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INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

WORKING PAPER SERIES

WPS No. 562/ October 2005

A Survey of the Third-Party Logistics (3PL) Service Providers in India

by

Subrata Mitra

[email protected]

Assistant Professor, IIM Calcutta, Diamond Harbour Road, Joka P.O., Kolkata 700 104India


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A Survey of the Third-Party Logistics (3PL) Service Providers in India1

Subrata Mitra2

Indian Institute of Management Calcutta

Joka, D. H. Road, Kolkata 700104

E-mail: [email protected]

Abstract

Third-party logistics (3PL) or logistics outsourcing is gaining importance as more and morecorporations across the world, unable to manage their complex supply chains, are outsourcinglogistics activities to the 3PL or logistics service providers. By outsourcing logistics activities,corporations are able to not only concentrate on their core business operations, but also achievecost-efficiency and improve delivery performance and customer satisfaction. The 3PL revenuearound the world was $141 billion in 2003, and it is expected to touch $300 billion in 2006. Thelargest market is the U.S., which was about $80 billion in 2003 accounting for nearly 60% of the

world market. The 3PL market in India is least developed and highly fragmented. However,there is an immense potential for growth of 3PL in India, about 20% per annum, and if thelogistics cost can be brought down from the current level of 13% of GDP to 8.7% (level in theU.S.), the savings would be around $20 billion resulting in a potential 4.3% cut in prices ofIndian goods globally making them more competitive. The objective of the current survey was toassess the 3PL market in India, its growth prospects, opportunities and threats. Data werecollected to assess the strengths and weaknesses of the 3PL providers in terms of their asset base,services offered, industries served, coverage and IT capability. That the 3PL market in India isfragmented clearly came out from the survey as it was found that 20% of the respondentscornered about 90% of the total 3PL revenue of all the respondents in 2003-2004. The 3PLrevenue as well as the volume of cargo handled by the respondents were growing over the years,registering growth rates of 18.25% and 20.33%, respectively, in 2003-2004 over the previousyear. The most important roadblock to the growth of 3PL in India, identified by the respondents,was poor transportation and communications infrastructure, and the most important opportunityfor growth of 3PL in India was indicated as the increasing awareness of the Indian firms towardsthe benefits of logistics outsourcing.

Keywords: 3PL; third-party logistics; logistics outsourcing; service providers; India

Introduction

Third-party logistics (3PL) refers to outsourcing transportation, warehousing and other logistics-related activities to a 3PL service provider that were originally performed in-house. More andmore corporations across the world are outsourcing their logistics activities due to variousreasons, some of which are outlined below.

Due to globalisation, corporations across the world are increasingly sourcing, manufacturingand distributing on a global scale making their supply chains very complex for them to

1CMDS project vide work order no. 2355/CMDS:TPLSP2Assistant Professor, Operations Management, IIM Calcutta


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manage. Hence they have to outsource their logistics activities to experienced 3PL providers,who have global operations. Todays 3PL providers with their sophisticated IT capabilitiesand state-of-the-art transportation and material handling equipment and warehousingfacilities offer complete supply chain solutions.

Logistics outsourcing is used to complement the logistics activities the corporations do not

have competency in, and also to increase the geographic reach. When a corporation expandsbusiness overseas, it may not be conversant with the customs duties, tax structures, rules andregulations, import/export policies of the government, and culture of the foreign country. A3PL provider, who has long been operating in that country, will be better able to carry out thelogistics operations.

Logistics may not be one of the core activities of a corporation. So, inefficiency may creep inif it is looked upon as a secondary activity. By outsourcing logistics, corporations may focuson their core competencies.

Logistics outsourcing may also reduce costs as the 3PL providers can get the advantage ofthe economies of scale, which is otherwise not available to the corporations.

By outsourcing logistics, corporations can reduce their asset base, and deploy the capital

released for other productive usage. Logistics outsourcing improves cycle time and delivery performance, thereby increasing

customer satisfaction.

Since the 3PL providers are now offering a number of value-added services such as customsclearance, freight forwarding, import/export management, distribution, after sales support,reverse logistics and so on, corporations can outsource all these activities, and concentrate ontheir core business operations.

Due to an incredible growth in electronic retailing since the late 1990s, many firms aroundthe world with virtually no distribution systems rely heavily on the 3PL providers fordelivery of the merchandise at the customers doorstep. This has resulted in a significantgrowth in the order fulfilment sector of the 3PL service industry.

Evolution of 3PL

The concept of logistics outsourcing can be traced back as far as one goes down the history ofmankind. In Europe, a number of logistics service providers can trace their origins back to theMiddle Ages1. We restrict ourselves to the recent decades, and trace below the evolution of 3PLfrom the 1950s.

1950s & 1960s Logistics outsourcing was limited to transportation and warehousing. Thetransactions were mainly short-term in nature.

1970s Emphasis was on improved productivity, cost reduction and long-termcontracts.

1980s Value-added services such as packaging, labeling, systems support andinventory management were on offer.

1990s to present Outsourcing has picked up momentum, and more value-added services arebeing offered. Some of them are import/export management, customs


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clearance, freight forwarding, customer service, rate negotiation, orderprocessing, assembly/installation, distribution, order fulfilment, reverselogistics, consulting services that include distribution network planning,site selection for facility location, fleet management, freight consolidation,logistics audit etc.

3PL market

Currently, the logistics cost around the world is about $2 trillion. For any country, the logisticscost is pegged between 9% and 20% of GDP. For India, the figure is about 13%. Considering aGDP of over $475 billion, the logistics cost in India turns out to be about $62 billion2.

