Logistics and infrastructure Exploring opportunities

Business BankingYour Partner In Growth

Contents

1. Executive summary 3

2. Macro-economic overview 6 2.1. Indian economy - Impact of global economic decline 6 2.2. The way ahead for Indian economy 10 2.3. Interlinking sustainable economic growth with logistics 10 2.4. The logistics cost factor 12

3. Logistics industry overview 13 3.1. Evolution of the global logistics industry 13 3.2. Opportunity indicators for global logistics sector 14 3.3. The Indian logistics sector 16 3.4. Significance of SMEs in the Indian logistics industry 23

4. SMEs in logistics: Succeeding in the market place 24 4.1. Competitiveness of SMEs in logistics 24 4.2. Assessment of challenges internal & external 31 4.3. S-W-O-T Analysis 31

5. Transport infrastructure 33 5.1. Transport infrastructure performance 33 5.2. Railways 34 5.3. Roads 36 5.4. Ports 38 5.5. Airports 41 5.6. Infrastructure finance 44 5.7. The PPP approach 45

6. Conclusions 46

Abbreviations 48

Bibliography 49

31. Executive summary

Macro-economic outlook Contrary to the much talked about theory of decoupling hypothesis which held that emerging economies will remain relatively unaffected by the downturn due to their substantial foreign exchange reserves, improved policy framework, etc emerging economies too have been hit by the crisis and India is no exception. However the Indian economy has fared much better than most of its Asian peers in the face of the global economic recession. The real GDP grew by 6.7 per cent in 2008/09, and expects a revival in the latter part of 2009. Although domestic demand, the mainstay of the economy, has held up relatively well, there are signs that the worst might not be over yet .

History has shown that export-led growth is a crucial component of sustainable economic growth. There are many enablers of export oriented economic growth including facilitating regulatory environment, establishing export oriented zones like SEZs, elimination of administrative barriers to FDI in export-oriented sectors etc. However the most important enabler is the improvement in transportation infrastructure (mainly ports, roads, airports and railways), telecommunications and power. Government incentives aimed at promoting economic growth can make areas such as infrastructure i.e., development of Greenfield ports, airports, road, and rail logistics attractive for private investment. This helps capacity augmentation and thereby encourages industrial production. In addition, logistics cost is an important factor that affects the competitiveness of nations as well as firms. The logistics cost is considerably high in India (around 13-14 per cent of GDP ) than developed world regions like U.S (9.5 per cent) & Europe (7.15 per cent). The comparatively high logistics cost can be attributed to factors such as a complicated tax regime, fragmented market structure and inadequate infrastructure.

Logistics industry overview The reduction in the logistics cost can be brought about by improving the national logistics infrastructure to facilitate smooth transfer of materials and information. Simultaneously, at the micro level, the logistics service providers need to infuse better management practices, employ technology that facilitates its logistics process to reduce its service cost.

As the logistics services industry evolves, competitors are moving away from asset-based commoditized services to more strategic, information-based approaches. Customers are demanding a single point of contact for all logistics services. In one of the global logistics study conducted by Deloitte, a set of attributes was developed to identify high opportunity industries with diverse but complementary product flows for the logistics outsourcing industry. The attributes were formulated based on the requirements of the various aspects of supply chain planning and implementation including design, implementation and management of logistics services. Some of the attributes of industries researched that would offer the highest opportunity / best fit for logistics service provider include -.

Largelogisticsspend Relativelyhighvalueproducts Manageacrossmultiplemodes Managecomplex,timesensitivesupplychains Diversesupplychainfootprintsincludingtheirown

operations, suppliers and customers Maturityinoutsourcingcycle(currentlymanaging

3PLs) DecentralizedmanagementoflogisticsComplementarytocurrentbaseof4PLbusinessHighcubeandhighweightproducts

Competitiveness of SMEs in logistics The contribution of SMEs to the nations economic growth is by no means small. As globalization and technological change reduce the importance of economies of scale in many activities, the potential contribution of smaller firms is enhanced and logistics SMEs are no exception. Today, despite facing regional, geographical and legislative diversity, the Indian logistics SMEs reverberate sound local dynamics, assurance of a personal service and the emergence of a new genre of integrated solution providers. Since the Small & Medium Enterprises constitute a significant percentage of the logistics service providers, it would not be inappropriate to mention that these SMEs would be acting as the catalyst in reducing the national logistics cost component.

4Deloittes survey of Small & Medium logistics players aimed at bringing to the fore, developments in the Indian logistics space and more importantly the broad level challenges that the industry is currently facing, particularlyfromtheperspectiveofaLogisticsServiceProvider(LSP).Thesurveycoveredplayersacrossawide spectrum of logistics segments such as freight forwarding, shipping, customs booking, container freight stations, warehousing, and multi-modal transportation & thus aimed at offering them a platform to share their varied concerns.

The analysis of industrys internal factors suggests that moving to higher value added services is perceived as thebiggestgrowthopportunitybytheIndianLSPs.Besides, in a situation like todays, optimizing operations is viewed as the best means of surviving in business and competing effectively. In a way, this would also assist the individual players in accumulating sufficient profits to be ploughed back in business, as a means to tide over the problem of limited access to affordable credit. The trend of consolidations by way of mergers and forging alliances with other players is fast picking up in the logistics community and would address the fragmented nature of industry. Given these opportunity areas, a focused training approach and extensive implementation of advanced technologies could boost the international competitivenessofIndianLSPs.

Other logistics cost inflators are variable vessel charter costs, fluctuating fuel prices, exchange rates, non-availability of return loads and high haulage rates. Further,theLSPsaretypicallyresortingtoinitiativeslike negotiating and renegotiating contracts, load optimization, efficient route scheduling, working capital management and inventory cost control among others, to overcome the burgeoning logistics cost. While a likely boom in construction and pharmaceuticals spell opportunities for the logistics sector in terms of increased potential of multi-modal movement of raw material & manufactured products, progressive reforms such as introduction of a singular Goods and Service Tax (GST) and the Governments push to infrastructure expansion are equally encouraging. On the other hand, major threat is posed by competition

from large foreign players and price sensitive nature of Indian markets. There is yet another impediment, although short term, i.e., the impact of slowdown in terms of decline in international trade. This can be curtailed by concentrating on domestic markets, which are still quite promising. On the external front, infrastructure and regulatory bottlenecks are the prime cause of transportation delays and cost overruns, which consequently hamper the quality of logistics services.

Transportation infrastructure outlook The 11th five year plan Approach Paper calls for the investment to increase from a current level of 4.6 per cent of GDP, to between 7 & 8 per cent. The Capsule Report on Infrastructure sector performance by Ministry of Statistics and Program Implementation, the year on year rate of growth in cargo traffic has considerably declined in FY 2008-09. The freight loading for Indian railways for 2008-09 of 833 million tonne did not meet the target of 850 million tonnes. The Railway Ministry has outlined many measures to generate revenues from non-traditional sources to bolster the railways balance sheet. The Railways are also working out the details of a premium service for movement of containers with assured transit periods for time-sensitive cargo. Permission has also been provided in the recent budget to container train operators to access private sidings to help attract piecemeal traffic that are at present not being carried by railways. Further, the railways is also expected to unlock its land resources by holding an auction for private real estate developers to build malls, cineplexes and shopping arcades.

5The major ports in the country handled 530.35 million tonnes of cargo during 2008 2009, which was 7.9 per cent lower than the target set for the period and around 2.1 per cent more than that the traffic of 519.31 million tonnes for the previous year. There has been a drastic decline in augmented capacities at major ports during the last four years. In addition, lack of proper facilities, deeper drafts, good connectivity and necessary equipment / technology has contributed to high logistics costs. On the positive side, with the Government encouraging private participation in port development, non-major ports have begun contributing significantly to the economy. The new Governments ambitious agenda to award 6 concessions for ports and initiate for 20 others through PPP totaling to more than Rs. 3300 crore, within a span of 3 months, is being regarded as a welcome move. While there are a lot of new avenues in aerospace services in the coming decades, the constraints associated need to be addressed to enable the smooth growth of the sector. Some of the issues faced by the sector include mounting losses of the airlines, volatile aviation fuel prices, congestion at airports, shortage of qualified technical manpower, upgradation of security, land acquisition, high taxation, high airport charges etc. Indian aviation space offers promising opportunities in the areas of airport infrastructure, airport and ground support equipment, MRO facilities, ground handling services, trained manpower, air cargo along with tapping the potential stream of non aeronautical revenues.

