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Third Party Logistics Practices: An India Perspective B. S. Sahay and Ramneesh Mohan ______________________________________________________________________________

Abstract: Third party logistics (3PL) is a business dynamic of growing importance all over the world. However, it is at a very nascent stage in India, though some domestic and multinational companies are trying to establish themselves in this sector. This paper is an attempt to provide a 3PL perspective in India. The paper focuses on three major issues – present extent of usage of third party logistics services, reasons for outsourcing and impact of usage of third party logistics services on business results. The paper reveals that most 3PL users are satisfied with the current level of services provided by 3PL service providers as it has led to a positive impact on business results. As a result, the usage of third party logistics services is likely to increase substantially (40 percent) in the future. Key Words: Supply Chain Management, Third Party Logistics, Outsourcing, India.

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Introduction Outsourcing of logistics function is a business dynamics of growing importance all over the world. A growing awareness that competitive advantage comes from the delivery process as much as from the product has been instrumental in upgrading logistics from its traditional backroom function to a strategic boardroom function (Razzaque and Sheng, 1998). In order to handle its logistics activities effectively and efficiently, a company may consider the following options – it can provide the function in-house by making the service, or it can own logistics subsidiaries through setting up or buying a logistics firm, or it can outsource the function and buy the service. Currently, there has been a growing interest in the third option, i.e. outsourcing of logistics functions to third party logistics service providers. Third party logistics services are widely prevalent in North America (Lieb, 1992; Lieb and Randall, 1996) and Europe (Lieb, Miller and Wassenhove, 1993) and have been examined in a number of previous studies. Similar studies have focused on logistics issues in Bulgaria (Bloomen and Petrov, 1994), South Africa (Cilliers and Nagel, 1994), Australia (Dapiran, Lieb, Millen and Sohal, 1996), Korea (Kim, 1996), Asia Pacific (Millen and Sohal, 1996), Singapore (Bhatnagar, Sohal and Millen, 1999), and Indochina (Goh and Ang, 2000). These countries have availed large benefits of 3PL services over the last few years. However to date there has been no comprehensive study reported in the literature that has focused on third party logistics services in India. There are many isolated examples of individual organizations and their respective logistics capabilities. Hence, it was considered important to carry out a comprehensive survey on 3PL practices in India. The paper has been organized as follows. In the next two sections, we present a brief description of the Indian transport environment followed by a review of the relevant segments of literature. Subsequently, we outline the research methodology which is then followed by the results, based

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on data analysis, from the survey. Finally, future trends and conclusions arising from this research are presented.

The Indian Transportation Environment With a gross domestics product (GDP) of over US $475 billion, the Indian industry spends 14 percent of its GDP on logistics. The Indian logistics environment comprises road transport companies, railways, air freight companies, inter-modal transport providers, ports and shipping companies, as well as 3PL companies. Their performance is critically dependent on the state of infrastructure – roads, railways, ports and airports. Roads & Trucking: India has a fairly widespread road network totaling to 2.7 million kms of road length (1996-97), the third largest road network in the world. According to estimates of the Planning Commission, the roads carried just 11 per cent of goods and 28 per cent of passengers during 1950-51. The proportions stood at 60 per cent for goods and 80 per cent for passengers during 1995. Express and National highways constitute only 1.4 per cent of the total road length but carry nearly 40 per cent of all freight moved through the road sector. Reach in the interiors of the mainland is limited with only 48% of the 0.55 million villages being connected with roads. This poses a serious limitation of access and connectivity to rural markets. Overall the quality of roads is very poor, resulting in slow transport speeds, increased wear and tear of vehicles and high accident rates. Despite suspect quality, the share of freight passing through roads has grown to 61 percent in 2001. The Indian Government has initiated a mega project, called National Highway Development Program, for four-laning of highways connecting the four metros of India and the North-South and East-West corridor. Completion of this project by 2007 is expected to have a great impact on transportation times and costs. Rail Transport: The Indian Railway network is a government monopoly in India and is fraught with hidden efficiencies. It is the second largest railroad systems in the world covering a route length of 62,809 Kms (1998-99). This facilitates 4630.05 millions of passengers and 450 million tonnes of freight movement every year (CMIE, 1999). However, the system of variable freight rates depending on class of commodities has discouraged some of the industries from using rail transport. At the same time, the total cost of using the rail network is high due to handling requirements and the time and cost of arranging pick-up and drop of consignment to and from railway facilities. This results in the slow average speed of freight movement and low average wagon turnaround time, which are major concerns for the logisticians in the country. Currently, the Indian Railways is making efforts to improve its services by introducing special freight trains, which offer much quicker transportation times, and offering multi-modal facilities to reduce handling times through containerized cargo movement by Concor (Container Corporation of India). Airports & Air Cargo: The six international and 87 domestic airports handle 0.22 million metric tonnes of domestic cargo and 0.468 million metric tonnes of international cargo, which is extremely poor in terms of world standards. This is because the air cargo is used only when sea trade could not be used either due to time or space constraint. This poses a serious limitation in procurement, especially when companies are looking at adopting global sourcing strategies to reduce costs and enhance product quality. To make air cargo more attractive and efficient, the Indian government has initiated some major steps which include – introduction of ‘open sky’ policy, introduction of integrated cargo management system at four metro airports, provision of centers for perishable cargo and synchronization of working hours for city side operation for export and import activities.

