asme logistics report

8/3/2019 aSME Logistics Report

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Conference paper onSMEs in logistics:

Bringing value to thechanging Indianlandscape

Prepared byDeloitte Touche Tohmatsu India Private Limited


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Contents

1. Executive summary

2. Small and medium enterprises2.1. Introduction2.2. SMEs global scenario2.3. SMEs Indian scenario

3. Logistics and supply chain management3.1. Introduction3.2. Indian logistics scenario3.3. SMEs in logistics3.4. Future trends in logistics3.5. Regulatory overview

4. Logistics operations via major channels4.1. Waterways4.2. Railways4.3. Roadways4.4. Airways

5. Technology trends in the logistics industry5.1. Emerging trends5.2. Rfid in focus5.3. Summary chart of technologies used in logistics

6. Growth drivers6.1. Gdp growth and rise of 3pl services6.2. Investments in infrastructure6.3. Qualified work force6.4. Availability and access to finance6.5. Merger & Acquisition trends

7. Logistics model7.1. Indicative logistics model for a soft drink company7.2. Indicative logistics model for an it hardware company

8. Material handling equipment8.1. Global scenario8.2. Indian overview8.3. Demand for material handling equipment8.4. Classification of material handling equipment8.5. Future market trends

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3

List of figures and tables

List of figures

Figure 1 Definition of SMEs as per MSMED Act, 2006

Figure 2 Growth and development of SMEs

Figure 3 Range of logistics services

Figure 4 Logistics cost as a % of GDP

Figure 5 Elements of logistics cost (India)Figure 6 Strategy emphasis placed by logistics companies

Figure 7 Infrastructure at a glance

Figure 8 Railway freight earnings

Figure 9 Warehouse Management System

Figure 10 GPS Receiver

Figure 11 ERP System

Figure 12 RFID tag

Figure 13 Growth drivers in logistics

Figure 14 SMEs life-cycle trend

Figure 15 Logistics model of a soft drink manufacturer

Figure 16 Logistics model of an IT hardware company

Figure 17 Types of Material Handling Equipment

Figure 18 Fork lift truck

Figure 19 Pallet Truck

Table 1 SME global comparison

Table 2 Growth of Micro and Small Enterprises

Table 3 SWOT Analysis of Indian SMEs

Table 4 Range of logistics services11

Table 5 India's world ranking in logistics performance and related indicators

Table 6 Savings estimated with a reduction in logistics cost

Table 7 Characteristics of SMEs in logistics

Table 8 Estimated capacity addition at Indian ports

Table 9 RFID v/s bar coding

Table 10 RFID global overview

Table 11 Summary chart of technologies used in logistics

Table 12 Opportunity for 3PL Players in India

Table 13 Some of the recognized institutes offering courses in SCM in India

List of tables

2009 Deloitte Touche Tohmatsu India Private Limited


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3PL

4PL

AAI

CAGR

CFS

CGS

CII

CLCSS

DG

DIC

EDI

EPC

ERP

FDI

FMCG

GDP

GOI

GPS

GST

ICD

IID

ISCC

LMP

LSP

MNC

Third Party Logistics

Fourth Party Logistics

Airport Authority of India

Compounded Average Growth Rate

Container Freight Stations

Credit Guarantee Scheme

Confederation of Indian Industry

Credit Linked Capital Subsidy Scheme

Directorate General

District Industrial Centres

Electronic data interchange

Electronic Product Code

Enterprise Resource Planning

Foreign Direct Investment

Fast Moving Consumer Goods

Gross Domestic Product

Government of India

Global Positioning System

Goods and Services Tax

Internal Container Depots

Integrated Infrastructure Development

India Supply Chain Council

Lean Manufacturing Project

Logistics Service Provider

Multi National Corporation

List of abbreviations

MSMED

NH

NHAI

NMCP

NPA

NSIC

NVOCC

OMS

PIB

PPP

RFID

SCM

SH

SIDBI

SIDO

SISI

SKU

SME

SOE

TEU

TMS

VAT

WASME

WMS

WTO

Micro, Small and Medium Enterprise Development

National highways

National Highway Authority of India

National Manufacturing Competitiveness Programme

Non Performing Asset

National Small Industries Corporation

Non Vessel Operating Common Carrier

Order Management System

Press Information Bureau

Public Private Partnership

Radio Frequency Identification

Supply Chain Management

State Highways

Small Industries Development Bank of India

Small Industries Development Organisation

Small Industries Service Institutes

Stock Keeping Unit

Small and Medium Enterprise

State Owned Enterprises

Twenty foot equivalent units

Transport Management System

Value Added Tax

World Association of Small and Medium Enterprises

Warehousing Management System

World Trade Organisation

Abbreviations

4 2009 Deloitte Touche Tohmatsu India Private Limited


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1.Executive summary

SMEs occupy an important position in any country's

economy, they constitute as high as around 90% of all

industries in any country. As of July 2006, around 14

crore SMEs in 130 countries employed 65% of the total

labour force. They form the backbone of the Indian

economy.

Salient characteristics of SMEs in India are as follows! Approximately 1.3 million SMEs in India as on 2007! Share in GDP around 8 to 9%! Provide 80% of the total industrial sector employment.! Account for 45% of total manufacturing output! Contribute 40% to the total export trade.

According to a World Bank Study, there are more than

60 definitions of SMEs used in 75 countries surveyed.

An SME in India is defined on the basis of limit of

historical value of investment in plant and machinery,

as per MSMED Act

Like with most industries in India, the logistics industryis also dominated by SMEs. They play a vital role in the

survival and blossoming of the logistics business, and

together form an integral part of the Ind ian economy.

Logistics is an integral function for every business

organisation. Logistic Service Providers (LSPs) form the

backbone of most companies. Logistics management

activities typically include inbound and outbound

transportation management, fleet management,

warehousing, materials handling, order fulfilment,

logistics network design, inventory management,

supply/demand planning, and management of third-

party logistics services providers. To varying degrees,the logistics function also includes sourcing and

procurement, production planning and scheduling,

packaging and assembly, and customer service.

Logistics cost in India are estimated to be 13% of GDP,

which is much higher than the developed economies

like USA which spends around 10% of its GDP as

logistics cost and Japan which spends 11% of its GDP

for the same. The reason for this high spending is

attributed to poor infrastructure facilities, lack of

implementation of IT in logistics and unnecessary check

points at the National highways which wastefully

increases the transportation costs. India can save upto

US$ 7.13 bn each year in the event of a reduction in

logistics cost by 1%.

As per a survey conducted by Deloitte, the SMEs in

logistics have indicated quality of service, cost effective

methods and providing integrated solution as the key

differentiators which sets one SME apart from the other.

Some of the characteristics of SMEs in the logistics

business are as follows! Focus on outsourcing led growth! Desire to go global, but lack the vision or / and

adequate exposure! Mostly followers of the successful models set forth by

the larger players in the business.! Lack professionalism in management.

The evolving business landscape and increasing

competition across industries, is creating the need for

more efficient and reliable logistics services than what

exists today. The growth drivers of SMEs in Logistics can

be summarized as follows ! GDP growth and rise of 3PL services Most

companies across industries like automotive,

electronics, FMCG and pharmaceutical sectors areincreasingly opting to outsource their logistics

requirements to specialized 3PLs. This has created a

demand for a range of logistics services which will

benefit the productivity and efficiency of the

customers supply chains.

! Investments in infrastructure Given the current

thrust on infrastructure investments, the growth and

efficiency of LSPs as well as their customers will be

positively impacted. The government has planned

investments in infrastructure development amounting

Rs 20,00,000 crore in the next 5 years. This will proveto be a major benefit for the logistics industry.

! Qualified work force There has been a sudden

transformation in the scale and scope of activities

within the logistics sector. This growth rate needs to

be supported with a parallel growth of skilled and

trained manpower. Attracting and retaining talent is a

major problem faced by SMEs in the logistics business.

There is a need to incorporate a high degree of

professionalism in the functioning and approach of

SMEs in this business.

! Availability and access to finance As the SME

sector emerges to be the nation's economic growth

engine, raising finance to power that growth remains



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6

an impediment for sustained expansion. The

government is taking various measures to improve the

delivery of credit to SMEs. A policy package for

stepping up credit to SMEs has been started by the

government. The government has also set up a Credit

Guarantee Fund to provide relief to those small

entrepreneurs who are unable to pledge collateral

security.

