation of VAT, consolidation of warehouses from many spread across different

states to just a few zonal hubs is expected to take place. There is expected to be greater

volumes of goods to handle and information from fewer warehouses, which is likely to lead

to the implementation of technologies and tools such as robots, conveyor belts, cranes, and

fork-lifts imperative. The C&F agents may not be able to provide services with this level of

sophistication, placing 3PL service providers at a clear advantage.

The apparel industry may need to operate out of high capacity warehouse facilities consid-

ering the large volumes being handled. Investing in these facilities may not be economically

viable and leading brands may occupy multi-user warehouses operated by a 3PL service

provider. This can also take place in the pharmaceuticals and FMCG sectors, where margins

are already strained greatly. The retail sector is also expected to benefit as direct factory to

retail shipping will become more viable. The 3PL service providers can take advantage of the

opportunities opened up by these sectors. Large multi-user warehousing facilities can help

3PL service providers leverage economies of scale.

Implementation of VAT is also expected to start automating the supply chains in India greatly

as companies will need to record financial transactions at every point along the supply chain

and information about the physical movement of goods. This will need appropriate tech-

nology implementation, which 3PL service providers in India have already started offering.

An indirect result of this could be better managed supply chains, which is something 3PL

service providers could offer to their clients.


3End-User Analysis—Overview of 3PL Needs

and Practices in India

O v e r v i e w o f 3 P L N e e d s a n d P r a c t i c e s i n I n d i a

3PL Usage in the Indian Automotive and Auto Components Sector

Chart 3.1 shows the logistics model followed by a leading MNC Vehicle Manufacturer in the

Indian third party logistics market in 2005.

C h a r t 3 . 1

Third Party Logistics Market: Logistics Model followed by Leading MNC Automakers

(India), 2005



The automotive and auto components sector is the largest revenue generator in the Indian

third party logistic (3PL) market. The entire automotive and auto components sector in India

is estimated at $40 billion. With the growth of India as one of the next destinations for auto-

mobile manufacturing outside Europe and North America, the growth of 3PL operations in

this sector is driven with the increasing need for professionally managed supply chains.

Indian manufacturers are beginning to adopt global best practices and have started realizing

cost benefits that can be derived by concentrating on core competencies and delegating logis-

tics to professional agencies.

The penetration of the 3PL concept is one of the highest in this sector with manufacturers

demanding seamless logistics. Most Original Equipment Manufacturers (OEMs) source from

a large and geographically diverse vendor base. Integrating the supply chains of these

vendors seamlessly poses a formidable challenge. Inbound logistics was previously not

greatly focused on because of the complication and criticality involved in operations, consid-

ering that late deliveries could disrupt manufacturing schedules and early deliveries could

result in unnecessary inventory holding costs. One of the reasons for this was the wide

geographical spread of the vendor base. Some companies in places such as the west Indian

state of Maharashtra had vendors located as far as the south of the country. Consolidation of

the same was difficult considering the varying sales tax rates in states. Outsourcing to a 3PL

service provider has reduced these problems considerably, as these companies slightly

tweaked the sourcing patterns and managed transporters and freight providers to make the

supply chain more efficient.

Concepts such as Kanban and just-in-time (JIT) delivery to the assembly line are gaining

acceptance, Certain companies hold only a few hours of inventory and replenish stock regu-

larly. As a result, professionally managed inbound logistics solutions is being increasingly

considered as a viable cost saving option. This can be witnessed on a regular basis with

leading automobile manufacturers, where daily milk runs by 3PL service providers are

conducted to provide seamless inbound logistics, instead of waiting for the vendor to supply

it, thereby helping in reducing the number of vehicles entering the factory premises and main-

taining optimum levels of inventory.

Another trend that is beginning to be observed is the growth of vendor managed inventory

(VMI). VMI is a means of optimizing supply chain performance wherein suppliers have

access to manufacturing schedules and inventory data and are accordingly responsible for

maintaining inventory as required by the customer. In the past, OEMs have been known to

carry inventories of several days or even months, owing to the lack of visibility along the

supply chain, leading to very high levels of working capital. It increases the transparency

along the supply chain. In VMI, the 3PL service provider plays a very critical role in ensuring

that consignments are brought to the satellite warehouses for putting in bins and trans-

porting to the factory just-in-time (JIT) for assembly. It can be said that The level of IT

integration along automotive supply chains is higher than that in other sectors; however,

there is definitely a great amount of room for improvement.


Outsourcing of warehousing operations to a 3PL service provider is witnessing a growing

trend in this sector. With inventories getting replenished at very short intervals in the ware-

house, a large number of stock keeping units to maintain the use of 3PL managed warehouses

could become imperative. These are highly technology driven warehouses with high-end use

of sophisticated material handling equipment. IT usage in warehouses has also gained accept-

ance with the implementation of warehouse management solutions to provide real-time

visibility about inventories in the warehouse. Adoption of technologies such as the use of

Radio Frequency Identification (RFID) tags in warehouses may just be witnessing a growing

trend. This being followed in certain warehouses of Ashok Leyland Limited at Hosur and

Maruti Udyog Limited. At present local sourcing is rife in the Indian automotive sector. India

is one of the next component sourcing destinations for global automotive giants such as

General Motors (GM). In fact GM have announced plans to source $1 billion worth of auto

components from India annually by 2008. Growth in internationally linked supply chains is

expected to be a key growth driver for 3PL services in this sector. Currently, more than

60 percent of the demand for auto components is from the aftermarket with most OEMs

having well established supply chains to cater to the same. The export channel accounts for

the smallest demand while the other demand comes from the OEMs.

The uniqueness of logistics for the automotive sector has witnessed the growth of many 3PL

service providers that operate in this niche segment. Companies such as TVS Logistics and

Transystem Logistics International are pure auto logistics companies. There are other compa-

nies such as Om Logistics that predominantly operate in the automotive sector. Pricing

strategies in the segment are highly competitive leading to increasingly lower rates offered to

clients.

The implementation of a uniform VAT system and the elimination of the present sales tax

system is expected to make auto supply chains a lot more leaner. Sourcing from other states is

expected to become cheaper and more efficient as bottlenecks such as inter-sate border legal-

ities are expected to be eliminated.

Hence, there is a major potential for growth of 3PL services in the automotive and auto

component sector. The sector continues to be one of the key drivers for the growth of 3PL

services in India.

Leading 3PL companies in this sector include Om Logistics, Total Logistics, Transystem

Logistics, and TVS Logistics.


3PL Usage in the Indian IT Hardware and Electronics Sector

Chart 3.2 shows the standard model of goods flow in the IT Hardware and Electronics sector

of the Indian third party logistics market in 2005.

C h a r t 3 . 2

Third Party Logistics Market: Standard Model of Goods Flow in the IT Hardware and

Electronics Sector (India), 2005


The India IT Hardware and electronics sector was worth $11.0 billion in 2005. The logistics

of the Indian IT hardware and electronics sector is very challenging. The competition in the

industry sector is very intense and companies consider their supply chains as a means of

gaining a competitive edge.The challenges are several. Logistics will be carried out with

minimal disruptions at the same time help in the growth of revenues and profits. The growth

of 3PL managed logistics in the sector is on a growing trend and the penetration of 3PL

service providers in the logistics of the industry is very high.


In the IT sector, getting the goods to the retail shelves is of critical importance as, in many

cases, time literally translates to sales and hence capital. Opportunity costs involved in the

sector are very high. At present one of the key areas of focus in logistics of this sector is effec-

tive planning of inventory. The most affected along the supply chain in terms of inventory

costs are the value-added re-sellers and the distributors. These are experimenting with

different forecasting models to decide on a model that is most economical. Distributors and

vendors are generally inclined to plan their inventories on a monthly cycle, while the Value

Added Re-sellers (VAR) prefer it on a daily cycle. Inventory holding costs in this sector are

high. This has led to a growth in the outsourcing of inventory management in the industry.

Companies that were previously maintaining inventory levels of up to 30 days have benefited

by outsourcing to a 3PL service provider, which has helped in reducing inventory levels to a

week. Companies now determine minimum order quantities and ordering is done in three to

four cycles every month to maintain optimum inventory. Product life cycles in the IT hard-

ware sector are very low, thereby requiring very effective forecasting. Selling stocks of

leading companies is not an easy task as products have to be available with the distributor

for it to be sold. This requires very effective forecasting and logistics management.

