Emergence of Third Party Logistics in India

 

In the last 2 posts it was about the role of 3 PL service providers and their significance this is the concluding part about need of having the 3 PL service providers and how outsourcing can help companies on focussing their core competence.

  • The logistics cost is estimated between 9% and 20% of GDP for any country. The figure is about 14% for India. India’s logistics sector is highly defragmented and the aim is to reduce the logistics cost from the present 14% of GDP to less than 10% by 2022, according to an update from the Department of Commerce. India’s logistics sector is very complex with more than 20 government agencies, 40 partnering government agencies (PGAs), 37 export promotion councils, 500 certifications, 10000 commodities, 160 billion market size. It also involves 12 million employment base, 200 shipping agencies, 36 logistic services, 129 ICDs, 168 CFSs, 50 IT ecosystems and banks & insurance agencies. Further, 81 authorities and 500 certificates are required for EXIM. (Data Source – Business Standard)
  • According to an analysis the third-party logistics market in India is to grow at a CAGR of 8.36% during the period 2018-2022.
  • India has a huge potential for cost savings if it can reduce its logistics costs from the present level of 14% of GDP to 8 % (which is also the level in the U.S.).  
  • Challenges in the development of the 3rd Party Logistics market in India
  • The main challenge before 3PL service providers is to face the geographic diversity of India which needs varied logistics expertise for each region.
  • The model required by logistics operation in each state should be such that it helps in the proper storage and transportation of goods mostly sold in that particular state, so it becomes very difficult to have a uniform logistics model. The 3rd Party Logistics services provider interested in a particular company would have to offer all kind of solutions to meet nationwide requirements of that company.
  • Another problem faced by 3PL service providers is that proper warehousing and specialized storage facilities are available only in certain part of the country i.e. only in major cities which result in limiting them from offering services across India. Thus it becomes another reason of their failure to become complete logistics service providers for clients.Although off late in 2nd and 3rd tier cities also better facilities are getting developed but the pace is slow.
  • With the introduction of GST and One Nation One Tax concept situation is improving but still companies has to think and find out ways to serve the last consumer.
  • Outsourcing, third party logistics services (3PL) and contract logistics is one and the same thing. It involves the use of external companies to perform logistics functions, which have traditionally been performed inside an organization. A key rationale for outsourcing of logistics functions is the intensified globalization of businesses.
  • During the last few years it has been seen that corporations across the world are progressively sourcing, manufacturing and distributing globally making their supply chains complicated and difficult for them to manage. Hence organizations have to outsource their logistics activities to 3rd Party Logistics service providers, who have global operations. 3PL of today provides with their advanced IT capabilities and transportation service/ warehousing facilities provide complete supply chain solutions.
  • Usage of supply chain strategies for logistics improvements is increasing by Indian industry – to enhance sales revenue, to earn more profits, decrease order to delivery cycle time and minimize inventories.
  • Logistics is therefore emerging as a main driver of competition in the future. Good logistics performance requires a trade off between the need to reduce overall lead times and supply chain inventory, while at the same time capturing economies of scale and improving customer service for enhanced business performance.
  • Usage of third party logistics services is a strategic decision and hence it is essential to observe and quantify the impact it has on business performance. The goal of involving third party relations is not only cost reduction, but a combination of service improvements and efficient operations.
  • Organizations using services of 3PL logistics provider have cited that there is also improvement in financial indicators. – improvement in sale revenues, improvement in working capital, capital asset reduction, production cost reduction, labor cost reduction, return on asset improvement, logistics cost reduction – because of the usage of 3PL services.
  • User organizations also indicated that they have been able to improve focus on their core competencies and reduce operational costs at or above expectations. Lastly the use of the logistics service has also helped corporations to bring in more strategic/operational flexibility and differentiation from the competitors.

Conclusion –

  • Evolving business environment has forced corporations in India to focus on their core activities and transfer logistics functions to logistics operations experts. Globally, the domain of efficient logistics outsourcing consists of freight bill payments, auditing, contract manufacturing and assembly operations, packaging and labelling freight consolidation to name a few, apart from transportation, warehousing and custom clearance a whole range of other activities.
  • More and more companies are planning to use 3PL services in the future as an integrated set of services rather than for just movement of material.Advantages of logistics cost reduction, ability to concentrate on the core business, and improving supply chain efficiency are the reason for doing so.
  • It is clear that usage of 3PL services can help corporations achieve desired results, both in terms of customer satisfaction and logistics cost reduction. Positive results will work as foundation for rise in outsourcing of logistics operations in the short term and long-term future by current and potential users for improved business results and supply chain efficiencies.

Divya Prabhat

Supply Chain & Logistics Consultant

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