It has been established that spending in road sector has a multiplier effect in terms of job creation and increase in per capita income. Hence any spending, whether

by government or by a private partner, definitely helps in economic stimulus. Accordingly the government plans to invest around Rs 1,00,000 crore to build about 12,000 kms of roads for the F.Y 2009-10 mainly through the toll-based model, with options to bring in foreign investors. Infrastructure projects being capital intensive, with long gestation periods; the Financial Institutes (FIs) and the banks need to create new structures to facilitate the funding. New ways of structuring like take-out financing, roll over financing, put-call options, hedging / swapping of exchange / interest rate risks etc are also being offered for funding of long gestation projects. The users willingness to pay for the services availed affects the cash flow. The strength and experience of the promoters, concession framework, tax benefits to the project, inputs / off-take arrangements add to the bankability of the project.

Public Private Partnership (PPP) offers a distinct possibility for increasing total investments by using a limited amount of public resources to leverage a much larger amount of private investment. Given the bottlenecks and inefficiencies often encountered in public infrastructural investment, such PPPs could also increase economic efficiency and lower the capital requirement, provided that regulatory mechanisms are adequate.

Conclusions Globalization, consolidation, technology advancements and outsourcing have only led to growth in the logistics services market and this industry will continue to evolve in the coming years. Firms can enhance their market competitiveness by reducing their logistics costs, thus lowering the total costs of goods and services. Any impetus to improve the competitiveness of the firms at the national platform would enable the nation to register a dynamic economic performance in a global environment. India has got a huge opportunity of reducing its national logistics cost by studying and benefiting from other success stories. This would include upgrading the macro logistics infrastructure to world class standards and by providing a facilitative role to the SME players in the logistics sector to improve their service level competitiveness. The effect of the referred improvement would substantially provide a ripple effect in the larger canvas of the countrys logistics development thereby acting as a catalyst in reducing the national logistics cost.

6as against US $ 251.7 billion in 2007-08, registering a growth of 14.3 per cent in dollar terms. It is being increasingly felt that unless we take some fundamental steps to diversify Indias export basket, most fiscal incentives may only benefit the profitability of the few exporters in the short term and not give a big thrust to the overall export performance of the country.

Indias EXIM trade trends in billion US $

Source : Directorate General of Foreign Trade

2. Macro-economic overview

2.1 Indian economy - Impact of global economic decline Many investors living today have never really had to weather really tough financial times. It is difficult to meet someone who was old enough during the Great Depression to recall how tough that was, especially on investors. Although there have been recessions since, none has been of such a disturbing magnitude as the current crisis. The current crisis is unique not only in its severity and its projected length, but in how far-reaching its effects will be felt worldwide. Contrary to the much talked about theory of decoupling hypothesis which held that emerging economies will remain relatively unaffected by the downturn due to their substantial foreign exchange reserves, improved policy framework, and robust corporate balance sheets, emerging economies too have been hit by the crisis and India is no exception.

The extent to which Indian economy is affected can be assessed by gauging the magnitude of changes in the following key parameters:

TradeDeficit:Astheglobaleconomyshrank,sodid the growth in Indias external trade. The dismal industrial growth was partly caused by a weak external demand. Further, a flare up in petroleum prices in 2008 led to a sharp rise in import bill, thereby adding to the trade deficit. Indias cumulative value of exports for the period 2008-09 was US $ 168.7 billion as against US $ 163.1 billion in 2007-08, thereby registering a growth of 3.4 per cent in dollar terms. On the other hand, the countrys cumulative value of imports for 2008-09 was US $ 287.8 billion

A flare up in petroleum prices in 2008 led to a sharp rise in import bill, thereby adding to the amount of net imports

$ bn

300

250

180

120

60

0

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Export Imports

7 Fiscaldeficit:Fiscaldeficitisaneconomicphenomenon, where the Governments total expenditure surpasses the total receipts (excluding borrowing). It signals the government about the total borrowing requirements from all sources. Indias combined fiscal deficit of the Centre and the states at close to 9.5 per cent of GDP in 2008-09 is among the highest in the world. It has risen by almost 4 per cent points in a span of just one year (i.e., 2008-09 vis--vis 2007-08). The change in economic environment between 2007-08 and 2008-09 and corresponding fiscal stimulus packages by the Government during this period to deal with the economic slowdown has contributed to widening of this deficit. To add to this, the Finance Minister, as expected, has announced a budget keeping the Aam Aadmi in mind.

Combined fiscal deficit (as a % of GDP)

Source : Ministry of Finance, GOI

A number of social sector projects have been announced which, while benefiting employment creation and infrastructure development, will further worsen the state of the fiscal balances. Furthermore, economists are of the view that the centres gross fiscal deficit in 2009-10 is likely to over-shoot the budgeted estimate of 5.5 per cent on account of an increase in expenditure and slow pace of increase in tax revenue. According to some policy makers, following an aggressive disinvestment policy can help the Government mobilize enough proceeds to contain the countrys fiscal deficit.

IndustrialProduction:Closeontheheelsofglobalcues, Indias industrial production rose by 2.6 per cent in 2008-09, down from 8.5 per cent in 2007-08. It fell by 0.75 per cent year on year in March 2009. Manufacturing output also dropped by 1.4per cent year on year to Rs.1.25 trillion in January-March 2009, after rising by just 0.9 per cent in the fourth quarter of 2008. In contrast, the month of April witnessed a rise in industrial production by 1.4 per cent from a year earlier. This happened for the first time after three consecutive declines over the trailing four months. The corresponding manufacturing output for April also recorded a rise of 0.7 per cent from a year earlier. This upside can be attributed to improvement in domestic demand. However, some economists relate this to election spending by way of increased construction and electricity production over recent months. If this is true, then the pick-up in growth may be just a temporary phenomenon.

Indias combined fiscal deficit of the Centre and the states at close to 10 per cent of GDP in 2008-09 is among the highest in the world

10%

8%

6%

4%

2%

0%

2005-06 2006-07 2007-08 2008-09

8 Inflation:ConsumerPriceIndex(CPI)-basedinflation tracks the year-on-year rise in prices paid by consumers to retailers. Typically, high liquidity injection by the RBI to tackle the effects of global turmoil, rising food prices, and the increase in oil and commodity prices have contributed to a high CPI-based inflation.

Consumer price inflation only marginally slowed and stood at 9.6 per cent year on year in February. According to recent data, it is now ruling around 8 per cent. Although this is expected to average around 6 per cent in 2009 and 4.7 per cent in 2010, it will be significantly above the Asian & world averages.

The slowdown in Indias economy is not only due to the impact of the global recession, but also the bursting of a real estate bubble following an unprecedented economic boom between 2003/04 and 2007/08.

Notwithstanding the earlier, the Indian economy has fared much better than most of its Asian peers in the face of the global economic recession.

Percentage Y-o-Y GDP change

Source : IMF, WEO database

It grew more than expected in the quarter ended March 2009, boosting the confidence of both the corporate sector and the newly formed government. This reiterates the belief that the Indian growth story remains and is still by & large domestic driven. A spending spree by the government and robust growth in agriculture and services industries helped the economy grow 5.8 per cent year-on-year in the quarter ended March 2009.The real GDP grew by 6.7 per cent in 2008/09, and expects a revival in the latter part of 2009.

10

8

6

4

2

0

2004 2005 2006 2007 2008 2009 2010

Consumer price inflation (average %)

Source : Economist Intelligence Unit Estimates

World Asia (excl Japan) India 2010 2009

-10 10-5 50

Vietnam

Thailand

Malaysia

Indonesia

China

Singapore

Korea

Hong Kong

Japan

India

9Real GDP growth (% change)

Source : Economist Intelligence Unit Estimates

Industry Q1 Q2 Q3 Q4

Agriculture 3.0 2.7 -0.8 2.7

Mining & quarrying 4.6 3.7 4.9 1.6

Manufacturing 5.5 5.1 0.9 1.4

Electricity 2.7 3.8 3.5 3.6

Construction 8.4 9.6 4.2 6.8

Trade, transport, comm. 13.0 12.1 5.9 6.3

Finance, insurance 6.9 6.4 8.3 9.5

Community 8.2 9.0 22.5 12.5

GDP at factor cost 7.8 7.7 5.8 5.8

Source : Ministry of Finance, GoI

The real GDP grew by 6.7 per cent in 2008/09, and expects a revival in the latter part of 2009

10

6

2

-2

-6

2004 2005 2006 2007 2008 2009 2010

World Asia (excl Japan) India

Quarterly estimates of GDP for 2008-09 (at 1999-2000 prices) % chg

10

2.2 The way ahead for the Indian economyIndias relatively less dependence on merchandise exports, its smooth functioning financial system, and comfortable forex reserves are believed to aid swift recovery from the slowdown. Although domestic demand, the mainstay of the economy, has held up relatively well, there are signs that the worst might not be over yet. Forecasts by the Organization for Economic Co-operation and Development (OECD), the Asian Development Bank (ADB) and the Economist Intelligence Unit for the current year are markedly more pessimistic than the governments. The OECD projects a further deceleration in 2009 as a whole, to 5.9 per cent. The ADB also forecasts that growth will slow again this year, to 5 per cent.