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Seaports & Shipping: There are 11 major ports that handle the total foreign trade of the country amounting to 271.92 million tonnes (1998-99). The facility and infrastructure of Indian ports are rated low on global standards primarily on account of lack of storage space and outdated handling equipment. As a result, India’s share in the global maritime is miniscule though the Indian fleet of vessels represent a little over 1 percent of the global registered tonnage. Due to lower draft, the average size of the Indian ports is much smaller than prevailing sizes internationally. Also, most Indian sea ports are inefficient in loading and unloading operations. The result is that ships are stuck for longer time here, which multiples the cost for the shipper by as much as 10-20 percent. The granting of infrastructural status to the shipping industry is expected to give financial and tax benefits for the development of this transport mode in the coming years. All the factors related to transport infrastructure stated above have adversely affected the logistics network in the country - both in terms of lead-time and costs (Korgaonker, 1999). However, a host of policy changes currently underway is expected to bring about a positive change in the Indian transportation environment. This provides vast opportunities for companies offering logistics services in the country and hence augurs good news for Indian organizations to reduce logistics costs by using third party logistics services for enhanced supply chain efficiencies.

Literature Review Outsourcing, third party logistics services (3PL) and contract logistics generally mean the same thing (Lieb, Millen and Wassenhove, 1993). It involves the use of external companies to perform logistics functions, which have traditionally been performed within an organization. The functions performed by third party logistics service providers can encompass the entire logistics process or select activities within that process. A key rationale for outsourcing of logistics functions is the intensified globalization of businesses. During the last two decades, globalization has emerged as a major force of shaping business strategies, leading firms to develop products designed for a global market and to source components globally (Cooper, 1993). This has led to more complex supply chains requiring larger involvement of managers in logistics functions. Lack of specific knowledge of customs, tax regulations and infrastructure of destination countries has forced firms to acquire expertise of third party logistics service providers. As a result firms are concentrating their energies on core activities and leaving the rest to specialist firms (Byrne, 1993; Foster and Muller, 1990; Trunick, 1989). An equally important development that is impacting the logistics industry is the increased emphasis on supply chain management as a source of competitive advantage. In the last two decades, the quest for time based competence led initially to a rapid adoption of new manufacturing methods like just-in-time, flexible manufacturing systems, computer aided manufacturing and so on by organizations. These methods have brought about significant improvements in supply chain performance through their focus on compressed manufacturing lead times and improved quality. However, further enhancements in supply chain performance will necessitate speeding the flow of information on orders to upstream supply chain partners, and expediting logistics activities like storage and delivery of materials or products through the entire supply chain (Bhatnagar, Sohal and Millen, 1999). A recent research carried out on supply chain management practices in India highlights that the opening of Indian economy and globalization of businesses has been a key factor for the Indian industry to align supply chain strategy with business strategy, streamline processes for supply chain integration and form partnerships for

