Logistics and warehousing plays an indispensable role in the transportation of goods across the country. A warehouse is a fundamental part of business infrastructure and is one of the key enablers in the global supply chain. It is the fulcrum for procurement, manufacturing and distribution services which collectively build robust economies.
Today logistics cost in India accounts for 13-17 percent of the Gross Domestic Product (GDP) which is nearly double (6-9 percent) the logistics cost to GDP ratio in developed countries such as the US, Hong Kong and France. Much of the higher cost could be attributed to absence of efficient intermodal and multimodal transport systems. Moreover, warehousing which approximately accounts for 25 percent of the logistics cost has also been facing major challenges. This further added to the logistics cost borne by the end users and other stakeholders.
Earlier, the incentives to enter India’s warehousing sector was minimal for organised players as the occupiers themselves were content to engage with fringe partners offering low cost options with a network of small storage facilities near consumption centres. Multiple state and central level taxes made it sensible for companies to maintain smaller warehouses in each state. Further, this limited the focus on automation and higher throughput. This attitude of occupiers of preferring to save on costs as their sole objective is changing. There has been a gradual transition in the mindset of occupiers to use the services offered by organised segments.
A plethora of factors are driving this wave of change such as: requirement from compliance regulators (in case of the pharma industry), quality consistency assurance required by clients/ regulators, statutory penalties on non-complaint warehousing facilities, economies of scale being achieved through larger warehouses, safety and security of goods, efficiency in operations, quicker turnarounds, need for efficient warehousing designs and the advent of e-commerce and other multinational businesses that prefer to occupy only complaint facilities. This shift was further accentuated by the implementation of the Goods and Services Tax (GST) in India.
The whiff of such a mammoth opportunity has attracted global pioneers in warehousing expertise to Indian shores. The government’s thrust to the sector such as giving infrastructure status to the logistics sector, the ‘Make in India’ programme, development of multimodal transport networks and initiatives to set up industrial corridors like Delhi Mumbai Industrial Corridor (DMIC), Delhi Kolkata Industrial Corridor and logistics parks have propelled the cause.
Over the past few years, the government has undertaken several reforms to promote and provide an exit route to real estate investors via the Real Estate Investment Trusts (REITs). Currently the market for REITs in India is at a very nascent stage and it would take time to evolve. Once the market for REITs matures, the institutional investors would be able to get a credible exit avenue to gain from their warehousing investments by listing their warehousing assets through REITs. These initiatives would go a long way in leveraging the true potential of the sector and bring down the overall costs linked to warehousing and logistics as well give credible exit opportunities to investors.
The Goods And Services Tax (GST)
The Goods and Services Tax, touted as the biggest tax reform in the history of independent India became a reality in 2017. This tax replaced a plethora of central level taxes (i.e. excise duty, countervailing duty and service tax) and state level taxes (Value-Added Tax, Octroi and entry tax, local body tax, luxury tax, etc.), which meant that the same product was sold at different prices in different states. The web of state and central level taxes made the inter-state trading of goods in India as cumbersome as exporting them to another country. Many businesses were of the opinion that in some segments, the exports of goods were seamless for the latter.
Pre-GST Era: Precious delivery time was often lost as trucks transporting goods were held up for days together at multiple entry barriers across states and for payment of local body/entry taxes. There were additional costs due to compliance burdens. Moreover, each state had its own set of taxes and the companies had to tie-up with local compliance staff for getting the required permits. All these barriers ultimately led to an increase in product prices. Further, the companies engaged multiple smaller warehouses to avoid wastage of time at the barriers on inter-state transfer of goods and also avoid inter-state sales in which taxes added to cost burden. This pattern stayed in practice although it worked against efficient model of operations.
Post-GST Era: GST has been envisaged to resolve the erstwhile pre-GST pain points and streamline the supply chain. Most companies are deliberating the need to redesign their after-produce supply chain networks. Currently, companies are enjoying the immediate benefits from removal of check points. According to our survey, this has led to average cost saving in the range of 3–7 percent, which varies across several industries. However, the time savings are substantial.
For example, earlier the travel time between Delhi–Chennai, which used to take 5–6 days, post-GST, has come down to 3–4 days. Trucks are able to cover longer distances every day with an improved turnaround time ensuring that the transporters can carry out their business with a smaller fleet. Once the system for generating e-Way bills is implemented by all states, and the system for generating e-Way bills stabilizes, the savings due to reduction in travel and turnaround time would be higher.
As a consequence of faster movement of goods across the country, in the near future, companies would need to carry smaller levels of inventory to support the same level of sales. This would reduce the inventory carrying costs and working capital requirements leading to significant financial savings. The reduced inventory levels would also reduce the overall warehousing space required.
