Logistics Sector

Overview

The Logistics industry can be broadly divided into ocean freight, air freight, rail freight, trucking and
third party logistics (3PL) services. The size of the Indian Logistics industry is pegged at around USD
30 billion. The industry is expected to grow at a 13% CAGR to USD 54 billion by 2012.

Drivers

The growth in the industry is driven by:

• Increase in trade: The India’s foreign trade has been growing at 25% CAGR over the past
five years and is expected to continue its impressive growth on the back of emergence
of India as a manufacturing hub for garments, engineering goods, electronic hardware and
other goods. Moreover, the high growth in domestic consumption and manufacturing
outsourcing will further drive trade.
• Reforms in Government policy: The reforms in government policy and pro-industry
initiatives like abolition of CST and private participation in rail, air and port freight services is
driving growth in logistics.
• Increased Government spending in infrastruct ure: The Government plans to invest USD
44 billion in improving infrastruct ure across roads, ports, railways, and air transport by FY12.
The increase in Government spending on infrastructure will lead to an increase in efficiency
and catalyze the growth of the industry.
• Rise in domestic consumption and retail: Driven by changing lifestyles, strong
income growth, and favorable demographic patterns, Indian retail is expanding at a rapid
pace. The Indian retail market is expected to grow from the current USD 350 billion to USD
427 billion
by 2010.This would drive the growth in logistics industry as the goods would need to be
delivered from production centers to consumption centers.
• Containerization: Containerization is a growing trend in India because of the need for
intermodal transport. This has resulted in low handling costs and reduced pilferage and
breakage. Though containerization of cargo is occurs predominantly in foreign trade,
the changeover to containerization is expected to occur in domestic trade as well. In FY07,
bulk cargo grew at 8% while containerized cargo increased at 18.5%, reflecting the
growing demand for containerized cargo.

Industry Segment-Road Freight

The size of the road freight segment is USD 10 billion. Approximately 65% of the freight is carried
through roads in India. The road freight segment is highly fragmented with more than 16,000 trucking
players. The large number of small truck operators, increase in fuel prices and poor quality of roads
has led to lower profit margin for the trucking services companies. The leading trucking companies in

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India typically don’t own the entire fleet but outsource approximately 75% of their trucks to smaller
transporters.

Drivers

• Increase in quality of road infrastructure: Investments of USD 14 billion in

highway development is envisaged by the Government including development of
the Golden Quadrilateral connecting the major cities (Delhi, Mumbai, Chennai
and Kolkata) and development of North- South and East-West corridors.
• Phase out of Central Sale Tax (CST) and implementation of Value Add Tax
(VAT): Currently 3% CST is levied for interstate movements. This had led to
preference for state- wise warehousing to enable intra-state sourcing and distribution
networks. The phase wise abolition of CST by 2010 would catalyze interstate commerce
and consolidate supply chains networks.

Opportunities

Consolidation
The consolidation of supply chain networks and increasing share of organized retail will shift
market share towards organized trucking companies. The consolidation would lead to the
emergence of pan- India players with significant size and better profitabil ity.

Higher Margins and Service Component

Capital
Intensive

Low Margins, Highly competitive

Logistics Hubs and Distribution Centers

The abolition of CST would lead to a switchover to centralized warehousing and hub and
spoke distribution network. This would create a demand for larger distribution centers and
logistics hubs. This should be an attractive opportunity for companies who would have the
skills to manage these hubs as well as trucking companies looking to forward integrate into the
supply chain of their clients.

3PL
The changeover to a hub and spoke supply chain model will catalyze the demand for 3PL
service providers. Auto and auto component companies have been frontrunners in outsourcing
Supply Chain Management (SCM) and have already started the process of consolidating their
logistics services pro viders. In retail and textiles too there is significant business potential for 3PL.

Cold Chain Warehousing Logistics

The retail revolution along with the increasing consumption of processed food products presents
a growth opportunity for the cold chain logistics business in India. There are various companies
trying
to enter this high growth sector – Concor has announced its plans to enter the cold chain
logistics segment through its wholly owned subsidiary called Fresh and Healthy Enterprises; GDL has
acquired
50.1% stake in Snowman Frozen Foods Ltd., a pan-India player in this segment.

Courier and express players: Cost and time efficiency from smoother roads combined with expected
growth in document shipments and high-value products such as mobile phones, network

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hardware, jewelry and branded drugs will allow the express industry to continue to grow at 25%-plus
rate. Industry Segment-Rail Freight
The rails are operated in India by the Indian Railways (IR), a Government undertaking. The size of
the rail freight segment is around USD 11 billion and is expected to grow at 8% year on year.
Traditionally, IR has favoured carrying passengers over hauling freight, and as a result, railways has
been steadily losing freight share to roadways. However, the pro industry reforms and greater private
sector participation have started to catalyze the growth in this segment.
Drivers
• Privatization of rail container operation: Container Freight Stations (CFS) and Inland
Container Depots (ICD) were privatized in the last decade. In 2006, the government of India
awarded fifteen licenses to operate rail container services across all routes in India. Currently,
eight players have already begun their operations. Private players will need to have their own
terminals (ICDs) with rail sidings to load and unload containers. Indian Railways is expecting
an investment of approximately USD 2.5bn over the next two years for the purchasing of
wagons, setting up of logistics parks and ICDs by the private players.
• Development of dedicated freight corridor: Indian railway has planned an investment of
USD 6.25 billion over the next five years to remove all capacity bottlenecks. The projects
include strengthening of the Golden Quadrilateral, strengthening of rail connectivity to ports
and development of multimodal corridors to the hinterland.
Opportunities
Rail Operation
The private rail container operators in India are currently operating with 22 rakes. The private players
are currently not seeing any pressure on pricing and are steadily increasing the market share by giving
better services than Concor (the freight handling arm of IR).
Inland Container Depots and Warehousing
ICDs will benefit significantly from increased containerization of goods and entry of private rail
operators. Presence of railway siding would play a key role in freight handled and throughput of the
ICDs. Another critical success factor for ICDs would be road connectivity and proximity to industrial
belts or SEZs.
Wagon manufacturing
The entry of private players in rail operation and increased demand from the railways will drive
demand for wagon manufacturers in private sectors.
Industry Segment-Ocean Freight
The major Indian ports are being stretched to maximum capacity. The total port capacity at major
Indian ports in FY07 was 484mn tons while freight volume handled was 464mn tons. The increased
domestic consumption and manufacturing growth has resulted in high growth in the Exim trade in
India.
The Ocean logistics industry involves various intermediaries like freight forwarders (originates
freight), customs house agents (offers customs clearing services), multi modal transporters (either
shipping companies or freight forwarders that are allowed to transport the cargo by more than one
mode of transport), and inland container depots & container freight stations (provides services like
stuffing, de-stuffing, warehousing etc.).
Drivers
• Private participation in port infrastructure: One of the key factors for improved port
infrastructure is private participation in port operations and ancillary services. Private
operators are presently operating all major container terminals at ports in India. Also, private
ports at Mundhra and Pipavav and the upcoming private port at Rewas (owned by Reliance
Industries) in western India are augmenting India’s bulk and container cargo handling
capacity. In addition, numerous ICDs and CFSs are being operated by private players.
• Large investments flow into ports: The major ports in India, public and private, are making
large investments in increasing port drafts to accommodate mainline vessels, enhancing the
capacity of their container terminals and improving rail and road links to and from the ports.
The Indian government plans to spend USD 13 billion during FY06 to FY12 for these
initiatives.
Opportunities
CFS and ICDs

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Standardization of containers promotes a mechanized form of cargo handling. Containerisation has
also led to demand for services of ICDs and CFSs for stuffing/de-stuffing of containers and also
custom clearance away from the ports. The rationale for market players to set up CFSs and ICDs is to
offer complete bouquet of services to their customers. There seems to be a danger of overcapacity in
the sector because of unplanned growth. The ability to control traffic flow is the key for operating a
CFS. A CFS/ICD that operates its own container terminal, freight forwarder or shipping line is well
positioned to benefit from the surge in ocean freight.
Integrated logistics companies
Companies in the business of consolidation are moving towards owning assets in the form of
CFS/ICDs and container trains. Going forward it will be essential for a container logistics provider to
have a presence across the entire value chain from point of origination to final destination. This would
entail having an international presence or tie-ups with overseas logistics companies.
Multimodal transport operators
Another growth area would be Multimodal transportation, driven by growing international trade and
expanding domestic demand for efficient supply chain systems for the retail and manufacturing
industries. Multimodal transportation in India is governed by the Multimodal Transportation of Goods
Act and requires a license by the Government of India to operate.
Project cargo handling
Handling of project cargo involves transportation of equipments and products on a turnkey basis. The
turnkey logistics for project cargo comprises of over-dimensional (ODC) and over-weight cargo
(OWC). The scope of work begins from packaging of the cargo at the factory point any where in the
world, to delivery of the same at the project site. It involves ocean and land transportation, customs
clearance, route survey, documentation, obtaining of NOC and other permissions from Government
departments and arranging heavy lift equipment and inland transportation to its ultimate destination.
This would see a good growth with increasing investments in oil and gas and the power sector.
Equipments
Equipments form a critical part of the infrastructure for ports. Equipment manufacturers of reach
stackers, forklifts, tractor trailers, cranes etc. will see huge demand from the CFSs and ports.
Private Equity/M&A Activity
An indicative list of SME deals concluded in the logistics sector in 2007 is given below. According to
Venture Intelligence estimates, the logistics sector attracted private equity investments of more than
USD 250 million in year to date and accounted for 3% of the total private equity flow into the country
for the same period.

The Logistics Industry

¾ Globally, the logistics industry is valued at US$ 3.5

trillion.

¾ The U.S., which contributes to over 25% of the global

industry value, spends close to 9% of its GDP on logistic
services.

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¾ The Indian Logistics Industry is presently estimated
at US$ 90 billion. (CII)

¾ The industry has generated employment for 45 million

people in the country in comparison with the IT and ITeS
sector which employs approximately 4.3 million people.

¾ It is forecast to grow at a Compound Annual Growth

Rate (CAGR) of approximately 8% over the next three to
five years. (CII)

¾ Third Party Logistics (3PL) Solutions, is slated to

grow at a compound annual growth rate (CAGR) of over
16% from 2007-10. Consequently, 3PL service providers are
expected to corner an increased share of the Indian Logistics
pie, from 6% in FY06 to 13% in FY11, at a CAGR of 25% (CII).

¾ The primary growth drivers of this industry are as under:

o Investments in the infrastructure sector amounting to

US$ 350 billion:

Increased efficiency and productivity of the

transport system would result in lower transit times.

o Streamlining of the indirect tax structure:

The introduction of Value Added Tax (VAT) and the

proposed introduction of a singular Goods and Services
Tax (GST) are expected to significantly reduce the
number of warehouses manufacturers are required to
maintain in different states, thereby resulting in a
substantial increase in demand for integrated logistics
solutions.

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 o Robust trade growth

Strong economic growth and liberalization have led

to considerable increase in domestic and international
trade volumes over the past five years. Consequently,
the requirement for transportation, handling and
warehousing is growing at a robust pace and is driving
the demand for integrated logistics solutions.

o Globalization of manufacturing systems

Globalization of manufacturing systems coupled with

advancements in technology are increasingly
compelling companies across verticals to concentrate on
their core competencies and avail the cost saving
potential of outsourcing. This is expected to contribute to
an increase in the need for integrated logistic solutions,
which is the niche of every Third Party Logistics Service
(“3PL Services”) provider.