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minimizing inventories. Indian organizations are increasingly deploying supply chain strategies for logistics improvements – to increase sales revenue, enhance profits, reduce order to delivery cycle time and minimize inventories. (Sahay and Mohan, 2003). Logistics is therefore emerging as a key frontier of competition in the future. Good logistics performance requires a tradeoff between the need to reduce overall supply chain inventory and lead times, while simultaneously capturing economies of scale and improving customer service for enhanced business performance. Versatility of third party logistics service providers enables them to maintain this trade-off by turning fixed costs into variable costs for companies using their services (Trunick, 1989). The use of third party logistics service providers has gained prominence in this context. Empirical studies have tested the following factors in defining the extent of usage (Lieb, 1992; Dapiran, Lieb, Millen and Sohal, 1996; Bhatnagar, Sohal and Millen, 1999): • Length of experience with third party logistics firms • Level of commitment to the usage of third party logistics services • Percentage of the total logistics budget allocated to third party logistics service providers • Specific logistics services outsourced (warehouse management, shipment consolidation, fleet management, order fulfillment, product returns, carrier selection, logistics information systems, rate negotiation, product assembly, order processing, inventory replenishment, order picking, inbound transportation, outbound transportation, labeling and packaging, distribution, custom clearance and forwarding, import export management, customer service/support). At the same time, studies indicate that firms outsource logistics functions for a variety of reasons. Watson and Pitt (1989), Sheffi (1990), Foster and Muller (1990), and Bardi and Tracey (1991) have suggested the following reasons for the growth of logistics outsourcing in America: need to focus on core activities, better transportation solutions (e.g., consolidation), cost savings, customized services, reducing inventory, penetrating markets, becoming more active in international shipping, gaining the use of sophisticated technology, need for more professional and better-equipped logistics services. Gooley (1992) added flexibility as another reason for outsourcing based on his experience with European firms. By understanding the reasons for outsourcing of logistics services, 3PL service providers can gain insight into the benefits sought and provide focused services. A third party logistics service provider with experience, focus and expertise is regarded as more competent, compared to those service providers who profess to be "all things to any consumer" (Sink et al., 1996). The research on supply chain management practices in India has identified that outsourcing of logistics activities is growing in popularity for Indian organizations and there has been an increase in the number of third party logistics providers over the last couple of years (Sahay and Mohan, 2003). The major reasons cited for usage of 3PL services include – cost reduction (27 percent), strategic reasons (26 percent), process effectiveness (24 percent), and lack of internal capability (11 percent). Usage of third party logistics services is a strategic decision and hence it is necessary to perceive and quantify the impact it has on business performance. The purpose of engaging in third party relations is seldom cost reduction alone, but a combination of service improvements and efficient operations (Larsen, 2000). Studies based on user firms indicate that the decision is worthwhile if it has an impact on one or more factors depicted in Table I.

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Table I: Impact of usage of 3PL services – Literature Review Factor

Identified By (Year)

Impact on Customer Satisfaction

Gooley (1992); Lieb et al. (1993)

Impact on Logistics system performance Reduction in capital investment in facilities Reduction in capital investment in equipment Reduction in investment in information technology

Lieb et al. (1993); Dapiran et al. (1996); Bhatnagar et al. (1999) Foster & Muller (1990); Richardson (1992, 1995) Fantasia (1993); Foster & Muller (1990); Richardson (1992) Goldberg (1990); Sheffi (1990); Trunick (1992); Fantasia (1993)

Impact on Employee morale Reduction in manpower cost

Bowersox (1990); Dapiran et al. (1996) Foster & Muller (1990); Richardson (1992, 1995)

Improvement on specific Logistics function parameters Improvement in inventory turnover rates Improvement in on-time delivery Increasing productivity

Minaham (1997); Mc Mullan (1996) Richardson (1990, 1995) Richardson (1995) Bradley (1995)

Lieb et al. (1993), Dapiran et al. (1996), and Bhatnagar et al. (1999) have observed that the future usage of third party logistics services is a function of the current level of satisfaction of the firm with the logistics services provider. The authors have also explored the changes in the level and the nature of outsourcing of logistics services by the user firms. All the above studies indicate high levels of satisfaction with third party logistics services providers, which will translate in increased outsourcing in the future. Typically, firms start with the outsourcing of few logistics services, moving over to activities which have maximum impact on logistics performance and then increase scope of usage of logistics services with perceived and quantifiable impact on overall business performance. The above studies provide a robust framework for the research methodology for analyzing the third party logistics practices in India. The input variables to the research framework depict the organization-specific characteristics, such as the extent of usage of third party logistics services, the reasons for outsourcing and the impact of the usage of third party logistics services. The output function of future usage of third party logistics services is influenced by the three input variables.