! Merger & acquisition trends While

entrepreneurship is on the rise, the reality check is that

only few in every 100 new businesses make it past the

second year. Given the odds, buying an existing

business can be a much less risky and more quickly

profitable venture than starting business from scratch.

But its not entirely risk free and success depends

heavily on how wisely one chooses and evaluates the

business to buy.

When small and medium enterprises consider

implementing supply chain management initiatives, theyoften find themselves facing a unique set of challenges

that larger companies typically do not face. While these

challenges should not deter companies from

implementing supply chain management, SMEs should

be aware of them and formulate tactics for responding

to them. The most common challenges faced by LSPs

are as follows! Decentralised supply chain management! Lack of consistent business processes! Limited training and skill development! Lack of significant capital for investment!

Increased technology demands

Technology in the transportation and logistics industry is

quickly transforming business management and

operations. Leading edge wireless applications are

helping logistics managers to improve the metrics of

their freight in the supply chain. In order to keep pace

with the growth in the logistics business,

implementation of new technology is of prime

importance.

WMS A well designed WMS helps in reducing

inventory levels, lowers costs, promoting customer

satisfaction, giving real time updates, improving quality

control and often also nurturing a healthy work

atmosphere.

GPS GPS system helps logistics companies to track the

location of their goods. GPS technology gives the details

of the origin and destination of a shipment. During

transit, it helps in providing the exact position of a

consignment. There are sophisticated GPS maps and

technology available through which one can track the

movement, and be proactive to customers by informing

about the shipment status and expected delivery time.

ERP ERP induces enough visibility in the supply chain

so that an efficient work flow can be established. By

pulling together and sharing information from functions

such as purchase, warehousing, and sales; it helps to

control costs. A lot of medium enterprises are installing

ERP software due to unprecedented growth in the

logistics and transportation Industry.

RFID RFID allows LSPs to track, monitor, report andmanage products, documents, assets and people more

effectively and efficiently as they move between

locations anywhere at any time. An RFID tag is

incorporated into a product for the purpose of

identification using radio waves.

The market size of the global Material Handling

Equipment (MHE) industry has been estimated at Rs

3,75,200 crore for the year 2005 and is projected to

increase over Rs 4,68,000 crore by 2010. Given the fast

pace of economic growth in India, there is tremendous

potential for growth in the material handling sector. Thetraditionally fragmented material handling Industry has

been consolidating at a fairly rapid pace in the recent

years. However, the growth of the logistics Industry has

helped realise the importance of incorporating various

material handling and storage equipment. Main types of

material handling equipment used by logistics

companies! Fork lifts! Pallet trucks! Stackers! Order picker! Reach truck



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Benefits of using material handling equipment are as

follows! Better inventory control! Faster throughput! Less time for changeover! Less defects during material handling! Better utilization of space i.e. floor space as well as the

space up to ceiling

Demand for material handling equipment has been

increasing in the last few years. Manufacturers of

material handling equipment state that in the last 5-6

years demand for MHE has increased almost 3-4 times.

One of the primary reasons fuelling this growth is that

companies are increasingly feeling the need to lower

their logistics cost. Also, due to the presence of large

number of players in the Industry, use of equipments

helps to keep up with increasing competition.

In the next few years, the Material Handling Industry in

India is expected to grow steadily. The principal factorfuelling gains will be improved Indian economy, which

will result in the accelerating demand for goods

movement and create opportunities for suppliers of

goods-handling products and services of all types. Due

to ambitious plans for the rapid globalisation of the

Indian economy, cargo and freight traffic is likely to

maintain the current upward trend for the next few

years. As the need for material handling equipment is

directly related to the amount of cargo and freight

traffic, India will see a major pull in the demand for

these equipments.

7


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SMEs occupy an important

position in any country'seconomy, they constituteas high as around 90% of

all industries in anycountry. As of July 2006,around 14 crore SMEs in

130 countries employed65% of the total labourforce. They form the

backbone of the Indianeconomy.



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2. Small and mediumenterprises

2.1 Introduction

Small and Medium Enterprises (SMEs) occupy an

important position in any country's economy and

contribute immensely to the industrial development,

exports and forex earnings, creation of employment

opportunities etc. They constitute as high as around

90% of enterprises in most countries worldwide. SMEs

are the driving force behind a large number of

innovations and contribute to the growth of the

national economy. Also their contribution to poverty

reduction and wider distribution of wealth in developing

economies cannot be undermined.

The SME segment has developed in parallel with large

scale and MNC corporations. A continuous growth and

development of the companies in this segment ensures

a balanced growth of the economy and acts as a

facilitator towards entrepreneurial development,

employment generation business ownership and related

wealth creation. As of July 2006, around 14 crore SMEs

in 130 countries employed 65 percent of the totallabour force.

2.2 SMEs global scenario

Overview

SMEs are one of the principal driving forces in the

economic development of every nation. They stimulate

private ownership and entrepreneurial skills, they are

flexible and can adapt quickly to changing market

demand and supply situations, help diversify economic

activity and make a significant contribution to exports

and trade. Many transition economies have

acknowledged that SMEs are crucial for industrial

restructuring and have formulated national SME policies,

programmes and enterprise development policies. Most

governments have policies that encourage the growth

of SMEs because they facilitate in alleviating poverty by

increasing income levels and creating jobs.

The underlying table gives a global comparison of SMEs.

Definition

China

India

European Union

Japan

USA

Defined on the basis of fixedassets and number of employees

Defined on the basis of limit ofhistorical value of investment in

plant & machinery, as per theMSMED Act of 2006.

Defined on the basis of numberof people employed in theenterprise.

Defined on the basis of capitalsize and number of employees

Defined by the number ofemployees

Table 1: SME global comparison

Source: Government websites of SMEs of respective countries

0.43 crore(2007)

1.30 crore(2007)

2.30 crore(2005)

0.57 crore

Not Available

Number of SMEs(in units)

Employment generatedby SMEs

Percentage oftotal business

75% of the country'semployment

4.1 crore

8.5 crore

2.9 crore

Not Available

Country

99.0%

99.7%

99.0%

99.2%

Not Available



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10

China

In China there are two definitions being used: one, on

the basis of fixed assets that is, the level of fixed

assets(small industry is up to $1.8 million in book value

of fixed assets); and the other definition is in terms of

the number of employees (small enterprises are between

10 and 50 employees). The actual industrial census

shows that the average size for small enterprises is

about 15 employees; that of medium enterprises are

893 employees; and that of large enterprises is 3,755.

India

SMEs form the backbone of the Indian Economy. The

SME segment in India has come into the limelight, with

increased focus from several government institutions,

corporate bodies and banks, and is viewed as agents of

growth. Apart from the policy focus and government's

thrust towards promoting the SME segment,

globalisation and India's robust economic growth has

opened several latent business opportunities for this

segment. The classification of SMEs in India is discussedin the next section.

The European Union (EU)

SMEs play a central role in the European economy. They

create wealth, foster new ideas and are a key source of

new jobs. According to the EU definition, an SME is

defined as a company, which ! Employs fewer than 250 people! Has a turnover of less than 40 million per annum or

net balance sheet assets of less than 27 million! Must be less than 25 percent owned by larger

company/companies which do not qualify as an SMEthemselves.

Japan

SMEs are the economic base of the industrial value

chain and the underpinning of the Japanese economy.

99.2% of all businesses are SMEs and these enterprises

have provided a safety net by covering 70-80% of total

employment. 60% of SMEs in Japan have direct or

indirect transactions with large enterprises in the

manufacturing industry.

United States

In the US, a Government Department called Small

Business Administration (SBA) sets the definition of small

business. In the United States, small business is defined

by the number of employees and it refers to those

businesses with less than 100 employees, while

medium-sized business often refers to those with less

than 500 employees.

