INDIAN LOGISTICS VISION
SUBMITTED TO: Dr. G. P. Sharma
SUBMITTED BY: Shweta Pathak ITLD Roll No.: 93 EPGDIB (vsat) - 2009-2010 Indian Institute of Foreign Trade (IIFT)
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Table of Contents:
(1) Introduction (2) Elements of Logistics cost (3) Logistics- Global scenario (4) SIZE OF THE LOGISTICS MARKET IN INDIA (3) Indian Situation: (4) Warehousing: (5) India: The Global Manufacturing Hub (6) Recent Trends in Logistics Air Cargo: Marine: Rail: Third Party logistics players in India (7) Advantage India (7) Future of Logistics – The Indian Scenario: Opportunities in India: o Industry Supply Chain o KBLP Business Model o The Agri Supply Chain (8) CONCLUSION (9) References Page 3-6 Page 6 Page 7-8 Page 8 -9 Page 9 Page 10 Page 11 Page 12-16
Page 16 Page 16-19
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Introduction:
Wars have been won or lost on the strength of logistics capability or lack of it. Although quite an old concept, logistics has been becoming efficient only since the globalization wave of the early 1990s and hence, the businesses supported by it, worldwide, have been pushed for competitive balance-sheets, providing consumers a better product/service and yet adding value to its investors. INDIAN LOGISTICS VISION 3
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Triggering intense competition, globalization, coupled with liberalization, forced both private and public firms to commit themselves to making available to their customers the right material of right condition, at the right time and place at the lowest cost — be it a product or a service. The World Bank, in a recent survey Connecting to Compete: Trade Logistics in the Global Economy, has developed a Logistics Performance Index (LPI) that can serve as a benchmarking tool for measuring performance of businesses along a country’s logistics supply chain. The Bank study asserts that countries that are able to connect to the global logistics web would not only have access to vast new markets but also remain a part of the global trade growth. The report avers that it is not the income of nations but their undergoing trade expansion that determines their logistics efficiency, as the survey shows that nations with increasing trade (imports and exports) to GDP emerged as the out-performers on the LPI scale relative to their income levels. It also warns that those countries whose links with the global logistics chain are weak are bound to face large and growing costs of exclusion from international trade. India trails behind China on important indices such as customs procedures, overall infrastructure quality, international shipment, logistics competence and tracking of shipments, but is ahead of the latter on the domestic logistics efficiency front. Healthy economic growth in India is increasingly supported by robust industrial growth. One of the relatively lesser known but significant sectors that support almost all industrial activity - the logistics sector - is also witnessing this growth as a follow through. However, not withstanding its importance and size (INR 4 trillion), it has traditionally not been accorded the attention it deserves as a separate sector in itself. Country USA UK Singapore India China Mexico LPI Score 3.85 3.84 4.19 3.07 3.64 2.64
The level of inefficiency in logistics activities in the country has been very high across all modes. With the evolving business environment creating a strong demand pull for quality and efficient logistics services, core issues around enabling infrastructure, regulatory environment and the fragmented nature of the industry are being overcome gradually. The required pace of efficiency and quality improvement will demand rapid development of capabilities of logistics service providers. And with logistics being a service oriented sector, skill development will emerge as a key capability while skill issues exist in varying degrees in all segments of logistics; those segments where the gaps are not only wide but also widening at a relatively fast pace. The most severe and immediate requirement for skill development is found to be in the road freight and warehousing segments. India’s spend on logistics activities - equivalent to 13 percent of INDIAN LOGISTICS VISION 4
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its GDP is higher than that of the developed nations. The key reason for this is the relatively higher level of inefficiencies in the system, with lower average trucking speeds, higher turnaround time at ports and high cost of administrative delays being just a few of the examples. These inefficiencies have arisen over the years from a combination of a non-conducive policy environment, extensive industry fragmentation and lack of good basic infrastructure. India's indirect tax regime discouraged large centralized warehouses and led, over time, to fragmentation in the warehousing sector. At the same time, the absence of a single logistics 'champion' (whether in form of a ministry or otherwise) in the government (or industry) led to a disintegrated approach to development of the sector. Country India U.S. Europe Japan Logistics Cost/GDP 13% 9.90% 10% 11.40%
Extensive fragmentation meant the incapacity of industry players to develop the industry as a whole and poor support infrastructure, such as roads, ports and telecom, led to a situation where the opportunity to create value is limited. However, much of this is changing with the government now demonstrating a strong commitment towards providing an enabling infrastructure and creating conducive regulations. There is significant current and planned investment in infrastructure to the tune of (INR 15 trillion) over the next few years and an increased emphasis on public-private partnership. At the same time, regulations around rationalization of tax structures and prevention of overloading for example are creating an environment of positive change. Players now have the opportunity to leverage economies of scale, complemented with better infrastructure e, to provide integrated logistics solutions which are cost effective. In addition, the evolving business landscape and increasing competition across industries, is creating the need for more efficient and reliable logistics services than what exist 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. Fundamentally, a fragmented industry with low average scale - and consequent limited investment and market development capability - is worst placed to serve these needs. It is not surprising therefore that there is a frantic pace of consolidation and organic growth that the industry is witnessing (refer box and While logistics service providers is struggling to keep pace with the growth, logistics service users with limited or no outsourcing are finding it increasingly difficult and / or undesirable to manage this non-core activity in-house. The result is a wide need gap that is seemingly widening much faster than it is being filled.