Research Methodology To determine the usage of third party logistics practices in India, a mail survey was conducted during 2002-03. The survey questionnaire was designed based on the studies carried out by Lieb et al. (1993), Dapiran et al. (1996), Bhatnagar et al. (1999), Larrhoven et al. (2000) and Sahay et al. (2002). The survey instrument focused on the following areas: (1) Importance of various logistics activities to organizations; (2) Extent of usage of services offered by third party logistics service providers for carrying out specific logistics activities; (3) Reasons for outsourcing; (4) The impact of using third party logistics services on logistics performance, customer satisfaction and employee morale; (5) The benefits of using third party logistics services on specific business objectives; (6) The overall satisfaction with third party logistics service providers; and (7) The future plans of current users of third party logistics services.

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The respondents were requested to fill out the survey that best captured the current state of logistics issues in the organization with emphasis on outsourcing. In addition to the questionnaire survey and a number of personal visits to various organizations were carried out to get first hand information related to this field as well as cross-check on the responses received from the survey participants. The target population for this study was the 2002 Business Today list of top 500 organizations in India. The questionnaire together with the cover letter and a post-reply envelope were mailed to these organizations addressed to the above executives. Within a month of sending out the survey questionnaire 85 responses were received. Thereafter reminder telephone calls were made to the remaining 272 organizations that had not responded. As a result, 49 organizations responded more in the next two weeks. However, after data entry 4 responses were found incomplete and hence inappropriate for detailed analysis. It resulted in the final response rate of 130 or 26.0 percent of the original sample of 500 organizations. The response rate is in line with the previous studies conducted on third party logistics services in North America, Europe, Australia and Singapore that were based on 131, 53, 84 and 126 responses respectively (Lieb et al., 1993; Dapiran et al., 1996; Bhatnagar et al,, 1999; Laarhoven et al., 2000) resulting in response rate of 12.6 percent in Australia and 16.8 percent in Singapore. The response rate also compares well with the previous study conducted on Supply Chain Management Practices in Indian industry that had a response rate of 156 organizations or 9.0 percent (Sahay et al., 2002). Finally, detailed data analysis was performed on the usable sample size of 130 Indian organizations. Analysis of the data is presented in the following section.

Results Participants profile The responding organizations represented a broad cross-section of the industry including Engineering, Chemicals, FMCG, Retail, Automotive, Textiles, Metal, Pharmaceuticals, Trading, and Telecom industries. However, majority of the respondents were from Automotive, Engineering, Chemicals, Metals and FMCG (Figure 1). 27.5

Automotive 22.9

Engineering 21

Others 7.3

Chemicals/ Fertilisers Metals

4.6

FMCG

4.6

Textiles/ Apparel

3.7

Services

3.7 2.8

Telecommunications

1.8

Transportation 0

5

10

15

20

25

Percentage of Respondents

Figure 1: Classification of Respondents by Industry

30

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The respondents include a mix of public sector as well as the private sector. The responses are markedly better from public limited company, which constituted nearly 63% of the total sample, followed by private limited (34%) and public sector (3%) organisations (Figure 2). 44.1% of the total respondents had MNC stake. Of the respondents with MNC stake 21.57% had stake less than 25%, 35.29% had stake between 26% and 50%, 21.57% had between 51% and 75% and equal percentage between 75% and 100%. Responding companies had turnovers ranging from as low as Rs. 30 lacs to Rs. 16,000 crore per annum. Majority of the companies had turnover ranging from Rs 100 to Rs 500 crore per annum (FY 2002 figures) as shown in Figure 3. Overall the respondent organizations represented a combined turnover of US $350million in the financial year 2001-2002.