Overview

The Small and Medium Enterprises (SMEs) constitute an

important segment of the Indian economy in terms of

their contribution to the country's industrial production,

exports, employment and creation of an entrepreneurial

base. According to a World Bank study, there are said to

be more than 60 definitions of small and medium

industries used in 75 countries surveyed. In some other

countries, annual turnover of the company determines

the size of an enterprise, whereas certain countries

define SMEs on the basis of number of Employees. In

the Indian context an SME is defined on the basis of

limit of historical value of investment in plant &

machinery, as per the MSMED Act of 2006.

2.3 SMEs Indian scenario

Figure 1: Definition of SMEs as per MSMED Act, 2006

Source: Ministry of Micro, Small and Medium Enterprises, GOI

Definition of SMEs as perMSMED Act

Manufacturing(Investment in plant & machinery

Services(Investment in equipment)

A micro enterpriseDoes not exceed Rs.25

lakhs

A small enterpriseMore than Rs.25 lakhs but

does not exceed Rs.5 crores

A medium enterpriseMore than Rs.5 crores but


A micro enterpriseDoes not exceed Rs.10

lakhs

A small enterpriseMore than Rs.10 lakhs but


A medium enterpriseMore than Rs.2 crores butdoes not exceed Rs.5 crores



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1Some of the salient features of SMEs are as follows! Approximately 1.3 million SMEs in India as on 2007! Share in GDP Around 8 to 9 %! Provide 80% of the total industrial sector employment! Account for 45% of total manufacturing output! Contribute 40% to the total export trade.! Second largest employer of human resources after

agriculture, employs around 41 million people.! SMEs produce about 8,000 items from very basic to

highly sophisticated products.

Growth and development of SMEs in India

The period during 1948-1991 was characterised by

protection given to the sector through reservation of

items, access to bank credit through priority sector

lending, excise exemption etc. With the introduction of

the New Industrial Policy, 1991, the protection given to

SMEs was replaced with a competitive approach to

infuse more vibrancy and growth to SMEs. Small

industry in India were compelled to cope up with an

increasingly competitive environment because

liberalisation of the investment regime favoured Foreign

Direct Investment (FDI) and also formation of World

Trade Organisation (WTO) in 1995 which forced India to

drastically scale down quantitative and non-quantitative

restrictions on imports. Hence the period from 1999

onwards focussed on technology up gradation,

investments in infrastructure and quality improvement.

! SIDBI set up in 1990! IID scheme introduced in

1994! Introduction of technology

development and

modernization fund in 1995

! Recognition given to micro

and small enterprises! SIDO set up in 1954! NSIC established in 1955! SISI set up for entrepreneurial

and skill! DICs set up at state level

1948-1991 1991-1999 1999-2006 2006 onwards

Figure 2: Growth and development of SMEs

Source: Deloitte analysis (2008)

! Ministry of MSME came into

being in 1998! CLCSS launched to encourage

technology upgradation! CGS started to provide

collateral free loans to

entrepreneurs!

Performance and credit ratingscheme introduced in 2005

! MSMED Act introduced in

2006! The Act defines medium

enterprise for the first time! The Act provided the first ever

legal framework for

recognition of the concept of

enterprise which comprisesboth manufacturing and

service entities

111Ministry of Micro, Small and Medium Enterprises, GOI 2009 Deloitte Touche Tohmatsu India Private Limited


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Indian SMEs future trends

With the growth of SMEs the business environment

have now started demanding improved servicing

standards and a faster cycle time for achieving business

success. The future of SMEs can be briefly explained as

follows:! SMEs in future aim to concentrate on lean

manufacturing systems in order to keep up with the

rising competition.! National Manufacturing Competitiveness Programme

(NMCP) plans to launch a lean manufacturing project

worth Rs 2,30,000 crore. The project is scheduled to2

cover 7,000 to 10,000 units by 2012.! 10 new tool rooms are to be set up under Public

Private Partnership (PPP) as training needs of SMEs2are rapidly rising.

!

Policies that create an enabling environment for SMEgrowth are devised for the future. Cluster based

financing approach and encouragement to credit

ratings, are some of the initiatives to be undertaken

to double the flow of institutional credit towards

SMEs by 2010.

1990-1991

Total SSI units (lakh no.)

Fixed investment (Rs crore)

Production (Rs crore)

Employment (lakh persons)

67.87

93,555

84,728

158.34

Table 2: Growth of Micro and Small Enterprises

Source: Ministry of Micro, Small and Medium Enterprises, GOI

101.10

1,46,845

1,84,401

238.73

2000-2001 2005-2006

123.42

1,88,113

4,18,884

294.91

Parameters

2Ministry of Micro, Small and Medium Enterprises, GOI2009 Deloitte Touche Tohmatsu India Private Limited


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! High cost of input

material - Concentration on

high quality raw material to

keep up with intense

competition! Lower productivity - Lack

of specialization and skilled

work force resulting in poor

efficiency! Technological

obsolescence - Deployment

of outdated technology and

excessive dependence on

manual operations

! Self reliance - Flexible and

self managed business! Manufacturing flexibility -

Production as per requirement!

Availability of cheaplabour - Extensive use of

unskilled labour which is easily

available in India

Table 3: SWOT Analysis of Indian SMEs

Source: Deloitte Resources (2008)

! End of quota regime - End

of quota regime replaced

protection with

competitiveness to infuse

more vibrancy and growth toSMEs in the face of foreign

competition and open market! Shift in domestic market -

Due to globalisation and

liberalization, manufacturers

can increase production and

export surplus, thereby

increasing overall profitability! Increased disposable

income - Resulting in an

increase in purchasing power

and consequently an

increased demand for goods

and services! Emerging economy and

expansion - Growth in

sectors like manufacturing,

retail, automobile etc

resulting in higher domestic

and international trade

! Stiff competition from

developing economies -

China poses as a serious

threat as they manufacture in

bulk and enjoy large scaleeconomies in manufacturing

and distribution of goods and

services! Pricing pressure - SMEs are

forced to sell at lowest

possible prices in order to

keep up with competition

from other SMEs as well as

from established players in

the industry.! Locational disadvantage -

Compelled to set up

manufacturing units in rural

areas, due to high cost of

land and labour in urban

areas! International labour and

environmental laws - These

laws pose restrictions on

functioning of SMEs

SWOT analysis of SMEs in India

A SWOT analysis of the Indian SMEs is presented below

depicting the various factors that would help SMEs to

capitalize on their strengths, overcome their

weaknesses, grab opportunities as and when they come

and beware of threats that are likely to affect their

business.

Strengths Weaknesses Opportunities Threats



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3. Logistics and supply chainmanagement

14

3.1 Introduction

Logistics involves planning, implementing, and

controlling the efficient, cost effective flow and storage

of raw materials, in-process inventory, finished goods

and related information from point of origin to point of

consumption so as to meet customer requirements. It

includes procurement, maintenance, distribution, and

replacement of personnel and materiel. In simple terms,

it is all that goes into ensuring that the right material

reaches the right place at the right time.

Logistics management is a part of supply chain

management (SCM) that plans, implements, and

controls the efficient, effective forward and reverse flow

and storage of goods, services and related information

between the point of origin and the point of

consumption in order to meet customers' requirements.

Logistics management activities typically include

inbound and outbound transportation management,

fleet management, warehousing, materials handling,

order fulfilment, logistics network design, inventorymanagement, supply/demand planning, and

management of third-party logistics services

providers.(3PLs) . To varying degrees, the logistics

function also includes sourcing and procurement,

production planning and scheduling, packaging and

assembly, and customer service. It is involved in all levels

of planning and execution strategic, operational and

tactical.

As shown in the figure below, the logistics value chain

consists of three key functions or segments -

Transportation, Warehousing and Value Added Services.

Traditionally LSPs (Logistics Service Providers)

concentrated mainly on transportation and logistics as

they form a major share in logistics. However, in order

to keep up with rising demands and customer

expectations, companies now also concentrate on value

added services like packaging, custom clearance,

inventory management and labeling.

Figure 3: Range of logistics services

Source: Government websites of SMEs of respective countries

Channels of logistics Components of logistics

Surface transport

Air transport Inventory management

Water Labelling

Railways

Roads

Freight transportation

Packaging

Warehousing

LogisticsService

Provider



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The size of the logistics sector globally is around Rs.

1,48,50,000 crores, making it one of the largest sectors

of the global economy. The US expenditure on logistics

currently stands at around 10% of its GDP i.e. Rs.

