Supply Chain Management (SCM)

A supply chain is a set of organizations directly linked by one or more of the

upstream and downstream flows of products, services, finances, and information
from a source to a customer. Managing a supply chain is 'supply chain
management'. In literature, logistics and SCM are often used interchangeably,
though there is a subtle difference between the two. While SCM is more strategic
in nature, logistics is more operations-oriented.
Supply Chain Management is the systemic, strategic coordination of the traditional
business functions and the tactics across these business functions within a
particular company and across businesses within the supply chain, for the purposes
of improving the long-term performance of the individual companies and the
supply chain as a whole.

Global logistics industry:

Currently the annual logistics cost of the world is about USD 3.5 trillion. For any
country, the annual logistics cost varies between 9% and 20% of the GDP, the
figure for the US being about 9%.

The logistics industry is a very competitive one with a large number of

international players having presence in many countries. The service providers
have a number of issues to address, such as pricing pressures, high costs of
operations and low returns on investments, hiring and retaining talent, and pressure
from clients to broaden the range of service offerings and internationalize

operations, demand for customized solutions and more value-added services,

besides infrastructure bottlenecks and government regulations.
The service providers have to continuously upgrade their networks and systems
and equip themselves with the latest technologies to carry out their complex
operations and provide the best logistics services to their customers. This involves
huge capital expenditure and an ongoing maintenance costs. Logistics companies
the world over are increasingly investing in technologies like Warehouse
Management System (WMS), Enterprise Resources Planning (ERP), Global
Positioning System (GPS) and Radio Frequency Identification (RFID) to provide
the best logistics services increasing transparency and efficiency of supply chains
of their customers.

3PL
Third-party logistics (3PL) refers to outsourcing transportation, warehousing and
other logistics related activities to a 3PL service provider that were originally
performed in-house.

Third-party logistics (3PL) or logistics outsourcing is gaining importance as more

and more corporations across the world, unable to manage their complex supply
chains, are outsourcing logistics activities to the 3PL or logistics service providers.
Globalisation has led to rapid rise in the need for outsourcing logistics by
companies looking for readymade distribution channels to an entity with local
expertise. Also the process of global sourcing by companies and supply chains
increasingly becoming global and complex has given impetus to the growth of 3PL
services.

By outsourcing logistics activities, corporations are able to not only concentrate on

their core business operations, but also achieve cost-efficiency and improve
delivery performance and customer satisfaction.

Further evolving from outsourcing logistics to 3PL service providers companies

are moving towards 4PL and 5PL service providers to improve their logistics with
minimum investments and in a cost effective manner. This process of evolution
helps companies to build efficient supply chains, reach all the potential customers
and achieve customer satisfaction leading to improved business performance
impacting both revenue and profit growth.

Indian Logistics Industry

The logistics sector in India has evolved over the past two decades from being a
pure transportation / warehousing functional service to provision of more value
added offerings like customs clearance, domestic / international freight forwarding,
cross-docking, reverse logistics, freight consolidation, warehousing of modern
standards etc. India with a GDP of about Rs 31,297 billion is estimated to spend 13
per cent of its GDP on logistics creating an industry size of around Rs. 4,068
billion (approx. Rs 4 lakh crores). The industry generates employment to 4.5 crore
people in the country. The sector has been witnessing double-digit y-o-y growth
rate since 2002 and is expected to be more than USD 120 billion (approx Rs.5.4
lakh crores) by 2015.

India ranked 47th in the World Banks 2010 Logistics Performance Index (LPI) out
of 115 countries that were assessed for their efficient logistics systems with a score
of 3.12 out of a possible 5.

While there has been a growing recognition in India of logistics as a strategic tool
for enterprise cost reduction and improvement of organizational efficiency on the
flip side however, the logistics sector is characterized by dominance of a
disorganized market. Transporters with fleets smaller than five trucks account for
over two-thirds of the total trucks owned and operated in India and make up 80%
of revenues. The freight-forwarding segment is also represented by thousands of
small customs brokers and clearing & forwarding agents, who cater to local cargo
requirements. In order to reduce logistics costs and focus on core competencies,
Indian companies across verticals are now increasingly seeking and using the
services of third-party logistics service providers.
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.

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.

Challenges faced by Indian logistics sector

These are among the supply chain challenges outside companies can expect as they
enter the India market:
Limited physical infrastructure. In India the national highways account
for less than 2 percent of the total road network, but carry 40 percent of the
traffic. This is one reason the average speed in India is 20 miles per hour,
compared to the Wests 60 miles per hour.

Over-burdened ports. India has a long coastline, but its port system isnt
well utilized. Seventy percent of the seaborne trade is handled by 2 of its 12
major ports, while 180 minor ports go virtually unutilized.

Non-existent warehouse standards. There is virtually no complex

distribution center set-up, no standards for suppliers, and little vendor
compliance. Beyond that, firms will find there is little vacant DC space
available. Firms entering the country will have to build this infrastructure,
which will include supplying their own electricity, running water, and road
access.

Disorganized trucking operations. Two-thirds of fleets have less than five

vehicles, making it difficult for shippers to manage the plethora of carriers
required to handle shipment volumes. Freight consolidators and brokers take
a commission to provide truck owners with consignments, and corruption is
rampant.

Multiple tax structures at entry points of different states. Multiple tax

rates at different states, octroi and different documentation requirements at
the entry checkpoints of different states consumes time and increases

complexity of trade between states. This acts a big blockade for movement
of goods between states.

Opportunities:

The Indian economy at USD 1.2 trillion and growing at the rate of 7.5%
offers huge potential for the growth of logistics sector which is valued
currently at USD 156 billion and expected to witness double digit growth in
the coming years.

The phasing out of VAT and introduction of Goods and Services Tax (GST)
will remove multiple tax structures in different states and hence accelerate
the interstate movement of goods.

The investment in infrastructure projects like upgradation and setting up of

seaports and airports at several locations across the country, the Golden
Quadrilateral project and dedicated rail freight corridor will improve
transport infrastructure in the country, reduce logistics costs and lead times.

The setting up Free Trade and Warehousing Zones (FTWZs) on the lines of
SEZs will increase investments in the sector and logistics infrastructure in
the country.

The 3PL market in India is least developed and highly fragmented. However,
there is an immense potential for growth of 3PL in India, about 20% per
annum with companies increasingly outsourcing their logistics to focus on
core activities and achieve cost efficiencies.

 The new mass-merchant-style organized retailing, which today makes up

less than 4 percent of the overall market, is expected to grow to $60 billion
and increase the overall retail market by a compound annual growth
rate (CAGR) of 21.8 percent by 2015.

Key Players
Indian logistics industry is a highly fragmented one with 99% of the market catered
by many small unorganized players and most of the remaining 1% catered by a
large number of organized players. So, one can see that the logistics industry in
India is in a nascent stage.
There are a large number of organized logistics service providers (LSPs) operating
in India operating in several modes viz road, rail, air and sea. Over the year each

player has developed competence in one or multiple modes, but none have
achieved economies of scale to operate cost effectively due to severe competition
from unorganized players.