Companies are now consolidating into larger warehouses to get benefits of economies of scale. Some of their earlier smaller warehouses are now becoming redundant. Going forward the companies would take up larger spaces and reduce their total number of warehouses which they use currently; this coupled with lower inventory level requirements would lead to significant savings in real estate cost. The biggest advantage which supply chain experts attribute to the implementation of GST is the reduction in inventory. The savings due to reduction in overall inventory levels is expected to far exceed savings in real estate costs on account of consolidation of warehouses.
Infrastructure Status to Warehousing and Logistics
100 percent foreign direct investment (FDI) in the storage and warehousing sector under the automatic route has been permitted since several years. In addition to this, the government has recently announced infrastructure status to the logistics industry. This decision will enable companies in the logistics and warehousing sector to access funds at lower cost, longer tenure and enhanced limits. Companies would now be accounting for lesser cash outflows due to debt and interest repayments in the initial years unlike earlier, as the debt financing can be taken with longer repayment tenure. It would also enable them to raise larger amounts of funds as external commercial borrowings (ECB), borrow longer tenure funds from insurance companies, pension funds, sovereign funds and also make them eligible to borrow from the India Infrastructure Financing Co. Ltd (IIFCL). Moreover, even the banks would be able to lend to this sector with lower provisioning requirements than earlier.
The approval process also gets simplified. The Government of India has set out certain conditions that need to be met for a project to be classified under infrastructure status. The government has defined “logistics infrastructure” to include a multimodal logistics park comprising an Inland Container Depot (ICD) with a minimum investment of Rs 50 crore and minimum area of 10 acres, cold chain facility with a minimum investment of Rs 15 crore and minimum area of 20,000 sq ft and/or a warehousing facility with a minimum investment of Rs 25 crore and minimum area of 100,000 sq ft. Institutional players will not invest in unorganised and small warehouses; they generally invest or set up large warehouses and huge logistics parks.
Currently, the new facilities that are being built by institutional players are generally of large sizes, bigger than the minimum requirements as specified above and hence, they would stand to benefit from the infrastructure status.
Outlook
The warehousing industry in India is largely unorganised and there are very few opportunities to buy assets from the organised segment, as such players are few in number. However, compared to other real estate assets, warehousing assets can be built in a relatively shorter time span. Hence, the risks in greenfield investments are lower. With infrastructure status, the approval and funding risk for greenfield investments have reduced further. Earlier, due to the unorganised nature of the industry the equity IRR for a development project was low. Now with all the policy reforms that are being undertaken there is a paradigm shift in the industry structure where it is becoming favourable for organised players.
On account of this structural transformation, the attractiveness of taking up a warehouse development project is evident. Our assessment, reflected in the Equity IRR of a warehouse development project, indicates how warehousing as an asset class is becoming lucrative avenue in the spectrum of commercial real estate development.
Limited warehouse supply from the organised segment, amidst the increasing demand brought by reforms in the sector has translated into heightened investor interest in the available warehouse stock.
While the trend, currently, is a mix of brownfield and greenfield projects, the shrinking opportunities would make greenfield investment the only way to participate in the asset play that the sector will have on offer.
Meanwhile in light of the slump in the Indian residential market over the past few years and the track record of poor returns; investors preferred to invest in rent-yielding commercial assets. With increased investor activity in the commercial segment and the acute shortage in supply of good quality of office space, the cap rates are declining and inching below 8 percent from the 9–10 percent range witnessed a few years ago. The risk-reward ratio would start becoming unfavourable as the cap rates start to decline further below 7–7.5 percent. As a result, there has been a considerable shift in investors’ focus towards the warehousing sector. The warehousing assets are offering a higher cap rate around 150–200 bps greater compared to what commercial assets are currently offering.
Demand for large warehousing spaces is likely to see steady increase as occupiers now to move out of their smaller warehouses and consolidate their activities in larger facilities, which are presently in short supply compared to the demand. This demand-supply gap is visible in the current premium commanded by organised players owning these assets. For example, in the Bhiwandi warehousing cluster, the rents for unorganised spaces are as low as Rs 9 per sq. ft., whereas organised players are commanding rents in the range of Rs 14–17 per sq. ft. in the same region. As more and more companies streamline their logistics networks, it would be observed that unorganised players or smaller organised players would consolidate or sell their assets to larger ones.
The industry is expected to witness a structural shift over the next 3–5 years.
