Third Party Logistics – An Overview

Third Party Logistics (3PL), the concept of a single professional logistics service
provider managing the entire logistics functions of a company, had originated in the
developed economies of Europe and America, to relieve industries from huge logistics
costs apart from the hassles of dealing with multiple in-coherent logistics service
providers. It proved to be immensely successful in improving logistics efficiency of
majority of industries and quickly gained popularity, spreading across the globe. In the
process, several professional logistics service providers offering that kind of services
have emerged to be leading 3PL providers with operations in multiple continents.

In the initial stages, 3PL providers offered only basic logistics services such as
warehousing and transportation. But with growing logistics needs of organizations to
remain competitive in globalized economies, 3PL providers have evolved to offer several
other value added services ranging from packaging to supply chain planning.

Advent and Growth of 3PL Industry in India

3PL industry’s origin in India can be traced back to mid 1990s. The industry was
pioneered by global logistics majors as a part of extending these services to the Indian
subsidiaries of multinational companies in automobile, electronics and FMCG sectors.
Indian subsidiaries of multinational companies in these sectors took cue from their parent
companies and began to outsource a share of their logistics functions to these specialist
service providers. Though insignificant in the first few years, Indian 3PL industry is
experiencing a rapid growth after year 2000. The number of participants in this industry
had grown to be more than 400 by year 2005.

The Indian 3PL industry can be divided into three distinct tiers - National Major 3PL
companies with nationwide presence, Regional 3PL companies with strong presence in
one or two regions, and Small Remote 3PL companies.
3PL Market in India – Poised for a Remarkable Growth

The 3PL market in India is still in a relatively nascent stage, with multinational
companies in all industries being the predominant users of these services. However,
domestic major companies in leading industry sectors have also begun to follow the
footsteps of their multinational counterparts, starting with outsourcing their basic
logistics functions. Realizing the significant cost reductions and several other benefits
gained by these companies, the large numbers of small to medium companies in all the
industries are gearing up to use 3PL services in their logistic functions, resulting in a
tremendous potential market for the 3PL market in India.

The opportunities for growth of 3PL usage could be varied among different types of
companies. The multinational companies that are already using 3PL in basic logistic
functions might graduate to outsourcing value-added advanced services such as customer
support, inbound logistics, and reverse logistics. Whereas, the domestic major companies
might increase their 3PL usage in the basic logistic functions and occasionally
experiment with the value-added advanced services. On the contrary, the small and
medium companies could just begin to use 3PL services for their basic logistic functions.

Nevertheless, considering that the most important logistics functions for Indian industries
still are transportation and warehousing, which are likely to be outsourced to 3PL in
increasing share, a high level of growth is estimated for the Indian 3PL market in the next
5-7 years. The Indian 3PL market, estimated at about US$890.3 billion in 2005, is
expected to grow at a compound annual growth rate of 21.9 percent to reach US$3,556.7
million in 2012.

Frost & Sullivan’s research identified that the largest end-user industry for 3PL services
as of 2005, is the auto industry. A lot of multinational automobile makers, like Suzuki,
Honda, and Ford, have set up manufacturing bases in India, and have been major users of
3PL services. Expansion of manufacturing facilities by most of these companies indicates
huge potential for 3PL services in this industry. Other sectors that have shown substantial
contribution to 3PL market and significant growth potential include the information
technology (IT) hardware and electronics, Fast Moving Consumer Goods (FMCG), and
retail sectors.

A Few Challenges to be addressed for Maintaining the Momentum

Geographic diversity of India needing varied logistics expertise for each region is a major
challenge to be addressed by 3PL service providers. India has a diverse geographic
scenario coupled with a diverse consumer habit scenario in each of its 25 states. Logistics
operation in each state requires a suitable model that facilitates the effective storage and
transportation of goods mostly sold in that state, making it very difficult for adopting a
uniform logistics model. 3PL service companies interested in serving a particular
company would have to offer multiple solutions to fulfill the nationwide logistics needs
of that company.