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It is in this context that capability development of logistics service providers assumes critical importance. While rapid development across all dimensions of organizational capability will be required to achieve and sustain demand growth, logistics being a service industry, manpower capabilities assume utmost 5 importances. The sector currently employs about 40 million people, a number that will rise rapidly with exponential growth expectations in the sector. 6 A look at the financials of a set of 80 logistics companies in India across sectors reveals that manpower spends comprise 8-10 percent of overall sales of the sector. This roughly translates to about an INR 500 billion spend on logistics manpower in the country annually. Only about 13 -14 percent of the overall manpower costs are spent on non-salary, manpower development items (welfare, training etc.). This share for the unorganized companies would expectedly be much less. As against this leading global logistics companies spend around 20 percent of their employee expenditure on non-salary items. This lack of focus on developing manpower and skills for the logistics sector has resulted in a significant gap in the numbers and quality of manpower in the sector. This gap, unless addressed urgently, is likely to be a key impediment in the growth of the logistics sector in India, and in consequence, could impact growth in industry and manufacturing sectors as well. This underscores the need for identifying areas where such manpower and skill gaps are critical, and developing focused action plans to improve the situation. In the next section, we analyze each segment of the Logistics sector in India to identify the skill gaps that exist in each. These gaps are then prioritized to identify key focus areas, and the action that needs to be taken to bridge the gaps.
Elements of Logistics cost • Transportation 35% • Inventories 25% • Losses 14% • Packaging 11% • Handling and Warehousing 9% • Customers' shopping 6%
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Logistics- Global scenario
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The Global Business Scenario Global Customer Global Manufacturing: No Product produced in one country or by one company Outsourcing to LCC’s gained pace Vertical Integration to Network of Companies Material, Information and Funds need to moved across continents Competition is defined by efficiency, synchronization, and competencies in the network
SIZE OF THE LOGISTICS MARKET IN INDIA:
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Indian Supply Chain and Logistics Industry is more than USD 100 Billion in size and is the backbone of Indian Economy. Our industry is growing at a rate of 8-10% annually and has been a crucial contributor in the growth and development of the Indian economy. In the near future, Traditional Logistics services like Transportation and Warehousing would continue to growth at a good rate. However, the big ticket growth would come from the Value Added Logistics services in the near future. At present, Outsourced Logistics accounts for only one-third of the total Logistics market in India, which is a significantly lower proportion vis-à-vis the developed markets. Growth in this industry is currently being driven in India by over USD 300 billion worth of infrastructure e investments, the phased introduction of VAT, the development of organized Retail and Agro-processing industries, along with a strong manufacturing growth. In addition, we expect strong Foreign Direct Investment inflows in the Indian markets, which would lead to increased market opportunities for providers of Third-Party Logistics in India. Therefore, India possesses substantial opportunities for growth in the Supply Chain & Logistics industry in the coming years, notwithstanding the temporary jolt due to the economic slowdown.
