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Logistics industry report

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  • 1. Logistics Industry Report By: Sindoor Naik Overview of Global Logistics Industry The global logistics industry is estimated to be worth USD 300 billion. Though most of the large service providers are headquartered in Europe, the biggest market is the US, which captures about one-third of the world market. The global logistics industry is characterized by high costs of operations, low margins, shortage of talent, infrastructural bottlenecks, demand from clients for investing in technology and providing one-stop solutions to all their needs, and consolidation through acquisitions, mergers and alliances. Though, in India, the industry is still in its infancy, there is immense potential for growth. The Indian logistics industry is currently plagued with low demand, poor infrastructure, high costs, government regulations etc. However, it is going to turn around on the back of robust GDP growth, globalization, FDI in logistics and increasing government support. This paper highlights the current state of the industry, including the dynamics and opportunities for growth, globally, in general, and in India, in particular, based on findings from surveys of logistics service providers, and users, of India and other countries. 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. The analysis of industry’s internal factors suggests that moving to higher value added services is perceived as the biggest growth opportunity by the Indian LSPs. 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 competitiveness of Indian LSPs.
  • 2. Other logistics cost inflators are variable vessel charter costs, fluctuating fuel prices, exchange rates, non-availability of return loads and high haulage rates. Further, the LSPs are typically resorting to initiatives like 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 Government’s push to infrastructure expansion are equally encouraging. On the other hand, major threat is posed by competition. 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 -. Large logistics spend Relatively high value products Manage across multiple modes Manage complex, time sensitive supply chains Diverse supply chain footprints including their own Operations, suppliers and customers Maturity in outsourcing cycle (currently managing 3PLs) Decentralized management of logistics Complementary to current base of 4PL business High cube and high weight products Evolution of Logistics Industry in India The Indian economy has been growing at an average rate of more than 8 per cent over the last four years (Srinivas, 2006) putting enormous demands on its productive infrastructure. Whether it is the physical infrastructure of road, ports, water, power etc. or the digital infrastructure of broadband networks, telecommunication etc. or the service infrastructure of logistics – all are being stretched to perform beyond their capabilities. Interestingly, this is leading to an emergence of innovative practices to allow business and public service to operate at a higher growth rate in an environment
  • 3. where the support systems are getting augmented concurrently. In this paper, we present the status of the evolving logistics sector in India, innovations therein through interesting business models and the challenges that it faces in years to come. Broadly speaking, the Indian logistics sector, as elsewhere, comprises the entire inbound and outbound segments of the manufacturing and service supply chains. Of late, the logistics infrastructure has received lot of attention both from business and industry as well as policy makers. However, the role of managing this infrastructure (or the logistics management regimen) to effectively compete has been slightly under- emphasized. Inadequate logistics infrastructure has an effect of creating bottlenecks in the growth of an economy, the logistics management regimen has the capability of overcoming the disadvantages of the infrastructure in the short run while providing cutting edge competitiveness in the long term. It is here that exist several challenges as well as opportunities for the Indian economy. There are several models that seem to be emerging based on the critical needs of the Indian economy that can stand as viable models for other global economies as well. Chandra and Sastry (2004) have pointed towards two key areas that require attention in managing the logistics chains across the Indian business sectors – cost and reliable value add services. Logistics costs (i.e., inventory holding, transportation, warehousing, packaging, losses and related administration costs) have been estimated at 13-14 per cent of Indian GDP which is higher than the 8 per cent of USA’s and lower than the 21 per cent of China’s GDP. Service reliability of the logistics industry in emerging markets, like India, has been referred to as slow and requiring high engagement time of the customers, thereby, incurring high indirect variable costs (Dobberstein et. al, W.P. No. 2007-03-07 Page No. 3 2005). However, the Indian logistics story is one with islands of excellence though there has been a general improvement on almost all parameters. Logistics Infrastructure in India Transportation related challenges In India road has become the predominant mode of transportation of freight cargo. Estimate of the modal movement of cargo highlights that In India nearly 61% of the cargo is moved by road, 30% by rail and rest by airway, pipelines and inland waterways. This is as compared to a 37% share of road in the USA and 22% in China .It is recognized that movement of long haul bulk traffic by road is less efficient than by rail. But road is still preferred over rail because:  Important rail networks are oversaturated: There has been little investment in track infrastructure since independence. While route kilometer has grown only at a CAGR of 3%, track kilometer, incorporating additional lines on existing routes, has not fared much better growing at a low CAGR of 6.6%. During the same period freight