The 3PL market across the world is increasing at a rapid rate. According to Armstrong &Associates, the world 3PL revenues in 1992, 1996 and 2000 were $10 billion, $25 billion and$56 billion respectively. According to another research firm IDC, the 3PL revenue was $141billion in 2003, and it will touch $300 billion in 2006 growing at a compounded annual rate of

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. The worlds largest 3PL providers are headquartered in Europe (Top seven 3PL providersin terms of revenues are European-based, UK-based Exel plc being the largest in the world with$8.3 billion in revenues), but the largest market is the U.S., which was about $80 billion in 2003accounting for nearly 60% of the world market4.

The 3PL market in India is least developed. The market is highly fragmented, and there are veryfew service providers, who generate substantial revenues (more than Rs. 50 crore). A surveyconducted by Frost & Sullivan estimates the logistics market in India at $298.7 million in 2003or 0.48% of the logistics cost in that year5. Compare this figure with 7% across the world and 9%in the U.S. considering a GDP of over $10 trillion and 8.7% of the GDP being the logistics cost.

There is an immense potential for cost savings for India if it can bring down its logistics costsfrom the current level of 13% of GDP to 8.7% (level in the U.S.). The savings would be around$20 billion resulting in a potential 4.3% cut in prices of Indian goods globally making them morecompetitive, a Logistics Institute Asia-Pacific study estimates

2.

Problems in the growth of the 3PL market in India

There are some operational and regulatory roadblocks to the growth of the 3PL market in India.The major problems are outlined below.

The Indian firms are still wary of outsourcing their logistics activities due to lack of trust andawareness. The 3PL activity is less than 10% of the total logistics operations in India,whereas the corresponding figures for the U.S., Europe and Japan are 57%, 40% and 80%respectively2. According to a TCI-MDI survey6 of 130 Indian firms, 55.4% respondentsindicated that their firms use 3PL services. The mostly used 3PL services are inbound andoutbound transportation and customs clearing and forwarding. Outsourcing of other value-added services such as warehousing, inventory management, distribution and orderprocessing is yet to pick up.


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The poor infrastructure of India acts as a deterrent for attracting investments for the logisticssector. The national highways constitute 1.4% of the total road network, but carry 40% of thetotal freight movement by roadways. Owing to a bad condition of roads and inadequatecommunications infrastructure, 3PL providers would not be able to provide quality service totheir clients, and hence would not be able to attract business from the Indian firms. The

unwillingness of the Indian firms to outsource logistics operations due to lack of trust andawareness and the unwillingness of the 3PL providers to bring in more investments due to apoor infrastructure constitute a vicious cycle and act as a major roadblock to the growth ofthe 3PL market in India.

The logistics firms offer limited services. In order to attract more business, they have to offermore value-added services, namely packaging and labeling, order management, orderfulfilment, distribution, customer support, fleet management, freight consolidation, reverselogistics and logistics consulting.

The 3PL providers in India are caught on the wrong foot because of the differential sales taxpolicy of the Indian Government. Currently, the 3PL providers have to set up warehousingfacilities in a number of states to avoid double taxation, thus losing the advantage of the

economies of scale. Outsourcing logistics to a 3PL provider will attract a service tax, which was increased in the

last budget from 8% to 10%, thereby increasing the outlay in service taxes should a firmdecide to outsource its logistics operations. In the changed scenario, the firm may find it cost-effective to keep logistics operations in-house.

Prospects of the 3PL market in India

Despite the problems mentioned above, the 3PL market in India is poised to grow at over 20%compared to the average world growth rate of 10%7. Some of the large Indian corporates such asReliance, Tata, Mahindra and Mahindra, TVS Group and Essar Shipping have already forayed

into the logistics business. Initially these corporates formed divisions to handle internal logistics,but sensing the potential of the market, they have started offering logistics solutions to otherIndian corporates and have already turned these logistics divisions into profit centres

8. Some

large express cargo and courier companies such as Transport Corporation of India Ltd. (TCIL),Gati, Safexpress and Blue Dart have also started offering 3PL services. Owing to the large assetbase and distribution networks that are already put in place, it was just a matter of time for thesecompanies to venture into the logistics business. Some of the reasons for the prospects of the3PL market in India are given below.

Indian firms increasingly realize the importance of reducing cost and staying competitive inthe world market. One of the means of reducing cost is through outsourcing logistics, which

also improves delivery performance and customer satisfaction. The Indian GDP is growing steadily at 6% compared to the world GDP growth rate of 3%,

which even beats the GDP growth rates in the U.S. (3.3%), U.K. (2.6%) and Japan (1.3%)9.

This eventually will translate into more outputs and more demand for specialized logisticsservices.

The Indian Government has focused on infrastructure development. One of the initiatives isthe golden quadrilateral project of the National Highway Development Programme, which


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will connect all the four metros and will act as East-West and North-South corridors. Oncecompleted, it will give a boost to the road transportation network in India.

3PL services come under the purview of the BPO sector. The BPO sector in India, mainly ITand ITES, is growing at a rapid rate, and the Indian Government has declared many sopsincluding allowing 100% FDI though with certain restrictions in some cases. This is in

contrast with China where foreign investment in domestic logistics is still not permitted.Almost all the large global 3PL providers have their presence in India doing mainly customsclearance and freight forwarding for their international clients. With the logistics marketgrowing at a rapid rate and infrastructure developing, it is just a matter of time before global3PL providers invest in domestic logistics. The possible routes may be acquisitions, quickand easy for the fragmented logistics market, and forming wholly owned subsidiaries or jointventures.