Neither organization expects economic activity to bouncebackuntilmid-2010.Lookingatabroadertime frame, Indias economic think tank Centre for Monitoring Indian Economy (CMIE) predicts a 5.8 per cent growth in 2009-10 and expects that economy will bounce back to 9 per cent growth by 2011, when impact of poor exports demand would be overcome. World Banks recent projections of an 8 per cent growth for India in 2010, ahead of Chinas expected growth of 7.7 per cent further add to this optimism.

The new government already has its task cut out. On an optimistic note, the industry anticipates a growth rate of around 6 per cent in the current fiscal, and with the government keen on introducing reforms in its first few months in office, the situation can get even better. The challenge before the new government is to initiate measures aimed at bringing about fiscal consolidation within a reasonable span of time. With the revenue growth expected to decline significantly, the only way to bring down the revenue and fiscal deficit would be to drastically cut down the subsidies, particularly non-merit subsidies that never reach the intended target groups or the poorer sections. It will also be necessary to curtail wasteful expenditure in several areas.

The government should also induce some of the better-performing PSUs, particularly those engaged in infrastructure, such as power, transport, construction, etc., to expand and speed up their investment programmes. Finding resources for infrastructure development and speeding up investment in this sector should receive top priority, for, as the World Bank has observed, infrastructure is a key factor in improving the lifestyles of the masses and addressing the pressing issue of poverty.

2.3 Interlinking sustainable economic growth with logistics Typically, export-led growth has been a crucial component of sustainable economic growth. There are many enablers of export oriented economic growth including facilitating regulatory environment, establishing export oriented zones like SEZs, elimination of administrative barriers to FDI in export-oriented sectors etc. However the most important enabler is the improvement in transportation infrastructure, telecommunications and power. A booming economy generates higher purchasing power, which in turn accelerates domestic demand. This leads to an increase in production as well as EXIM trade, which necessitates increase in need for cargo movement both locally as well as internationally .

Government incentives aimed at promoting economic growth can make areas such as infrastructure i.e., development of Greenfield ports, airports, road, and rail logistics attractive for private investment. This helps capacity augmentation and thereby encourages industrial production.

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Although several headways have been made in the infrastructure sector over the last few years, shortcomings still exist in almost all the segments, be it highways, railways, ports or airports. Infrastructure developments like the railway dedicated freight corridors, road development projects and modernization of over 37 operational airports will increase Indias handling capacities, thereby enhancing logistical performance.

A snapshot of the Eleventh Five Year Plan for the various categories of logistics infrastructure is indicated in the table below. However, with a mid-term review of the plan in face of the slowdown, there is a likelihood of these targets being softened. But again, with infrastructure being the key to sustaining the nations growth, it will be left to policymakers domain to strike a balance between review of growth targets and infrastructure development.

Transportation infrastructure Deficit, eleventh plan targets, & permissible FDI

Sector Deficit Eleventh plan targets FDI Envisaged investment size

Roads / highways 65,590 km of existing national highways: Compriseonly2%ofnetwork Carry40%oftraffic Ofwhich12%is4-laned;50%

is 2-laned; and 38% is single laned

6-lane6,500kminGQ 4-lane6,736kmNS-EW 4-lane20,000km 2-lane20,000km 1,000kmexpressway

100 % FDI under automatic route US$ 78.5bn

Ports Inadequacy of Berths Rail/roadconnectivity

New capacity: 485millionMTinmajor

ports 345millionMTinminor

ports

100 % FDI under automatic route US$ 22 bn

Airports Inadequacy of Runways Aircrafthandlingcapacity Parkingspaceandterminal

buildings

Modernize4metroand35non-metro airports

3greenfieldinNorthEasternRegion (NER)

7othergreenfieldairports

100%FDIforexistingairports(FIPB approval for FDI beyond 74%)

100%FDIunderautomaticroute for greenfield airports

49%FDIispermissibleindomestic airlines under the automatic route, but not by foreign airline companies

US$ 7.74 bn

Railways Oldtechnology Saturatedroutes Slowspeeds(freight:avg

22kmph; passengers: avg 50kmph)

Lowpayloadtotareratio(2.5)

8132kmnewrail7148kmgaugeconversionModernize22stationsDedicatedfreightcorridors

100% FDI permitted in railway infrastructure under automatic route

US$ 65.45 bn

Source: Planning Commission, IBEF

2.4 The logistics cost factorLogisticscostisanimportantfactorthataffectsthecompetitiveness of nations as well as firms. However, it is considerably high in India than first world regions like U.S. & Europe, thus affecting the cost competitiveness of Indias exports. It is estimated that transportation and warehousing costs constitute a major chunk i.e., around 60 per cent of the logistics cost. In India, the logistics cost is expected to be around 13-14 per cent of GDP as against the US (9.5 per cent) and Europe (7.15 per cent).

At present, the Indian logistics sector is very fragmented. Despite being a major contributor to the nations economic development, it is still not awarded the much needed status of an independent sector so as to warrant an exclusive budgetary allocation and corresponding focus on development. The major players can be broadly categorized as pure transport providers, transporters providing certain value added services such as warehousing, and completely integrated players providing3PLservices.Themajorelementsoflogisticscosts for Indian Industries include transportation, warehousing, inventory management and other value-added services such as packaging. The comparatively high logistics cost can be attributed to factors such as a complicated tax regime, fragmented market structure and inadequate infrastructure.

While several factors like these go against Indias logistics industry, there are indeed many growth factors and opportunities enumerated in the subsequent sections that suggest its steady transformation.

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3. Logistics industry overview

Logisticshasalwaysbeenacentralandessentialfeatureof all economic activity. Despite this importance, there is a long history of organizations paying little attention to their logistics. They traditionally concentrated their efforts into manufacturing products and considered the movement and storage of materials as an uninteresting errand that formed part of the overheads of doing business.

However, over the years, the status of logistics has continued to improve, primarily due to recognition by the organizations of the following critical factors:

Appreciationofhighlogisticscostandopportunitiesfor major savings

Increasingcompetitionforbothusersandprovidersoflogistics, who have to continually improve operations to remain competitive

Newtypesofoperations,whichcanforcechangesto logistics such as just-in-time, total quality management, flexible operations, time compression etc.

Needforimprovedtechnologyforidentifying,locating and tracking materials

Recession in many markets, combined with new sources of competition, has raised the consciousness of customers towards value of service delivered to them by their service providers. Accordingly, the logistics industry has consciously strived to be at the focal point of strategy formulation and operational excellence to continue in its endeavour for providing maximum contribution in value creation.

3.1 Evolution of the global logistics industry Globalization, consolidation, technology advancements and outsourcing have led to growth in the logistics services market. The capabilities of logistics service providers are growing along with the changing expectations of their clients. As the logistics services industry evolves, competitors are moving away from asset-based commoditized services to more strategic, information-based approaches.

Evolution of the logistics model

Source : Deloitte Research

Customers are demanding a single point of contact for all logistics services and are looking for one-stop logistics shopping unable to cope with complexities across their supply chains. The models in logistics industry have accordingly evolved over time to address the changing needs of the market and vary based on scope of service offerings, degree of collaboration, levels of asset intensity and IT capabilities across the supply chain. The logistics model has been evolving from a specializedfunctiontofourthpartyLogistics(4PL)andfifthPartyLogistics(5PL)companies.

FirstandSecondPartyLogisticshandlealllogisticsfunctions, such as trucking and warehousing, which face low returns and high levels of asset intensity but low barriers to entry. With the increasing need for one-stopsolutions,many2PLhaveevolvedinto3PLby adding new logistics capabilities and integrating their operations. They are asset light and usually tend to have high returns; they contact most of their capacity needs to2PLs.Whilethe2PLputsinhardcashtangibleasset,the3PLputsinintellectualproperty.

Fourth party logistics is an integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, build and run comprehensive supply chain solutions. The figurebelowillustratesthegamutofservicesthata4PLprovider will offer.

5PL(electronicco-ordinationofsupply-chain-information ownership)

Redu

ced

asse

t in

tens

ityIn

crea

sed

info

rmat

ion

inte

nsity

3PL(Supplychainexpertisewith some asset provision)

2PL(pre-dominatlyasset provision)

4PL(SCMlimitedassetprovision)

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As the orchestrator of this broad set of providers, a 4PLmustcomprehendbroadanddeepexpertiseandcapabilities.Sincetheadventofthe4PLservice,theinternational logistics industry has been researching on the development of the fifth-party logistics service i.e. the realization of full-scale operation of e-procurement. Akeyfunctionofthe5PListoaggregatethedemandsofthe3PLintoabulkyvolumefornegotiatingmorefavorable rates with airlines and shipping companies regardless of which generation of logistics solution belongs to all.