The Indian Situation:
India is being touted as the land of opportunity for logistics service providers all over the world. The demand for logistics services in India has been largely driven by the remarkable growth of the economy, projected to grow at 9-10 per cent in next few years. The Indian logistics market, valued at $14 billion a couple of years ago, is expected to grow at a CAGR (compounded annual growth rate) of 7-8 per cent. It is felt that the growth will continue, and might even scale newer heights, as the economy is experiencing a retail boom with Western companies such as Metro, Wal-Mart planning to start operation in this country, and large local retailers such as Shoppers Stop, Pantaloon, RPG and Big Bazaar planning to expand their operations in smaller cities. But, then, logistics management in India is too complex, with millions and millions retailers catering to the requirements of more than one billion people and the infrastructure yet to develop to cater properly to a growing economy. INDIAN LOGISTICS VISION 9
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The poor condition of roads translates directly to higher vehicle turnover, which in turn pushes up the operating costs and reduces efficiency. The reduced efficiency is passed on the logistics service providers, with transportation costs accounting for nearly 40 per cent of the total logistics cost. The National Highways are being upgraded but these highways account for a meager two per cent of the total road network in the country. There are other problems such as complex tax laws and insufficient technological aids. The fragmented market increases costs due to huge paperwork and the individual truck owners, dominating the market, are unable to contract directly with customers, with the result freight consolidators and brokers take a commission to generate business for the truck owners. Only about a few thousand vehicles out of a total of several millions have tracking system. The use of IT, thus, is limited. Despite these challenges, the country's logistics industry is set to grow. Industries such as chemicals and pharmaceuticals, metals, FMCG, cement, textiles and capping it all the retail segment have been identified as the top contributors to the projected growth of the economy and therefore to logistics revenues. The new generation corporate are looking to outsource non-traditional logistics requirements such as reverse logistics, inventory management, order processing, distribution, and labeling and packaging.
Warehousing: Newly developed electronic commodity markets, such as Multi Commodity Exchange of India Ltd. (MCX) has played an instrumental role in the logistics. Creation and development of warehouses followed the emergence of these markets or exchanges. MCX’s collateral management arm National Bulk Handling Corporation Ltd (NBHC), a national -level end-to-end solutions provider in warehousing, bulk handling, grading and inspection, commodity care, pest management and collateral management of commodities, is playing a key role in taking logistics and, hence, markets closer to the producers. Sticking to their mandate, commodity derivatives markets have proved to be extremely beneficial to farmers. The gap between prices (many of the commodities) in the post-harvest season and those in any lean season has narrowed down significantly over the past few years. Earlier, during the pre-futures era, when prices would slump immediately after harvest, farmers would have to make distress sales. But today, with the opportunity to sell for a better price at futures markets, they stand to benefit enormously. While growers can store (hold back) their produce in NBHC-monitored w warehouses in anticipation of realizing higher prices later, they can avail of loans against warehouse receipts (WRs), to help them carry on with their crop operations for the next season. In the few years of its existence, NBHC has built a rather strong and wide logistics network with professionally managed scientific warehouses armed with market-approved INDIAN LOGISTICS VISION 10
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quality-testing techniques. And this has attracted investors and participants from various backgrounds, creating better linkages among the markets. The development of logistics by creating good warehouse infrastructure would surely go a long way in lifting farmers’ incomes. Such infrastructure is expected to get a fillip with the recent passage of the Warehousing (Regulatory & Development) Bill and its effective implementation. Both public and private enterprises’ participation in equal measures is required for developing logistics and improving supply chain management. Very importantly, the lesson for private investors is that it is not just about creating efficient business to thrive in the logistics sector, but also about exploring and revamping other areas by way of diverting energy, costs and time that were otherwise wasted in a weak logistics system. India - The Global Manufacturing Hub:
Manufacturing hubs emerge due to a process of agglomeration. Because of agglomeration, a disproportionate surge of manufacturing is attracted to locations with a lower wage cost or higher market access or both. Thus when textiles manufacturing shifted from the US North East to the US South, then to Japan, Korea and now finally to China and India, it fits a predictable pattern. The same is true when auto industry shifted from Detroit to Mexico across the order and Brazil, then again to South East Asia. The shift from west to east is evident in i industry after industry. For instance, nearly two- third of world fiber production comes from Asia today, nearly one-fourth of the world fuel demand now originates in non-Japan Asia, compared to just one-tenth in mid-seventies. To take a more recent example China, Thailand and India have contributed to 36% of the vehicle production between 2001 and 2004. After the IT boom, a manufacturing revolution has been well underway in the Indian economy, spurred on by the increasing presence of multinationals, scaling up of operations by the domestic companies and expanding domestic market. The sector has been averaging 9 per cent in the last four years (2004-08), with a record 12.3 per cent in 2006-07.