Freight constitutes around 60 percent of the costs in the logistics. With the cost of transpor-

tation increasing annually due to hike in fuel prices worldwide, it will be cost effective to

outsource logistics management to a 3PL service provider. Distributors such as Redington,

Rashi Peripherals, and Savex have tied up with 3PL service providers such as Gati, Safex-

press, and AFL. One of the concerns expressed by companies is that there are only a few

logistics service providers that provide committed delivery schedules.

Warehousing operations are also beginning to be outsourced to 3PL service providers.

Companies generally maintain warehouses at multiple locations to enable tax savings under

the existing sales tax system. This requires large IT support infrastructure in terms of inven-

tory forecasting and control. Warehousing costs in the industry are high due to cost of

storage, insurance, depreciation, and obsolescence. Companies generally tie up with 3PL

service providers to use warehouse space and pay a fixed amount every month. In the future,

more sophisticated warehouses enabled with warehouse management systems software and

tracking devices are expected.

With the implementation of VAT,there is likely to be a change in the distribution strategies

adopted by companies as the industry will be relieved from the effects of cascading taxes and

companies could shift to centralized distribution models. Warehousing in this sector is then

expected to witness a healthy growth after the uniform VAT is implemented.

Skilled management of logistics in the industry needs effective procurement at the right price

and time. Controlling physical movement of goods is of utmost priority and hence there is a

necessity to provide track and trace facilities. Outsourcing to a 3PL service provider will help

clients achieve seamless logistics with visibility along the chain.


One of the disadvantages of outsourcing to a 3PL service provider is the applicability of

service tax, especially on express transport, a service that is of importance to the IT Industry.

The logistics of the sector need professional management and hence companies are increas-

ingly outsourcing to professionals. The penetration of 3PL services in the logistics of this

sector is among the highest across all verticals.

Leading 3PL companies in this sector include AFL Logistics, Exel Logistics, Safexpress, and

SembCorp Logistics.

3PL Usage in the Indian FMCG Sector

Chart 3.3 shows the standard model of goods flow in the FMCG sector of the Indian third

party logistics market in 2005.

C h a r t 3 . 3

Third Party Logistics Market: Standard Model of Goods Flow in the FMCG Sector (India),

2005


The Indian fast moving consumer goods (FMCG) sector was valued at $14.5 billion in 2005.

The logistical requirements of the sector are huge. The logistics of this sector has for long

been dominated by participants in the unorganized segment, with small time truckers and

C&F agents playing a very crucial role. This unorganized format of logistics is because the

volumes of goods manufactured and the geographical diversity of India's consumers. This

cannot be handled by any single logistics company. There is a very high degree of decentrali-

zation in the logistics of this sector with stockists and dealers spread all over the country.

Manufacturing Unit

Central Warehouse

State/Regional

Warehouse

District Level Stock

Point

Town Level Stock

Point

Retailer

Indian FMCG Sector - Standard Goods Flow Model

Owned by Company

Owned by Company

Owned by C&F Agent

Owned by Distributor

Owned by Wholesaler


There are around 3.3 million retail outlets to cater to by these companies. The logistics of the

FMCG sector demand that stock keeping units be made available on retail shelves to a great

extent to prevent customers switching brand loyalty. Distribution strategies employed by

companies are also very aggressive.

In spite of the nature of competition that exists in the industry, professionally managed logis-

tics is hardly seen. There could be several reasons for this. Firstly, as FMCG companies

operate on slim margins, outsourcing to a 3PL may hike up distribution costs as these service

providers charge high rates. This can result in slimming margins further. Secondly, the supply

chain is one of the most critical components of an FMCG company's operations, and

outsourcing the entire chain would mean investing all its resources with one service provider.

Any disruption in the chain could have disastrousconsequences on distribution activity and

this is something that FMCG companies cannot afford in such a competitive scenario. Clients

are also not convinced about the infrastructure capabilities of the 3PL service providers to

manage the large volumes produced.

Transportation activity in the logistics of the FMCG sector is predominantly in the done by

the unorganized sector. The activity is outsourced to local truckers who generally have a

long-term working relationships with local company depots. The activity is managed very

unprofessionally and the trucks run on full loads. There is no proper weather proofing avail-

able and the vehicles are covered with tarpaulin covers in the event of rain to prevent water

from seeping in. The disadvantages with the unorganized segment are very high. There is a

lack of accountability, and malpractices such as fuel pilferage are common. In spite of this

companies do not mind operating with the unorganized segment, as it is cost effective and

also honors a long-term relationships with the truck owner.

The warehousing operation is predominantly in the form of clearing and forwarding (C&F)

agents, whose presence has been necessitated because of the redundant sales tax system in

India. The C&F agents have flourished under the past system. Companies have used them to

effect stock transfers between states. Some companies find it very convenient with C&F

agents due to long standing relationships with them and these agents also release scarce

working capital. This type of warehousing lack professionalism and is more of a storage

function only.

Organized 3PL warehousing can be seen on the growing trend with industry leaders such as

Hindustan Lever Limited, Dabur, and Marico outsourcing their requirements, albeit in a

small way, to 3PL service providers such as Exel Logistics and Sembcorp Logistics. Most

companies have started outsourcing on purely an experimental basis. In fact Hindustan Lever

has outsourced their warehouse at Bangalore to Exel logistics after a successful experiment at

their Hyderabad warehouse.


The implementation of VAT is likely to witness supply chains being altered in the FMCG

sector. One interesting opportunity that 3PL service providers can look forward to is occu-

pying a position previously held by C&F agents. The margins in the FMCG sector are already

low and hence 3PL service providers cannot expect very high margins. The growth in this

sector is expected to come from professional warehousing, with leading companies increas-

ingly outsourcing to 3PL service providers.

Leading 3PL companies in this sector include Exel Logistics, Gati, Reliance Logistics,

Sembcorp Logistics, and TCI Supply Chain Solutions

3PL Usage in the Indian Pharmaceuticals Sector

Chart 3.4 shows the standard model of goods flow in the pharmaceuticals sector of the


C h a r t 3 . 4

Third Party Logistics Market: Standard Model of Goods Flow in the Pharmaceuticals Sector

(India), 2005


The Indian pharmaceuticals sector is one of the fastest growing in the country. It was valued

at $8.3 billion in 2005. The average spend on logistics is around 3.8 to 4 percent of the total

industry turnover. The average cost of logistics is greater in the case of companies that

operate cold chains.The penetration of 3PL service providers in this sector has been fairly

low, considering that they may not be equipped with the infrastructure to handle the large

volumes and diverse distribution networks that pharmaceutical companies need.

Manufacturing Unit

Central Warehouse

State/Regional

Warehouse

District Level Stock Point

Medical Representatives

Retailer

Indian Pharmaceuticals Sector - Standard Goods Flow Model

Owned by Company

Owned by Company

Owned by C&F Agent

Owned by Distributor

Owned by Wholesaler


A majority of companies manage their logistics themselves, either using a network of C&F

gents or through their own depots.This can change if some good 3PL service providers enter

the market. At present, penetration is very low, where there are only a few companies that

outsources the entire distribution to only one party. C&F agents work at a commission of 1

to 1.5 percent of the invoiced amount. They provide only space while all the billing is done in

the name of the company. All the other responsibilities lie with the company. In a vast

majority of the cases, the penetration of the 3PL service provider has been extremely low.

On an average, a little more than half of the total cost of a pharmaceutical product in India is

in the form of raw material costs. The sourcing of raw materials for the manufacture of bulk

drugs is characteristically complex, due to the large vendor base. Certain special chemicals

required for manufacture are available only outside the country, with long lead times.

Procurement of certain chemicals from alternate sources generally tends to be a more expen-

sive process, as tax and duty structures tend to make imports significantly cheaper than

chemicals sourced locally. Hence there are formidable inbound logistics challenges to be met

such as reducing the sourcing costs.

Transportation in the pharmaceutical sector is highly unorganized. Most of the transporta-

tion is in the form of traditional trucking. The unorganized truckers treat expensive

pharmaceutical consignments just as an ordinary one. Generally the whole consignment is

carried on full truck loads and just covered with a tarpaulin cover. Extreme weather condi-

tions such as heavy rainfall can damage consignments. The pharmaceutical sector in India is

in great need of professionally managed cold chains for drugs that need controlled storage

environments.

