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IMPACT OF LOGISTICS OUTSOURCING ON THE PROFITABILITY OF FOOD PROCESSING INDUSTRIES
(A STUDY IN MAHARASHTRA)
Thesis Submitted to the Padmashree Dr. D. Y. Patil University, Department of Business Management in partial fulfillment of the requirements
for the award of the Degree of
DOCTOR OF PHILOSOPHY In
BUSINESS MANAGEMENT
Submitted by GAUTAM TREHAN
(Enrollment No.: DYP-PHD 09010)
Research Guide Dr G. S. MONGA
PADMASHREE DR. D.Y. PATIL UNIVERSITY, DEPARTMENT OF BUSINESS MANAGEMENT,
Sector 4, Plot No. 10, CBD Belapur, Navi Mumbai – 400 614
November 2012
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IMPACT OF LOGISTICS OUTSOURCING ON THE PROFITABILITY OF FOOD PROCESSING INDUSTRIES
(A STUDY IN MAHARASHTRA)
iv
DECLARATION
I hereby declare that the thesis entitled “Impact of Logistics Outsourcing on
the Profitability of Food Processing Industries (A Study in Maharashtra)
submitted for the Award of Doctor of Philosophy in Business Management at the
Padmashree Dr. D.Y. Patil University Department of Business Management is
my original work and the thesis has not formed the basis for the award of any
degree, associate ship, fellowship or any other similar titles.
Place: Navi Mumbai.
Date:
Signature of the Guide Signature of theDirector, Signature of the student
v
CERTIFICATE
This is to certify that the thesis entitled “Impact of logistics outsourcing on the
Profitability of Food Processing Industries”(A study in Maharashtra)and
submitted by Mr GautamTrehan is a bonafide research work for the award of
theDoctor of Philosophy in Business Management at the Padmashree Dr. D.
Y.Patil University Department of Business Management in partial fulfillment ofthe
requirements for the award of the Degree of Doctor of Philosophy in Business
Management and that the thesis has not formed the basis for theaward
previously of any degree, diploma, associate ship, fellowship or anyother similar
title of any University or Institution.
Also certified that the thesis represents an independent work on the part of
the candidate.
Place:
Date:
Dr. R. GOPAL Dr. G.S. Monga
Signature of the Director, Signature of the Guide
Head of the Department
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ACKNOWLEDGEMENT
I am greatly indebted to the Padmashree Dr. D.Y. Patil University, Department
of Business Management which has accepted me for the Doctoral Program
and provided me with an excellent opportunity to carry out the present
research work.
I am grateful to my guide, mentor, philosopher Dr. G. S. Monga&Dr. R.Gopal for
having guidedme throughout the research span of time and for providing his
constructivecriticism which made me bring my best. I would also like to thank sir
for beingthere at any point of time without considering his own precious personal
time.
I would also like to thank Mr. SalimSethwala Director of Sethwala Foods Ltd, for
sponsoring the Projects & for having supported me throughout the study.
I sincerely thank my wife MrsChitraTrehan& my Mother SmtUrmilTrehan for
providing me the necessary motivation forcompleting this dream project. I also
wish to place on record my sincerethanks to my revered deity and my late father
who have provided me withthe strength and ability to carry this research out of
the best of my ability.
Lastly I also wish to thank all my near and dear ones who have been directly
and indirectly instrumental in the completion of my dissertation.
Place:Signature of the student
Date:
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CONTENTS
CHAPTER
NO
TITLE Page
NO
List of Figures
List of Tables
Executive Summery
1. Introduction 1
1.1 Logistics & Supply Chain 3
1.2 F.D.I. in Logistics 11
1.3 Key issues & Challenges for Logistics Industries 15
2. Literature Review 31
2.1 Gap in the studies 38
3 Purpose of the study & Research Methodology 41
3.1 Purpose of the study 42
3.2 Objectives of the study 43
3.3 Hypothesis 44
3.4 Research Methodology 45
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3.5 Secondary Data 46
3.6 Primary Data 47
3.7 Sampling 48
4. Indian Logistic Industry 62
5. Logistic Outsourcing 77
6. Profitability Facts 85
7. Food Processing Industry 108
8. Tabulation & Statistical Analysis of Data 129
9. Interpretation & Report Writing 164
10. Outsourcing Strategies 198
10.1 Modeling the logistics outsourcing relationship variable
to enhance shippers productivity & competitiveness in
Logistics Supply Chain
199
10.2 Performance Measurement in business process
outsourcing decisions insight from 4 CS
223
11. Future Outsourcing Strategies 247
11.1 Training Future Logistics Managers 248
11.2 The Role of Balanced,Strategic, Cascaded & aligned
performance measurement in enhancing firm
270
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measurement.
12. Challenges & Opportunities for Indian Logistics
Outsourcing Companies.
306
12.1 Keeping a watchful eye on pilferage prevention 307
12.2 Building Warehousing- Key to faster logistics growth 313
12.3 Maritime Transportation 315
12.4 Mega Trends in Air Cargo 330
12.5 Rail Freight in India 334
13. Major Findings 345
13.1. Limitation of the Study 349
14. Conclusions 351
14.1 Recommendations & Suggestions 354
Reference Section 357
Annex.- 1 Questionnaire 358
Annex 2- Bibliography 364
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LIST OF FIGURES
List of Figures Page No
Fig1 The Major Forces driving Logistics 19
Fig 1.1 3PLs & 4PLs Service provider operations 26
Fig 8.11 Steps involved in Research 113
Fig 8.1 Job Position 135
Fig 8.2 What level Decision of logistics outsourcing is
taken 136
Fig 8.3 Degree of involvement in decision making 137
Fig 8.4 Percentage of Increase in Total sales volume 138
Fig 8.5 Managers involvement &Development of Total Sales volume in Percentage
139
Fig 8.6 Degree of Involvement & development in total
Sales Volume
140
Fig 8.7 Managers View For outsourcing of outbound
transportation
141
Fig 8.8 Managers view for outsourcing of Pack & Labels 142
Fig 8.9 Managers view for outsourcing of Transportation
Management
143
Fig 8.10 Activity contributes highly competitive advantage 144
Fig 8.11 Activity essential to support managers core
activities
145
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Fig 8.12 Activity which performed efficiently compared to
rivals
146
Fig 8.13 Special equipment used by Mangers 147
Fig 8.14 Special Knowledge & Skills 148
Fig 8.15 High cost of outsourcing 149
Fig 8.16 Performance Evaluation 150
Fig 8.17 Difficulties in logistics service 151
Fig 8.18 Opinion of Managers on Perishability 152
Fig 8.19 Impact of SKUs on Logistic Process 153
Fig 8.20 No. of Products in Storage 154
Fig 8.21 Variety of Product Group Influence logistic
Process
155
Fig 8.22 Production Features 156
Fig 8.23 Fluctuationsin output, quality, and quantity 157
Fig 8.24 Yearly Demand Volume 158
Fig 8.25 Demand Uncertainty 159
Fig 8.26 Demand Changes 160
Fig 8.27 Distribution Impact 161
Fig 8.28 Role Of International Customers 162
Fig 8.29 Influence of Distribution (No. of Warehouses) 163
Fig 8.30 Variety of Distribution Channels 164
Fig 8.31 Delivery Frequency 165
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Fig 8.32 Order Lead Time 166
Fig 8.33 Time of Distribution size 167
Fig 8.34 Changes in Distribution 166
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LIST OF TABLES
Table 9.1. Job Position 170
Table 9. 2. Logistics outsourcing Levels 170
Table 9.3. Degree of involvement in decision for outsourcing 171
Table 9.4. Risein total sales volumeas per logistic outsourcing activity
171
Table
9.5&9.6
Development of total sales 172
Table 9.7 Growth in sales 172
Table 9.9 Opinion on outsourcing of outbound transportation 177
Table 9.10 View on Packs & Label 178
Table 9.11 Role of sourcing in outbound transportation
179
Table 9.12 Contribution to highly competitive advantage
180
Table 9.13 Impact of essential to support managers core activity
181
Table 9.14 Effect of rivals 182
Table 9.15 Special equipment for the activity 183
Table 9.16 Special Knowledge & skills for the activity 184
Table 9.17 Costly on outsource 185
Table 9.18 Evaluation
185
Table 9. 19 Problems in measurement of performance (logistic service)
185
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EXECUTIVE SUMMARY
Indian Logistic Industry and Outsourcing
Indian logistics industry is expected to grow annually at the rate of 15-20
percent, reaching revenues of approximately $385 billion by 2015.The market
share of organized logistics players is also expected to double to
approximately 12 percent during the same period & a large number of
upcoming SEZs have necessitated the development of logistics for the
domestic market as well as for global trade.
According to the Assocham report, about 55 percent of Indian companies are
outsourcing logistics services, such as supply chain management and
warehousing, which used to be between 10-15 percent 10 years ago. The
concept was initially introduced in the U.S. AND Europe, but India is fast
catching up to increase the efficiency of domestic corporate through efficient
logistics functions. But like with most industries in India, the logistics industry
is also dominated by SMEs. As the business environments starts demanding
improved servicing standards, fast cycle time has become the key factors for
business success, including SMEs. This highlights the critical role of the
logistics industry. In fact, logistics is what connect local trade & is also a part
& parcel of global business.
“The logistics industry in India is growing at 20% as against the world
average of 10% growth in this sector. Even today, the organized sector
accounts for merely 1% of the annual logistics cost, therefore, this sector has
tremendous growth potential. Over the years several large companies & large
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express cargo & courier companies have started logistics & supply chain
operations. These companies enjoy the advantage of already having large
asset base and an all-India distribution network. Since logistics service can
be provided without assets, there is growing interest among entrepreneurs to
venture into this business,”informs M.S. Sayad, Vice Chairman AquaLogistics
Limited, a full-scope 3PL (third-party logistics) service provider, delivering
end-to-end solutions in the logistics & Supply chain area. Numbers don’t lie.
The success story of this sector is being written ever since the opening of the
Indian economy in the 1990s. Consider this; India’s logistics sector attracted
investments worth Rs 23,200 crore in first half of 2008, outdoing some of the
major sectors including aviation, metals and mining and consumer durables
among others and today, it has become a full- fledged industry contribution to
the GDP of the country! Indian logistics market is estimated to constitute
mare than 13% of the GDP.
The global logistics industry was valued at US$3.5 trillion in2005, whereas
US logistics industry size was around US $ 900 billion, 25% of the global
logistics industry. However, India’s spending on logistics industry is much
higher than the developed economies like the US (9.5% ) and Japan (10.5%).
Evidently, logistics and logistics management has become an ever-increasing
concern for many industries and is regarded as the single most crucial point,
which can propel business towards success. Today when the production has
stopped yielding whopping gains & when competition has forced companies
to reduce margins, companies are desperately trying to search for areas
xvi
where they can increase profits & cut costs. Logistics is emerging as one
such areas where one can ensure timely delivery and can also directly affect
stock holding.
The importance of logistics and supply Chain Management has increased
manifold since the last few years. From the Mumbai Dabbawalla System that
caters to a huge number of hungry tummies everyday to the kitchen inventory
to transportation of cargo & delicate inventories, logistics & supply chains
have become indispensable toeveryday living.The rampant growth of the
logistics industry points towards its growing significance in business
operations.
Traditionally Indian Logistics Industries:-Traditionally, industry in India has
always viewed logistics as a cost centreand, over the past few decades since
independence most business have always attempted to cut corners in trying to
move their products from the shop floor to the warehouses and distribution
channels and from there on to the end-user. In recent years, however there
has been a welcome change in this kind of thinking and an increasing number
of industries are now beginning to view logistics as a tool toaugment customer
experience and improverevenues. Several large business houses and mid-
sized enterprises now see logistics as a strategic tool, which can lead to
efficient business operations resulting in higher revenues and better
profitability.
The cost of logistics in India is pegged at around 12-13% of the GDP, or
roughly $125 billion. Until very recently, nearly 99% of logistics cost was
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accounted for by the unorganized sector, which consists of owners of less than
five trucks, small warehouse operators, customs brokers, freight forwarders,
and the like. As a matter of fact, 54% of the road transport market was with
operatorsownings no more than a single truck. The organized sector’s
contribution, on the other hand was a tad above 1% This situation served as a
major deterrent to the customer as the small operator was in no position to
offer end-to-end solutions. Also at 13% GDP the logistics cost was much
higher than that prevailing in Europe and the United States ( at around 7-9%
on average), making the service extremely unattractive for the customer.
There has been some improvement in the above statistics, with the entry and
expansion of large players in this area for instance large cargo and transport
firms and courier companies such as Transport Corporation of India, DHL,
TNT, & Blue Dart have captitalised on their existing asset bases and all India
network to start logistics operations. Others, such as Aqua Logistics have used
a mix of organic & inorganic growth to ramp up their business models, In fact
today around 10% of the business is in the hands of a few leading players.
Driven by developments in information and communication technology and
globalization,the outsourcing industry has shown impressive growth in the last
decade. The globalmarket size of the industry has increased from
approximately US$6 billion in FY2000 toalmost US$60 billion in FY2009
(www.nasscom.in). As the spread of outsourcing modelhas increased, new
forms of organization have emerged, known as “outsourcing firms.”
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Food Processing Industry
Meat, Fish and Poultry have been part of human diet since antiquity. As the
civilization advanced, man understood the importance of meat in human
nutrition. Modern Science has unraveled the mysteries of the biochemistry and
the microbiology of Foods of Animal Origin. The knowledge on meat has slowly
started percolating into the public life. As the people are becoming more
Science Conscious, the religious taboo attaché to meat is slowly dwindling.
India has the largest livestock population among the World countries. The
livestock is playing a key role in the Socio – Economic upliftment of the country.
The potential of Indian meat & poultry Industry can be seen from the
phenomenal growth of livestock over the past three decades. The consumption
of meat is on increase in the domestic market. Revenues from the export of
meat, poultry and by products have substantially increased in recent years.
Further, globalization of Indian business created ample opportunities and
potentialities for the export of meat and poultry products. Government of India
has recognized meat, fish and poultry as one of the important sectors in the
food industry.
No research initiative has been undertaken in India that has focused on
Logistics outsourcing & its effect on Food Processing Industry in India. In
recent years, however there has been a welcome change in this kind of
thinking and an increasing number of industries are now beginning to view
logistics as a tool to augment customer experience and improve revenues.
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Several large business houses and mid-sized enterprises now see logistics as
a strategic tool, which can lead to efficient business operations resulting in
higher revenues and better profitability.
Objectives of the Research:-
1. To Study the Impact of Logistics Outsourcing on Profitability of
Companies. The Researcher is aiming to study the logistics cost, delivery
time, meeting of order quantity i.e logistics performance does it plays a
key role in profitability of the company.
2. To Study Logistics Outsourcing visa-versa Food Processing Companies
with respect to their Competitive advantage. The researcher is trying to
find out the degree of current practices like Outsourcing of outbound
logistics, outsourcing of pack & labels, Transportation Management,
Inventory Management, & Distribution & network planning.
3. To Study the efficiency of Logistics Outsourcing with context of different
parameters such as Production, Distribution, Sales, etc. Here the
researcher is trying to assess the Numbers of Packaging lines, uncertainty
of production output time, annual demand volume, demand uncertainty &
fluctuation, Numbers of customers, Warehouses, Distribution Varity,
Delivery Frequency, Order Lead time.
4. To study the level of decision making in Logistics Outsourcing has
significant impact on sales volume of the company. For this research work
job position of the managers i.e level of decision making for Logistics
Outsourcing, does it has a significant impact on sales volume of the
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company. For measuring decision making & impact on sales volume of the
company. Managers job profile, one or multi factory level, degree of
involvement, & sales volume of last three years is taken into
consideration.
Primary and secondary data sources were used to collect information about
aspects of supply chain and customer satisfaction in Logistics outsourcing in food
Processing businesses. Survey involving personal face- to -face interviews with
both Logistics managers, Finance Managers, directors etc was conducted. Key
participants in Mumbai’s logistics were approach for data. Executives (general
managers, operations managers, ) 992 Managers from logistics companies Food
processing companies were interviewed.
Building the much needed model and explore the bottlenecks and challenges in
the journey ahead for Logistics outsourcing industries. This will include – new
processes and operations that could be considered for outsourcing, highlighting
regulatory implications and overall cost maintenance and of course benefits
achieved by getting into a Profitable situation.
Questionnaires
Questionnaires shall be prepared from the context of Logistics outsourcing i.e.
from a User company and service provider perspectives. Details will be captured
in these questionnaires and further taken up for analysis. The findings from this
exercise will be then considered in the final research report preparation and
“Sample size is one which fulfills the requirements of efficiency,
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representativeness, reliability and flexibility for the research work ,” (Kumar,2008)
That is why the sample of Logistics outsourcing in Food processing Companies
was so selected that they truly and adequately represent the universe otherwise
the results obtained would be misleading. Taking this into account the
researcher interviewed 991 companies in Food processing & logistics
Outsourcing companies across the city of Maharashtra. The size of the
sample was considered to be optimum because it fulfilled the requirements
of representativeness and reliability. Gupta (2005) emphasised that sample
selection and data collection are interwoven and one has an impact on the other.
Sampling Technique of Data collection was Sample Technique where a part of
the universe is studied and the conclusion about the universe is drawn from this
data. In consumer research census is not practical and normal sampling
technique is used for the survey.
Limitation of the Study:-This study was conducted in the city of Mumbai which
is considered to be representative of the Companies Outsourcing Logistics
activities.Companies outsourcing logistics across the country and the sample
frame was determined accordingly at the time of deciding the research design .
However, this research does not cover other metros and hence might not have
captured regional factors affecting CoThe level of decision making depends on
job profile of the managers i.e whether he is logistics managers, financial,
production managers, or Director of the company it has an Positive impact on the
profitability of company.
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2. There is significant association between activities (Outbound transportation,
pack & labels, transportation management, inventory management, distribution
network planning) and job positions of the managers of the companies, i.e
Logistics Managers contribute significantly to the profitability of the company
through competitive advantage.
3. There is significant positive association between manager’s view on efficiency
of important parameters like production, distribution and sales. Production
aspects depends on number of packaging lines, uncertainty of production output
time. At the same time Distribution aspects depends on number of customers
domestics or international, warehouses, channel variety, delivery frequency,
order lead time, & sales & demand fluctuations.
Major Findings of the Research:- The level of decision making depends on
job profile of the managers i.e whether he is logistics managers, financial,
production managers, or Director of the company it has an Positive impact on the
profitability of company.
2. There is significant association between activities (Outbound transportation,
pack & labels, transportation management, inventory management, distribution
network planning) and job positions of the managers of the companies, i.e
Logistics Managers contribute significantly to the profitability of the company
through competitive advantage.
3. There is significant positive association between manager’s view on efficiency
of important parameters like production, distribution and sales. Production
xxiii
aspects depends on number of packaging lines, uncertainty of production output
time. At the same time Distribution aspects depends on number of customers
domestics or international, warehouses, channel variety, delivery frequency,
order lead time, & sales & demand fluctuations.
Conclusion:-Last couple of years have been packed with several significant
developments for Indian Logistics industry, including the entry of many large
corporate houses and growing acceptance of modern formats. Though Logistics
outsourcing is relatively new in India . It is heartening to note that they have
quickly adopted required processes in their operations.
Given the industry’s changing landscape and emerging challenges, the focus of
Logistics industry players too is changing. They are concentrating on
strengthening the existing operations and assessing options for profitable growth
through enhancing efficiency in Supply chain, embracing appropriate technology,
upgrading skills of employees and are moving towards consolidation and
innovation of processes.
Page 1 of 384
CHAPTER 1
INTRODUCTION
LOGISTICS INDUSTRIES FDI IN LOGISTICS KEY ISSIUES & CHALLENGES FOR LOGISTICS
INDUSTRIES
Page 2 of 384
CHAPTER 1
LOGISTICS INDUSTRIES
The health of any modern economy depends heavily on the state of its
infrastructure, more particularly its ability to move finished and semi-finished
factory products & farm produce both within & beyond its borders. A well-
developed & integrated logistics industry, therefore, is critical for a country to post
& sustain healthy economic growth. Efficiency in the supply chain function gives
a competitive edge to industry. Logistics & supply chain management (SCM) are
also assuming increasing importance in modern economies due to the advent of
globalization, as large multinational firms outsource their manufacturing
&distribution functions to more cost effective areas, and also ramp up their
operations on a global scale. The auto industry, for instance is replete with
examples of manufactures such as Volkswagen, Hyundai, Mercedez-Benz
setting up manufacturing bases outside their countries of origin, In such cases,
the supply chains become extremely complex to manage in India one of the first
examples of domestic companies setting up manufacturing bases abroad is that
of Asian Paints, which commissioned factories in regions as diverse as Africa &
the Fiji Islands. It is in this context that outsourcing logistics activities to
experienced logistics service providers (LSPs), also known as third-party logistics
( 3PL or TPL) providers assumes great significance, as manufacturing or
distributing enterprise can derive very efficient & customized logistical support
while themselves focusing on their core organizational activities. Today there are
Page 3 of 384
a number of large multinational LSPs that offer complete supply chain solutions
that cut across countries. In addition to fundamental logistical activities such as
transportation & warehousing, LSPs also offer a number of value-added services
that include but are not limited to customs clearance, freight forwarding, import/
export management, inventory management assembly & installation, packaging
& labeling, distribution& after sales support & reverse logistics, by outsourcing
logistics companies can leverage the expertise of LSPs while concentrating on
their core competencies.
While the terms logistics & SCM are often used interchangeably, there is a
difference between the two, SCM is largely a strategic function, whereas logistics
is more concerned with the operational aspects of the business. Let‘s briefly take
a look at the evolution of the logistics & SCM function over the past few decades.
1.1 Logistics & Supply Chain
Supply chain & logistics has become an ever-increasing concern for many
industries & is regarded as the single most crucial point, which can propel
business towards success….
What was once considered a highly fragmented & disorganized sector,
logistics & supply chain management has today become one of the key
drivers of India‘s economic growth. According to a report by industry body
Assocham, the Indian logistics industry is set to become a $178 billion
industry by2012, an increase of about 19 percent on the current level and the
outsourcing of third-party logistics business (3PL) in the country could touch $
90 million by 2012, up from the current $58 million.
Page 4 of 384
Indian logistics industry is expected to grow annually at the rate of 15-20
percent, reaching revenues of approximately $385 billion by 2015.The market
share of organized logistics players is also expected to double to
approximately 12 percent during the same period & a large number of
upcoming SEZs have necessitated the development of logistics for the
domestic market as well as for global trade.
According to the Assocham report, about 55 percent of Indian companies are
outsourcing logistics services, such as supply chain management and
warehousing, which used to be between 10-15 percent 10 years ago. The
concept was initially introduced in the U.S. AND Europe, but India is fast
catching up to increase the efficiency of domestic corporate through efficient
logistics functions. But like with most industries in India, the logistics industry
is also dominated by SMEs. As the business environments starts demanding
improved servicing standards, fast cycle time has become the key factors for
business success, including SMEs. This highlights the critical role of the
logistics industry. In fact, logistics is what connect local trade & is also a part
& parcel of global business.
―The logistics industry in India is growing at 20% as against the world
average of 10% growth in this sector. Having said that, even today, the
organized sector accounts for merely 1% of the annual logistics cost,
therefore, this sector has tremendous growth potential. Over the years
several large companies & large express cargo & courier companies have
started logistics & supply chain operations. These companies enjoy the
advantage of already having large asset base and an all-India distribution
Page 5 of 384
network. Since logistics service can be provided without assets, there is
growing interest among entrepreneurs to venture into this business,‖informs
M.S. Saved, Vice Chairman Aqua Logistics Limited, a full-scope 3PL (third-
party logistics) service provider, delivering end-to-end solutions in the
logistics & Supply chain area. Numbers don‘t lie. The success story of this
sector is being written ever since the opening of the Indian economy in the
1990s. Consider this; India‘s logistics sector attracted investments worth Rs
23,200 crore in first half of 2008, outdoing some of the major sectors
including aviation, metals and mining and consumer durables among others
and today, it has become a full- fledged industry contribution to the GDP of
the country! Indian logistics market is estimated to constitute mare than 13%
of the GDP.
The global logistics industry was valued at US$3.5 trillion in2005, whereas
US logistics industry size was around US $ 900 billion, 25% of the global
logistics industry. However, India‘s spending on logistics industry is much
higher than the developed economies like the US (9.5% ) and Japan (10.5%).
Evidently, logistics and logistics management has become an ever-increasing
concern for many industries and is regarded as the single most crucial point,
which can propel business towards success. Today when the production has
stopped yielding whopping gains & when competition has forced companies
to reduce margins, companies are desperately trying to search for areas
where they can increase profits & cut costs. Logistics is emerging as one
such areas where one can ensure timely delivery and can also directly affect
stock holding.
Page 6 of 384
The importance of logistics and supply Chain Management has increased
manifold since the last few years. From the Mumbai Dabbawalla System that
caters to a huge number of hungry tummies everyday to the kitchen inventory
to transportation of cargo & delicate inventories, logistics & supply chains
have become indispensable toeveryday living.The rampant growth of the
logistics industry points towards its growing significance in business
operations.
The onslaught of economic liberalization & globalization ( in the 1990s) has
seen Indian economy opening up to MNCs and many other global business
players. With a population of over one billion & a customer base of nearly 400
million. India is one of the largest markets for consumer & industrial goods
today. While managers, traders, businessmen, have realized the need to be
keep themselves well informed in an increasingly competitive market, the
pressure on the companies to cater to the demands of the customer to make
products and goods available at the right place, at the right time and in the
right quantities is ever mounting. The expansion & outsourcing of
manufacturing & rapid developments in IT have also changed the face of
transport & logistics industry, Integrated logistics & supply chain management
presents an unmatched opportunity for the Global Logistics Providers. The
domestics logistic sector is now focusing on increasing its efficiency aiming to
better supply chains and logistics operations. Companies are now looking for
the ways to better their competency because of the drop in their cost
production. Earlier CEOs rarely considered logistics and supply chain as a
prime area with in the company. But things are clearly changing with many
Page 7 of 384
corporate taking note of the logistics division & giving it due importance and
benefiting from it as well. Emerging market trends have made leading players
realize the need to create successful system of co-operating companies &
treat the world as one single global market, in order to establish themselves
as one of the few supply chain management companies of the future.
In India, many logistics & courier service providers are offering expertise on
total logistics solutions. Apart from the traditional courier companies who are
the service participants of large integrators, foreign companies too have also
entered the fray claiming a heightened knowledge and understanding of the
complete supply chain. In addition, there are a plenty of clearing & forwarding
agents possessing proficiency in international inbound & outbound. Today,
almost all large global logistics companies have their presence in India,
mainly involved in freight forwarding. The logistics industry in India is evolving
rapidly and it is this ever evolving dynamics of infrastructure, technology &
new types of service providers that is taking the industry forwards. Currently
the impetus is on prospective cost diminution & service level improvement. In
times to come, Logistics would therefore, evolve as a function adapting the
burgeoning communications & escalating computing technology, However,
issues affecting customer satisfaction directly by logistics, importance of
logistics related costs, significance of logistics in the entire supply chain
management, fragmented freight industry, privatization problems, problems of
infrastructure development etc. are some of key areas of concern we have to
grapple with. ‗One of the key challenges faced by this sector is that it‘s a
high-cost, low margin business. Unfair competition with unorganized players,
Page 8 of 384
who can get away without paying taxes & cutting their costs have added to
the woes of organized logistics companies, Further, even the organized
sector that contributes slightly more than 1% of logistics cost, is highly
fragmented.‘―The existence of the differential sales tax structure is a problem
that prohibits companies like ours from exploring economies of scale. Apart
from the non-uniform structure, Indian logistics companies have to pay
numerious other taxes & face check post harassment from authorities. This
increases the cost of operations & makes it an unattractive business. To add
to it, there is stiff completion from multi-national freight forwarders, who
because of sheer size of their operations in many countries offer low freight
rates which the Indian freight forwarders are unable to do so. The sector also
suffers from the lack of skilled & knowledgeable manpower,‖ opines Saved.