The Indian Government is working towards a uniform VAT regime. Once implemented, itwill enable the 3PL providers to consolidate the warehousing facilities currently maintainedin different states bringing in economies of scale.

Motivation and objective of the survey

The benefits of 3PL and the prospects of the logistics market in India were essentially themotivation behind conducting this survey. To the authors knowledge, there has been no surveyof the Indian logistics service providers so far. The objective of the survey was to assess the 3PLmarket in India, its growth prospects, opportunities and threats. The strengths and weaknesses ofthe 3PL providers in terms of their asset base, services offered, industries served, coverage andIT capability were also to be analysed.

Research Methodology

The research methodology was based on collection of data from primary and secondary sources.The primary sources were the 3PL providers, and data collection was through questionnairesurveys, telephonic interviews and personal visits. The secondary sources were books, publishedreports, journal articles and the Internet. The details of the questionnaire design and the processof administering the questionnaire to potential respondents are outlined below.

Design of the questionnaire

The questionnaire had 10 sections. The questions asked in each section are given below.

Section I: General information

The respondent was asked to give the contact information. The respondent was also asked tomention the countries of operation other than India and tie-ups, if any, with global 3PLproviders. This was to assess the extent of global reach of the respondent. In addition, therespondent was asked to mention the year of starting 3PL operations and the number ofemployees in India to see how old it was in the business of 3PL and to assess its size in terms ofstaff strength.


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Section II: Financial informationThe respondent was asked to list the 3PL turnovers and total turnovers for the last 5 financialyears, from 1999-2000 to 2003-2004. The objective was to assess the 3PL turnover growth rateand the trend in the 3PL turnover as a percentage of the total turnover over the last 5 years.

Section III: Services offeredA whole range of services starting from transportation, warehousing, inventory management,freight forwarding and customs clearance to order processing, invoicing, distribution, reverselogistics and consulting were listed, and the respondent was asked to tick the services that itoffered. The objective was to assess the breadth of service offerings of the respondent.

Section IV: Industries servedA number of industries were listed and the respondent was asked to tick the industries that itcatered to. The respondent was also asked to list its major customers and competitors.

Section V: Asset base and volume of cargo movement

The respondent was required to list the different types, numbers and total capacities (in tons) ofvehicles and material handling equipment that it owned. The number of warehouses/godownsand the total capacity (in sq. ft.) were also required to be listed. The respondent was also asked tomention the volumes of cargo handled (in tons) in the last 5 years to assess the growth of cargovolume.

Section VI: Extent of coverageThe entire country was divided into 6 regions: North, South, East, West, North-east and CentralIndia, and the respondent was asked to tick the regions that it covered. The number of statescovered and the number of branches and offices that the respondent had were also asked for inorder to ascertain the reach of the respondent.

Section VII: Information systemsThe respondent was asked to tick the Information Technologies that it used among Bar coding,Electronic Data Interchange (EDI), Mobile Communications, Satellite-based tracking system,Geographic Information System (GIS) and Global Positioning System (GPS). The respondentwas asked to mention the percentage of operations computerised and list the logistics softwares,databases, ERP packages and web-based applications used by it. The respondent was also askedto mention the investments in information systems as % of total investments in the last 5 years.

Section VIII: Threats to the growth of the 3PL industry in IndiaFive factors were identified by the author as the possible reasons for the low growth of thelogistics market in India so far, namely lack of trust and awareness among the Indian firms, poortransportation and communications infrastructure, limited value-added services offered by the3PL providers, diseconomies of scale due to differential sales tax structures and cost-inefficiencydue to imposition of service tax. These factors were listed and the respondent was asked toassign a score, on a scale of 1-5, to each of these factors where 1 indicated very important and5 indicated not at all important. Also, space was provided for the respondent to mention anyother factor(s), which, it felt, was (were) important.


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Section IX: Opportunities for the growth of the 3PL industry in IndiaFive factors were identified by the author as the possible reasons for the growing logistics marketin India, namely increasing awareness towards logistics outsourcing, demand for morespecialized services as a result of a steadily increasing GDP, development of infrastructure,possibility of investments by global 3PL providers and uniform VAT regime likely to be

effective from April 1, 2005. These factors were listed and the respondent was asked to assign ascore, on a scale of 1-5, to each of these factors where 1 indicated very important and 5indicated not at all important. Also, space was provided for the respondent to mention any otherfactor(s), which, it felt, was (were) important.

Section X: Size of the 3PL market in India and growth forecastsThe respondent was asked to indicate its estimate (in Rs. crore) of the size of the 3PL market inIndia, and the average annual growth forecasts for the market and its own 3PL business in thenext 5 years.

Administering the questionnaire

Upon designing the questionnaire, the next step was to locate the potential respondents foradministering the questionnaire. This was not an easy task since the 3PL market in India is leastdeveloped and the author could not lay hands on a formal directory of Indian logistics serviceproviders. The author could gather the references of some of the well known Indian 3PLproviders from various published materials, and could go to their websites directly for thecontact information. For information on other potential respondents, the author referred to thedirectories available on the following websites: http://www.azfreight.com,http://dir.indiamart.com, http://www.logisticsworld.com and http://www.logisticsfocus.com. Theauthor is also grateful to some of the respondents for providing information on the Indian 3PLproviders. From all the sources, about 200 potential respondents were identified and each ofthem was sent a questionnaire along with a self-addressed envelope and a covering letter,addressed to the Chief Executive of the company, explaining the background of the survey.Some of the respondents were kind enough to send back the filled-in questionnaire within oneweek of despatching. Some of them required clarifications and wanted more time to respond dueto pressing job demands and the detailed nature of the questionnaire. The author started sendinge-mails and calling the potential respondents about two weeks after despatching thequestionnaire. Some of them denied receiving the questionnaire. So, it had to be resent by e-mail.Some of them said that they would not respond to the survey. The rest promised that they wouldwork on the questionnaire and send it back as early as possible. In the process of calling thepotential respondents, many a time the author had to explain the meaning of the term 3PL, as itwas new to them, and convince them that the services they offered were nothing but 3PLservices. This shows that 3PL is still in its early stage in India. The author had to call thepotential respondents more than once, sometimes 4-5 times, to remind them to send back thefilled-in questionnaires. But despite all the efforts, the author could finally receive 32 filled-inquestionnaires, which corresponded to about 16% response rate. Had all the potentialrespondents, who promised to send back the filled-in questionnaires, responded, the responserate would have been extremely good. However, compared with the data on response ratesavailable for other similar surveys, the 16% response rate is perceived to be reasonably good6.One of the reasons why a higher response rate could not be realized might be the fact that many