Growth of the express mode of transport could happen if companies realize the benefits of

using it. Presently the penetration of express transport in the transportation requirements is

low. This is expected to change once the road infrastructure of the country develops and

becomes more conducive for express transport. Currently, there is requirement for express

transport, considering the highly competitive nature of the pharmaceutical sector. However,

highly strained margins may deter companies from outsourcing to a professional 3PL service

provider.l.

The hidden costs involved in logistics of the pharmaceutical sector are high and these are

often overlooked. It will be possible to eliminate these costs by outsourcing to a 3PL service

provider. For example the time and effort of accountants, who are directly not connected but

still perform a very important role in the managing of supply chains is greatly overlooked

and this is a component that can be avoided by outsourcing to a 3PL service provider.

IT infrastructure along the supply chain is very poor. The way stocks are rotated poses a huge

challenge. Clearing near expiry date stocks faster is of paramount importance and most of it

is done manually. Presently, a large pharmaceutical company may have in excess of a hundred

distributors spread all over the country, an integrating them remains a major challenge. Due

to the drug price control orders imposed by the government, it is economical to adopt tech-

nologies such as RFID.


Outsourcing to a 3PL service provider has started in warehousing operations. Many compa-

nies such as Lupin Laboratories, Dr. Reddy's Laboratories, and Ranbaxy have shown a

willingness to outsource their warehousing operations albeit to only a small extent. This is

expected to grow once a nationwide VAT system is implemented, eliminating the necessity of

a C&F agent to a great extent. The C&F agents manage their resources very unprofession-

ally, and generally do not have IT systems of their own. They are mostly provided by the

company itself.

Outsourcing to a 3PL service provider is expected to gain acceptance soon as there is an

increasing requirement for professional management of logistics. Companies may operate on

very low margins and 3PL service providers may need to operate with a critical mass of at

least five to six companies to stay competitive.

Leading 3PL companies in this sector include Safexpress, Gati, and Sembcorp Logistics.

3PL Usage in the Indian Retail Sector

Chart 3.5 shows the logistics model of leading retailers in the Indian third party logistics

market in 2005.

C h a r t 3 . 5

Third Party Logistics Market: Logistics Model followed Leading Retailers (India), 2005



The Indian retail sector is currently worth $200 billion and it contributes to around

6.0 percent of the employment in the country. Although there are 12 million outlets across

the nation, majority of them are mom and pop shops with the organized segment contrib-

uting to around 3.0 percent of the total retail market.

The logistical needs of the retail sector depends largely on the scale of operations, the

product category, and retail format. The unorganized segment of retailing still employs

truckers and fleet operators to carry out their transportation activity and maintain very less

inventory in their own warehouses, which in most cases is a part of their shop. The penetra-

tion of 3PL service providers in this segment is as low as 2.0 percent. This can be attributed

to the fact that the small shops also form a part of the distribution network of a major 3PL

service provider and hence use their services in rare occasions.

The organized segment of retailing, which is the main driver for the 3PL market in India is

expected to have a high growth rate of around 30.0 percent by 2012. The organized retailing

segment is marked by foreign direct investment, entry of multinationals, and rapid expansion

of existing outlets across the nation. This is a direct result of the increasing levels of dispos-

able incomes among the middle class consumers and their aspiration to raise their standard

of living.

With the increasing need of the organized retailing in India, the 3PL needs are also expected

to be on the rise accordingly. Currently there is a low level of 3PL service adoption even

among the organized retailers. The transportation is partly carried out by organized service

providers and partly by truckers and local transporters. With the implementation of VAT, the

warehousing activity is expected to be streamlined, which is an added advantage for the retail

sector. It is expected to increase outsourcing of warehousing operations in the future. The

multinationals entering the Indian retail market are expected to take the expertise of 3PL

service providers to meet their logistical needs at a low cost with minimal investment in the

infrastructure. The need for information management is also increasing in order to stay

competitive. It essentially helps the local and multinational participants to track their inven-

tory and maintain minimal stocks and achieve greater cost efficiency in their supply chain.

These factors are expected to drive the retail sector toward outsourcing their logistics activi-

ties to a 3PL service provider till 2012.


The organized retail participants include different segments such as apparel and lifestyle,

consumer durables, food and grocery, footwear and leather, home furniture and fixtures,

health and beauty-based multi-brand retailers, stationery and gifts, watch, and jewelry. The

logistics model for each of these segments varies significantly due to the nature of product

and the product life cycle. The future opportunities of 3PL service providers depend on their

ability to customize their services to suit the unique needs of each participant of this segment

and offer competitive rates.

The opportunities offered by the retail sector are large and the expectations are high;

however, the attitude is not so favorable. The Indian retailers are still not open to

outsourcing for fear of losing control over their supply chain. The 3PL service providers

therefore have to prove their competency by offering cost effective services and build a long-

term synergetic relationship with the retailers, which will attract the new entrants into the

market to outsource as well. Though the stabilization period for the 3PL market is expected

to continue for the next five years till 2010, the growth of the market after that period is

likely to be phenomenal with the increasing need and confidence of the retailers.

Leading 3PL service providers in this sector include Safexpress, Gati, Sembcorp Logistics,

and TCI Supply Chain Solutions.


4Competitive Analysis of the 3PL Providers in

Indian Market

I n d u s t r y S i z e

Industry Size in Terms of Number of Companies

Figure 4-1 and Chart 4.1 show the industry structure by type of service provider in the Indian

third party logistics market in 2005.


F i g u r e 4 - 1

Third Party Logistics Market: 3PL Industry Structure by Type of Service Provider (India),

2005

Category Number of Companies

National 3PL Service Provider 40

Regional 3PL Service Provider 30

Local 3PL Service Provider 360

TOTAL 430


C h a r t 4 . 1

Third Party Logistics Market: 3PL Industry Structure by Type of Service Provider (India),

2005


In 2005, the total number of service providers in the Indian 3PL market was estimated at

430. National 3PL service providers accounted for around 47.7 percent of the revenues

generated in the market. In 2005, there were around 40 national 3PL service providers in the

market. They have very strong distribution networks on a national scale and are highly

known and often used by large corporations for their logistical needs. There were around

30 service providers in the regional 3PL market. The regional 3PL service providers

accounted for around 43.5 percent of the revenues generated in the market. These 3PL

service providers deal with companies on a regional or state level basis and cater to the needs

of clients in local areas, as well as to places where national 3PL service providers do not have

a reach. There were around 360 local 3PL service providers in the market. The local 3PL

service providers accounted for around 8.8 percent of the revenues generated in the market.

These service providers have relatively much smaller scales of operations compared to the

regional and the national 3PL ones. They also have very well established networks on a

district or town level.

I n d u s t r y L i f e C y c l e

Current Status of the Industry Life Cycle

Chart 4.2 shows the life cycle of 3PL service providers in the Indian third party logistics

market from 2000-2015.

Local 3PL Service Provider

360

Regional 3PL Service Provider

30

National 3PL Service Provider

40


C h a r t 4 . 2

Third Party Logistics Market: 3PL Industry Life Cycle (India), 2000-2015


The Third Party Logistics (3PL) Industry today comprises many companies competing with

each other. In 2005, there were around 360 local 3PL service providers that operated at a

level not penetrated by participants with a purely regional and national-level presence. The

30 regional service providers have well established networks in the state and deal with the

local service providers for access in remote areas. The service providers with national opera-

tions, liaison with the regional operators, in areas accessible by the latter. This shows that

there are three tiers of companies, each operating at a different level. As a result, it can be

noted that the industry is highly fragmented, as has been the case for many years now. This

fragmented scenario is expected to fade away slowly once the consolidation phase sets into

the industry. Consolidation has not set in the industry and it is expected that it will start take

place, driven by a requirement to manage fewer logistics service providers. Till then the

number of 3PL service providers in the market is expected to grow. The smaller companies

are likely to ultimately start consolidating with the bigger companies in the market, failing

which, they may be not be in a position to survive in the highly competitive environment and

eventually ceasing to exist. Mergers & Acquisitions by companies, especially multinational

3PL service providers to gain local network access is expected to take place.

Mergers & Acquisitions are already taking place on a global level, and the scenario is likely

to be replicated in India, where several 3PL service providers are catering to the needs of

their clients, assisted by smaller companies. This is likely to witness the emergence of fourth

party logistics (4PL) service provider. Though consolidation is expected to take place, the

market is still likely to remain fragmented to a substantial extent.