¾ The industry has been valued at US$ 125 billion in 2010.

(CII)

¾ A snapshot of the FDI regulations governing the industry

is as under:

i. 100% FDI under the automatic route is permitted for

all logistic services except services mentioned in points ii
and iii below.

ii. FDI up to 100% subject to FIPB approval is

permitted for courier services.

iii. FDI up to 49% under the automatic route is

permitted for air transport services, including air cargo

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 services. It is pertinent to mention in this context, that
Press Note 1 (2007) that is expected to be imminently
notified by the DIPP proposes to increase the limit of FDI
on air cargo services in 74%.

¾ The industry has been at the receiving end of increasing

interest from the private equity sector. The year 2007
witnessed just under US$ 1 billion in private equity
investments in this industry, representing approximately 7%
of total private equity investments during the year, against 3%
in the previous year.

Abstract

Logistics management is increasingly becoming a topic of interest among academicians and practitioners
since it may lead to reduced operational costs, improved delivery performance and increased customer
satisfaction levels.

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.

Introduction

Logistics and supply chain management (SCM) as an area of research has been getting increasing attention
from academicians and practitioners over the last two decades since it may lead to reduced operational
costs, improved delivery performance and increased customer satisfaction levels, thereby making an
organization more competitive in terms of cost, quality, delivery and flexibility. The importance of logistics
and SCM is increasing also due to globalization as more and more multi-national companies (MNC) are
sourcing, manufacturing and distributing on a global scale, making their supply chains very complex to
manage. However, outsourcing logistics activities to experienced logistics service providers (LSP), also
known as third-party logistics (3PL) providers, may enable companies get very efficient and customized
logistical support while themselves focusing on the core organizational activities. Today, there are many
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large multi-national LSPs that offer complete supply chain solutions across many diverse countries in terms
of their socio-economic and political environments. Apart from core logistical activities such as
transportation and warehousing, LSPs also offer value-added services such as customs clearance, freight
forwarding, import/export management, inventory management, assembly/installation, packaging and
labeling, distribution, after sales support, reverse logistics and so on. By outsourcing logistics, companies
can leverage the expertise of LSPs while concentrating on their core competencies.

In literature, logistics and SCM are often used interchangeably, though there is a subtle difference between
the two. While SCM is more strategic in nature, logistics is more operations-oriented. The evolution of
logistics and SCM in the 1990s can be traced back to “physica l distribution management” in the 1970s
when there was no coordination among the various functions of an organization, and each was committed
to attain its own goal. This myopic approach then transformed into “integrated logistic management” in the

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1980s that called for the integration of various functions to achieve a system-wide objective (Vrat, 1999;
Seturam, 1999). SCM further widens this scope by including the suppliers and customers into the
organizational fold, and coordinating the flow of materials and information from the procurement of raw
materials to the consumption of finished goods. The objectives of SCM are to eliminate redundancies, and
reduce cycle time and inventory so as to provide better customer service at lower cost. The focus has
shifted from the “share of the market” paradigm to the “share of the customer” paradigm, wherein the goal
is to create “customer value” leading to increased corpo rate profitability, shareholder value, and sustained
competitive advantage in the long run (Evans and Danks, 1998). The successive stages of evolution of
logistics and SCM, the central characteristics of each stage, and the drivers of change are shown in Fig. 1.

Distribution mgmt. Integrated logistics Reengineering Supply chain mgmt.

in the 1970s mgmt. in the 1980s in the 1990s
of organi-

No coordination among
functions
Focus on reducing inventory
and distribution costs
Increased
Coordination among functions
internal to an organization
Achieve a system-wide
objective
Coordination among
several firms to reduce
cost and redundancies
Create customer value

Focus of the organization

Share of the Share of the
Market customer

Fig. 1 Evolution of Logistics and Supply Chain Management

While SCM deals more with the linkages in the chain, contracts and relationships, supplier selection,
information and financial flows besides materials flows, creating new facilities such as plants, warehouses
and distribution centres, and broader issues such as society, economy, government and environment, the
scope of logistics is more or less confined to the routine job of transportation and storage of goods.
However, if one deeply ponders, one may realize that logistics is the core of SCM, and if logistics fails, the
whole chain snaps. Though logistics deals with mundane vehicles, warehouses, layouts, material handling
equipment, Motor, Vehicles Act, toll tax, sales tax, octroi, documentation etc., efficient management of it
has the potential to make the chain taut and agile. Therefore, there is growing interest in logistics, and hence
in SCM, around the world.

The concept of logistics outsourcing can be traced quite far back in history. In Europe, a number of LSPs
can trace their origins back to the Middle Ages (Lynch, 2002). Tracing the evolution of logistics outsourcing
in recent decades, we find that, in the 1950s and 60s, logistics outsourcing was limited to transportation and
warehousing. The transactions were mainly short-term in nature. In the 70s, the emphasis was on improved
productivity, cost reduction and long-term contracts, while value-added services such as packaging,
labeling, systems support and inventory management were on offer in the 80s. Since the 90s, outsourcing
has picked up momentum, and more value-added services are being offered. Some of them are import/export
management, customs clearance, freight forwarding, customer service, rate negotiation, order processing,
assembly/installation, distribution, order fulfillment, reverse logistics, consulting services that include
distribution network planning, site selection for facility location, fleet management, freight consolidation,
logistics audit etc.

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competition

zational cost structures and globalization

Literature on the logistics industry is abundant in the form of survey-based empirical research and reviews
of extant literature. Notable surveys of logistics users of different countries include, among others, Langley
et al. (2007) (North America, Latin America, Europe and Asia-Pacific), Lieb and Bentz (2005) (North
America), Lieb et al. (1993) (North America and Europe), Arroyo et al. (2006) (Mexico), Cilliers and
Nagel (1994) (South Africa), Dapiran et al. (1996) (Australia), Mollenkopf and Dapiran (2005) (Australia
and New Zealand), Kim (1996) (Korea), Bhatnagar et al. (1999) (Singapore), Sahay and Mohan (2006)
(India), Sohail and Al-Abdali (2005) (Saudi Arabia), Sohail et al. (2005) (UAE) and Aktas and Ulengin
(2005) (Turkey). In these surveys, logistics managers of user firms are asked to respond to issues such as
reasons for outsourcing, number of activities outsourced and volume of outsourcing, logistics budget
allocated to outsourcing, impact of outsourcing on cost, service level, customer satisfaction and employees,
experience on collaboration with LSPs, expectations and future plans. All these surveys indicate growing
needs of outsourcing, higher allocation of logistics budgets to outsourcing, and longer and deeper
collaboration with LSPs. Long association with a service provider proves to be beneficial for both the user
and the service provider. Building and sustaining a successful logistical alliance requires, besides mutual
trust and transparency, a cultural synergy between two different organizations, a clear internal assessment
of logistics cost components and outsourcing only those services that are really needed, not giving up
complete control of the supply chain, an unambiguous contract minutely detailing the roles of and
expectations from the service provider, development of key performance indicators and incorporation of
the same in the contract, close monitoring of the performance of the service provider, and constant dialogue
and communication with the service provider. As far as the impacts of outsourcing are concerned, most of
the firms have experienced either positive or very positive impacts on cost, service delivery and customer
satisfaction level. The only negative impact of outsourcing that was reported was employee dissatisfaction,
which may be caused due to the shift of responsibility, and hence authority, and probable downsizing of
logistical workforce. The expectations of user firms range from offering more value-added services to
globalization of operations by LSPs so that they could avail of services of a limited number of LSPs for all
their logistical needs. For example, Exel Logistics has a contract with Motorola to manage large parts of its
supply chain in Amsterdam, Chicago, Hong Kong and Singapore. Unilever is looking to Exel to provide
warehousing services in Brazil, Mexico, the UK and the US (Bot and Neumann, 2003). IBM has
outsourced the management of its service parts supply chains in North America and Europe to UPS while
its finished goods supply chains are managed by Menlo Worldwide and Geodis in North America and
Europe, respectively (Bowman, 2006).

While literature from the perspectives of logistics users is abundant, the same from the perspectives of
LSPs is scarce. In their survey, Lieb and Butner (2007) asked 22 top North American LSPs to respond to
issues such as mergers and acquisitions, managing relationships, differentiating the company in the
marketplace, adoption of new technologies, industry dynamics, and future prospects of the industry and the
company. Respondents perceived more merger and acquisition activities, continued globalization and
broadening of service offerings, more collaborative relationships, evolution of niche players, gradual
adoption of new technologies such as RFID (Radio Frequency Identification), continued problems of high-
cost, low-margin and lack of management talent, and steady growth of revenue and profitability of both the
industry and the company. The logistics industry is growing very fast in south-east Asian countries due to a
shift of manufacturing base and increasing volumes of exports from these countries. A survey of Indian
LSPs (Mitra, 2006) found the logistics industry in India very promising, currently growing over 20% per
year. Though the estimated size of the industry is still miniscule (~ USD 1-1.5 billion) and the industry is
still concentrated (20% of the respondents accounted for nearly 90% of the total revenues), there is
immense potential for growth as the Indian GDP is growing at over 9% for the last couple of years
compared to the world GDP growth rate of 3% and a lot of consolidation activities are taking place as more
and more multi-national LSPs are expanding their presence in India through direct investments,
acquisitions and alliances. The main roadblocks identified by the respondents to the growth of the industry
in India were the lack of trust and awareness among Indian shippers and poor physical and communications
infrastructure. However, it was also pointed out that Indian shippers are gradually realizing the benefits of
outsourcing and the government is taking steps in the right direction for development of infrastructure.
Reviews of extant literature on the logistics industry are available in Maloni and Carter (2006) and
Selviaridis and Spring (2007).

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The organization of the paper is as follows. The next section gives an overview of the global logistics
industry, an estimate of its size, and current status and dynamics of the industry. The subsequent section
gives an overview of the Indian logistics industry, its competitive dynamics, and problems and prospects of
the industry. Finally, managerial implications are presented in the concluding section.

Global Logistics Industry

This section gives an overview of the size of the global logistics industry and its current status and
prevailing dynamics.

Size of the global logistics industry

Currently the annual logistics cost of the world is about USD 3.5 trillion. For any country, the annual
logistics cost varies between 9% and 20% of the GDP, the figure for the US being about 9%. US-based
Armstrong & Associates, Inc. tracks the issues and trends in the world logistics market and in the US
logistics market, in particular, in their annual surveys of top 25 global LSPs. According to the firm, the
global logistics market sizes in 1992, 1996 and 2000 were USD 10 billion, USD 25 billion and USD 56
billion, respectively. In 2003 and 2004, the corresponding figures were USD270 billion and USD 333
billion, registering high growth rates. Though most of the large LSPs are headquartered in Europe, the US
logistics market is the largest in the world capturing one-third of the world logistics market. In 2003, it was
about USD 80 billion. In 2004, it grew to USD 89 billion, and in 2005, it registered an impressive growth
rate of 16% to cross the USD 100 billion mark for the first time and reach USD 103.7 billion (Foster and
Armstrong, 2004, 2005, 2006). However, considering the fact that the logistics market in the US is about
10% of its annual logistics cost (Foster and Armstrong, 2006), there is still immense potential for growth of
3PL in the US in particular, and in the world in general.