The warehousing aspect in the logistics supply chain globally is going through a transformation. From being a mere storage space provider for goods, the segment is offering an array of value added services such as packaging, small scale manufacturing, cross docking, automation, algorithm based demand forecasting and distribution centres. This transition would only happen if economies of scale come into play and companies are able to consolidate their spaces and move into larger warehouses. The Indian warehousing industry which was lagging behind its global counterparts due to its fragmented structure would now enter the same league.
International Benchmarking
In the present era of globalisation, customer satisfaction is the norm. The booming e–commerce sector has made the act of sale and purchase very easy and quick. But this comfort to sellers and consumers comes at the cost of logistics providers. Supply chain processes are under immense pressure to efficiently and effectively meet this growing demand within a stipulated time and cost. If the right product does not reach the right customer within the prescribed time then the company loses not just business but also reputation. As a result, warehouse floors are always under high stress. In such a situation, it is better to adapt and adopt. Best practices in supply chain design and management from across the globe should be adapted with modifications suitable to Indian needs. This chapter covers a few such notable global trends that can serve as a benchmark for the Indian Logistics and Warehousing industry.
Global Trends in Logistics-
There are three major logistics trends globally:
FUNCTIONAL
Super Grid: 3PLs and 4PLs are already a norm in the developed markets and they are now moving towards supergrid logistics. The idea is to arrange global supply chain networks in a gridlike structure such that different components of logistics are integrated. Such a logistics supergrid will span across borders, sectors, companies and services by assimilating multiple supply chains, smoothly and flexibly. Cloud computing can enable the creation and operation of such supergrid. eg: Amazon
Share Economy: The industry trend of sharing assets instead of owning them is now finding ground in the logistics sector, especially after the success of start–ups like Airbnb. Everything from warehouses to trucks to electronic enablers can be shared between two or more entities. Such sharing is highly cost effective as it saves considerable expenditure on ownership of resources and assets. Smooth and hassle-free sharing of logistics activities and resources is enabled by peer–to–peer sharing platforms. eg: PepsiCo and Nestle
Omnichannel: Customer demand has in recent times diversified into anytime, anywhere, and from any device categories. This has consequently led to the integration of online and retail i.e. offline business channels. Omni-channel logistics is nothing but the coming together of physical shopping and virtual shopping experiences for a customer. The end expectation of a customer is to have a well–informed, hassle–free, to–their– doorstep shopping experience. eg: IKEA Temperature-controlled: Products like fresh agricultural produce, frozen foods, photographic films, chemicals and pharmaceuticals are sensitive to temperature change either due to a smaller shelf–life or due to their sensitive chemical composition. To avoid damage to such products it is necessary to maintain a fixed temperature range round the clock. Cold chain logistics does that. Temperature–controlled environments are created end–to–end, right from transportation to storage to delivery. This protects the products from any damage and keeps them fresh and intact till the last mile. eg. –Die Bauerntute
Relay Trucking: An established practice in developed markets, relay trucking facilitates optimisation by round– the–clock movement of freight trucks. Furthermore, it is driver–friendly from the employee’s perspective and costfriendly from the company’s perspective. The model works as follows – a driver sets out with a designated truck load on a particular route. At the same time, another driver sets out with a different truck load on the same route from the opposite direction. They meet en–route and exchange trucks and then drive back to their respective origin destinations carrying freight designated for that location. As a result, the truck keeps moving to its destination without a halt and the drivers don’t over–work or stay away from their hometowns. This helps increase time and cost efficiency. eg: Rivigo
Hyperlocal: The hyperlocal concept is a good enabler of the ‘on–demand delivery’ business model. It makes use of the existing local retail network to meet the demands of consumers. Logistics players team up with local retailers such that their inventories are integrated with the online platforms. When products from the inventory are ordered local retailers fulfil this demand on behalf of the logistics company. This also ensures faster delivery. eg. – Amazon Prime Now
Anticipatory Shipping: Anticipatory shipping is dispatching of product/s to a particular cluster based on the anticipation of its demand. This anticipation is made with the help of big data–based predictive algorithms that are built on previous demand patterns. Such analysis helps logistics providers predict demand even before an order for the product is placed. eg: Amazon
Multi-purpose Networks: Making use of existing networks and public transport infrastructure to transfer, store and deliver goods is an idea that is slowly gaining popularity. Instead of having sector-specific logistics chains or dedicated infrastructure, companies now look to integrate their supply networks with those of others or with the public infrastructure. This helps save cost, increases capacity utilisation, increases mobility and flexibility in deliveries, and thus enhances customer satisfaction.