Current Status of Market Life Cycle

Chart 4.3 shows the market life cycle of the Indian third party logistics market from

2000-2015.

C h a r t 4 . 3

Third Party Logistics Market: Market Life Cycle (India), 2000-2015


The market for 3PL is experiencing a growing trend. This is expected to be witnessed till the

year 2012, considering the various factors that are driving the market are likely to have a

greater impact than those restraining the growth. The growth is expected predominantly

from multinational companies entering India, and their increasing tendency to outsource

logistics to a professional service provider, while concentrating on core competencies. The

growth is expected to continue well without recording any retardation until the end of fore-

casted life cycle period 2015.

M a r k e t S h a r e C o m p a r i s o n a n d B r e a k u p

Competitive Scenario

Figure 4-2 and Chart 4.4 show the revenue breakup by type of service provider in the Indian

third party logistics market in 2005.



C h a r t 4 . 4

Third Party Logistics Market: Revenue Breakup by Type of Service Provider (India), 2005


Figure 4-3 and Chart 4.5 show the revenue share breakup between national 3PL service

providers in the Indian third party logistics market in 2005.

F i g u r e 4 - 2

Third Party Logistics Market: Revenue Breakup by Type of 3PL Service Provider (India),

2005

Category 2005 (%)

National 3PL Service Provider 47.7

Regional 3PL Service Provider 43.5

Local 3PL Service Provider 8.8

TOTAL 100.0

Local 3PL Service Provider

8.8%

Regional 3PL Service Provider43.5%

National 3PL Service Provider47.7%



C h a r t 4 . 5

Third Party Logistics Market: Revenue Share Breakup Between National 3PL Service

Providers (India), 2005


F i g u r e 4 - 3

Third Party Logistics Market: Revenue Share Breakup Between National 3PL Service Provid-

ers (India), 2005

Company 2005 (%)

Gati 11.8

Safexpress 9.4

Om Logistics 8.2

TVS Logistics 7.0

SembCorp Logistics 6.1

AFL Logistics 5.6

Reliance Logistics 4.7

Patel Logistics 4.2

Transystem Logistics 3.6

DHL 2.6

Take Solutions 1.4

Others (Bax Global, Kochi Logistics, Prologis, Lemuir, Linfox etc.) 35.4

Total 100.0

Others (Bax Global, Kochi Logistics,

Prologis, Lemuir, Linfox etc.)

35.4%

Take Solutions 1.4% DHL 2.6%

Transystem Logistics 3.6%

Patel Logistics 4.2%

Reliance Logistics 4.7%

AFL Logistic 5.6%

SembCorp Logistics 6.1%

Om Logistics 8.2%

Safexpres 9.4%

Gati 11.8%

TVS Logistics 7%


The national 3PL service providers accounted for 47.7 percent of the revenues generated in

the market in 2005. They have the largest share of the market and generally cater to large

corporations. This can be attributed to the relatively more expensive rates offered by them,

which find customers predominantly among the large corporations. The regional 3PL service

providers accounted for 43.5 percent of the revenues generated in the market. The local 3PL

service providers accounted for 8.8 percent of the revenues generated in the market.

S e r v i c e s C o m p a r i s o n

National 3PL Service Providers

Figure 4-4 shows the service comparison between national 3PL service providers in the


F i g u r e 4 - 4

Third Party Logistics Market: Services Comparison between National 3PL Service Providers

(India), 2005

Company Name

Range of Services Offered for FMCG Sector in each Function

Major Verticals ServedWarehousing Transportation Freight Forwarding MIS/Others

DHL—Exel Distribution Consolidation and Mega Warehouse Management

Partial-Primary Transportation from Factory to Regional Ware-house

Complete export Import Logistics Management

MIS, Back Office Operations, Pro-curement Logis-tic, Reverse Logistics

Service Parts Logistic-sSpare Parts Logistics-Medical ElectronicsTelecommuni-cationsFMCGRetailTex-tile and Apparel

SembCorp Logis-tics

Warehouse Management and Storage Solutions

Partial-Primary Transportation from factory to Regional Ware-house

Complete export Import Logistics Management

MIS, Customer Support, Packag-ing Solutions

FMCGRetail IT Hard-ware & ElectronicsPhar-maceuticals and HealthcareConsumer DurablesAutomotive and Auto Components

Reliance Logis-tics

Warehousing and Distribu-tion Manage-ment

Multi-modal pri-mary Transporta-tion Management

Export—Import logistics support

Customized MIS Services

FMCGRetailChemicals and PetrochemicalsCon-sumer Durables

TCI Supply Chain Solutions

Warehousing Services

Primary and Sec-ondary Transpor-tation Services up to Distribution Centers

Standard Freight Forwarding serv-ices

MIS, e-Logistics, Kitting, Reverse Logistics

FMCGConsumer Dura-blesAutomotive and Auto Components

Gati Customized Warehousing Solutions

Primary and Sec-ondary Transpor-tation Services up to Distribution Canters

Customs clearance and cargo Manage-ment Services

MIS solutions, Returns Manage-ment, Supply Chain Consulting

AutomotivePharmaceuti-calsRetailConsumer Elec-tronicsConsumer DurablesIT Hardware-FMCG



The national service providers have the capacity to offer end-to-end supply chain solutions to

their clients, acting as a single point stop for all logistics requirements. They have pan India

operations.They offer extremely sophisticated services and provide solutions such as vehicle

tracking and vendor management of inventory. Other 3PL service providers may not be in a

position to offer these service. Their services are highly professional in nature and are gener-

ally with large corporations whose supply chain performances are extremely critical and time

bound. The level of technology adoption by these service providers is relatively higher than

the service providers in the other two tiers. The warehousing solutions offered by these

service providers also meet global standards. There is use of material handling equipment

such as fork-lifts, cranes, and conveyor belts for facilitating better logistics inside the ware-

house. The use of equipment to manage space more effectively inside the warehouse to enable

utilization of vertical spaces is also gaining acceptance. The adoption of technologies such as

Radio Frequency Identification (RFID) too is expected to witness a growing trend with these

service providers, as the demand is expected to be driven by increasing requirements to

provide visibility along the supply chain. In areas not accessible by them, they liaison with

the regional 3PL service providers to provide reach. The level of Information technology

usage is relatively higher than in the other two tiers.

Om Logistics Standard Ware-house Manage-ment

Primary and Sec-ondary Transpor-tation Management up to Distribution Centers

Customs clearance and Cargo Manage-ment services

Standard MIS Services

AutomotiveConsumer DurablesRetailConsumer ElectronicsPharmaceuti-calsFMCG

AFL Logistics Warehousing and Distribu-tion Services

Multi-modal Pri-mary Transporta-tion Management

Standard Freight Forwarding Serv-ices

MIS, Sales Pro-motion

Automotive & Auto com-ponentsIT HardwareCon-sumer ElectronicsTelecommuni-cationsFMCGPharmaceu-ticalsRetail

Safexpress Centralized Warehouse Management

Primary and Sec-ondary Transpor-tation Management up to Distribution Centers

Customs clearance and Cargo Manage-ment Services

Standard MIS Services, Consult-ing

Retail & ApparelIT Hardware & Electronic-sAutomotive & Auto componentsPharmaceuti-calsFMCGConsumer Durables

Patel Logistics Basic Ware-housing and Distribution Services

Primary and Sec-ondary Transpor-tation Services up to Distribution Centers

Basic Freight For-warding Services through Partners

Basic MIS AutomotiveEngineer-ingFMCG

F i g u r e 4 - 4 ( C o n t i n u e d )

Third Party Logistics Market: Services Comparison between National 3PL Service Providers

(India), 2005

Company Name

Range of Services Offered for FMCG Sector in each Function

Major Verticals ServedWarehousing Transportation Freight Forwarding MIS/Others


Regional 3PL Service Providers

Regional 3PL service providers operate only at a regional level. Hence, they do not provide

services of high standards set by the national 3PL service providers. They have lesser

resources at their behest, and hence the scale of operations is also much lower than that of

national 3PL service providers. These companies generally operate a fleet of trucks and

operate warehouses that predominantly serve as stocking points as opposed to technology-

enabled warehousing activity. They have hubs in major towns in various states and cater to

the regions surrounding them. The level of technology adoption here is restricted to the use

of information management systems and (Enterprise Resource Planning) ERP systems linked

by Very Small Aperture Terminals (VSAT) to the client's location.The use of technology t is

relatively lower when compared to the national companies. For transportation activity, these

companies generally own a small feet of trucks that operate regionally. The portfolio of

value-added services is also not vast as they do not have the capacity to provide these serv-

ices. Most of these companies provide logistical services to companies that cater to region-

specific markets and to national level 3PL service providers that do not have access to these

areas.