To begin with changing government policies on taxation & regulation of
service providers can be of immense help in augmenting the growth of this
sectors,‖ he adds further. And considering the rapid growth of this sectors at
present, About 110 logistics parks spread over approximately 3,500 acres at
an estimated cost of $ 1 billion are expected to be operational and an
estimated 45 million feet of warehousing space with an investment of $ 500
million is expected to be developed by various logistics companies by 2012.
Western Region: The Logistics Hub Of India
The western region is the logistics hub of India, a fact which is known world-
wide. Ports, the gateways to India‘s International trade by sea handle over
90% of foreign trade. There are 12 Major Ports & 187 Minor/ Intermediate
ports along the 7,517 kms long coast line of the country. Needless to say,
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India is being touted as ‗Destination Future‘ for the logistics service providers
all over the world. Indian players are also gearing up & positioning
themselves differently by providing a wide spectrum of freight & logistics
services. But the true potential and the opportunities that exist need to be
fully assessed. With two-thirds of India‘s total crude production accruing from
offshore, companies in the offshore service providing space are also
witnessing high demand for activities such as logistics support ( through
offshore supply vessels, multi-service vessels, platform supply
vessels,)drilling, construction & maintenance support, diving,
geotechnicalservices & floating production storage & offloading. The Indian
registry has about 90 offshore supply vessels, and several firms have
embarked on fleet expansion plans.
Maritime Transport and marine logistics hence is also a critical infrastructure
for the social and economic development of a country. It influences the pace,
structure & pattern of development. According to the Planning Commission,
India‘s shipping fleet strength will be increased up to 15m GRT by the end of
2011-12, with an estimated investment of US$17.7 billion. The port
throughput will increase up to 1,008m tones, growing at a CAGR of 10.96%
from 2007-08 to 2011-12. Gauging the current trend and efforts, logistics is
going to be one of focus sectors that would drive the industrial development
in the Western Region. Gujarat and Mumbai have emerged as the favorable
destinations to further boost growth and development in the ports and
logistics sectors. Mumbai has emerged as the preferred location for the
development of logistics parks with an investment of approximately $ 200
Page 10 of 384
million. The development of seven to eight logistics parks are in pipeline on
600 acres around Mumbai. Within Gujarat, the Gujarat Maritime Board (GMB)
has had a major role to play in the development of the ports sector and
marine logistics in the state. The Gujarat Maritime Board (GMB) was set up in
1982 under the Gujarat Maritime Board Act, 1981 as the first autonomous
state board. The GMB manages 40 ports, with the exception of kandla, which
is a major port under the Central government. Of these 40 ports, 11 are
intermediate ports and 29 are minor ports. In 2005-06, kandla alone handled
cargo traffic of 45.9 million tones. The setting up of an agency such as GMB
in Gujarat was found to be necessary to exploit the immense potential for port
and shipping facilities in the state. The Gujarat Maritime Board is perhaps the
only maritime body with an enviable feat, nationally & internationallyboth in
cargo handling & ship breaking activity. The Ship breaking yard at Alang is
among the biggest ship-breaking yards in the world today.
Over the years, the GMB has striven to ease the load on the overburdened
major ports of western India, including Mumbai and kandla, by developing
new ports facilities. In the process state-of-the-art ports have become the
order of the day in Gujarat. Some of these all-weather, direct-berthing, deep-
sea ports represent the country‘s first Greenfield ports to be developed in the
joint sector on BOOT,( Build, Own, Operate and Transfer) basis. The port
sector has been identified as one of the prime catalysts to accelerate and
enhance the industrialization process of the state. The continuous rise in
traffic at the ports of Gujarat is a testimony to the success of the vision of port
sector successfully conceived & assimilated by the state and the GMB.
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According to Helicopter study, a part of an ongoing Port Development of
Gujarat (PODEG) programme conducted by the internationally acclaimed
Dutch consultant, the total handling capacity in the state including the
planned capacities is likely to be around 313 million tones/ year ( including
Kandla & Vadinar) by the year 2015, kandla port also plays a major role in the
country‘s international trade. Having notched up a string of success, it has
emerged as a forerunner, and has carved a niche for itself, by its steady
growth and economy of operations. GMB has a vision for the International
Maritime sector for the year 2020. It is envisaged that the year 2020, will
reveal a very different picture of the port sector, in terms of composition of
cargo, vessel traffic and parcel size of vessels, resulting into an altogether
new definition of port operations, with state-of-art-infrastructure. Due to this
change, many old ports in operation today, may vanish from the maritime
map or become redundant by 2020, if they do not adopt to the
changingrequirement of time. At the same time, many new port sites which
are being developed now will flourish for a long time to come.
1.2 FDI in Logistics
Efficient logistics management would also result in significant material
conservation and better Utilization of infrastructure assets.Logistics is the
retail face of infrastructure and like the retail sector, Indian logistics industry is
dominated by traditional operators. It has evolved so far on its own without
any specific policy props or incentives. Even now, it is managing to attract
considerable attention from private equity funds based on its own inherent
strengths & growing market opportunities.
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Auto majors & modern retail chains have created a new market space for end
to end logistics service providers, who are referred to a third party logistics
providers-3PLP or just 3PL in short. Heightened competition in the domestics
market as the one which is too obvious in the telecom sector is helping the
domestic logistics industry to expand in to areas far beyond transport
management and handling related clearances.Today‘s logistics services go
beyond managing the supply chain & are destined to become a major option
for all kinds of physical business process outsourcing ( PBPO), What is
economically more relevant for the country is that when we attempt to
improve the quality of services, it would automatically help bring down the
transaction costs. In addition, efficient logistics management would also result
in significant material conservation and better utilization of infrastructure
assets. The logistics sector has done well for itself. Although India‘s
infrastructure adequacy is ranked 86 by the World Economic Forum ( WEF),
World Bank‘s logistics performance report gives India an overall rank of 47 in
2010 with a logistics quality & competence rank of 40.Our overall rank would
have been better but for the 52nd rank assigned to customs clearance and the
56th rank given to timeliness. What we must not forget at the same time is the
fact our logistics performance index ( LPI) has slipped from 39 in 2007, Even
as of 2007 one of the key factors which weighted down our LPI is domestic
logistic costs in which the country was ranked 46.The same trends is
reflected in the Enabling Trade Index ( ETI) of WEF. In spite of falling from a
rank 31 in 2009,India‘s logistics competence is still ranked very high at 38 as
compared to the overall ETI of 84 which has fallen from the previous year‘s
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rank of 76. Road and port infrastructure quality ranks have plummeted to 83
and 85. The ranks of our documentary procedures for imports & exports have
also declined to 91.We seem to have moved one notch up only in the case of
airport infrastructure, These ranking certainly do not indicate an absolute fall
in the quality of our performance, Of course we have been making
improvements in a highly competitive global economy we would be required
move faster even for holding on to our place. For attracting FDI in to the
logistics. Senior Advisor J. Jevaseelan States that ―What is economically
more relevant for the country is that when we attempt to improve the quality
of logistics services, it would automatically help bring down the transaction
costs‖.
Infrastructure & Logistics Federation Of India (ILFI).
Sector we must be globally competitive in all areas that have an impact on its
profitability. FDI would come into the Indian logistics primarily because of its
very large market size & future growth potential. The large number of SEZs
and logistic park in various stages of planning or implementation would
certainly be an additional lure. Indian logistics companies have also
demonstrated their competitive capabilities by setting up joint ventures in
other countries. However, What is more important to boost the profitability of
logistics industries and enhance the global competitiveness of the Indian
economy is to work towards removing debilitating factors that are keeping
domestic logistics and transaction costs high.
Logistics costs account for 14% of the value of goods, as compared to 10% in
China. The freight cost in India is about 7% per tone-km while it is 2 and 3.7
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in Canada and Japan. A recent South African study showed that trucks
travelling on average and bad roads experienced an increase in costs
between 684% and 1560% respectively, These clearly show the scope for
bringing down domestic logistics costs. Transport costs account for an
average about 40% of logistics. Another major contributor is the warehousing
cost. Both transport and warehousing costs can also be much higher in the
case of cold chain logistics which also bears an additional cost burden
because of irregularity and unreliability of grid power supply. Continued
shortage have in the past led to overriding policy for increasing the availability
of infrastructure, It is time that we focused our attention equally on quality and
cost, Allour PPP models and bidding processes in the infrastructure sector
must stipulate world class quality parameters and ensure lowest cost to the
end user. It would be a penny wise pound foolish strategy to look at licenses
for infrastructure projects as a source of revenue generation for government.
Apart from urgently improving the quality of roads and de-bottlenecking inter
state movement of goods, the country must have a major focus on rail freight
infrastructure, Railways play a far greater market integration role in larger
countries.
Although Indian Railways does nearly as many passenger-KM as China, it
does only one fifth of China‘s tone-KM. Railways are also far behind in
performance parameters. Freight trains run at average speed of 23.3K.Mph
as against about 100 in Europe and US, It also carries a dead weight of
450kg for every 1000 kg of freight as compared to only 170 kg in the US. Our
efforts to improve freight movement by rail must look beyond a few freight
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corridors, With the rising oil prices and very low carbon footprint of rail freight
we must certainly look at a 50% modal share similar to the US.
On the policy front we would certainly need to make the much required
distinction between infrastructure and logistics. Logistics is not the same as
transportation infrastructure. Development of logistics is not the same as
transportation infrastructure, Development of logistics is not about creating
large infrastructure facilities, but providing custom tailored solutions to meet
specific demands. It is the missing link the last mile solution required to make
major infrastructure projects viable and profitable. But the profitability of the
logistics sector would also depend on how efficient the infrastructure is.
1.3 Key issues & Challenges for Logistics Industries
There are many issues which are regularly raised & discussed with the aim of
highlighting the most important challenges that need to be addressed by logistics
professionals. In recent years there have been very significant developments in
the structure, organization and operation of logistics, notably in the interpretation
of logistics within the broader supply chain. Major changes have included the
increasein customer service expectations, the concept of compressing time
within the supply chain, the globalization of industry- in terms of both global
brands and global markets and the integration of organizational structure.
Issues may be external to logistics, such as deregulation, or may indeed derive
from changes within logistics, such as improved handling or information
technology. It is possible to view these different influences at various points along
the supply chain these factors in relation to
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The external environment
Manufacturing & Supply
Distribution
Retailing
The Consumer
It is worth emphasizing that, aside from external issues and developments in
technology many changes in logistics are largely conceptual in nature whereby
certain aspects of logistics and the supply chain are viewed with a new or
different approach. Many people, especially logistics practitioners may feel that
some of these concepts and approaches are very much like old ideas dressed in
new clothing. To a certain extent this is true; for example, much of the new
process-oriented approach to logistics is an echo of what used to be called ‗work
study‘. The use of flowcharts for analyzing workflows in distribution and logistics
has always been very common What a number of these ‗new‘ concepts and
approaches are achieving is to re-emphasize certain ideas and to rekindle the
fires of enthusiasm for constant reviewand change. As logistics exists in a very
dynamic andever-changing environment, this is probably not a bad development.
Another relevant point is that a number of these concepts are not applicable to
many operations & organizations. This is often due to their size or to their market;
for example, small nationally oriented organizations are usually unaffected by
globalization or supply chain agility. Nevertheless, for large multinational
companies these are very important questions that need to be addressed. The
traditional key drivers of logistics have always been cost versus customer
service, This has not changed as most surveys confirm.
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The External environment:-
One Key influence that has become increasingly important in recent years has
been the development of a number of different economic unions (EU, ASEAN,
NAFTA, etc), Although the reasons for the formation of these unions may be
political, experience has shown that there have been significant economic
changes-most of these beneficial ones.
One of the major consequences is deregulation within these internal markets,
and this has a particular impact on companies logistics strategies, within the
European Union, for example there have been significant advances in, amongst
others:
Transport deregulation;
The harmonization of legislation across different countries;
The reduction of tariff barriers;
The elimination of cross-border customs requirements;
Tax harmonization.
Within logistics, this has led many companies to reassess their entire logistics
strategy and move away from a national approach to embrace a new cross-
border /international structure. There are many examples of companies that have
significantly reduced distribution centre (DC) numbers and associated inventory
and storage costs whilst maintaining or improving customer service.
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Fig:1 The major forces driving logistics
Percentages of Responses
Source: Herbert W Davis & Co (2005)
Supply chain strategy has also been affected by the impact of emerging markets.
The most important are probably India & the Far East, in particular the opening
up of China, which has seen astounding growth in both the supply of and the
demand for many different types of product. There are obvious implications for
logistics regarding the flow of products out of India and the Far East, whether
components or finished goods, and the inward flow of raw materials and finished
goods into these areas. A good solution for many companies is to outsource
these operationsbecause of the complexity of the flows, the difficulty of setting
up in-house operations in these regions and the risk of investing in organizations
0 20 40 60 80 100
Cost
Service
Speed
IT integration
Globalization
other
Series 1
Series 1
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and structures that may not see the growth in supply and demand that is initially
forecast.
Also important is Eastern Europe. Here from a Western European perspective,
the sources and markets do not have the problem of distance with the associated
time constraints and supply chain complexity, Nevertheless there are still some
real issues for logistics because of the limited transport infrastructure and the
problem of initial low levels of supply & demand. So, again there are good
reasons for manufacturers and retailers to avoid the high risk and high cost of
setting up in-house operations, making the outsourcing of these operations a
natural and attractive alternative.
Another factor that has had a particular impact in Europe is the rise in importance
of ‗green or environmental issues. This has occurred through an increasing
public awareness of environmental issues, but also as a result of the activity of
pressure groups. The consequences for logistics are important. They include:
The banning of road freight movements at certain times and days of the
week;
The attempted promotion of rail over road transport;
The recycling of packaging
The ‗greening‘ of products;
The outsourcing of reverse logistics flows;
The design of products to facilitate repair, reuse, recycling and the
minimization of packaging.
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For most cities throughout the world, one very visible external impact is that of
road congestion. The fact of severe traffic congestion may well have a very
negative effect on some of the new concepts in logistics- in particular the idea of
JIT and quick-response system. Allied to this problem is that most forecasts
predict a significant increase in vehicle numbers at a time when, in most
countries, with the exception of China and India, there are very limited road
building programmes. Many Western countries try to reduce congestion through
a combination of road tolls, truck bans access restrictions time restrictions and
usage tax- all of which have an impact on logistics costs & performance. There is
no generally accepted solutions Companies try to alleviate the problem through
strategies such as out of hours deliveries stockless depots and the relocation of
DCs closer to delivery points.
Recent rapid changes and developments in logistics thinking and logistics
information technology have also contributed to another issue that has a
significant impact on logistics- this is the problem of the restricted availability of
suitable management and labour. The need for a strategic view of logistics and
the need for an appropriate understanding of the integrated nature of logistics are
both important for managers who are operating in today‘s supply-chain oriented
networks. Many managers do not have the relevant experience or knowledge
that provides this viewpoint because they have for many years worked in national
rather than international supply chains and also because their focus has
generally been in an operational rather than planning context. This applies to
managers from both in-house and third party operations. And to this the rapid
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changes in technology, & it is understandable why there is such a shortage of
managers with suitably broad knowledge and experience.
This problem is also reflected in the quality of labour available to work in the
many different logistics and distribution functions. In particular, developments in
the tools and technology of operational logistics have meant that the skills
requirements have changed and that the necessary skill levels are much higher
for some logistics jobs. There are also labour shortages in some geographic
areas and for some specific logistics jobs, such as transport drivers.
In the past few years there have been a number of unpredictable and
unexpected events such as natural disasters, terrorism, corporate failures, and
industrial disputes that have resulted in amongst other things, serious disruptions
to supply chain and logistics activities. These events have highlighted the
vulnerability of many supply chains and have shown that there is a risk to many
supply chain and logistics operations that has not been adequately addressed.
Many of these events are not directly related to the supply chain operations that
are affected, for example, in the UK, a rise in the price of fuel for car drivers led
to the blockading of fuel depots, which created a shortage of diesel for delivery
transport, which in turn produced a general shortage of food because it could not
be delivered to shops and supermarkets. There have also been examples of
companies moving to a single source for the supply of a key component only to
find that the supplier becomes insolvent and cannot supply the component and
that production at the company‘s plants is disrupted or halted. Vulnerability has
become more of an issue as the complexity of supply chains has increased
dramatically in recent years.
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Manufacturing and Supply:-
There have been many important development in supply or inbound logistics.
These have resulted from both technological and organizational changes. Within
the context of raw material sourcing and production, these include:
New manufacturing technology (CIM), which can accommodate more
complex production requirements and more product variations.
New supplier relationship, with the emphasis on single sourcing and lean
supply, thus enabling suppliers and buyers to work more closely together.
Focused factories, with a concentration on fewer sources but
necessitating longer transport journeys.
Global sourcing, emphasizing the move away from local or national
sourcing.
Aided by the development of free trade, lower transport costs and fast
communications, Western business have seen the advantages of moving their
manufacturing to lower cost economies. The last 15 years has seen a migration
of factories from the developed world to Asia, South America, and Eastern
Europe, often resulting in the setting up of manufacturing facilities to take
advantage of the low cost workforces in developing countries.
Initially the changes was led by technology manufactures, closely followed by
automotive parts manufacturers and OEMs (Original Equipment Manufacturers),
most of whom saw Great opportunities in the low cost Asian economies.
Consumer goods manufactures have since reviewed their own manufacturing
and supply chain strategies and a number have moved to low cost countries.
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Western European manufacturers have seen Eastern Europe as an opportunity
to reduce cost with only a modest impact on supply chain delivery times, whilst
North American companies have preferred Central America as destination.
This migration of manufacturing has brought with it ever more complex and
lengthy supply chains, requiring more transportation to move the product into
main marketplaces of the world and significantly more co-ordination and
management for both inbound materials and outbound finished goods. Global
manufacturers need to manage & have visibility of all inventory including inbound
materials, raw materials stock, work in progress, finished goods, goods in transit
and service parts and returns. However, they also need to be able to balance the
trade off between origin costs and savings made at destination, They have to
consider all aspects of a product‘s landed cost, including transportation, duty,
order lead time and inventory holding costs. This clearly requires full co-
operations from all partners across the global supply chain.
Increases in product range and characteristics have also affected logistics
requirements. Typical examples include the shortening of product life cycles (
personal computers have about a 6 month life cycle, and mobile phones become
outdated in even shorter periods the extended product range that is expected by
customers and provided by suppliers and the increase in demand for time
sensitive products- especially fresh and prepared foods, These may all pose
added logistics problems with respect to the impact on stock levels and in
particular the speed of delivery required.
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Distribution:-
Fourth Party Logistics has been hailed as the future for supply chain
management outsourcing. Fourth –party logistics is where an external
organization is able to provide a user with an overall supply-chain-wide solution
by incorporating the resources and expertise of any number of third parties to
best effect. The 4PL provider will be involved in both the design and the
management of a client‘s logistics system and will act as a co-ordinator for many
different types of service, which may include distribution information systems,
financial services, etc 4PL service providers can offer a number of enhanced
services which will enable:
A total supply chain perspective;
Visibility along the supply chain;
Measurement along the supply chain ( cost & performance);
Open system;
Technical vision;
Flexibility
Tailored Structures and system.
Accenture have defined a 4PL service provider as ‗an integrator that assembles
the resources, capabilities, and technology of its own organization and other
organizations to design, build and run comprehensive supply chain solutions‘.
The main impetus is for the overall planning to be outsourced and that the
complete supply chain operation should be included within the remit of the 4PL.
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Fig 1.1 3PL &4PL Service providers Operations
Source: Bumstead and Cannons ( 2002)
There are a number of different ways in which 4PLs can solve some of the main
problems that users of 3PLs companies have experienced. The major drawbacks
are likely to be the cost of using a 4PL and the loss of control over the supply
chain function within the company. The main advantage are likely to be:
Addressing strategic Failures:
- Minimizing the time & effort spent on logistics by the user;
- A 4PL organization is a single point of contract for all aspects
of logistics;
- The management of multiple logistics providers is handled by a
single organization;
- Allows for provision of broader supply chain services;
- A 4pl organization can source different specialists with best-in-
class credentials.
3PL 4PL
Architect/Intgra
tor
i
Supply Chain Visionary, Multiple Customer relationship
Supply Chain Re-engineering, Project Management,
Service integrator, Continuous innovation
Control
Room
Experienced Logisticians, Optimization engines, Decision
support, Neutral positioning, Continuous improvement
Supply
Chain
IT system, IT infrastructure provision, Real time data
tracking, Convert data to information, provide info to
point of need, Technical support Resource
Provider Transportation, Warehousing, Manufacturing
(Outsourcing), Procurement Service
Page 26 of 384
Addressing service and cost failures:
- The freeing of the user company‘s capital for core /
mainstream use by selling assets;
- The continuous monitoring and improvement of supply chain
processes, performance and costs;
- The benchmarking of different supply chain processes against
world-class companies;
- The continuous monitoring and reassessment of service level
achievements;
- The development and use of core expertise from all logistics
participants.
Addressing operational failures:
- A new entity makes it easier to eradicate old industrial
relations issues;
- A new entity should enable the transfer of selective personnel;
- A new and more flexible working environment can be
established;
- A new company ‗culture‘ can be created.
Additional benefits:
- Provision of ‗knowledge management‘, ‗The bringing together
and effective sharing of knowledge among the identified
stakeholders‘;
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- Provision of supply chain accountability for achieving desired
performance;
- The provider assumes risk on behalf of the user in return for a
share of the profit.
There is a view that 4PL is a refinement of 3PL, in fact there is a very significant
difference between the two. A 4PL is non asset- based, unlike a 3PL, which is
generally seeking to fill its asset capacity of distribution centres, vehicles, and
freight. Historically, 3PLs have operated vertically across the supply chain
providing services in warehousing, transportation and other logistics activities. In
contrast the 4PL works horizontally across the whole supply chain and uses the
services of 3PLs to provide end-to-end solutions for customers. Typically, the
4PL only owns IT system and intellectual capital and is therefore asset light. This
allowsthe 4PL to be neutral in terms of asset allocationsand utilization, with the
ability to manage the supply chain process, irrespective of which carriers,
forwarders or warehouses are used. Thus, the 4PL does not have to consider
using its own assets, but can take the shipper‘s perspective, using the best
operators for the different logistics requirements. The 4PL focuses on satisfying
and retaining its customer by understanding the complexity of the customer‘s
requirements and providing end-to-end solutions based on sound processes,
which address their customers overall supply chain needs.
One interesting innovations in distribution is the development of logistics or
freight exchanges. These are online transaction system for shippers and carriers
that enable online freight purchasing. Basically they are internet-based trading
mechanisms that facilitate the matching of shipper demand with carrier
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availability. They range in complexity from simple electronic bulletin boards (
these allow shippers and carriers to post their needs, manually compare the two
lists and then contact each other) to sophisticated algorithms (these identify
suitable matches through the filtering and comparison of rates, carrier
performance, service offering and equipment types).
Another very important development in the use of RFID: radio frequency
identification tagging. This technology enables automatic identification through
the use of radio frequency tags, data readers and integrating software. A tag has
a microchip& an antenna that can store and transmit data & it can be fixed to
individual products or unit loads. It can be active ( send a signal) or passive
(respond to a signal). The reader retrieves the data and sends them to the
software, which can then interface with other logistics information systems.
Retailing:-
There have been several trends in the retail sector that have had & will continue
to have an impact on developments in logistics & the supply chain. Many of these
logistics-related changes have emanated from grocery multiple retail sector,
which continues to play a major role in introducing innovative ideas. These
changes have all had an influence on logistics strategies and operations.
One of the most far-reaching implications has been that of inventory reduction
within the retail supply chain, which has evolved from a combination of different
policies. These policies include:
Page 29 of 384
The maximization of retail selling space; an important retailing policy has
been the move to maximize selling space in store in order to increase
sales opportunities. This has usually been achieved at the expense of
shop stockrooms, leaving nowhere for stock to be held in a shop except
on the shop floor. This can have significant implications for the fast and
effective replenishment of store inventory.
The reduction in DC stock-holding; this has been undertaken in order to
promote cost-saving through reduced inventory levels in the supply chain.
A direct consequence has been to put additional pressure on the accuracy
and speed of inventory replenishment system.
The reduction in the number of stock- holding DC; many companies have
reduced the number of stock- holding depots in their logistics structure as
a result of cost-saving exercises that involve depot rationalization and a
move to stockless depots.
JIT philosophies and concepts; some manufacturing concepts such as
just-in-time have been applied to the retail sector. This has been achieved
through the use of a number of developments in information technology,
particularly electronic point of sale (EPOS) systems, which provide a much
more accurate and timely indication of stock replenishment requirements
at shop level.
The consequences are that stocks and buffers in retails stores have been
reduced or eliminated in favour of the continuous flow of products into the stores.
This necessitates more responsive delivery systems, more accurate information
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and more timely information. Thus logistics operations must perform with greater
efficiency but with fewer safeguards.
The Consumer:
Linked directly with retailing operations is the gradual move into non-store
shopping or home shopping. This phenomenon was initially introduced in the
USA and Europe through the use of direct selling and mail order catalogues.
Home shopping has now achieved ‗breakthrough‘ levels in the grocery sector
and made significant inroads into more conventional retail shopping The means
for such a change have been the widespread use of home computers, automatic
banking and of course the internet, including the improved availability of
broadband. These changes have begun to have a fundamental impact on
logistics. The very nature of the final delivery operation has for home delivery,
altered dramatically, with wide implications for the whole of the supply chain.
It is important to differentiate between home shopping and home delivery (e-
fulfilment) ‗Home shopping‘ refers to the different ways of shopping for and
ordering products from home. ‗Home delivery‘, or e-fulfilment, refers to the
physical delivery of the product.
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CHAPTER 2
Literature Review
A CONCEPTUAL FRAMEWORK OF VULNERABILITY IN FIRM’S INBOUND &
OUTBOUND LOGISTICS FLOWS
DEVELOPING A DECISION-MAKING FRAMEWORK FOR LEVELS OF
LOGISTICS OUTSOURCING IN FOOD SUPPLY CHAIN NETWORK
EVALUATING THE PERFORMANCE OF 3PL ARRANGEMENTS: A
RELATIONSHIP MARKETING PERSPECTIVE
LABELLING OPTIONS OFFER MARKETING, PRODUCTION ADVANTAGES
STUDIES OF TRENDS IN 3PLs USAGE: WHAT CAN WE CONCLUDE
S.C.M.& ITS RELATIONSHIP TO LOGISTICS, MARKETING, PRODUCTION &
OPERATION MANAGEMENT
STRATEGIC LOGISTICS CAPABILITIES FOR COMPETITIVE ADVANTAGE &
FIRM SUCESS
THE EVOLUTION OF SUSTAINABLE COMPETITIVE ADVANTAGE: FROM
VALUE CHAINTO MODULAR OUTSOURCING
GAP IN THE STUDIES
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CHAPTER 2
LITERATURE REVIEW
2.11 A conceptual framework of vulnerability in firms' inbound and
outbound logistics flows
The research done by Svensson, Goran which was published in the
International Journal of Physical Distribution & Logistics
Management32. 1/2 (2002): 110-134.States that the time and functional
dependencies between firms' activities and resources in supply chains. These
dependencies cause vulnerability. The principal objective of that research is
to conceptualize the construct of vulnerability in firms' inbound and outbound
logistics flows. The vulnerability construct of that research consists of two
components: disturbance and the negative consequence of disturbance. The
research was based upon a two-phase process utilizing sequential
triangulation. It was proposed that the vulnerability in the inbound logistics
flows from sub-contractors, and the vulnerability in the outbound logistics
flows to customers, may be measured and evaluated by four principal
dimensions, namely: service level, deviation, consequence and trend. In
addition, a model of inbound and outbound vulnerability scenarios in supply
chains was introduced for teaching and training purposes, as well as to
position and compare the outcome of replication studies of vulnerability in
firms' inbound and outbound logistics flows.