Such multi–purpose usage is more beneficial for sectors that require specific transport and storage conditions like the cold storage goods – a single cold storage network can be utilised for frozen foods as well as pharmaceuticals. This helps reduce the cost of specificity. eg. – Postbus
2. TECHNOLOGICAL
Smart Warehousing: Like smartphones, smart warehouses are the ones that effectively perform multiple functions simultaneously with the help of technology. They are also referred to as intelligent warehouses or warehouses that think. In a smart warehouse, all gadgets and devices are fitted with sensors and are connected to each other via the Internet. This connectivity gives the gadgets the ability to coordinate their processes thereby enabling seamless operations. Internet of Things, Cloud Computing, Big Data Analytics, Robotics and Automation together enable the concept of a Smart Warehouse. They are all necessary elements of a larger integrated ecosystem.
3D Printing: Also known as additive manufacturing, 3D printing is a process of making three–dimensional objects from a digital file. This technology is seeing massive use in the biomedical, aviation and automobile sectors. For instance, it can be used to print vehicle spare parts in areas where there are no service centres or dealer outlets. Though 3D printing cannot replace conventional manufacturing processes, it can definitely facilitate faster production of in-demand goods. Logistics sector can benefit from this technology as they can save on the cost and time of manufacturing and procurement. For instance, the batch size 1 trend (discussed above) is made possible because of the mass manufacturing facilitated by 3D printing.eg. – Fly from Amazon
Augmented Reality: Augmented reality is real time integration of digital information with the existing environment. This technology makes use of worker’s environment and integrates it with virtual information to enhance what is seen, felt or smelt. Vision picking is the most popular application of this concept. Augmented reality smart glasses facilitate faster, hands–free operation of warehousing tasks like picking, sorting, and assembly. In the US and Europe, smart glasses are being increasingly used in warehousing operations. eg. – DHL.
Big Data: A massive amount of data is generated in logistics at every level and every minute and this data is huge, diverse, unstructured and high in frequency. All of it can be and needs to be put to use in order to avoid losses and wastages. However, two major obstacles in this process are the unstructured nature of data and its extensively high frequency. As a result, real time analysis becomes a challenge. That is why the need for big data analytics. This technology consumes large amounts of data and helps analyse it real-time. It also helps discern or identify patterns, if any. In India, big data is quickly gaining popularity in the logistics sector. Companies like Wipro have developed business intelligence tools such as Insta Intelligence that automate logistics processes.
Robotics: New and advanced robotics can help boost productivity of logistics operations. These robots are equipped with high–resolution cameras, pressure sensors and self–learning capabilities that can be used for assistance to and collaboration with manual labour. For instance, in warehouses, these robots can be programmed to perform tasks like picking, packing and sorting or assist in loading and unloading of goods. In developed markets like the US and Europe, they are also used for last–mile delivery activities. Eg. – Sawyer.
Cloud Logistics: Logistics goes hand-in-hand with extensive datasets. Recording every minute detail from the start to the end is absolutely essential for monitoring and supervising the supply chain. But documenting every record for every good is extremely tedious,time and space consuming, and highly prone to errors. Use of cloud computing technology is the best solution. Cloud logistics facilitates the creation of a limitless virtual space to save and share data. It also facilitates quick and real– time access to information from across the world. Ensuring adequate safety of sensitive data is the only challenge of cloud computing and even that is taken care of with advanced technological features.
Digital Supply Chain: It is the digitisation of production and distribution processes, viz. procurement, manufacturing and logistics. Using Internet, a single digital interface is built to connect and integrate these functions. This helps analyse extensive information real-time to better coordinate the supply chain making it more agile.
Internet Of Things: A system that connects and integrates electronic devices via Internet such that they can send and receive data from each other is Internet of Things (IoT). In supply chain management and warehousing, numerous devices function individually carrying out their respective operations. If these devices communicate and coordinate their activities then all processes can be executed smoothly and seamlessly resulting in increased time efficiency. Furthermore, massive data generated by these devices can be analysed real-time to reduce losses and inefficiencies, if any. Such a sync of devices is made possible through IoT. In India, IoT has been introduced to support online payment gateways and in sectors like telecommunication and power. The logistics sector is still to witness the IoT revolution.
Self Driving Vehicles: Self-driving vehicles are more flexible and more autonomous than automated forklifts and driverless trucks. These are fully driverless and make use of integrated sensors to navigate unlike other unmanned trucks that require magnetic or inductive strips. They can be used in indoor as well as outdoor logistics operations – from pallet movers in warehouses to last-mile delivery solutions.
Drones Or Unmanned Aerial Vehicles: Express deliveries and deliveries in remote areas can be executed very efficiently with the use of unmanned aerial vehicles (UAVs) or drones. These are only meant to reduce the deliverytime and/or help access difficult terrains.