3.2 Opportunity indicators for global logistics sector In one of the global logistics study conducted by Deloitte, a set of attributes was developed to identify high opportunity industries with diverse but complementary product flows for the logistics outsourcing industry. The attributes were formulated based on the requirements of the various aspects of

supply chain planning and implementation including design, implementation and management of logistics services. The set of attributes derived were to focus attention on those industries that offer greatest opportunity for logistics service providers. The attributes of industries that would offer the highest opportunity / best fit for logistics service provider are provided below -

Largelogisticsspend Relativelyhighvalueproducts Manageacrossmultiplemodes Managecomplex,timesensitivesupplychains Diversesupplychainfootprintsincludingtheirown

operations, suppliers and customers Maturityinoutsourcingcycle(currentlymanaging

3PLs) Decentralizedmanagementoflogistics Complementarytocurrentbaseof4PLbusiness Highcubeandhighweightproducts

The 4PL will serve as the single point of contact for customers, managing a comprehensive set of supply chain and logistics services that are executed by other providers

4PL Provider managed services

4 P L

Order to deliver supply chain services

Transition & support services

Provider managed services

3PLprovidedservices Distribution operations Claims management

Carrier services Transportation routing and scheduling

Freight pay and audit

Forwarder services Transportation execution Trade management

Brokerage services Warehouse management Others

Source : Deloitte Research

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Largelogisticsspend Industrieswhoselogisticsspendissignificantrelativetothevalueofitsproductsnaturallyplaceahighdegree of importance and priority on logistics

Relatively high value products Industrieswithhighvalueproductsplaceahighdegreeofimportanceonlogisticswhichcanimpactmacro inventory levels

Manage across multiple modes Logisticsfunctionsoperatingmultiplemodesoftransportfacesignificantissuesindealingwiththeresulting complexity and present greater opportunities for logistics service providers

Manage complex, time sensitive supply chains

Themorecomplexasupplychain,andthemoreimportantitistomanagetimeacrossit,themorelikelycompanies are to look to a logistics service provider for help

Diverse supply chain footprints, including their own operations, suppliers and customers

Diverseandwidespanningsupplychainsarecomplexanddifficulttomanage.Companieswithsuchsupply chains are more likely to struggle with these complexities and may therefore seek help

Maturity in outsourcing cycle (currentlymanaging3PLs)

Historyhasshownthatoutsourcingisanevolutionaryprocessandthatindustriesthathavealongerhistory of outsourcing are more receptive to advanced stages of outsourcing such as contracting with third and fourth party logistics providers

Decentralized management of logistics

Thelogisticsfunctionisdifficulttomanageacrossgeographicboundaries.Companieswithdecentralizedmanagement tend to offer ripe opportunities for logistics service providers to add immediate value

Complementary to current base of3PL/4PLbusiness

Industrieswhoselogisticsand/orproductattributesarecomplimentarytothe3PLs/4PLsbaseofbusiness(macro flow patterns, etc.) offer opportunities to increase efficiencies of logistics resources (e.g., increased utilization of transportation equipment) and thereby reduce rates and total spend

High cube and high weight products

Industrieswiththeseproductattributesoffergreateropportunitytoleverageandbetterutilizecommontransportation equipment

The description of the logistics requirements for each of the attributes, is mentioned below:

Based on the detailed analysis of the above attributes, the following industries were identified as potential high priority areas of focus for marketing opportunities for logistics services.

Auto OEMs & suppliers Thisindustryoffersobvioussynergies,largemarketpotentialandthemostimmediateopportunitiesfor3PL/4PL

However,autosuppliersarehighlyfragmentedwithveryfewhavinglargelogisticsspend

Heavy equipment manufacturing Thisindustryissimilartotheautoindustryintermsofshipmentattributes Howevertherearechallengestopenetratingthisindustry,duetothesmallersizeandregionalfocusof

most companies

Metals Logisticsflowbalanceopportunitiesexistwithintheindustry;majorityshipmentsflowtoautomotiveandindustrial equipment manufacturing applications

However,theseindustriesarefairlyverticallyintegratedandtraditionallymanagelogisticsoperationsin-house

Technology infrastructure Thisindustryisattractiveintermsofmajorityshipmentattributesincludingcomplexsupplychainswithshort order-to-delivery cycles

Retail Thisindustryofferstremendousopportunitiesfromsynergiesinshipmentattributes;largeplayersarelooking to cut logistics costs dramatically

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3.3 The Indian logistics sectorThe logistics sector in India has evolved over the past two decades from being a pure transportation / warehousing functional service to provision of more value added offerings like customs clearance, domestic / international freight forwarding, cross-docking, reverse logistics, freight consolidation, warehousing of modern standards etc. India with a GDP1 of about Rs 31,297 billion is estimated to spend 13 per cent of its GDP on logistics creating an industry size of around Rs. 4,068 billion. The sector has been witnessing double digit y-o-y growth rate since 2002 and is expected to be more than USD 120 billion (approx Rs.5,400 billion) by 2015.

While there has been a growing recognition in India of logistics as a strategic tool for enterprise cost reduction and improvement of organizational efficiency on the flip side however, the logistics sector is characterized by dominance of a disorganized market. Transporters with fleets smaller than five trucks account for over two-thirds of the total trucks owned and operated in India and make up 80% of revenues. The freight forwarding segment is also represented by thousands of small customs brokers and clearing & forwarding agents, who cater to local cargo requirements.

In order to reduce logistics costs and focus on core competencies, Indian companies across verticals are now increasingly seeking and using the services of third-partylogisticsserviceproviders.TraditionallyLSPs(LogisticsServiceProviders)concentratedmainlyontransportation and logistics as they form a major share in logistics. However, in order to keep up with rising demands and customer expectations, companies now also concentrate on value added services like packaging, custom clearance, inventory management and labeling.

Transporters with fleets smaller than five trucks account for over two-thirds of the total trucks owned and operated in India and make up 80% of revenues

3.3.1 The growth driversThe evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exists today. For example, rapid growth of organized retail and the need to reach out to the large untapped rural markets in India are necessitating development of strong back end and front end supply networks.While the end user industries like auto, consumer durables, organized retail, etc are direct triggers for the growth of the logistics sector in India, some of the other drivers are described below:

Key growth drivers for the logistics sector

Riseof3PLservices-Thelogisticscostisadirectfunction of quality of the national transportation infrastructure and professionalism of the logistics services offered. In addition, the level of maturity of the logistics industry of a nation is co-related to the shareof3PLserviceprovidersvis--vistheshareoffirst and second party logistics service providers.

Streamlining ofindirect taxstructure

Increased demandof3PLservices

Recognition of logistics management as a

strategic tool

Globalization ofmanufacturing

systems

Infusion of qualifiedwork force

Investments intransportationinfrastructure

Growth Drivers

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In the developed economies like Japan, the United States, Canada and the European Union nations, business customers have very similar high expectations for logistics system performance, regardless of where in the developed economies theyre operating. The professionalism and maturity hasindeedbeenderivedfromtheshareofthe3PLservice players in the referred countries. Hence it is not surprising to note that the logistics cost of the developed countries is comparatively less than that of emerging world nations (India, China, Brazil).

National logistics cost vis--vis the share of 3PL in the

logistics market

The table reflects that there is an inverse relationship between logistics cost of a nation and the share of 3PLsinnationallogisticsmarket.Thegreatertheshareof3PLsthelesseristhenationallogisticscostthushighlightingtheimportanceof3PLsinlogistics.

Many Indian companies are realizing the importance of their supply chain network and are increasingly calling upon logistics managers for their professional inputs into corporate and marketing strategies. Consequently there has been an uptrend in the requirementofspecializedThirdPartyLogisticsService Providers to whom companies are looking to outsource their logistics requirements. As per industry estimates,itisexpectedthat3PLsolutionsinIndiawould grow at a CAGR of more than 20% during the period 2009-15.

Investmentsininfrastructure-Awell-knitandcoordinated system of logistics infrastructure plays an important role in the sustained economic growth of the country. Indias infrastructure deficiencies have become more visible because of high growth witnessed during the past few years. The most visible indicators of overstretched infrastructure are Indias congested highways, airports and ports. Though the current levels of efficiency are much below when compared with other developed nations, the government has plans for improvement through infrastructure development. While projects like development of the dedicated rail freight corridors, port development projects under National Maritime Development Program are being envisaged and executed at the national level, it is imperative that India augments its infrastructure spending.