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2.12 Developing a decision-making framework for levels of logistics
outsourcing in food supply chain networks
“Researcher Hsiao, H I; J.G.A.J. van der Vorst; R.G.M. Kemp; S.W.F. (Onno)
Omta.Has written& published in International Journal of Physical
Distribution & Logistics Management” 40. 5 (2010): 395-414, has presented a
decision-making framework for outsourcing levels of logistics activities. These
were: execution level of basic activities (such as transportation, warehousing);
value-added activities; planning and control level of activities (such as
transportation and inventory management); and strategic decision-making level
of activities (distribution network design). Design/methodology/approach - The
research design comprises three stages. Literature review was undertaken to
study outsourcing theories. Successively, case studies on three food
manufacturers were conducted resulting in a framework for make-or-buy
decision. Finally, an exploratory survey was undertaken to examine the
determinant factors for outsourcing the different activities. Findings - Results
indicate that logistics activities at different levels are outsourced for different
reasons. Three main determinant factors are identified: asset specificity, core
closeness and supply chain complexity. This implies that the evaluation of
outsourcing different activities requires insights of three theories, namely
transaction cost, resource-based and supply chain management theory.
Research limitations/implications - The research and resulting framework are
based on three small cases. Furthermore, there are few companies that
outsource higher levels of activities, which limits the statistical assessment of the
survey results. Practical implications - The framework can support the decision-
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making process for outsourcing different logistics activities in food industry.
Originality/value - The key contribution of this paper is that it creates a
comprehensive framework for outsourcing of both basic and advanced logistics
activities specifically for the food industry.
2.13 Evaluating the Performance of Third-Party Logistics Arrangements:
A Relationship Marketing Perspective
“Knemeyer, A Michael ; Murphy, Paul R has published in the. Journal of
Supply Chain Management40. 1 (Winter 2004): 35-51” that by 2005, users of
third-party logistics services may be spending an average of nearly one-third of
their total logistics budgets (compared to 20 percent today) to support 3PL
services (Gooley 2000). Yet, very little research has examined managerial
activities that might influence the performance of these logistics outsourcing
relationships. Over the past several years, the management approach that views
relationships as key assets of the organization has gained increased prominence
in the priorities and practices of many companies (Gruen, Summers and Acito
2000). The current study utilizes this relationship marketing perspective as the
basis for evaluating the perceived performance of third-party logistics
arrangements. In particular, the current study examines the influence of six key
relationship marketing dimensions on a customer's perceptions of their 3PL
provider's performance. In so doing, the article builds on research (e.g., Goldsby
and Stank 2000) that focuses on potential linkages between logistical
performance metrics and managerial activities. The results suggest linkages
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between relationship marketing activities and the perceived performance of the
3PL arrangement.
2.14. Labeling options offer marketing, production advantages
The Researcher “Korolishin, Jennifer published an paper in Beverage
Industry”96. 1 (Jan 2005): 40 that as technology has evolved, beverage
labeling has been transformed from a commodity to a powerful marketing tool
that provides differentiation in a crowded marketplace. There are four main
beverage labeling options - cut-and-stack, full-wrap hot-melt or spot-cold-glued
film or paper labels; roll-fed, usually produced with laminated film constructions;
pressure-sensitive; and shrinkwrap. In choosing a label type and application
method, beverage-makers must consider how established a brand is and its
production volume. Bottle shapes influence label choices, as do product and
packaging color - clear labels are popular in cases where color is among a
product's main features.
2.15. Studies of Trends in Third-Party Logistics Usage:
What Can We Conclude?
“Ashenbaum, Bryan ; Maltz, Arnold ; Rabinovich, Elliot has published an
article in . Transportation Journal”44. 3 (Summer 2005): 39-50,” This article
evaluates the various longitudinal studies of third-party logistics (3PL) usage and
proposes methods and approaches to improve the rigor of future research in this
area. Three well-established methodologies for combining the results of multiple
studies are reviewed (literature reviews, meta-analysis, and repeated survey
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analysis), and then considered in application to the findings of the various 3PL
usage studies since 1991. Beginning with an overview of the results that emerge
from simply combining and comparing the key longitudinal data, the article
moves on to a more detailed analysis of the measurement scales, data collection
methods, and samples utilized in the different 3PL surveys. The article ends with
concrete recommendations for reorienting the ongoing surveys to increase their
rigor and validity, and thus increase their predictive value to both academics and
logistics managers.
2.16. S.C.M. & its Relationship to Logistics, Marketing, Production &
operations Management
“Mentzer, John T; Stank, Theodore P; Esper, Terry L. has published in
Journal of Business Logistics”29. 1 (2008): 31-VII”thatThe renaming of the
Council of Logistics Management (CLM) to the Council of Supply Chain
Management Professionals (CSCMP) ushered in some interesting definitional
dialogue and debate within the practitioner and academic communities. Inherent
in emerging definitions is the notion that SCM encompasses activities
traditionally considered aspects of production, logistics, marketing, and
operations management. Defining SCM in such a broad scope (i.e., a "within"
and "across" functions perspective), while considered by many scholars as the
true representation of the essence of SCM, creates confusion regarding the
appropriate organizational level within a business that is best suited for
managerial decision making regarding the phenomenon. This paper contributes
to the emerging SCM dialogue by highlighting the functional spaces (the "within"
function perspective), relationships, and conceptual overlaps (the "across"
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functions perspective) between marketing, logistics, production, operations, and
supply chain management. By comparing and contrasting the literature-based
conceptual boundaries of each discipline, a framework is proposed that more
clearly captures the essence of the SCM decision making sphere. Managerial
insights and future research implications are presented.
2.17 Strategic logistics capabilities for competitive advantage and firm
Success.
―Morash, Edward A Droge, Cornelia L M ; Vickery, Shawnee K has written
in the. Journal of Business Logistics”17. 1 (1996): 1-22. That Logistics
capabilities can be classified as either supply chain-oriented or demand chain-
oriented. The present research investigates the managerially perceived
importance, actual implementation, and financial impact of some major demand-
oriented and supply-oriented logistics capabilities. The findings show that
demand-oriented logistics capabilitieshave a greater impact on firm
profitability. Inconsistencies between managerially perceived importance and
financial impact suggest the need to anchor and assess logistics capabilities in
the context of firm performance. The research also demonstrates that logistics
capabilities such as customer responsiveness and competing on time can
provide core competencies for corporate strategy.
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2.18 The Evolution of Sustainable Competitive Advantage: From Value
Chain to Modular Outsource Networking
―Busbin, James W ; Johnson, Julie T ; De Coninck, James, has published in
Competition Forum Journal‖ 6.1 (2008): 103-108.That Corporate competitive
strategy was rudimentary until the 1980s. Then advancements in technology and
market globalization introduced rapid changes in competitive strategy
development. Porter introduced the value chain concept, followed by core
competencies, as means by which to develop sustainable competitive
advantage. Recently, advancements in outsourcing are influencing the nature of
competition. Long-standing competitive beliefs about vertical integration and
asset ownership are being called into question. A new generation of competitive
strategies are emerging that bear little resemblance to their predecessors - one
such strategy - "Modular Outsource Networking" is introduced here.
2.19 GAP in the Studies
India spends about 13-14% of its GDP on logistics, due to its diverse geography,
inefficiencies in the SCM and non existence of modernized logistics-related
infrastructure. However, given the country‘s high growth rate, coupled with the
steady rise in India‘s trade levels, there has been an increase in outsourcing of
logistics solutions apart from improvements in supply chain mechanisms. This
has played a crucial role in not only making logistics one of the fastest growing
sectors, but also one of the most lucrative avenues for foreign players to invest
in.Valued at US$110 billion, the Indian logistics sector is expected to touch the
US$200 billion figure by 2020--- a factor which highlights the huge potential that
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the market has to offer to its investor and existing investors who are planning to
build and expand on their existing capacities.
Presently Indian companies outsource about 52% of logistics services and
solutions, Many companies are also increasingly outsourced 3PL business
models with aim to reduce costs and make their services more efficient, About
76% of the Indian logistics sector is primarily handled and managed by the
unorganized service providers.Primarily dominated by small and medium sized
service providers, the Indian logistics industry is highly fragmented with major
players possessing a small market share. The road transportation service
provider segment is completely dominated by small trucking companies and
individual truckers. Transport companies having fleet below 5 trucks account for
over two-thirds of the total trucks owned and operated in India & make up for
80% of revenues.Meanwhile, the air cargo segment has been evolving rapidly in
India over the past few years; it has overtaken the ocean freight and rail freight
markets by expanding at nearly 19% in the last three years, as against 10.3%
growth registered by ocean freight and 9.2% by railways.
India had a trade deficit of $19.6 billion in October 2011, the highest in four
years, as the pace of export growth slackened amid a slowdown in major global
markets. The trade gap was estimated at $93.7 billion during the April-October
period, the first seven months of fiscal 2011-2012, according to the Commerce
Ministry. For majority of the unorganized players in the logistics sector,
outsourcing is constrained due to small scale or decentralized and non-
automated operations. The larger players are increasingly streamlining and
standardizing their internal processes. Currently, very few Indian companies are
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in a position to separate out individual processes that can be outsourced. With
enterprise wide IT systems deployment the outsource ability of activities is
expected to increase. Presently, the low level of outsourcing in logistics sector is
primarily due to low sector maturity. Other restraints for outsourcing are
fragmented market, lack of systems and processes and resistance to outsource,
therefore This research is specific to Logistics Outsourcing.
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CHAPTER 3.
PURPOSE OF THE STUDY & RESEARCH METHODOLOGY
PURPOSE OF THE STUDY
OBJECTIVE OF THE STUDIES
HYPOTHESES
RESEARCH METHODOLOGY
SECONDARY DATA
PRIMARY DATA
SAMPLING
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CHAPTER 3
PURPOSE OF THE STUDY & RESEARCH METHODOLOGY
3.1 PURPOSE OF THE STUDY
No research initiative has been undertaken in India that has focused on
Logistics outsourcing & its effect on Food Processing Industry in India. In recent
years, however there has been a welcome change in this kind of thinking and an
increasing number of industries are now beginning to view logistics as a tool to
augment customer experience and improve revenues. Several large business
houses and mid-sized enterprises now see logistics as a strategic tool, which can
lead to efficient business operations resulting in higher revenues and better
profitability.
Indian manufactures and distributors are generally quite skeptical and / or
unaware about outsourcing logistics. The volume of outsourcing by Indian
shippers is currently is as low as around 10% compared around 50-80% in
Western Europe and the US. The unwillingness to outsource logistics on part of
Indian Logistics Managers may be attributed to skepticism about the possible
benefits, perceived risk, and losing control of sensitive organizational information
and vested interests in keeping logistics activities in-house.
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3.2 Objectivesfor the Study
1.. To Study the Impact of Logistics Outsourcing on Profitability of Companies. The
Researcher is aiming to study the logistics cost, delivery time, meeting of order quantity
i.e logistics performance does it plays a key role in profitability of the company.
2. To Study Logistics Outsourcing vis-a vis Food Processing Companies with respect
to their Competitive advantage. The researcher is trying to find out the degree of
current practices like Outsourcing of outbound logistics, outsourcing of pack & labels,
Transportation Management, Inventory Management, & Distribution & network planning.
3. To Study the efficiency of Logistics Outsourcing with context of different parameters
such as Production, Distribution, Sales, etc. Here the researcher is trying to assess the
Numbers of Packaging lines, uncertainty of production output time, annual demand
volume, demand uncertainty & fluctuation, Numbers of customers, Warehouses,
Distribution Varity, Delivery Frequency, Order Lead time.
4. To study the level of decision making in Logistics Outsourcing has significant impact
on sales volume of the company. For this research work job position of the managers i.e
level of decision making for Logistics Outsourcing, does it has a significant impact on
sales volume of the company. For measuring decision making & impact on sales
volume of the company. Managers job profile, one or multi factory level, degree of
involvement, & sales volume of last three years is taken into consideration.
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3.3 Hypotheses
H01 : Logistics performance does not play a key role in the profitability of the
companies.
H11: Logistics performance plays a key role in the profitability of the companies.
H02 : Logistics Manager do not contribute significantly to the companies‘
competitive advantage.
H 22 : Logistics Manager contribute significantly to the companies competitive
advantage.
H03 : Different aspects like production, distribution, & sales are not
important parameters in creating the efficiency of logistics outsourcing
H33 : Different aspects like production, distribution, and sales are important
parameters in determining the efficiency of logistics outsourcing.
H04 : There is no Impact of Logistics Outsourcing on sales volume of the
Companies.
H44 :There is a positive impact of Logistics Outsourcing on sales volume of the
Companies.
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3.4 Research Methodology
This research study is based on survey of Logistics Outsourcing Companies in
food Processing Companies For the purpose of the thesis both Primary and
Secondary sources of Data were used.
3.1 Figure shows the general steps involved in this research:
Researcher has adopted a descriptive approach, which involves questionnaire
which helps in exploring new areas. Also this approach helps in defining the
scope of enquiry, target audience and the time span. The Research would be
Selection, analysis and statement of the research problem
Formation of research objectives
Literature review
Research Methodology
Conclusion & Recommendations
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conducted through structured empirical analysis. 992 companies small,
medium,& big would be used as source to investigate.
3.5 Secondary Data Collection / Descriptive Survey
Primary and secondary data sources were used to collect information about
aspects of supply chain and customer satisfaction in Logistics outsourcing in food
Processing businesses. Survey involving personal face- to -face interviews with
both Logistics managers, Finance Managers, directors etc was conducted. Key
participants in Mumbai‘s logistics were approach for data. Executives (general
managers, operations managers, ) 992 Managers from logistics companies Food
processing companies were interviewed.
Information collected from secondary data sources included books, magazines,
journals, reports and websites. A systematic review of published reports like
Datamonitor, Euromonitor, KPMG about Logistics outsourcing in India was
conducted. These data that are intended to meet the needs of government
departments and local governments are usually clearly defined, well
documented and of a high quality. Such data is accessible in compiled form, and
are widely used by other organization and individual researchers (Saunders,et
al,2003)
Further, Data on the internet was located using search engines like EBSCO and
online journals of Retailing. The researcher while accessing the secondary data
excluded the data which was not relevant to the researcher‘s objective and
questions. The researcher made a quick assessment of the reliability and validity
of the data by looking at the source of the data. Dochartaigh (2002) refers to this
as assessing the reputation of the source.
The secondary data provide a useful resource with which to compare or set in
context the researcher‘s own findings. However, Bowley points out, that
―secondary data should not be accepted at their face value‖ The reason is that
such data may be erroneous in many respects due to bias, inadequate size of
the sample, substitution, errors of definition , arithmetic errors etc.(Gupta,2005).
Keeping this in mind the researcher ensured that the secondary data used is
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suitable for this research. The suitability of data was judged in the light of the
nature and scope of investigation. The researcher checked the adequacy of the
data in the light of the requirements of the survey.
3.6 Primary Data Collection / Field survey Building the much needed model and explore the bottlenecks and challenges in
the journey ahead for Logistics outsourcing industries. This will include – new
processes and operations that could be considered for outsourcing, highlighting
regulatory implications and over all cost maintenance and of course benefits
achieved by getting into a Profitable situation.
Questionnaires shall be prepared from the context of Logistics outsourcing i.e.
from a User company and service provider perspectives. Details will be captured
in these questionnaires and further taken up for analysis. The findings from this
exercise will be then considered in the final research report preparation and
conclusion.
Research Instruments for Primary data collection are;
1. Interviews using above Questionnaires
2. Emphasis on Findings – What, When, Where and How
3. Enablers – LinkedIn Groups and Contacts, Yahoo and Other Social
Site Contacts
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The questionnaire comprised of questions pertaining to;
General Information
Information related to type of industry
Information related to Organizational Structure
Information related to Regulatory Compliance
Information related to Risks & Strategy
Information related to Operational Principles / Delivery
Excellence
Information related to Growth Initiatives
Information related to Organizational Perception towards
Outsourcing
Information related to Organizational Perception towards Services.
3.7 Sampling
Sample Size
―Sample size is one which fulfills the requirements of efficiency,
representativeness, reliability and flexibility for the research work ,‖ (Kumar,2008)
That is why the sample of Logistics outsourcing in Food processing Companies
was so selected that they truly and adequately represent the universe otherwise
the results obtained would be misleading. Taking this into account the
researcher interviewed 991 companies in Food processing & logistics
Outsourcing companies across the city of Maharashtra. The size of the
sample was considered to be optimum because it fulfilled the requirements
of representativeness and reliability. Gupta (2005) emphasised that sample
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selection and data collection are interwoven and one has an impact on the other.
Sampling Technique of Data collection was Sample Technique where a part of
the universe is studied and the conclusion about the universe is drawn from this
data. In consumer research census is not practical and normal sampling
technique is used for the survey.
Sampling Design
Sampling design is a definite plan for obtaining a sample from a given population.
It refers to the technique that the researcher adopts in selecting items for the
sample.(Kumar, 2008)
Outlining the universe and defining the sample unit : While developing the
sample design the first step undertaken by the researcher was to clearly outline
and dentify the set of objects to be studied. In this case it was the Logistics
outsourcing companies in the city of Mumbai and its suburbs.
Sampling Frame
Sampling frame is the actual set of units from which a sample is drawn, In this
study the sample frame is Logistics Outsourcing Companies in Mumbai. The
researcher took care to ensure that the source list is as representative of the
population as possible. The source list was prepared such that it was
comprehensive, reliable and appropriate. For this purpose the sample frame
was devised after going through the various published reports that described
the various attributes of the formats and enlisted the recognized Logistics
outsourcing Companies in Mumbai. In terms of the consumers ,the researcher
attempted to study customer satisfaction in organized food retail. For this
purpose , the researcher took care and interviewed only those consumers who
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were related to logistics activities. There are basic problems of sampling frames
Some members of the population may not be included in the frame, or the non-
members of the population may get included in the frame and a member of the
population may be surveyed more than once. The frame may list clusters instead
of individuals. We have taken care to overcome the basic problems of missing
elements by extensively reviewing the list of Logistics outsourcing companies in
the city of Mumbai and carefully excluded the non members of the population or
foreign elements in the source list i.e. Further the researcher made certain that
there were no duplicate entries or no member of the population was surveyed
more than once and that frame listed only individuals and not any groups or
clusters.
Sample Justification
Maharashtra was chosen for study because it is the most important economic
and commercial Centre. In addition to this it is among the top 10 preferred
location for Logistics activities is growing parallel with real estate development
in Mumbai.
Probability Sampling
Sampling for this thesis was not haphazard selection. Probability sampling
where every item in the universe has a known chance or probability of being
chosen for the study ; it includes Random sampling and stratified sampling
methods which were used by the researcher.
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Random Sampling
To ensure balanced representativeness of the consumers, the random sampling
was used. According to Gupta (2005),Simple random sampling refers to that
sampling technique in which each and every unit of the population has an equal
opportunity of being selected in the sample, ―personal bias of the researcher
does not influence the selection.‖
This sampling was preferred over other techniques especially convenience
sampling because it may hardly be representative of the population(Gupta,
2005). In comparison, since random sampling is a probability sampling, it
eliminates bias due to personal judgment.
In terms of Logistics Outsourcing sampling, Stratified sampling was used. In this
type of sampling the population embraces a number of distinct categories, the
frame can be organized by these categories into separate "strata." A stratum is a
subset of the population that share at least one common characteristic. ― (Gupta,
2005). According to Shahjahan(2005) the units within each stratum are as
homogeneous as possible. Various Strata are non over- lapping. This means
each and every unit in the population belongs to one and only one stratum.
This method could be used because the population could be partitioned into
smaller sub groups of population, each of which is homogeneous according to
the particular characteristic of interest. Stratified sampling is considered to be
appropriate for this study because it reduces sampling error and also the
Variability within strata is minimum while Variability between strata is maximum .
C.J Grohman has rightly pointed out that this type of sampling balances the bias
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of deliberate selection‖ (Gupta,2005) Further it was found to be representative of
the population: Since the population is first divided into various strata and then a
sample is drawn from each stratum there is a little possibility of any essential
group of the population being completely excluded. In addition to it being
representative it was also considered to be more accurate (Gupta, 2005) and the
division of the population into relative homogeneous sub –groups leads to
administrative convenience(Shahjahan,2005)
Stratified Sampling
While applying Stratified sampling , the Logistics Outsourcing Companies were
sub divided or stratified into mutually exclusive groups and included all items in
the universe. After this a simple random sample was then chosen independently
from each group. Here the base of stratification was the size of the Companies.
The researcher created strata‘s for the purpose of this study viz. So that Logistics
Outsourcing decisions taken in relation to increase in Profit.
Response Rate
Response rate is calculated by the number of individuals who respond and
complete the questionnaire divided by the total number of individuals contacted
as given below:
Response rate:
Number of individuals who respond and complete the questionnaireX100
Total number of individuals contacted
Response rates are strongly affected by the method of data collection. In
general, the more interaction between the potential respondents and the
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researcher, the higher the response rate. (daa.com.au)The researcher collected
the data using face to face interviews. A total of 991 respondents were
approached
According to Gupta (2005) Generally, the highest response rates in surveys
based on random samples are achieved when personal face to face interviews
are conducted with the respondent. For this purpose the researcher conducted
face –to face interviews
In order to improve the responses , the researcher had a short covering letter
which focused on the importance of the study and the respondent‘s reply. The
questionnaire was short and easy to complete. The researcher tried to increase
the trust by displaying the official documents and stationery demonstrating it as
an academic research work.
The researcher ensured that the questions were not ambiguous , had clear
instructions and asked only what was necessary. In the beginning, before starting
the data collection, the researcher phoned, emailed or personally met the
logistics outsourcing executives to inform about the interview and set it up. The
person approached were part of the target population
Questionnaire Description
In this research work questionnaire used was specifically designed for this
survey. Questionnaire is a data collection tool in which each person is asked to
respond to the same set of questions in a pre determined order (deVaus,2002).
To gain insights into the supply side and to understand the operations of
organized food, before formulating questionnaire, key officials responsible for
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modernization and experts from various economic and distribution research
centers in the city were met. Since the intention was to gain an understanding of
the relevant issues, the interviews typically involved a great deal of probing and
exchanges.
In accordance with the topic of research and the purpose of testing hypothesis, a
questionnaire was prepared which included aptly worded questions with proper
relevance and emphasis on the data desired for the purpose of the investigation.
The role of questionnaire is to ensure a structured interview across all subjects.
It is an important element in the success of data collection . The survey through
questionnaire was administered by the interviewer through face- to- face
interview.
For the thesis one sets of questionnaires were prepared. One for the Logistics
Outsourcing Companies in Food processing Companies
Further, the questionnaire can be broadly categorised into 2 divisions:
The two sets of questions
1.Classification Data and
2. Questionnaire Data
Classification Data on profile of Respondents : Consists of questions which
include general preliminaries This was done to get a perspective on distribution
of profile of consumers.
For the questionnaire data, the researcher opted for a structured interview
because a structured interview is one in which each subject or respondent is
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asked a series of questions according to a fixed and a prepared interviewing
schedule. Semi structured interview was avoided as it could mean different
things to different people. (Brace, 2004)
―Questions applying identification and description of the respondents should
come first followed by major information questions.‖ The sequence of the
questions was considered carefully in terms of the purpose of the study and the
persons who will supply the information. Further, the questions were arranged in
a logical order so that a natural and spontaneous reply to each was induced.
The questionnaire administered to the consumer consisted of 12 statements to
be rated on a 7 point rating scale where 1 meant very low and 7 meant very high.
The purpose of a rating scale is to allow respondents to express both the
direction andstrength of their opinion about a topic. Typically, market researchers
prefer respondents to make adefinite choice rather than choose neutral or
intermediate positions on a scale. For this reason, a scale without a midpoint is
preferable, provided it does not affect the validity or reliability of the responses.
(Garland, 1991)
The number of the questions included depended on the objective and scope of
the investigation: (Gupta,2005) .
Reliability Test
The questionnaire was further tested for Cronbach Alpha α reliability to test the
internal consistency of the items. According to Aiken,(2003) This is a general
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formula for estimating the reliability of a test consisting of items on which
different scoring weights may be assigned to different responses.
Reliability refers to the consistency of scores obtained by the same person when
re-examined with the same test on different occasions or with different sets of
equivalent items or under variable examining conditions.
SPSS was used to analyze the data. In this research, Cronbach Alpha reliability
coefficient for the consumer questionnaire was found to be 0.740 which is within
the acceptable range. (George and Mallery, 2003 )
Overcoming Error
In order to overcome bias in the selection process, the researcher drew the
sample entirely at random. Due to a large sample size, the researcher had to
take care of both sampling as well as non sampling errors.Cape, Lorch and
Piekarski (2007) shows how drop out is a function of length of questionnaire, as
respondents become bored andfatigued. To overcome the danger of
respondents continuing reluctantly till end providing potentially unreliable data,
the researcher ensured only relevant questions were asked and kept the length
of the questionnaire in mind while designing the questionnaire.
The researcher took care that the inclusion of data was from within the
population only thereby reducing the fear of overcoverage. Further, data was
collected from consumers in the retail store to minimize the error and ensure that
sampling frame included all the relevant elements in the population and
overcome the problem of undercoverage.
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Foddy (1994:17) emphasised that the questions must be understood by the
respondent in the way intended by the researcher and the answer given by the
respondent must be understood by the researcher in the way intended by the
respondent. To address this concern and in order to overcome the issue of
measurement error, the researcher clarified the question wherever necessary.
The researcher was cautious of making value judgements. Further, during the
interview, the interviewer took care to never show any expression of surprise,
agreement, disagreement or criticism when the respondent was answering the
questions asked so that the interviewee ‗s responses are not influenced
Respondents were encouraged to give frank and honest responses, they were
assured that their identity and the identity of their organization would be
protected.
The researcher obtained as much information as possible about the objectives in
order to maximize the value of the study. For this the researcher tried to give an
honest indication of the time commitment involved as this is an important concern
of individuals deciding whether to participate or not. The researcher explained
briefly what the survey is about and its purpose. In addition to this , the
researcher also outlined to what use the findings will be put to.
Respondents were assured that all the information given as part of the survey
will be treated in strictest confidence. The researcher assured them that under
nocircumstances information on an individual retail outlet will go beyond the
academic project. The researcher also emphasized that any findings of the
survey will only be made available in the form of aggregate results, so that it will
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be made impossible to identify the replies of any individual firm. Further, Data
entry was verified and rechecked in order to reduce processing error. Data
specification was adequate and consistent with respect to objective of the survey.
The researcher informed and took appointments to ensure that the retailers
participating in the survey were contacted at the time convenient to them.
Pre-testing the Questionnaire & Pilot Study
The questionnaire should be pre-tested with a group before using it with a larger
sample. The advantage of pre-testing is that the shortcomings of the
questionnaire are avoided.(Saunders et.al,2003) It also helped researcher get an
idea about the extent of non-response likely to take place.
The researcher undertook a pilot survey. ―The pilot survey is particularly useful
for uncovering problems with the questionnaire document.‖ (Gupta,2005,
Kumar,2008) It has allowed the researcher to test the acceptability of the
questionnaire to the target sample. The acceptability of the survey in terms of the
length of the questionnaire or the time commitment required of the respondents
was also tested.