Transportation

Road

Rail

Water

Air

Trucking and relatedservices like fleet management,

network optimization, routeplanning etc.

Railway cargo transportation

Shipping operations, portoperations etc.

Air cargo operations i.e.ownership and operation ofcargo Aircraft

Table 4: Range of logistics services

Warehousing related to inlanddistribution whether inbound

or outbound shipments,transshipment centers

ICD / CFS multimodalWarehousing

ICD / CFS port basedwarehousing, tank Farms

Air cargo transhipment,warehouse

Warehousing Value added services

Services bundled around roadtransportation and warehousing like

express, cold chain, track and trace,packaging, consulting etc.

Services bundled around railtransportation and warehousing likededicated rail container services,stuffing /de-stuffing, consolidation etc.

Freight forwarding, freightconsolidation, NVOCC, customsClearance

Express and courier services, freightforwarding, customs clearance

Mode of Transportation

Range of logistics services

China

4

8

12

16

20

0

India EU Japan USA

45,00,000 crore. In comparison, India with a GDP of

about Rs 27,64,000 crore spends 13% of its GDP on

logistics creating an industry size of around

Rs. 4,00,000 crores.

Figure 4: Logistics cost as a % of GDP

Source: Industry Reports (2007)

Logistics cost as a % of GDP



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16

3.2 Indian logistics scenario

The Indian logistics structure is witnessing a paradigm

shift. The industry is expected to grow at 16% upto

2010. Being driven by rising export and import,

government investment on infrastructure and the entry

of private players, the industry is undoubtedly on a high

growth path. With the market becoming more

competitive especially for the manufacturing sector,

outsourcing of logistics activities is the preferred option.

A consistent good performance of the economy is the

key force, driving the growth in the logistics sector. A

sustained economic performance has catalysed the

activities of this sector. India's GDP is expected to grow

at almost around 8% per year, the Indian logistics

industry which is pegged at Rs 3,60,000 crore as of

2007 is at an inflection point, and is expected to reach a3

market size of over Rs 5,00,000 crore in year 2010. The

industry has generated employment for 4.5 crore people

in the country compared to IT sector which employs

4only approximately 0.43 crore people.

The Indian logistics industry is currently very

disorganised. The major players can be broadly

categorised as pure transport providers, transporters

providing certain value added services such as

warehousing, and completely integrated players

providing 3PL services. The major elements of logistics

costs for Indian Industries include transportation,

warehousing, inventory management and other value-

added services such as packaging. The figure on the

right shows that transportation and inventories account

for 35 % and 25 % of logistics cost respectively,indicating their importance in logistics.

World ranking

Customs

Infrastructure

International shipping

Logistics competence

Domestic logistics cost

47

42

39

31

46

Table 5: India's world ranking in logisticsperformance and related indicators

Source: World Bank & CII (2007)

Parameters

Figure 5: Elements of logistics cost (India)

Source: Cygnus Research (2007)

Transporatation Inventories

25%

35%

14%

11%

6%

9%

Losses

Packaging Handling & warehousing

Customers shopping

3India Supply Chain Council, Article March 19, 2007

4Confederation of Indian Industry, Dewan Chopra Report 20072009 Deloitte Touche Tohmatsu India Private Limited


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At 13% of GDPUS$ bn

Transportation

Industry

Warehousing

Packaging

Others

Total

32.45

23.18

10.20

8.34

18.54

92.72

Table 6: Savings estimated with a reduction in logistics cost

Source: Credit Analysis and Research Ltd (2007)

Functions

India's spending on the logistics industry is much higher

than the developed economies. The reason for high

spending on logistics in India is attributed to poor

infrastructure facilities, lack of implementation of IT in

logistics and unnecessary check points at the National

highways which wastefully increases the transportation

costs. The table below shows that India can save upto

US $ 7.13 bn each year in the event of a reduction in

logistics cost by 1%

Like with most industries in India, the logistics industry is

also dominated by SMEs. The industry is characterized

by dominance of the unorganized players, primarily the

small truck-fleet operators and single office logistics

providers. The unorganized segment accounts for over

80% of revenues across the value chain. In freight

transportation, predominately in road movements, the

market is highly fragmented with individual truck

owners and small companies holding majority market

shares. However, as the business environments havestarted demanding better servicing standards, improved

cycle time has become the key factor for business

success for SMEs. In fact, logistics is what connects local

trade and business part and parcel of global business.

SMEs play a vital role in the survival and blossoming of

the logistics business and together form an integral part

of the Indian economy.

Characteristics of SMEs in the logistics business are as

follows ! Focus on outsourcing led growth!

Desire to go global, but lack the vision or/ andadequate exposure

! Mostly followers of the successful models set forth by

the larger players in the business.! Lack professionalism in management

3.3 SMEs in logistics

At 12% of GDPUS$ bn

Amount savedUS$ bn

29.95

21.40

9.41

7.70

17.12

85.58

2.50

1.78

0.78

0.64

1.43

7.13

Manpowerstrength

Start ups

Strugglers

Survivors

Very less

Medium

Medium to

high

Table 7: Characteristics of SMEs in logistics

Source: OECD conference on enhancing role of SMEs in Global Value Chain (2007)

SME Capital Serviceprovided

Limited capitalavailability.Do not qualify formost VentureCapital (VC) funds

Moderate capital.Qualify for VCfunds. Yet most ofthe VCs ignorethem.

Beneficiary of

most banks, VCfunds and policiesimplemented forSMEs.

Fragmented, mayprovide only roadtransport orspecific shippingservices

Provide few ofthe main logisticsservices

Provide end to

end solutions andnot just services.

Training andskills

No specificinitiatives takento trainmanpower

Limited training

Place

Importance ontraining andprofessionalismin work.



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18

Primary survey observations and findings

Deloitte conducted a primary survey in order to

understand the growth pattern, future trends and

challenges faced by the logistics companies. The main

aim of the primary survey was to understand the issues

and challenges faced by the logistic companies and the

ways to overcome these problems.

The following are the observations made during the

primary survey conducted -! The logistics industry is growing @ 18 20 % p. a.

Consolidation, mergers and acquisitions have been

observed in the last few years.! LSPs are now expanding their banquet of services e.g.

Custom house agents to transportation, liners to

forwarders.! The increase in customer expectations has resulted in

more professionalism in the functioning of service

providers. Due to the need for a one stop shop;

companies have now started providing end to end

solutions. This has led to reduction in transaction timeand faster cargo movement.

! Earlier LSPs provided only services, now they are

striving to provide complete solutions. A few years

back businesses were largely scattered and

fragmented; now there is certain degree of

consolidation

The following are the findings of the survey! There are certain key differentiators which set one

SME apart from the other. Though most SMEs in the

logistics business by and large provide similar services,

it is the degree of professionalism and emphasis they

place on certain strategies that set them apart from

the rest.! In the survey conducted, each and every service

provider rated quality of service as absolutely essential,

since customers now rate the quality of service as the

minimum qualifying criteria required from a service

provider.! The next most important differentiator is cost effective

methods and providing integrated solutions.

Companies are now striving to utilize seamless modes

of transportation to get the work done. It's no longer

important how the goods move from A to B, so long

as they do so safely, on time and in the most cost

effective way.! Logistics service providers are leveraging IT as a

strategic tool. Deployment of effective IT tools forlogistics applications can put an enterprise ahead in

the race for a contract. Ability to invest is important for

growth and development of the SMEs in logistics! Establishing strong relationship with other service

providers and emphasis on training and development

are some of the other strategies SMEs adopt to

differentiate themselves.

Figure 6: Strategy emphasis placed by logistics companies

Source: Deloitte study (2008)

Brand image

0 10 20 30 40 50 60 70 80 90 100

Referrals

Training to employees

Relationship with other service providers

Ability and willingness to invest

Use of information and IT technology

Integrated solutions

Cost effectiveness

Quality of service

%



19/44

Logistics companies therefore need to concentrate on

the following areas within their organizations in the

future to stimulate future growth! Investing in IT hardware and software! Fostering a service mindset! Controlling costs! Developing products and services that can demand

higher prices! Integrating functions within SMEs! Nurturing and training manpower! Educating customers about services and its benefits.! Understanding customer needs! Ensuring data integrity and security! Meeting and exceeding customer expectations at all

time at lowest possible prices

The Indian logistics industry is currently growing at a

good pace. However, if the industry wishes to sustain

this progress, it is crucial for the government and the

players of this Industry to help remove obstacles and

introduce world class infrastructure.

