A BRIEF NOTE ON LOGISTICS INDUSTRY IN INDIA : Dated 12/10/2010

Logistics is usually misinterpreted as only transportation of goods, which is far from truth as transportation is just a subject of logistics. Logistics is a knowledge-based industry that requires procurement, transport, inventory control and distribution of goods. The cost of logistics of a company is estimated to be around 2 % of its total sales. With effective and efficient logistics 20 % of this cost can be saved. Logistics and Supply Chain Management (SCM) have always been an integral part of any business for timely and cost-effective decision making. Logistics can safely be said to be the management of the flow of goods, information and other resources from the point of origin to the point of final consumption by the customer. Just imagine there is a supplier situated at Baddi, Himachal Pradesh, which manufactures shampoos for The Taj Mahal Hotel, Mumbai. The raw materials need to be picked up from nearby supplier by tempo or if some raw material need to be imported from a manufacturer situated outside the country, say China, then it would involve another set of logistics- Collection from the overseas factory to nearby port, customs clearing, Import, again customs clearing in India and Transportation to factory at Baddi. The raw materials after the manufacturing process needs to be packaged and stored, then it will be transported either by road or train or air or a combination of these to reach Mumbai and then before reaching the hotel, needs to be cleared by Octroi authorities at entry point of Mumbai. Now the goods are ready to be delivered to the hotel which would ultimately reach the customers of the hotel who are staying there. Thus, Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, clearing, and occasionally security. Logistics is a channel of the supply chain which adds the value to the goods by making them available at the right place and at the right time to the right consumer.

Under relentless pressure to reduce costs and increase sales around the world, firms are outsourcing operations to subcontractors who can do them better and more cheaply, and moving more of their production and services to lower-cost countries. Globalization requires greatly increased co-ordination of transport by road, rail, sea, air and now also by an entirely new route to market: the internet. This makes logistics vastly more complex. The job of ensuring that all these things work together is known as Supply-Chain management (SCM). SCM is an evolution of logistics. Logistics tends to be tactical; supply-chain management is strategic. SCM can include anything from buying raw materials to managing suppliers, warehousing, operating transport fleets, taking orders, collecting payments, repairing products and even answering the telephone at call-canters.

Logistics is increasingly becoming a strategic source of competitive advantage with the increase in global production sharing, shortening of product life cycles and intensification of global competition. In this highly competitive business environment, the quality of logistics has assumed greater significance influencing firms’ decisions such as which country to locate in, which suppliers to buy from or which consumer markets to enter. Essentially, high logistics costs coupled with low levels of service are a barriers to trade and foreign direct investment (FDI) and thus to economic growth. World today has realized the need to make Logistics more efficient as resources are getting more and more scarcer and dearer day by day. Logistics and SCM are now getting the attention they deserved and momentum is on to make this sector environment friendly. Massive investments are being made worldwide with some of the best known investment gurus putting their bet on this industry which is directly linked to the growth of any economy. India is no exception and it is estimated that being a developing economy we may be spending as high as up to 13% of our GDP in Logistics itself! Indian economy is now worth more than US$ 1.25 Trillions and as a consequent Logistics industry in India is worth more than US$100 billion. There is a scope for huge savings in terms of cutting down this cost by bringing in more efficiency in this sector by adopting some of the best practices. Also very few organized players are in this industry to which acts as an impediment in this direction. The logistics sector is considered the weak link of the Indian economic story. At present, there are few professionally founded logistics players. Most companies are run like family businesses, unlike in other service sectors where professionals have taken the venture funding route to fund businesses. There is a big demand for high quality, time definite supply chain solutions and there are customers — manufacturing companies and organized retailers — willing to pay a premium for services, such as cold chain, warehousing and trucking. Robust growth of Indian economy and the rise in domestic consumption and trade have driven the cargo/freight volumes in the country. The government’s increasingly laying importance on the infrastructure development has also helped in getting the goods and services and communication to all parts of the country.

Companies are also outsourcing supply-chain services, commonly called 3PL. Yet SCM is not just about wringing costs out of a business. It can also be used to increase revenue and boost profits without necessarily lowering costs. Indeed, some companies have re-engineered their supply chains to gain a huge competitive advantage. The market leaders have supply chains that are more responsive to customer demand. Things like transport, purchasing and warehousing used to be considered merely part of the cost of doing business, and were often managed as separate entities. Now they are coming together as a strategic item on the chief executive's agenda. Most firms have been organizing their logistics to make themselves leaner. Many now carry little or no inventory to save money. In the present era of tough competition market wars are shifting from media to the retailer's shelf and even directly to the customers. Coke, Pepsi, Hyundai, Maruti, HLL, Godrej, TATA, Bajaj, etc, derive immense strength from their well-established distribution networks. In fact India is becoming the auto hub of the world and big logistic companies and even Govt. of India and Indian railways are especially targeting the auto industry (along with the manufacturing industry and commodities and food grains) to get more involved in the effective use of resources by entering into Public-Private partnerships so that there is overall savings to all the parties involved. Logistics is the only department of a company that is in direct contact with the customers. So, the customer perceives the delivery channels as the representatives of the company and it becomes the prime responsibility of the channel members to deliver the services that keep the customers satisfied.