Given the scale of work that is needed, presently

it is still relatively low at 4.6% of GDP far behind Chinas which is around 10% of GDP. The Planning commission recommends a step-up in this ratio to 8% by 2011-12. Post elections it is indeed perceived that the government will demonstrate renewed vigour in implementing transportation infrastructure projects across the country. It is expected that a stable government at the centre 2009 will usher a new wave of confidence globally in the Indian economy. The government has also indicated that bottlenecks and delays in implementation of infrastructure projects because of policies and procedures, especially in railways, power, highways, ports, airports will be systematically removed. It is also expected that a large number of PPP projects in different areas currently awaiting government approval would be cleared expeditiously and the regulatory and legal framework for PPPs would be made more investment friendly.

The above factors signal the emergence of an efficient transport infrastructure, which will trigger the growth of advanced logistics service offerings.

Country Logistics cost as a % of GDP

Share of 3PL

India 13.0 14.0% Lessthan10%

China 18.0% Lessthan10%

USA 9.9% 34%

Europe 7.1% 54%

Source : Various

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Recognitionoflogisticsasanintegralpartofcorporate strategy -Over the years, the importance of distribution and logistics has become much more apparent to a broad range of Indian companies.The significance of logistics within a companys total business structure is illustrated in the table below by using the inter-relationships of logistics with other functions .

For the formulation of any competitive strategy, knowledge of key logistics elements is essential. Any factors related to the procurement, storage and movement of goods must, of necessity, be relevant to the determination of a companys business. Accordingly there has been a growing importance of the role and contribution that the logistics / distribution manager makes to corporate strategic planning.

Qualifiedworkforce-Foranindustrytoprosper,thequality of the personnel it absorbs is an essential facilitator for sustaining its long term growth. While logistics was not usually the first career choice for many and hence quality of manpower was an issue that was felt in the industry. However with the growing recognition of the strategic role that logistics managers can provide, there has been a steady inflow of some of the best talent in the logistics sector over the past few years.

From the point of view of supply chain planning, the key roles for a logistics manager with a broad remit might be summarized as:

Toleadthedesign,creation,configurationandparameter setting of the entire supply chain

Tocreatetheframeworkandthedialoguethatdetermine the performance targets along the whole chain

Todrivethesystemsandmonitorandreporttheentire logistics operational performance against agreed targets

Toreviewhowproblemscanbesolvedandperformance improved

Relationship of logistics with other corporate functions

With production With marketing With finance

Production schedulingProduction controlPlant warehouse designRaw material stocks

Customer servicePackagingDistribution centre locationInventory levelsOrder processing

Stock-holdingStock controlEquipment financingDistribution cost control Stock control

Source:HandbookofLogisticsandDistributionManagementbyAlanRushton,PhilCroucherandPeterBaker

There is an inverse relationship between logistics cost of a nation and the share of 3PLs in national logistics market. The greater the share of 3PLs the lesser is the national logistics cost

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Educational institutes in India have also commenced designing undergraduate, post graduate, diploma and executive level courses specifically catering to the logistics and supply chain management sector, for which there has been a very encouraging response. In addition, logistics companies are sincerely trying to benchmark their HR practices with the best in the industry and implementing measures to attract and retain talent. Given the steady interest in logistics as a long term career option amongst the brightest of the Indian youth, it can be safely derived that Indian logistics sector will leverage on the growth path it has witnessed over the past decade.

Streamliningoftheindirecttaxstructure-InIndia,distribution network is designed more by the tax consideration rather than the requirements of servicing customers at optimal cost. Most of the consumer goods companies operate with at least one distribution center or Clearing & Forwarding Agent (CFA) in each state, where they sell, to avoid inter-state Central Sales Tax (CST). Such companies operated with 25 to 50 warehouses all over India, which is a very high number compared to developed economies (less than 5) or even China (less than 10). The introduction of Value Added Tax (VAT) and the proposed introduction of a singular Goods and Services Tax (GST) are expected to significantly reduce the number of warehouses, manufacturers are required to maintain in different states, thereby resulting in a substantial increase in the demand for integrated logistics solutions.

Globalizingofmanufacturingsystems- Globalization of manufacturing systems coupled

with advancements in technology is increasingly compelling companies across verticals to concentrate on their core competencies and avail the cost saving potential of outsourcing. This is expected to contribute to an increase in the need for integrated logistics solutions, which is the niche of every third party logistics service provider.

3.3.3 Opportunities in the logistics spaceThe Indian logistics industry is poised for a significant growth in the coming years as companies, especially in the automotive, pharma, manufacturing, retail and FMCG sectors, are increasingly opting to outsource their logistic requirements to specialized service providers. Some of the existing and emerging growth areas in the logistics sector is enumerated in the subsequent section.

Cold chain storage and related logisticsCold chains form an integral part of the supply chain for storage and distribution of perishable goods and temperature sensitive pharmaceuticals and biological preparations. Estimated size of the Indian cold-chain industry is Rs. 8,000-10,000 crore (US$ 1.80 - US$ 2.27 billion) and is expected to grow at 20 to 25 per cent annually. It is estimated that this industry will grow to over Rs. 40,0002 crore (US$ 9.09 Billion) by 2015. As per the planning commission estimates, there are presently around 4,762 cold storage units in India with a capacity of 196 lakh tonnes, with potato constituting almost 81 percent of the total capacity of cold storages being handled.

India may be among one of the worlds leading producers of horticulture products but more than half the fruits and vegetable produce end up rotting as waste, even before it arrives in the market for sale. Poor post-harvest methods of warehousing, storage and unsafe transportation from point of production to point of sale are among most prominent causes of this avoidable value drain. The key issues in the Agri-logistics related to the development of the cold chain industry are of non-standard pricing, limited financial capabilities of the transporters, opportunistic profiteering, lack of scientific handling of produce and consequent high prices and limited choices for the consumers.

There has been a growing importance of the role and contribution that the logistics / distribution manager makes to corporate strategic planning

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Volume wise perishable products share in India

Note: Others include poultry, ice creams and vaccines Source: Various

As per industry estimates, approximately 104 million tonnes of perishable product / produce is moved in the country in a year. Out of that around 100 million tonnes goes through the non-reefer mode and remaining 4 million tonnes goes through reefer transport. Out of the 100 million tonnes of perishable load 96 million tonnes directly enter in local and regional markets. Out of this volume, around 86 million tonnes is sold through the wholesale and retail outlets based in regional and local markets without warehousing and cold storage conditions and 10 million tonnes is the produce that requires cold storages even when they enter the markets. Accordingly the requirement of cold chain across the country by the stakeholders far outstrips the handling capacity of the available cold chain infrastructure in the country.

Some of the industry and government initiatives for development of cold chain infrastructure include -

ContainerCorporationofIndia(CONCOR)ismovinginto cold chain logistics in a big way and is developing a cold supply chain business in the form of suitable logistics infrastructure as well as state-of-the art storage facilities to sell fresh fruits and vegetables in the global food market.

Withaviewtoincreaseshareofprocessedfood

in the country to 20% from the present 6%, the government is setting up 30 food parks by 2012 under public-private partnership. These food parks will have cold warehousing, grading centers and research laboratories. These parks could also be given SEZ and other fiscal benefits to reduce production cost and increasing competitiveness. Considering the high risks involved in the food processing sector, the government will provide a subsidy of Rs 50 crore per park to private investors.

Thegovernmentplanstoestablish50coldchain

networks, including refrigerated vans all over the country, which will help the farmers enhance the shelf-life of their produce and retain their quality.In addition, investment-linked incentives have been introduced for setting up and operating cold chain facilities, warehousing.

TheAgriculturalandProcessedFoodProductsExport

Development Authority (APEDA) has established six Centres for Perishable Cargo at Bangalore, New Delhi, Chennai, Thiruvananthapuram, Hyderabad, and Mumbai of varying capacities. The total handling capacity at these six CPCs is 2.16 lakh tonnes per annum. The operating and ground handling agencies have been designated for each CPC. In addition, APEDA has signed MoUs for setting up of CPCs at Cochin, Ahmedabad, Amritsar, Kolkata, Bogdogra, Lucknow,andGoa.

Milk Fresh meat and marine sector

Fresh fruits and vegetable Others

57%

1%

39%

3%

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Air cargoThe use of air as the mode of choice for the movement of cargo has increased over the past few years. While the amount of the cargo freighted via air is growing steadily, the infrastructure related to air cargo handling and evacuation is not. The Government has acknowledged the need for development of cargo related facilities and is taking the necessary steps to address the situation. India already has an open sky policy for air cargo. An air cargo hub is being developed at Nagpur by the Ministry of Civil Aviation. The ministry also has plans to build dedicated cargo airports across the country to cater to increasing demand in air cargo traffic.