Currently, most small and medium logistics enterprises

are driven by function-based logistics services such as

storage, transportation and documentation, whilst fully

integrated value-added services are only provided by far

and few. The need for these logistics service providers is

to now elevate the level of involvement with the client

from the traditional one-time transaction level to that of

a strategic partnership one. The SME logistics service

providers are now consciously striving to move up the

value chain and are placing more emphasis on thestrategic approach to obtain new business.

The following interdependent factors are expected to

shape Indian logistics industry over the next 5-10 years:

1. Growth of multimodal logistics - In an era of

intense competition where just-in-time deliveries have

become crucial, efficient multimodal logistics will spell

the difference between success and failure in the

market. The growth of multimodal logistics is resulting

in a radical transformation in the logistics business and

is certain to bring down the logistics cost and time by

around 20-30 % in the near future.

3.4 Future trends in logistics

2. Globalization and consolidation - Mergers and

Acquisitions are creating firms that have the capability to

provide a 'single point of contact' that can handle global

supply chains for their clients. Globalization of traditional

businesses is driving the logistics industry to address

considerations like market expansion, new sources of

supply, international trade, etc.

3. Increased outsourcing - Supply chains are becoming

complex to manage; companies are focusing more on

core competencies. In order to increase flexibility and

responsiveness in their supply chain, companies are

increasingly utilizing logistics outsourcing.

4. Security and risk management - Supply chain

security and risk management will be a key area to

prevent disruptions due to factors like weather, labour

issues and strikes or terrorist attacks.

5. Technological advancements - Rapid advancements

in supply chain technology enablers (like RFID) will leadto increased functionality and greater potential to

improve performance of supply chain.

6. Increased customer expectations - Customers will

be moving away from tactical transactional based

service outsourcing to solutions that are more strategic

in nature and supported by leading edge technology

and systems.

The SME logistics service providers arenow consciously striving to move upthe value chain and are placing moreemphasis on the strategic approach toobtain new business.



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20

3.5 Regulatory overview

Taxes and duties pertaining to the logistics

industry

Important components of logistics cost include tariff

such as central sales tax, local sales tax, entry tax, octroi,

turnover tax, etc. Many of these taxes are state subjects.

Traditionally, there have been no mutual consultations

or agreement among the states on making taxes

uniform. The local sales tax rates vary significantly

between states. The states have also been competing

with one another in offering sales tax concessions to

attract investment proposals, making decisions such as

the location of manufacturing facilities, warehouses,

etc, dependent on these taxes. However, the situation is

likely to undergo a paradigm shift soon.

Legal enactments of transportation

The following are the acts/enactments that specify the

laws relating to the logistics industry! The Carriers Act, 1865! The Carriage of goods by Sea Act, 1925! Sale of Goods Act, 1930! The Merchant Shipping Act, 1958! Custom Act, 1962! The Marine Insurance Act, 1963! Major Port Trust Act, 1963! Carriage by Air Act, 1972! The Railways Act, 1989! The Multimodal Transportation of Goods Act, 1993! Central Road Fund Act, 2000! Carriage by Road Act, 2007

MSMED ActThe Micro, Small and Medium Enterprises Development

Act, 2006 (MSMEDA, 2006), aims to facilitate

promotion, development and enhancement of micro,

small and medium enterprises competitiveness, and has

come into force from 2nd October, 2006. It aims to

facilitate promotion, development and enhancement of

the competitiveness of micro, small and medium

enterprises through skill development, technological up

gradation, and preference in procurement by

government, public sector enterprises and governmentaided institutions. The Act also seeks to provide

protection to such enterprises by making provisions for

timely release of payments due to these organisations.



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4. Logistics operations viamajor channels

India's transport system has expanded manifold since

independence, both in terms of spread and capacity.

Along with the increase in quantity, there have been

several developments of qualitative nature, such as

emergence of a multi-modal system, improvement in

the self-financing capacity of the sector etc. Impressive

as this progress is, the country's transport system is far

from adequate and suffers from a large number of

deficiencies and bottlenecks

.

Figure 7: Infrastructure at a glance

Source: PPP in India (2008)

21

India's transport system has expandedmanifold since independence, both interms of spread and capacity.



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22

4.1 Waterways

The importance of maritime infrastructure in facilitating

international trade is well recognized. It is observed that

about 95% by volume and 70% by value of the

country's foreign trade is carried on through maritime

transport. India's ability to achieve rapid economic

growth via the export route therefore lies in improving

its major international trade gateway, viz the ports.

India has 12 major ports, six on the west coast and six

on the east. The 12 major ports handled 519 million5tonnes of cargo in 2007-08. All the Major Ports are

administered by Port Trusts which are managed by the

individual Port Authority under Central Government

jurisdiction except for the newly constructed Ennore

Port which is run by a company named Ennore Port

Limited registered under Companies 96 Act, 1956.

There are also around 187 non major / intermediate

ports dotted along India's 7,517 km of coastline.

Issues Faced by LSPs

Due to severe congestion at Indian ports and

inadequate infrastructure, Logistics Service Providers are

finding it difficult to manage the increasing growth in

the consignment shipments. For instance, the Jawaharlal

Capacity as of March 2007

Major ports

Non major ports

Total

509

228

737

Table 8: Estimated capacity addition at Indian ports

Source: Planning commission (2007)

1,002

573

1,575

Capacity by March 2012Ports

Capacity addition in million tonnes

Nehru which is the largest container port in India is

severely congested. The port reported a backlog of

roughly 5,500 import containers in June 2007 due to

shortage of trains. It is estimated that India looses about

Rs 48,000 crore each year because of higher transaction

costs at its ports.

The transaction cost at Indian ports is about 10 percent,

compared to 6 percent in developed countries; resulting

in a number of problems faced by logistics companies.

The main issues are! Higher turnaround time! Port congestion! Inadequate use of information technology! Shortage of dredging capabilities! Shortage of trained personnel at ports.

The Indian Railways freight earnings for f iscal 2007-08

have gone up by 13.86 per cent driven by a

combination of higher freight volumes and tariff hikes.Railways recorded Rs 47,558.78 crore of freight earnings

during the fiscal 2007-08, up 13.86 per cent from Rs

41,768.35 crore in 2006-07. The Rail budget 2008-09

shows that freight loading has been increased by 10%

and the cargo in the railways are expected to be

monitored online in the next two years i.e. by 2009-10.

In order to cope up with the increasing freight volumes,

projects like the Dedicated Freight Corridor have been

sanctioned. The Dedicated Freight Corridor (DFC) project

was conceived mainly due to the capacity constraints

faced by the existing railway network. At present thefreight and the passenger trains are using the same

tracks causing delays. The Construction for Phase I of

the project is proposed to be completed by 2012. The

Phase I of the Dedicated Freight Corridor (DFC) is

envisaged to be completed by 2012.

4.2 Railways

5India Supply Chain Council, Article April 20082009 Deloitte Touche Tohmatsu India Private Limited


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The Western Rail Freight Corridor would comprise of

1483 km of a double line diesel track from JNPT to Dadri

via Vadodara-Ahmedabad-Palanpur-Phulera-Rewari. The

Eastern Corridor encompasses a double line electrified

traction corridor from Sonnagar on the East Central

Railway to Khurja on the North Central Railway (820

Km), Khurja to Dadri on NCR Double Line electrified

corridor (46 Km) and Single electrif ied line from Khurja

to Ludhiana (412 Km) on Northern Railway.

Issues faced by LSPs! Railway congestion! High incidence of loss of goods in transit! Fear of damage to goods! Long waiting period for booking cargo space on

railways

Roadways are the most preferred mode of freight

transport due to their cost efficiency and assurance of

door to door service. 70% of the total freight in India iscarried by roadways.

Indian road network of 33 lakh km is the second largest

in the world. Out of this total network, National

Highways (NH) comprise of 66,590 km and the length

of State Highways (SH) is 1,31,899 km. National

Highways constitute only 2% of the total road network

but carry 40% of the total traffic.