Current status and dynamics of the industry

The extant literature on the logistics industry points to a number of issues that service providers have to
address, such as pricing pressures, high costs of operations and low returns on investments, hiring and
retaining talent, pressure from clients to broaden the range of service offerings and internationalize
operations, demand for customized solutions and more value-added services, besides infrastructural
bottlenecks and government regulations. Service providers complain that clients expect them to have the
latest software, databases and ERP (Enterprise Resource Planning) packages, and invest in new
technologies such as RFID and satellite-based real-time tracking systems. Clients perceive that these
investments are part of the basic service package, and often do not want to match the same with increased
payments for these additional services. Pressure from clients to broaden the range of service offerings and
internationalize operations, has forced service providers to look for suitable alliances, mergers and
acquisitions that help fill the gaps in service offerings, and industry verticals and geographic areas served,
achieve economies of scale and enhance service providers’ capability to support international operations.
Currently, the world logistics market is going through a consolidation phase. Tibbett & Britten Group of
North America was acquired by Exel Logistics in August, 2004, and Deutsche Post World Net, parent
company of DHL, took over Exel in December, 2005. Bax Global was taken over by Deutsche Bahn,
parent company of Schenker, in November, 2005 while A. P. Möl ler acquired P&O Nedlloyd in February,
2006, and TNT Logistics was sold to Apollo Management L. P. in November, 2006. However, mergers and
acquisitions have their own set of problems in terms of integration of two diverse business units. Carbone
and Stone (2005) tracked the evolution of 20 leading European LSPs between 1998 and 2004 in terms of
their approach to mergers, acquisitions and alliances, and found that although growth led to more coverage,
integration of two different cultures was one of the most difficult challenges faced by these firms in the
consolidation process. Recent trends in the logistics industry indicate that to be successful, service
providers have to differentiate themselves from their competitors in terms of offering value-added services,
focus on key customer accounts that have the potential to generate high profitability for a long term, enter
into suitable alliances to complement the range of services offered and geographic areas served, and sell
logistics services to clients’ suppliers and customers, thus leading to complete supply chain integration.

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 Indian Logistics Industry

This section gives an overview of the size of the Indian logistics industry, its competitive dynamics and
future prospects.

Size of the Indian logistics industry

The annual logistics cost in India is estimated to be 14% of the GDP, which translates into USD 140 billion
assuming the GDP of India to be slightly over USD 1 trillion. Out of this USD 140 billion logistics cost,
almost 99% is accounted for by the unorganized sector (such as owners of less than 5 trucks, affiliated to a
broker or a transport company, small warehouse operators, customs brokers, freight forwarders, etc.), and
slightly more than 1%, i.e. approximately USD 1.5 billion, is contributed by the organized sector. So, one
can see that the logistics industry in India is in a nascent stage.

However, the industry is growing at a fast pace and if India can bring down its logistics cost from 14% to
9% of the GDP (level in the US), savings to the tune of USD 50 billion will be realized at the current GDP
level, making Indian goods more competitive in the global market. Moreover, growth in the logistics sector
would imply improved service delivery and customer satisfaction leading to growth of export of Indian
goods and potential for creation of job opportunities.

Competitive dynamics and other issues

The following problems existing in the Indian logistics industry make it unattractive for investments and
also create entry barriers.

¾ Logistics is a high-cost, low-margin business. The problem of organized players is compounded

by unfair competition with unorganized players, who can get away without paying taxes and following
operating norms stipulated in the Motor Vehicles Act such as quality of drivers and vehicles, volume and
weight restrictions, etc.

¾ Economies of scale are absent in the Indian logistics industry. Even the organized sector that
contributes slightly more than 1% of the logistics cost, is highly fragmented. Existence of the differential
sales tax structure also brought in diseconomies of scale. Though VAT (Value Added Tax) has been
implemented since April 1, 2005, failure in implementation of a uniform VAT structure across different
states has let the problem persist even today.

¾ Apart from the non-uniform tax structure, Indian LSPs have to pay numerous other taxes, octrois,
and face multiple check posts and police harassment. High costs of operation and delays involved in
compliance with varying documentation requirements of different states make the business unattractive. On
an average, a vehicle on Indian roads loses 24-48 hours in complying with paperwork and formalities at
different check posts en route to a destination. Fuel worth USD 2.5 billion is spent on waiting at check
posts annually. A vehicle that costs USD 30,000 pays USD 7,500 per annum in the form of various taxes,
which include the excise duty on fuel. This is why freight cost is a major component of the cost of a
 product in India.

¾ There is lack of trust and awareness among Indian shippers with regard to outsourcing logistics.
The volume of outsourcing by Indian shippers is presently very low (~ 10%) compared to the same for the
developed countries (> 50%, sometimes as high as 80%). The unwillingness to outsource logistics on part
of Indian shippers may be attributed to skepticism about the possible benefits, perceived risk, and losing
control, of sensitive organizational information, and vested interests in keeping logistics activities in-house.

¾ Indian shippers expect LSPs to own quality assets, provide more value-added services and act as
an integrated service provider, and institute world-class information systems for more visibility

and real-time tracking of shipments. However, they are unwilling to match the same with

5
 increased billings; even pay little attention to timely payments that leave LSPs short of adequate
working capital.

• Indian freight forwarders face stiff competition from multi-national freight forwarders for
international freight movement. MNCs, because of their size and operations in many countries, are
able to offer low freight rates and extend credit for long periods. Indian freight forwarders, on the
other hand, because of their smaller size and lack of access to cheap capital, are not able to match
the same. Moreover, clients of MNCs often want to deal with a single service provider and
especially for FOB (Free on Board) shipments specify the freight forwarders, which most of the
time happen to be the multi-national freight forwarders. This is sort of a non-tariff barrier imposed
on Indian freight forwarders.

p Poor physical and communications infrastructure is another deterrent to attracting investments in

the logistics sector. Road transportation accounts for more than 60% of inland transportation of
goods, and highways that constitute 1.4% of the total road network, carry 40% of the freight
movement by roadways. Slow movement of cargo due to bad road conditions, multiple check
posts and documentation requirements, congestion at seaports due to inadequate infrastructure,
bureaucracy, red-tapeism and delay in government clearances, coupled with unreliable power
supply and slow banking transactions, make it difficult for exporters to meet the deadlines for their
international customers. To expedite shipments, they have to book as airfreight, rather than
seafreight, which adds to the costs of shipments making them uncompetitive in international
markets. Moreover, many large shipping liners avoid Indian ports for long turnaround times due to
delays in loading/unloading and hence Indian exporters have to resort to transshipments at ports
such as Singapore, Dubai and Colombo, which adds to the costs of shipments and also delays
delivery.

q Low penetration of IT and lack of proper communications infrastructure also result in delays, and
lack of visibility and real-time tracking ability. Unavailability and absence of a seamless flow of

information among the constituents of LSPs creates a lot of uncertainty, unnecessary paperwork
and delays, and lack of transparency in terms of cost structures and service delivery. For example,
a shipper has to pay a higher freight rate if it cannot ensure return load. At present, there is no real-
time process by which a shipper may know about the availability of trucks and going rates at the
destination market. Therefore, it has to pay more. Had the market information been available to
both the shipper and the service provider, the service provider’s cost structure would have been
transparent to the shipper and it would have ended paying the actual market rate. Another example
would be that LTL (Less than Truckload) shipments cost more than FTL (Full Truckload)
shipments. Now, when a shipper books a LTL shipment, it has no idea about the status of its
shipment after it leaves the warehouse at the origin and before it reaches the warehouse at the
destination. The service provider may still convert this LTL shipment into a FTL shipment at its
own warehouse before delivering at the destination. So, the shipper ends up paying LTL rates for a
FTL shipment. Had there been visibility during delivery, this problem would not have occurred.

p Since most of the LSPs are of relatively small size, they cannot provide the entire range of
services. However, shippers would like service providers to offer more value-added services and a
single-stop solution to all their logistical problems. The inability of service providers to go beyond
basic services and provide value-added services such as small repair work, kitting/dekitting,
packaging/labeling, order processing, distribution, customer support, etc. has not been able to
motivate shippers to go for outsourcing in a big way.
q Service tax levied on logistics service fees (currently 12.36% with educational cess) may make
outsourcing costly and outweigh the possible benefits.

r There is lack of skilled and knowledgeable manpower in the logistics sector. Management
graduates do not consider logistics as a prime job. To improve the status of the industry, service
providers have to move beyond the level of brokers and truckers to attract and retain talent.

6
Future prospects

Despite problems, The Indian logistics industry is growing at 20% vis-à-vis the average world logistics
industry growth of 10%. Since the organized sector accounts for merely 1% of the annual logistics cost,
there is immense potential for growth of the sector. The major opportunities are highlighted below.

p Many large Indian corporates such as Tata and Reliance Industries have been attracted by the
potential of this sector and have established logistics divisions. They started providing in-house
logistics services, and soon sensing the growth of the market, have started providing services to
other corporates as well.

q Large express cargo and courier companies such as Transport Corporation of India (TCI) and Blue
Dart have also started logistics operations. These companies enjoy the advantage of already
having a large asset base and an all-India distribution network. Some large distributors have also
forayed into the logistics business for their clients.

r Since logistics service can be provided without assets, there is growing interest among
entrepreneurs to venture into this business.

s Indian shippers are gradually becoming more aware of the benefits of logistics outsourcing. They
are now realizing that customer service and delivery performance are equally important as cost to
remain competitive in this global economy.

t The Indian economy is growing at over 9% for the last couple of years (compared to the world
GDP growth rate of 3%), which implies more outputs and more demand for specialized logistics
services.

u The Indian government has focused on infrastructure development. Examples include the golden
quadrilateral project, east-west and north-south corridors (connecting four major metros), Free
Trade and Warehousing Zones (FTWZ) in line with Special Economic Zones (SEZ) with 100%
Foreign Direct Investment (FDI) limit and public-private partnerships (PPP) in infrastructure
development. It is expected that infrastructure development would boost investments in the
logistics sector.

v In India, 100% FDI is allowed in logistics whereas in China, until recently, foreign investment
was not allowed in domestic logistics. Almost all large global logistics companies have their
presence in India, mainly involved in freight forwarding. For domestic transportation and
warehousing, they have tie-ups with Indian companies. As the Indian logistics scenario looks
promising, these MNCs are expected to play a bigger role, probably forming wholly-owned
subsidiaries or taking the acquisition route. The latter may be the preferred route of investment
since the target company is readily acquired with its asset base and distribution network, and the
need for building everything from scratch can thus be avoided. The benefits for the acquired
company include the patronage of an MNC and access to the MNC’s global network. As an
example, DHL Danzas, the biggest logistics company in the world, has taken over Blue Dart.

