India has transformed from being a slow-growing agrarian country into one of the world's most dynamic economies in less than two decades. Barring the current fiscal, India's GDP has grown at an average of more than 8 per cent annually over the past few years, making it the second-fastest growing economy in the world. Given the flourishing economy and increasing exim levels, domestic companies are increasingly stepping into the global arena even as MNCs are setting up bases in India. This has prompted these companies to have efficient logistics operations, which, in turn, is increasing the need to outsource logistics.



Outsourcing of logistics operations is not a new phenomenon in India. It has been in existence for a number of years, with only basic functions such as transportation and warehousing being outsourced. However, this scenario has been changing, albeit at a slow pace, with logistics operations being outsourced to a single player referred to as a third party logistics (3PL) player. The need for reducing logistics cost and streamlining operational efficiencies will drive growth of the 3PL segment.

Key conclusions
l 3PL aids in the optimisation of inventory, and transportation and warehousing costs

l 3PL market to grow at a CAGR of 27 per cent to reach Rs162-165 billion by 2013-14

l Changes in regulatory environment and industry behaviour to provide impetus to 3PL growth

l Logistics parks and GST implementation to provide fillip to the 3PL growth

l Organised retail and consumer durables hold tremendous potential for migration towards 3PL arrangement

l Poor infrastructure and lack of logistics players with pan-India presence act as major deterrents to the growth of the 3PL industry in India

Definition of 3PL
The logistics industry in India is undergoing a change to the system wherein a dedicated player handles most of a company's logistics operations. It may include transport modes such as road, rail, and pipeline, and infrastructure segments such as warehousing, CFS/ICD and cold storages. These dedicated players are referred to as 3PL players, which typically specialise in integrated transportation and warehousing services that can be customised to meet the client company's needs based on the prevailing market environment.

3PL players facilitate the movement of materials from suppliers to manufacturers and finished products from manufacturers to distributors and retailers. They provide services such as transportation, warehousing, cross-docking, packaging and freight forwarding. However, a 3PL player does not necessarily have to provide all of these services and need not cater to all the logistics requirements of its client company.

The study defines a 3PL company as a logistics player that can provide both multi-modal and infrastructure services. If it handles the transportation as well as warehousing requirements, and also offers value-added services such as repackaging and reverse logistics, then the player can be referred to as a 3PL services provider.

Growth drivers of 3PL in India
Strong GDP growth to translate to healthy revenues for the industry

During 2000-01 and 2007-08, India's GDP has grown at an average of over 8 per cent, annually. However, the prevailing global financial turmoil is likely to suppress this growth rate; consequently, India's GDP is expected to grow by 6-7 per cent over the next few years. Nevertheless, CRISIL Research believes that the country's long-term prospects remain intact, as growth fundamentals are expected to be favourable in the long run. Healthy revenue growth and increased international operations have heightened the need for smooth logistics operations, which is expected to steer the growth of the 3PL market in India.

Proposed implementation of GST to drive 3PL growth
In the existing tax regime, companies have to maintain a distribution centre/warehouse in every state to save on inter-state CST during stock transfers. This leads to the setting up  of smaller warehouses with inadequate and outdated technology and equipment. Due to the large number of warehouses, material handling costs and IT overheads are quite high.
Phase-out of CST -- and proposed introduction of GST -- is expected to reduce the number of warehouses required in different states. This will boost the demand for integrated logistics solutions, which in turn is expected to be a major growth driver for the 3PL industry in India. The 3PL player will be able to manage a smaller number of warehouses with modern handling equipment and technology, leading to savings in the overall warehousing cost.

Logistics parks and FTWZ to further the growth
A logistics park is a notified area that facilitates domestic and foreign trade by providing services such as warehousing, cold storage, and multi-modal transport facility, among others. A logistics park typically has a container terminal for both domestic and international operations, storage and distribution, as well as trans-shipment facilities, cold storage and product-specific warehouses besides hotels, banks, food parks and entertainment centres. On the other hand, FTWZ is a type of SEZ specific to the trade and warehousing segment. The chief objective of FTWZs is to create trade-related infrastructure to facilitate imports and exports of goods and services.

Majority of logistics parks and FTWZs are being developed in and around established and upcoming industrial hubs, or in proximity to SEZs, in a bid to tap their logistics needs. The 3PL industry in India is expected to gain momentum with the development of logistics parks and FTWZs, as it will be easier for a 3PL player to provide most of the services at a single location.

Deterrents to growth of 3PL
3PL has gained wide acceptance in developed countries, as companies in these nations have complex distribution networks and, more importantly, recognise the influence of 3PL services in enhancing customer satisfaction and improving revenue growth through efficient business operations. In contrast, companies in India look at logistics as an in-house function, a mindset that has led to low penetration of 3PL services in the country. Further, loss of control and fear of dependency on 3PL players restrict the growth of this segment. These factors also explain why some customers limit outsourcing contracts to more routine, commoditised services, instead of more innovative strategic services.

Poor infrastructure
The poor quality of infrastructure in India acts as a major block in attracting investments in the logistics sector. Owing to the bad condition of roads and inadequate infrastructure in warehousing and cold storages, 3PL players are unable to provide quality services. The unwillingness of Indian companies to outsource logistics operations, and the reluctance of logistics players to make more investments due to the poor infrastructure lead to a vicious cycle, and act as a major bottleneck to the growth of the 3PL market in India.

Pan-India presence
The logistics industry in India is highly fragmented. There are few logistics players in India that have the capability of providing end-to-end logistics services, and this limits the scope of growth of the 3PL industry in the country.

Loss of control
The unorganised nature of the Indian corporate sector is largely the result of the entrepreneurial nature of players. They consider logistics to be an inherent part of their operations and are, therefore, reluctant to outsource the same. The fear of shifting control to a third party is one of the main roadblocks to 3PL usage.

Going ahead
To conclude, in India, the concept of 3PL is still in the nascent stages. Most companies continue to perceive 3PL usage as a cost centre rather than a tool for effective logistics management. So, they need to be enlightened about the basic premise of 3PL, which involves efficient use of resources that ultimately lead to savings in costs, rather than adding to it. Further, inadequate infrastructure and lack of uniform tax regulations are some of the issues that have to be dealt with to fuel the growth of the 3PL industry.