Infrastructure limitations in India, which limit the scope of logistics services package are
another concern for 3PL service providers. The congested roadways and ports resulting in
significant delay in movement of goods, affect the performance of 3PL service providers.
Similarly, lack of sufficient warehousing and specialized storage facilities beyond major
cities of the country result in 3PL service providers to restrain from offering warehousing
services across the country, hence resulting in their failure to become the complete
logistics service providers for clients. Building own warehousing facilities in strategic
geographic locations that would serve as hubs for specific regions, could address this
problem.

The complicated tax structure, deep-rooted corruption and high bureaucratic control are
some other hassles faced by 3PL service providers in providing the best of logistics
solutions for their clients. However, despite the existence of challenges, several factors
are driving the growth of Indian 3PL market.
Some Factors that are Driving Indian Logistics towards 3PL

Value Added Tax (VAT), the Indian Government’s proposed uniform tax regime, is
expected to drive Indian industries towards using more 3PL services. Introduced partially
in 2005, a full implementation of this regime is expected to necessitate having centralized
large warehouses in regional hub cities, to achieve best efficiency in logistics. Since
building such large warehouses requires huge investments, most Indian companies are
likely to outsource the warehousing function, creating immense potential market for 3PL
service providers. Leading companies in major industries have already started planning
for the new scenario and the required warehousing capacity to be outsourced. Others are
expected to follow them soon.

The government of India’s increased focus on improving logistics infrastructure is

expected to have a huge positive impact on 3PL market. The government has invested US
$17 billion to upgrade highway networks, with the implementation of two major projects,
namely the Golden Quadrilateral network and the North-South-East-West (NSEW)
Corridor. Apart from this, in a remarkable infrastructure related decision, the government
has opened up rail freight operations to private players, thereby creating opportunities for
cheaper and faster movement of goods. Transportation by rail is definitely cheaper than
by road, as trains are faster and have lower costs per unit distance traveled. This is
expected to enable 3PL service providers in offering more cost-effective services to
clients, thereby increasing the 3PL usage by all industries.

Apart from these factors, the increasing list of multinational companies starting
operations in India is expected to fuel the growth of 3PL market. Entry of giants like
BMW, Flextronics, and Wal-Mart are expected to contribute to considerable growth of
3PL usage in their respective industry sectors. The opening up of the Indian economy to
foreign investments is expected to attract more companies into the country, thereby
adding momentum to 3PL market growth. The wide-spread information technology
awareness and expertise in India is also expected to help 3PL companies in offering
several value added services using IT such as Fleet Management Systems, Warehouse
Management Systems, and integrated Supply Chain Management systems.
FUNCTIONS OF WAREHOUSE

 Providing Transit Warehouse

 Space for LCL Consolidation

 Provided Space for Air Cargo

 Provided Space for Bonded Warehouse

 Multi-stacking of high value cargo

 Separate bay for personal effects

 X-ray equipment

 Weighing Machine

ACTIVITIES IN WAREHOUSE:

 Palletisation
 Consolidation
 Aggregation
 LCL Consolidation
 Stuffing / De-stuffing
 Delivery of Cargo
 Shutout of Cargo
 Re-working of Cargo
 Fumigation
  Loading / Unloading of Cargo

BENEFITS OF BONDED WAREHOUSE:

 Facility to import cargo

 Duty payment deferred
 Enables buyer to clear in lots
 Re-export is possible without payment of customs duty

Conclusion

The Indian 3PL market is set to grow tremendously in the next 5-7 years, spearheading
the growth of logistics market. Several factors including government’s support are
instrumental in this growth. Though certain challenges remain to be addressed, the
general trend is highly positive. With scenario highly favorable for them, the onus is now
on 3PL service companies to offer quality services at affordable pricing, and delivering
consistent results to maintain the momentum. For now, surely 3PL is the way forward for
Indian Logistics Market.