At present India contributes over 1% of the world air cargo traffic. The five major airports (Mumbai, Delhi, Kolkata, Chennai and Bangalore) account for around 88% of the total air cargo handled in India. Growth in cargo / freight volumes is an outcome of macro-economic factors such as domestic consumption, exports and imports. Infrastructure remains a major challenge. The international and domestic cargo volumes (except for the F.Y 2008-09) have shown a steady growth despite inadequate capacity and infrastructure constrains. The blip in 2008-09 can be accounted due to the global slowdown.

Cargo volume handled at international and domestic

airports in India

Source: Airports Authority of India

The major commodities being air freighted out of India are garments, machinery components, pharmaceuticals, dyes, chemicals and perishables such as fruits, vegetables, flowers, fish and meat. Due to the high time sensitivity Clientele demand, there has also been a steady patronage of air cargo services across industries including telecom, gems & jewellery, electronics, IT & ITES related equipments etc. The Civil Aviation Ministrys proposal to frame a policy for the development of airports exclusively for cargo operations is encouraging and on commissioning of these cargo airports in due course of time will provide a much needed trigger to the air cargo segment. These airports will be established in the countrys major business centres. Under the new policy on cargo, a Centre for Perishable Cargo (CPC) would be established, which would ensure movement of perishable cargo at the airports.

Cargo in 000 Tonnes

2000

1600

1200

800

400

0

2004-05 2005-06 2006-07 2007-08 2008-09

International

Domestic

Total

The Civil Aviation Ministrys proposal to frame a policy for the development of airports exclusively for cargo operations is encouraging and on commissioning of these cargo airports in due course of time will provide a much needed trigger to the air cargo segment

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Some of the opportunities emerging from the growth in the air cargo segment include:

Providingvendorsandindustryinthenon-metrocitiesa speedy gateway to the world

Investmentinaircargoinfrastructurewouldspawn related supporting infrastructure including warehousing, industrial parks, Distribution Centres etc.

Theefficiencyandthereachoftheexpresscargoindustry will further improve

IndiancompaniescanexploittheirinherentITcapabilities to develop specific application systems to enable air cargo planning, movement, management and co-ordination

Domesticairlinescanleverageonthedevelopmentof the Hub-and-spoke model for the countrys cargo operations

Material handling equipment The Indian Material Handling Equipment (MHE) market has been estimated at about Rs 5,000 crore. The traditionally fragmented material handling Industry has been consolidating at a fairly rapid pace in the recent years. Material handling equipment used by logistics industry include forklifts, pallet trucks, stackers, reach truck, order picker, overhead travelling cranes etc.

Traditionally, a lot of manual intervention was involved in the logistics business, as a result of which they were delay in deliveries; products were more prone to damage due to poor handling and transit time taken was much longer. This resulted in low speed, handling problems like scratches, chipping, breaking and difficulty in monitoring the material flow.

Demand for material handling equipment has been increasing in the last few years. One of the primary reasons fuelling this growth is that companies are increasingly feeling the need to lower their logistics cost. As a result of which there is a shift from manual operations to use of electric and battery operated equipments, especially in warehouses to improve efficiency and save time. Some of the reasons for this shift include low maintenance requirement, one time investment, long life of equipment, no diesel requirement, etc. In addition, the foreseen increase in cargo traffic handled at the major gateways over the future, the requirement of material handling equipment will maintain its uptrend.

Reverse logisticsMany logistics movement of goods go beyond the conventional supply chain perspective and thereby generate add itional business transactions. These include failed components repaired to serve as spare parts, unsold stock being recovered, old products improved to meet latest standards again, reusable material returned and refilled / re-developed etc. Reverse product flows may generate value on a product, component, or material level.

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With an ever increasing breed of quality and timely delivery conscious Indian consumers, manufacturers have endeavoured to develop logistics network that would cater to the reverse logistics flow of materials. The ability of a logistics network to cater to the timely retrieval and delivery of material can be considered as a strategic tool for customer retention. A customer who enjoys a timely after sales spare part replacement would generate a positive word-of-mouth campaign.

While earlier, the manufacturers tried to manage their reverse logistics system in-house, manufacturers are now also seeking the option of outsourcing of their entire reverse logistics network to third parties. However outsourcing the management of reverse logistics flow entails that the third party service provider has the mechanism to respond to the customers query, develop suitable system to collect the old product from the customer and if required possibly replace it with a new product, deliver the product to the manufacturers location.

The manufacturer hence needs to have the confidence that the third party interaction with the customer should be smooth considering that the replacement of a product may lead to a contentious issue. Accordingly, before outsourcing of the reverse logistics network, the manufacturer has to collaborate with the logistics service providers to chalk out and implement a robust reverse logistics system. For the logistics service provider, the reverse logistics support for a manufacturer would never be treated as a one off transaction. The logistics service provider would be required to act not only as a service provider, but would be required to treat the Client as a service partner treating the Clients business as his own. While global manufacturers are outsourcing reverse logistics operations to third parties in the developed logistics nations; the trend is steadily catching up in India. This provides a huge opportunity for the various logistics service providers to expand their bouquet of service offerings and consolidate on the opportunities that reverse logistics would offer.

The challenge however that is in India, the forward logistics chain is far from perfect and hence establishing a sustainable reverse logistics system might be a challenging task.

3.4 Significance of SMEs in the Indian logistics industrySmall and medium -sized enterprises (SMEs) are usually the mainstay of most economies, particularly in terms of employment and overall development impacts. As per the World Association for Small and Medium Enterprises (WASME), there are over 5 million SMEs in India accounting for around 80% of the industrial sector employment. It is the second largest employer of human resources after agriculture, employing around 20 million people, contributing 35% of the total export trade and accounting for nearly 40% of the total value of industrial production.

The above figures reflect the importance and contribution of the SME sector to the national economic growth and prosperity. It is hence not surprising to realize the importance and the significance of the SMEs in the Indian logistics sector. The logistics sector in the country is dominated by the Small and Medium Enterprises (SMEs) of which the majorities are the road transport providers. It is estimated that more than a million transport operators are owning and running more than 4 million trucks.

The reduction in the logistics cost can be brought about by improving the national logistics infrastructure to facilitate smooth transfer of materials and information. While at the macro level, the Government of India can initiate steps for improving the logistics infrastructure of the country, the logistics service providers at the micro level would need to infuse better management practices to reduce their service cost and improve their operational efficiency. Since the Small & Medium Enterprises constitute a significant percentage of the logistics service providers, it would not be inappropriate to mention that these SMEs would be acting as the catalyst in reducing the national logistics cost component.

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4. SMEs in logistics: Succeeding in the market place

The power of small is enough to bring about a revolution in the way business is done. Typically, firms that start small but do a good job of responding to market needs become larger over a period of time. To enable such new entrants with drive and good ideas to grow, it is necessary to create a conducive environment. The objective of any program for SME support, therefore, should not be to reward firms that happen to be small. Rather, it should ensure a functioning ecosystem, in which new ones can emerge, existing ones can grow, and large and small ones can collaborate and leverage their synergies.

Logisticsserviceprovidershavinginvestmentinequipment (excluding land and buildings) exceeding Rs.10 lakh (US$ 0.2 lakh) but less than Rs.2 crore (US$ 4.1 lakh) qualify as Small enterprises and those investing more than Rs. 2 crore but less than Rs.5 crore (US$10.3 lakh) classify as Medium enterprises3 . Today, perhaps the biggest challenge that these service providers face is coping with the regional, geographical and legislative diversity in the country. This results in a lack of standard practices, procedures, regulations as well as disparities inthelevelofcompliance.Landtransportationinparticular gets significantly exposed to these issues as the fragmented ownership of key components like warehouses and trucks makes the consolidation of services an enormous task, and the resultant offering becomes extremely inflexible to suit customers needs. Users of logistics services are no longer lured by buzzwords or big names; the focus is clearly on costs and delivered value. Hence, the emergence of SMEs as strong regional or sectoral players is imminent. SME service providers are rich in local experience and have the flexibility and speed to deliver according to the expectations of the principal. Most SMEs are also owner-driven, and this reassures customers that they will be dealing with a person rather than an impersonal service.

As the Indian logistics sector becomes more competitive globally, multinational companies will look to outsource their entire logistics services to India. Most of the logistics companies in India now offer a complete range of services: warehousing systems, distribution, tracking of goods and separate storage facilities for

wet and dry goods. This will serve as a major attraction for international companies, as they are looking for a one-stop-shop for most of their business verticals. In addition, implementation of innovative technology and the cost-effective models will help ensure better management of assets, allowing SMEs to reduce expenditure and remain competitive in the present economic slowdown.