Local 3PL Service Providers

The local 3PL service providers operate in the interiors of a state or district where other

national and regional service providers do not have any reach. They offer very basic trucking

and storage solution. They generally operate out of a depot and own a small fleet of trucks.

The level of technology adoption is very low with these companies and there is relatively

much lower visibility along the supply chains they manage, when compared to the national

and regional 3PL service providers. The warehousing services offered by them are in the form

of very small depots, where deployment of warehouse management solutions( WMS) may not

be economically viable.

P r o f i l e s o f t h e M a j o r 3 P L S e r v i c e P r o v i d e r s

i n I n d i a

AFL Logistics

Name of the Company: AFL Logistics

Estimated 3PL Revenues in 2005: $24 million


Industry Segment Focus:

Automotive and Auto components

IT Hardware

Consumer Electronics

Telecommunications

FMCG

Pharmaceuticals

Retail

Clientele:

Sona Koyo Steering

MICO BOSCH

Tata Motors

NEI

APCOM

HP

Sansui

Blue Star

Venky's

LG

Warehousing Capacity: Around 45 warehouses in 29 states with over 1 million square feet of

warehousing space.

Company Background: AFL Logistics is a part of the AFL Group of companies consisting of

two other companies namely AFL WIZ couriers and AFL Cargo services. The company occu-

pies a leading position in the 3PL services market in India and boasts of a prestigious

clientele. Around 7 to 10 percent of the its revenues are generated from providing logistics

solutions to the automotive sector. The dominant part of company's revenues are from the IT

hardware sector, which contributes around 40 to 45 percent of the its revenues. The company

is one of the oldest integrated logistics solution providers and has established networks and

serves a prestigious clientele.


DHL

Name of the Company: DHL



Service Parts Logistics

Spare Parts Logistics

Medical Electronics

Telecommunications

FMCG

Retail

Textile and Apparel

Mergers & Acquisitions: Global Acquisition of Exel Logistics

Clientele:

Siemens

Hewlett Packard

Cisco

Nortell Networks

General Electric Company

Phillips Medical

Exel Logistics' Clientele:

Hindustan Lever Limited

Hindustan Motors

Mahindra & Mahindra

Daimler Chrysler

Lifestyle International


Warehousing Capacity: 500,000 square feet

Company Background: DHL-Exel was created by the DHL's global acquisition of the

UK-based Exel Logistics. The acquisition has created the world's single largest 3PL service

provider. Prior to the acquisition, DHL's Indian operations were primarily focused on Inter-

national Air Express, which still forms a significant portion of the company's revenues in the

country. DHL does provide service parts logistics and spare parts logistics to its multina-

tional clients operating in India. The company is in the process of setting up warehouses and

is reported to have imported material handling equipment to install in the same. Exel logis-

tics is one of the leading warehouse solutions providers in the country, and is reported to be

investing innetworks to strengthen its foothold in the country. The company also specializes

in managing clients' inbound supply chains. The company also manages aftermarket opera-

tions for its certain clients. This strategic acquisition is expected to witness DHL-Exel emerge

as a market leader in the future.

Dynamic Logistics

Name of the Company: Dynamic Logistics

Estimated 3PL Revenues in 2005: N/A


Automotive

Pharmaceuticals

Retail


Consumer Durables

Metals

FMCG


Clientele:

Alpha Laval

Atlas Copco India

Bajaj Electricals Limited

Behr

Coca Cola

Crompton Greaves Ltd.

Delphi

DGP Hinoday Industries Ltd.

Emerson India

Finolex

Fleetguard Inc.

Ford India Private Limited

Godrej Industries Ltd.

HLL

Hoechst Roussel Vet.Pvt. Ltd.

Kirloskar

ISSAL

Lipton

Nestle

Shree Precoated Steels Ltd.

Tata Sons Ltd.

Tetra Pak

Thermax

Timken India

Whirlpool

Voltas Limited


Warehousing Capacity: Over 1 million square feet of warehousing space

Company Background: Dynamic Logistics is a part of the Talera Group. The company is

widely regarded as one of the pioneers of 3PL services in India, The company offers a wide

variety of logistical and value-added services and provides good technological support to its

clients. It has an established network in place. The company is a specialist in the automotive

and auto components sector, though it serves other verticals also. It has its own in-house

technology services division responsible for producing systems such as warehouse manage-

ment systems and transportation management systems. The company also operates a

container freight Station, thereby facilitating import-export logistics.

GATI

Name of the Company: Gati Ltd.



Automotive

Pharmaceuticals

Retail


Consumer Durables

IT Hardware

FMCG

Clientele:

Ashok Leyland

3M

Ford

Maruti Udyog Limited

General Motors

Rane TRW Steering

Indian Terrain

Whirlpool


Lifestyle

Titan Industries

Pantaloon Retail

Godrej GE Appliances

Sony

Hitachi Home and Life Solutions

Warehousing Capacity: Around 600,000 square feet spread over 27 modern warehouses.

Fleet Size: Over 2,000 vehicles

Company Background: Gati is one of India's largest express distribution service providers.

The company aims to achieve 25 to 30 percent Year-on-Year growth in revenues in the

coming years. A majority of the its profits come from the express distribution and supply

chain and the company is in the process of building express distribution centers to cater to

the needs of its 3PL clients. The company is focusing on better warehouse space utilization

and is investing in mechatronic warehouses to enable sophisticated material handling. It is

investing close to $10 million to upgrade certain facilities. With a presence in 580 out of

590 districts in the country, Gati has the best network in the country. The company's main

industry focus is the retail sector, which contributes around 30 percent of its 3PL revenues.

The company has also invested heavily in information technology to provide clients extensive

IT support and visibility along the supply chain.

Geo Logistics

Name of the Company: Geo Logistics



Consumer Durables

IT Hardware

Automotive and Autocomponents


Clientele:

Sansui India Ltd.

Hyundai Electronics Limiteg

ETA General Air-conditioners India (Pvt.) Ltd.

Crompton Greaves

Hewlett Packard

Akai

Goodyear Tires

Warehousing Capacity:Over 1 million square feet

Company Background:

Geo Logistics started operations in India around 1998 as a C&F and Freight Management

Company and has ever since grown into providing end to end supply chain solutions for

Indian Industry. They were globally acquired by PWC Logistics in 2005.The company

provides excellent warehousing facilities and reach to its clients. The company operates out

of more than 18 offices located at key transportation hubs in the country and offers a whole

gamut of value added services to clients.

Om Logistics

Name of the Company: Om Logistics



Automotive

Consumer Durables

Retail


Pharmaceuticals

FMCG


Clientele:

General Motors

Tata

TVS Group

Subros Ltd.

Mahindra & Mahindra

Bajaj Auto Limited

Eicher Motors

Skoda

3M

Yamaha

Escorts

Hero Honda


Ashok Leyland

Motherson Sumi

LG

GEC

Zydus Cadilla

Glaxo Smithkline

Auro Textiles

ITC

Pepsi

Godrej


Warehousing Capacity: Around 5 million square feet

Fleet Size:Over 3,000 vehicles

Company Background: Om Logistics is one of the leading providers of 3PL services in India.

The majority of Om Logistics' revenue comes from the automotive sector. It is a company

that specializes in automotive logistics, with the sector accounting for nearly 65 percent of

their revenues. It is among the market leaders in providing logistics solutions to the automo-

tive industry. Om Logistics has the advantage of owning assets that give it a competitive

edge. The company has access to around 1,000 strategic locations in the country. It operates

out of 240 branch offices and 200 franchisees. With a fleet size exceeding 3,000 vehicles, and

a pan-national presence Om logistics is a definitely a big force to reckon with in the Indian

3PL market.

Patel Logistics

Name of the Company: Patel Logistics



Automotive

Engineering

FMCG

Clientele:

Tata Motors

OTIS

FAG Bearings


Parle Ltd.

Emami Ltd.