Managerial Implications
Studies on logistics indicate that in this highly competitive and high-cost, low-margin business, logistics
managers have to not only focus on differentiating the services rendered by their companies, but market the
differentiating factors of their services appropriately to the clients. They also need to make their cost
structures transparent, and convince clients to foot the bill towards investments in quality assets and new
technologies such as RFID and GPS (Global Positioning System) leading to improved, and differentiated,
delivery of service. Since clients usually prefer a single-point solution to all their logistical problems,
managers need to broaden the range of their service offerings, internationalize operations and cover as

7
many industry verticals as possible. They may focus on key customer accounts gradually moving away
from accounts generating low, even negative, profitability. However, small-to-medium-sized companies
that seem to have high growth potential should not be ignored in the process. In order to become a single
point of contact for clients, logistics companies may pursue acquisitions or alliances, which, however, pose
the challenge of integration of diverse cultures. Attracting, recruiting, training, motivating and retaining
management talent are also a great challenge that logistics managers need to take on (Lieb and Butner,
2007).

A survey of North American LSPs (Bagchi and Mitra, 2006) found that logistics managers perceived
internationalization of operations, industry focus or specialization, investment in information systems,
availability of skilled logistics professionals, integration of supply chains, customer focus and breadth of
service offerings as the most important factors for success as a LSP. However, the survey identified
significant gaps between expectations and actual achievements of LSPs with respect to internationalization
of operations, skilled logistics professionals and integration of supply chains, which should be seriously
looked into by managers. The survey also established relationships among a set of performance metrics and
key success factors to identify significant predictor and criterion variables. One of the most important
observations was that collaborative relationships with clients and investments in assets are necessary but
not sufficient conditions for success in logistics. The findings of the survey may provide a useful guideline
to logistics managers for allocation of scarce resources.

As far as the Indian logistics industry is concerned, logistics managers of user firms need to realize that,
with supply chains getting more and more complex, outsourcing part or all of their logistical activities to
experienced LSPs will help reduce their overheads, streamline supply chains, reduce costs and improve
service delivery. The organizational interests should be put above vested interests, if any. They need to
realize that organized LSPs are professionals, who will maintain confidentiality of sensitive client
information.

The Indian government should also focus on developing infrastructure and encourage public-private
partnerships in investments in infrastructure. Highway projects such as golden quadrilateral and east-west,
north-south corridors connecting all four metros are already underway. Private investments in inland
containerized transportation by railroad, which was a monopoly of Container Corporation of India Limited
(CONCOR), a subsidiary of Indian Railways, until recently, have been allowed. 100% FDI is also allowed
in Free Trade and Warehousing Zones (FTWZ) to create necessary trade-related infrastructure to facilitate
import and export of goods and services. The government may create logistics SEZs (Special Economic
Zones) or logistics hubs with concessions in land and tax rates. Incentive schemes may also be extended for
construction of modern automated warehouses and cold chains. Access to cheap capital should be made
available to LSPs for investments in infrastructure, enabling them to extend longer credit periods to their
clients and supplementing their working capital. The government may create a uniform tax structure and do
away with multiple check points and documentation requirements, which would lead to speedier delivery
of cargo. To generate awareness, the government may organize seminars, workshops, exhibitions and
meetings to bring in representatives of logistics users, service providers and government under one roof,
and also sponsor courses in leading Indian institutes to attract talent. Growth of the logistics industry in
India will not only contribute to the GDP, but also generate employment (Mitra, 2006).
 Abstract

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). Changing
government policies on taxation and regulation of service providers are going
to play an important role in this process. Coordination across various
government agencies requires approval from multiple ministries and is a road
block for multi modal transport in India. At the firm level, the logistics focus is
moving towards reducing cycle times in order to add value to their customers.
Consequently, better tools and strategies are being sought by firms in order
to enhance their decision making. In this paper, we provide a perspective on
these issues, outline some of the key challenges with the help of secondary
information, and describe some interesting initiatives that some firms &
industries are taking to compete through excellence in managing their
logistics.
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1 Introduction

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 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
(Sanyal, 2006a). 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,

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2005). However, the Indian logistics story is one with islands of excellence
though there has been a general improvement on almost all parameters. It is
this aspect that we explore further in this paper. The paper is organized as
follows: the next section gives a brief introduction of some of the peculiarities
of the Indian logistics sector. In section 3 we discuss the determinants of
growth in this industry. In section 4 we provide some interesting initiatives
that point towards a renewal of the sector. The challenges facing the sector
are discussed in the last section.

2 Some Peculiarities of the Indian Supply Chains

The Indian logistics sector has typically been driven by the objective of
reducing transportation costs that were (and often continue to be)
inordinately high due to regional concentration of manufacturing and
geographically diversified distribution activities as well as inefficiencies in
infrastructure and accompanying technology. Freight movement has slowly
been shifting from rail to road with implications on quality of transfer,
timeliness of delivery and consequently costs except for commodities which
over long distances, predominantly, move through the extensive rail network.
More on the infrastructure issues later.

Figure 1 shows the relative value of transportation costs vis-à-vis other

elements of the logistics costs in India. The transportation industry is
fragmented and largely un-organized – a large number of independent
players with regional or national permits that carry freight, often with small
fleet size of one or two single-axle trucks. This segment carries a large
percent of the national load and almost all of the regional load. This
fragmented segment comprises owners and employees with inadequate skills,
perspectives or abilities to organize or manage their operations effectively.
Low cost has been traditionally achieved by employing low level of
technology, low wages (due to lower education levels), poor maintenance of
equipment, overloading of the truck beyond capacity, and price competition
amongst a large number of service providers in the industry. Often, one finds
transportation cartels that regulate supply of trucks and transport costs.
However, the long run average cost of transport operations across the entire
supply chain may not turn out to be low.

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Figure 1: Elements of Logistics Cost in India

Transportation 40

Warehousing,

Packaging & 26

Losses

Inventory 24

Order Processing

10

& Adim instrative

0 5 10 15 20 25 30 35 40 45

percent contribution

Source: Sanyal (2006a)

Table 1 gives a breakup of the logistics cost across different sectors of the
Indian industry and the changes therein over the last five years. It shows how
the logistics spend is increasing, sometimes dramatically, across various
industrial sectors. Steel, pharmaceuticals, food & agro-business, and auto
have also been the sectors that are growing most rapidly in the national
economy – it is no surprise that their logistics costs have been increasing at a
faster rate. A few observations are in order here. The low change in order
processing & administrative costs in the cement sector could possibly be due
to the use of call centers by various producers for order processing and
dispatch planning. Steel and pharmaceutical sectors have seen maximum
changes in component costs. The distribution practice of pushing goods down
the channel might be responsible for high increase in the inventory and
warehousing costs in the pharmaceutical industry. Investments in new cold
chains and losses might be the causes of high change in the warehousing,
packaging & losses related costs.

Warehousing, has also been typically dominated by small players with small
capacities and poor deployment of handling, stacking and monitoring
technologies. While it has had detrimental effect on almost all sectors, the
food sector has been the one that has suffered the most due to low
investment in cold chains and allied machinery. Erratic power outages have
also meant low dependence on technology and a more manual operation.
Another fact that has affected both the location as well cost of operating a

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1
warehouse has been the “octroi tax .” Firms have been locating warehouses
outside city limits.

Table 1: Distribution of Logistics Costs across Some Sectors (2000-

2005)

Warehousing
Logistics , Order Total
Transport Inventory
Cost packaging & processing & Logistics
Sector ation holding
administrativ
Components loses e cost

(in US $ mn)

2000-01 285.0 171.0 185.3 71.3 712.6

Auto
2005-06 406.5 243.9 264.3 101.6 1016.4

Avg. Change 20.3 12.2 13.2 5.1 50.6

2000-01 50.6 30.4 32.9 12.7 126.5

Cement
2005-06 55.4 33.3 36.0 13.8 138.5

Avg. Change 4.8 2.9 3.1 1.2 12.0

2000-01 331.9 199.1 215.7 83.0 829.6

Consumer
2005-06 398.9 239.3 259.3 99.7 997.3
Durables
Avg. Change 11.2 6.7 7.3 2.8 27.9

2000-01 201.5 120.9 131.0 50.4 503.8

FMCG
2005-06 280.7 168.4 182.5 70.2 701.8

Avg. Change 13.2 7.9 8.6 3.3 33.0

2000-01 398.7 239.3 259.2 99.7 996.8

Food
2005-06 524.5 314.7 340.9 131.1 1311.2

Avg. Change 21.0 12.6 13.6 5.2 52.4

2000-01 337.3 202.4 219.2 84.3 843.2

Garment
 2005-06 454.4 272.6 295.3 113.6 1135.9

Avg. Change 19.5 11.7 12.7 4.9 48.8

2000-01 174.0 104.4 113.1 43.5 434.9

Pharmaceuti
cal 2005-06 310.0 186.0 201.5 77.5 775.0

Avg. Change 22.7 13.6 14.7 5.7 56.7

2000-01 438.3 263.0 284.9 109.6 1095.7

Steel
2005-06 693.6 416.1 450.8 173.4 1734.0

Avg. Change 42.5 25.5 27.7 10.6 106.4

Source: IAEIS

They delay moving goods into retail network as late as possible. It has also
led to the development of a unholy business-government nexus to avoid the
tax and extract rents. Use of technology is quite limited – both IT and
engineering equipments in order to increase productivity and service. An in-
appropriate evaluation of the diverse benefits of technology has led to higher
usage of manual labour across the logistics industry whether

1
An entry tax on goods coming into a city. The tax is a major source of
revenue for city municipal corporations.

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it is in the distribution activities or within plants. Many firms try to compete

through the factor advantage of low wages which have necessitated hiring
low or no skill personnel thereby sacrificing productivity related gains in the
long run.

Understanding the linkage between inventory and transport planning is a key

to reducing operational cost of distribution. Chandra and Sastry (2004)
identify transport & dispatch planning as an area of concern in a survey of
manufacturing firms in India. Ninety eight per cent of sample firms in that
survey have a contract with trucking companies for making dispatches and
only 11 per cent own their own fleet of trucks. While 36 per cent of these
firms use third party logistics (3PL) service providers for making dispatches,
about 30 per cent use 3PL service providers for procuring their material from
their suppliers. Somehow, transport planning has remained a unglamorous
area within Operations despite the fact that about 10 per cent of the cost of
sales comes through physical distribution (Sanjeevi, 2003). Transport
planning (e.g., optimal dispatch quantities & frequency of dispatch, vehicle
routing, loading pattern in the trucks etc.) does not appear to have received
the required attention. For example, in the same survey, only 21 per cent of
sample firms report the use of some software for scheduling dispatches.

It is worth understanding the structure of the Indian supply chains, in

aggregate, to get a better appreciation of many of the issues raised earlier. In
Figure 2 Chandra and Sastry (2004) present the structure of the supply chain
of a sample of firms. It can be seen that about 4 per cent of firms have less
than five suppliers, about 85 per cent of firms have less than five plants,
about 14 per cent of firms have less than five regional distributors, and about
9 per cent of firms have less than five retailers. A similar statistics is obtained
for other ranges of suppliers, plants, distributors, and retailers. What is worth
noting is that 63 per cent of firms have more than 100 suppliers, about 39 per
cent of firms have more than hundred distributors, and 77 per cent of firms
have more than hundred retailers. In addition, about 17 per cent of firms
claim to have more than 500 suppliers. The same for distributors and retailers
is 22 and 54 per cent respectively. This is perhaps where difficulties in
managing logistics in India lie - larger the number of suppliers or distributors,
higher is the cost of coordination.