Relating questionnaire to Research objectives
The researcher constructed and used the questionnaire to facilitate the
respondents to give the best information that they had. Questionnaire was
designed to collect data that was required to answer the objectives of the study
as objectively as possible while minimizing the likelihood of error occurring at any
stage in the data collection and analysis process.
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Approach to Recording Data
The researcher overcame the possibility of ‗ mixing up data from different
interviews and not completing each questionnaire at the time it took
place‘(Ghauri and Gronhaug,2002) by insisting on answering all questions by the
respondent and compiling the data as soon as it was recorded.
A full record of the interview should be compiled as soon as possible after it has
taken place (Healey,1991;Robson,2002.) The researcher adhered to this and
tried to capture the exact nature of the explanation provided as well as general
points of value particularly in the area of consumer satisfaction from the
interaction with the respondents.
The Time period of the Study
The researcher started collecting the data in 2009. The pilot study was
undertaken in 2009 and 2010. The primary data collection was completed by
December 2010.The researcher would like to add that recent secondary and
tertiary source of literature were included in the literature review.
Profile of the Respondent
Classification of the profile of respondents: The Classification of the respondent
was based on job position i.e Logistics Manager, Financial manager, production
managers, Director.
At what level decision of logistics outsourcing is taken i.e. one factory level or
Multi-factories level and their involvement in decision making of logistics
outsourcing.
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Analysis of Data
The responses observed from each of the items in the questionnaire were
scored and tabulated into a master sheet. The statistical tools included Person
Chi-square, Likelihood Ratio and Linear-by-Linear association has been applied
to draw logical conclusions. The analysis was done using SPSS. In addition,
based on wide industry experience, worksheets were tabulated using Matrix
Analysis. As part of this method, two key variables were selected that could
impact desired outcome. A two-dimensional matrix was prepared, labeled one
axis with first variable and the other axis with second variable. Along each axis,
all possible subtopics for each variable were listed. Drew lines from each axis so
that ―cubes‖ are formed, representing the combination of one variable from each
axis. Then each variable was subdivided into elements. From each cube of the
matrix, considered how elements could be combined and contribute to an
innovative solution.
Interpretation & report Writing:-
The analyzed data were finally interpreted to draw the conclusions and reported
with the objective of the study in view.
Limitations of the Study
1. This study was conducted in the city of Mumbai which is considered to be
representative of the Companies Outsourcing Logistics activities .Companies
outsourcing logistics across the country and the sample frame was determined
accordingly at the time of deciding the research design . However, this research
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does not cover other metros and hence might not have captured regional factors
affecting Companies outsourcing Logistics Activities.
2. Researcher has assumed that the information provided by the Logistics
Executives and managers is transparent and accurate. However there can be
constraints while sharing information by the Logistics executives & Managers for
general and academic survey. Hence more accurate information can be gathered
only if such survey is commissioned by large Outsourcing Companies for their
own use.
3. The literature search and review was dependent upon the availability and access
to research information on the subject in India. It must be acknowledged that as
organized logistics outsourcing is in fledgling state and hence not many
research projects in this field has been conducted and consequently only limited
authentic published work is available and a source for secondary data.
4. It must be mentioned that in an academic research work of this nature only
illustrative factors affecting Logistics Outsourcing research hypothesis could be
included in the survey. To get deeper insight about the holistic picture of
companies Logistics outsourcing many more specific parameters needs to be
included.
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CHAPTER 4
INDIAN LOGISTICS INDUSTRIES
SIZE & SHAPE OF THE INDUSTRIES
COMPLEX INTERSTATE TAX STRUCTURE & COMPLIANCE
3 PLs AN INTEGRATED APPROACH TO LOGISTICS
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CHAPTER 4
Indian Logistics Industries
Traditionally, industry in India has always viewed logistics as a cost centre and,
over the past few decades since independence most business have always
attempted to cut corners in trying to move their products from the shop floor to
the warehouses and distribution channels and from there on to the end-user. In
recent years, however there has been a welcome change in this kind of thinking
and an increasing number of industries are now beginning to view logistics as a
tool toaugment customer experience and improverevenues. Several large
business houses and mid-sized enterprises now see logistics as a strategic tool,
which can lead to efficient business operations resulting in higher revenues and
better profitability.
Globally, the size of the logistics industry is placed at $3.5 trillion, with most of
the large players operating out of Western Europe. However the biggest market
in the US and it account for about 33% of the total global market size, although
China‘s share in global trade has rising rapidly, In India, the industry is still in the
nascent stage of development, with an estimated size of about $125 billion for
Financial Year 2009-10. However, a robust domestic manufacturing sector,
coupled with an increasing number of MNCs seeking to outsource their
manufacturing function to this country or set up base here, strong focus on the
infrastructure sector, of which logistics from a core, in successive policy
announcements, and simplification of the complex indirect tax structure are seen
as some of the key drivers that will catapult the logistics industry into big league.
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India‘s container trade has been growing at around 15 per cent over the past five
years. That means the logistics services business will be growing at a multiple of
the box trade, probably around 20 per cent and more per year. The growth in
demand presents significant opportunities for the logistics industry as also
challenges.
Yet, the Indian logistics industry faces a number of roadblocks, the chief among
them being low demand due to high operational costs poor infrastructure,
government regulations, a complex tax structure and an industry dominated by
the unorganized sector. These factors in turn have led to a situation where
despite the huge interest by both players and investors very little investments
have flowed into the industry- this when 100% FDI is allowed in all services
coming under its purview, save and except airtransport and air cargo services.
Some of the key issues that the industry in India faces today.
4.1 Size & shape of the Industries
The cost of logistics in India is pegged at around 12-13% of the GDP, or roughly
$125 billion. Until very recently, nearly 99% of logistics cost was accounted for by
the unorganized sector, which consists of owners of less than five trucks, small
warehouse operators, customs brokers, freight forwarders, and the like. As a
matter of fact, 54% of the road transport market was with operators ownings no
more than a single truck. The organized sector‘s contribution, on the other hand
was a tad above 1% This situation served as a major deterrent to the customer
as the small operator was in no position to offer end-to-end solutions. Also at
13% GDP the logistics cost was much higher than that prevailing in Europe and
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the United States ( at around 7-9% on average), making the service extremely
unattractive for the customer. There has been some improvement in the above
statistics, with the entry and expansion of large players in this area for instance
large cargo and transport firms and courier companies such as Transport
Corporation of India, DHL, TNT, & Blue Dart have captitalised on their existing
asset bases and all India network to start logistics operations. Others, such as
Aqua Logistics have used a mix of organic & inorganic growth to ramp up their
business models, In fact today around 10% of the business is in the hands of a
few leading players.
Business Dynamics
Logistics is a high-cost, low-margin business, making it very unattractive for the
unorganized player, as he invariably faces unfair competition from unorganized
players, who can get away without paying taxes and following operating norms
stipulated in the Motor Vehicles Act such as Utility of drivers & vehicles, volume
& weight restrictions. Secondly, there are issues of economies of scale in Indian
logistics, given that there is a high degree of fragmentation even within the
organized sector.
4.2 Complex interstate Tax structure& Compliance
Another factor that contributes to the lack of scale economies is the non-uniform
sales tax structure. This problem has been mitigated to some extent through with
the introduction of Value Added tax VAT which was implemented in 2005 & the
proposed GST regime is expected to provide further fillip to the industry. Having
said that the logistic service provider (LSP) today has to deal with a host of other
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taxes such as octroi & goes through considerable trouble transport ting goods
across state borders, stopping at multiple check posts and complying with
varying documentation requirement of different states.
A study conducted by Indian Institute of Management ( IIM-C) says the truck on
Indian road loses 24-48 hours on average in complying with paper work &
formalities at different check posts en route to a destination. It says Fuel worth
$2.5 billion is spent on a waiting at check posts each year. A vehicle that costs
$30,000 pays $7,500 per annum in the form of various taxes, which include the
excise duty on fuel.
Awareness
Indian manufactures and distributors are generally quite skeptical and / or
unaware about outsourcing logistics. The volume of outsourcing by Indian
shippers is currently is as low as around 10% compared around 50-80% in
Western Europe and the US. The unwillingness to outsource logistics on part of
Indian shippers may be attributed to skepticism about the possible benefits,
perceived risk, and losing control of sensitive organizational information and
vested interests in keeping logistics activities in-house.
International Freight Movement
Foreign freight forwarders offer stiff competition to their Indian counterparts in the
areas of international freight movement. Multinational firms are able to capitalize
on their size and operations in many countries to offer low freight rates and
extend credit for longer periods. Indian freight forwarders, on the other hand
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because of their smaller size and lack of access to cheap capital, are not able to
match the same, Moreover, clients of MNCs often want to deal with a single
service provider and especially for FOB (Free on Board) shipments specify the
freight forwarders, which most of the time happen to be the multinational freight
forwarders.
Poor physical Infrastructure
Poor physical and communications infrastructure is another deterrent to
attracting investments in logistics sector. According to a CII report, the country
loses as much as $65 billion due to inefficient supply- chain system despite the
retail sector being in the high-growth mode. It points out that since Independence
only 20 percent capacity has been added to the railway network but the traffic
has increased tentimes. The reportsadds that the sector is expected to touch
$879 billion by 2018, but if its supply-chain system‘s challenges are not
addressed, its growth could get hampered.
A Mc Kinsey study paints a grimmer picture and says India‘s waste in logistics
could cross $100 billion by the year 2020. The reports says while logistics
infrastructure spend has tripled from $10 billion in 2003 to an estimated amount
$30 billion this year, the country‘s network of roads, rail and waterways will be
insufficient as freight movement increases about threefold in the coming decade.
It recommends an integrated and coordinated approach in which the
development of each mode- railways, waterways and roads is matched to the
needs and existing assets are better utilized. An IIM-C reports says road
transportation accounts for more than 60% of inland transportation of goods and
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highways that constitute 1.4% of the total road network, carry 40% of the freight
movement by roadways. Slow movements of cargo due to bad road conditions
multiple check posts and documentation requirements, congestion at seaports
due to inadequate infrastructure, bureaucracy, red-tape and delay in government
clearances, coupled with unreliable power supply and slow banking transactions,
make it difficult for exporters to meet the deadlines for international customers.
To expedite shipment, they have to book as airfreight, rather than seafreight,
which adds to the costs of shipments making them uncompetitive in international
markets. Moreover many large shipping liners avoid Indian ports for long
turnaround times due to delays in loading/ unloading and hence Indian exporters
have to resort to transshipments at ports such as Singapore, Dubai and
Colombo, which adds to the costs of shipments and also delays delivery.
Inadequate IT Support
Low penetration of IT and lack of proper communications infrastructure also
results in delays and lack of visibility and real-time tracking ability. Unavailability
and absence of a seamless flow of information among the constituents of LSPs
creates a lot of uncertainty, unnecessary paperwork and delays and lack of
transparency in terms of cost structures and services delivery for example, a
shipper has to pay a higher freight rate if it cannot ensure return load. At present
there is no real-time process by which a shipper may know about the availability
of trucks and going rates at the destination market. Therefore it has to pay more
had the market information been available to both the shippers and the service
provider, the service providers cost structure would have been transparent to the
shipper and it would have ended paying the actual market rate. Another example
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would be that LTL ( Less than Truck load) shipments cost more than FTL ( Full
Truck load) shipments. Now when a shippers books a LTL shipment it has no
idea about the status of its shipments after it leaves the warehouse at the origin
and before it reaches the warehouse at the destination. The service provider may
still convert this LTL shipment into a FTL shipments at its own warehouse before
delivering at the destination so the shippers ends up paying LTL rates for a FTL
shipment. Had there been visibility during delivery, this problem would not have
occurred.
Service Tax
Service tax levied on logistics service fees may make outsourcing costly and
outweigh the possible benefits.
Human Resourses
The IIM-C report points to a general lack of skilled and knowledgeable manpower
in the logistics sector. It says management graduates do not consider logistics as
a prime job. To improve the status of the industry, service providers have to
move beyond the level of brokers and truckers to attract and retain talent.
What the Future Holds
Even today, the bulk of India‘s manufactured exports consist largely of traditional
industries such as garments and other textile products, handicrafts & other labour
intensive goods in which the value addition at each step of manufacture is
marginal, As a result, therefore imports largely consist of raw materials that are
used to make these products. Moreover it is the domestic market and not the
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overseas market, which accounts for a larger share of the revenues in the
manufacturing sector, so the emphasis on high-end & sophisticated logistics
solutions is not so pronounced. In certain sectors such as processed food
exports, a great deal of importance is given to the logistics function and there is
considerable emphasis on timely delivery of perishable goods. Machine tools &
electronics exports are other examples of industries in which timely logistics
support and efficient supply chain management system assume a high degree of
criticality. However this same thinking does not apply to the bulk of goods
exported from or imported into the country. As mentioned earlier, traditionally,
Indian businesses are prone to cutting corners and treat logistics merely as a
means to move goods from one place to another and this iswhere the small
operator thrives as he is able to provideeconomical, albeit inefficient and
insufficient service to small cost conscious enterprise.
All this is about to change, however as the economy grows and attract more and
more large multinationals to move in and set up manufacturing and distribution
bases in as a result of this the small manufacturer will be forced to start vying
with the MNC for a domestic market that was hitherto his alone, In other words,
as the dynamics of manufacturing and distribution change there will be an
increasing need for more reliable, seamless supply chain solutions that offer real-
time visibility along the pipeline, It is in this context that the need for integration
assumes greater significance as now even domestic manufacturers and
distributors will start seeking one-step shop solutions that will augment the value
of their expenditure incurred in getting their merchandise to the market place.
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And the logistics industry itself will move to subsequent level of competitiveness
as the demands for efficiency from the manufacturing sector increase.
Bottom Line
Despite the issues highlighted above, India‘s logistics industry is set to take the
big leap forward to growth, The economy is booming and was the only one part
from China to have withstood the onslaught of the global meltdown that started in
2008. There is a marked shift in the industrial profile of the country as well, with
pharmaceuticals, cement, metals, and FMCG, among others beginning to
acquire greater prominence in the manufacturing sector. These industries, along
with retail which is seeing the entry of multinationals such as Wal-Mart, and the
ramping up of Indian business such as the Future Group are being perceived as
the leading contributors to economic growth going forward. It is companies that
belong to this set of industries, and which are eyeing non-conventional logistics
solutions such as inventory management, reverse logistics, distribution, labeling
and packaging that will dictate the way the logistics industry moves from hereon.
4.3:3PL: An integrated approach to logistics
On the decade and a half after liberalization first touched the economy, India has
emerged as a force to contend with in the world economic scenario while the
country was posting a GDP growth of 9% in the years preceding the global
recession it held firm even in the fact of the meltdown on the back of a robust
services sector, and a growing manufacturing sector, We are still behind China in
terms of the manufacturing sector‘s contribution to the Gross Domestic Product
while the sector accounts for about 45% of China‘s GDP that figures in India is
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still around 20%. However the sector is assuming increasing significance in
terms of its ability to cater to both a growing domestic market and the exports
segment. This growth represents significant opportunities as well as challenges
for the logistics industry in India.
Need for Integrating Logistics Function
The key components of logistics in India include transportation, warehousing,
freight forwarding and other value-added functions such as information
technology and MIS of these industries have traditionally outsourced
transportation and freight forwarding functions while internally managing
warehousing and MIS.
However, Indian industries are increasingly finding it a challenge to manage their
supply chain to reach all parts of the country given the diversity in the various
regions, population and infrastructure conditions in India. Today the top priority of
Indian manufacturers is to ensure a consistent presence of their products across
maximum possible sectors of a vast domestic retail network consisting of more
than three million outlets and an even more complex international market. In the
present day, the most effective way for organizations to achieve this is to focus
on their core strategy of manufacturing, while outsourcing the entire distribution
function to a LSP who offers the entire gamut of supply chain services in a
seamless manner. This is where the third-party logistics services provider comes
in.
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SO, What is 3 PL
Third Party Logistics (3PL) refers to a single logistics service provider who
manages the entire logistics functions of a company. The services offered by a
3PL organization include but are not limited to:
Transportation
Warehousing
Customs clearance
Freight forwarding
Import-export management
Inventory control
Assembly and installation
Packaging and labeling
Distribution and after-sales support
Reverse logistics
Management Information systems
3PL as a distribution concept has its roots in Western Europe and North America
where service providers in this domain emerged to relieve manufacturing
enterprises from huge logistics costs apart from the trouble of dealing with
several small-time LSPs each of whom invariably had the expertise to manage
just one or two of the functions mentioned above. In other word, The 3PL
provider offered end-to-end logistics solutions and took over the entire headache
of ensuring last mile delivery of the customer‘s manufactured output. The
concept proved to be a great success and quickly gained popularity with 3PL
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firms moving from offering basic logistics services such as warehousing and
transportation initially to adding several other value added services ranging from
packaging to supply chain planning as business dynamics became more
complex.
3PL Industries in India
3PL made its way into India in the 1990s, with global logistics players extending
these services to Indian subsidiaries of multinationals in automobile, electronics
and FMCG, these subsidiaries took the cue from their foreign parents and began
to outsource their logistics functions to these specialist service providers though
small in the first few years 3PL in India witnessed rapid growth after year 2000.
However at $ 60 million currently, it is miniscule compared to Western Europe,
US and Japan, where the use of 3PL constitutes around 40%, 50% and 80%
respectively of the total logistics cost, Despite this the Indian market is full of
opportunities with the huge emphasis being given infrastructure development
like ports, roadways and railways. The 3PL industry is estimated to reach $90
million by 2012 according to an Assocham study, which states that around 55%
of Indian companies are outsourcing logistics services such as supply chain and
warehousing compared with10-15% a decade ago,another estimate is much
more optimistic & states that improving infrastructure and focus on core business
operations will yield total revenue of $4 billion by the same year.
An IIM Calcutta estimate pegs 3PL growth in India at over 20% compared to the
average global growth rate of 10%. Business houses such as Reliance, the Tata
group & Mahindra and Mahindra have already entered logistics business, Initially
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these companies formed divisions to handle internal logistics but sensing the
potential of the market they have started offering logistics solutions to other
Indian firms and have already turned these logistics divisions into profit centres.
Some large express cargo courier companies such as Transport Corporation of
India Ltd (TCIL), Gati, Safexpress and Blue Dart have also started offering 3PL
services. Owing to the large asset base and distribution networks that are
already put in places it was just a matter of time for these companies to venture
into the logistics business.
Motivation
The key reasons for this expected surge are :
Globalization of sourcing, manufacturing and distribution leading to greater
complexity of material movement.
Increasing competition, which is forcing companies to became more
responsive and reduce inventories as a means of cutting costs
Resource constraints that require companies to focus on their core
manufacturing or new product development activities.
Introduction of value-added tax (VAT) and the launch of goods and
services tax (GST) will greatly reduce the number of warehouses
manufacturers are expected to maintain across the country. This in turn
will provide a great boost to integrated logistics services.
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New Trends in 3PL
Technological advancements and the corresponding increase in supply chain
function and communications have given rise to a relatively new model for third-
party logistics operations- the ―non-asset based logistic provider.‖ Non-asset
based provider perform functions such as consultation on packaging and
transportation, freight quoting, financial settlement, auditing, tracking, customer
service and issue resolution, However they don‘t have their own any physical
distribution assets such as trucks, warehouses, trailers and the like, Such service
providers typically have a team of domain experts with accumulated freight
industry expertise and information technology assets. They fill a role similar to
freight agents or brokers but maintain a significantly greater degree of hands-on
involvement in the transportation of products.
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CHAPTER 5
LOGISTICS OUTSOURCING
DEFINING LOGISTICS OUTSOURCING
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CHAPTER 5
LOGISTICS OUTSOURCING
Defining Logistics Outsourcing
Driven by developments in information and communication technology and
globalization, the outsourcing industry has shown impressive growth in the last
decade. The global market size of the industry has increased from approximately
US$6 billion in FY2000 to almost US$60 billion in FY2009 (www.nasscom.in). As
the spread of outsourcing model has increased, new forms of organization have
emerged, known as “outsourcing firms.”
Outsourcing firms are distinctive organizations which exist with the sole objective
of being providers of outsourcing services and activities to client firms. These
firms can be defined as “higher capability firms that provide determined non-
strategic activities or business processes or human resources, necessary
for the manufacture of goods or provision of services, by means of
agreements or contracts with client organizations, with the aim of
improving the clients’ competitive advantage” (Sharda, 2008). Outsourcing
firms have steadily grown not only in terms of number but also in scope of
services provided. Almost 82% of large firms in Europe, Asia and North America
have outsourcing arrangements, and almost 51% of them use offshore
outsourcing firms(Gottfredson, Puryear & Phillips, 2005). With their growth, the
bargaining position of these firms has changed too. Their tremendous growth and
success has led some to labelthem as the ―oil barons of 21st century‖ (Greco,
1997; Logan, 2000).
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The current economic downturn, however, has thrown up some serious
challenges foroutsourcing firms. It has dampened demand in the global markets
which has translated into lesser number of new contracts and tightening budgets
from existing clients. Competition has intensified amongst outsourcing firms as a
result of which smaller players are being squeezed out by their larger
competitors. To add to this, there is renewed resistance against outsourcing in
large export markets such as US and UK due to rising unemployment. Despite
these challenges, the outlook for outsourcing firms is still optimistic. The global
outsourcing industry grew at a rate of 12% in 2007-08 and 14.8% in 2008-09,
which was highest among all technology related segments (www.nasscom.in).
This trend is expected to continue, and the worldwide outsourcing market is
projected to grow at a CAGR of11.9% to reach $181 billion by 2012
(www.nasscom.in). The economic crisis has forced clients to outsource more
processes due to greater need for operational efficiency, reduced complexity and
more standardization besides controlling costs. Recession has also exerted
pressure on outsourcing firms to explore new sectors and new markets (Frost&
Sullivan, 2009), thereby creating new business opportunities in the outsourcing
industry. It is estimated that the Asia Pacific outsourcing market will grow from
US$13.7billion in 2008 to US$20.3 billion in 2011, and the majority of this
revenue will be generated from India, Philippines, Malaysia and China (Frost &
Sullivan, 2009). Analysts believe that amongst these main growth markets, India
is best poised to blaze along the outsourcing success trail (Frost & Sullivan,
2009; India Knowledge@Wharton, 2008).
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In order to take advantage of these new opportunities, outsourcing firms will have
to gea up. Leading researchers believe that outsourcing companies can stay
afloat during the crisis, and perhaps even get ahead, by offering ―core‖ services
and replacing transaction oriented client relationships with strategic partnerships
aimed at helping businesses transform themselves in the current economic
environment (India Knowledge@Wharton,2008). Other experts think survival for
outsourcing firms will depend on the continuation of their existing strategies
(India Knowledge@Wharton, 2008). Some industry analysts assert that
outsourcing firms will have to move up the value chain through a strategy of
offering more data services to foreign clientele (Frost & Sullivan, 2009). Yet
others believe that outsourcing firms will have to diversify not only in terms of
geographies, verticals and service lines, but will also have to enhance focus on
domestic markets to derisk their business and tap in local growth opportunities
(www.nasscom.in). It appears from this debate that strategy, now more than
ever, will determine the difference between nsuccess and failure of outsourcing
firms.
In principle, the issue of whether to outsource such logistics functions as
transportation, warehousing, and order processing is a variation on the traditional
"make-or-buy" decision. Make-or-buy is really a short hand term for the crucial
decision of how a firm obtains goods and services. If the company determines
that the open market is the best source for a particular component or support
service, then the firm should buy the itemor service. If the company decides that
the part or function should be supplied by company employees, then the term
has taken the "make" choice. As the name implies, formal make-or-buy analysis
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began in a manufacturing context.' where the question is whether a product's
component parts should be bought from a supplier or produced in-house. Both
operations management" and purchasing texts' routinely treat this decision as a
cost minimization issue. One compares the supplier's quotet o internal costs and
chooses the less expensive alternative. Perceived differences in quality, delivery
reliability, responsiveness, and similar issues are sometimes quantified, but often
these non price issues are treated separately. Recently, students of
manufacturing have begun to investigate the importance of the component make-
or-buy decision to overall manufacturing strategy and competence,''
Management scholars have also pointed out that the make-or-buy decision can
have corporate strategy implications since employment levels, asset levels, and
core competencies are involved. A number of companies have used Total Cost
of Ownership (TCO) procedures to incorporate non price considerations into the
make/buy decision,'' We believe that TCO is an excellent starting point for
analyzing logistics outsourcing issues. However logistics, especially finished
goods distribution, is vitally concerned with external customers and services,
rather than internal customers and products. Since logistics deals with services
rather than parts, any outsourcing analysis must account for managing a third-
party process from initial loading to final delivery. !n contrast, component
outsourcing involves inspection costs at a point in time, often at the supplier's
shipping dock or the factory's receiving dock. Logistics' focus on external
customers entails data gathering over time both third-party performance and
customer satisfaction. Buyers managing component outsourcing receive direct
feedback from a single source: the manufacturing function hey supply.
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In the field of logistics numerous works have been published (Sohail & Sohal,
2003) resulting in a host of definitions for the concept of logistics (Masson-
Franzil, 2003) and the outsourcing phenomenon (Tage, 2000). In these articles
(e.g., Colin & Paché, 1988; Halley, 1999; Paché1994;Samii, 2000), logistics is
presented as a combination of physical and informational flows.
We thus define logistics as the management and control of physical and
informational flows, either by internal means or by outsourced means along a
chain from the input to the output encompassing all the operations of transport,
stock, manufacturing, packaging, distribution and so on carried out for the
customer‘s satisfaction and in optimised performance conditions for the
company.
Logistics has evolved through several stages. Seen as a supportive function in
the 1960s, it slowly became a strategic function in the mid-1980s (Jones and
Riley, 1985) with the emergence of the concept of Supply Chain Management
(SCM), among others. SCM is a fashionable logistic strategy. Stock and Lambert
(2001) define it as a component of eight businesses: customers' relationship
management, customer service management, demand management, order
fulfilment, manufacturing flow management, procurement, product
development/commercialization and returns. SCM is dealt with in many Anglo-
Saxon works, such as those by Bowersox (1997), Christopher (1998) or Larson
and Hallodorson (2002).
At the theoretical level, the concept of outsourcing has been dealt with in many
research works which have given numerous and varied definitions (Masson-
Franzil, 2005). The concept has often been mentioned as a synonym of other
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and older notions, such as subcontracting, although they refer to other situations.
We can mention here the influence of Barreyre‘s portent works (1968) on
‗subcontracting‘. He defines it as ‗the action through which an economic agent
entrusts another economic agent with the production of a good destined to be
part of the combination of the final product of the subcontracting agent in
question‘. In the 1970s, subcontracting practices were rather restricted to the
production of goods. However, in the 1990s, their range of application came to
encompass such functions of the company as supportive or administrative ones
which had been unheard of in terms of outsourcing (Parrotin & Loubère, 2001).
The decision of outsourcing has thus become a strategic action showing that
firms aim at refocusing on their core activities or at looking for skills they do not
have outside the company.
The increasing number of research works on outsourcing has led to some kind of
stabilization of the concept today. Barthélemy (2001, p. 7-8), in his research work
on outsourcing strategies, clearly distinguishes outsourcing from subcontracting,
downsizing and reengineering by defining it as ―the fact to entrust a supplier or
an external provider with an activity and its management rather to carry it out in-
house‖. According to the author, three crucial elements characterize outsourcing:
1) The activity used to be carried out by the outsourcer, 2) The outsourced
activity usually goes together with an assets transfer, 3) The relationship
between the outsourcer and the provider usually runs on the middle or long term.