Warehousing Capacity: Around 14 warehouses with area in excess of 2,0000 square feet and

380 stocking points with areas in the range of 500 square feet and 7000 square feet.

Fleet Size: Around 94 vehicles owned by company, other transportation requirements

outsourced


Company Background: Patel Logistics is a division of Patel Roadways Limited, which was

founded in 1959. The company adopts a highly customer-centric approach and caters to a

highly prestigious clientele. The company has the advantage of a strong and well-established

network in the country, covering over 1,000 locations. The company provides containerized

trucking solutions for high-value consignments.

Reliance Logistics

Company: Reliance Logistics



FMCG

Retail

Chemicals and Petrochemicals

Consumer Durables

Clientele:


Metro

Parle

Nestle

Cargill

Reliance Industries Limited

Godrej

ITC

IPCL

ISPAT

Warehousing Capacity: Around 460,000 square feet spread over 55 warehouses

Fleet Size: Around 5,000 vehicles


Company Background: Reliance Logistics is a company that operates mainly on the full truck

load segment, though they do offer 3PL services and 4PL services. A fairly big part of the

company's revenues is from inside the Reliance Group of companies, the company offers

solutions for companies in other verticals also. Though the entire revenues of the company

exceed $400 million, the company's 3PL revenues contribute a relatively small share to the

total revenues. Reliance Logistics through its sophisticated setup of 55 warehouses all over

the country, caters to the needs of its prestigious clientele. The company offers a host of serv-

ices that include warehouse start-up and management, distribution management, inventory

management, provision of IT support, and other value-added services.

Safexpress

Name of the Company: Safexpress



Retail and Apparel

IT Hardware & Electronics


Pharmaceuticals

FMCG

Consumer Durables

Clientele:

NIIT

Acer

Benetton

Blue Star

Canon

ColorPlus

Dell Computers

Escorts Communication

Ford


General Motors

Hilti

Hewlett Packard

Hughes

IBM

Kirloskar Oil

LG FMCG

Madura Garments

Reebok

Ricoh

Sansui

Wipro

Fleet Size: Around 3,100 trucks

Warehousing Capacity: Around 4 million square feet

Company Background: Safexpress has an extremely strong presence in the Indian 3PL market

and caters to a wide range of industry segments. The apparel and automotive sectors

contribute an estimated 20 percent of the company's 3PL service revenues, while the IT hard-

ware segment contributes another 20 percent. The company's presence in the retail sector is

also very strong and it boasts of a prestigious clientele. The company has witnessed very

strong growth in a short period of time and expects to have a growth of 35 percent in its

revenues annually.

SembCorp Logistics

Name of the Company: SembCorp Logistics




FMCG

Retail

IT Hardware and Electronics

Pharmaceuticals and Healthcare

Consumer Durables

Automotive

Clients:

Coca Cola

ITC Ltd

Marico Industries Ltd.

Dabur Ltd.

Colgate Palmolive

Duncan Tea

Lupin Laboratories

Toshiba

Nortel

Ranbaxy

Phillips

Glaxo Smithkline

Winsome Group

TCL (Thomson)

DuPont

Warehousing Capacity: Around four logistic centers at Pune, Chennai, Jamshedpur, and

Bhiwandi. Managing in excess of 1 million square feet of warehousing space.


Company Background: Sembcorp Logistics India is a wholly owned subsidiary of Sembcorp

Logistics Singapore. The company was set up in India in 1996, and has since established a

strong pan-India network, enabling them provide seamless solutions to clients. The company

is a force to reckon with in the FMCG sector, where volumes are large. The major logistics

centers of the company are shared facilities equipped with state-of-the-art material handling

equipment and racking systems. The company possesses the expertise to develop a custom-

ized supply chains solution for its clients and it offers a host of other value-added services as

a part of its portfolio.

Take Solutions

Name of the Company: Take Solutions



Food Retail


Consumer Durables

Machinery and Engineering

Clientele:

Pizza Corner India

Hatsun Agro

Whirlpool

Saint-Gobain Glass India Limited

Philips India Limited

Parle Products Private Limited

MK Electric (India) Limited

ITC Limited

Ashok Leyland Ltd

CavinKare Private Limited


Company Background: Take Solutions offers a wide gamut of Supply Chain Management

services, helping clients concentrate on their core competencies.It is a company following a

model where they take title to the goods and execute logistics. The company is presently

concentrating on the food retail sector and may loot to venture into the Engineering retail

sector, with an increased focus on niche services The company offers a wide scope of end to

end services that inlcude inventory management, expiry management and temperature

management.. It is a multinational company with offices in South East Asia and the Middle

east. The company offers warehousing solutions of very good quality. The company adopts a

highly customer focused, process enabled and technology driven approach to supply chain

optimization. Other services include Strategic Sourcing, Product Availability Management

and Transaction Processing.

TCI Supply Chain Solutions

Name of the Company: TCI Supply Chain Solutions

Estimated 3PL Revenues in 2005: N/A


Automotive

Telecommunications

FMCG

Clientele:

Bridgestone Tires

Goodyear

Nestle India Ltd.

ITC Limited


Company Background: TCI Supply Chain Solutions is a part of the Transport Corporation of

India Group. This division of the group handles the 3PL services and caters to clients across

different verticals. Services offered include offerings of vendor managed inventory solutions

for automotive clients, cross-docked warehousing, and stock buffering for FMCG clients,

and telecommunications equipment distribution. The company offers end-to-end supply

chain solutions and services such as transport management, warehouse management, C&F

management, and other value-added services.


Total Logistics

Name of the Company: Total Logistics




Retail

Consumer Durables

Machinery and Engineering

Clientele:

TELCON Ltd.

L.G. Electronics Ltd.

Voltas Ltd.

Goodyear India Ltd.

Modicare India Ltd.

Thermax Ltd.

Electrolux Ltd.

Rane Brakes Ltd.

SKF Bearing Ltd.

Kirloskar Oil Engines Ltd.

Akzo Nobel Explosives Ltd.

Lifestyle

Tata Steel

Josts Engg.Company Ltd.

Bombay Swadeshi Stores

Atul Ltd.

Eureka Forbes Ltd.

Exide Ltd.


Tata Motors Limited

Larsen & Toubro Ltd.

ABB Limited.

Bharat Forge Limited.

Warehousing Capacity: Around 900,000 square feet

Fleet Size: Around 600 trucks

Company Background: The company has a formidable network of 74 branches and hence has

an excellent market reach. Total Logistics has experience in the field of logistics and has the

requisite expertise in handling all statutory requirements. The company offers clients good

MIS support to enable demand planning and ensure visibility. Total Logistics created a speci-

ality automotive logistics business unit in 2005 to cater to the needs of the automotive sector,

which is the largest contributor to 3PL services revenue of the company.

Transystem Logistics International

Name of the Company: Transystem Logistics International

Estimated 3PL Revenues in 2005: $15.5 million

Industry Segment Focus: Automotive and Auto components

Clientele: Toyota Kirloskar Motor Limited

Fleet Size: Around 270 trucks

Company Background: Transystem Logistics International is a joint venture between Mitsui

Logistics, which holds a 51 percent equity in the company and Transport Corporation of

India (TCI), which holds the rest of the 49 percent. The company was created exclusively to

cater to the logistical needs of Toyota Kirloskar Motor Limited, and handles the complete

supply chain, right from component procurement from vendors to transporting built-up vehi-

cles. The company has the advantage of TCI's geographical reach and Mitsui's expertise in

automotive Logistics. The company offers its clients inbound logistics involving procure-

ment, segregation, and transportation of parts just-in-time (JIT) to the assembly line, knock

down logistics, and spare parts logistics.


TVS Logistics

Name of the Company: TVS Logistics


Industry Segment Focus: Automotive and Auto components

C l i e n t e l e :

Pricol

Delphi TVS

Ashok Leyland

Ford

JCB

Mahindra & Mahindra

Royal Enfield

TVS Motor Company

Tata Motors

Rane Group

Cummins

Sundram Fasteners

Warehousing Capacity: Around 17 warehouses

Fleet Size: Around 3,100 trucks

Company: TVS Logistics is a wholly owned subsidiary of TV Sundaram Iyengar and Sons.

The company was started initially as a backward integration to cater to the logistics needs of

the TVS group, majors in Auto Ancillaries. The company has now diversified its client port-

folio to include leading vehicle manufacturers. The company is a niche participant in the

automotive sector and holds a very dominant position in it. Though a significantly large

chunk of the company's revenues are still from within the TVS group. This scenario is

expected to change and more companies are likely to be included from outside the group.