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of the potential respondents were freight forwarders and custom house agents with very small-scale operations for whom the significance of 3PL was irrelevant. The author could convincesome of them over phone, but the rest of them chose not to respond. The author also personallyvisited some of the respondents to have a discussion on the data they provided and the 3PLscenario in India, in general.

Results of the Survey

Based on the data provided by the respondents, an overall analysis of the respondent firms wascarried out. Given below is an analysis of data collected, followed by a summary of findings.

Analysis of data

A section-wise analysis of data is given below.

Section I: General informationMost of the respondents headquarters are located in National Capital Region (NCR) (32%),Mumbai (25%) and Chennai (22%). The distribution is shown in Exhibit 1. 56% of therespondents have global tie-ups and 41% have operations outside India. Exhibit 2 shows thepercentage of respondents having operations outside India in different continents. As regards tothe year of starting 3PL operations, 29 out of 32 firms provided data on this. According to thedata given, 24% of the respondents started their 3PL operations in 2000 or later and 59% startedoperations in the last 10 years. This shows the relatively young age of the Indian 3PL providers.Exhibit 3 shows the distribution of the respondents in terms of the year of starting 3PLoperations. With respect to the number of employees, 72% of the respondents have less than 200employees, but at the same time 22% have 900 or more employees, which shows the fragmentednature of the respondent firms. Exhibit 4 shows the distribution of the respondents in terms of thenumber of employees.

Exhibits 1, 2, 3 and 4 around here

Section II: Financial informationOut of 32 respondents, 23 furnished financial information. The remaining 9 respondents did notwant to divulge financial data. Out of these 23 firms, 13 (56.5%) were only 3PL providers, i.e.,their 3PL turnovers and total turnovers were the same whereas the remaining 10 (43.5%) hadother business interests apart from 3PL. The total 3PL turnover of these 23 firms in 2003-2004was Rs. 1187.66 crore. The distribution of these firms according to their 3PL turnovers in 2003-2004 is shown in Exhibit 5. It can be seen that 62% of the firms earned less than Rs. 10 crore and

for 8% of the firms, the 3PL turnover exceeded Rs. 100 crore. It was also seen from the data that20% of the firms contributed to about 90% of the total 3PL turnover of the firms in 2003-2004,which again shows the market is fragmented. Exhibit 6 shows the year-on-year growth rates ofthe total 3PL turnovers of the firms in the last four years. In 2003-2004, the total 3PL turnovergrew by 18.25%, which is in line with the industry forecast for 3PL growth of 20%. However,the 3PL turnover as a percentage of the total turnover was found to steadily decrease over theyears probably because the other businesses that the 10 firms were in grew faster than their 3PLbusinesses. It is to be mentioned here that out of 23 firms that furnished financial information, 2


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firms started operations in 2003-2004. Hence 3PL growth rates for these firms could not becomputed. Among the remaining 21 firms, the maximum 3PL growth rate observed in 2003-2004 was 153.16% and the minimum 3PL growth rate was 11.74% (negative growth). 14 firms(66.67%) recorded a higher 3PL growth rate than the overall 3PL growth rate of the firms in2003-2004, i.e., 18.25%.

Exhibits 5 and 6 around here

Section III: Services offeredExhibit 7 shows the services offered by at least 50% of the respondents. The top slot is occupiedby warehousing, which is offered by 84% of the respondents, followed by Full Truck Load(FTL) transportation (81%) and freight forwarding (75%). Other services offered by at least 50%of the respondents and the corresponding percentages of respondents offering these services arethe following: Less than Truck Load (LTL) transportation (69%), multi-modal transportation(69%), consulting (69%), customs clearance (69%), freight consolidation (66%), reverse logistics(59%), break bulk operations (56%), distribution (53%) and freight brokerage (53%). An

exhaustive list of services and the corresponding percentages of respondents offering theseservices are shown in the Appendix. Exhibits 8 and 9 show the services offered by therespondents engaged in reverse logistics and consulting activities, respectively. Exhibit 8 showsthat 68% of the respondents engaged in reverse logistics activities handle the return of productsdamaged during transportation. Return of packaging, containers etc. and warranty returns/returnsfor repair are each handled by 63% of the respondents. Other reverse logistics services and thecorresponding percentages of respondents offering these services are the following: productreturns for recovery/recycling/remanufacturing (53%), product recalls by manufacturers (47%),return of products shipped in excess (37%), return of seasonal products (37%), return of productswhose expiry dates are over (32%) and return of products after the expiry of the lease/rent period(16%). For consulting services, we observe from Exhibit 9 that 82% of the respondents engaged

in consulting activities offer logistics and supply chain consulting. 45% and 41% of therespondents offer consulting services for optimizing the modes of transportation and distributionnetwork planning, respectively. Other consulting services and the corresponding percentages ofrespondents offering these services are the following: supply chain strategy development (32%),supply chain reengineering (32%), Fourth-Party Logistics (4PL)10 (32%), site selection forfacility location (27%), logistics audit (14%), customs clearance (9%), education and training(5%) and risk management (5%).

