• How-to

The Indian logistics industry is valued at Rs.6,97,500 crore and employs 50 million people. An efficient inventory management, distribution and transportation network gives businesses/products the edge that saves cost, time, improves efficiency and ultimately translates the market share of the business/product. Third Party Logistics (3PL), the concept of a single professional logistics service provider managing the entire logistics functions of a company to relieve industries from huge logistics costs, apart from the hassles of dealing with multiple incoherent logistics service providers, is key to ensuring an efficient supply chain. In India, 3PL are expected to see a growth rate of around 16-20 percent in the next five years.

Investment and funding
Logistics services can be as simple as brokering and managing freight flows for the customer or as complex as managing the movement of goods from the point of production to other countries for sale, setting up a national network of warehouses, and a national transportation network connecting the manufacturer to all its dealers. Investment required will depend on kind of service offered and also the extent of network (whether local, national or international). To set up a single service, for example, freight forwarding, you may require a minimum investment of Rs.4 crore-Rs.8 crore along with tremendous zeal and commitment.

A pure 3PL player who operates primarily with leased asset would also be looking at an investment of Rs.30 crore-Rs.50 crore. However, an infrastructure-focused investment like developing an integrated logistics/transportation center may need an investment of Rs.320 crore. Developing a ICD/or logistics park may require an investment of Rs.750 crore, (statistics from Infrastructure Development Corporation Ltd).

As an entrant to the logistics sector or someone seeking to set up a 3PL company, you will have to assess your investment requirement, after indentifying what niche service or services you will provide. While making this assessment you need to consider points such as investment in management or people, investment in technology (automating processes versus relying on relatively cheaper manual labor) and investment in assets (a business that focuses on providing logistics infrastructure or a business that focuses on logistics services). Other factors that determine which niche or services to offer include domestic or international competitive landscape, geographic scope in which to operate, whether the logistics company shall offer solutions specific to an industry/product or whether general purpose logistics solutions are to be offered.

The above considerations shall go into determining the investment required and will help an entrepreneur develop a detailed business plan.

Generally, setting up a full-fledged 3PL service requires heavy investment and, as an entrepreneur, you will have to rely on an external source. Private equity investors are currently quite keen on the logistics sector in India. In addition, there are funds that focus exclusively on the logistics space. In addition, by and large, the logistics sector has no FDI restrictions (except in some specific sectors).

Business risks
Risk management is very important for a 3PL company. The logistics industry is changing rapidly due to the combination of a deregulated transportation environment, together with 3PLs embracing the internet, e-commerce and other electronic means to provide their logistics services. These changes significantly impact the liability risks 3PLs face.

A 3PL’s customer contractually relies on it to provide secure, trouble-free access, movement, storage and distribution for its goods. When there are problems, the customer looks to the 3PL on a direct party claim. Serious liability issues that arise are those involving damage, theft, pilferage, shortage, or loss of cargo/material entrusted with a 3PL and those involving Workers Compensation.
While business insurances in some ways help to address liability concerns, they are not always effective. While statutes such as the Carriers Act, and insurance policies such as Cargo and Property insurance, Insurance against Theft and Marine and Fire insurance policies cover some of the business risks, note that the terms and conditions must be carefully analyzed and coverage limits must be arrived at only after a thorough understanding of the exposure a 3PL company is taking on. For example, most Cargo and Property insurance will not cover inventory shortages, this being considered a normal risk in the course of business.

Competitive landscape
The industry is adapting to global influences, bringing in competitors of all shapes and sizes. Many players in the logistics market in India are unorganized and driven by owner/entrepreneur’s will and vision. At the same time, liberal FDI norms bring in global competition i.e large multinationals driven by their worldwide presence and brand. Smaller/unorganized competitors have the advantage of cost, ability to offer customized solutions, and flexibility; however, their business model may lack sustainability. Larger MNCs are able to compete by investing heavily in infrastructure and in securing global contracts. Before entering, you must study the competition and determine how to position yourself, either in terms of indentifying a niche, such as servicing only a particular type of product/industry, or even geography.

Customer acquisition
This is key to any business and no less true for a logistics business. As a 3PL service provider, you would do well if you studied various industries/products and their logistics needs, find their pain areas where inefficiencies are high and offer customized solutions to address problems specific to that industry. This will help create a standard base of customers, upon which you can invest in creating infrastructure and solutions and eventually use the existing resources to address a broader market.

Industry bodies
There are various industry/international bodies that act as a platform for the logistics companies to gain insights into emerging trends, industry-specific problems and global best practices in logistics and supply chain management. The CII Institute of Logistics is one such effective forum. In addition, association with International Air Transport Association (IATA) and Air Cargo Agents Association of India (ACAAI) and local CHA Associations are very useful for freight forwarders and customs house agents.

Madhumita Rajan runs Bengaluru-based Jayem Logistics, a group of companies which provide end-to-end logistics solutions.

©Entrepreneur June 2011

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3pl, ACAAI, Air cargo, Air cargo Agents Association of India, business, business risk, cargo, CHA association, CII, competitive landscape, customer, freight, funding, IATA, industry, institute of logistics, International Air Transport Association, investment, Logistics company, Madhumita Ranjan, Third party logistics