TVS logistics aims to be a $100 million company in the near future. With the increase of

India's automotive exports, the company is expected to witness a good growth and

strengthen its position to become the market leader for 3PL solutions in the automotive

sector.


5Recommendations and Growth Strategies for

3PL Providers in India

O p p o r t u n i t i e s f o r 3 P L S e r v i c e P r o v i d e r s i n

I n d i a

Types of Services with Potential

Figure 5-1 shows the top ten services with high growth potential in the Indian third party

logistics market in 2005.


F i g u r e 5 - 1

Third Party Logistics Market: Top Ten 3PL Services with High Growth Potential (India),

2005

Rank Service

1 Inbound/Outbound Warehousing

2 Consignment Tracking And Telematics

3 Vendor Managed Inventory

4 End-To-End Supply Integrated Supply Chain Management

5 Procurement Logistics

6 Reverse Logistics

7 Customer Service/Support

8 Import/Export Logistics

9 Order Processing

10 Marketing And Sales Promotion


The warehousing service has the greatest potential for growth is in the Indian third party

logistics (3PL) market. It is expected to grow at a compound annual growth rate (CAGR) of

23.7 percent from 2005 to 2012. Value-added services are expected to be having similar

potential as warehousing. Transportation too is expected to grow at a healthy pace, though

not as fast as warehousing. The growth in transportation is expected with the rise in express

transport and increasing requirements by customers to get committed deliveries by 3PL

service providers. The potential in freight forwarding is relatively lesser compared to the

other services. Value-added services are expected to have a strong growth potential over the

forecast period from 2006 to 2012

Potential of Services during the Forecast Period

Figure 5-2 shows the top ten services ranked in order of potential in the Indian third party

logistics market from 2006 to 2012.


F i g u r e 5 - 2

Third Party Logistics Market: Top Ten 3PL Services Ranked in Order of Potential (India),

2006-2012

Rank Service 1-2 Years 3-4 Years 5-7 Years

1 Inbound/Outbound Warehousing High High Very High

2 Consignment Tracking and Telematics Medium/High High High

3 Vendor Managed Inventory Medium/High High Very High

4 End-to-end Supply Integrated Supply Management Medium/High High Very High

5 Procurement Logistics Medium/High High Very High

6 Reverse Logistics Medium/High Medium/High High

7 Customer Service/Support Medium/High High Very High

8 Import/Export Logistics Medium/High Medium/High High

9 Order Processing Medium/High High Very High

10 Marketing And Sales Promotion Medium/High Medium/High High


Increasing requirements for vehicle telematics are expected during the forecast period from

2006 to 2012.Global Position Systems (GPS) systems are likely to become less expensive with

the introduction of Galileo, which is the European version of the same. Vendor managed

inventory (VMI) is presently witnessed in industries such as automotive and auto compo-

nents. The trend is expected to catch up with other sectors where supply chain processes are

extremely critical. In the present day it is observed that most companies outsource only a

portion of their supply chain processes to 3PL service providers. This is likely to change over

a period of time, and companies could be seen outsourcing their entire supply chains. This

trend is expected to witness only a gradual growth in services such as procurement logistics,

reverse logistics, customer service and support, marketing promotions, and rate negotiation.

Import-export logistics also have a good potential for growth and are expected to perform

well.

Warehousing, the service with the greatest growth potential has a high growth potential in

the short term. This is due to a general trend where many companies are accepting the serv-

ices of professionally-managed warehouses. This trend is expected to witness a surge post

2010, when a national uniform VAT system is implemented, bringing with it a new hub and

spoke warehousing and distribution model. After the implementation of VAT, companies are

expected to shift to multi-user facilities, which could lead to the emergence of better ware-

housing facilities. The 3PL service providers can leverage on the economies of scale once VAT

is implemented uniformly. After 2010, the growth is expected to continue, though the

increase in growth rate is not likely to be very significant, as the initial effects of VAT may

subside gradually. Value-added services are expected to experience similar growth as ware-

housing. Moreover, there is good growth potential from value-added services.A strong

growth in revenues from value-added services is expected in the short term. In the medium

term, the growth is expected to be accelerated faster due to increased outsourcing and

increasing requirements of clients for provision of the same. Transportation is still expected

to remain in the unorganized sector to a great extent. The growth in transportation in the

short term is expected to be relatively slower than in warehousing. This is due to the infra-

structure and increasing fuel prices.. Transportation by a 3PL service provider is significantly

more expensive than outsourcing to smaller truckers. Transportation by a 3PL service

provider is expected to witness growth once there is an increased demand for express trans-

port and efficient multi-modal transport. This is likely to be driven by development

infrastructure.


B u s i n e s s M o d e l

Suggested Business Model

In transportation, some companies such as Om logistics predominantly follow an asset-based

model. The owning of assets can prove to be a healthy competitive edge as it obviates the

need to approach 2PL truckers to a great extent and hence lesser problems. Companies need

to have a balance between owned and outsourced infrastructure. Multinational 3PL service

providers generally prefer outsourcing their transportation to second party logistics (2PL)

companies. Managing the 2PL service providers is a formidable task and most multinationals

are disadvantaged compared to domestic participants regarding transportation. In ware-

housing, companies may build their own warehouses or operate a leased third party

warehouse built according to their specification. Cost of investing in warehousing may be

prohibitive, and hence outsourced real estate managed by the 3PL service provider is a better

option. Choice of location of warehouse is also an important factor, considering the

constantly reducing lead and turnaround times and thus helping clients to gain a competitive

edge.

P r i c i n g a n d P o s i t i o n i n g

Suggested Pricing Strategy

Companies are suggested to initially operate at extremely competitive rates to gain market

access. The rates offered may be extremely low; however, at the same time it is likely to

capture more customers. Profit margins are likely to be very lean initially; however, it can

help the company gain market share. Such a strategy is not advisable to be applied for long,

as due to the leaner margins, employees are likely to get paid lesser and hence may switch

companies. Companies should concentrate on increasing their client base as a means of

increasing revenues and profits. Focusing on minimum profit margins is advisable. Aiming

very high margins can directly mean expensive rates, and consequentially lesser revenues.

Suggested Positioning Strategy

One of the key areas needed to be addressed by companies is the range of value-added serv-

ices. The provision of these services is expected to be a part of the standard portfolio offered

by service providers in the future. One of the key aspects to be focused on is the ownership of

assets. Till the introduction of 3PL services in India, companies approached small fleet

owners and truckers. After outsourcing, if a 3PL service provider were to approach the same

category of truckers,then there would be no value addition for the client. Service quality is of

utmost importance and it would be apt if the companies can show the cost savings they

derive by outsourcing to the 3PL service provider.


S t r a t e g i c A l l i a n c e s J o i n t V e n t u r e s a n d

P a r t n e r s h i p s

Suggested Strategy for Forming Alliances Joint Ventures and

Partnerships

It is highly recommended that multinational companies seek joint ventures and alliances in

order to establish themselves in India. Companies willing to enter joint ventures and partner-

ships need to consider the presence and capabilities of their prospective partners. These

include asset capabilities, network capabilities, IT support, reputation, and clientele. The

companies should look for service capabilities that they do not possess and should accord-

ingly ally with freight forwarders, local transporters, distributors, and other such agents.

The 3PL industry in India is moving toward consolidation and it has already started.

Although there is no specific strategy that can be suggested, there are a few trends that can be

well observed and that which have a major impact in the industry. Currently, the Indian

logistics market is opened for foreign investments. The existing local giants in the country are

striving to expand their business in two ways. One is the acquisitions of regional or local

companies, thereby consolidating the industry size and making the market less fragmented.

Another is that, the domestic companies are looking forward for alliances and joint ventures

with multinationals in order to combine the best of the expertise and technology and thereby

offer customized integrated services for customers. This in a way helps the multinationals

also, since the domestic knowledge, asset utilization, and the domain expertise of the local

giants brings them the competitive advantage.


6Database of Key Industry Participants

M a r k e t P a r t i c i p a n t s — 3 P L S e r v i c e P r o v i d e r s

A F L P V T. LT D .