Exhibits 7, 8 and 9 around here

Section IV: Industries served

Exhibit 10 shows the industries served by at least 50% of the respondents. The leading industryis pharmaceuticals, which is served by 72% of the respondents, followed by automotive andengineering/industrial, each of which is served by 66% of the respondents. Other industries andthe corresponding percentages of respondents serving these industries are the following:textiles/apparel (59%), computers and electronics (53%), telecommunication (50%), FMCG(50%) and consumer durable goods (50%). An exhaustive list of industries and thecorresponding percentages of respondents serving these industries are shown in the Appendix.


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The respondents mentioned many major Indian manufacturers as their customers. Ascompetitors, they mentioned other 3PL providers, especially the multi-national logisticscompanies, which give them a tough competition in the freight forwarding business.

Exhibit 10 around here

Section V: Asset base and volume of cargo movement50% of the respondents have their own vehicles while the rest outsource their requirements.Among the respondents owning vehicles, 43% have substantial capacity (in high 100s and1000s of tons), 13% have medium capacity (in the lower side of 100s of tons) and the rest 44%have low to medium capacity (in 10s of tons). With respect to the material handling equipment,38% of the respondents own them while the rest outsource their requirements. Among therespondents owning material handling equipment, 42% have substantial capacity, 8% havemedium capacity and the rest 50% have low capacity. 59% of the respondents own theirwarehouses while the rest outsource. Exhibit 11 shows the distribution of the owners based onthe capacities of their warehouses. We can see from the exhibit that 47% of the owners have

warehouse capacities less than 30,000 sq. ft., but at the same time 26% of them have warehousecapacities more than 500,000 sq. ft.

With respect to the volume of cargo handled, 21 firms provided data for 2003-2004. The totalvolume of cargo handled by these firms in 2003-2004 was 32,79,416 tons. Exhibit 12 shows theyear-on-year growth rates of cargo volumes handled by these firms in the last four years. In2003-2004, the cargo volume growth rate was 20.33%, Among the 15 firms for which growthrates in 2003-2004 could be computed, the maximum growth rate recorded was 166.67% and theminimum growth rate recorded was 27.55% (negative growth). The growth rates for 6 firms(40%) exceeded the overall growth rate in 2003-2004, i.e., 20.33%.

Exhibits 11 and 12 around here

Section VI: Extent of coverageExhibit 13 shows the extent of regional coverage by the respondents. The northern part of thecountry is covered by the maximum (81%) number of respondents, followed by the southern(78%) and western (69%) regions. The eastern, central and north-eastern regions are covered by47%, 44% and 34% of the respondents, respectively. Exhibits 14 and 15 show the distributionsof the respondents, based on the data provided by 29 respondents, in terms of the number ofstates covered and the number of branches and offices, respectively. From Exhibit 14 we can seethat 45% of the respondents cover less than 10 states, but at the same time 24% of therespondents cover 25 or more states. Similarly, Exhibit 15 shows that 70% of the respondents

have 10 or less number of branches and offices while 20% of them have 200 or more branchesand offices. These figures again indicate the fact that the Indian 3PL market is still fragmented.


Section VII: Information systemsExhibit 16 shows that 78% of the respondents use mobile communications, followed by EDI(56%), bar coding (31%), satellite-based tracking (9%), GPS (9%) and GIS (3%) in terms of


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usage. Exhibit 17 shows the distribution of the respondents in terms of per cent computerisationof operations. The average investments by respondents in information systems as a % of totalinvestments in the last five years are shown in Exhibit 18. The upward trend in investments ininformation systems is worth to note.


The respondents reported the use of logistics softwares such as WMS, TWL, GEMS, Ice Gate,Logistics Plan, Express IT, i2, Baan, Win Cargo, Red Berry, Agrani etc., databases such asOracle, DB2, SQL, FoxPro, MS Access, Ex, Tally etc., ERP packages such as SAP, Oracle,MfgPro, JD Edwards etc. and web-based applications such as Intranet, Java, VSAT, GPS, Track-n-Trace etc. They also reported using customised and in-house developed software packages.

Section VIII: Threats to the growth of the 3PL industry in IndiaExhibit 19 shows the average scores of the threats to the growth of 3PL in India. Poortransportation and communications infrastructure was identified by the respondents as the most

important criterion in this respect with the lowest average score (2.06). It is followed by the lackof trust and awareness (2.29), diseconomies of scale due to differential sales tax structures (2.42),limited value-added services (2.58) and imposition of service tax (3.03). These five criteria weregiven by the author. The respondents also mentioned the lack of skilled manpower, lack of good3PL providers, high costs of operations and government control as other deterrents to the growthof 3PL in India.


Section IX: Opportunities for the growth of the 3PL industry in IndiaExhibit 20 shows the average scores of the opportunities for growth of 3PL in India. The

respondents identified the increasing awareness towards logistics outsourcing as the mostimportant factor in this respect with the lowest average score of 1.42. This is followed by thedemand for more specialized services as a result of a steadily increasing GDP (2.13),development of infrastructure (2.16), uniform VAT regime likely to be effective from April 1,2005 (2.16) and possibility of investments by global 3PL providers (2.84). Some of therespondents also mentioned about government support towards the growth of 3PL in India.