4.1 Competitiveness of SMEs in logisticsDeloitte conducted a survey of several Small & Medium logistics players to capture the developments in the Indian logistics space and more importantly the broad level challenges that the industry is currently facing, particularlyfromtheperspectiveofaLogisticsServiceProvider(LSP).Therespondentcompaniesbelongedtoa wide spectrum of logistics segments such as freight forwarding, shipping, customs booking, container freight stations, warehousing, and multi-modal transportation.

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As a part of the survey, Deloitte had designed a holistic questionnaire, which was administered to the respondents during a one-to-one discussion. It attempted to seek responses on various parameters such as company background, operational performance, internal benchmarking, soft infrastructure and also views on quality of external infrastructure and its impact on logistics businesses. The individual responses thus collated, form the basis of analysis that follows.

4.1.1 Internal factors affecting competitivenessServices In the recent past, the logistics industry has witnessed a paradigm shift in scope of service offerings with the constituent players moving from typically being single service specialization companies to what are now popularly referred to as Total logistics solution providers. This has added a new dimension of service synergies, which ultimately helps the service providers to offer a whole gamut of quality services to the client at competitive rates.

Furthermore, in a situation like todays it also helps diversifying the basket of offerings into a wide range of avenues so as to minimize risk faced due to unpredictable / vulnerable business segments. While managing the complete supply chain presents its own unique challenges, it also helps in optimizing costs not only for the service provider, but also for their customers wherein they can have greater control over their inventory levels to prevent stock outs. Organizations that have been able to embrace this change and expand their capabilities beyond pure play transportation certainly enjoy a competitive advantage over their peers. In India, this trend is largely seen in firms which have a strong warehousing and distribution capability, a customer centric approach and a forward thinking leadership.

Foreign alliancesAnothertrendwhichisfastpickingup,isthatofLSPsforging alliances with foreign players to ensure access to untapped geographies and benefit from collaborative effort. Having said that, the regional strength of domestic players is equally a compelling factor for SMEs to collaborate and leverage on. In several cases, the scope of this relationship has moved beyond the realm of geographic reach to making strategic investments and bringing specific logistics related expertise, which can be a strong competitive advantage.

Key value propositions of alliances

Source: Deloitte survey

CostThe current slowdown has robbed the logistics sector of not just volumes but even margins. The businesses have witnessed varying impacts with volumes falling to the tune of anywhere between 10 per cent to 30 per cent and margins declining by as high as 70 per cent.

Reliability

Internationalpresence

Size

Pricing

Companybackground

Cost ofalliance

Technicalexpertise

Financialstrength

Market reach

Value addedservice

Key valueproposition of

alliances

Users of logistics services are no longer lured by buzzwords or big names; the focus is clearly on costs and delivered value. Hence, the emergence of SMEs as strong regional or sectoral players is imminent

26

The fear of price sensitive Indian market, not being able to bear the additional cost of technology acts as an impediment

While segments such as project cargo movement and domestic agency business have managed to remain afloat, others like container business and ship chartering have had to bear the brunt. eg: Booking a container from India to U.K. which used to earn around US $1000 per TEU earlier, now gives only US $300 per TEU. Unlike commercial orders which have taken a hit, personal cargo volumes are still promising and thereby ensuring reduction of adverse impact.

To ensure survival, some players are charging rock bottom rates and in turn rendering the services of other players uncompetitive. This has clear implications for individual players to streamline operations. Optimizing operations together with cost cutting will therefore go a long way in helping SMEs gather strength internally and compete effectively. This can be further supplemented by company initiatives such as adopting a sales intensive approach including cross selling by different divisions and strengthening recovery.

TrainingAlthough basic training is provided in most organizations, it lacks the necessary focus to tap and promote workforce talent and elevate service performance to global best standards. This is partly reflected in the survey response, wherein despite having adequate workforce and low attrition, the quality of work has been lagging.

Another reason could be recruitment of inexperienced / unqualified staff at lower wages, with an objective of cutting on costs, unaware of the repercussions it could have on the quality of services rendered. At certain places, the operational training is limited to technology updates, while at some other it is purely in form of on the job experience. To compete effectively in todays age, training in supply chain management practices and quality management techniques such as six sigma can help to a great extent.

TechnologyGlobally, investment in technology is another important driver of an organizations efficacy. However, technology implementedbytherespondentLSPsismoreorlesslimited to cargo tracking in general and for agency business in particular, it is confined to systems used by the principal so as to ensure compatibility. At times, point-to-point movement of cargo is even manually tracked and updated by agents en route the final destination. The level of familiarization and use of advanced technologies like Global Positioning System (GPS), Warehouse Management System (WMS), Radio frequency identification (RFID) amongst SMEs in India is quite low.

The fear of price sensitive Indian market, not being able to bear the additional cost of technology further acts as an impediment. Again, a few setups despite being significantly large do not employ such technologies since they cater to bulk transportation & warehousing, unlike third party logistics players which are concerned with moving numerous small parcel sizes.

The chart below plots areas of growth opportunity from theperceptionofLogisticsSMEsthatwerecoveredbythe survey. The various opportunity areas were assigned weights, based on world averages sourced from survey by leading logistics player UPS, on SMEs in India. These have been compared with corresponding relative importance in per cent terms, which was an outcome of the Deloitte survey. From the analysis, it follows that moving to higher value added services is perceived as thebiggestgrowthopportunitybyLogisticsSMEstoday.

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Perception of growth opportunity by logistics SMEs

Pursuing the right mix of growth opportunities can help a player boost its market share. Notwithstanding this, thecustomerschoiceofanLSPisdrivenbyasetofparameters, some of which are indispensable and the others desirable.

Key determinants of choice for selecting a LSP

Source: Deloitte survey

Relative importance for logistic SMEs

Relative weights based on world average

35%

30%

25%

20%

15%

10%

0%

Optimizing operations

Improving workforce quality through training

Moving higher valueadded services

Forging alliances & acquisitions

IT adoption

0 1 2 3 4 5 6

Choice of an LSP

Timely delivery

Compliance& approvals

Specialized cargo handling

Network reach

Cost effectiveness

Service quality

Equipment

Reputation

Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

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In the earlier mentioned chart, compliance and approvals refer to the various licences and/or permits which are particularly of relevance to custom house and clearing & freight forwarding agencies. Besides the above factors, public sector organizations also typically look for past performance, financial standing and the quantumofordersexecutedbytheprospectiveLSPina particular period. The desirable factors, on the other hand, are sophisticated IT infrastructure, door-to-door service, alliances, and brand name.

Other factors that have a bearing on the competitiveness of logistics service providers are:

Transactionalrelations:Thisismostlydrivenbytheclients requirements & degree of his satisfaction with theservicesoftheLSP.Althoughonanaveragemostdeals are carried out on a deal-to-deal basis, many LSPsaretryingtopitchinforlongerrelationshipsasthis can ensure them a steady flow of work orders.

Servicelevelagreements:ServiceLevelAgreements

(SLAs)setoutperformancestandardstobecomplied by the logistics service provider and include parameters such as delivery, quality, safety information availability, etc. Such agreements bring in efficiencyandaccountabilityinthebusiness.SLAsarelargely insisted in contract logistics wherein the service provider handles product movement up to the point of purchase and can vary as per the industry and nature of cargo. Industries like computer peripherals and hardware, automotive, perishable products are likelytodemandstringentSLAs.ItisunderstoodthatadherencetoSLAsinIndiaisaround80to85percent while in developed economies it is around 95 per cent. The survey responses also indicate that pure play transporters generally are not very conscious aboutSLAsastheyaremoreworriedaboutthecost,ascomparedto3PLswhomonitortheSLAsclosely.

Benchmarking:Eachplayerseemedtobeguidedby its own set of benchmarking practices. Internal benchmarking is mostly being practiced by way of achieving conformity with SOPs to ensure uniform level of performance at all operation centres, internal review, performance audit, and periodic calculation of customer satisfaction index based on customer feedback. External benchmarking, however, is not so widelyundertakenbytheIndianLSPsyet.

Innovation:Thisisonesuchfactorthatcanhelpa

player differentiate its services from the rest and more importantly benefit from the first mover advantage. This could either manifest in form of exclusive service offerings such as serving the niche segment of hydrocarbon transportation, etc or thinking out of box like fitting four cars in one container instead of three using a movable deck. Innovation can also sometimes take form of intensive capital investment, the first of its kind, in equipment at a place, such that competitors find difficult to match such huge investment and eventually tend to lose out. Unfortunately, innovation amongst the Indian logistics SMEs is still at a relatively nascent stage

4.1.2 External factors affecting competitivenessThese can be broadly classified into infrastructural bottlenecks and policy constraints. Infrastructural bottlenecks relate to deficiencies in physical infrastructure such as roads, railways, ports, airports, Inland Container Depots (ICDs) & Container Freight Stations (CFSs), whereas policy constraints refer to the regulatory & procedural hurdles affecting transportation.