As for logistics outsourcing several synonyms are often used: ―outsourcing‖,
―third partylogistics‖ or ―contract logistics‖ (Larson & Kulchitsky, 1999). Reviewing
the definitions pointing at this concept (e.g., Langley, Dobrey, & Newton, 1997;
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Lieb, 1992; Lieb, Millen & Van Wassenhove, 1993; Lieb & Randall, 1996; Murphy
& Poist, 1998; Tage, 2000; Virum, 1993) allowed us to define logistics
outsourcing as the fact of entrusting all or part of the logistic chain, whose
activities were previously performed in-house, to an external supplier on the long
run, with a potential transfer of resources and with an objective of performance.
This definition, including a strategic dimension thus makes outsourcing different
from the concepts of subcontracting, contracting out and so on which are often
considered close or equivalent to it. According to Tage (2000: 113), it
―presupposes that several characteristics are fulfilled before the relationship
between buyer and seller‖ such as ―a certain duration, joint efforts to develop
further cooperation, a customerization of the solution, together with a fair sharing
of benefits and risks‖.
Beyond some conceptual and semantic differences of opinion, it seems more
interesting to note that these practices are in keeping within the paradigm of
intercorporate relationships incurred by the restructuring of economic activities.
Faced with the pressure of uncertainty and their environment, firms have
transformed and new structures combining flexibility and dynamism have sprung
up. Outsourcing practices have thus emerged as hybrid cooperation forms
situated along a continuum between the market and the hierarchy.
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CHAPTER 6
PROFITABILITY FACTS
A Study of the Dairy Industry in India
Impact on profitability
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CHAPTER 6
PPROFITABILITY FACTS
Determinants of Small‐Scale Farmer inclusion in Emerging
Modern Agrifood Markets:
6.1 A Study of the Dairy Industry in India
Summery
In response to structural transformations taking place in the Indian dairy sector
mainly inprocessing segment this article examines determinants of market
channel choices of milk producers based on a survey of 390 farm
households in 2007. It also attempts to investigatewhat impacts these market
channel choices may have on farmers‟ income and technologyadoption. A
two‐stage multinomial logistic model is employed to investigate determinants
andeffects of market channel choices of milk producers. While modern marketing
channels haveemerged in the Indian dairy sector, the traditional sector is still
dominant. Farmers sell nearly85 per cent of milk to traditional channels. The
share of the modern organized sector isgrowing but at a slow pace. The
dominance of the traditional channel is an indication of avery competitive and
cost‐effective traditional market in linking producers and consumers. Itis possible
that high transaction costs also act as a barrier. However, issues of hygiene
andquality of milk being sold through traditional channels require attention.
Results indicatethat small dairy farmers and the poor are mostly excluded from
modern private sectorchannels. Household‟s socio‐economic variables (farm
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size, age and education) areimportant determinants of marketing channel choice
in the case of the modern privatesector. Large farmers have better opportunity to
participate in modern private channels.
Market infrastructure such as road, provision of veterinary services, distance
from milkcollection centre, markets, milk collection centers, price risks, etc. have
significant effect onfarmers‟ marketing choices. thateducation, membership of
producers‟ association/cooperatives, provision of veterinaryservices, and farm
size have significant impact on cooperative marketing channel farmers‟income
while in the case of modern private sector, education and price risk have
significantimpact on income.
In 1991, the government of India liberalized its markets leading to fundamental
changes inthe agri‐food sector. The structural adjustment and stabilization
programmes substantiallyreduced controls and state interventions in the
agricultural sector and encouraged andfacilitated foreign direct investment (FDI).
This resulted in new investments in some sectorsof the Indian agri‐food system,
particularly in food processing and retail distribution. Sincethen, rapid changes
have taken place in the structure and governance of agri‐food markets,including
consolidation, institutional, organizational, and technological transformation,
andmultinationalization. These changes are occurring very rapidly in many
developing countriesand are bringing rapid changes in the organizational,
institutional and technologicalpractices all the way ―upstream‖.Some agribusiness
and food processing companies, often as part of their own restructuring,have
introduced modern procurement systems like contract relationship with farmers
toprovide basic inputs in return for guaranteed and quality supplies and
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distribution strategiesthat have impacted institutional, organizational and
technological aspects of the agri‐foodsupply chain. The modern supply chains
provide both new opportunities (price and volumestability) and new challenges
(quality and food safety standards, continuous supply). Socioeconomicfactors
(income, population, tastes, and preferences) on the demand side andsupply
side factors such as trade liberalization, privatization, and modernization of
agroprocessingand retailing sectors are major drivers of changes.There have
been growing concerns on the likely impacts of these changes on
smallholderproducers in developing countries. Modern retail chains, particular
supermarkets, havebeen emerging in many developing countries since the early
90s (Reardon, et. al., 2005;Balsevich, et. al., 2006). Changes have also occurred
in food processing, wholesaling, andprocurements (Reardon and Timmer, 2007).
Previous studies show that increase insupermarkets could have serious
distributional impacts in the downstream of the marketchain. Studies in Latin
America, Central and Eastern Europe, Mexico, Brazil, and Kenyasuggest that
mainly large and wealthy farmers benefit from the rise of demand for
highvalueagriculture and emergence of supermarkets (Reardon and Timmer,
2007; Berdegué, et.al., 2005; Schwentesius, et. al., 2002, Dries and Swinnen,
2004, Hu, et. al., 2004 ). Because ofthe high transaction costs involved with
dealing with millions of small farmers anddifficulties in ensuring quality and food
safety, supermarkets prefer to deal with large andbetter‐off farmers. As a
consequence, there could be possible adverse consequences forsmall, poor
farmers (Reardon and Timmer, 2007).Very few studies have been done in India
on the impact of supermarkets and marketingchains on production and marketing
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at farm level. Some recent studies have providedanecdotal evidence of
smallholder producer participation in modern market channels (Joshi,et. al.,
2007, Sharma, 2007; Birthal, et. al., 2007). However, these studies are in scope
ongeographical coverage, commodities, and market channels. Some household
survey basedstudies in other developing countries provide mixed evidence.
Some studies have shownthat modernization has benefited largely large farmers
and excluded smallholder producers.On the other hand others indicate that
modernization indeed can have a positive impact onsmallholder producers.
This article contributes to the literature on farm‐level impact of changing market
structuresin the dairy sector in India. This objective is: what has been response
of smallholderproducers and processors to changing modern dairy supply chains
in India? morespecifically:
What are determinants of smallholder dairy farmer participation in modern
supply chains? Key hypotheses to be tested include: small and poor
producersare often excluded from modern market channels; market
infrastructure,incentives, and risks have significant impact on farmers‘
marketing decisions andchoices; and institutional factors such as farmers‘
associations facilitateparticipation in modern marketing chains.
What is the impact of participation on farmers‘ income, production,
technology choices, etc.? Major hypotheses to be tested include: there are
significant impacts of farmers‘ marketing choices on their income, scale of
operation/herd size, and technology adoption. The results presented in
this articler are based primarily on interviews with key personnel in the
organized private, public, and cooperative and unorganized milk
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processing and marketing sector and data from a survey of 390 dairy
producers. The dairy sector in India provides an interesting picture for
different reasons. First, India is the largest producer of milk, contributing
about 15 per cent of world milk production (MoA, 2006). However, the
organized dairy industry accounts for less than 15 per cent of the milk
produced and less than 1 per cent in global trade for dairy products.
Second, the per capita supply of milk in India is low compared with world
average and nutritional requirement, creating opportunity as well as need
to strengthen the dairy sector from nutritional point of view. Third, given
the low level of processing, several players are making forays into the
dairy market. New players include global majors such as Danone,
LandoLakes, and Kraft Foods. Among the existing players, besides
Nestle, Coca‐Cola, Pepsico, Reliance Retail, Bharti, etc. intend to enter
into the liquid milk market, while the cooperatives‐GCMMF (Amul) and
NDDB (Mother Dairy)‐are looking at the possibilities of entering global
markets to improve profit margins. Furthermore, the combination of lower
milk supplies in neighboring markets in South and South East Asia and
the Middle‐East and the implementation of regional and free trade
agreements also provide growth opportunities for the Indian dairy sector.
Changing Structure of Indian Dairy Sector
Before 1991, dairy processing was controlled by the government through
licensing and wasmainly reserved for cooperatives. About 117,575 dairy
cooperative village societies,involving about 12.4 million farmer members (out of
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which 3.2 million are women), hadbeen organized by March 2006 to supply milk
to processing firms. Beginning 1991, as part ofdomestic economic reforms and
commitments to WTO, the dairy sector was liberalized in aphased manner. On
the supply side, the sector was deregulated and trade was
increasinglyliberalized. Following decontrol, many private players entered the
market and set up milkprocessingfacilities, mostly in milk surplus areas. Some of
the private sector plants alsoadopted the cooperative model by creating informal
contracts with local farmers andproviding inputs and services to farmers.
However, in 1992 because of pressure from theindustry, some restrictions were
brought back under the Milk and Milk Products Order(MMPO 1992). Another
major development was the removal of restrictions on import andexport of dairy
products in mid 90s.These changes have had major impacts on the structure of
milk production and upstreamsegments of the dairy value chain. The number of
private milk processing plants increasedfrom 250 in 1996 to 403 in 2002 (about
10 per cent increase per year), while that ofcooperative milk processing plants
increased from 194 to 212 (nearly 1.5 per cent increaseper year).
In contrast, the number of plants under government milk schemes,
governmentowned,and mother dairies) declined from 65 in 1996 to 63 in 2002
(Sharma and Singh, 2007,MoA, 2006). The installed capacity in the private
sector has increased from 24.4 millionlitres per day in 1996 to 32.4 million litres
per day in 2002 (about 5.4 per cent increase peryear). In the cooperative sector,
installed capacity increased from 24.2 million litres to 28.3million litres per day
during the same period (2.9 per cent increase per year). However,cooperatives
witnessed an increase in average installed capacity per plant from 125 000litres
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per day in 1996 to 134 000 litres in 2002. Average installed capacity of
governmentownedplants and mother dairies increased from 112 000 litres per
day to 193 000 litres perday between 1996 and 2002. In private sector plants, a
marginal decline in average capacityper plant (from 98 000 litres to 80 000 litres
per day) was witnessed. The possible reason forincrease in installed capacity in
cooperatives and government plants could be their longpresence in the sector
and strong backward linkages with milk producers to have consistentsupplies of
raw milk. In case of the private sector, most of these players are new entrantsand
are not willing to make big investments at first go owing to lack of assured supply
of rawmilk.Bowing to pressures from different quarters, the government amended
MMPO in March2002 and removed all restrictions on setting up new milk
processing capacity. In addition, itallowed foreign direct investment (FDI) in the
dairy sector in the early 2000s. The new policyfully exposed the Indian dairy
sector to market forces. The milk processing and marketingsector witnessed
significant expansion and new investments in the 2000s. The number ofmilk
processing plants in the private sector increased from 403 in 2002 to 493 in 2006
(5.6per cent increase per year), while the number of cooperative milk processing
plantsincreased from 212 to 246 (nearly 4 per cent increase per year) during the
same period. Incontrast the number of plants under the other category
(government milk schemes,government owned plants and mother dairies)
declined from 63 in 2002 to 50 in 2006.Installed capacity in the private sector
increased from 32.4 million litres per day in 2002 to46.1 million litres per day in
2006 (about 7 per cent increase per year). In the cooperativesector, installed
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capacity increased from 28.3 million litres to 36.6 million litres per dayduring the
same period (4.8 per cent increase per year).
At the national level, the number ofdairy processing plants increased from 678 in
2002 to 789 in 2006 and installed capacityincreased from about 73 million litres
per day to 98 million litres per day in 2006.Recently, many national and global
players have evinced interest to enter the sector and areexpected to make huge
investments. Reliance plans to procure milk directly through itscollection centre
networks mostly in Punjab (high potential state) and is likely to expandoperations
to Rajasthan and Andhra Pradesh. Existing players such as Amul, Nestle,
andMother Dairy are also planning capacity expansions. However, the question
which isbothering policy makers and other stakeholders is: Will the entry of
corporates guaranteebalance between market forces and societal concerns in
rural India? There is also a fear thatforeign and domestic retail biggies and
modern supply chains will push a large section offarmers, in particular
smallholder producers out of the market as they mostly fail to meetthe quality
threshold requirements. Transaction costs are also high in coordinating
suppliesfrom a large number of small producers. Small farms are also
constrained financially formaking investments in infrastructure and post‐harvest
activities. Currently the organizedsector accounts for about 30 per cent of total
milk marketed, making the sector much moreattractive to new entrants. With the
entry of new players, the share of the organized sectoris expected to almost
double in the next one and a half decades (Sharma and Singh, 2007).Given this
scenario, the timing for entry of retail biggies and other dairy companies and
theirimpact particularly on smallholder producers, who form the backbone of the
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sector, isworth studying.It is evident from the results of meso‐report (Sharma and
Singh, 2007) that restructuring ofindividual dairy industry segments, mainly in
production, procurement and processing, isoccurring in simultaneous and
interdependent ways, albeit at different rates and in differentways across states.
The study identified challenges facing primary producers and theireconomic
organizations in negotiating market access conditioned by liberalization and
modernization include technological, organizational and financial demands
placed on smallscalefarmers. The study pointed out that it is important to analyze
changes in procurementpatterns for milk as a result of the recent policy changes
and also know whether large scaleproducers have cost advantages and higher
efficiency that will lead to the displacement ofsmallholders under a liberalized
market. In order to investigate some of these issues microlevelstudy was
undertaken in four states, namely, Punjab, Haryana, Uttar Pradesh andGujarat,
which have strong presence of modern (coops and private) as well as
traditionalsector are major restructuring in agrifood markets is taking place in
these states.
Using a sample of milk producing households, a market participation model is
estimated toexplain why some households engage in a particular marketing
channel while others do not. If we also focus on identifying factors that
significantly increase the level of participation inmodern supply chains by
households.To study the impact of changing market structure on market channel
choice, scales ofoperations in milk production, livelihoods, and welfare of rural
households, one needs asample containing a sufficient number of households
representing various scales of operations geographical regions, and market
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channels. In selected 390 households in nine districts of four leading milk
producing states, namelyGujarat, Haryana, Punjab, and Uttar Pradesh having
well developed infrastructure and a mixof milk marketing channels.
Milk Marketing Channels
In India, all forms of marketing channels exist in the dairy sector. These include
modern/organized (cooperatives and private dairy plants) and
traditional/unorganizedsectors comprising marketing of liquid milk and traditional
products such as locallymanufactured ghee (butter oil), paneer (cottage cheese),
and indigenous products likesweets. In 2004‐5 out about 40 million tonnes of milk
(48 per cent of total production) wasretained in the villages itself and 44 million
tonnes were (52 per cent) sold in urban areas.Out of 44 million tonnes of
marketed surplus, the share of the organized sector(cooperatives and private
sector) is small (30 per cent). A large portion (about 70 per cent)of milk continues
to be marketed through traditional channel(s).Depending on the involvement of
market intermediaries in marketing of milk from producerto consumer, major
marketing channels. Thepredominant traditional marketing channel is from
producer to milk vendor/trader toconsumer. However, some farmers also sell milk
directly to consumers in the village itself ornearby villages. Milk marketing
cooperatives, is another marketing outlet available tomember‐producers.
Cooperatives are owned by members ‐ milk producers, who participatein the
cooperatives with the principle of ―one member, one vote‖, independent of the
levelof their investment, ownership of shares, and volume of milk supplied.
Cooperativestransfer their entire income to farmers, after taking out operating
expenses. Farmers aregiven a minimum procurement price for milk on a butter
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fat and solid‐not fat (SNF) basis. Inthe case of traditional channels, milk vendors
pay for milk mostly on a butter fat basis (inmany cases a flat rate irrespective of
fat content) with little or no consideration for thenonfat solids content. The
organized private sector also procures milk directly from farmers.The share of the
private organized sector is small but is increasing owing to the liberalizationof the
dairy sector.However, downstream restructuring has not penetrated into farm
procurement. Farmers‘milk marketing channels in the study area are still
dominated by the unorganized sector.Nearly two‐thirds of milk is marketed
through traditional supply channels, while modernchannels, which include
cooperatives and private companies, account for about 36 per cent(Figure 3).
The share of the cooperative sector has increased marginally from 22.2 per
centto 22.6 per cent between 2002 and 2006, while the share of the organized
private sector hasincreased marginally from 14.4 per cent to 14.7 per cent. As
the traditional sector handlesthe largest share of unprocessed milk marketed in
India, the entities that process and sellfluid milk to consumers in each
region/state varies. For example, most of the milk producedin the northern region
flows from dairy farms to traditional channels, while in the westernregion dairy
cooperatives procure and process most of the milk and distribute to
consumersthrough retail outlets. The share of cooperatives in the selected states
varies from less than5 per cent in Haryana and Uttar Pradesh to as high as 72
per cent in Gujarat; the share ofthe traditional sector varies from nearly 10 per
cent in Gujarat to over 90 per cent in UttarPradesh and that of the organized
private sector is highest in Punjab and lowest in Gujarat.The results of the micro
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household study on milk marketing channels support the findings ofthe
meso‐level analysis (Sharma and Singh, 2007).
In the traditional sector, milk vendors/traders handle the largest volume, implying
that smallmilk traders are more effective in procuring and marketing milk from
smallholder dairyproducers. However, despite health risks associated with
consumption of unhygienicunprocessed milk and dairy products marketed
through traditional channels, the traditionalsector is still predominant. The
number of intermediaries has a bearing on both producerand consumer milk
prices. It is expected that shorter the channel more likely consumerprices will be
lower and the producer will get a higher return. However, milk producers maynot
necessarily benefit from a short marketing chain, modern channels may be
paying thefarmer almost the same price as traditional channels. However,
farmers sometimes preferselling milk to milk vendors because factors such as
prompt payments (sometimes inadvance) and inaccessibility to formal market
outlets such as producer cooperatives ororganized private milk processing units.
The biggest disadvantage of traditionalchannels/milk vendors is lack of quality
control and frequent adulteration of milk with waterand other chemicals.
There is growing consumer awareness of food safety and quality issues.
Demand for milkand dairy products is increasing in the country due to rising per
capita income, changingdietary patterns and lifestyle, and demographic changes.
This explains why, following theliberalization of the dairy industry, the share of
modern channels (cooperatives and private)has been on the increase.
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Channel Participation and Growth for Smallholder Producers
In order to analyze the effects of participation in modern dairy channels on the
growth of Small holder farmers, it was analyze changes in herd size and breed
upgradation over theperiod 2002‐06. As indicated earlier, this is the period during
which all restrictions on entryof the private sector in milk processing including
milk shed area concept were abolished. Weinclude two size dimensions ‐ number
of dairy animals and milk output volume ‐ and on upgrading dimension ‐ share of
improved breeds and milk yield.The statistics of growth indicators and
upgradation over the period 2002‐2006. In both channels there is a shift towards
larger herds with a higher percentage of more productive crossbred cows. The
average herd size is highest (11.2 animals) in modern
private channel farms, followed by traditional channel farms (7.2 animals) and
cooperatives(6.4 animals). The share of improved crossbred cows has increased
in all channel farms but increase is highest in the case of cooperative channel
farmers. Average productivity peranimal has increased by about 5 per cent in all
three types of farms, while in the case of buffaloes yield increase is higher in
modern private and traditional channel farms. Increasei n productivity is higher in
the case of cows compared to buffaloes. This implies that farmers have started
replacing low‐producing traditional breeds with high‐yielding cross bred animals
because of availability of the breeding services.
Milk output volume has increased in all farm types; it increased more in
traditional channel farms, followed by organized private channel farms and
cooperatives. Although average marketed surplus has increased for all farmer
types, it increased more for dairy farmers in the cooperative channel, followed by
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traditional and modern private channels. Cow milk price has increased by 28.7
per cent in the case of traditional channel farmers while buffalo milk price has
increased by about 12 per cent. There has been a moderate increase in milk
prices but is higher in the case of the private sector than cooperatives.
Factors affecting Market Channel Choice
Milk producers use different market channels for their output. They sell to
traditional channels such as milk vendors/traders, sweetshops, directly to
consumers, village dairy cooperative society milk collection centres, and milk
collection centres of organized private sector dairy plants. The largest share of
milk is sold to traditional channels comprising mainly milk vendors, while sale to
modern chains (cooperatives and private) is low but increasing. Farmers may
use more than one market outlet but in different degrees and perhaps for
different purposes.
Market access is not uniform across different categories of households because
of different transaction costs (distance to roads, markets, towns, transport
facilities, etc.) to market participation, risks associated with prices and contract
arrangements, human capital (age, education, gender, extension, training),
physical capital (number of dairy animals, farm size, farm assets), and financial
capital (income from crop and off‐farm income). Geographical markets may
likewise be differently integrated into the local/national/global economy because
of spatial difference in costs of commerce, in the degree of competition among
market channels or both. In general the farmer first decides to participate in the
market when it is profitable to do so, and then decides on how much to sell and
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to which channel. The above factors affect profitability by affecting marketing
costs.
Transaction Costs
In general, we expect that farmers with lower transaction costs are more likely to
participate in modern channels and sell higher quantities. Thus we expect
farmers having easy access to milk collection centres, living near roads, markets,
towns, and having better transportation facilities to participate in modern markets.
Smallholder producers face high transaction costs, and this reduces the
opportunity of participation in modern markets. Given the transaction costs
encountered when using the input and output markets, a solution for the
individual farmers would be to cooperate with other farmers for various farm
activities. Indeed the advantage of organizing farmers into groups is widely
acknowledged in the literature. The advantages comprise the reduction of
transaction costs in accessing input and output markets and strengthening of the
negotiation power of the farmers.
Human Capital We expect age to be negatively associated with modern market participation, as
older households tend to have more subsistence production activities and are
risk averse. Education and extension are expected to have a positive impact on
market participation since both enhance the skills and ability to meet food safety
and quality requirements of modern channels and better utilize market
information, which may reduce marketing costs and make it more profitable to
participate in modern market channels.
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Physical Capital
We hypothesize that larger the farm, greater the probability that the grower will
opt for the modern channel. Physical assets such as land, herd size, and farm
assets may have an indirect positive impact by enabling farmers to overcome
credit constraints, where land can be used as collateral for getting institutional
credit for adopting improved technologies that increase productivity and
profitability.
Financial Capital
Financial capital is expected to have mixed impacts. For example credit for dairy
activities is expected to have positive impact, while that given for crop farming
and other activities mayraise the opportunity cost of dairy production, hence
reducing participation in modern markets. Other assets that we hypothesize to be
important in participating in modern market channels include sources of off‐farm
income to serve as risk management mechanism to balance the initial risk of
selling to a traditional channel and providing finance for working and investment
capital.
Conclusions
Dairy Market Restructurings
While modern marketing channels have emerged in the Indian dairy sector, the
traditional sector is still dominant. Farmers sell nearly 85 per cent of milk to
traditional channels. The share of the modern organized sector is growing but at
a slow pace.
Consistent with the findings of the local meso study, the rapid restructurings of
down stream dairy processing and to some extent wholesale and retail markets
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have not penetrated into farm procurement. Overall, milk sold directly to modern
channel accounts for less nearly 15per cent of the marketed surplus. The
dominance of the traditional channel is an indication of a very competitive and
cost‐effective traditional market in linking producers and consumers. It is possible
that high transaction costs also act as a barrier. However, issues of hygiene and
quality of milk being sold through traditional channels require attention.
It was found that there was no significant difference between modern dairy
channels and traditional dairy channels in terms of herd size, milk output volume,
and price as well as in terms of upgradation with respect to improved breeds and
productivity. However, it was found that relative growth in terms of output volume
outstripped relative growth in upgradation .This indicates that farmers have been
able to make efficient and effective use of new technologies and management
practices as well as scaling up herd size.
Determinants of Farmers’ Marketing Choices
Small dairy farmers and the poor are not excluded from cooperatives but are
excluded from modern private sector channels. There is evidence of herd size
affecting the farmer‘s choices of selling their produce to modern channels. In
case of cooperatives, large farmers are opting out and shifting to either the
modern private sector or the traditional sector as they receive price incentives for
large supplies. Large farmers have better opportunity to participate in modern
private sector channels .Age and education are important determinants of
marketing channel choice in the case of the modern private sector. Young and
more educated farmers have better chances of inclusion in the modern private
sector channel. Market infrastructure such as road, provision of veterinary
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services, distance from milk collection centre, markets, milk collection centres,
price risks, etc. are found to have significant effect on farmers‘ marketing
choices.
Impacts of Marketing Restructurings and Marker Channel Choices on
Farmers
The result show that education, membership of producers‘
association/cooperatives, provision of veterinary services, and herd size have
significant impact on cooperative marketing channel farmers‘ income while in the
case of modern private sector education and price risk have significant impact on
income. For traditional market channel farmers, dairy income is significantly
determined by price riskand herd size. Modern market channel farmers have
higher dairy income than traditional channel farmers, which is explained by
higher yields obtained by modern channel farmers but they receive lower prices
than traditional market channel farmers.
6.2. Impact on Profitability
“At war with rising Fuel Cost Pressures” With fuel prices touching all-time
highs, logistics companies are working towards devising solutions & mechanisms
to reduce operations costs & implement innovate methods to streamline available
resources. Banking on technology & efficient use of the available resources,
companies have been able to curb the increasing logistics for the time being.
How companies will manage the evident rising cost pressure in the long run,
however, remains to be seen.
Fuel accounts for 50-60% of the total logistics cost and any increase in fuel
prices tends to directly impact the logistics sector. Amid this, petrol prices have
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been increased steeply by the Centre from May 2012. This price fluctuation has
directly impacted the logistics sectors in its different formats. Commenting on the
impact Abhisek Chakraborty, Executive Director, DTDC Courier & Cargo Ltd,
avers, ―Fuel price definitely has an impact on our business, as we use an
extensive ground transportation network. We also depend on the aviation sector,
for many of our Air Express products, which are also affected by the increase in
fuel prices. Moreover, it results in regional & national trunk route prices going up,
which directly hits our bottomline‖
Though traditional warehousing companies have been hit by this price
fluctuation, some have not been directly affected. Elaborating on the same,
Aditya Bafna, Executive Director, Shree Shubham Logistics Ltd ( SSLL),
highlights, ―Being an agri-logistics company, we are not directly affected by fuel
price hike. Generally, an increase in thecost is passed on by the depositors to the
end consumers. Hence, we are not linked or affected with the increase or
decrease in fuel price, as we do not provide transportation services‖.
Passing the Cost: A Solution ?