Public Sector 3%

> 1000 cr 18%

Private 34%

< 50 cr 22%

500 to 1000 cr 11% 50 to 100 cr 13%

Public Limited 63% 100 to 500 cr 36%

Figure 2: Classification of Respondents by Ownership

Figure 3: Classification of Respondents by Turnover

Present extent of usage of third party logistics services 55.4 percent respondents indicated that their organizations use third party logistics services, while 44.6 percent do not currently outsource logistics functions to third party logistics service providers. Of those organizations currently outsourcing logistics services, 82.3 percent indicated that their firms employed the services of more than one logistics service provider. Furthermore 28.6 percent of these have been using the services of third party logistics service providers for over 3 years. Another 18.8 percent have been working with third party logistics service providers for 1-3 years. This indicates a relatively low amount of experience with third party logistics service providers in India as a result of which the concept of outsourcing logistics functions to third party logistics service providers is still in its nascent stage in India. This is in contrast to studies conducted in developed countries like North America, Europe, Australia and Singapore (Lieb et al., 1993; Dapiran et al., 1996; Bhatnagar et al,, 1999). Out of the total no of respondents, more than half the organizations have already outsourced logistics activities such as Outbound Transportation (55.7%), Inbound Transportation (52.2%) and Custom Clearing and Forwarding (51.5%). Other logistics activities that have been outsourced by more than a fourth of the respondents are Import and Export Management (34.5%), Outbound Warehousing (33.9%), Inbound Warehousing (29.5%), Labeling and Packing (29%), Fleet Management & Consolidation (28.6%), Order Picking (27%) and Inventory Management

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(23.5%) indicating that these are the more important services that are already being outsourced. The logistics functions that are least outsourced include Marketing sales promotion, Assembly/Installation, Selected Manufacturing and Customer Service/Support. To determine why organizations decide to outsource certain logistics functions, respondents were asked to indicate the importance of the same set of logistics functions on a 5-point Likert scale, with a score of 1 indicating “not important” and a score of 5 indicating “very important”. The responses to importance rating and the extent of outsourcing of all logistics functions are presented in Table II.

Table II: Importance Rating and Extent of Outsourcing of Logistics Activities

Logistics Activities Customer Service/Support Inventory Management Rate Negotiation Outbound Transportation Distribution Custom Clearing & Forwarding Order Fulfillment Selected Manufacturing Order Picking Outbound Warehousing Labeling & Packaging Import/Export Management Inbound Transportation Inbound Warehousing Fleet Management & Consolidation Marketing Sales Promotion Order Processing Assembly/Installation Reverse Logistics

Current Outsourced (%) 15.8 23.5 22.6 55.7 22.9 51.5 20.4 16.4 27.0 33.9 29.0 34.5 52.2 29.5 29.1 8.5 19.4 12.7 22.2

Importance Rating ** Outsourcing Non-Outsourcing Organizations Organizations 4.50 4.14 4.36 4.27 4.23 4.37 4.00 3.91 3.91 3.80 3.91 3.50 3.80 3.77 3.75 3.24 3.69 3.54 3.69 3.49 3.55 3.00 3.54 3.34 3.44 3.25 3.42 2.86 3.40 3.12 3.25 3.89 3.22 3.93 3.00 2.74 3.00 2.40

(** Importance rating on a 5 point Likert scale: 1 indicating “not important” and 5 indicating “very important”)

Very clearly, outsourcing percentage is higher for organizations with importance ratings between 4.00 and 3.25, i.e. “moderately important”. Organizations are still not open to increased outsourcing of either “very important” or “less important” logistics activities. 46.7 percent of organizations in India use 3PL providers to perform both domestic and international operations. The other 44.4 percent use such services for domestic operations only and 8.9 per cent use these for international operations only.

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The level of commitment to the usage of the third-party logistics services varies considerably amongst the respondents. Over two-third (67.7 percent) of the respondents, currently using the services of third party logistics service providers, indicate that their organizations’ commitment to the concept was “moderate” or “extensive”, while the remaining users indicated that their organizations’ commitment was “limited” or “very limited”. The varying degree of commitment is also reflected in the percentage of the total logistics budget allocated to the third-party providers as a proportion of the total cost of logistics function (Table III). Of the respondents, 63.4 percent had less than 20 percent and 7.6 percent had 20-40 percent of their total logistics budget allocated to 3PL service providers. These figures indicate a fairly low level of commitment to the use of 3PL services in India currently. Furthermore there is no significant correlation between the total cost of logistics function, as a percentage of gross sales, and percentage allocation of logistics budget to 3PL providers (Chi-square Test: chi square value = 27.593; df = 16; p-value = 0.759; hence not significant at 95 percent confidence level).