  • 4. and passenger traffic has grown at a CAGR of nearly 54%. This has led to most high density corridors becoming over saturated.  Rail freight tariffs are high: Indian Railways follows a policy of subsidizing passenger tariff by freight tariff. This has resulted in a sharply rising trend in railway freight rate over the years compared to an almost stagnant passenger tariff rate. The result of this has been that Indian rail freight rates have already become one of the highest in the world, with freight rates in India being nearly 4 times that in United States. If truck overloading is also taken into account then rail freight rates work out to be higher than road freight in many instances.  Transit times are long and uncertain: Freight traffic is frequently subordinated to passenger traffic on the railway network. This results in a freight train taking as much as 6-8 days for a journey of 2000 kilometers. Also there is no guarantee provided on the transit time for freight trains.  Rail terminal quality is poor: Most rail terminals (goods shed) used for loading/unloading of freight are antiquated. They also suffer from issues of access and evacuation of traffic.  Less flexibility in carrying different types of products: Special wagons are not easily available for carrying specialized products. For example special types of steel required for automobile production have to be carried by trucks as the existing wagons do not offer the kind of protection that these high value products require. While customers are allowed to request for new wagon designs the process of getting these wagon designs approved by railways is cumbersome.  Railway carriage not easy for industries which cannot provide full train loads: Railways have a preference for customers who can provide full train load as unlike in some other countries, railways in India no longer run mixed trains which can carry different types of cargo. Operational efficiency is cited as the major reason for the same. While containerized rail movement can provide for freight movement for industries with smaller rake loads domestic container movement has not taken off in a big way- with one of the issues being a lower priority being accorded to container trains on the railway network.
  • 5. Road network coverage: Freight movement in India is dependent on National Highways. While National Highways constitute only about 2% of the road network of India they carry nearly 40% of the total traffic. As a result most of these highways are severely congested- resulting in freight travelling only a third of the distance compared to developed countries.  Poor road quality: The road quality in India, on the National Highways as well and other roads, is improving but is still poor in many locations. Estimates suggest that motorable roads are still less than 10% of the total road network. Large stretches of National Highways are also two laned in many stretches reducing their capacity to handle large traffic loads.  Expressway network will take time to develop: In many developed countries expressways have been developed to facilitate high speed freight movement through linking of important cities, ports and industrial centers. In India the expressway network is still largely at a planning stage with a target of development of around 15,000 kilometers of expressways only by the end of the 13th plan period.  Multiple check points: Trucks in India have to pass through multiple check points in their journey. Trucks have to stop at state borders, for payment of toll taxes, for RTO inspections, Octroi etc. An estimate of the time taken at the check points shows that in a journey of 2150 kilometers between Kolkata and Mumbai a truck had to stop for as much as 32 hours at various checkpoints on 26 different locations.1 In addition to roads and railways which carry the bulk of freight traffic in India other modes of freight carriage also suffer from their own issues. The ports sector in India suffers from several issues:  High turnaround times: Data from Indian Ports Association shows that ports in India suffer from high turnaround times for ships. JNPT, which is the premier port in India, has more than 2 times the turnaround time of Colombo and Singapore ports because of congestion on berths and slow evacuation of cargo which are unloaded at the berths.  Inadequate depth at ports: The depth at many ports in India is not enough and dredging tenders take a long time in getting awarded. As a result with the existing depths many ports are not able to attract very large vessels.
  • 6.  Costal shipping has not taken off: Costal shipping in India is hampered by inadequate port and land side infrastructure which hampers large scale use of it for freight movement. Finally Air cargo has also not taken off significantly in India. With increased volumes of cargo major airports are getting congested resulting in long waiting time. The waiting time for exports in India is 50 hours compared to a World average of 12 hours while the waiting time for Imports in India is 182 hours compared to a World average of 24 hours. Also the airfreight sector suffers from high fuel costs and tariffs as well as several manpower issues. While it is difficult to set up a facility, at the same time, the existing facilities themselves are plagued with several issues:  Many of the older facilities today are located within city boundaries restricting day movement of trucks  The approach roads to the facilities are poor making evacuation of cargo difficult  Most facilities have issues of inadequate parking, lack of available land for expansion, paving etc.  State of warehousing is poor: Various estimates put warehousing costs to be between 20-25% of the total logistics cost. Despite this the state of warehousing in India is largely dismal. On the warehousing front 80-85% of warehouses are traditional with sizes of less than 10,000 square feet. Most of these warehouses are not leak proof, equipped with security systems, racking facilities and other facilities. Majority of the operators of these warehouses are also small to mid-sized entrepreneurs with limited investment capacity. The only really large warehousing owners are government agencies including Central Warehousing Corporation and State Warehousing Corporations, but the focus of a significant majority of the government warehouses is food grain storage. Not only are the existing warehouses of poor quality, there are also not enough of them. This is because land availability for warehousing at an appropriate place and at an appropriate price is a concern. The magnitude of the problem in this regard was highlighted in a recent CII conference on warehousing where it was highlighted that Delhi alone has a deficit of 9000 acres of land for development of warehousing facilities!  State of cold storages is poor: Despite the significant requirement of cold storages from the retail sector, pharmaceutical and chemical sector and the farm sector, where it is estimated that upto 40% of the fruits and vegetables grown in India gets wasted, the sector needs to grow much faster to meet the needs. Estimates on cold chain facilities in India put the number of cold storages at around 5400 with a capacity of 24 million metric tons. However nearly 60% of these facilities are meant for storage of potato crop. Also with the poor electricity condition in the country the cost of operating such facilities is very high. With government intervention and various sops the situation is slowly improving but many challenges remain.