Though many companies have increased their prices, many have been working
inwardly to sort our operational issues that were creating huge cost burdens. The
fuel price pressure has resulted in such companies relooking at their operating
cost sheets and working out innovative as well as conventional solutions to tackle
the increasing cost pressure. Chakraborty asserts, ―We make an effort to limit the
impact of such price hike by relooking at our operational footprint and finding
ways to further optimize our resources by reorganizing or restructuring our
operations. However, when fuel hike crosses a certain mark, we are left with no
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choice but to pas on a share of it to the customer. A common practice in Express
Industry is to apply a fuel surcharge that is charged to the customers and varies
with the fuel price increase.‖ At SSLL, various initiatives like controlling cost on
account of transportation by ensuring all the services including weighing, grading,
testing, & certification, packaging & distribution, storage ( dry & cold), disposal
services through electronic platform, export trading & retail opportunities are
completed under one roof, to avoid multiple handling of stocks. In addition, the
company is working with NCDEX, one of the leading commodity exchanges,
where they have launched fungible contracts that is traded both in spot & future
(market simultaneously) & vice, versa, thereby avoiding cost to transportation &
loading & unloading of commodities. SSLL is also creating awareness among
those farmers, who are unaware of the commodity grading & proper standards of
delivery mechanism, and is helping them reduce transit cost by providing all agri-
logistics services under one roof. When it comes to innovation in curbing cost,
DTDC is a step ahead. Chakraborty stated, ―The nature of our business offers no
significant scope for the use of alternate fuels. We have switched over to CNG
for many of their vehicles. CNG not only works out as a relatively cheaper fuel
option, but also helps get better mileage. Moreover, its price tends to fluctuate
less and it is environment friendly.‖ On reducing cost for the last mile, heads, our
ground transportation network is dependent on all traditional modes of
transportation. However, a significant portion of our local deliveries managed by
DTDC‘s channel partners are being done on bicycles. This last-mile delivery
initiative of the channel partner network helps control costs.‖
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Technology: The Cost Saver
With companies working on internal processes and operations, technology has
also been widely used to curb repeat costs. Bafna asserts, SSLL has a
scientifically upgraded cold storage system with updated technology, they use
polynum insulation in all their warehouses, which helps maintain the temperature
and thus protects and preserves the stocks, thereby ensuring its quality. They
have NCDEX accredited warehouses, which provide depositors, like traders,
farmers and agri-retail sellers, the opportunity to sell their produce directly on the
exchange platform, this in turn reduces the cost of transportation and ensures
that they fetch a better price.
At DTDC overall strategy to cope with the fuel price hike has been to reduce the
overall mileage they clock. Technology plays a vital role in implementing it as
their fleet vehicles are now GPS enabled this helps them track & optimize
consumption, routes and curtail wastage, many consumables such as stationery
and office supplies are linked to fuel cost, so they try to optimize their
consumption within the organization. Additionally to further reduce the cost of
shipping most of these items, they have decentralized the purchase process &
switched over to a local purchase & distribution mechanism monitored by their
SAP technology.
All these measures have helped the company bear the price rise, for now. As per
experts structured and systematic methods of management need to be adopted
by logistics companies, Besides reduction of transaction & networking costs will
also help partially bear the burnt. Though increase in the fuel price has prompted
companies to identify the missing links and create internal cost cutting points,
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further increase in fuel cost will start directly affecting the cash registers of
logistics companies. It remains to be seen on which path the Indian logistics
industries is headed on cost graph in the long run with the continuous streak of
fuel price hikes in the backdrop.
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CHAPTER 7
FOOD PROCESSING INDUSTRIES
PROMOTING FOOD PROCESSING INDUSTRIES
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CHAPTER 7
FOOD PROCESSING INDUSTRIES
Processing Industries
Meat, Fish and Poultry have been part of human diet since antiquity. As the
civilization advanced, man understood the importance of meat in human nutrition.
Modern Science has unraveled the mysteries of the biochemistry and the
microbiology of Foods of Animal Origin. The knowledge on meat has slowly
started percolating into the public life. As the people are becoming more Science
Conscious, the religious taboo attaché to meat is slowly dwindling.
India has the largest livestock population among the World countries. The
livestock is playing a key role in the Socio – Economic upliftment of the country.
The potential of Indian meat & poultry Industry can be seen from the phenomenal
growth of livestock over the past three decades. The consumption of meat is on
increase in the domestic market. Revenues from the export of meat, poultry and
by products have substantially increased in recent years. Further, globalization of
Indian business created ample opportunities and potentialities for the export of
meat and poultry products. Government of India has recognized meat, fish and
poultry as one of the important sectors in the food industry.
Consumer's outlook is changing towards quality meat and meat products. The
challenges before the Indian meat and poultry Industry are disease control in
livestock, improvements in hygienic status of meat, effective recovery and
effective utilization of by products and value addition to meat. To achieve these
targets, knowledge base human resource is imminent and assumes greater
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significance during production, processingpreservation and distribution of animal
foods. There is a dire need for exposing the personnel engaged in the meat and
poultry industry to the modern meat processing concept and methods available in
the R & D Institutions in India.
Meat Fish & Poultry Technology
Livestock is an important segment in the Indian agriculture from the point of its
contribution to the Gross National Product (GNP) as well as the employment
potential in rural areas. Livestock sector contributes at current prices Rs.1,
30,233 cores (milk group Rs 90,538 crores and meat group Rs 20,856 crores) as
output to total agriculture (1999- 2000). A survey in rural India by National
Sample Survey Organization (NSSO) of the Government of India highlighted that
livestock activities were preferred by over 90 % of small cultivator and wage-
earning farmhand (non-cultivator) households, as a source of supplementary
income. Animal husbandry farming systems can contribute significantly in the
rural upliftment through providing (1) higher and more stable income, (2) more
opportunities for gainful employment and (3) food products. People are becoming
more aware of the nutritional value of livestock products (milk, meat, poultry and
eggs). Organization and development of livestock sector in rural land would meet
the local needs, urban requirements and export demand. Thus, livestock sector
will boost up the socio-economic status of the country.
The Government of India has recognized meat, fish and poultry sector as one of
the important food industries. New economic policies created ample enterprise
opportunities for business community and challenges for the researchers in
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meat,fish and poultry sector in India in recent years. Certain multinational
companies of repute areactively engaged in meat and poultry business in India
and they are channelizing their marketing outlets to international markets. The
scope o for small and medium entrepreneurs is equally good to cater to the
needs of people in domestic market. New industrial policy has depended the
windows to the international trade house to enter into Indian market. To meet the
above challenges, meat, fish and poultry sector need to be strengthened in rural
areas with a view to reach the benefits of the industry to the rural poor and
weaker sections.
Improved methods of production, processing, packaging and preservation,
HACCP (Hazard Analysis and Critical Control Points) concept, GMP (Good
Manufacturing Practices), Chilling, Freezing, IQF (Individual Quick Freezing),
Irradiation, Modern processing techniques, Emulsion technology, High pressure
technology, Fermentation, Hurdle technology and MAP (Modified Atmospheric
Packaging) are gaining importance in improving quality, safety and value addition
to meat, fish and poultry.
Production of meat and poultry
India has the largest livestock population in world. Goat, sheep, poultry, pigs,
cattle, buffaloes and poultry are the major meat animals. India possesses 3600
registered traditional slaughter houses, 20 modern abattoirs, 220 meat
processing plants under MFPO and 7 pork processing units.Goat, sheep, poultry
and pigs are mainly slaughtered for domestic consumption. Meat from cattle and
buffaloes is mainly for export. Slaughter takes place in licensed slaughterhouses
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and clandestine slaughter is also prevalent. Estimate put the red meat production
in India at 4.3 million MT .The increase in meat productionover the past 16 years
is around 45 %. Cattle and buffaloes, though not reared for meat production, are
brought for slaughter after the completion of their much or, draught period. With
partial ban on cow slaughter, buffaloes are emerging as prospective meat
animals and they occupy a place of prominence in meat production. The per
capita availability of red meat is 4.0 kg per person per year and is very low as
compared to developed countries.Subsidized programs and incentives given by
government in recent years for development of sheep, goat and buffalo, are the
indications of emerging organized meat production on a sound footing. Rabbit,
quails, turkeys and ostrich are emerging as important sources of meat. New
business scenario in India has tremendous impact on Indian meat industry. It is
estimated that meat production will be 7.0 million tons by 2010 AD and 10.0
million tons by 2015 AD as against the demand of 13.0 million tons by 2010 AD
and 16.0 million tons by 2015 AD. This emphasizes the need to augment the
production of meat through increased rearing of animals. The buffalo meat has
demand in the export market too.
Poultry industry is well organized in India. There has been a phenomenal
increase in poultry production in the past three decade India is the fifth largest
egg producer in the world The annual egg production is 44 billion and poultry
meat production is 1.59 million tones. The annual growth rate of production of
eggs and poultry meat is 4.8 % and 10.0 % respectively. India ranks 5 in egg
production and 15 in poultry meat production in the world. Eggs and poultry meat
are the well- accepted sources of animal protein. Almost 75 % of eggs and
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chicken meat are consumed in urban and semi-urban areas. Bulk of the
commercial poultry farms is located in cities,urban and semi-urbanareas. The
national per capita availability of eggs is 35 and in urban areas and it is as high
90 - 100 in metro cities, while in rural areas it is barely 10 - 12. Poultry meat is
high in protein, low in fat, low in cholesterol and provides vitamins and trace
elements. Per capita availability of poultry meat is 521g.
Modernization of abattoirs and meat processing plants:
The quality of meat produced in the existing slaughterhouses is far from
satisfactory, unhygienic and carries high levels of microbial contamination.
Though Indian way of cooking kills many of the micro organisms in meat, cross-
contamination of the products eventual‖ occurs under the prevailing conditions of
meat handling. Recovery of by-products is poor in the existing slaughterhouses.
Enormous quantities of by-products are wasted. It is therefore necessary to
improve the conditions in the slaughterhouses or to establish small sized or
medium sized modern or semi-modern abattoirs in metro cities, urban, semi-
urban and rural areas and also bring improvements in meat handling practices,
recovery and effective utilization of by-products and waste treatments for
pollution control.
Processed and convenience products these are the prepared products (ready-to
cook, ready-to-eat and ready-to-serve) or the products that may require less time
for preparation. They provide convenience to the consumers. It is an exciting
area for enterprise. A quantum of 30,000 MT of processed meat products valuing
around Rs. 50 crores is produced annually in the country. The trend for
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consumption of processed meat products is increasing in domestic market.
Export of processed meat products is also increasing. New export policies
contemplated would boost up the export of processedmeat products to various
countries. The processed products include sausages, ham, bacon and canned
products. Traditional products such as tandoori chicken, kabab, tikka, meat fry,
meat curry, kheema, biryani, meatballs, korma and pickles are consumed in large
quantities in the country. These products will find a place in export market for
ethnic groups. Consumers‘ outlook has changed in traditional meat preparations.
They need these products in convenient form. Thus kitchen products are being
transformed into market oriented convenient product in the years to come.
Recently fast food restaurants are mushrooming in urban and metro cities in
India.
Indian processed and traditional products are becoming popular in the fast food ‗-
―restaurants. Nirula‘s Pizza King and Whimy in New Delhi, Pizza Hut, Open
House, Hasty Tastes, Snowman, Sterlings and MacFast Foods in Mumbai,
Quabila and Touch in Hyderabad and Venky‘s Fast Foods, Pune are of the
popular mega fast food restaurants. The changing scenario in public like more
women going for work, wife and husband working, changes in life styles, desire
of younger generation for new tastes, small families, single person living alone,
migration of people from rural to urban and metro cities and the need of travelers
have increased the demand for processed and convenient meat and poultry
products. Further multinationals like McDonalds and Pepsi are coming in a big
way to establish fast food restaurants to market meat product
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The demand for the processed products is around 5 lakh MT in domestic market.
Export market is also bright for processed meat products. The outlets for
domestic market are fast food restaurants, cafeterias, hotels, airline, star hotels
and railways. Cost is the main constraint for popularization of processed and
convenience products. This can be solved by using cheaper meats, tough meat,
trimmings, vegetables and cereals for product development. Diversification to
frozen meat products (ready-to cook, ready-to-serve and marinated) is a new
facet and these products are easily accepted in export market. Some of the
processes and technologies developed at CFTRI would benefit entrepreneurs
and consumers and improve the meat business in India. There is a good
potential for processed meat products in the years to come.
Export of meat and meat products: Meat and meat products worth of around
Rs.1318.48 crores was exported during 2001-02 from India (Table 6). Frozen
buffalo meat is a major export item. The major importing countries are Malaysia,
UAE, Oman, Kuwait, YAR, Saudi and Bahrain. The country has exported animal
casings valuing Rs. 9.63 crores during 2001-02 to Netherlands, Spain, Japan,
Portugal and Germany. Bone based products worth of Rs. 50 crores and skins,
hides and leather worth of more than Rs. 10,000 crores are exported annually.
Acceding to Ministry of Commerce, the potential for export of buffalo meat will be
of the order of Rs. 10,000 crores. Construction of export oriented modern
abattoirs with quality assurance systems is essential for production of hygienic
meat to meet international specifications.
Meat packaging: Most of the meat sold in India is in unpacked form. Meat is
packed only in some organized meat factories, in Bacon factories and in export
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houses. There is an urgent need to bring awareness among met seller and
butchery community on the importance of packaging. Consumer forums should
insist on the sale of packed meat. Meat packaging plays a vital role ‗in marketing
and preservation of meat and meat products. The main purpose of packaging is
to protect the meat products from microbial contamination, light, oxygen and any
physical damage. A good packaging makes the products more appealing to the
consumer and provides longer shelf life to the product Simple packaging systems
(such as LDPE or shrink package) might be quite useful for domestic market.
Modern packaging systems like vacuum packaging, modified atmosphere
packaging (MAP) will boost up the export market.
By-products and wastes: Effective recovery and utilization of by-products is the
lifeline of the industry. This would not only reduce the cost of production and give
better economic returns to the producers but also reduce the problems of
pollution and health hazards. This is only possible if the infrastructural facilities
are improved in the existing abattoirs and scientific techniques are followed. By-
products constitute to an extent of 45 - 55 % of animal slaughter. Around 3.0
million tons of raw by-products annually fetch revenues more than Rs. 800
crores. The by-products are blood, head, legs, hide and skins, intestines,
stomachs, horn and hoof, glands lungs, liver, heart, oesophagus , tongue,
trachea, kidneys, testes, ovaries etc. Conditions in abattoirs are unsatisfactory.
Poultry slaughter also generates enormous quantity of by-products. By-products
are not fully utilized. It is estimated that there is a loss of 15 - 20 % due to non-
utilization and under-utilization of various valuable by-products. If scientific
methods of processing are advocated in abattoirs, better quality of skins and
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hides would be available to the leather industry. There are many by-products that
have medicinal values.
Each abattoir may not be able to afford its own processing unit. Therefore, by-
product collection from a number of abattoirs becomes necessary in order to
obtain economic quantities of inputs adequate to feed a processing plant.
Further, by-products are often wasted in rural areas due to lack of collection
facilities and ignorance of meat handlers on the value of by-products. It is
therefore necessary to establish rural and urban regional centre‘s for processing
of by-products. Conversion of by-products into value-added products is an
exciting area for fetching better economic returns. A few examples of value-
added products are leather goods, gelatin, casings, neat foot oil, catgut,
hemoglobin, insulin, hormones, enzymes, vitamins, collagen sheets, bone meal,
bone ash, blood meal, brushes etc. The wastes can be conserved by
inexpensive techniques such as ensilage and incorporated into animal feeds.
Modern biotechnological approaches would go a long way to convert by-products
and wastes into high value products.
Marketing :-There is no well integrated marketing system for meat and meat
products in India. The main reasons are monopoly of meat trade, lack of
coordination between production of meat and demand, too many middlemen in
the trade and inefficient management of slaughterhouses by municipalities.
Establishment of meat corporations would improve the marketing system so that
the consumers would get the quality meat and meat products at reasonable
prices. The improvements should centre around (1) organization of selling live
animals, (2) primary, secondary and tertiary processing, (3) transport, (4) storage
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and (5) retail sale. Human resource development: Meat industry is emerging as
one of the important food processing industries in India. Consumers are
becoming conscious of quality of meat and meat products, the right type of
manpower are vital for production of wholesome and safe meat and meat
products. It is imperative to develop appropriate manpower for handling
operations (butchers, operators, processors, supervisors and managers). The
personnel, viz., need to be exposed to scientific techniques and modern meat
processing methods to boost up the quality of meat and meat products. The
levels of training are to be designed depending on the needs of the industry.
Training facilities are available at CFTRI, Mysore, IVRI, Izatnagar and Veterinary
colleges.
Machinery and equipment : The machinery play vital role in the production of
hygienic meat. These machinery include equipment, instruments and tools. The
equipment for small sized units is at minimal. There is a need for organized
machinery set up for capacities of 100 large animals and 1000 sheep / goats per
shift per day. There is a great deal of mechanization in slaughterhouses
worldwide. The auxiliary machinery e.g. power hoist conveyor system, effluent
treatment plant, pump, chilling, blast freezer, frozen storage are indigenously
available. A few machinery e.g. power splitting pneumatic skinning knives and
brisket saw are to be imported. This sophisticated equipment can also be
manufactured in the country provided enough demand is there.
The improvements that the industry needs are (1) Improvements in the hygienic
status of slaughterhouses, fish processing units and poultry processing units
through modern or semi-modern systems by the application of modern
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processing methods, (2) Modern technologies in improving the eating quality of
meat and poultry, (3) Meat packaging and transport, (4) Methods to control
spoilage of meat and poultry, (5) Technology packages for processed meat and
poultry products, (6) Development of technologies for traditional products, (7)
Modern preservation methods for domestic and export market, (8) Recovery and
utilization of by-products by appropriate technologies, (9) Recycling of wastes
from slaughterhouses and poultry processing units and (10) Human resource
development.
Processing for Future
A special Reporton Ministry of food processing Industries- government Of India
Strengthening Infrastructure
“There has been a quantum jump in the fund allocation for the llthplan schemes including the scheme for
infrastructure development”.
The total plan allocation for 10thPlan was Rs.650.00 crore out of which Rs.
180.00 crore was earmarked for infrastructure development, whereas total fund allo-
cation for llth Plan Scheme is Rs. 4,031.00 crores out of which Rs. 2,613.00 crores is
earmarked for infrastructure development schemes. The scheme has three
components and break-up component wise of fund allocation is as follows:
1 Megha Food Park Scheme - 1575.00 crore
2. Modernization Abattoirs - 828.00 crore
3.Integrated Cold Chain Facilities- 210.00 crore
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As a result of concerted efforts and focused approach the food processing sector is
growing at an average rate of approximately 13.5% per annum. The level of processing
has gone up by about 4% from existing 6% to 10% and value addition by 10% from 20% to
30%.
MEGA FOOD PARK
In the llth Plan, the government has approved a new scheme to establish 30 Mega
Food Parks (MFP) in the country with a view to provide farm proximate state-of-the-art
infrastructure along the supply chain for food processing sector in the country on a
pre-identified cluster basis with a strong backward and forward linkage and to provide
value addition of agricultural commodities including poultry, meat, dairy, fisheries
etc.in a demand driven manner. Theseparks will be owned, operated and
maintained by a Special Purpose Vehicle (SPY) which would be a body corporate
consisting of individuals, firms, companies, banks/financial Institutions, farmer groups,
NGOs.
Pattern of Assistance
Government or government undertakings, etc. The government will provide financial
assistance in the form of grant @ 50% of project cost excluding land component in
general areas and 75% in difficult areas subject to a maximum of Rs. 50.00 crores.
Government has approved 10 such parks to be taken for assistance in the 1st phase in
the States of Andhra Pradesh, Assam, Jharkhand, Karnataka, Maharashtra, Punjab,
Tamil Nadu, Uttar Pradesh, Uttarakhand and West Bengal.
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Programme Management
Considering the complexities of the scheme, the ministry would engage a Program
Management Agency (PMA) to provide management, capacity building, coordination
and monitoring support. For meeting the cost of the above and also other
promotional activities by the Ministry, a separate amount, to the extent of 5% of the
overall grants available, is earmarked. The project component for the purpose of eli-
gibility under this scheme would consist of the following components:
Core processing Facility
1. Farm proximate collection centers (PCC) and primary processing
centers (PPC) which will have cleaning, grading, sorting and packing
facilities (including equipments) dry warehouses, specialized cold stores
including pre-cooling chambers, ripening chambers (including equipments),
reefer vans, mobile pre-coolers, mobile collection vans etc.
2. The Central processing centers (CPC) with buildings for common
facilities like testing laboratory (including equipments),
and packing facilities (including equipments), dry warehouses,
specialized storage facilities including controlled atmosphere
chambers, pressure ventilators, variable humidity stores,
pre-cooling chambers, ripening chambers etc. (including equipments), cold chain
infrastructure including reefer vans, packaging unit, irradiation facilities, steam
sterilization units, steam generating units, food incubation cum development centers,
etc. 3. The above mentioned facilities are only illustrative and exact nature of the
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facilities may vary from project to project based on specific requirements. However, it
is expected that at least 50% of the project cost (ex- eluding land) would be towards
creation of above mentioned core processing facilities.
Factory Building
It will consist of standard factory sheds for Micro and Small Enterprises (MSEs) which are
built on a maximum of 10 per cent of the area of CPC as part of plug and play facilities for
MSEs.
Enabling basic infrastructure:
It will include roads, drainage, water supply, electricity supply including captive power
plant, effluent treatment, telecommunication lines, parking bay including traffic
management system, weighbridges etc. Enabling infrastructure should be commensurate /
proportionate to support core activities. Non-core infrastructure: It will consist of support
infrastructuresuch asadministrative buildings, training center (including equipments), trade
center/display center, creche, canteen, workers hostel, offices of service providers,
labour rest and recreation facilities, marketing support system, etc. However, the cost of
non-core infrastructure facilities not exceeding 10% of the project cost, would be eligible for
grant purpose Project implementation expenses: This would include cost of hiring the
services of domain consultants by the SPVs for preparation of DPRs, supply chain
management, engineering/designing and construction supervision etc.
Land:
Land for the project shall be purchased / arranged by the SPY The registered value
of such land would be taken as contribution/ share of the SPY The government grant shall
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not be used for procurement of land and will be 50% of non-land component of the project.
Although the projects are expected to be formulated by the SPVs based on the felt
needs, the projects with greater emphasis on establishment of core processing facilities
and thereby directly enabling the establishment of food processing units would be given
preference.
Present Status:
Final approval has been accorded to 6 SPVs to establish MFPs at Chittoor in Andhra
Pradesh, Ranchi in Jharkhand, Haridwar in Uttarakhand, Nalbari in Assam,
Dharmapuri in Tamil Nadu and Jangipur in West Bengal. 1st tranche of 1st installment of
grants-in-aid has been released to four SPVs.
Cold Chain
To encourage setting up of cold chain facilities hi the country, Ministry of Food
Processing Industries (MFPI) has a plan scheme for cold chain, value addition and
preservation infrastructure during the llthplan to provide financial assistance to project
proposals received from public / private organizations The scheme envisages financial
assistance in the form of grant-in-aid @ 50% of the total cost of plant and machinery and
technical civil works in general areas and 75% for North Eastern Region and difficult
areas subject to a maximum of Rs.10.00 crore. Ministry has accorded approval to 10 cold
chain projects during 2008-09 in Maharashtra, Bihar, Tamil Nadu, Rajasthan, Karnataka,
Uttarakhand, West Bengal, Andhra Pradesh, Gujarat and Haryana. Most of the projects
are now nearing completion are ready for operationalization.
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Abattories
Setting up of new abattoirs/modernization of existing abattoirs is a scheme targeting
infrastructure for meat processing industry. It aims to upgrade qualitative and quantitative
capacities of abattoirs, which will be linked, with commercial processing of meat, both
for domestic consumption and exports. Main objectives of scheme are scientific/hygienic
slaughtering, less painful treatment of animals/minimizing transportation of animals,
better byproduct utilization/value addition, providing chilling facility to prevent microbial
activity in meat, better hygiene, safety and retail cold chain management and better
forward linkage facilities for finished meat and meat products.
Based on detailed discussion with stakeholders, industries and States
Governments, the scheme has been modified to induct private capital, better technology
and backward and forward linkages. The Scheme is aimed at reducing huge wastages
and ensuring better valuerealization forthe farmers. The Scheme would lead to reviving
of the agricultural sector by making the returns higher for farmers and meat processing
entrepreneurs. This would also lead to large employment opportunities particularly in
the rural areas.
Financial Assistance
Financial assistance (grant-in-aid) would be provided at 50% and 75% of cost of plant
&machineries and technical civil work in general and difficult areas respectively, subject
to maximum of Rs. 15 crores for each project. Technical consultancy fee @ 5% of grant
provided to meet cost of engaging Technical Consultancy firms at apex level to assist the
Ministry.
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Physical Progress
The Ministry is proposing, to upscale the earlier approved Scheme for Setting up of Abat-
toirs by setting up 40 new abattoirs and modernizing 110 existing abattoirs. Project
management agencies have been engaged to constantly monitor the projects. Based
on their evaluation and recommendation further installments are made by the ministry.
The Ministry has approved the proposal for taking up 10 abattoirs all over the country.
The initial 10 projects, for which 1st installments have been granted by the Ministry are
in an advanced stage and other projects would also be implemented gradually which
would benefit a large number of meat workers/ food processing entrepreneurs.
7.1 Promoting Cold Chain
Ministry of Food Processing Industries (MFPI) has launched a scheme for Cold Chain, Value
Addition and Preservation Infrastructure in the country during 11 thfive year plan, with the
objective of providing integrated and complete cold chain and preservation infrastructure
facilities without any break, from the farm gate to the consumer. The scheme envisages linking
groups of producers to the processors and market through well-equipped cold chain
infrastructure.
Under this scheme, Ministry has approved 10 (ten)cold chain projects during 2008-09 in
different states. Depending upon the nature of the project, each cold chain unit may have
components such as collection centre / minimal processing centre at the farm level and this
centre is to have facility for weighing, sorting, grading waxing, packing, pre-cooling, cold storage,
normal storage and IQF; mobile pre-cooling vans and reefer trucks; distribution hubs with multi
product multi chamber C A / MA cold storage /Variable Humidity Chambers, Packing facility, CIP
Fog treatment, IQF and blast freezing. Irradiation facilities / projects has been approved on stand-
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alone basis under the scheme. These projects are set up by individuals or group of entrepreneurs
with business interest in cold chain solutions and also by those who manage supply chain.
In order to have the effective monitoring of these projects, MFPI intend to engage a multi
skilled professional Agency to carry out con-current evaluation of the cold chain projects
assisted by MFPI during 2008-09. In this connection, Ministry of Food Processing Industries
have invited Expression of Interest from interested Project Management Consultants (PMCs)
empanelled with MFPI to provide professional services for Mega Food Park/cold chain Projects.
To encourage setting up of cold chain facilities in the country, Ministry of Food Processing
Industries (MFPI) has a Plan Scheme for Cold Chain, Value Addition and Preservation
Infrastructure duringthe 11 thPlan to provide financial assistance to project proposals received
from public / private organizations for cold chain infrastructure development. The scheme
envisages financial assistance in the form of grant-in-aid @ 50% of the total cost of plant and ma-
chinery and technical civil works in general areas and 75 % for North Eastern Region and difficult
areas subject to a maximum of Rs. 10.00 crore.Ministry has accorded approval to 10 cold chain
projects during 2008-09 in each of States i.e. Maharashtra, Bihar, Tamil Nadu, Rajasthan,
Karnataka, Uttarakhand, West Bengal, Andhra Pradesh, Gujarat and Haryana. MFPI's scheme is
project specific, not State specific". MFPI has assisted 18 cold storage / cold chain projects during
2006-07,2007-08,2008-09 and 2009-10.The scheme for Cold Chain, Value Addition and
Preservation Infrastructure (including Packaging Centre and Irradiation Centre) have the
following components:
Minimal Processing Centre at the farm level and this centre is to have facility for
weighing, sorting, grading waxing, packing, pre-cooling, cold storage, normal storage
and IQF, mobile pre-cooling vans and reefer trucks, distribution hubs with CA
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chambers/cold storage /Variable Humidity Chambers, Packing facility, CIP Fog treat-
ment, IQF and blast freezing, to avail financial assistance, any two of the components,
from (a), (b) or (c) above will have to be setup by the applicants. Considering the functional
nature of the facility, Irradiation facility can be treated as a stand alone one for the
purpose of availing grant.