Table III: Percentage allocation of Total Logistics Budget for 3PL services

Percentage allocation of Logistics Budget for 3PL services 0% - 20% 20% - 40% 40% - 60% >60%

Level of commitment to usage of 3PL services (Percentage of respondents) Extensive

Moderate

Limited

Very Limited

8.6 0.0 5.4 6.4

25.8 0.0 7.5 7.5

21.5 6.5 1.1 0.0

7.5 1.1 0.0 1.1

Reasons for Outsourcing To determine why companies decide to outsource their logistics functions, respondents were asked to indicate the importance of a number of factors affecting the decision to outsource on a 5point Likert scale, with a score of 1 indicating “not important” and a score of 5 indicating “very important”. The responses to this question are presented in Table IV. Over three-quarter of the users indicate that reduction in logistics cost (overall importance rating 4.39), focus on core competencies (overall importance rating 4.28) and improvement in customer satisfaction (overall importance rating 4.11) were moderately important or very important reasons for outsourcing. About half of the users identify, improved return of assets (overall importance rating 3.91), productivity improvement (overall importance rating 3.75) and increased inventory returns (overall importance rating 3.73) as substantially important or very important in their rationale for outsourcing of logistics functions.

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Table IV: Reasons for Outsourcing Logistics Activities Percentage Respondents (%) Reasons for Outsourcing

Not important

Less important

Important

Moderately important

Very important

O

NO

O

NO

O

NO

O

NO

O

NO

Focus on core competencies

0.0

0.0

2.6

0.0

12.8

33.3

15.4

30.6

69.2

36.1

Logistics cost reduction

0.0

4.7

0.0

2.3

16.4

16.3

21.8

11.6

61.8

65.1

5.9

6.9

14.7

13.8

29.4

37.9

32.4

27.6

17.6

13.8

2.3

2.8

6.8

2.8

15.9

27.8

25.0

16.7

50.0

50.0

8.3

3.0

5.6

3.0

38.9

27.3

11.1

33.3

36.1

33.3

Imbibe more flexibility in operations Improved customer services Productivity improvements Access to emerging technology Access/Expansion to unfamiliar market Diverting capital investment

7.1

20.0

7.1

16.0

35.7

24.0

28.6

20.0

21.4

20.0

11.1

11.5

40.7

15.4

14.8

34.6

22.2

19.2

11.1

19.2

25.0

20.0

25.0

20.0

32.1

28.0

10.7

20.0

7.1

12.0

To increase inventory turn

8.3

3.3

8.3

13.3

30.6

13.3

16.7

36.7

36.1

33.3

Success of firms using 3PL services

7.1

6.5

12.5

13.0

5.4

15.2

7.1

6.5

67.9

58.7

Corporate restructuring

26.1

20.0

21.7

28.0

21.7

36.0

26.1

12.0

4.3

4.0

To develop supply chain partnerships

14.7

3.6

14.7

25.0

35.3

32.1

11.8

17.9

23.5

21.4

Improve Return of Assets

5.6

3.3

11.1

6.7

22.2

13.3

19.4

36.7

41.7

40.0

(O = Outsourcing; NO = Non-outsourcing)

Respondents were also asked to rank the top five reasons for using the services of 3PL providers. 80.6 percent of the respondents state that logistics cost reduction is an important reason for outsourcing thereby reducing their costs of servicing the customer. 76.0 percent of the respondents want to use the 3PL service providers so that they can focus on their core competencies. Further organizations want to provide improved customer service by using the competencies of the service providers as is evident from the 71.3 percent respondents stating it as an important reason for using the service. The other important factors, which have been highlighted among the top five reasons for outsourcing, include improved return on asset, increased inventory turns and productivity improvements (Figure 4). To a great extent, the ranking of top five reasons falls in line with the importance rating given by the respondents.