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Figure 2 : Structure of the Supply Chain of Sample Firms

90

80

70

60
Firms

50
of

40
Percent

30

20

10

0
5

0
-

10

00

00

00
10

50
0

0
than
-

10
5

5
0

-
10

15

25

10

00
e
-
50

r
00

00
10

o10
50

m
10

20

500

Range

Suppliers Plants Approved Retailers Regional Distributors

Source: Chandra and Sastry

(2004)
When we look at the spatial distribution of both plants and suppliers, the
above statement becomes even stronger. Of the sample firms that operate
more than one plant, 48 per cent of these plants are located more than 100
kilometers away from each other, 33 per cent of these plants are located
more than 500 kilometers away from each other and 18 per cent of these
plants are located more than 1000 kilometers from each other. Similarly, on
an average, only 4 per cent of suppliers are located within 5 kilometers of the
manufacturing plant, about 13 per cent are located within 5-25 kilometers of
the plant, 16 per cent are located within 25-100 kilometers of the plant and
about 67 per cent of suppliers have facilities that are more than 100
kilometers away from the plants. Location policies of the past may have
forced some firms to locate plants away from each other. However, this may
be coming to haunt today as the cost of coordination increases and the ability
to provide quick response to customer requirements might reduce. This
problem gets exacerbated with suppliers. Manufacturers have to either
develop suppliers separately for each location (thereby increasing the number
and affecting consistency in quality, price & delivery times) else material has
to travel longer distances if there is a common supplier to all plants.

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The logistics challenge in such an environment is immense – build the

infrastructure, manage the requirements of a changing structure of various
sectoral supply chain, change industrial policies to facilitate efficient
production and movement of goods and services, deploy effective managerial
practices and technology to enhance the competitiveness through better
management of logistics networks, and develop new models for new sectors
especially in the service sectors as well as traditional areas like agri-business
etc. It must be mentioned that the logistics industry in India is transforming
itself very interestingly despite its peculiarities by developing innovative
business models and by chipping away at the such structural and policy
based rigidities. In a later section, we discuss some of these innovative
initiatives that are leading the renewal of the logistics industry in India.

3 The Changing Logistics Infrastructure

With rising consumer demand and the resulting growth in global trade, the
role of infrastructure support in terms of rails, roads, ports & warehouses hold
the key to the success of the economy. In this section we provide a quick
overview of the status of the logistics infrastructure in India and the current
initiatives, both private and public, in that area.

Goods are transported predominantly by road and rail in India. Whereas road
transport is controlled by private players, rail transport is handled by the
central government. With the second largest network in the world, road
contributes to 65 per cent of the freight transport (Rastogi, 2006). Road is
preferred because of its cost effectiveness and flexibility. Rail, on the other
hand, is preferred because of containerization facility and ease in transporting
ship-containers and wooden crates. Sea is another complementary mode of
transport. Ninety five per cent of India’s foreign trade happens through sea
(Deccan Herald, 2006). India has 12 major ports, six each on the West and
East coasts and 185 minor ports. Table 2 maps the various modes on different
performance indicators, clearly indicating the vitality and importance of road
transport in Indian economy. There is also evidence of an, across the board,
increase in freight traffic for all modes indicating an increased logistics
activity. For instance, the per cent change in road, rail, air and sea cargo
traffic has increased, between 2001 and 2005, from 5 to 14 per cent, 4 to 7.5
per cent, 6 to 20 per cent and 3.5 to 11 per cent respectively (CMIE Database,
2006).

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Table 2: Comparison Chart for Various modes

Rail Road Sea

Number 214760 3487538* 806

(wagons, trucks,
ships)

Freight
Capacity(mn 10.66 5.12* 7.9

ton)

Route Length (mn

km) 0.11 3.34 12

/Number of major

ports

Freight Revenue 7.00 38.64 4304

(US $ bn)

iron ore, coal,

coal, steel, automobile, petroleum

petroleum, electronic (and industrial and

Major Products primary items, consumer products on

garments
metals etc. the outbound export)

Source: IAEIS, 2005-2006, Financial

Express, 2006a *This figure is for 2002-03

1 US$ = Rs 44

In keeping with the increasing demand for road transportation, the National
Highway Authority of Indian (NHAI) has been strengthening and widening
national highways in multiple phases. As part of the National Highways
Development Project, the work on the development of golden quadrilateral
(connecting Delhi, Mumbai, Chennai and Kolkata) and the North-South and
East-West links were started in 1998. It will build 13000 km expressways that
would connect the nation (Surabhi, 2006). NHAI is investing about $650mn
towards the development of an Intelligent Transportation System (ITS) which
will make transport services on the highways (like reducing congestion,
advance signaling, medical assistance, accident management, etc.) efficient
and automating many processes like toll collection etc. (Sanjai, 2007).

Because of the growing opportunity and potential for high revenue, the
Ministry of Railways has been taking measures to expand the rail connectivity
and recapture the market share of freight business. By focusing on improving
wagon utilization, the Railways have managed to reduce the freight cost from
2
61 paise per net tonne km (ntkm) in 2001 to 56 paise per ntkm in 2005
(Rastogi, 2006). At present, goods train run on same

2
100 paise = 1 Rupee

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railway tracks as passenger trains at an average speed of around 25 kmph

(Gill, 2006). With the proposed dedicated west and east freight corridors, the
goods trains are expected to run at 100kmph. The West and East rail corridor
of 1469-km and 1232-km will be built with an investment of $2.60 bn and
$2.40 bn respectively and will be equipped with the latest centralized traffic
control systems (Acharya, 2006a). Indian Railways has also decided to
collaborate with bulk users of freight transport to build the rail network in a
Public Private Partnership (PPP) mode. The first project on this line comprises
nine public and private sector companies that are building a 82-km rail line
between Haridarpur and Paradip at a cost of $ 120mn (Telegraph, 2006).
Recently several steel companies have also shown interest in linking iron and
coal mines in Orissa with a 98-km rail line (Business Standard, 2006).

Multi-modal transport in India was a monopoly of the Container Corporation of

India till 2005. With licenses being given to 13 new private players (Acharya,
2006b), rail trade should improve considerably. In order to encourage trade
by small scale industries, Indian Railways has started a “road-railer”system
where container vehicles are capable of running both on highways hauled by
trucks and on rail (Guha and Sinha, 2006). In 1998-99, the Konkan Railway
(one of the railway zones in South-Western India) pioneered the 'roll-on, roll-
off' ('RO-RO') concept between Mumbai (Kolad) and Goa (Verna). Privately
owned trucks are loaded with their goods which are driven on to a rake of flat
cars and are carried (trucks and their cargo) to the destination.

In 2005-06, the ports handled 456.20 million tonnes of cargo traffic. This is
expected to increase to 700 million tonnes by 2011-12. In keeping pace with
the growing demand, the government plans to increase port capacities to
around 1 billion tonnes per annum in the next six years (Raja, 2006). Under
the National Maritime Development Programme (NMDP), the government is
encouraging public-private partnership to build and maintain ports. This
scheme will cover 276 port related projects at an investment of $12.40 bn
(Raja, 2006). With rising congestion levels at major ports and with high
average turnaround time, the government has decided to develop minor ports
in seven states to ease the traffic of major ports (Financial Express, 20006b).
Tables 3 the operational performance of various ports in India – while there is
an improvement in performance, the pace is slow. The estimated cost of this
development is expected to be around $350 mn. Further, private sector is
likely to invest $ 7.67 billion over the next six years.

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Table 3: Average Turnaround Time At Ports (in Days)

2000- 2001- 2002- 2003- 2004- 2005-

Port 01 02 03 04 05 06 CAGR

Chennai 6.40 5.80 5.30 3.70 4.60 3.80 (9.90)

Cochin 3.23 3.10 2.37 2.19 2.22 2.33 (6.32)

Haldia 5.21 3.96 4.01 3.02 2.87 3.00 (10.45)

Jawaharlal
Nehru 1.72 2.48 2.34 2.28 2.04 1.84 1.36

Kandla 6.15 4.72 6.55 5.94 5.06 4.62 (5.56)

Kolkata 6.59 5.50 4.71 4.47 4.29 4.17 (8.75)

Marmugao 4.30 4.25 2.04 3.86 4.47 4.35 0.23

Mumbai 5.60 5.20 5.47 5.06 4.10 4.21 (5.55)

New
Mangalore 3.80 2.89 2.73 1.90 2.35 2.96 (4.87)

Paradip 3.89 4.16 3.99 3.37 3.42 3.41 (2.60)

Tuticorin 6.39 4.10 4.11 3.59 2.59 2.66 (16.08)

Vishakhapatna
m 4.75 3.71 3.51 3.72 3.33 3.20 (7.60)

Average 4.84 4.16 3.93 3.59 3.45 3.38 (6.92)

Source: IAEIS

Currently, fifteen private sector projects are operational at various major

ports and four more projects are under implementation (Raja, 2006). One of
them aims to build the deepest port in the world at an investment of $ 1bn
(Financial Express, 2006c). This project is handled by a three-firm Chinese
consortium with a Mumbai-based partner, Zoom Developers. Interestingly,
firms like Ambuja Cement have been using barges for transport of clinkers
from their factories to crushing and packaging plants all over the coast,
thereby, reducing transport costs considerably. It can be seen that there is a
fury of activity in enhancing the infrastructure capacities in the country.
4 Determinants of Logistics Growth in India

The Indian logistics business is valued at US$ 14bn and has been growing at a
CAGR of 7-8 per cent. As mentioned earlier, the logistics cost represents 13-
14 per cent of the country’s GDP. The market is fragmented with thousands of
players offering partial services in logistics; it is estimated that there are
about 400 firms capable of providing some level of integrated service
(Mahalaksmi, 2006). The economy is expected to grow around ten per cent
over the next ten years and sectors like chemicals, petrochemicals (especially
distribution), pharmaceuticals, metals and metal processing, FMCG, textile,
retail and automobile are projected to grow the fastest. New business models
are emerging as new firms, both domestic and foreign, enter the market. As a
result of the ensuing competition, linkages with global supply chains and
domestic market growth

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promise to change the face of logistics industry beyond recognition. In this

section, we discuss how these are going to determine the growth of the
sector.

The scale of operations in manufacturing is changing and so are their markets

and sourcing geographies. Growth in manufacturing in India has happened
across clusters that are located in different parts of the country, e.g.,
Ludhiana, NCR, Baddi and Dehradun in North, Rajkot, Jamnagar, Pune and
Mumbai in West (along with Ankleshwar, Vapi, Aurangabad, and Kolhapur and
most recently Kutch), and Coimbatore, Vishkahpatnam, Bangalore, Hosur,
Chennai, Pudduchery and Sriperumbudur in the South. Assembly plants at
these locations are being fed with raw materials and intermediate products
from all over the country and abroad (as well as these locations). Moreover,
distribution networks with emerging hubs in Indore and Nagpur (i.e., Central
India) supply all over the country and abroad. This is going to increase the
nature and extent of movement of goods and services across the country.
This has been accompanied by the expansion of domestic production capacity
(e.g., ORPAT in Morbi has added capacity to produce 40,000 units of quartz
clocks and time pieces at a single location) as well as a big MNC entry into the
Indian manufacturing scene (e.g., NOKIA’s new factory at Sriperumbudur
produces 1 million mobile phones per month). As the volume of production
grows, so will the extent of movement of goods either to the ports for export
or to the rest of the country. Some of the large players to enter (or expand
significantly) the Indian market recently have been Reliance Retail, Big
Bazaar Hypermart, Pantaloon and RPG in Retail; Nokia, LG, Samsung,
Motorola, Sony, Blue Star in Consumer Electronics; Bajaj, Hero Honda, Maruti,
Honda, Toyota, Audi, Volkswagen, Renault, Volvo in the Automotive sectors;
Holcim in Cement; etc. It can be expected that their operations will drive the
growth of logistics industry.

