The Hindu Business Line : Logistics sector on steady growth path

THE Indian logistics industry is poised for a significant growth in the coming years as new companies, especially in the automotive, pharmaceutical, manufacturing and FMCG sectors, are increasingly opting to outsource their logistic requirements to specialised service providers.

Industry analysts say that the key drivers for logistics outsourcing are the corporate trend of focus on core operations, competitive pressure, increasing global trade and MNCs investments in India.

Third party logistics service providers in India are gearing up to meet the growth demand, incorporating value-addition in their services and customising their supply chain management solutions.

Says Mr Manoj Agarwal, Head (Retail) of Gati, India's leading logistics service provider: "We see a lot of growth from the FMCG sector. We are in talks with companies such as Emami Ltd, Rupa and Wrigley's chewing gum for handling their entire supply chain management."

Gati is planning to add new services in its portfolio, such as transportation of clinical samples for pathological labs and medical institutions and reverse logistics that involve movement of defective products from the dealers back to the factory.

Echoing similar sentiments, Mr Chris Callen, country manager of DHL, told Business Line that "the global air express industry is also expected to undergo huge transformation in the years to come as a result of increasing spread of e-commerce and the need for vendors to match the speed of electronic ordering with physical delivery of critical inputs for the industry. In fact, we feel that by 2020, this industry is expected to represent almost 30 per cent of the global air cargo with an average annual growth rate of 10 per cent."

Indeed, a recent study on the logistics market by Frost & Sullivan has estimated that the revenue of the logistics industry from the manufacturing sector alone was $13.46 billion in 2003, with the market likely to grow at a CAGR of 6.2 per cent during the next five years. Chemicals, metal, FMCG, cement and textiles were identified as the top five contributors to the revenues of the logistics industry.

In fact, the trend in the industry is towards the third party logistics (3PL) concept — the market size for this category of service was estimated at $250 million in 2003. "The market for 3PL services is likely to grow at a CAGR of 20.4 per cent during the next five years, with the growth being fuelled by the entry of MNCs and export focus of Indian companies. At present, the automotive, IT hardware and FMCG companies are the major users of 3PL services," says Mr Ganesh Ralekar of Frost & Sullivan.

In India the logistics costs are still higher than in the developed markets — it is estimated to be around 13 per cent of GDP, against 9 per cent of GDP in the US. The transportation cost accounts for nearly 40 per cent of the cost of production, with more than half the goods in India being moved by road.

One sector that is increasingly looking for outsourcing logistics is textiles, especially as it is facing the challenges of exacting delivery requirements and multiple export markets.

Analysts say that with large retailers such as Wal-Mart and Target seriously evaluating new suppliers for textiles in India, this sector is bound to outsource logistics in the coming years. Also, the retail industry is expected to jump into the 3PL bandwagon, with such large retailers as Shoppers Stop and RPG expanding to smaller cities.

Realising the potential in the outsourced logistics market, 3PL service providers are expanding their basket of services as companies are now looking for more than just transportation of their products and raw materials. The logistics firms are also focussing on related services such as customer clearing and forwarding, inbound warehousing, labelling and packaging, fleet management, order picking and inventory management. Says Mr Agarwal: "We at Gati are constantly re-inventing the company. We are designing customised supply chain management packages, with a guarantee of cost savings to our clients." Similarly, at DHL, the thrust is on expansion, with the company recently inaugurating its first exclusive express handling unit in India at theDelhi airport and acquiring a new fleet of 300 vehicles from Mahindra and Mahindra, Maruti Suzuki and Tata Motors.

"We are also making significant investments in IT so that customers can know what is happening with their shipments. Our express agents are being equipped with new generation GSM scanners, which facilitate real-time information in shipments within 15 minutes of pick-up or delivery," Mr Callen pointed out.

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