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80.6

Logistics cost reduction

76.0

Focus on core competencies

71.3

Improved customer services

68.2

Improve return on assets

60.6

To increase inventory turn

56.5

Productivity improvement Imbibe more flexibility in operations

46.1

Access to emerging technology

45.3

Access/ Expansion to unfamiliar market

35.9

Diverting capital investment

24.5 0

20

40

60

80

100

Percentage of Respondents

Figure 4: Reasons for Outsourcing

Impact of usage of third party logistics services Users of the services of 3PL providers were asked to categorize the impact of those services to their business in terms of logistics system performance, customer satisfaction and employee morale on a five-point Likert scale, with a score of 1 indicating “very negative” and a score of 5 indicating “very positive”. The responses to this question are summarized in Table V. Table V: Organizational impact of Outsourcing Logistics Activities Percentage of Respondents (%) Factors

Very Positive

Positive

Average

Negative

Very Negative

Logistics System performance

13.8

54.3

28.7

2.1

1.1

Customer satisfaction

22.6

45.2

32.3

0.0

0.0

Employee Morale

6.8

42.0

46.6

4.5

0.0

Results indicate that the usage of services of 3PL providers has had a strong positive impact on all the three dimensions. Nearly 50 percent of the users noted that the impact has been “positive” or “very positive” in all the three areas of organizational impact. However, 4.5 percent of the respondents indicated that 3PL services had a negative impact on employee morale. Also 3.2 percent of the respondents indicated a negative impact on logistics system performance. These results show that people issues are a critical factor to be considered in outsourcing of logistics functions. Besides, the respondents were also asked to quantify the percentage improvement on financial indicators – improvement in sale revenues, working capital improvement, capital asset reduction, production cost reduction, labor cost reduction, return on asset improvement, logistics cost reduction – because of the usage of 3PL services. User organizations have cited substantial

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financial improvements as shown in Table VI. The financial improvements tie well with the focus on logistics cost reduction as the primary reason for using 3PL services. Table VI: Financial Improvements Financial Indicator

% Improvement

Improvement in sales revenue Working capital improvement Capital asset reduction Production cost reduction Labor cost reduction Return on Assets improvement Logistics cost reduction

13.5 12.3 9.2 10.5 10.0 10.0 15.0

Further, the survey questionnaire probed the respondents to report on the improvement they have had on specific business objectives related to logistics system performance. Users report obtaining multiple benefits in varying degrees compared to their expectations. More than 80% of the respondents state that the use of the service providers has helped them improve on-time delivery, provide specialized logistics service and reduce cycle time at “expected” or “more than expected” degrees. Nearly 75% of the respondents feel that they have been able to improve focus on their core competencies and reduce operational costs at or above expectations. 3PL service providers have been able to enhance the geographic reach of the user organizations as is stated by 61% of the respondents. Finally the use of the service has also helped organizations to bring in more strategic/operational flexibility and differentiation from the competitors (Figure 5). Improve on time delivery

86.7

More specialized logistics expertise

85.3

Reduced cycle time

79.8

Improve focus on core activities

79.7

Operational cost reduction

76.4 61.3

Enhance geographic reach Differentiation from competitors

56.7

Facilitate growth

56.1 54.0

Strategic/ operational flexibility 0

20

40

60

80

100

Percentage of Respondents

Figure 5: Improvement in business objectives related to Logistics system performance Clearly, 3PL providers can help an organization achieve significant results, both in terms of business performance and logistics cost reduction. Logistics competency through outsourcing will definitely be a key differentiator in today's competitive world.

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Summary and Future Trends Currently almost all the organization using third party logistics services are satisfied with the performance of 3PL service providers with respect to their expectations. A total of 9.6 percent indicated that their overall satisfaction with 3PL service provider was “more than expected”. Another 72.3 percent indicated that their satisfaction was at “expected” levels. Only 6.0 percent stated that they were either “not satisfied” or their satisfaction were “less than expectations” with the usage of third party logistics service providers. Not surprisingly, 96 percent of the respondents indicated that the use of third party logistics service providers had been a positive development looking at the impact of the usage of 3PL services on business objectives. Users were also asked how they would modify their use of third party logistics service providers, if they were given complete corporate responsibility to make that decision. Most participants have shown keenness towards increasing the use of third party logistics services from moderately increasing it to substantially increasing it. 39.8 percent of the respondents are looking forward to modify the services by substantially increasing it while 41.8 percent of the respondents want to increase the outsourced services moderately. Only, 15.3 percent indicated that they would keep it at same levels and the remaining 3.1 percent would moderately decrease the use of third party logistics services. The fact that no one would like to eliminate the use of third party logistics service providers is in itself a positive sign of the changing logistics scenario in India. Table VII: Activities planned to be outsourced