The liberalizing Indian economy is experiencing entry of large domestic and

global firms in new businesses as well as enlargement of distribution network
of many regional Indian firms. The announcement of large retail projects by
Reliance and Bharti (in collaboration with Wal-Mart) will bring new technology,
add additional warehouse capacity and will require fast and reliable
movement of goods across the country. Reliance is thinking of establishing
large warehouses in Thailand to take advantage of low cost sourcing from
South-East Asia once the Free Trade Agreement with Thailand (as well as
ASEAN) gets finalized. Similarly, regional food & grocery retail leaders like

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Subhiksha who are present very extensively in the South Indian market are
now entering the rest of the country with more than 600 new retail stores in
2007. Their logistics strategy and needs are transforming very significantly
with this nationwide expansion. New retail chains are entering the non-metro
towns and non-State capitals. It may be mentioned that the growth of the
courier industry post-liberalization has helped change the parameters of
service evaluation in the industry from cost alone to cost, time, and reliability.
This sector has also seen a number alliances between regional and local
players especially in the small package (less than 500 grams) market thereby
creating networks of small players who are not only cost effective but also
more flexible than the large national players. This segment of the industry
has taken advantage of the large manpower and is gradually moving away
from “Angadiyas” or manual inter-city couriers to a more organized network
that shares transport infrastructure (and even consolidates sub-packages
from various small couriers in a single large courier bag to be transported by
air cargo or road transport rather than these sub-packages being carried by
several manual couriers on the train; the courier firms are gaining on service
and are sharing fixed costs).

The entry of large third party logistics (3PL) carriers like Federal Express and
DHL and the expansion of domestic networks of Indian firms like Gati and
Shreyas Shipping is also transforming the nature of services and the business
practices across the sector. Table 4 gives an idea of the investment plans
announced by the various firms for the coming financial year and gives a
sense of their increasing activity. Another trend driving growth in this sector
has been the consolidation amongst the logistics player. Mergers &
Acquisitions amongst Indian and MNC logistics firms is starting to increase the
reach of MNC 3PLs in the domestic

Table 4: Investment Plans of Major 3PL Service Providers

 Investme
nt Details/

Firms Plans (2007-08)

(in US $ mn)

DHL 260

TNT 115

Gati 200

*Shreyas Shipping and

350
Logistics

Source: Baxi (2006), Sanjai (2006a)

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market while consolidating the business (e.g., DHL acquired Blue Dart, TNT
acquired Sppedage Express Cargo Service, Fedex bought over Pafex etc.).
Consolidation is expected to be beneficial to both the service providers as
well as the consumers. Initially MNC 3PL firms were providing only custom
clearance and freight forwarding facility to their international clients. With the
logistics market growing we should see a shift in this trend. The complexity of
managing the supply chain in the pre-consolidation era is illustrated through
the following scenario at Nokia (Figure 3) . Logistics activity for Nokia’s India
Hub was maintained by a large number of

Figure 3: Typical Logistics Supply Chain of Nokia

Gati, Blue Dart

UPS
DHL,
Panalpina
Domestic Outbound
Inbound Warehouse in India
logistics logistics

Nokia Hub in

Sriperumbudur
Export Market
International Outbound

logistics

DHL

Source: Mishra et al. (2006

service providers. Coordination and handover was a problem at times. With

DHL acquiring Blue Dart, it is now able to provide seamless end-to-end
integrated supply chain solutions. Downstream distribution channels have
also seen some consolidation. Manufacturing firms, particularly, in the FMCG
sector have started to reduce the number of wholesalers (and at times,
distributors) so as to increase the reach and consequently the returns to each
wholesaler. This also induces them to invest in new productivity enhancing
technology and effective managerial practices. Technology in the logistics
chain is being upgraded bringing better visibility on customer off-takes
(though an absence of cash registers and the accompanying regulatory
discipline to avoid tax evasion stand in the way of automated data updation).
Introduction of more efficient transport technology and mobile
communication has the potential of changing the logistics practices in the
industry. Increasing competition and the low penetration of IT also implies
that the scope for change is immense and imminent. The agri-business
sector’s supply chain, for example, has changed significantly with increasing
investment in cold-chains across the country. With this, fruits and vegetables
are being transported long distances (often more than 1500 kms) and milk
grid is able to pickup and deliver liquid

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milk from and to remote areas more frequently. Here the role of cooperatives
like AMUL has been exemplary both in increasing the size of the distribution
network and also in re-organizing the supply network very efficiently along
with enormous buildup of social capital – a pre-requisite for growth in
emerging economies (Chandra and Tirupati, 2003). Low penetration of hand
held technologies for order processing and tracking, product tracking and
material handling accessories, as well as IT for improved decision making can
be seen as opportunities for growth. Mobile technologies also hold the
potential for rapidly using information for real time decision making as well as
for coordinating both the inbound and outbound logistics. Indian customers
exhibit strong value and variety seeking behaviour hence developing
capabilities in the process of product and service delivery will induce loyalty
(i.e., process loyalty).

Government policies have been another driver of change in the logistics

industry. The trend towards a higher road cargo traffic as compared to rail is
going to require better logistics control and coordination. The golden
quadrilateral road project and the east & west rail corridors are expected to
change the reactiveness of Indian firms through shorter lead times as well as
lower maintenance costs on the transport equipment. They also have the
potential of reducing the procedural delays on highways by reducing the
number of checks and related stoppages of vehicles. Its impact on perishable
good will be most significant. Thirteen States and three UTs have already
amended the State laws allowing private sector participation in direct
purchases of farm produce from farmers (Ahya, 2006) which is making
procurement more efficient and is bringing better technology as well as
products in the rural production and distribution network (e.g., see ITC
echoupal in the next section). Banks have developed venture capital funds for
logistics players. Small Industries Development Bank of India or SIDBI, for
instance, has invested $ 2.3 mn in the Mumbai based firm Direct Logistics
(Baxi, 2006). The unbundling of the logistics supply chain (both the physical
pickup, storage and movement of goods as well as allied services like
invoicing, order management, freight forwarding, customs clearance, octroi
tax management etc.) will lead to business opportunities and add value to the
customers. An interesting example is that of Reliance Connect Service
Centres that have been established on Indian highways by Reliance industry
along with petrol stations. The Connect Centres provide a place for truckers to
relax (sometimes with overnight stay facilities), send information (including
data) to parent firms on their location, completed transactions etc., receive
material/instructions from the firm, remit money to parent firm,

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etc. It has become a one-stop shop for truckers and their companies to keep
in touch. Similarly, once VAT is introduced, it will simplify the process of
goods servicing and will lead to rationalizing of many operational decisions.

The implication of the emergence of a strong service industry on logistics

performance is not well understood. Perhaps, a new business segment will
emerge that is technology driven and will help coordinate activities across
business channels. For example, there is a need to integrate the flow of
information, goods and services between a medical physician, a diagnostics
center, hospitals & nursing homes, and retail medical outlets – all of which are
un-coordinated independent entities at the moment. This could range from
digital transmission of MRI scans from a diagnostics center to a physician’s
computer to blood collection and delivery from various city centers to nursing
homes/blood banks or directly to dispersed operation theatres. The role of a
coordinating agency becomes, organizationally, valuable in such an
environment. The need is to link physical logistics processes with
communication technologies –building on the strengths of the IT and mobile
communication industries.

5 The Renewal of the Sector: Some Innovative Experiences

There have been several instances of firms undertaking innovative re-design

of their logistics systems or deployment of interesting business models to
enhance the effectiveness of their networks in order to deliver value to their
customers. Sometimes it was done to overcome an inherent disadvantage
that may exist in the supply chain. In this section, we present a few such
experiences both at the firm level and at the industry level, through brief
caselets highlighting their innovative contribution. They also represent the
renewal process that is transforming the logistics sector and the distribution
strategy of firms.

3
GATI
Established at a time (in 1989) when firms in India hardly outsourced their
logistics requirements, Gati has transformed itself from a cargo movement
company to become one of the leading end-to-end logistics and supply chain
solutions provider in India. Continuous innovation and high end technological
investments to improve service

3
Source: www.gati.com, Sharma and Thakur (2006), Prowess (2006), Reddy (2007)

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quality, speed and efficiency can be ascribed as the reasons behind their
success. It is staring to connect with mass retail market in several cities
through 1500 Customer Convenient Centres. It is also the first Indian
company to operate in the far-east market with its own subsidiary in Hong
Kong. On the service front, there have been several firsts in India by Gati – a
money back guarantee on cargo services, cash-on-delivery and a toll-free
number for convenience of customers.

Gati operates one of the largest road networks linking 594 districts out of a
total of 602 districts in India at a turnover of $104mn in 2005-2006. It covers
4
3.2 lakh -km every day with a fleet size of 2000 trucks. Its automated
shipment tracking ability has brought it closer to the customers – for example,
the SMS based tracking system has allowed the customers to continuously
get an update on the status of their consignment. Another feature also
enables customers to get email based conformation of any delivery.

Gati has also transformed the warehouse management practices in India with
its modern system, WMS - a web based warehouse management system that
provides both functionality and flexibility to customers in managing their
warehouse operations. WMS enables Gati and its customers to track inventory
status in real time. Along with its transportation related capabilities, this has
allowed Gati to manage the entire outbound logistics (i.e., warehousing,
transport and dealer/retailer replenishment) of Blue Star for his home air-
conditioning division. Order processing times and shipping errors have
decreased and customer service levels have improved, as a consequence.
Currently, Gati operates with 10 warehouses and plans to setup another 25
over the next three years at an investment of $100mn. It is designing these
new warehouses with mechatronic systems that could lead to a paradigm
shift in warehouse management in India. It has implemented CRM and ERP
systems, using IT to full advantage delivering value to the customers.

5
AMUL
The Kaira District Milk Cooperative Union or better known as AMUL was
established in 1946 in Anand in the western State of Gujarat with an aim to
remove the intermediaries in the milk procurement and distribution process
and thereby increase return to milk farmers. The milk farmers were mostly
marginalized members of the society and most of

4
1 lakh = 100,000

5
www.amul.org; Chandra and Tirupati (2003)

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them barely poured a few litres of milk each day. They, however, depended
on this for their livelihood and any money lost to the middleman or to
uncertainty in the environment meant a threat to their existence. Thus was
born AMUL (which means invaluable in Hindi)! The Story of AMUL is an
extraordinary story of vision, effort and power of networks for the benefit of
the poor. From being a net importer of milk in 1947 when India became
independent, India has now emerged as the largest milk producer in the
world. This remarkable story has been scripted by a network of cooperatives
called AMUL.