Physical and Financial Targets:
An allocation of Rs.150 crore has been provided for the year 2009-10 for the
infrastructure scheme, of which the present integrated cold chain project proposal is one of
the components. The scheme has received overwhelming response due to its inherent
features and also its appropriateness to extend shelf life and maintain quality. In
response to the scheme, this Ministry has received 56 expressions of interests as on
31.3.09, for setting up of integrated coldchain facilitiesincluding irradiation facilities from different
States. Out of 56 proposals, 10 integrated cold chain; value addition and preservation
infrastructure projects have been approved during the financial year 2008-09 and Rs. 9.68
crore has been released. The fund requirement for the year 2009-10 is estimated to be
Rs. 86.00 crore for implementation of integrated cold chain projects for 10 existing cold
chain proposals. Out of this, Rs.66.00 crore is required for committed liabilities towards 10
projects approved during 2008-09 and Rs. 20 crore is for the new projects being taken up
during 2009-10.
Objectives:
The objective of the scheme is to provide integrated and complete cold chain and preservation
infrastructure facilities without any break, from the farm gate to the consumer. Pre-cooling
facilities at production sites, reefer vans, and mobile cooling units also need to be assisted under
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the Integrated Cold Chain projects. Integrated cold chain and preservation infrastructure can be
set up by individuals or groups of entrepreneurs with business interest in cold chain solutions and
also by those who manage supply chain. They will enable linking groups of producers to the
processors and market through well equipped supply chain and cold chain.
Salient features:
The scope of components of Integrated Cold Chain, Value Added Centre, Packaging
Centre and Irradiation Facilities to be broadened to allow flexibility in project
planning.
To provide integrated and complete cold chain facilities without any break, from the farm
gate to the consumer, Pre-cooling facilities at production sites, reefer vans, and mobile
cooling units also need to be assisted under the Integrated Cold Chain facilities projects.
Stand alone facilities, except irradiation facility will not be considered for assistance.
Horticulture produce also to be included for support under Integrated Cold Chain Fa-
cilities.
Value addition Centres may also include infrastructural facilities including multi-line
processing / collection centres, etc. for horticulture including organic produce, marine,
dairy, meat and poultry, etc. » Irradiation facilities may also cover warehousing, cold
storage facilities etc. for storage of raw material and finished products for efficient
utilization of the facility.
Page 129 of 384
CHAPTER 8
TABULATION & STATISTICAL ANALYSES OF DATA
Page 130 of 384
CHAPTER 8
TABULATION & STATISTICAL ANALYSES OF DATA
Result and Analysis
Fig 8.1 Job Position
Source primary data (questionnaire)
Comments:- A Research reveal that 75% of the Managers are Logistic
Managers,18% are others Managers, 6% are the Financial Managers and 1%
Director’s were surveyed.
75%
6%
1%18%
DISTRIBUTION OF JOB POSITION
Logistics Manager
Financial manager
Director
Other
Page 131 of 384
Fig 8.2 What level Decision of logistics outsourcing is taken
Source primary data (questionnaire)
Comments:- It is clear from the survey that 91% of the decision is being
taken at Multi-factories level and 9% of the decision are being taken at one
Factory level.
9%
91%
DISTRIBUTION OF LOGISTICS OUTSOURCING LEVELS
One Factory level
Multi- Factories level
Page 132 of 384
Fig 8.3 Degree of involvement in decision making
Source primary data (questionnaire)
Comments:-76% of the Managers are moderately involved in decision
making Process, 11% of the managers are not involved, 9% are little bit
involved, and 4% are highly involved in Decision making Process.
4%
76%
9%11%
0
10
20
30
40
50
60
70
80
Highly Moderately Little Bit Not Involved
DISTRIBUTION OF DEGREE OF INVOLVEMENT IN DECISION FOR
OUTSOURCING
Page 133 of 384
Fig8.4 Percentage of Increase in Total sales volume
Source primary data (questionnaire)
Comments:- The increase in total sales volume according to logistics
outsourcing activity reveals that there is 10-20% volume contribute 85-90%
at one factory & Multi Factory Level, and greater than 40% is contribute
10% at One Factory level, while 3-4% at Multi-Factory Level.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
<9 10-20 21-30 31-40 >40
INCREASE IN TOTAL SALES VOLUME ACCORDING TO LOGISTICS OUTSOUCING
ACTIVITYOne factory level Multi- Factories level
Page 134 of 384
Fig 8.5 Managers involvement &Development of Total Sales volume in Percentage
Source primary data (questionnaire)
Comments:- It can be observe from the graph that 96-98% of Logistics
Managers are involved in increasing 10-20% of the total sales volume, at
the same time, 64% of Financial Managers are involved in increasing 10-
20% of total sales volume. Interestingly 99% of Director’s contribute
increase 31-40% of total sales Volume.
0%
20%
40%
60%
80%
100%
<9 10-20 21-30 31-40 >40
DEVELOPMENT IN TOTAL SALES VOLUME
Logistics Manager
Financial manager
Director
Other
Page 135 of 384
Fig 8.6 Degree of Involvement & development in total Sales Volume
Source primary data (questionnaire)
Comments- It was seen that 10-20% are highly involved in development of
total sales volume i.e 23% while 98-99% are moderately involved in
development of 10-20% of total sales volume, 80% are little bit involved in
development of 10-20% total sales volume and 64% are not involved.
0%
20%
40%
60%
80%
100%
<9 10-20 21-30 31-40 >40
DEVELOPMENT IN TOTAL SALES VOLUME
Highly
Moderately
Little Bit
Not Involved
Page 136 of 384
Fig 8.7 Managers View For outsourcing of outbound transportation
Source primary data (questionnaire)
Comments:- When asked about Managers views for outsourcing of
Outbound Transportation, It was seen that 99% of the Directors were
undecided, and at the same time 99% of the Logistics and Financial
Managers were Agreeing about the Outsourcing of Outbound
Transportation.
0%
20%
40%
60%
80%
100%
Disagree Undecided Agree
MANAGERS VIEWS FOR OUTSOURCING OF OUTBOUND TRANSPORTATION
Logistics Manager
Financial manager
Director
Other
Page 137 of 384
Fig 8.8 Managers view for outsourcing of Pack & Labels
Source primary data (questionnaire)
Comments:- It is Seen that 98% of the Logistics Managers are agreeing for
outsourcing of pack & Labels, 37% of Financial Managers are disagreeing
for outsourcing of Packs & Labels and 96% of the Directors are undecided
about outsourcing of Packs and Labels.
0%
20%
40%
60%
80%
100%
Logistics Manager
Financial manager
Director Other
MANAGERS VIEWS FOR OUTSOURCING OF PACK & LABELS
Disagree
Undecided
Agree
Page 138 of 384
Fig 8.9 Managers view for outsourcing of Transportation Management
Source primary data (questionnaire)
Comments:-It is Seen from graph that 96% of Logistics Managers are
views for outsourcing of Transportation Management, 64% of the Financial
Managers, 99% of the Directors & 80% belonging to others Category are of
view for Outsourcing of Transportation Management.
0%
20%
40%
60%
80%
100%
Logistics Manager
Financial manager
Director Other
MANAGERS VIEWS FOR OUTSOURCING OF TRANSPORTATION MANAGEMENT
Disagree
Undecided
Agree
Page 139 of 384
Fig 8.10 Activity contributes highly competitive advantage
Source primary data (questionnaire)
Comments:-The above graph reveals that 98% of Directors 90% of
Logistics Managers, 37% of Financial Managers, and 40% of others
considered Distribution Network Planning as the activity which contributes
highly to competitive advantage.
0%
20%
40%
60%
80%
100%
ACTIVITY CONTRIBUTES HIGHLY COMPETITIVE ADVANTAGE
Logistics Manager
Financial manager
Director
Other
Page 140 of 384
Fig 8.11 Activity essential to support managers core activities
Source primary data (questionnaire)
Comments:- It is seen from the above graph that 99% of the Directors care
of opinion that Packaging & Labels is essentials to Support Managers core
activities, 87% of Logistics Managers are of opinion that Inventory
Management is Essential to support managers core activities.
0%
20%
40%
60%
80%
100%
ACTIVITY ESSENTIAL TO SUPPORT MANAGERS CORE ACTIVITIES
Logistics Manager
Financial manager
Director
Other
Page 141 of 384
Fig 8.12 Activity which performed efficiently compared to rivals
Source primary data (questionnaire)
Comments:- The above findings reveals that 82% of Logistics Managers,
18% of Financial Managers Considered Outbound Transportation activity
which they performed efficiently compared to rivals, while 98% of Directors
are of View Inventory Management as the activity which they performed
efficiently as compared to rivals.
0%
20%
40%
60%
80%
100%
ACTIVITY WHICH PERFORMED EFFICIENTLY COMPARED TO RIVALS
Logistics Manager
Financial manager
Director
Other
Page 142 of 384
Fig 8.13 Special Equipment Used By Managers
Source primary data (questionnaire)
Comments:- The Graph reveals that 99% of Directors says that they have
invested heavily on equipments to conduct Outbound transportation, at the
same time the 92% of Logistics Managers considered the Inventory
Management as the activity in which they have invested heavily.
0%
20%
40%
60%
80%
100%
MANAGERS SPECIAL EQUIPMENT TO CONDUCT THE ACTIVITY
Logistics Manager
Financial manager
Director
Other
Page 143 of 384
Fig 8.14 Special Knowledge & Skills
Source primary data (questionnaire)
Comments:- The above graph reveals that 89% of Logistics Managers says
that they have acquired special Knowledge & Skills to perform Outbound
transportation activity, while 98% Directors are of opinion that for Inventory
Management they have acquired Special Skills & Knowledge.
0%
20%
40%
60%
80%
100%
SPECIAL KNOWLEDGE & SKILL TO PERFORM THIS ACTIVITY
Logistics Manager
Financial manager
Director
Other
Page 144 of 384
Fig 8.15 High Cost of Outsourcing
Source primary data (questionnaire)
Comments:- The above points out that 98% of the Directors are of opinion
that Packs & Labels is the Costly activity to Outsource while 91% of
Logistics Manager are of opinion that Transportation Management is the
costly activity to outsource & 54% Of Financial Managers are of opinion
that Outbound Transportation is the Costly activity to outsource.
0%
20%
40%
60%
80%
100%
COSTLY TO OUTSOURCE THIS ACTIVITY
Logistics Manager
Financial manager
Director
Other
Page 145 of 384
Fig 8.16 Performance Evaluation
Source primary data (questionnaire)
Comments:- The above graph suggest that 99% of the Directors take
precise measure for evaluating Packs & Labels activity while 90% Logistics
Managers take precise measure for evaluating the performance of
Transportation Management.
0%
20%
40%
60%
80%
100%
THE PRECISE MEASURE FOR EVALUATING THE PERFORMANCE THE ACTIVITY
Logistics Manager
Financial manager
Director
Other
Page 146 of 384
Fig 8.17 Difficulties in Logistics Service
Source primary data (questionnaire)
Comments :- The above graph reveals that 98% of directors, and 90% of
Logistics Managers are of opinion that in Inventory Management they find
difficulty in Measuring the Performance.
0%
20%
40%
60%
80%
100%
DIFFICULT TO MEASURE THE PERFORMANCE OF LOGISTICS SERVICE
Logistics Manager
Financial manager
Director
Other
Page 147 of 384
Fig 8.18 Opinion of Managers on Perishability
Source primary data (questionnaire)
Comments:-The above finding reveals that 74% of the Managers
Moderately agree that perish ability of the end product complicates the
logistics process, at the same time 16% of the managers strongly agree
that perish ability of the end product complicates the logistics process.
1% 4% 5%
74%
16%
MANAGERS VIEW TO PERISH ABILITY OF END PRODUCT COMPLICATES THE LOGISTICS PROCESS
Strongly Disagree
Undecided
Agree
Moderately Agree
Strongly Agree
Page 148 of 384
Fig 8.19 Impact of SKUs on Logistic Process
Source primary data (questionnaire)
Comments:-The above graph reveals that 78% of Managers Moderately
agree that Logistics process is effected with number of SKUs, While 9% of
the managers strongly agree that Logistics process is effected with
number of SKUs.
3%
5%5%
78%
9%
MANAGERS VIEW THAT THE LOGISTICS PROCESS IS EFFECTED WITH NUMBER OF SKUS
Strongly Disagree
Undecided
Agree
Moderately Agree
Strongly Agree
Page 149 of 384
Fig 8.20 Numbers of Products in Storage
Source primary data (questionnaire)
Comments:- The above findings reveal that 75% moderately agree & 8%
strongly agree that the variety of product in storage condition complicate
the logistics process.
2% 3% 4%
8%
75%
8%
MANAGERS VIEW THAT THE VARIETY OF PRODUCT IN STORAGE CONDITION COMPLICATE THE LOGISTICS
PROCESS
Strongly Disagree
Disagree
Undecided
Agree
Moderately Agree
Strongly Agree
Page 150 of 384
Fig 8.21 Variety of Product Groups Influence Logistic Process
Source primary data (questionnaire)
Comments:- The above findings states that 73% of managers strongly
agree that the logistics process is affected with number of product group,
while 13% Moderately agree and 10% agree that the logistics process is
affected with number of product group.
2% 2%
10%
13%
73%
MANAGERS VIEW THAT THE LOGISTICS PROCESS IS AFFECTED WITH NUMBER OF PRODUCT
GROUP.
Strongly Disagree
Undecided
Agree
Moderately Agree
Strongly Agree
Page 151 of 384
Fig 8.22 Production Features
Source primary data (questionnaire)
Comments:-The above finding reveals that 96% of directors, 50% of
Managers from other groups, 37% of Financial Managers and4% of
logistics Managers are undecided about production Characteristics, i.e.
Number of Packaging line complicates the logistics process, and 96 % of
logistics Managers Strongly agree or Clear of Production Characteristics
i.e. Number of Packaging line complicates the logistics process.
0%
20%
40%
60%
80%
100%
MANAGERS VIEWS ON PRODUCTION CHARACTERISTICS (NO. OF PACKAGING LINE)
Logistics Manager
Financial manager
Director
Other
Page 152 of 384
Fig 8.23 Fluctuations in output, quality, and quantity
Source primary data (questionnaire)
Comments:-The above findings reveals that 98% of Directors disagree on
production Characteristics i.e. uncertainty in Output, Quality, & Quantity
complicates the logistics process, while 90% of Logistics Managers
moderately agree on production Characteristics i.e. uncertainty in Output,
Quality, & Quantity complicates the logistics process.
0%
20%
40%
60%
80%
100%
MANAGERS VIEWS ON THE PRODUCTION CHARACTERISTICS (UNCERTAINTY IN
OUTPUT, QUALITY & QUANTITY)
Logistics Manager
Financial manager
Director
Other
Page 153 of 384
Fig 8.24 Yearly Demand Volume
Source primary data (questionnaire)
Comments:- The above graph states that 94% of Logistics Managers, 50%
of Financial managers moderately agree that annual demand sales
complicates the management of Logistics process, while 98% of directors
Strongly agree that annual demand sales complicates the management of
Logistics process.
0%
20%
40%
60%
80%
100%
MANAGERS VIEWS ON SALES/ DEMAND CHARACTERISTICS (ANNUAL DEMAND VOLUME)
Logistics Manager
Financial manager
Director
Other
Page 154 of 384
Fig 8.25 Demand Uncertainty
Source primary data (questionnaire)
Comments:-The above finding reveals that 92% of Logistics Managers 98%
of directors moderately agree that demand uncertainty complicates the
logistics process, while 56% of Financial managers strongly agree that
demand uncertainty complicates the logistics process.
0%
20%
40%
60%
80%
100%
MANAGERS VIEWS ON SALES/ DEMAND CHARACTERISTICS (DEMAND UNCERTAINTY)
Logistics Manager
Financial manager
Director
Other
Page 155 of 384
Fig 8.26 Demand Changes
Source primary data (questionnaire)
Comments:- The above findings reveals that 97% of Directors,57% of
Financial Managers, 33% of Managers belonging to other groups are of
view that Demand fluctuation complicates the logistics process. While 85%
of Logistics Managers Strongly agree that Demand fluctuation complicates
the logistics process.
0%
20%
40%
60%
80%
100%
SALES/ DEMAND CHARACTERISTICS(DEMAND FLUCTUATION)
Logistics Manager
Financial manager
Director
Other
Page 156 of 384
Fig 8.27 DistributionImpact
Source primary data (questionnaire)
Comments:- The above finding reveals that 96% of Directors are undecided
that Numbers of customers complicates the logistics process, 86% of
Logistics Managers moderately agree that Numbers of customers
complicates the logistics process, while 30% of financial Managers agree &
56% of Financial Managers Strongly agree Numbers of customers
complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (NO. OF CUSTOMERS)
Logistics Manager
Financial manager
Director
Other
Page 157 of 384
Fig 8.28Role of International Customers
Source primary data (questionnaire)
Comments:- The above finding reveals that 97% of Directors, 36% of
Financial Managers 7% of logistics Managers agree that Numbers of
International Customers complicates the Logistics process. While 86% of
Logistics managers, 36% of Financial managers moderately agree that
Numbers of International Customers complicates the Logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (NO. OF INTERNATIONAL CUSTOMERS)
Logistics Manager
Financial manager
Director
Other
Page 158 of 384
Fig 8.29 Influence of Distribution (No. of Warehouses)
Source primary data (questionnaire)
Comments:- The above findings reveals that 90% of Logistics
Managers,97% of Directors and 17% of Financial managers agree that
numbers of warehouses complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (NO. OF WAREHOUSES)
Logistics Manager
Financial manager
Director
Other
Page 159 of 384
Fig 8.30 Variety of Distribution Channel
Source primary data (questionnaire)
Comments:-The above graph reveals that 99% of Directors,16% of Financial
managers,12% of Logistics managers agree that Distribution channel verity
complicates the logistics process, while 89% of logistics managers
strongly agree that Distribution channel verity complicates the logistics
process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (DISTRIBUTION CHANNEL VARITY)
Logistics Manager
Financial manager
Director
Other
Page 160 of 384
Fig 8.31 Delivery Frequency
Source primary data (questionnaire)
Comments:-The above finding reveals that 99% of Directors, 98% of
Logistics managers ,17% of Financial managers Moderately agree that
Delivery frequency complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (DELIVERY FREQUENCY)
Logistics Manager
Financial manager
Director
Other
Page 161 of 384
Fig 8.32 Order Lead Time
Source primary data (questionnaire)
Comments:-The above graph reveals that 99% of Directors disagree that
order lead time complicates the logistics process, 97% of logistic
managers 15% of Financial managers moderately agree that order lead time
complicates the logistics process, while 70% of financial managers agree
that order lead time complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (ORDER LEAD TIME)
Logistics Manager
Financial manager
Director
Other
Page 162 of 384
Fig 8.33 Time of Distribution Size
Source primary data (questionnaire)
Comments:- The above graph reveals that 98% of Directors, 16% of
financial managers moderately agree that Distribution size time
complicates the logistics process, 87% of Logistics managers strongly
agree that Distribution size time complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (DISTRIBUTION SIZE TIME)
Logistics Manager
Financial manager
Director
Other
Page 163 of 384
Fig 8.34 Changes of Distribution
Source primary data (questionnaire)
Comments:- The above finding reveals that 98% of Directors, 85% of
Financial managers agree that uncertainty of distribution, time, quality &
quantity complicates the logistics process, while 88% of Logistics
managers moderately agree that uncertainty of distribution, time, quality &
quantity complicates the logistics process.
0%
20%
40%
60%
80%
100%
DISTRIBUTION CHARACTERISTICS (UNCERTAINTY OF DIST. TIME, QUALITY& QUANTITY)
Logistics Manager
Financial manager
Director
Other
Page 164 of 384
CHAPTER 9
INTERPRETATION & REPORT WRITING
Page 165 of 384
CHAPTER 9
INTERPRETATION & REPORT WRITING
H01: There is no positive significant correlation between level of decision
making & impact on sales volume of the company.
H1: There is positive significant correlation between level of decision
making & impact on sales volume of the company.
Level of decision making depends on job profile of the managers i.e
weather he is logistics manager, Financial, or Production Managers or
Director of the company &weather they has a impact on the sales volume
of the company.
Table 9.1. Job Position
Job Position Percent Logistics Manager 75.0
Financial manager
6.0
Director 1.0 Other 18.0 Total 100.0
Table 9. 2. Logistics outsourcing Levels
Logistics outsourcing Levels
Percent
One Factory level 9.0 Multi- Factories level 91.0 Total 100.0
Page 166 of 384
Table 9.3.Degree of involvement in decision for outsourcing
Degree of involvement
Percent
Highly 4.0 Moderately 76.0 Little Bit 9.0 Not Involved 11.0 Total 100.0
Table 9.4.Rise in total sales volume as per logistic outsourcing activity
Increase in total sales volume (2009-2011)
Logistics outsourcing Levels
Total
One factory level
Multi- Factories level
<9 2.2% 2.0% 10-20 88.9% 90.1% 90.0% 21-30 3.3% 3.0% 31-40 2.2% 2.0% >40 11.1% 2.2% 3.0% Total 100.0% 100.0% 100.0%
Chi-Square Tests
Value
Exact Sig. (2-sided) P-Value
Pearson Chi-Square 2.863a .629 Likelihood Ratio 2.696 .629 Fisher's Exact Test 3.383 .629 Linear-by-Linear Association 0.962b .342
Page 167 of 384
NOTE :CACULATED P-VALUE <0.05 INDICATES THE SIGNIFICANT ASSOCIATION Test suggests that there is no significant impact of logistics outsourcing on development in sales volume.
Table 9.5.DEVELOPMENT OF TOTAL SALES
Increase of total sales volume Logistics outsourcing Levels
Mean Std. Deviation
Std. Error Mean
One factoey level 17.3333 16.11676 5.37225 Multi- Factories level 13.5055 7.69180 .80632
Development of total sales volume
t-test for Equality of Means t Sig. (2-
tailed) Mean Difference
Std. Error Difference
95% Confidence Interval of the Difference Lower Upper
Equal variances assumed 1.260 0.211 3.82784
3.03698
-2.19894
9.85462
Equal variances not assumed
0.705 0.500 3.82784
5.43243
-8.60507
16.26075
Above t test reveals that there is no significant difference in mean developments of sales volume between the given Logistics outsourcing levels.
Page 168 of 384
Table 9. 6 DEVELOPMENT IN TOTAL SALES Development of total sales volume Mean Std.
Deviation
Std. Error
95% Confidence Interval for Mean
Minimum
Maximum
Lower Bound
Upper Bound
Logistics Manager
12.0133 5.08706 .58740 10.8429 13.1838
10.00 50.00
Financial manager
26.6667 16.63330
6.79052 9.2111 44.1222
15.00 60.00
Director 40.0000 . . . . 40.00 40.00
Other 15.7778 11.46635 2.70264 10.0757
21.4799 4.00 45.00
Total 13.8500 8.71707 .87171 12.1203 15.5797
4.00 60.00
ANOVA Sum of
Squares Mean Square
F Sig. P -Value
Between Groups
1989.319 663.106 11.504 .000
Within Groups 5533.431 57.640 Total 7522.750
Test reveals that there is significant difference in the mean development of total sales volume between the job positions of the managers.
Page 169 of 384
Table 9.7 Development in total sales volume code
Job Position(% within Job Position) Total Logistics Manager
Financial manager
Director Other
<9 11.1% 2.0% 10-20 97.3% 66.7% 72.2% 90.0% 21-30 1.3% 16.7% 5.6% 3.0% 31-40 100.0% 5.6% 2.0% >40 1.3% 16.7% 5.6% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% Chi-Square Tests Value Asymp. Sig.
(2-sided) Exact Sig. (2-sided)
Pearson Chi-Square 71.936a .000 .001 Likelihood Ratio 26.121 .010 .001 Fisher's Exact Test 36.083 .000 Linear-by-Linear Association
2.356b .125 .118
Above Test reveals that there is highly significant impact of Job profile of managers on development in sales volume.
Table 9.7Growth in Sales
Development in total sales volume code
Decision making of outsourcing Total Highly Moderate
ly Little Bit Not
Involved <9 18.2% 2.0% 10-20 25.0% 98.7% 77.8% 63.6% 90.0% 21-30 25.0% 1.3% 9.1% 3.0% 31-40 25.0% 11.1% 2.0% >40 25.0% 11.1% 9.1% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Page 170 of 384
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 56.620a .001 Likelihood Ratio 35.556 .000 Fisher's Exact Test 41.040 .000 Linear-by-Linear Association
.032b .915
Test reveals that there is highly significant impact of involvement of manager‘s
decision, for logistics outsourcing on development in sales volume.
Table 9.8
Development of total sales volume Mean Std.
Deviation
Std. Error
95% Confidence Interval for Mean
Minimum
Maximum
Lower Bound
Upper Bound
Highly 35.0000 12.90994 6.45497 14.4574 55.5426 20.00 50.00
Moderately 11.6974 2.43869 .27974 11.1401 12.2546 10.00 25.00
Little Bit 21.3333 17.31329
5.77110 8.0252 34.6415 10.00 60.00
Not Involved
14.9091 12.33251
3.71839 6.6240 23.1942 4.00 45.00
Total 13.8500 8.71707
.87171 12.1203 15.5797 4.00 60.00
Page 171 of 384
ANOVA Development of total sales volume Sum of
Squares Mean Square
F Sig.
Between Groups
2657.801 885.934 17.482 .000
Within Groups 4864.949 50.677 Total 7522.750
Test reveals that there is highly significant difference in the mean development of total sales volume between the given degrees of decision making of logistics outsourcing.
Conclusion :- H1 Hypothesis is accepted, From the above test it has been proved that level of decision making depends on job profile of the managers. i.e. weather he is logistics manager, Financial, or Production Managers or Director of the Company they have an impact on the sales volume of the company.
Page 172 of 384
H02: Logistics Managers do not contribute significantly to the Companies
Competitive advantage.
H2: Logistics Managers contribute significantly to the Companies
Competitive advantage.
The focus on the Managers on the Logistics Managers on outsourcing of
the various activities like Outbound transportation, Packs & Labels,
Transportation Management, Inventory Management, & Distribution of
Network Planning.
Table 9.9OPINION ON OUTSOURCING OF OUTBOUND TRANSPORTATION
Views for outsourcing of outbound transportation
Job Position Total Logistics Manager
Financial manager
Director Other
Disagree 11.1% 2.0% Undecided 100.0% 22.2% 5.0% Agree 89.3% 33.3% 27.8% 74.0% Moderately Agree
6.7% 16.7%
22.2% 10.0%
Strongly Agree 4.0% 50.0%
16.7% 9.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 69.994a .000 Likelihood Ratio 49.504 .000 Fisher's Exact Test 52.814 .000 Linear-by-Linear Association .087b .797
Page 173 of 384
Managers views for outsourcing of outbound transportation
Job Position Total Logistics Manager
Financial manager
Director Other
Disagree 11.1% 2.0% Undecided 100.0% 22.2% 5.0% Agree 100.0% 100.0% 66.7% 93.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 44.588a .020 Likelihood Ratio 28.551 .000 Fisher's Exact Test 29.132 .000 Linear-by-Linear Association 26.269b .000
Tests reveal that there is significant association between manager‘s views to outsourcing outbound transportation and their job positions in the company. i.e managers at higher posts are more agreed to outsourcing of outbound transportation.
Table 9.10VIEWS ONPACK & LABEL
Managers Views For Outsourcing Of Pack
& Levels
Job Position Total Logistics Manager
Financial manager
Director Other
Disagree 1.3% 33.3% 5.6% 4.0% Undecided 2.7% 100.0% 5.6% 4.0% Agree 96.0% 66.7% 88.9% 92.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Chi-Square Tests Value Exact Sig. (2-
sided) Pearson Chi-Square 39.599a .002 Likelihood Ratio 14.865 .008 Fisher's Exact Test 18.842 .003 Linear-by-Linear Association
1.935b .197
Test reveals that there is significant association between manager‘s views to
outsourcing of pack & labels and their job positions in the company. i.e managers at higher posts are more agreed to outsourcing of Pack & labels.
