Third Party Logistics in India Issue Date : 26/7/2007

26/07/2007
Overview, Challenges & Prospects
Introduction
Third party logistics (3PL) refers to
service providers offering part or full
logistics support to companies such as
transportation, warehousing and other
logistics related activities. 3PL industry
has been growing in importance owing to
reduction in total supply chain costs
enabled by it. Outsourcing trends are
more popular, especially in cargo
movements. The major growth driver for
this is the role of large operators, striving
to render their services for the entire
supply chain. Outsourcing logistics
activities has not only enabled the
companies to concentrate on their core
business activities but also in achieving
cost efficiency, improving delivery
performance and ultimately, customer
satisfaction. According to Frost &
Sullivan, a leading research organisation,
the 3PL market size in India was
approximately US$890.3m in 2005,
growing at a compounded annual growth
rate of 21.9%. The industry is expected
to touch US$3.56 billion by 2012. Its
immense potential for growth is evident
from its more than 20% growth rate per
annum since 2004-05.

Evolution of 3PL in India

Table 1 outlines the evolution of 3PL
market in India. The services offered by
Indian 3PL service providers have been
expanding over a period of time due to
the paradigm shifts in customer
requirements.

Types of 3PL providers

Standard 3PL providers: These are the
basic 3PL service providers who perform
activities like pick and pack,
warehousing and distribution.
Service developers: These 3PL providers offer advanced value-added services such as
tracking and tracing, cross-docking, specific packaging or providing a unique security
system. These providers perform the tasks with the help of a strong IT base and focus on
economies of scale.
Customer adapters: This category of 3PL service providers take over complete control of
the company’s logistics activities. The 3PL provider improves the logistics dramatically,
but does not develop a new service.

Customer developers: This group of 3PL service providers constitutes the highest level
services that a service provider can attain with respect to its processes and activities. This
occurs when the 3PL provider integrates itself with the customer and takes over the entire
logistics activities.

Services offered by 3PL providers

With the entering of multinational companies (MNCs) like Suzuki, Hyundai, Honda and
Ford in the Indian market, the 3PL market is booming in India. In view of the significant
benefits of cost reductions and just-in-time delivery gained by the MNCs, a large number
of domestic small and medium enterprises are also gearing up, to use 3PL services in their
logistic functions. The 3PL providers are offering an increasing array of logistics services
to their customers. Following are some of them:

Outbound Transportation
Warehousing
Inbound Transportation
Freight Bill Auditing/Payment
Customs Brokerage
Freight Forwarding
Customs Clearance

Factors Driving the Indian 3PL Market Growth

Concentration on cost-cutting measures by domestic as well as multinational companies in

core activities
The Government of India’s implementation of Value Added Tax regime is driving the
industries towards using more 3PL services since a full implementation of this uniform tax
regime would necessitate huge investment for establishing centralised large warehouses
and cold storages. Most of the domestic companies are outsourcing these functions, which
in turn is creating demand for 3PL service providers.

Indian Government has invested US$17 billion for the upgradation of National Highways
under two major projects—the Golden Quadrilateral Network and the North-South-East-
West Corridor. The government has also decided to spend about Rs14 trillion across the
sectors such as roads, railways, aviation, ports, urban infrastructure, power and telecom
from 2005-06 to 2011-12. The increased focus on improving logistics infrastructure had a
huge positive impact on the growth of 3PL market in the country.
Apart from the above factors, the entry of multinational companies such as BMW,
Flextronics and Wal-Mart into the country is expected to fuel the growth of 3PL market
and increase the usage of 3PL services in their respective sectors.

Challenges in the Growth of 3PL in India

There are some operational and regulatory challenges for the 3PL industry in India. The
major challenges are:

The penetration of 3PL services is very low among Indian business firms due to lack of
awareness. In India, the total share of 3PL operations is less than 10% of the total logistics
operations, whereas it is 60%, 55% and 80% in the US, Europe and Japan respectively.
Poor logistics infrastructure such as roads, airports, lack of adequate railway wagons and
seaports is also a major challenge before the Indian 3PL market growth.

The problem of congestion at roads and seaports and the resultant delays in movement of
cargo, is significantly affecting the performance of 3PL service providers.

In India, at present, there are about 1,300 cold storages and most of them are under
utilised. Most of these storage facilities are concentrated in the major cities of the country.
This could be a major challenge.

Outlook for Indian 3PL Market

The outsourcing of logistics operations has been on the rise (Chart 1) due to the continuous
efforts of the companies for improving the efficiency, reliability and for reduction in the
total cost of supply chain management. The use of 3PL services by the MNCs, starting
their operations in the Indian market, is increasing. In addition, strong foreign direct
investment inflows in automotive, capital goods, electronics, retail and telecom is expected
to increase the market opportunities for 3PL providers in the country.
Outsourcing of logistics functions to 3PL service providers in India is seen only in a few
sectors such as the automotive sector. Other sectors that have contributed substantially to
3PL market include the IT hardware and electronics, fast moving consumer goods, textiles
and retail.
Lastly, end-to-end outsourcing is becoming popular as companies are realising the benefits
of focusing on core competencies. The concept of just-in-time delivery is also gaining
acceptance in this sector.