Most Indian roads were built with the primary aim of

moving passenger traffic. Due to the increased

containerized movement of the freight, container

trolleys are replacing trucks. Most Indian highways do

not have the adequate bearing capacity for multi-axle

and tandem trucks. This has led to rapid deterioration of

road surface quality in much geography.

Keeping in view the demand of the road traffic, the

National Highway Development Programmes (NHDP) is

being implemented by NHAI in the following phases -! Phase I- 4-laning of National Highways connecting

four metropolis of Delhi, Mumbai, Chennai, Kolkatta

and Delhi, namely Golden Quadrilateral (G.Q),! The Phase II (NSEW) - mainly comprises North-South

4.3 Roadways

Figure 8: Railway freight earnings

* - budget estimatesSource: CMIE (March 2008)

Rs.crore

2001-02

0

15000

30000

45000

60000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09*

and East-West Corridor connecting Srinagar to

Kanyakumari and Silchar to Porbandar

! Phase III - 4-laning of 10,000 kms of NationalHighways

! Phase IV - 2 laning with paved shoulders of 20,000

kms of National Highways! Phase V - 6 laning of 6,500 kms selected stretches of

National Highways.! Phase VI - Development of 1,000 kms of expressways.! Phase VII - Construction of ring roads, flyovers and

bypasses on selected stretches! Port Connectivity - include improvement of links to

the major ports.

Issues faced by LSPs! Roadways have been built keeping in mind passenger

vehicles and not freight movement through heavy

vehicles. This causes high number of truck accidents

on Highways. Roads are being damaged due to the

high axle load of the cargo carriers.! The poor condition of roads translates directly to

higher vehicle turnover, which increases operating

costs and reduces efficiency.! Average speed of trucks in India is only 32 km per hr,

compared to 60 km per hr in developed nations.



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Roadways are the

most preferred modeof freight transportdue to their costefficiency andassurance of door to

door service. 70% ofthe total freight in

India is carried byroadways.



25/44

10

The air cargo Industry acts as an engine of growth for

the economic development of a country. Aircrafts

carried 2% of international trade by volume, but 40% by

value in 2007 - 08. They are an integral part of supply

chains of any manufacturer and retailer who operate in

lean inventory environment. In order to keep up with

the increasing demand, Indias Civil Aviation Ministry

plans to increase the number of airports in the country.6It has set a target of 500 operational airports by 2020.

Issues Faced by LSPs! India has only 80 fully functional airports and 368

landing strips that function as makeshift airports for

limited purposes. Airlines are facing infrastructure

constraints due to limited landing slots, inadequate

parking bays, and congestion during peak hours...! Due to regulatory restrictions and time consuming

procedures such as excessive physical examination of

cargo by customs, there is usually delays in customs

clearance.

4.4 Airways ! The present cargo handling complexes need a drastic

facelift in the overall infrastructure, operations to

accommodate the growing potential of air cargo

transport.! The need to improve perishable cargo handling

facilities also becomes imperative for a booming

organized retail sector! Lack of a reliable Electronic Data Interchange (EDI)

system that offers proper co ordination between

Airport Authority of India (AAI) and customs officials

to help streamline the documentation procedure of

logistics service providers! Lack of up-gradation of the IT hardware and support

system at the cargo complex.

6Center for Asia Pacific Aviation Report, 2008



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5. Technology trends in thelogistics industry

26

5.1 Emerging trends

Warehouse Management System (WMS)

In India warehouses typically operate at 65% of their7capacity. The primary reason behind this is the precious

time that is lost between tasks. An appropriately

customized WMS helps in reducing inventory receipts,

send-outs and storage, along with manpower and

resource handling in an optimum way. Thus, a well

designed WMS helps in reducing inventory levels,

lowering costs, promoting customer satisfaction, giving

real time updates, improving quality control and often

also nurturing a healthy work atmosphere. A 3.5%

improvement in inventory accuracy and a 10-35%

reduction in warehouse operating expenses are usually8anticipated post the implementation of a WMS.

WMS is currently used only by well established logistics

companies which have a large warehouse at multiple

sites and carry a large SKU.

Global Positioning System (GPS)

GPS technology gives the details of the origin anddestination of a shipment. During transit, it helps in

providing the exact position of a consignment. There are

sophisticated GPS maps and technology available

through which one can track the movement, and be

proactive to customers by informing about the shipment

status and expected delivery time. GPS system helps

logistics companies to track the location of their goods.

However, GPS has low adoption among the SMEs in the

logistics business in India.

Around 25% of LSPs currently use the GPS system. This

is due to high ongoing capital investment. Though eachGPS receiver costs upwards of 40,000 rupees, however

the service charges are high at around Rs. 20,000-Rs.

25,000 annually has restricted the use of GPS in India.

Customers also face issues like service, geographical

coverage, support, updates and integration with

backbone system. At present mobile phones are vastly

used to track and keep record of shipment.

Figure 9: Warehouse Management System

Figure 10: GPS Receiver

7Survey conducted by ARC Advisory Group, 2007

8Logistics Management Magazine, June 2007

9Deloitte Findings, 20082009 Deloitte Touche Tohmatsu India Private Limited


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Enterprise Resource Planning (ERP)

ERP systems integrate several data sources and

processes of an organization into a unified system. A

typical ERP system uses multiple components of

computer software and hardware to achieve the

integration.

ERP induces enough visibility in the supply chain so that

an efficient work flow can be established. By pull ing

together and sharing information from functions such as

purchasing, warehousing, and sales it helps to control

costs. A lot of medium enterprises are installing ERP

software's, due to unprecedented growth the logistics

and transportation Industry.

Radio-frequency identification (RFID) is an automatic

identification method, relying on storing and remotely

retrieving data using devices called RFID tags or

transponders. It allows LSPs to track, monitor, and

report and manage products, documents, assets andpeople more effectively and efficiently as they move

between locations anywhere at any time.

An RFID tag is incorporated into a product for the

purpose of identification using radio waves. Some tags

can be read from several meters away and beyond the

line of sight of the reader. These RF Tags can be active

or passive and they require a reading device and

interface computer to process information.

Importance of RFID in logistics!

Allows the service provider to track items at eachsupply chain location, from plant to consumer

! Protects against copying and counterfeit of goods by

embedding a unique Electronic Product Code (EPC)

code into each item! Proves the origin and improves the handling of goods.

Shippers can use RFID tags to show a sterile supply

chain and enable better quality in security processes.! Tracks the amount of goods in the supply chain and

helps to save capital required for distribution and

warehousing storage costs

5.2 RFID In focus

Figure 11: ERP System

Figure 12: RFID tag

Savings that can be enjoyed by a LSP using RFID

technology includes! Reduces the manpower requirement of the company

considerably! Saves time as scanning of cases/items takes place

rapidly. RFID can scan upto 1000 boxes in a second

whereas bar coding would take a few hours to scan

the same number of boxes! High level of security as data cannot be hacked



28/44

28

Reasons why RFID as a technology has not yet

penetrated in India

The high cost of installation is one of the primary

reasons why RFID is not used much in India as

compared to other countries. Incorporating a basic RFID

technology for a medium enterprise in the logistics10

business costs around Rs 0.50-0.60 Crores.

This is because the technology requires 100%

customisation. The service provider has to study the

entire functioning of the enterprise in detail to

incorporate use of RFID.

RFID tags are not manufactured in India and have to be

imported. This escalates the price of the tag due to

taxes levied on imports. The tags cost around Rs 9-Rs 60

in India which is very high as compared to countries like

North America and Europe where the price ranges from

Rs 2-Rs 4 per tag.15. RFID technology however

represents the next generation bar code and promises to

deliver additional benefits.

RFID

Plus

Minus

! 4Communicates through radio waves, line ofsight not required

! 4RFID tags store significantly moreinformation

! 4RFID is dynamic and information can beadded or deleted at every steps in a process

! 4Increased functionality; covert and difficultto counterfeit

! 4Fully automated and nearly error free! Tags are more durable and can operate in

harsh environments

! 4Higher costs but dropping, $0.05 tags onthe horizon

!