Section X: Size of the 3PL market in India and growth forecastsThat 3PL in India is still in its infancy is evident from the estimates of the size of the 3PL market

in India given by the respondents. The estimates varied from a few hundred crores of rupees toseveral thousand crores of rupees pointing to the fact that most of the respondents do not have aclear idea about the size of the market. If it is assumed that the bigger players have a better ideaabout the size of the market, then according to the estimates given by them, the size of the 3PLmarket in India should be at least Rs. 5000 crore. Based on the data provided by 26 respondents,it is estimated that the average annual growth of the 3PL market in India for the next 5 yearswould be 18.21%, and the average annual growth of the 3PL business of the respondent firms for


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the next 5 years would be 25.58%. Out of these 26 firms, 16 firms (61.5%) are likely to exceedthe average annual growth of 3PL in India estimated by the respondents, i.e., 18.21%.

Summary of findings

It is clear from the survey that the 3PL market in India is relatively new and fragmented where afew large players dominate the entire market. One of the most important factors plaguing thegrowth of 3PL in India is poor infrastructure, as also evident from the respondents feedback.Slow movement of cargo and congestion at the seaports due to insufficient infrastructure,bureaucracy, red-tapeism and delay in government clearances coupled with unreliable powersupply and slow banking transactions add to the woes of the exporters and make it difficult forthem to meet the deadlines for their international customers. To expedite shipments, theexporters have to book their consignments as airfreight rather than seafreight, which adds to thecost of the goods making them uncompetitive in the international market. Many large shippingliners avoid Indian ports in order to avoid delays in loading and unloading, and hence the Indianexporters have to resort to transshipments at ports like Singapore, Dubai and Colombo, whichagain adds to the cost of shipments and delays the delivery of export goods. In domestictransportation of goods by rail, which accounts for 35% of the total cargo movement, ContainerCorporation of India (CONCOR), a subsidiary of Indian Railways, has a monopoly. The global3PL providers have to depend on CONCOR for containerised transportation of goods by railfrom one part of the country to another. This adds to the transaction costs of the serviceproviders, and also affects their service. Moreover, due to insufficient number of rakes andInland Container Depots (ICD), CONCOR is not being able to manage the growing volumes ofexports from the country. All these facts ultimately point to the suggestion that the monopoly ofCONCOR should be done away with and private participation in development of infrastructureshould be allowed11.

Another important factor responsible for the slow growth of 3PL in India so far, perceived by therespondents, is the lack of trust and awareness among the Indian firms. On the one hand, theIndian firms have not been aware of the benefits of 3PL. On the other hand, they do not trust the3PL providers and do not want to share with them sensitive organisational information. OneDelhi-based respondent said during a personal interview that many firms do not want tooutsource logistics activities because of vested interests. They always want to put pressure on thetransporters for material benefits which otherwise they could not do with the 3PL providers.They do not want to interact with knowledgeable persons.

Another disadvantage of the 3PL business is that it is a high-cost, low-margin business. Differentsales tax requirements in different states, numerous other taxes, octrois, multiple check posts,police harassment and bribes paid by the truckers add to the woes of the 3PL providers. The

same Delhi-based respondent mentioned that the money that the truckers have to pay as bribes atdifferent points on the route is a substantial portion of the shipment cost. For example, he pointedout, if a shipment from Delhi to Mumbai by a 9-ton truck costs Rs. 9000, Rs. 2000 or about 22%has to be paid as bribes along the route. He also mentioned that the clients look for quality assetsowned by the service providers and prefer to deal with a single service provider rather than manyfor fulfilment of logistics needs. According to another Mysore-based respondent, the 3PLbusiness is operating with 5-year old costs and the profit margins are wafer thin. Apart fromquality assets, the clients also look for world class information systems, but they do not want to


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match them with increased billings; rather they give low priority to payments adequatelysupplementing their working capital.

The Indian 3PL providers are facing stiff competition from the multi-national 3PL providers,especially in international freight movements. The multi-national 3PL providers are mainly into

freight forwarding, but they are also into domestic logistics where they have made little or noinvestment. They outsource all the domestic logistics activities like transportation andwarehousing to small operators so that they can squeeze cost advantage out of them. This alsohappens because right now no information on the fragmented logistics market is readilyavailable. With respect to freight forwarding, the multi-national 3PL providers enjoy severaladvantages over the Indian 3PL providers. Because of their size and operations in manycountries, they are able to offer lower freight rates. Also, their multi-national clients prefer todeal with a single service provider across all the nations. As such, since Samsung is dealing withBax Global in other countries like the U.S., it also uses Bax Globals service in India. Since themulti-national 3PL providers have financial muscle, they can give extended credit to theirclients, which the Indian 3PL providers cannot give as they do not have volumes as well as

access to cheaper capital. Finally, most of the shipments from India are on the FOB (Free onboard) basis where the freight is paid by the client at the destination. The client, in this case,specifies the forwarder for shipping of cargo, and the multi-national 3PL providers through theircontact with the clients are able to corner most of the business from India. This is sort of a non-tariff barrier imposed on India by the developed nations, opined a Chennai-based respondent.

Despite the bottlenecks mentioned above, the Indian 3PL business is poised to grow at about20% in the coming years, as evident from the respondents feedback. The Indian firms havestarted to realise the benefits of 3PL. By outsourcing logistics activities they are able to not onlyreduce costs and focus on core competencies but also receive services from specialists in thisfield. One point worth mentioning here is that 53% of the respondents offering reverse logisticsservices are engaged in the return of products for recovery, recycling and remanufacturing. Thisis especially important in the context of growing awareness towards environmental pollution andstringent government regulations in many of the developed nations that hold manufacturersresponsible for taking back their products and packaging after use for recovery or disposal.Though India is lagging way behind in this respect, the survey indicates that at least someinitiatives towards product recovery and recycling have been started.

