_Contract logistics led warehousing

Logistics costs in India make up 13–14% of the GDP, which is approximately US$ 300 billion. This is higher than the global average of less than 8%, as the Indian logistics sector is largely unorganised and inefficient compared to its global counterparts. Building up a complex logistics ecosystem is a very costly affair and that is one of the main reasons why logistics is being increasingly outsourced to a 3rd party operator (3PL) or a contract logistics provider.

June 27, 2018

Market Dynamics

The logistics industry in India, although unorganised and underdeveloped, has come a long way from where it was. Growth in consumption demand, coming from rising incomes and population, is driving businesses towards India. This has led to an increase in the demand for logistics services and growth in the number of organised logistics service providers.

Globally, an estimated 86% of the Fortune 500 companies outsource logistics activities to 3rd Party Logistics (3PLs) players. Most of these companies also outsource logistics functions to more than one player in the market to reduce risk, increase efficiency and build a strong network. Comparatively, at 5.7%, India’s penetration is far below the fortune 500 average, according to Tata Strategic Management Group.

Additionally, the fragmented nature of the Indian logistics industry has also kept the total expenditure of Indian businesses on 3PL services at an estimated 15% of their total spends on logistics in India, according to Frost and Sullivan.

Current and forthcoming policy changes such as Goods and Services Tax (GST) and Make in India and emerging customer segments like e-commerce, present several unique opportunities for 3PLs as rising demand for complete logistics management through aggregation of vendors and services gains ground in the country. Logistics companies must leverage this demand for new and differentiated services by suitably building capabilities.

Industries Driving Demand

Factors Impacting the Logistics Sector & Outlook

The logistics industry in India is in its nascent stages where it is bound to face mammoth challenges on its way upwards. The sector, as a whole, is not very organised and the industry is competitive, especially in the big cities, where there are numerous unorganised small truck owners and service providers providing stiff competition at razor thin margins.

There exist both within-the-industry or internal and external factors that the 3PL firms will have to engage with to promote the industry as well as individual businesses.

The 3PL industry is a complex network chain of resources that not only helps you with moving and storing goods but also optimises the use of those resources and networks.

Therefore, 3PL is not an industry that is easy to be in. The pre-GST era in this industry was dominated by the unorganised and fragmented players but this is set to change.

The organised players with modern resources and facilities will take over the industry. The transfer of risk from the user to the 3PL would largely be the reason for the shift. The current slump in business is due to a downturn of industrial output, which is expected to take an upturn soon as companies become GST compliant.

Businesses will also look to 3PL for the reasons mentioned, which include cost, time and reach, apart from the transfer of risk. The new entrants in this business will either be disruptors who can leverage the use of technology and differentiate the product offering or forward integrators who do not only wish to use their supply chain but also be providers in the industry.

The industry will not see many substitutes, keeping in mind governments have not been in favour of process automation. Thus, the share of organised players will see a significant and sustained rise in time to come.

Click here to know more: Research - India Warehousing Market Report 2018