4Uncertain universality of systems! 4Tag reading is presently very much

dependent on environmental conditions! 4Tightly linked to the infrastructure

Table 9: RFID v/s bar coding

Bar Codes

! 4Involves lower cost tags and infrastructure! 4Has widespread utilization! Tags are human readable

! 4Transmission of data is performed optically-clear line of sight required.

!

4Information storage is limited! 4Reads only, one tag at a time! 4Read capability can be affected by dirt,

water and scuffing! 4Can only be written once; No updating! Human intervention opens possibility for

errors.

Source: Deloitte Analysis (2008)

10Deloitte Findings, 20082009 Deloitte Touche Tohmatsu India Private Limited


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North America

Tag Costs

Tagging RadioFrequency

ConsumerPrivacy

Standards

DistributionNetworkAlignment

Unit Price of Rs.2.8 (US$ .07)for passive tags.

EPC-Compliant, Generation-2tag

915 MHz (UHF)

United States: Significant issueSupreme court case Kyllo v.United States 533 US 27.Consumer rights advocatesspreading spychip idea.

Canada: Formation of GS1Canada Public Policy Forum toaddress RFID policy issues

EPC Global / ISO

Use centralised DCsstrategically placed nationwide.

Table 10: RFID global overview

Europe

Approaching Rs 4(US$ 0.10 per tag)

868 MHz (UHF)

At issue, but consumersare being educated andcan opt for tag removal.Article 29 of Directive95/46/ec provides data

protection and platformfor consumer protection.

EPC Global / ISO

Leading efforts to useItem level tagging

Source: Logistics Management (June 2007)

RFID global overview

Asia Pacific India

China: Rs 10-Rs.12 (US$0.25 US$ 0.30) per tag

Japan: Hibiki Project toreduce costs to Rs.1.6 (US$ 0.04) per tag

China: Governmentwants its own standardJapan: 950-956 MHz(UHF)

Not an issue becausemost Asia PacificGovernments favourcollective rights overindividual rights

China: NPC (NationalProduct Codes) StandardJapan: UID UbiquitousID

Network developed tosource large percentageof goods from localsuppliers

Rs 9 (US$ .22) to Rs.10(US$ .25) per tag to

about Rs.50 (US$ 1.2) toRs.60 (US$ 1.5 per tag)

Wireless PlanningCommission, GOI haspermitted the use of 865867 MHz (4 Watt ERP) forUHF in India

In India Consumer Privacyissues have never beenraised as there very littleinstances of RFIDimplementation at

consumer level.

EPC Global / ISO

At nascent stage ofmapping to US andEurope distributionnetworks



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30

Bar Coding

Launched

Installationcost

Maintenance

cost

Servicecharges

Skills requiredto operate

Industry wheretechnology isused

1990

Each barcodescanner costRs. 50,000

20% of the

instrumentcost perannum

NA

Minimal

Retail, logistics

Table 11: Summary chart of technologies used in logistics

CRM

Source: Various

RFID global overview

ERP MIS

5.3 Summary chart of technologies used in logistics

Parameters

1990s

Approx Rs 4 lakhs

Around Rs 1 lakh

per annum

Rs 1.5 lakhs perannum

Skilled personnel orneed for training

Mainly used in BPO,call centre, banks &retail industry

1995

Rs 9 lakhs forcompletesolution

Around Rs 1.5

lakhs perannum

Rs 2 lakhs perannum

Skilledpersonnel orneed fortraining

All industryverticals

Mid 1980s

Rs 3 lakhs forcompletesolution

Upto Rs 1 lakh

per annum

Upto Rs. 1.5lakhs if required

Skilled personnelor need fortraining

All industryverticals

GPS RFID

2005

Rs 40,000 andupwards for GPSreceiver.

Around 30 to

50% of Avg.installation Cost

Rs 20,000 to Rs24,000 perannum

Minimal

Logistics, tourismindustry,Infrastructureandcommunication.

2006 (used bymajor companieslike DHL and UPS)

Around Rs 50-60lakhs

Differs for each

and everyenterprise

Around 20% ofinstallation costper annum

Skilled personnelor need fortraining

Retail, logistics,courier companies



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6. Growth drivers

The evolving business landscape and increasing

competition across industries, is creating the need for

more efficient and reliable logistics services than what

exists today. For example, rapid growth of organized

retail and the need to reach out to the large untapped

rural markets in India are necessitating development of

strong back end and front end supply networks.

The government is demonstrating a strong commitment

towards providing an enabling better infrastructure and

creating conducive regulations. Hence, players now

have the opportunity to leverage economies of scale,

complemented with better infrastructure, to provide

integrated logistics solutions which are cost effective.

Figure 13: Growth drivers in logistics

Source: Deloitte analysis (2008)

Mergers & acquisitions Rise of 3PLservices

Growth driversof logistics

sector

GDP growth(high trade + EXIM

business)

Enhancedinfrastructureinvestments

Qualifiedworkforce

Availability andaccess tofinance



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32

6.1 GDP growth and rise of 3PL services

6.2 Investments in infrastructure

Most companies across industries like automotive,

electronics, FMCG and pharmaceutical sectors are

increasingly opting to outsource their logistics

requirements to specialized Third Party Logistic Service

Providers. This has created a demand for a range of

logistics services which will benefit the productivity and

efficiency of the customers' entire supply chains. It is

estimated that 3PL solutions are slated to grow at a

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 to11

13% in FY11, at a CAGR of 25%.

The table on the right shows that there is an inverse

relationship between logistics cost and the share of 3PLs

in overall logistics. The greater the share of 3PLs in

logistics the lesser is the logistics cost. This highlights the

importance of 3PLs in logistics.

The logistics industry in India is currently suffering due

to poor infrastructure. This has resulted in inefficiencies

and delay in deliveries, which in turn affects overall

productivity of logistics business. However, given the

current emphasis on infrastructure, the growth and

efficiency of LSPs as well as their customers will be

positively impacted. The government has planned

investments in infrastructure development amounting12Rs 20,00,000 crore over the next 5 years. This will

prove to be a major benefit for the logistics industry.

!

The NHDP projects including the Golden Quadrilateralroad project and the East & West Rail corridors are

expected to positively alter the response of Indian

firms through shorter lead times as well as lower

maintenance costs on the transport equipment. They

will also reduce the procedural delays on highways by

reducing the number of checks and related stoppages

of vehicles.

! Air cargo movement is expected to grow at over a

CAGR of 11.5 % from 2007-08 to 2011-12. This willgive a boost to the activities of LSPs. The air cargo

business has overtaken the ocean freight and rail

freight market by expanding at nearly 19 % from

2006 to 2008, as against 10.3% growth registered by

ocean freight and 9.2% by railways in the same13

period.

! The industry is estimated to grow in road segment by

13%, port segment by 9.5% and rail segment by 6%.

This will be possible with the improvement in road

infrastructure, implementation of National Maritime

Development programme and introduction of

dedicated freight corridors in rails.

Logistics cost as a% of GDP

India

China

USA

Europe

Japan

13.0%

18.0%

9.9%

10.0%

11.4%

Table 12: Opportunity for 3PL Players in India

Source: Logistics in India, SSKI (2007)

Less than 10%

Less than 10%

34%

54%

80%

Share of 3PL inOverall Logistics

Country

Capacity addition in million tonnes

11Confederation of Indian Industry, Dewan Chopra Report 2007

12Planning Commission, GOI 2008

13Planning Commission, Air Cargo Agents Association of India Report April 20082009 Deloitte Touche Tohmatsu India Private Limited


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6.3 Qualified work force

There has been a sudden transformation in the scale

and scope of activities provided by the logistics sector.

This growth rate needs to be supported with a parallel

growth of skilled and trained manpower. Attracting and

retaining talent is a major problem faced by SMEs in the

logistics business. There is a need to incorporate a high

degree of professionalism in the functioning and

approach of SMEs in this business.

Institute/University

An elective course offered under quantitativeskills and operations management, a part oftwo years Post Graduate Diploma inManagement.

A three year-full time bachelor's course.Degree awarded by West Bengal TechnicalUniversity (WBTU)

Elective included in a 1 year generalmanagement programme for workingexecutives.