Initiatives for infrastructure development such as the golden quadrilateral project have beenundertaken by the government. In the recently announced Foreign Trade Policy 2004-2009, ithas been decided that Free Trade and Warehousing Zones (FTWZ) will be established in linewith Special Economic Zones (SEZ). The policy allows 100% FDI in these FTWZs, whichwould create the necessary trade-related infrastructure to facilitate the import and export ofgoods and services12. However, to expedite the development process and to relieve thegovernment exchequer from bearing the huge expenses towards developing world classinformation systems and automating transportation and warehousing facilities, privateinvestments in the infrastructure sector should be permitted. Today, in order to make the supplychain more flexible and responsive to customer needs, significant investments in technologiessuch as Radio Frequency Identification Devices (RFID) are required to track shipments in real


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time. Arvind Mills, Gillette and Barista use these technologies to switch the already-shippedconsignments between locations based on changing demand patterns13.

Recently a few multi-national 3PL providers have invested in domestic logistics. SembcorpLogistics (India) Pvt. Ltd., a 100% subsidiary of Sembcorp Logistics, Singapore, started their

Indian operations in mid 1990s and since then has heavily invested in assets. The companycontrols over 1 million sq. ft. of warehouse space, which is available for sharing on a pay-as-you-use basis. Menlo Worldwide, based in Redwood City, California, U.S., which is managingthe factory and spare parts stores of General Motors in India, has been granted permission by theForeign Investment Promotion Board (FIPB) to offer Vendor Managed Inventory (VMI)services. The company also handles over-dimensional cargo and offers tailor-made services tosuit specific industry needs14. Recently DHL, the worlds fourth largest logistics company, hastaken over Blue Dart, a leading express cargo and logistics service provider of India. DHL, so fara sales ally of Blue Dart for international distribution of express cargo, will now be able toprovide domestic logistics services through the network of Blue Dart. The Indian logistics sectorwill get a boost if more and more multi-national 3PL providers invest in domestic logistics.

Conclusion

Third-party logistics or 3PL is growing around the world as more and more corporations preferto outsource their logistics operations to the 3PL or logistics service providers. The 3PL marketin India is still in its infancy and is highly fragmented. However, there is a high potential forgrowth of the market, which was evident from the survey of the Indian logistics serviceproviders. The respondents held the poor infrastructure and the lack of awareness and trustamong the Indian firms responsible for the low growth of 3PL in India so far. However, moreand more Indian firms are becoming aware of the benefits of 3PL and outsourcing a part orwhole of their logistics-related activities to the service providers. With respect to developing theinfrastructure, the Indian Government has already taken some initiatives, which may befacilitated by allowing private investments in this sector. The Government should identifyinvestments in infrastructure that will lead to the growth of 3PL, as one of the thrust areas as thiswould not only contribute to the GDP, but also generate employment. The policies andprocedures also have to be simplified to speed up the process of service delivery. That theGovernment is moving in the right direction and the Indian firms are becoming moreknowledgeable about 3PL were evident from the respondents feedback as these factors alongwith a steady growth in the GDP were identified by the respondents as opportunities for growthof 3PL in India.

Acknowledgement

I express my deep gratitude to Mr. Sharad Jobanputra of Fairdeal Distribution, Mr. S. Rajkumarof Sequel Logistics, Mr. S. M. Ganatra of SMG Spacers, Mr. S. L. Ganapathi and Mr. VineetGarg of Logistics Plus, Mr. C. D. Bhandari of BIC Logistics, Mr. P. Ravi Menon of InterfreightServices and Mr. G. Ranganathan of Friendly Logistics for providing me with valuableinformation on the 3PL scenario in India. I would also like to thank all the respondents of thesurvey.


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Appendix

List of services and the corresponding percentages of respondents offering these services

Service Respondent

(%)

Service Respondent

(%)

Service Respondent

(%)

Warehousing 84 Distribution 53 Order processing 31FTL 81 Freight brokerage 53 Payment collection 31

Freight fwd 75 Cargo insurance 47 Systems support 31

LTL 69 Customer service 41 Sales promotion 28

Multi-modal 69 Packaging/Labeling 38 Order fulfilment 25

Consulting 69 Inventory mgmt 34 Vendor management 22

Customs clr 69 Import/export mgmt 34 Fleet management 19

Freight cons 66 Invoicing 34 Assembly/Installation 19

Reverse logistics 59 NVOCC15 31 Chartering of vessels 13

Break bulk ops 56 Port operations 31 Cross docking16 9

List of industries and the corresponding percentages of respondents serving theseindustries

Industry Respondent

(%)

Industry Respondent

(%)

Industry Respondent

(%)

Pharmaceuticals 72 FMCG 50 Oil and gas 16

Automotive 66 Consumer durable 50 Bank/Financial Inst. 6

Engg/Industrial 66 Food & beverages 44 Precious metals 6

Textiles/Apparel 59 Chemical/Fertilizer 38 Defense 3

Computers/Elect. 53 Retail 31 Dry flower 3

Telecommunication 50 Healthcare 28 Poultry 3


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References and Notes

1. Lynch, C F, 2002, 3PLs: the state of outsourcing,Logistics Management, Vol 41, No 6, ppT47-T50.

2. The Economic Times, October 7, 2003.

3. The Economic Times, December 18, 2003.4. Foster, T A and R Armstrong, 2004, Top 25 third-party logistics providers extend theirglobal reach, Global Logistics and Supply Chain Strategies, Web magazine available athttp://www.glscs.com.