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India's manufacturing base, which is the fourth-largest among emerging economies, is among the fastest growing and has seen more investments as a proportion of gross domestic product than any country except China. Consequently, manufacturers from across the world are transforming India--which has all the required skills in process, product, and capital engineering.” Every major company has India on its radar screen," And the number of companies, spanning diverse industries, planning to make India their global hub for host of operations has only been increasing by the day. Cummins is making India its manufacturing hub for newly developed line of generator sets; Samsung plans to make its manufacturing plant in Chennai its global hub; Ford is making India its manufacturing hub for engine manufacturing; Suzuki and Hyundai are making India the manufacturing and exports hub for small cars. In fact, all the top five telecom manufacturers have set up manufacturing facility in India. Recent Trends in Logistic:
The global logistics industry was valued at US$3.5 trillion in 2007, whereas US logistics industry size was around US$900 billion, 25% of the global logistics industry. Logistics costs in India are estimated to be around 13% of the GDP, which comes to around US$94 billion in 2006-07. However, India’s spending on logistics industry is much higher than the developed economies like the US (9.5%) and Japan (10.5%).
Roadways
National Highway Development Project (NHDP), US $13 billion, 1998-2007 . – Four/six laning of the highway connecting Bombay, Delhi, Calcutta and Madras – North-South and East-West corridors (NS-EW), – Kashmir to Kanyakumari and Silchar to Porbandar. The end to end transport process to be optimized by controlling loading densities through packaging and palletizing standards, and loading and unloading Facilities automation. Slow speeds, traffic congestion, high wear and tear of vehicles are some of the problems
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Air Cargo:
Source: Internet
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Air transport sector contributes over 0.2% to the country’s GDP at constant prices (19992000 Prices). Transport sector’s contribution to the GDP has been firming up over the last couple of years, mostly because of the growing economic activities in the country. Domestic air cargo traffic has been growing at CAGR of 12.80% from 2001-02 to 2006-07, whereas international air cargo traffic has been moving at CAGR of 13% during the same period. During 2006-07, total air cargo traffic is estimated to be over 1.56m tones against 1.4m tones during 2005-06, registering a growth rate of 14.65%. According to the Planning Commission, India’s air cargo movements would grow at over CAGR of 11.5% from 2007-08 to 2011-12. Riding high on export of gems and jewellery, special chemicals and high-value pharmaceuticals, international air cargo traffic at all Indian airports have been growing rapidly. The six major airports carry 88% of the total air cargo
Marine:
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Vast coastline of 7,517 kms handles 95% of foreign trade 12 major ports and 184 other (minor and intermediate) ports Traffic in major ports : 2002-03 - 313 million tones Private sector participation is talked about
Marine transport sector contributes over 0.2% to the country’s GDP at constant prices (1999 - 2000 prices). Transport sector’s contribution to the GDP has been firming up over the last couple of years, mostly because of the growing economic activities in the country. Shipping industry plays a significant role in the Indian economy. India has 12 major and 187 minor/intermediate ports along its coastline of around 7,517km. The fleet strength at the end of December 2006 was 774 vessels with 8.42m Gross Registered Tonnage (GRT). Ports serve as the gateways to the international trade in India. Major ports in India together have handled 463.84m tones of cargo in 2006-07, a growth of 9.51% against the same period of the previous year. The petroleum-oil-lubricants (POL) accounted for 33.38% of the total traffic at major ports during April-March 2007, while iron ore constituted 17.37%, coal 12.98%, container traffic 15.84%, fertilizer 3.04%, and others 17.49%. According to the Planning Commission, India’s shipping fleet strength will be increased up to 15m GRT (as per the 3rd target) by the end of 2011-12, with an estimated investment of US$17.7 billion. The port throughput will increase up to 1,008m tones, growing at a CAGR of 10.96% from 2007-08 to 2011-12.