Two year Post graduate Diploma in BusinessAdministration through distance learning

programme. The last 2 semesters containspecialization related subjects wherein SupplyChain Management specialization isavailable.

Four semester post graduate diploma inSupply Chain Management

Executive post graduate diploma in SupplyChain Management 1 year weekendprogramme

! Indian Institute of Management (Ahmedabad)! Symbiosis Institute of Operations

Management (SIOM), Nashik! SP Jain Institute of Management and

Research, Mumbai

! NSHM, Kolkata

! Xavier Labour Research Institute, (XLRI)Jamshedpur

! Prin L. N. Welingkar Institute of ManagementDevelopment and Research, Mumbai

!

ICFAI University, Tripura

! CII Institute of Logistics, Chennai

! Loyola Institute of Business Administration,Chennai

Table 13: Some of the recognized institutes offering courses in SCM in India

Courses

However, there is a dearth of practical skills, knowledge

and expertise on the functioning of this Industry.

Courses in supply chain management and logistics

management are not yet the preferred career option for

many students. Also, there are only a handful of

institutes offering specialised courses in this field. Most

courses offered are generally very theoretical and

elusive. It is important to design a course structure

which is an ideal mix of theory and practice.




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34

6.4 Availability and access to finance

As the SME sector emerges to become the nation's

economic growth engine, limited ability of raising

finance to power growth remains an impediment for

sustained expansion. Venture Capital firms are generally

wary of investing in relatively young or unproven

technologies. Banks too are unable to provide debt

financing. In addition, there is no formal mechanism for

SMEs to raise investment from capital markets. It is also

important to understand that it is not very easy for

banks to assess credit requirements of SMEs and

providing them with timely credit. The main reasons for

this are! Highly fragmented nature of SMEs in logistics! Information asymmetry! Lack of transparency! Limited financial disclosures in financial statements of

SMEs! Non Performing Asset (NPA) legacy effect

Financial hurdles faced by SMEs! Financial reforms and financial prudence! Information opaqueness! Lack of proper accounting practices and

documentation! Inability to provide collateral as required by banks! High transaction cost for small sized firms! High risk perception by lending institutions

As a result, SMEs either raise money through informal

means, or scale back on their product and service

offerings. However, if SMEs have easy access to

institutional credit at competitive rates they are morelikely to significantly increase their contribution to GDP

and they would also be in a better position to take on

the global competitive pressures. The government is

taking various measures to improve the delivery of credit

to SMEs. A policy package for stepping up credit to

SMEs has been started by the government. The

government has also set up a Credit Guarantee Fund

(CGF) to provide relief to those small entrepreneurs who

are unable to pledge collateral security.

6.5 Merger & acquisition trends

While entrepreneurship is on the rise, the reality check is

that only few in every 100 new businesses make it past

the second year. Given the odds, buying an existing

business can be a much less risky and more quickly

profitable venture than starting business from scratch.

But it's not entirely risk free and success depends heavily

on how wisely one chooses and evaluates the business

to buy.

M&A among SMEs in logistics

The challenge facing many SME logistics companies in

India is how to expand. Organic growth often requires

high investment with slow returns. The alternative

approach is through mergers or acquisitions. These are

considered as a risky and potentially costly option. But

the fact is that mergers and acquisitions if done

strategically and diligently can be low risk, and can also

attract funding from institutional investment companies

whose long term interest is to facilitate growth. The

challenges are actually in finding the right acquisitions,understanding restructuring options to minimise risk and

cost, and finding the most suitable investment partners

when additional funding is required. Figure 14 shows

that though a number of SMEs crop up in India, many

of the businesses shut down, due to lack of adequate

knowledge and skills required to run an enterprise.

Figure 14: SMEs life-cycle trend


Start-ups

Strugglers

Survivors

P oferiod

istex ence



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In order to survive in the competitive environment, small

enterprises come together in order to provide a larger

basket of services and also to take advantage of

economies of scale. Mergers and Acquisitions help

enterprises to survive and grow. This highlights the

importance of Mergers and Acquisitions among SMEs.

A number of factors like globalization, positive cash

positions, increased customer expectations and higher

rewards make this the right time for supply chain players

to merge.! Globalisation - Shippers are increasingly likely to

source and sell goods outside their own borders.

Moving shipments across oceans and continents is

inherently more complex than moving shipments

domestically, so LSPs are required to build or buy

international shipping expertise. This has resulted in

tie-ups with various shipping service providers.

Shippers turn to 3PLs to solve a multitude of

challenges, most of which extend their services well

beyond the traditional capabilities of warehousing andtransportation.

! Positive Cash Position - Availability of finance has

been a major obstacle to the growth and expansion

activities of SMEs in logistics. Hence in the Indian

logistics space, Mergers and Acquisitions are turning

out to be the most favored route, helping companies

to emerge as stronger and more competitive players in

the industry. Investors are now finding 3PLs particularly

inviting because they have recorded good

compounded annual growth rates and low market

penetration. They are growing faster than the

economy.

! Meeting customer demands- Today, customer needs

are changing. Customers are now looking at complete

range of end to end solutions through a single

provider. Logistic industry in India is predominantly

fragmented, hence there is tremendous opportunity

for players to integrate and enhance the quality of

service provided.

Factors that LSPs must take into considerationbefore finalizing an M & A deal! Know the market and the risk! Always devise an alternative plan! Use service level agreements! Study the benefits and growth prospects before

entering into a merger



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7. Logistics model

36

This section indicatively depicts the logistics model

followed by soft drink companies and companies

dealing in IT hardware. The soft drink companies use a

single mode of transportation i.e. trucks for all their

transportation activities. IT hardware companies on the

other hand are an example of multi-modal logistics.

7.1 Indicative logistics model for a soft drink

company

Unlike most FMCG companies which follow a one way

business pattern, soft drink manufacturers follow a 2

way business pattern. In India soft drink manufacturing

is viable as manufacturers make use of Returnable Glass

Bottles (RGBs) instead of plastic disposable bottles.

It is more viable to adopt a two way business pattern

due to the tremendous cost saving on bottles, as the

glass bottle is used 8 t imes in its life. Companies invest

in a certain amount of glass every year known as glass

float. At any given point of time there must be a certain

fixed number of bottles in the market. The company has

its own set of manufacturers who make these bottles as

per the specifications and requirements. These bottlesare sent to the main plant called the mother plant in

trucks. The liquid is filled up at the plant and then

transported to the distributors using trucks. The bottles

Figure 15: Logistics model of a soft drink manufacturer


Manufacturer Mother plant Distributor Retailer Consumer

Direct distribution (10%)

Indirect distribution (90%)

Reverse logisticsfor empty bottles



are kept in crates where each crate carries 24 bottles.

There are two channels of distribution, direct

distribution and indirect distribution. The logistics

movement from the mother plant to the distributors is

called primary freight / load.

Direct distribution - Here the entire distribution of the

product is done by the company's own distributors.

The company has its own staff, owns the trucks and

other assets and bears 100% responsibility for the entire

distribution procedure. The top 10% of the Companies

account is usually handled by the Direct Distributors.

Indirect distribution - Here the company appoints

distributors who are completely responsible for the

entire logistics activity. The appointed agents use their

own vehicles and have their own staff. Distributors use

trucks to transfer the bottles to retailers. This process of

transfer from the distributor to the market is called

secondary freight / load. The filled bottles are

delivered to the retail outlets and the empty bottles are

taken from the retailer and taken back to the plant

where they are washed and refilled. Retailers pay a

deposit on every crate they purchase so that in case ofdamage, breakage or exchange of bottles the company

deducts the amount from the deposit.



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7.2 Indicative logistics model for an IT hardware

company

The model shown above is an example of multi-modal

logistics used by global IT hardware companies. The

goods are transported from the suppliers to theassembly plant. The products that need to be exported

are taken to the warehouse by trucks. From the

warehouse they are taken to the port and the

consignment is shipped to its destination. On reaching

the destination, the goods are stocked in warehouses

called transshipment points. From each warehouse

goods are taken to Country-wide Distribution Centres

(DCs) by trucks. Once again trucks are used to transport

the goods to the Retailers from where final purchase

takes place by consumers. This logistics model does not

include reverse logistics.

Suppliers(international)


Suppliers

(international)


asme logistics report

Documents