Article Dated: 10/24/2006
With the demand for Logistics Service Providers (LSP) on the rise in India, even carrier firms are looking at making the transition into a logistics player in the market. But it’s easier said than done; this trend is giving rise to several inefficiencies. The reasons: lack of technology, inadequate financial support, poor infrastructure, and lesser know-how of logistics among carrier firms.
Poor standards a cause for losses
The majority of 3PL revenues come from inventory handling, transportation, warehousing, and IT services. However, due to lack of technology, ill-equipped warehouses and very few value-added services, Indian LSPs have not managed to explore newer avenues. Both shippers and LSPs are losing a large part of freight value due to inefficiencies in the system.
According to the Seafood Exporters’ Association of India, the seafood industry loses $1.33 billion (US dollars) per year due to poor logistics. The country produces 5.2 million ton of fish worth $6.66 billion (US dollars) per year. Nearly 20 percent of the produce is wasted due to improper handling and poor transportation and storage facilities. Congestion at the port and lack of refrigerated containers are also major concerns for exporters.
Lack of infrastructure
Emphasizing the role that infrastructure plays in trade, Indian Finance Minister P Chidambaram said: “Given that approximately 95 percent of the trade volume and over 75 percent by value of the country’s international trade is carried by sea, the ports are crucial to India’s development and its overall standing in the global marketplace.” However, container capacity utilization could remain less than 70 percent until 2012. The country could lose out two percent of its GDP growth due to poor infrastructure, according to a report published by the Indian Government.
According to NOL Deputy Vice-President (Asia, Mid-East) Cedric Foo, government policies have a big impact in this respect. While China has invested 20 percent of its GDP in infrastructure, India has spent only six percent. Higher freight costs (11 percent) against a global average of six percent, along with high tariffs of around 8 cents (US dollars) per ton per kilometer are some of the highest in the world, thus adding to the industry’s woes.
A McKinsey study last year found that the standard transit time between the factory shop floor in India and the shop shelves in the United States is 6–12 weeks. In comparison, it takes just 2–3 weeks for Chinese goods to make the same journey.
Unlike the U.S. and China, LSPs in India do not have adequate funding to match their investment plans, which leads to unsatisfactory execution of their strategies. Funds are required to build state-of-the-art warehouses, deploy sophisticated technologies, to make captive investments in resource management like training, added security measures, and efficient tracking technologies.
Lack of robust integrated technologies
Indian logistics companies, which were primarily transport carriers until recently, have strong execution tools but inadequate planning software, including route and network optimizers, schedulers, pricing tools, load planners, and end client’s demand and supply assessment tool.
Indian LSPs have been unable to combine the high profit margin services with the lower profit margin ones due to inefficient technology frameworks. LSPs are lacking in systems, including manual and technology, to manage all the services together and keep them accountable separately in books of accounts. This leads to poor profit margins.
Ninety percent of technology solutions in India are developed in-house over a period of time, and modules are added when the need arises. There is lack of proficiency in integrating the applications of software like this with third-party application suites including SAP, Oracle, Manugistics and Siebel. CRM, ERP, TMS, and SCM and hence do not interface with each other at most times. There are not many tracking mechanisms, the existing technology is costlier and not all the vehicles are geared for tracking.
Cost of technology
LSPs in India do not spend enough on technology. The Transport Corporation of India (TCI), a large LSP, spent close to $350,000 (US dollars) on GPS technology as part of its large IT expansion plan. However, looking at the international standards, this is not sufficient to deploy efficient IT systems. TCI has already installed GPS in nearly 200 vehicles and plans to bring in another 400 vehicles under this technology in the coming years.
Indian logistics providers prefer to pay technology costs on deferred payment mode, wherein the cost is recovered as part of each transaction or from the savings in the cost. Application providers can take better control of the efficiency of the process and ensure higher yield out of their process and charge accordingly.
The state of warehouses
LSPs are yet to develop state-of-the-art warehouses with high security features. The warehouses are not integrated with each other, and therefore, do not support an inventory stock management program among the Regional Distribution Centers (RDC), Local Distribution Centers (LDC), and Global Distribution Centers (GDC). Warehouses are not TAPA-certified. They do not provide features like CCTV, alarms, pre-theft and post-theft security measures, e-seals, and mechanical seals.
Lack of know-how
Outsourcing among Indian shippers is more task-based than for the entire process, which largely limits the role of an LSP. KPIs are not adequately measured to reflect the direct value in the business of the shipper, mainly in terms of cash cycle, delivery lead time, time to market and time to cash. Indian logistics players do not spend sufficiently on research for newer markets and the requirements of shippers that are entering India now. There is not enough training imparted to employees, including drivers, to keep the systems and procedures intact. There is not enough collaboration between shippers and LSPs, limiting the end use objective of logistics service providers. There is considerate lack of trust in LSPs to provide them better access to information and process know-how. Third-party vehicle providers do not often have any regard for the systems and procedures put in place by the 3PL or shipper. Sufficient knowledge of the logistics value chain and its benefits can motivate all the stakeholders to provide better quality of logistics services.
Better technology, more informed employees of shippers and LSPs, and a robust infrastructure backed by considerable resources would take India to the most preferred destination in terms of the logistics market.
IBN is an international market research company headquartered in India, Pune serving Fortune companies globally in the logistics domain. IBN’s portfolio of services includes custom research, multi-client reporting, industry abstracts and competitive intelligence on a global scale.