The AMUL network is coordinated by the Gujarat Cooperative Milk Marketing

Federation (or GCMMF) which markets milk and milk products that are
produced by 12 Milk Unions (each having several factories) one of which is
AMUL at Anand. The Unions are spread in twelve districts of Gujarat. Each
Union collects milk from farmers through cooperative Village Societies. (This
structure is now replicated in almost all the States of India.) In 2005-2006,
GCMMF had a sales turnover of $860mn through milk and milk products (its
Unions or plants produce 15 categories of milk products with several products
in each category).

The 12 Unions collect about 6.3million litres of milk every day from 2.5 million
farmers through 11,962 Village Societies. (with an annual collection of 2.28
bn litres in 2005-2006). Each village society may have 100 to 1000 member
farmers who pour milk twice a day. Twice daily, about 500 trucks collect milk
from these Village Societies and bring them to either of the five chilling
centers or the processing plants (or Unions). The Unions process the liquid
milk – produce milk of various types for consumption, convert some to powder
as inventory and use both powder and liquid milk for producing milk products.
These products are distributed to consumers through a channel comprising
4000 stockists (or distributors) and 5,00,000 retailers. It is not difficult to
imagine the complexity of coordinating such a network of perishable products
with an explicit social objective, in addition to a commercial one. The network
realized the need for a unique model to deliver value to customers and
through that serve the key objective of setting up of the cooperative – making
a producer out of a poor consumer and helping her get better returns.

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Briefly, we will illustrate the unique mechanisms used by this network to

coordinate the complex supply chain through the intervention of a number of
third party service providers (distributors, retailers, logistics service providers
and IT support groups). The network practices frequent delivery and works
with low inventory levels in the chain, supported by extensive information
network and IT kiosks at the milk pickup locations that provide a variety of
services. Payment to farmers for RM procurement is instantaneous (well,
almost!) – during the same or in the next pouring shift by the Village Society
staff. Milk is carried in cans by trucks (twice daily) or in chilling trucks, once in
a day, to the plants. The routes of the trucks are well established and the
arrival timetables at each Society well known and rarely is there any delay.
This helps provide visibility to every member of the chain and improves the
return on investment in the channel. The network operates with a zero stock
out through improved availability of products and quick delivery. Disciplined
planning to reduce variability at each stage helps in maintaining timeliness in
the channel. GCMMF coordinates the production plan between the twelve
Unions and ensures matching of geographic markets with supplies. TQM and
Hoshin Kanri are the key tools used to plan and implement daily production
and change programmes – these have facilitated a six-sigma performance
throughout the network and has led to a doubling of sales revenue in the last
ten years. Most interestingly, AMUL has the largest market share in every
product category that it competes in – its competitors are both large MNCs
and large & small Indian firms.

AMUL illustrates how good managerial practices can help bridge the gap
between profits for the supplier and low cost, highy quality products for
consumers – all through exceptional coordination of logistics operations
across an extensive network. AMUL operates with one umbrella brand for
products from all its member Unions – a testimony to strong quality and cost
coordination across all Unions and Village Societies. In addition, its has been
singularly responsible for pulling out several million of its members from
poverty, ill health and illiteracy through its business model (called Anand
Pattern) and social programmes. For details on this case study see Chandra
and Tirupati (2003).
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6
The DABBAWALLAHs of MUMBAI

The “dabbawallah’s” or the ‘lunch box delivery people’ of Mumbai pickup and
deliver lunch boxes from homes or restaurants and deliver it to the
customer’s office – all within a specified time frame – and then deliver the
empty box back to the place of pickup. It is an example of how processes can
play an important role in coordinating logistics of an important service
industry in India. The Nutan Mumbai Tiffin Box Charity Trust of Mumbai was
established in 1891 to provide pick-up and delivery of lunch for Britishers
working in Mumbai. Since then it has become the leading lunch delivery
cooperative in the city. It picks-up and delivers 200,000 lunch boxes in a
standard container every day and returns the same to the place of pickup.
The firm has an annual turnover of about $12 mn and employs 5000 people
for pickup and delivery – almost all of them are uneducated. However, there
are less than 10 boxes mis-delivered or un-picked in a month! We discuss,
briefly, the processes that help make this logistics network error-proof and
deliver such an astonishing performance. The operations of the group has
attracted global attention and won them many awards. They represent a
growing group of service providers that exist as an element of the logistics
network, provide niche service and generate value in return for the customer.

The Trust which is organized as a cooperative is operationally organized in

hierarchical teams – pick-up teams, consolidation teams, delivery teams (and
then the reverse logistics for empty boxes with reversing of the functions for
the teams). Typically, each dabba or the lunch box passes through more than
four pair of hands and may be transported up to 60 km each way. Pickup is
done between 7.30am-9.00am, delivery between 12.00 and 1.00pm and
return between 2.00-5.00pm. These represent tight time-windows where a
team of 20-25 members (and supervised by a team leader who also fills in as
a pickup person in case of any absence) pick-up lunch boxes from homes –
about 30 per pick-ups person. The boxes are carried in a specialized fixture
on a bicycle to the nearest train station where the boxes are consolidated by
destination. A consolidation team performs this task and carries the boxes
(which may have been picked by members of different teams but need to
travel to the same destination geography) into the train. Often tiffin or lunch
boxes are un-loaded at intermediate train stations – re-consolidated with
boxes

coming from other cross-docked) and to

locations (i.e, carried on a third train its
6
Lecture of Mr Megde, President of the Nutan Mumbai Tiffin Box Suppliers
Charity Trust at IIM

Ahmedabad, 2003; Chandra

(2004)

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destination station. At the destination station, the lunch boxes coming from
various origins/cross-docking destinations, are once again segregated by the
building where the delivery is made. Finally, a delivery team picks up their
boxes, i.e., boxes that they will deliver to specific owners in specific buildings,
carry them on their bicycles and deliver them in the office of the owner of the
box. Later in the afternoon, the same person picks-up the empty box and
pursues the reverse logistics and the box is ultimately delivered at its point of
origin – either a home or a restaurant. With this as the complexity, what may
be plausible reasons for such low errors?

Contextually, the group members see their role as very important - they are
responsible for delivering food to their customers – socially, it enhances their
commitment to their task and establishes a critical customer-service provider
link. Operationally, the handoff is done successfully through simplification or
breaking down of tasks, codification and repetition. The designed process is
simple and easy to understand for each operator. More important, each
operator has a limited yet definite role. This role is one of pickup,
consolidation & transfer and delivery (and the similarly for reverse logistics).
Each pickup operator does not pickup more than 25-30 boxes as that is the
number of addresses etc. that he can remember accurately which helps in
avoiding mistakes. The lunch box is enclosed in a standard container which
carries a unique code for the destination station, the building where the box is
to be delivered and the floor number in that building where the office of the
customer is located. Each operator recognizes a limited set of codes that are
relevant to him (and does not have to learn the entire coding scheme). And
finally, repetition of the task (i.e., same pickup location, same place for cross
docking, same delivery location etc.) helps in making the task foolproof. Of
course, what helps is the linear geography of Mumbai, the punctuality of
trains, relatively stable demand and strong inter-dependence between
operators. It is an example of how manual logistics systems can be organized
to effectively deliver value to the customer.

7
ITC e-choupal
The e-choupal project was launched by ITC (a large diversified company with
strong FMCG presence) in 2000 in the central Indian State of Madhya Pradesh
(MP) to re-organize the distribution of soyabean in rural markets. Today e-
choupal reaches out to

7
Source: www.echoupal.com, Talk by the eChoupal CEO S Sivakumar at IIMA,
2003, Mitra (2004), MBS CS (2006)

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more than 3.5 million farmers in 31,000 villages through 5,200 internet
enabled kiosks and now covers a variety of agri-business products. The e-
choupal was a unique venture which aimed to eliminate the middlemen from
the agricultural commodity supply chain and reduce information asymmetry
for the farmers. It is an extremely profitable rural distribution system with its
unique design features.

The e-choupal was started with an objective to re-organize the soybean trade
which was operating in an inefficient manner. Farmers used to sell their
produce through government mandated markets called “mandis.” Mandi
trading was conducted by commission agents who bought and sold the
produce. As the produce was sold through auction by these traders, farmers
would find out the market price only upon arrival at a mandi. If the buyers
had purchased enough for the day at this mandi then either the auction prices
fell dramatically or the farmers had to wait for the next day’s auction. While
all this may have been happening at one mandi, the farmers were unaware of
the auction status at other mandis where there could have been shortages.
The decision regarding the quality of the produce was also dependent on the
trader. Similarly, distortions in price and quality effected agro-business
trading firms like ITC who were, by government law, required to purchase
from the mandi and through these traders and not directly from farmers.

Under the e-choupal model, kiosks were setup in villages providing farmers
information in local language on agricultural inputs, best practices in farming,
market price realized at various mandi auctions, weather details etc.
Nevertheless, it enabled ITC to purchase products directly from farmers
(through a change in the law), enhancing quality of products and significant
cost reduction (e.g., it saved $5.40 per tonne on soyabean). The e-choupal
now has just two service providers in its procurement chain - the sanchalak, a
person between the kiosks and the farmers who inspects the produce and
based on his assessment of the quality, the price of the commodity is decided
(he gets 0.5 per cent commission on the volume sold) and samyojak, a person
who manages the ITC warehouses (he gets 1 per cent commission on
transactions). Samyojaks also handle much of the logistics at the
procurement hub like storage management and transportation from the hub
to processing factories.

ITC was able to overcome the hurdles posed by infrastructure inadequacy in

villages. It uses solar energy to power the batteries of the computer kiosks
and has shifted from

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dialup connection to satellite based technology (VSAT). Farmers are now able
to make informed decisions as they understand the market better leading to
higher productivity. Various seed and fertilizer companies are now able to
reach wider market with lesser transaction cost. The e-choupal has provided a
market for more than 64 companies (to name a few, Monsanto and Nagarjuna
Fertilizers). This innovative direct procurement channel is a win-win
mechanism for all the involved parties. ITC is now building a rural retail
infrastructure on the foundation of the e-choupal network thereby changing
the rural distribution landscape.

Transforming the Auto-Component Replacement Supply Chain

With changing government policies and consumer preferences, the

distribution supply chain of Indian companies has been effected significantly.
This poses new challenges for various channel partners. We illustrate this
transformation process through the lens of the auto component replacement
market supply chain and discuss its implications. We surveyed 21
manufacturers and 22 channel members (distributors, wholesalers and
retailers) spread equally in Northern and Western clusters of auto component
Industry in India for this purpose.

The auto component industry produced parts worth $6.7 billion (2004-05)
with 57 per cent of the demand coming from the replacement market (ACMA,
2005). Low entry barriers have led to a large number of players in the
replacement market. There are about 400 firms in the organized sector and
more than 5000 in the unorganized sector. Another feature of this sub-sector
is the long duration of ownership of vehicles in India which leads to high
requirement of parts. It is also found, anecdotally, that willingness to pay for
parts decreases with the length of ownership. This has led to an intense
segmentation of the parts market by price.