Logistics Activities

Rate Negotiation Inventory Management Customer Service/Support Outbound Transportation Marketing Sales Promotion Distribution Order Processing Order Fulfillment Custom Clearing & Forwarding Order Picking Outbound Warehousing Import/Export Management Inbound Transportation Selected Manufacturing Labeling & Packaging Fleet Mngt. & Consolidation Inbound Warehousing Assembly/Installation Reverse Logistics

Importance rating of Logistics Activities 4.3 4.3 4.2 4.0 3.8 3.8 3.8 3.8 3.7 3.6 3.5 3.4 3.3 3.3 3.1 3.1 3.0 2.8 2.5

Percentage of Respondents (%) Increase in Increase in Current usage of 3PL usage of 3PL in Outsourcing in 2 yrs over 5 yrs over levels current levels current levels 22.6 33.9 38.7 23.5 38.2 54.4 15.8 35.1 45.6 55.7 32.9 38.6 8.5 39.0 47.5 22.9 38.6 54.3 19.4 40.3 53.7 20.4 35.2 42.6 51.5 31.8 39.4 27.0 38.1 52.4 33.9 35.7 48.2 34.5 32.7 47.3 52.2 40.3 43.3 16.4 34.4 47.5 29.0 40.3 46.8 29.1 40.0 54.5 29.5 44.3 55.7 12.7 34.5 45.5 22.2 42.6 57.4

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With a keenness to increase the outsourcing of logistics activities, respondents were asked to quantify the activities they planned to outsource in the next 2 years and the next 5 years (Table VII). Outbound Transportation (94.3%), Inbound Transportation (95.5%) and Custom Clearing and Forwarding (90.9%) will continue to be the most prominent activities to be outsourced over the next 5 years. Other logistics activities like Import and Export Management (81.8%), Outbound Warehousing (82.1%), Inbound Warehousing (85.2%) and Fleet Management and Consolidation (83.6%) would be outsourced by over 80% of the respondents in the next 5 years. However, maximum increase in usage of 3PL services is expected in the areas of Inbound Warehousing (44.3%) and Reverse Logistics (42.6%) in the next 2 years. Similarly, top 5 areas that will experience maximum growth in the next 5 years include Reverse Logistics (57.4%), Inbound Warehousing (55.7%), Fleet Management & Consolidation (54.5%), Inventory Management (54.4%) and Distribution (54.3%). Hence the usage of 3PL service providers would increase at a faster rate in logistics activities with lower importance rating. This validates the need of Indian organizations to reduce logistics cost and focus on core competencies as prominent reasons for usage of 3PL services. Results clearly indicate that significant increase in outsourcing has been planned across all activities of the logistics function in the next 2 to 5 years. However, no significant changes are anticipated in the mix of logistics activities being outsourced between now and the future trends.

Conclusion Changing business environment has pushed organizations in India to concentrate on their core activities and offload a host of logistics functions to experts in the field. Globally, the range of effective logistics outsourcing includes, apart from transportation, warehousing and custom clearance a whole range of other activities such as freight bill payments, auditing, contract manufacturing and assembly operations, packaging and labeling, freight consolidation to name a few. The practices in Indian industry reveal that: • Warehousing, inbound and outbound transportation, custom clearing and forwarding are the most frequently outsourced activities. • Activities such as packaging, fleet management and consolidation are gaining attention and growing in popularity. • More and more companies are planning to use 3PL services in the future as an integrated set of services rather than for just movement of material. • The motivation for doing so comes due to the benefits of logistics cost reduction, ability to focus on the core business, and improving supply chain efficiency. Though the usage of 3PL services reveals positive and significant impact on business performance, third party logistics practices are still at a nascent stage in India. 55% of companies subscribe to 3PL services as compared to 75% globally and these seem to be more of transportation and warehousing related activities. Organizations will increase the usage of 3PL services in traditional logistics activities and increase the scope of outsourcing based on the overall satisfaction and the impact on business objectives – logistics system performance, customer satisfaction and employee morale. These indicators should help the 3PL service providers plan the depth and scope of their service offerings in India. They clearly highlight the importance of delivering results that impact the business objectives in order to increase outsourcing opportunities for Indian organizations. It is evident that usage of 3PL services can help organization’s achieve substantial results, both in terms of customer satisfaction and logistics cost reduction. This will form the cornerstone for

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increase in outsourcing of logistics functions in the near and long-term future by present and prospective users for improved business results and supply chain efficiencies.

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