  • 7.  Multimodal Logistics parks yet to take off: With emerging requirements of integrated logistics, provision of transportation hub, value addition etc. large logistics parks were sought to be developed. However as with other areas the number of such facilities continues to remain much less than the requirement. Consolidation of large land parcels is a significant issue hampering their development. Other issues include the lack of recognition of the concept of Logistics Park by state government thereby obtaining permission for setting up one cumbersome. Tax structure related challenges A complicated tax regime is in place which places several challenges on the logistics industry. Payment of multiple state and central taxes results in:  Considerable loss of time in transit for road freight in order to pay such taxes  Fragmentation of warehousing space especially for low margin products thereby providing a disincentive to create large integrated warehousing spaces A uniform tax structure to be introduced through the GST is being highlighted as a panacea for the existing situation. If implemented in spirit GST will enable logistics services to be provided without consideration for tax boundaries. However while the introduction of GST looks fairly certain several companies have already started raising doubts about the final shape the bill will take, given the deep divisions between several state governments and the central government on the issue. Technology and Skills related challenges. The logistics industry is also hampered by low rates of technology adoption and poor skill levels. On the technology front the industry now seems to be paying serious attention with use of RFID, vehicle tracking technologies, warehouse management systems etc. However while acceptance is perhaps not an issue any more, the marriage between IT and domain requirement needs to be resolved. Automation in processes is still only in its infancy. Further progress is dependent on a certain level of standardization which is made more difficult by the high level of fragmentation in the industry. This is a drawback that needs to be tackled early. In addition to technology- related issues the skill levels of in the logistics industry also require to be upgraded urgently. As of now courses focusing on logistics industry remain few and far between. Also logistics industry is still not looked at as the industry of choice for young graduates thereby making hiring of quality professional manpower challenging. On the ground level too there are challenges. A recent study has found that a variety of skills are required in the sector. These include technology skills, driving skills including safety procedures, industry understanding and multi-operations skills. The present state of affairs is illustrated by example of truck driver in India, who is a critical point of contact for the logistics company with its customers where the truck drivers today find it difficult to accurately record delivery records, understand delivery documents, negotiate for return business, handle queries etc.
  • 8. (Manish Saigal, 2013) Future of Indian Logistics Industry As India continues its transformation into a manufacturing and services-led economy, growing migration toward urban areas is expected. It is anticipated that more than 60 percent of India’s urban population will be concentrated in 20–25 urban clusters by 2030. Against this backdrop, logistics support infrastructure in India’s metros is inadequate for serving existing trade needs. Challenges range from the availability of assets to congestion, regulation and monitoring. In future, industrial clusters will need dedicated freight corridors (DFCs) such as the Delhi-Mumbai Industrial Corridor with high-speed connectivity to key ports and urban centers. These corridors and access routes will likely help keep the cost of supplying goods and services to these urban centers either low or manageable. The growth of urban centers in size and number would necessitate the need for a proactive approach in logistics planning to sustain growth. Further, it will be imperative to oversee that the provision of logistics infrastructure for upcoming infrastructure clusters is not at the expense of fulfilling the transport needs of India’s expanding urban clusters.