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Rail:
(Source: Wikipedia: http://www.wikipedia.com)
The plan by the Indian Railways to develop Logistics Parks [‘hubs’ in supply chain parlance] is a good one. It has the potential to streamline and optimize the supply chain and reduce the supply chain costs. The service concept, service delivery and infrastructure have to be designed very well for the Railways Logistics Parks to add value to the supply chain. For the Railways Logistics Park to add value to the supply chain, at least one part of the transportation, either the incoming or outgoing, has to be by rail. The Indian Railways would have to introduce innovative train services, so that customers shift to rail from road and use trains for either the incoming or outgoing from the hub. Currently about 80% of the products in India move by road. One simple innovation could be to introduce time-tabled container trains, time-tabled parcel trains etc. It is essential to have a few time-tabled freight trains, because reliability in a supply chain is a big cost saver [reduces inventory levels, improves customer service] If the transportation, incoming and outgoing, is by road, then the Logistics Park adds no value to the supply chain. It makes more sense, from a supply chain standpoint, to have the hub on the highway, close to the city bypass, outside the city limits, outside the octroi limits and outside any ‘No Entry’ zone. It then makes more sense for the Railways to act as a landlord and build a Mall or Hypermarket. A Mall or Hypermarket would give much better rentals and higher returns on the land that the Railways own. Third Party logistics players in India Market is highly fragmented with large number of small players Rail is state run while truckers are often family-run Complex business environment, eg. tax rates differ between provinces, cultural differences Poor warehousing and transportation infrastructure INDIAN LOGISTICS VISION 16
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Foreign logistics competitors are Exel, Danzas, Bax Global, TNT, Panalpina – main revenue from freight forwarding Logistics market is expected to grow by more than 20% over the next 3 years as against the present rate of 12-15% Source : Scope, Indian Logistics Industry, January 2002 Advantage India One quarter of the world’s youth live in India 54% of the Indian population is less than 25 yrs of age 2nd Largest English speaking workforce Focus on Higher Education, Supportive government policies Second largest pool of technically qualified knowledge workers IPR laws in place Future of Logistics - The Indian Scenario: Opportunities in India: Leverage the IT & R &D advantage India’s Share of Industry is Very Low
Global Competitiveness in Manufacturing is a National Imperative Industry Supply Chain
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Leverage IT In Logistics software Development KBLP Business Model
Indian Retail Industry The Agri Supply Chain
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Indian Food Service Industry Service Chains Provide Immense Opportunities Construction SCM Headlines Health Care Logistics
India’s logistics sector attracted investments worth Rs. 23,200 crore in first half of 2008, according to a study by Assocham. It outclassed some of the major sectors including aviation (Rs 20,890 cry), metals and mining (Rs 8500 cr) and consumer durables (Rs 6000 cr) among others. Among the factors cited by analysts for the rapid growth of Indian logistics include the growth of organized retail industry, commodity markets, growth in manufacturing and development of Special Economic Zones. (SEZ). According to a report by Cushman and Wakefield, real estate consultants, Indian logistics industry is expected to grow annually at the rate of 15 to 20%, reaching revenues of approximately $385 bn by 2015. Market share of organized logistics players is also expected to double to approximately 12% during the same period. The report said about 110 logistics parks spread over approximately 3,500 acres at an estimated cost of $1 bn are expected to be operational and an estimated 45 mn sq ft of warehousing space with an investment of $500 mn is expected to be developed by various logistics companies by 2012. A large number of upcoming SEZs have necessitated the development of logistics for the domestic market as well as for global trade. Mumbai, Kolkata, Chennai and Hyderabad have become preferred locations for logistics parks. These locations are characterized by excellent port, rail, and road INDIAN LOGISTICS VISION 19
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connectivity and are witnessing significant investment in infrastructure. Eight logistics parks with an approximate investment of $200 mn are 600 acres of land around Mumbai. According to industry analysts, almost all logistics players are in the process of setting up warehouses, container freight stations, inland container depots, logistics parks, distribution centers and other facilities to tap the trade opportunities fuelled by revolution in the retail, ports etc. Demand for warehouses and logistics services are expected to accelerate further due to increase in foreign trade and the upcoming Maha Mumbai Special Economic Zone. Warehouse rentals in Panvel are expected to increase by 15 to 20% over the next two years. Proximity to textile and auto-component industry clusters and other manufacturing units has made Kolkata a major economic centre. Ten Special Economic Zones (SEZs) in the proximity of Kolkata have received in-principal approvals. This will result in major demand for logistics in this region. There are plans for 4 logistics parks spread across approximately 400 acres. Centers like Haldia, Falta, Pargana, Dankuni, Kharagpur, Bantala and Durgapur are expected to witness substantial logistics activities in the near future. Five logistics parks are being set up in Hyderabad, spread across 220 acres and approximately 10 mn sq ft of warehouse space coming up by 2012. It scores high as a logistics destination as it provides excellent connectivity to large markets in southern and western India and has established clusters of textile and engineering firms, as well as an important centre for the pharmaceutical industry. CONCLUSION: The logistics industry in India is evolving rapidly and it is the interplay of infrastructure, technology and new types of service providers that will define whether the industry is able to help its customers reduce their logistics costs and provide effective services (which are also growing). Coordination across various government agencies requires approval from multiple ministries and is a road block for multi modal transport in India References: 1. Aditya Birla Group Journal – India: Global Manufacturing Hub taken from AICAR 2. N. Viswanadham :Indian School of Business 3. Business School Library 4. Hindustan Times: http://www.hindustantimes.com 5. The Financial Express: htp://www.financialexpress.com 6. Wikipedia: http://www.wikipedia.com
7. Internet Images
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