They are not meant to replace or phase out the ground–based transportation and delivery systems. In rural regions, they can be used to access the remote and inaccessible terrains. In urban areas, they can be used for faster first and last mile delivery in areas of high congestion.
3. WAREHOUSING
Temperature-Controlled: Also known as cold-chain warehousing, these are warehouses equipped with temperature–controlled environments required for the storage of cool cargo products. Products like fresh agricultural produce, frozen foods, photographic films, chemicals and pharmaceuticals are sensitive to temperature change either due to a smaller shelf–life or due to their sensitive chemical composition. To avoid damage to such products it is necessary to maintain a fixed temperature range round the clock. This has led to the need of cold-chain warehouses. Such warehouses are equipped with temperature-control systems. Systems with a temperature range of 2°C–8°C and 15°C–25°C are common in pharmaceutical industries. (Source: Industry interactions) Along with temperature, these temperaturecontrol systems also need to maintain other product specifics and parameters like air quality levels (carbon dioxide, oxygen, humidity and others). Furthermore, such systems need to be supplemented with efficient and 24- hour monitoring equipments to ensure smooth functioning. Thus, cold chain warehouses have specific and advanced warehouse management systems that make use of technological tools like big data analytics for real time monitoring.
Multi-Storey: Multi-storey warehouses started coming up as a solution in land–onstrained countries to increase the usable floor space per square foot of land.
It is gradually gaining momentum in other countries as well. Such warehouses need sound architectural design as well as technological planning so that all supply chain processes can be carried out on all floors without any hindrance. Multi– storey warehouses have been common in the Asian cities of Tokyo, Singapore and Hong Kong. Land is a limited resource here and therefore the need to maximise utilisation of the available space.
Where Does India Stand?
The Indian logistics industry has grown leaps and bounds in the last 8-10 years. The global practise of 3PLs (third party logistics) and 4PLs (fourth party logistics) has gained considerable popularity in the country. Enormous growth in the e-commerce segment is fueling development in logistics and warehousing sector further. However, India still has a wide gap to cover in terms of increase in efficiency and effectiveness of supply chain processes. Adapting and adopting international best practices is one way to bridge this gap. Policies like Goods and Services Tax (GST) are welcome measures that are expected to supplement this process of growth. However, India still has a long way to go before it reaches the standards of its global compatriots and this can only be achieved with active and coordinated participation from government and private players.
The warehousing market in India is highly fragmented as majority of the warehouses measure less than 10,000 square feet. Further, almost 90 percent of the warehousing space is controlled by unorganised players and comprises small-size warehouses with limited mechanisation. The present warehousing market in India can be categorised into three – lower stratum, middle stratum and higher stratum. The lower stratum is just godowns of the past converted into warehouses. These are old buildings, mostly Reinforced Cement Concrete (RCC) structures and their only utility is storage. The middle stratum warehouses comprise similar structures as in the lower stratum, but these are built with pre– engineered slabs and are known as pre– engineered building (PEB) structures. Their planning and functioning is very basic, like that of the lower strata, but their buildings are in a comparatively better condition. Higher stratum warehouses are the modern and massive structures that perform a lot of supply chain functions along with storage.
Another practise in Indian warehousing market is the lack of attention to warehouse designing. This ignorance stems from lack of awareness and/ or lack of willingness on the part of landowners and developers to cater to the requirements of end users. Most warehouses are built keeping in mind the developer’s perspective and not that of the end user. Hence, the focus is to save cost which results in the construction of a very basic structure for a warehouse. Such warehouses do not adhere to market standards and therefore, end users are frequently plagued with issues like lack of basic amenities and sub–standard infrastructure with lower longevity. This approach needs to change.
India’s freight modal mix is highly skewed towards roads with 60 percent of the total freight movement in the country happening by road. This is mainly because of the poor railway and waterway infrastructure. Earlier, maximum freight movement used to happen via the railway network. However, lack of last–mile connectivity and technical inefficiencies in operations gradually reduced the reliance on railway freight movement. Waterways, on the other hand, were never a focus of policy development and hence could not be exploited for freight movement. Consequently, more than 50 percent of the long–haul freight movement takes place by road.
Two issues arise owing to the heavy dependence on roadways for logistics. First, for long–haul freight routes, road is approximately 25–30 percent costlier than railway. Accordingly, the overall freight transport cost in India is higher than the global standards. Second, even the road infrastructure of the country is wrought with problems like single– lane access in some areas, poor traffic management, bad quality roads and, delays due to factors such as toll and octroi. As a result of these inefficiencies, truck drivers work for lesser hours, truck travel distance per day is severely curtailed and all of these cumulatively increase the freight transportation time.
(The report was shared by The Knight Frank)