Pre–1991, this industry was still in a nascent stage. It was characterized by

few manufacturers and low demand. Consequently, the distribution network
was flat (Figure 4a). Availability of spare parts was a key issue with long
delivery lead-times and manufacturers sought large order sizes. This also led
to the growth of un-branded parts or parts branded by regional producers
(often supplied by small firms) in the replacement market. The product was
sold chiefly on personal relationship with the buyer; quality, brand and price
were not the selling propositions. Maruti Udyog Limited had created a

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network of suppliers of quality parts for its vehicles. Hero Honda had done the
same for its motorcycles.

Post-1991, the liberalization of the automotive industry led to an entry of

many foreign auto players. Because of the impending automobile industry
boom and high margins for distributors, the demand for spare auto-parts was
expected to grow. The distribution channel was modified with the entry of two
more channel members, i.e., wholesalers and semi-wholesalers (Figure 4b).
The latter were smaller versions of the former and locally oriented.

The period 1994-2007 saw a major transformation of the distribution

structure (Figure 4c). OEMs started to operate in the replacement market
through a parallel supply chain selling parts through their service stations.
Additionally, the entry of large number of channel members caused semi-
wholesalers to move out of the supply chain - they either moved up the chain
to become wholesalers or moved down to become retailers. To strengthen the
coordination of this extended supply chain and to buffer against the
differential tax structure across states, companies started to operate with
Carry and Forwarding Agents (C&FA). Transportation related activities are
carried out by all the members of the supply chain. Manufacturers use
services of 3PL for transferring their stock to C&FA and distributor locations.
But thereafter, the transportation activity is solely managed by channel
members themselves.

An analysis of the available IT infrastructure and its usage pattern for all the
channel members in our sample survey indicates that there is a high
deviation in the usage of IT in the replacement market supply chain. Eighty
seven per cent of the sampled firms use an ERP package – most of which is
customized and developed locally. The main impediment in the use of a
branded packages is the high cost of purchase and implementation. These
packages are used to generate sales report, order from suppliers, account for
the financial transactions and track the level of inventory at plant and C&FA.
Manufacturers order the stock from suppliers mostly through emails. In order
to track inventory in the channel, firms also made IT investments both at
C&FA and within the firm. Linking the C&FA to the company website enabled
firms to check stock status at the C&FA and reduce the order processing and
customer response times. Larger firms are also providing a similar setup to
their distributors. Since the C&FA is mostly owned

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and managed by the firms, manufacturers are also able to check the
inventory status, dispatching status and customer records. Distributors have
invested primarily in computers for keeping track of the inventory and
updating accounting details. On the other hand, rest of the channel partners
(wholesalers and retailers) don’t even own computers. Parts are ordered
primarily on the phone. Interestingly, most distributors were found to be
following periodic review policy while the rest of the channel members were
following continuous review policy because of their low sales volume.

Post 2007, with the implementation of a uniform tax structure across all
states, there will be some changes in the way firms operate. The C&FA will,
perhaps, become redundant as most manufacturers will prefer to deal directly
with distributors. The concept of an exclusive distributor is expected to
vanish. It is expected that with the increase in variety of components,
distributors might become wholesalers and will stock multiple brands for the
same product. Two parallel distribution channels are expected to be in
operation – the OEM chain and the non-OEM chain (Figure 4d). OEM network
will primarily handle the passenger car replacement parts and the non-OEM
distribution network will sell parts for Light Commercial Vehicles, Heavy
Commercial Vehicles, 2-wheelers and 3-wheelers as the car customer is
becoming more brand conscious even while replacing parts which comes
along with superior service. Further, we perceive that the more advanced
automobiles, Free Trade Agreement with other Asian countries and VAT are
going to change the way the replacement market operates. There will be a
rationalization of this market in terms of number of firms competing thereby
leading to an improvement in quality, delivery time and availability of parts.
The size of the firms is expected to increase with an emergence of large
national players (in addition to OEMs). This may reduce the number of
producers exclusively focusing on the local markets.
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Figure 4a Figure 4b

Manufacture
r Manufactur
er

Distributor
Distributors s

Institutional
Institutional Wholesaler
Semi- s
Buyers
Buyers
Retailers Wholesalers

Retailers

Government
Government Agencies Garage-station Agencies Garage-station

& &

Transport
Transport Companies Vehicle owners Companies Vehicle owners

Figure
Figure 4c 4d
 Manufacturer Manufacturer

Institutional Institutional
buyers C&FA OEMs buyers OEMs

Wholesalers

Distributors Authorized Service Authorized Service

Stations Stations

Semi-

Wholesalers

Wholesalers

Retailers
Vehicle

Vehicle Owners

Owners

Retailers

Government Agencies Garage-station Government Agencies Garage-station

& &

Transport Companies Vehicle owners Transport Companies Vehicle owners

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7 Challenges Ahead

Several challenges remain before the Indian logistics sector and its future
success will depend on the ability of the industry to overcome these hurdles.
Some of these impediments are at the firm level while others are at the policy
level.

At the policy level, the issues of infrastructure and integration of the nation’s
logistics network remain the two most critical areas that require attention.
The growth of infrastructure, since 1991, has been quite extensive (covering
a wide geographical area) as well as strategic – linking the key industrial,
consumption and transshipment centers. However, some imminent
weaknesses need be addressed. Movement beyond the golden quadrilateral
is required to bring goods from upcountry production sources to main
shipment centers. The rate of growth of expressway has to increase. Poor
road conditions increase the vehicle turnover, pushing the operating cost and
reducing efficiency. National highways are being upgraded but they account
for a meager 2 per cent of the total road network. (Sanyal, 2006a). More
importantly, due to non-contiguous development of expressways, truck traffic
has to frequently move from the expressway on to old national highways and
vice-versa. This is inconvenient and is restricting the utilization of the
excellent road network that is being developed. The pricing of the toll on
these expressways especially for cargo traffic has also been a deterrent to is
usage – perhaps, one needs to understand the price elasticity of this demand
and develop appropriate price packages for heavy and frequent users. Here,
the role of transport technology needs to be mentioned as well. Once the cost
of manufacturing multi-axle trucks comes down, it will see higher penetration
and consequently lower per unit cost of transportation. Volvo is trying to
develop this market but the volumes of high capacity truck continues to be
low (about 7 per cent of the total truck production, IAESI, 2006-2007). The
East & West bulk rail transport corridor will divert some traffic from road
provided the secondary movement (i.e., from the nearest station to the
plant/warehouse) can be minimized and the issue of security of the goods is
addressed adequately. Similarly, river navigation in the North and North-
Eastern India can pose useful options for cargo movement in hinterland where
road congestion is high.

Goods vehicle run only 250-300 km a day in India as compared to 800-1000

km in developed countries (Sanyal, 2006b). Inter-state check posts, surprise
checks and unauthorized hold ups on highways (some due to security reasons
while others are to

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establish the authenticity of the cargo as declared) create bottlenecks. Entry

taxes into cities for goods also create procedural bottlenecks. The Motor
Vehicles Act and the Motor Transport Workers Act that regulate driver
licensing, loading norms etc. and duty hours of drivers respectively require
modification to address the quality of services in this sector (Raghuram and
Shah, 2003). Similarly, while the regional permits that allow a truck to ply
between certain states come at a lower cost (as compared to a national
permit), it limits the flexibility of truckers to convert opportunities. Indian
logistics market remains fragmented on these counts and the national market
(as well as service) does not appear as one integrated entity. Harmonization
of taxes, procedures and policies across States is required to facilitate a
seamless flow of goods and services. For instance, if there was a nation-wide
broadband logistics IT-network then a trucker starting in Chennai (in the
southern Indian State of Tamilnadu) could file all the papers in Chennai, get
all inspections done there and move without interruptions to say, Jammu (in
the northern Indian Sate of Jammu & Kashmir) . Each state entry point could
have access to those papers and they could flag the truck through their
check-post as it reached there with no stoppages or delays. Today, it could
take anywhere from half hour to few hours to get papers and goods inspected
at each check post. The later could be taken care of by having sealed
container carriers. Changes in process technology are needed to increase the
effectiveness and responsiveness of the transport network.

In privatizing the operations of container traffic through rails, new entrants

are expected to face serious problems. Because of limited manufacturing
capacity for producing wagons, these firms will have to import wagons at high
cost. Huge investments in storage capacities near railway stations will also
add to their cost (Bhatt, 2006). All these factors will increase the entry
barriers for the private operators. Moreover, the tariff structure and revenue
sharing is still a hindrance for public-private partnership projects to succeed
in infrastructure development.
While the use of IT for logistics management is increasing, it is largely limited
to large size firms. This represents an opportunity to further improve the
decision making abilities across the supply chain and reduce costs further. For
instance, order processing and delivery status are two areas that reflect a
certain weakness in servicing (Chandra & Sastry, 2004). With the growth of
the IT sector in India, these are clearly areas that can

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gain from the IT sector’s engagement. For example, manufacturing firms can
collaborate with the extensive network of call centers for managing order
processing and actual integration of order servicing with the physical supply
chain. Similarly, there is a role for emergence of a segment (e.g., a service
provider) in the logistics chain that manages dispatch information and
performs delivery tracking across manufacturers for their customers.
Similarly, only a few thousand vehicles out of a total of several millions have
tracking system (Sanyal, 2006a). Truck manufacturers could integrate the
tracking technology in its products and IT servicing firms could provide
information service on highways tracking movement of vehicles. This would
provide information to distribution firms and help track both the consignment
as well as the truck better. As of now, the best service is the one provided by
Reliance Connect at their petrol pumps on the highways where truckers stop
by and call their firms to inform them of there whereabouts. Such service
providers become very valuable to tiny and small trucking companies that
proliferate the logistics industry and who do not have the wherewithal to
either install or operate their own IT systems. As the concentration in the
industry increases, the need to manage larger number of trucks, routes,
warehouses and customers will require decision support systems that perform
dynamic planning & scheduling. As observed by Chandra and Sastry (2004),
the IT base is indeed low and firms need to compete on the basis of real
logistics costs instead of clever accounting practices before the sector will see
increased IT penetration. As the need to have visibility in the supply chain
increases, better technology applications will also appear.

Another area that will see tremendous growth is outsourcing of logistics

service. While logistics outsourcing has been in existence for several decades,
it was limited to transportation and warehousing. Post-liberalization, the
country has seen outsourcing of value add services like freight forwarding,
fleet management, import/export and customs clearance, order fulfillment,
consulting services like distribution network planning etc. These are early
years for the 3PL service providers and a recent survey cites lack of trust and
awareness as the key hurdles to its growth (Mitra, 2005). Service tax on
outsourced cost and the requirement to establish multiple warehousing
facilities in order to avoid double taxation (and thereby lose the advantage of
scale economies with fewer warehouses) were also found to undermine the
3PL business (Mitra, 2005). According to this survey, most of the 3PL service
providers offer limited services. In future, their role as coordinators will
require that they offer a wider menu of value add services. They also

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have the potential of integrating SME channels through a variety of logistics

services and technology across a network of small producers.

The logistics industry 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 service. Changing government policies on taxation and
regulation of service providers will also play an important role in this process.
Coordination across various government agencies require approval from
multiple ministries and is a road block for multi modal transport in India (e.g.,
ports, roads, railways, container freight operations etc. are all managed by
different ministries in the Government of India (Sanjai, 2006b)). At the firm
level, the logistics focus will have to move towards reducing cycle times in
order to add value to their customers. These are few of the issues one need to
take account before the logistics industry can boom significantly in India.