5. Businessline, February 27, 2004.6. Sahay, B S and R Mohan, 2004, Third-party logistics practices: an Indian perspective,

Unpublished.7. Foster, T A, 2004, Global trade drives third-party logistics providers expansion, Global

Logistics and Supply Chain Strategies, Web magazine available at http://www.glscs.com.8. The Economic Times, September 23, 2004.9. http://www.worldbank.org.

10.Fourth-Party Logistics or 4PL refers to the service rendered to manage the 3PL providers onbehalf of a company. A 4PL provider does not necessarily have to be a 3PL provider. Itmight, for example, be a consulting firm brought in to provide these management services.

11.The Economic Times, October 8, 2004.12.Foreign Trade Policy 2004-2009: Preparing India for the world, Cargo Times, Vol 4, No 7,

September 2004, pp 5-6.13.3-D Logistics, Cargo Times, Vol 4, No 7, September 2004, p 42.14.Menlo Worlwide: Double celebrations, Cargo Times, Vol 4, No 7, September 2004, p 8.15.NVOCC or Non-Vessel Operating Common Carrier is a wholesaler of freight. The operator

obtains bulk rates from the carriers and sells the same to the shippers and other small freightforwarders at a premium. His risk, however, is to ensure that the shipment finally tendered tothe carriers exceeds a minimum load. This is also advantageous to the shippers in the sensethat if they go directly to the carriers, they have to pay higher freight rates.

16.Cross docking refers to the shipment of goods from the ports directly to the destinationswithout storing, bulk breaking or routing through a hub for consolidation, thus reducing thelead time for shipping.


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Exhibit 1: Location of HQ of the

respondents

32%

25%22%

9%

6%

3%

3%

NCR

Mumbai

Chennai

Kolkata

Ahmedabad

Mysore

Secunderabad

Exhibit 2: % of respondents having

operations outside India in different

continents

67

42

42

8

Asia

N.A.

Europe

Africa

Exhibit 3: Year of starting 3PL

operations

24%

35%17%

10%

7% 7%2000 and after

1995-1999

1990-1994

1985-19891980-1984

Before 1980


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Exhibit 4: Number of employees

63%9%

6%

16%

3%

3% 100 or less

Between 100 & 200

Between 500 & 600

Between 900 & 2000

Between 2000 & 3000

More than 4000

Exhibit 5: 3PL turnovers in Rs. crores

in 2003-04

62%17%

13%4% 4%

Less than 10

Between 10 & 20

Between 20 & 100

Between 100 & 200

More than 200

Exhibit 6: Year-on-Year 3PL growth

rate

5.64

10.1

14.01

18.25

0

5

10

15

20

2000-2001 2001-2002 2002-2003 2003-2004

Year

Gro

wthrate(%)

ov

erlastyear


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Exhibit 7: Services offered by at least

50% of the respondents

84

81

75

69

69

69

69

66

59

56

53

53

Warehousing

FTL

Freight Fwd

LTL

Multi Modal

Consulting

Customs Clr

Freight Cons

Reverse Logistics

Break Bulk Ops.

Distribution

Freight Brokerage

Exhibit 8: Services offered by respondents

(%) engaged in reverse logistics activities

68

63

63

53

47

37

37

32

16

Damaged product

Pkg./Container

Warranty/repair

Product recovery

Product recall

Shipped in excess

Seasonal product

Expiry date over

Lease/rent over


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Exhibit 9: Services offered by respondents (%)

engaged in consulting activities

82

45

41

32

32

32

27

14

95

5

L&SC Consult.

Opt. Trans. Mode

Dist. Net. Plng.

SC Strategy Devl.

SC Reengg.

Fourth-party Log.

Site Selection

Logistics Audit

Customs Clr.

Education/Trg.

Risk Mgmt.

Exhibit 10: Industries served by at

least 50% of the respondents

72

66

66

59

53

50

50

50

Pharma

Auto

Engg/Ind

Tex/App

Comp/Elec

Telecom

FMCG

Durables


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Exhibit 11: Warehouse capacity (sq.

ft.) of owners

26%

16%11%

47%

At least 500,000

Between 100,000& 500,000

Between 30,000& 100,000

Less than 30,000

Exhibit 12: Year-on-Year cargo

volume growth rate

6.479.91 10.02

20.33

0

5

10

15

20

25

2000-2001 2001-2002 2002-2003 2003-2004

Year

Growthrate(%)

overlastyear

Exhibit 13: Coverage of the

respondents (%)

81

78

69

47

44

34

North

South

West

East

Central

North-east


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Exhibit 14: Number of states covered

by the respondents

24%

14%

17%

45%25-29

20-24

10-19


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Exhibit 17: Per cent computerisation

of operations

32%

36%

20%

12% 90 or more

Between 70 & 90

Between 50 & 70

Between 20 & 30

Exhibit 18: Investment in information

systems as a % of total investments

8.1710.38 11.88

16.13 16.5

0

5

10

15

20

1999-

2000

2000-

2001

2001-

2002

2002-

2003

2003-

2004

Year

Investment(%)

Exhibit 19: Average scores of threats

to the growth of 3PL in India

2.06

2.29

2.42

2.58

3.03

Poor infra.

Lack of

awareness

Diseco. ofscale

Ltd. value

adds

Service tax


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Exhibit 20: Aveage scores of

opportunities for growth of 3PL in India

1.42

2.13

2.16

2.16

2.84

Awareness

GDP growth

Infra. devl.

VAT

FDI

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