The survey responses indicate that pure play transporters generally are not very conscious about SLAs as they are more worried about the cost, as compared to 3PLs who monitor the SLAs closely

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Nature of bottleneck

Area Cause Effect

Infrastructure

Ports

Inadequate capacity at major ports Heavy congestion at most major ports leading to higher vessel turnaround time

Untapped potential of non-major ports

Outdated equipment Inefficient handling

Lackofwarehousing Longwaitingtime

Airports

Few busy airports (Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad)

Congestion at main airports

Numerous unused airstrips & relatively less used airports

Lackofequipmentforodd-sizedpackages,professional packers, etc

Inefficient handling resulting in pilferage/damage

High cost of alternate arrangements (prices quoted by individual loaders)

Roads

Bad quality of roads Do not support the axle weight of the trucks & cause the roads to break and cave in

Inadequate lanes / lack of maintenance Bad road quality leading to poor speeds, accidents and high vehicle maintenance

Inadequate hinterland connectivity Inconvenience due to limited access to neighbouring ports

Railways

Too many level crossings / minimal electronic controls / priority to passenger trains over cargo trains

Choked rail network & resultant lower speeds of cargo trains

Limitednetworkandterminalsofprivateplayers(container movement)

Transportation delays & cost overruns

Inadequate capacity / connectivity Transportation delays

ColdChain/ CFS/ ICD

Unreliable infrastructure / uneconomical size Lessintegratedservices,inefficiency&resultantinconvenience

Inexperienced staff Inefficient handling

Regulation

Customs

Outdated customs formalities incl. documentation Huge delays

Erratic EDI

Interpretation of rules & regulations left to the discretion of Customs Commissioner

Ineffective administration of customs laws

Too many collectorates especially in the NCR region

Corruption

Border duties such as octroi

Abolished by most states, but still applicable in Mumbai, Pune, etc.

Increases cost of transporting through that city & eventually distorts logistics network

Inadequate controls (esp. roads)

Excess loads going unchecked Bad road quality leading to poor speeds, accidents

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To overcome the burgeoning logistics costs, the respondentLSPsareresortingtothefollowinginitiatives:

Negotiating&re-negotiatingcontracts Negotiations with airlines would involve a minimum

cargo commitment, eventually resulting in lower rates for customers. Negotiating with truckers (surface transport) would involve giving contracts to those providing competitive rates besides having a good network of pick-up.

Loadoptimization This refers to judicious selection of cargo by going for

a right combination of weight & volume cargoes so that total capacity is optimally utilized.

EfficientRoutescheduling This involves evaluation of available routes between

the source and destination and selecting the most appropriate route which will optimise cost and delivery, proper selection of load & discharge points and deciding on what quantities to be picked up from where. The ability to provide the most cost effective distribution network is being used as a competitive advantagebytheLSPs.

Nature of bottleneck

Area Cause Effect

At present, the congestion at ports has automatically reduced thanks to the decline in trade. But once trade volumes pick up, it could again start posing a significant problem and have a cascading effect on related transport channels. eg: The ideal transit timeforcontainerfromLudhianaJNPT(1500kms)is approximately 2-3 days. However, in times of congestion, this can escalate to even a week or more. TheLSPshavefoundawaytomitigatethisproblemby collaborating with ports, which enables them in availing preferential allotment of window. The long term solution to this, however, is development of more non-major ports. Further, alternatives like development of coastal shipping and inland water transport can be explored to help ease out the infrastructural bottlenecks and bring down the overall logistics cost. From the analysis, it follows that besides poor infrastructure & regulatory hurdles, the other logistics cost inflators are:

Variablevesselchartercosts

Fluctuatingoil/fuelprices

Fluctuatingexchangerates

Non-availabilityofreturnloads

Highhaulagerates

Regulation

Taxation

Attractive manufacturing incentives such as tax holidays for setting up units in a remote / industrially backward region

Distorts logistics network as units in remote regions of Himachal Pradesh / Assam, etc may not enjoy the logistical advantage of a place with relatively better connectivity

Multiple taxes for shipping (Tonnage tax + 12 other taxes)

Renders Indian shipping internationally uncompetitive

Red tape / bureaucratic hurdles

Involvement of multiple agencies such as Commerce Ministry for ICD / CFS / SEZ, rail ministry for private rail terminals, Ministry of Surface Transport for Roads, & Shipping Ministry for Ports / Shipping

Cost overruns, inconvenience & delay

LawApplicability of multiple acts such as Railway Act, Merchant Shipping Act, Indian Ports Act, MMTG Act

Subjects multi-modal operations to multiple regulations and makes compliance cumbersome

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Areas for improvement / challenges

Transportation infrastructure is not just crucial for logistics services world over, but is also an area that needs substantial improvement in the Indian context. This is followed by inadequate access to funding, a problem particularly faced by SMEs. Regulatory effectiveness, although equally important for India, carries a lesser weightage going by the world averages, probably due to foreign countries already having an appropriate and enabling regulatory regime.

4.3 S-W-O-T AnalysisStrategy formulation for any entity or a group of entities is primarily influenced by their relative competitive position in the industry. This, in turn, is collectively determined by a set of factors such as strengths & weaknesses (internal), opportunities & threats (external).

The ability to provide the most cost effective distribution network is being used as a competitive advantage by the LSPs

Levelofimprovementdesired

Relative weight based on world average

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Regulatory effectiveness

Innovation

IT Adoption

Access to funding

Qualityofmanpower

Transportation infrastucture

0 1 2 3 4 5 6 7

IncreasedadoptionofIT This is being actively pursued by implementing IT

infrastructure and software for managing business processes as well as operations. This will increase efficiency and reduce time taken for various activities particularly in warehousing and fleet management. A well designed MIS enables regular tracking of performance and financial metrics such as sales, profitability, variance analysis etc., Survey responses indicate a mix of organisations having separate IT systems and also those which have implemented a unified ERP solution.

Savingonlogisticsrelatedcommunication International communication is an integral part

of logistics operations, especially that of a freight forwarder. Most work is sorted over emails. The operations team refrains from making phone calls, unless absolutely necessary.

Cuttingdownonmanpower This is being actively pursued by implementing ERP

systems, which enable integration of office systems and provide client interface. Most of the manual work gets automated and therefore replaces the junior human resource at operations level.

Othermeasures These include working capital management, inventory

cost control and periodic reviews among other things. 4.2 Assessment of challenges: Internal & externalA thorough analysis of internal and external factors affecting the logistics industry in general, together with acknowledgement of constraints specific to SME players like lack of funding can enable us identify areas of improvement for the industry, as follows:

Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

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A conscious effort to maintain an edge in the areas of strengths, improve on weaknesses, a drive to actively pursue opportunities, and take proactive measures to guard oneself in areas of threats can enable the group of firms to find their way through adversity. The inputs obtained during the survey and subsequent analysis form the base for S-W-O-T framework for Indian LogisticsSMEs,whichiselaboratedinthefigurebelow:

Strengths Mostenterprises,byvirtueofbeingownerdriven,

tend to offer personal commitment and quality services to their clients

Relativeeaseatfillingupvacanciesinoperationsabundantly reflects availability of adequate labour

Withoperations&agencynetworkprimarilyconcentrated in a particular region, they enjoy regional dominance and can provide services at economical rates compared to their counterparts

Lowattrition,partlyaidedbythecurrentdownturn,can be further exploited by focusing on training & employee friendly HR initiatives

Weakness Thefragmentednature,aninherentweaknessof

the industry, can be effectively addressed through consolidations, partnerships, and segment specific forums aimed at providing integrated services to the clientele

AcommonproblemfacedbySMEsisthatoflimitedaccess to affordable credit, and can be overcome by

ploughing back profits (self funding) and optimizing operations so as to qualify for SME loans

Lackofuseofstateofarttechnologies,ifsuitablyaddressed can boost the international competitiveness of the Indian logistics industry, as a whole

Inadequatecontrols&costconsciousnessamongstdriveLSPs,particularlyroadtransporters,oftenleadto low safety standards eg: instances of overloading by trucks

Opportunities AlikelyboominConstructionandPharmaceutical

/ Healthcare sectors would imply potential business opportunityforLSPsintermsofincreasedmultimodalmovement of raw material & manufactured products, both domestically as well as internationally.

ProgressivereformssuchasintroductionofsingleGoods and Service Tax (GST) will help rationalize the warehousing se