AFL House,

Lok Bharati Complex,

Marol Maroshi Road,

Andheri (East),

Mumbai 400 059. India

Phone: 91-22-5646 3500

Website: www.afl.co.in

A P L L O G I S T I C S ( I N D I A ) P V T

LT D

3rd Floor

A-11, Kailash Colony

New Delhi 110 048. India

Phone: 91-11-5163 4190/ 4197

Website: www.apllogistics.com

D H L - E X E L S U P P LY C H A I N

S O L U T I O N S I N D I A

8th Floor, Leela Galleria,

Andheri Kurla Road, Andheri (East),

Mumbai 400 059, India

Phone: 91-22-5695 5000

Website: www.dhl.co.in

G A T I L I M I T E D

H.No: 1-7-293,M.G.Road,

Secunderabad - 500 003.

A.P., India

Phone: 91-40-2784 4284

Website: www.gati.com

O M L O G I S T I C S L I M I T E D

130, Transport Center

Ring Road, Near Punjabi Bagh Flyover,

New Delhi 110035

India

Phone: 91-11-5433222/5116143

Website: www.omlogistics.co.in

P A T E L L O G I S T I C S

A Unit of Patel Roadways Limited

Patel House,

Plot No 48,

Gazdhar Bandh,

North Avenue, Santa Cruz (W),


Phone: 91-22-2605 0021/ 2605 3915/ 2605

2915

Website: www.patel-roadways.com


R E L I A N C E L O G I S T I C S

L I M I T E D

17 ST Road, near Khira Industrial Estate,

off SV Road, Santacruz (W)


Phone: 91-22 - 30611700

Website: www.reliancelogistics.com

S A F E X P R E S S P R I VA T E

L I M I T E D

Safex Cargo Complex,

National Highway No. 8.

Mahipalpur Extension

New Delhi 110 037, India

Phone: 91-11-26783281 (10 lines)

Website: www.safexpress.com/home.asp

S E M B C O R P L O G I S T I C S

( I N D I A ) P R I VA T E L I M I T E D

2nd floor, No.51, Montieth Road

Egmore, Chennai 600 008, India

Phone: 91-44-28542000

Website: www.semblogindia.com

T C I S U P P LY C H A I N

S O L U T I O N S

TCI House,

69, Institutional Area

Sector-32, Gurgaon 122001

Haryana, India

Phone: 91-124-2381603 to 07

Website:www.tcil.com

L E E & M U I R H E A D P V T LT D

10 GN Chetty Road,

T.Nagar, Chennai 600 017, India

Phone : 91-44-2828 1844

Website: www.lemuir.com

T V S L O G I S T I C S

#54, Mount Poonamalle Road

St. Thomas Mount

Chennai 600016 India

Phone: 91-44-22320605

Website : www.tvslogistics.com

G E O L O G I S T I C S P V T LT D

3rd Floor, Vaman Centre, Makwana Road

Andheri-Kurla Road, Marol, Andheri East

Mumbai

India 400 059

Phone: 91-22-28596646

Website: www.geologistics.com

G E O D I S O V E R S E A S P V T. LT D .

2B & 2C, Ega Trade Center,

New No. 318, Old No.809

Poonamallee High Road, Kiplauk,

Chennai 600 010

India

Phone: 91-44-30513030

Website: www.geodis.com

T O T A L L O G I S T I C S P V T LT D

Viraj Impex House,47 p.d'mello road,

Mumbai 400009,

India

Phone: 91-22-375 9595

Website: www.tlipl.com

DY N A M I C L O G I S T I C S P R I VA T E

L I M I T E D

14, Motilal Talera Road,

Pune 411 001,

Maharashtra, India

Phone: 91-20-26113572

Website: www.dynamiclogistics.com


S C H E N K E R I N D I A P R I VA T E

L I M I T E D

93-94, Kapashera,

New Delhi 110 037,

India

Phone: 91-11-5102 5102

Website: www.schenler.com

M A E R S K L O G I S T I C S I N D I A

P R I VA T E L I M I T E D

#57/58, Transport House,

IInd Cross, Kalasipalayam New Extension,

Bangalore 560002,

India

Phone: 91-80-22222311-13

Website: www.maersk.com

T R A N S Y S T E M L O G I S T I C S

I N T E R N A T I O N A L L I M I T E D

#57/58, Transport House

IInd Cross, Kalasipalayam New Extension

Bangalore 560002,

India

Phone: 91-80-22222311-13

Website: www.tcil.com/trans.asp

B A X G L O B A L I N D I A P V T. LT D .

Gr. Floor, Wing - B, Radisson Commercial

Complex,

Radisson Hotel,

Mahipalpur,

New Delhi 11 00037

India

Phone: 91-11-55118200 - 04

Website: www.baxworld.com

P R O - L O G I S T I C S I N D I A P V T.

LT D .

C-8,Laxmi Towers

Bandra-Kurla Complex

Mumbai 400 051

India

Phone: 91-22 5679 1111

Website: www.pro-logistics.com


7Decision Support Database

C o m p a r i t i v e T a b u l a t i o n o f I n f r a s t r u c t u r e

a n d I n d u s t r y F i g u r e s

Tabulation of Infrastructural Figures

Figure 7-1 presents the comparative tabulation of economic and infrastructural figures of

India such as the GDP, road network, rail network, airports, pipeline network and marine

capacities.


F i g u r e 7 - 1

Decision Support Database: Tabulation of Economic and Infrastructural Figures

GDP AND ECONOMIC GROWTH FIGURES

Measure 2004 2005

GDP (Purchasing Power Parity) $3.100 trillion $3.678 trillion

Real GDP $690 billion $740 billion

Real GDP Growth 6.90% 7.10%

Percapita Income $620 $740

Country Airports Heliports Total Airports and Heliports

International Airports

International Seaports

InternationalPorts

TotalDomesticSea Ports

Domestic Sea Ports by State

Total Sea Ports

Infrastructure

India 334 27 361 Bangalore, Chennai,Hyderabad, Kochi,Kolkata, Mumbai,New Delhi and Thiruvananthapuram

12 Chennai, Cochin, Ennore, Jawaharlal Nehru, Kandla, Kolkata, Mormugao, Mumbai, New Mangalore, Paradip, Tuticorin and Visakhapatnam

188 Andhra Pradesh (13)Andaman & Nicobar (23) Daman & Diu (2) Goa (5)Gujarat (40)karnataka (10)Kerala (13) Lakshadweep (10) Maharashtra (54)Orissa(2)Pondicherry(1)Tamil Nadu (15)

200

Country Paved Runways Unpaved Runways

Airports

India 235 39

Country Type Kilometres

Road Network Paved Roadways 2.41 million

India Un Paved Roadways 1.44 million

Total Roadways Network 3.85 million

Note: India's road network is the second largest in the world after US with 6.4 million km, and ahead of China with 1.8 million km


Rail Network Broad Guage (1.5 m) 45,718

India Metre Guage (1.0 m) 14,406

Narrow Guage (0.75 m) 3,106

Electrified (16,693 km)

Total Railway Network 63,230



These figures are useful in ascertaining the capability of each of India in offering a conducive

environment for logistics activities


Pipeline Network Gas 6,171

India Liquid Petroleum Gas 1,195

Oil 5,613

Refined Products 5,567

Total Pipeline Network 18,546

Country Type Number

Merchant Marine Capacity Foreign Owned 10

India Registered in Other Countries 30

Domestic Owned 299

Total Sea Ports 339

Country Type Number

Domestic Merchant Marine Split

India Roll On / Roll Off 1

Petroleum Tanker 91

Passenger 3

Passenger / Cargo 9

Container 7

Liquified Gas 14

Combination—Ore/Oil 1

Chemical Tanker 13

Cargo 75

Bulk Carrier 85


Tabulation of Major Industry Sectors Size

Figure 7-2 provides the size of major industrial sectors in India, in terms of value, as of 2005.

Note: All Figures are rounded. Source: Frost & Sullivan

These values are useful in understanding the potentiality of each industrial sector for logistics

activities.

F i g u r e 7 - 2

Decision Support Database: Value of Major Industrial Sectors in India, as of 2005

Sector Size ($ billion)

Name of the Industry Sector in India (in 2005)

Auto Components $9.50

Consumer Durables $4.44

Consumer Electronics $3.82

IT Hardware and electronics $7.32

FMCG $14.50

Pharmaceuticals and Healthcare $6.00

Retail $6.00


3PL Report - Frost & Sullivan

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