  • 9. (Ref: KPMG Report) It is anticipated that the surge in trade will demand enhanced sophistication in logistics infrastructure and services across modes. As international standards are introduced in a competitive, service-oriented environment, existing infrastructure will likely become obsolete: Growth in the domestic manufacturing and retail segments has given impetus to the demand for efficient warehouse-management services. However, warehousing continues to see little investment. Current spending on organized warehousing in India constitutes 9 percent of total logistics spending, as against 25 percent in the US. Existing small warehouses need to be replaced by large, modern warehouses that incorporate global standards such as tall designs, modular racking systems, palletization, and the use of automation and IT. The growth of niche industries will likely necessitate value-added services such as cold- chain warehousing, packaging and track-and-trace services. Existing infrastructure needs to be upgraded to increase throughput. For example, average containers handled per ship per hour is 18 in India as compared to 28 internationally. Further, the average distance traveled per truck per day is 200 kilometers, which is half the international standard.
  • 10. Trade would require commodity- and geography-specific storage and transportation assets. Without these, the industry’s investment potential in other parts of the economy is likely to face roadblocks. Increasingly skewed modal mix: India’s logistics sector is currently not only constrained by lack of infrastructure; it is perhaps even more restricted by the misuse of transportation modes for certain types of commodity, as well as limits on the free use of transportation modes for others. In terms of volumes involved, cargo in India can be classified in a pyramid-like fashion, with each category entailing distinct logistical considerations. The optimal movement of freight by matching cargo categories with transportation modes will be crucial for expanding volumes across categories. The lopsided utilization of transportation infrastructure such as roads and railways (as is the case currently) stresses networks and adds to inflating costs and turnaround times. Deriving the best possible selection of modes to lower congestion and facilitate the smooth movement of cargo is the need of the hour. The desired ‘to be’ state would be an overlay of transportation networks, allowing for the efficient transportation of each commodity type as well as a natural handover point where networks intersect and where large quantities are broken down into smaller volumes for last-mile transportation into urban centers.
  • 11. Recommendation: At a time when awareness around specific initiatives is widely recognized, the objective has been to capture distinct aspects that could potentially revolutionize each segment. That said, the collective evolution of India’s logistics industry can only be realized through uniform progress across segments. For India’s logistics sector to fulfill its role in supporting the country’s rise as a complex, multi-layer and mature economy in future decades, the following recommendations should be considered to develop a universal roadmap for the industry: • Create appropriate policy changes per mode of transportation (road, rail, water and air), increasing investment in the various modes of transportation and opening up capacity, especially for rail and waterways. • Harmonize and streamline processes across government bodies that have a role to play in the logistics sector, thereby reducing stoppages and touch points of cargo movements, as well as increasing the speed with which goods are transported within, into and out of the country. • Set benchmarks and standards for the industry, thereby driving the uniformity of warehouses, storage and transportation equipment. • Channel the movement of commodities to suitable modes of transportation. Divert the transportation of bulk commodities from road to increasingly appropriate modes such as rail and waterways, thereby freeing up capacity for consumer goods and also reducing the risk of accidents. • Decongest airports and seaports, shifting cargo-clearance activities away from expensive real estate to inland or port or airport locations. • Establish safety, health and environment (she) related standards centrally to facilitate uniformity across industry sub sectors and companies while increasing safety and limiting the adverse environmental effects of the sector on society.
  • 12. Bibliography  ‘Fuelling the 3PL’, LOG India  ‘Cold chain development in india - modernization of the Infrastructure of cold storage of perishables’, Arvind Surange  ‘Indian logistics industry- Poised for humungous growth’, Connect  ‘Logistics as a driver for competitiveness in Latin America and the Caribbean’, Jose Luis Guasch  ‘Third party logistics: An analysis of the feasibility and contexts of strategic relationships’, Madhu Ranjan and Richard Tonui  ‘Transportation, Logistics, Warehousing and Packaging Sector (2022)’, National Skill Development Corporation  ‘3PL: The new sunrise industry’, Cargo Connect  ‘A snapshot report on logistics technologies in India’, Cygnus Business Consulting & Research Pvt. Ltd.  ‘Adani Logistics Limited rating history’, ICRA  ‘Allcargo Logistics- Higher dwell time at CFS’ and lower freight rates boosts profits’, IDFC  ‘Cold chain market’, Research on India  ‘Container Logistics (CFS & ICD) – India’, Research on India  ‘Express Courier Market – India’, Research on India  ‘Indian Logistics Industry Insight – Air Transport’, Cygnus Business Consulting & Research Pvt. Ltd.  ‘India logistics industry’, Cygnus Business Consulting & Research Pvt. Ltd.  ‘India- Logistics’, Centrum  ‘Logistics supplement’, Payload Asia  ‘Logistics update’, ENAM  ‘Mahindra Logistics Limited Rating Report’, ICRA  ‘India Retail Report’, ProLogis India  KPMG