asme logistics report
TRANSCRIPT
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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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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
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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
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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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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.
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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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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
does not exceed Rs.10 crores
A micro enterpriseDoes not exceed Rs.10
lakhs
A small enterpriseMore than Rs.10 lakhs but
does not exceed Rs.2 crores
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
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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
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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
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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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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
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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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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
%
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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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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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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
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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.
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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
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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
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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, $0.05 tags onthe horizon
!
4Uncertain universality of systems! 4Tag reading is presently very much
dependent on environmental conditions! 4Tightly linked to the infrastructure
Table 9: RFID v/s bar coding
Bar Codes
! 4Involves lower cost tags and infrastructure! 4Has widespread utilization! Tags are human readable
! 4Transmission of data is performed optically-clear line of sight required.
!
4Information storage is limited! 4Reads only, one tag at a time! 4Read capability can be affected by dirt,
water and scuffing! 4Can only be written once; No updating! Human intervention opens possibility for
errors.
Source: Deloitte Analysis (2008)
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North America
Tag Costs
Tagging RadioFrequency
ConsumerPrivacy
Standards
DistributionNetworkAlignment
Unit Price of Rs.2.8 (US$ .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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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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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
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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.
Source: Deloitte study (2008)
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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
Source: Deloitte study (2008)
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
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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
Source: Deloitte study (2008)
Manufacturer Mother plant Distributor Retailer Consumer
Direct distribution (10%)
Indirect distribution (90%)
Reverse logisticsfor empty bottles
Reverse logisticsfor empty bottles
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)
Suppliers
(international)
Suppliers(international)