Table 9.11ROLE OF SOUCRCING IN OUTBOUND TRANSPORTATION
Managers view for outsourcing of transportation management
Job Position Total Logistics Manager
Financial manager
Director Other
Disagree 2.7% 16.7% 11.1% 5.0% Undecided 16.7% 11.1% 3.0% Agree 97.3% 66.7% 100.0% 77.8% 92.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 14.861a .099 Likelihood Ratio 12.870 .015 Fisher's Exact Test 17.595 .006 Linear-by-Linear Association
5.309b .022
Fisher‘s test shows that there is significant association between manager‘s
views to outsourcing of transportation management and their job positions in the company. i.e managers at higher posts are more agreed to outsourcing of transportation management.
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Table 9.12 CONTRIBUTES TO HIGHLY COMPETITIVE ADVANTAGE Activity contributes highly competitive advantage
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
5.3%
11.1% 6.0%
Pack & Labels 1.3% 16.7% 11.1% 4.0% Transportation Management
1.3% 16.7%
22.2% 6.0%
Inventory Management 2.7% 33.3% 11.1% 6.0% Distribution Network Planning
89.3% 33.3% 100.0% 44.4% 78.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Fisher's Exact Test 35.877 .000
The test shows that there is significant association between Activities and Job positions of the managers of the company.
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Table 9.13IMPACT OF ESSENTIAL TO SUPPORT MANAGERS CORE ACTIVITIES
Activity essential to support your core activities
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
2.7% 16.7%
5.6% 4.0%
Packaging & Labels 100.0% 16.7% 4.0% Transportation Management 9.3% 33.3%
27.8% 14.0%
Inventory Management 86.7% 16.7%
11.1% 68.0%
Distribution Network Planning
1.3% 33.3%
38.9% 10.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig. (2-
sided) Pearson Chi-Square 81.175a .000 Likelihood Ratio 62.809 .000 Fisher's Exact Test 65.666 .000 Linear-by-Linear Association 1.831b .178
The test shows that there is significant association between essential activities and Job positions of the managers of the company.
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Table 9.14EFFECT OF RIVALS
Activity which performed efficiently compared to rivals
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
85.3% 16.7%
5.6% 66.0%
Packaging & Labels 2.7% 16.7% 22.2% 7.0% Transportation Management 2.7% 33.3%
16.7% 7.0%
Inventory Management 5.3% 16.7% 100.0% 33.3% 12.0% Distribution Network Planning
4.0% 16.7%
22.2% 8.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 59.215a .000 Likelihood Ratio 56.038 .000 Fisher's Exact Test 60.797 .000 Linear-by-Linear Association
33.927b .000
The above statistical test shows that there is significant association between efficiently performed activities and Job positions of the managers of the company.
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Table 9.15SPECIAL EQUIPMENT FOR CONDUCT THE ACTIVITY
Special equipment to conduct this activity
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
100.0% 22.2% 5.0%
Pack & Labels 4.0% 33.3% 44.4% 13.0% Transportation Management 1.3%
5.6% 2.0%
Inventory Management 92.0% 50.0% 27.8% 77.0% Distribution Network Planning
2.7% 16.7%
3.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 68.151a .001 Likelihood Ratio 50.254 .000 Fisher's Exact Test 54.946 .000 Linear-by-Linear Association
44.319b .000
The above statistical test shows that there is significant association between activities and Job positions of the managers of the company.
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Table 9.16 Special Knowledge&Skill for the activity
Special knowledge & skill to perform this activity
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
86.7% 16.7%
5.6% 67.0%
Pack & Labels 2.7% 33.3% 8.0% Transportation Management 2.7% 16.7%
27.8% 8.0%
Inventory Management 1.3% 16.7% 100.0% 22.2% 7.0% Distribution Network Planning
6.7% 50.0%
11.1% 10.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Table 9.17 Coston outsource this activity
Costly to outsource this activity
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation 5.3% 50.0%
5.6% 8.0%
Pack & Labels 16.7% 100.0% 11.1% 4.0% Transportation Management
85.3% 16.7%
33.3% 71.0%
Inventory Management 1.3% 16.7% 16.7% 5.0% Distribution Network Planning
8.0%
33.3% 12.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Table 9.18Evaluation
The precise measure for evaluating the performance the activity
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
16.7% 3.0%
Pack & Labels 4.0% 100.0% 27.8% 9.0% Transportation Management 88.0%
27.8% 71.0%
Inventory Management 4.0% 50.0%
16.7% 9.0%
Distribution Network Planning
4.0% 50.0%
11.1% 8.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Table 9. 19 Problems of measurement of performance(logistics service)
Difficult to measure the performance of logistics service
Job Position Total Logistics Manager
Financial manager
Director Other
Outbound Transportation
1.3% 33.3%
33.3% 9.0%
Pack & Labels 2.7% 33.3% 4.0% Transportation Management
33.3% 6.0%
Inventory Management 88.0% 100.0% 5.6% 68.0% Distribution Network Planning 8.0% 33.3%
27.8% 13.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
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Conclusion:- The above statistical test shows that there is significant
association between activities and Job positions of the managers of the
company therefore we accept H2 Hypothesis. i.e Logistics Managers
contribute significantly to the Companies Competitive advantage.
H0.3: Different aspects like Production, Distribution, Sales are not important
parameters of the efficiency in Logistics Outsourcing.
H3: Different aspects like production, Distribution, & sales are important
parameters of the efficiency in Logistics outsourcing.
Production aspects depend on Numbers of packaging lines, Uncertainty of
Production output time. At the same time Distribution aspects depends on
Number of customers Domestics or International, Warehouses, Channel Variety,
Delivery frequency, order lead time, & sales and demand Fluctuations.
Managers View to Perish ability of end product complicates the logistics process Views Percent Strongly Disagree 1.0 Undecided 4.0 Agree 5.0 Moderately Agree 74.0 Strongly Agree 16.0 Total 100.0
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Managers view that the Logistics process is effected with number of SKUs Views Percent Strongly Disagree 3.0 Undecided 5.0 Agree 5.0 Moderately Agree 78.0 Strongly Agree 9.0 Total 100.0
Managers view that the variety of product in storage condition complicate the logistics process Views Percent Strongly Disagree 2.0 Disagree 3.0 Undecided 4.0 Agree 8.0 Moderately Agree 75.0 Strongly Agree 8.0 Total 100.0
Managers view that the logistics process is affected
with number of product group.
Managers Views Percent Strongly Disagree 2.0 Undecided 2.0 Agree 10.0 Moderately Agree 13.0 Strongly Agree 73.0 Total 100.0
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Table 9.20 Managers view on production Management Characteristic (No of package line)
Managers views on Production characteristics (No. of packaging line)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 5.6% 1.0% Moderately Disagree
16.7%
1.0%
Disagree 1.3% 16.7% 33.3% 8.0% Undecided 5.3% 33.3% 100.0% 50.0% 16.0% Agree 4.0% 33.3% 5.0% Moderately Agree 1.3% 5.6% 2.0% Strongly Agree 88.0% 5.6% 67.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests
Value Exact Sig. (2-sided)
Pearson Chi-Square 95.294a .020 Likelihood Ratio 80.879 .000 Fisher's Exact Test 90.482 .000 Linear-by-Linear Association 52.235b .000
The above statistical tests reveal that there is significant association between
manager‘s views on number of packaging line and their job positions.
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Table 9.21 Managers view on production Characteristics (Uncertainty in time, quality& quantity
Managers views Production characteristics (Uncertainty in output, quality & quantity)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 16.7% 3.0% Disagree 1.3% 16.7% 100.0% 27.8% 8.0% Undecided 4.0% 50.0% 5.6% 7.0% Agree 5.3% 16.7% 33.3% 11.0% Moderately Agree 89.3% 16.7% 70.0% Strongly Agree 16.7% 1.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 97.236a .010 Likelihood Ratio 71.689 .000 Fisher's Exact Test 76.962 .000 Linear-by-Linear Association
40.070b .000
The above statistical tests reveal that there is significant association between manager‘s views on Uncertainty in output, quality & quantity and their job positions.
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Table 9.22Managers view on sales/ Demand Characteristics(Annual Demand Volume)
Managers views on Sales/ Demand characteristics(Annual demand volume)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 5.6% 1.0% Moderately Disagree 16.7% 5.6% 2.0% Disagree 1.3% 16.7% 4.0% Undecided 2.7% 16.7% 11.1% 5.0% Agree 4.0% 16.7% 27.8% 9.0% Moderately Agree 92.0% 50.0% 27.8% 77.0% Strongly Agree 100.0% 5.6% 2.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 95.933a .010 Likelihood Ratio 48.446 .000 Fisher's Exact Test 61.856 .000 Linear-by-Linear Association 21.460b .000
The above statistical tests reveal that there is significant association between
manager‘s views on Sales/ Demand characteristics (Annual demand volume)
and their job positions.
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Table 9.23 Managers view on Sales / Demand Characteristics (Demand Characteristics)
Managers views on Sales/ Demand characteristics(Demand uncertainty)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 5.6% 1.0% Disagree 1.3% 22.2% 5.0% Undecided 5.3% 16.7% 33.3% 11.0% Agree 4.0% 33.3% 16.7% 8.0% Moderately Agree 89.3% 100.0% 22.2% 72.0% Strongly Agree 50.0% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 97.073a .010 Likelihood Ratio 64.054 .000 Fisher's Exact Test 69.223 .000 Linear-by-Linear Association
33.507b .000
The above statistical tests reveal that there is significant association between manager‘s views on Sales/ Demand characteristics (Demand uncertainty) and their job positions.
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Table 9.24Sales/ Demand characteristics(Demand Fluctuation) % within Job Position Sales/ Demand characteristics(Demand Fluctuation)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 5.6% 1.0% Disagree 1.3% 11.1% 3.0% Undecided 2.7% 16.7% 5.6% 4.0% Agree 1.3% 50.0% 100.0% 33.3% 11.0% Moderately Agree 9.3% 16.7% 38.9% 15.0% Strongly Agree 85.3% 16.7% 5.6% 66.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 68.026a .010 Likelihood Ratio 63.605 .000 Fisher's Exact Test 71.904 .000 Linear-by-Linear Association 34.762b .000
The above statistical tests reveal that there is significant association between
manager‘s views on Sales/ Demand characteristics (Demand fluctuations) and
their job positions.
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Table 9.25Distribution Characteristics (No. of Customers) * Job Position Cross tabulation
% within Job Position Distribution Characteristics (No. of Customers)
Job Position Total Logistics Manager
Financial manager
Director Other
Strongly Disagree 1.3% 11.1% 3.0% Moderately Disagree 11.1% 2.0% Disagree 1.3% 16.7% 2.0% Undecided 2.7% 100.0% 11.1% 5.0% Agree 2.7% 33.3% 33.3% 10.0% Moderately Agree 89.3% 11.1% 69.0% Strongly Agree 2.7% 50.0% 22.2% 9.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 94.876a .000 Likelihood Ratio 74.509 .000 Fisher's Exact Test 82.062 .000 Linear-by-Linear Association 14.446b .000
The above statistical tests reveal that there is significant association between manager‘s views on Number of customers and their job positions.
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Table 9.26Distribution Characteristics (No. of International Customers) * Job Position Cross tabulation
% within Job Position Distribution Characteristics (No. of International Customers)
Job Position Total Logistics Manager
Financial manager
Director Other
Moderately Disagree
5.6% 1.0%
Disagree 2.7% 11.1% 4.0% Undecided 5.3% 44.4% 12.0% Agree 2.7% 33.3% 100.0% 22.2% 9.0% Moderately Agree 88.0% 33.3% 16.7% 71.0% Strongly Agree 1.3% 33.3% 3.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 78.952a .010 Likelihood Ratio 57.399 .000 Fisher's Exact Test 64.778 .000 Linear-by-Linear Association 33.749b .000
The above statistical tests reveal that there is significant association between manager‘s views on Number of international customers and their job positions.
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Table 9.27Distribution Characteristics (No. of warehouses)
% within Job Position Distribution Characteristics (No. of warehouses)
Job Position Total Logistics Manager
Financial manager
Director Other
Moderately Disagree
16.7%
11.1% 3.0%
Disagree 1.3% 16.7% 27.8% 7.0% Undecided 4.0% 16.7% 27.8% 9.0% Agree 90.7% 16.7% 100.0% 27.8% 75.0% Moderately Agree 1.3% 33.3% 5.6% 4.0% Strongly Agree 2.7% 2.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests
Value Exact Sig. (2-sided)
Pearson Chi-Square 60.660a .006 Likelihood Ratio 50.031 .000 Fisher's Exact Test 58.805 .000 Linear-by-Linear Association 24.747b .000
The above statistical tests reveal that there is significant association between manager‘s views on Number of warehouses and their job positions.
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Table 9.28Distribution Characteristics (Distribution channel varity) % within Job Position Job Position Total
Logistics Manager
Financial manager
Director Other
Distribution Characteristics (Distribution channel varity)
Moderately Disagree
16.7%
1.0%
Disagree 16.7% 3.0% Undecided 4.0% 16.7% 27.8% 9.0% Agree 8.0% 16.7% 100.0% 22.2% 12.0% Moderately Agree
1.3% 16.7%
27.8% 7.0%
Strongly Agree 86.7% 33.3% 5.6% 68.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
.
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square
79.398a .010
Likelihood Ratio 64.388 .000 Fisher's Exact Test 71.041 .000 Linear-by-Linear Association
36.896b
.000
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The above statistical tests reveal that there is significant association between manager‘s views on distribution channel variety and their job positions
Table 9.29% within Job Position Job Position Total
Logistics Manager
Financial manager
Director
Other
Distribution Characteristics (Delivery fequency)
Strongly Disagree
5.6% 1.0%
Moderately Disagree
5.6% 1.0%
Disagree 5.6% 1.0% Undecided 2.7% 33.3% 11.1% 6.0% Agree 2.7% 50.0% 33.3% 11.0% Moderately Agree 94.7% 16.7% 100.0% 22.2% 77.0%
Strongly Agree 16.7% 3.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 71.300a .030 Likelihood Ratio 60.230 .000 Fisher's Exact Test 74.866 .000 Linear-by-Linear Association
17.474b .000
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Table 9.30Distribution Characteristics (Order lead time) % within Job Position Job Position Total
Logistics Manager
Financial manager
Director Other
Distribution Characteristics (Order lead time)
Moderately Disagree
5.6% 1.0%
Disagree 1.3% 100.0% 2.0% Undecided 2.7% 16.7% 16.7% 6.0% Agree 4.0% 66.7% 33.3% 13.0% Moderately Agree 92.0% 16.7% 44.4% 78.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests Value Exact Sig.
(2-sided) Pearson Chi-Square 91.199 .010 Likelihood Ratio 43.373 .000 Fisher's Exact Test 51.140 .000 Linear-by-Linear Association 18.211 .000
The above statistical tests reveal that there is significant association between manager‘s views on customers order lead time and their job positions.
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Table 9.31Distribution Characteristics (Distribution size time) % within Job Position Job Position Total
Logistics Manager
Financial manager
Director Other
Distribution Characteristics (distribution size time)
Moderately Disagree
5.6% 1.0%
Disagree 1.3% 1.0% Undecided 2.7% 33.3% 16.7% 7.0% Agree 5.3% 33.3% 33.3% 12.0% Moderately Agree
4.0% 16.7% 100.0% 38.9% 12.0%
Strongly Agree 86.7% 16.7% 5.6% 67.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests
Value Exact Sig. (2-sided)
Pearson Chi-Square 66.136 .020 Likelihood Ratio 61.915 .000 Fisher's Exact Test 71.843 .000 Linear-by-Linear Association
29.652 .000
N of Valid Cases 100
The above statistical tests reveal that there is significant association between manager‘s views on distribution size time and their job positions.
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Table 9.32Distribution Characteristics (Uncertainty of dist. time, quality& quantity) % within Job Position Job Position Total
Logistics Manager
Financial manager
Director Other
Distribution Characteristics (Uncertainty of dist. time, quality& quantity)
Disagree 2.7% 5.6% 3.0% Undecided 1.3% 22.2% 5.0% Agree 1.3% 83.3% 100.0% 22.2% 11.0% Moderately Agree 89.3%
27.8% 72.0%
Strongly Agree 5.3% 16.7% 22.2% 9.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Chi-Square Tests
Value Exact Sig. (2-sided)
Pearson Chi-Square 76.003 .000 Likelihood Ratio 59.778 .000 Fisher's Exact Test 62.165 .000 Linear-by-Linear Association
7.698 .006
The above statistical tests reveal that there is significant association between
manager‘s views on uncertainty of distribution time and their job positions.
Conclusion:- The above statistical test shows that there is significant
association between different aspects like production, distribution and
sales are important parameters in determining the efficiency of logistics
outsourcing, therefore we accept H3 Hypothesis.
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H04: Logistics performance does not play a key role in the profitability of
the Company
H4: Logistics performance plays a key role in the profitability of the
company.
Logistics performance depends on low logistics cost, promised delivery
time, ordered quantity, which can effect the profitability of the company.
RELATIVE IMPORTANCE OF LOW LOGISTICS COST Table 9.35 Descriptive of importance given by the managers for logistics objectives.
Logistics Objectives
Mean Importan
ce in points out of 100
Std. Deviati
on Std. Error
95% Confidence Interval for Mean
Minimum Maximum
Lower Bound
Upper Bound
Low Logistics cost 24.67 10.02 1.00 22.68 26.66 10.00 65.00 High reliable& consistent logistics service
19.75 4.99 0.49 18.75 20.74 5.00 40.00
Short delivery lead time
19.75 4.99 0.49 18.75 20.74 5.00 40.00
High flexibility to accommodate demand changes
20.50 5.05 0.50 19.49 21.50 10.00 50.00
ANOVA
Sum of Squares
Mean Square F Sig.
Between Groups 1673.168 557.723 12.678 .000
Within Groups 17420.610 43.991
Total 19093.778
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Tukey HSD
Logistics Objectives
Subset for alpha = 0.05
1 2 High reliable& consistent logistics service
19.75
Short delivery lead time 19.75
High flexibility to accommodate demand changes
20.50
Low Logistics cost 24.67 Sig. .855 1.000
Means for groups in homogeneous subsets are displayed.
ANOVA test shows that there is significant difference between mean
relative importance of the logistics objectives and Turkey test shows that
maximum importance given to Low Logistics cost.
Conclusion:-
The above statistical test shows that Logistics performance depends
on low logistics cost, promised delivery time, ordered quantity, which can
effect the profitability of the company. therefore we accept H4
Hypothesis
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CHAPTER 10
OUTSOURCING STRATEGIES
MODELLING THE LOGISTICS OUTSOURCING RELATIONSHIP
VARIABLES TO ENHANCE SHIPPERS PRODUCTIVITY &
COMPETITIVENESS IN LOGISTICAL SUPPLY CHAIN
PERFORMANCE MEASUREMENT IN BUSINESS PROCESS
OUTSOURCING DECISIONS INSIGHT FROM 4 C.S.
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CHAPTER 10
OUTSOURCING STRATEGIES
10.1 Modeling the logistics outsourcing relationship variables to enhance
shippers' productivity and competitiveness in logistical supply chain
The outsourcing of logistics functions has become the obvious choice with the
companies (henceforth referred to as shippers: the companies who are usually
the suppliers or owners of commodities shipped) eyeing for cost reduction and
value enhancement while distributing and transporting their products.
Outsourcing all or part of logistics function in a logistical supply chain to logistics
service providers (LSPs) has now become the norm across the industry. As per
[54] Muller (1991), an improvement in the delivery process can also contribute
towards competitive advantages, as contributed by the product. Logistics
outsourcing has also been instrumental in turn around cases, wherein shippers
incurred loss; hence it has taken its place in strategic boardroom agenda ([23]
Foster and Muller, 1990). [68] Sheffi (1990), identified the major contributing
factors in the development of logistics outsourcing as increased competition,
service expectation, worldwide deregulation, and advances in computers and
communication technology. Shippers' growing concern towards cost, service,
focus or core competencies, experience, asset reduction, access to suitable
information technologies etc. is perceived by LSP and this growing concern has
compelled to venture new intrusion in to their offerings ([27] Gooley, 1994). [2]
Bardi and Tracey (1991) and [44] Lieb and Randall (1996), surveyed firms using
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outsourcing services to determine the extent of logistics outsourcing penetration.
The result from these surveys suggested that the outsourcing of logistics
functions is becoming increasingly common and it is rapidly expanding source of
cost savings, competitive advantage, and customer serviceimprovements.
However at the same time, it is important to note that logistics outsourcing can
pose threat tocorporate failure and disappointment too, if outsourcing relationship
is not clearly defined and practiced. Hence it is very important to identify the right
potential LSP who can meet shippers' requirements, and maintain an enduring
and healthy relationship. [65] Schultz (2005), suggested seven guidelines to keep
healthy relationship which include "sharing the benefits, realistic request for
proposal (RFP), going for hype-vs.-reality check, measuring everything, keeping
accurate record, it is not an all-or-nothing game and nobody is perfect". As per [1]
Ackerman (1996), shippers may fail to gain the advantage because of many
reasons for instance unclear goals and unrealistic expectations, internal
sabotage by managers, partial voice of the management opting for outsourcing,
and flaws in the contractual agreement linking the parties involved. Relationship
between shippers and LSPs is of hidden attributes, most often neglected by the
shippers; hence healthy relationship is necessary for successful logistics
outsourcing relationship. ([16] Deming, 1986; [31] Hanan, 1986; [5] Bhote, 1989;
[56] Poirier and Houser, 1993; [17] Dixon and Porter, 1994; [18] Dobler and Burt,
1996; [19] Dyer, 1996; [57] Rackham et al. , 1996; [70] Simchi-Levi et al. , 2000;
[77] Wagner et al. , 2002; [46] McHugh et al. , 2003). In the past decade, the
significance of different forms of relationships has also grown in business
practices because shippers try to gain a competitive advantage by outsourcing
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non-critical activities, establishing close partnering relations, and reducing and
trimming their supplier bases, ([24] Gadde and Snehota, 2000). Handling
logistics services provider demands careful intervention from shipper as "It's five
times as hard to manage outsourcing as it is to manage people who work for
you", ([49] Malhotra, 2002). [42] Lieb and Bentz (2003), conducted survey of 500
fortune manufacturers, to investigate nature of the relationship exists between
users and providers. They also investigated theimpact of the economic slowdown
on user volume and third party logistics (3PL) relationships. As per [8] Bowersox
et al. (2003), the act of one stop shopping ([29] Gooley, 2002), makes the
management of 3PL relationships more complex, hence requires effective cross-
company management skills to realize the potential benefits of such
relationships. [80] Wisner (2003), developed and analyzed a theoretical
framework to check the linkages between supplier management strategy,
customer relationship strategy and firm's performance Depicts three dyadic
relationships among shipper, buyer and LSP in logistical supply chain. The
relationship with LSP does not end with the award of the contract in fact, in many
ways it is just the beginning, moreover shipper has an equal responsibility to
nurture the relationship so that the healthy partnership is established and gets
converted in to an enhanced productivity and competitive advantage. As per [36]
Knemeyer and Murphy (2004), shippers spend an average of nearly one-third of
their total logistics budgets (compared to 20 percent today) to support logistics
services, ([28] Gooley, 2000). Yet, very little research has examined the
managerial activities that might influence the performance of these logistics
outsourcing relationships. The study attempts to bridge this gap, we have used
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an interpretive structural modeling (ISM) that can develop a frame work for a
logistics relationship between shippers and LSPs, for this purpose the following
objectives have been identified. - identification and ranking of the factors that
acts as an enablers for logistics outsourcing relationship and to study their
influence on productivity and competitiveness; - to find out the interaction among
identified enablers and relationship outcome variables using ISM; and - to
discuss the managerial implications of this research.
This article is further organized as follows. The next section presents the
literature review and discusses the identification of enablers and outcome
variables of logistics outsourcing relationship, which is followed by an
introduction to ISM, ISM methodology and ISM model development. Matrice
d'Impacts Croisés Multiplication Appliquée à un Classement (MICMAC) analysis
has also been carried out, on the developed model subsequently. Finally, the
discussion and conclusion of this research are presented, which is followed by
limitation and scope for future work.
Commitment or trust
Commitment (or trust) is very critical for shippers as well as LSP as it provides
the sound ground for healthy relationship for success ([10] Bradley, 1994; [67]
Sheehan, 1989). [71] Sinclair et al. (1996) described three types of trust:
competence, contractual and goodwill, whereas [30] Hacker et al. (1999)
described trust as capability, commitment, and consistency. [25] Ganesan
(1994), profoundly stressed "trust" and its effect on the long-term relationship.
Commitment and trust can beused interchangeably ([52] Mohrand Spekman,
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1994) to portray the shipper and LSPs' relationship. [32] Handfield and Bechtel
(2004), grouped the trust in to eight conceptual paradigms. The eight paradigms
identified were: reliability; competence; goodwill (openness and benevolence);
vulnerability; loyalty; multiple forms of trust; combining trust with vulnerability; and
The future of trust (non-partisan proactive-based trust).
Top management support
Top management support is vital to commence and sustain a healthy
relationship. Encouragement from top management by way of award of contracts
motivates LSPs morally and economically. [20] Ellram (1991), emphasized top
management support as an enabler, while lack of top management support as a
barrier to partnership. As per [13] Chen and Popovich (2003), top management
commitment is an essential element to bring an innovation in a daily practice and
ensures delivery of promised benefits. Top management support and
commitment right from the outset percolate to the lower echelons and helps in
better understanding and functional tuning in order to achieve the mission and
vision of the shippers.
Two way information sharing
Advent of internet and information technology has opened new modes for
effective and economic communication at rapid pace. Through systematic
investigation, [73] Sink and Langley (1997), confirmed the high degree of
communication and interaction requirement for shippers that exists, between
different levels of the management and between the shipper and the LSP. The
information sharing by exchanging important data at each stage helps to bridge
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the gap and enables theLSP to take initiatives andcorrective action for required
coordination and integration, [59] Rahman and Qureshi (2007). According to [40]
Lehtonen (2004), the success of the relationship is based on many variables for
instance, two-way information-sharing, joint problem solving, the partners' ability
to meet performance expectations, clearly defined and mutually-agreed goals,
and mutual involvement in relationship development and planning. Thus, good
and systematic communication leads to healthy relationship ([11] Bullington and
Bullington, 2005). Information sharing and cooperative monitoring methods are
decisive for the success of outsourcing relationships.
Added distinctive value through TQM and JIT practice
Benchmarking practices and innovative ideas add distinctive value to the
challenging logistics services and problem solving activities. Shipper prefers the
change ([11] Bullington and Bullington, 2005) and joint problem solving ([52]
Mohr and Spekman, 1994). LSP practicing TQM and JIT practice adds distinctive
value ([20] Ellram, 1991) and commitment in their offerings thus ensure the
healthy relationship. Just-in-time (JIT) is also identified as a main driver for
outsourcing ([26] Goldberg, 1990; [68] Sheffi, 1990; [76] Trunick, 1989) as it
helps in curtailing the inventory burden. LSPs practicing JIT and TQM have
shown much potency in handling delivery and inventory for shipper in critical
time. Change, or continuous improvement, by LSPs is also witnessed by shipper
during their long term relationship.
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Coordination
LSPs who are engaged in all or part of the firm's product distribution function,
allow the shipper to focus on its core competencies rather than on the distribution
expertise. Thus collaboration between a shipper and LSPs is indispensable for
successful production-distribution outcome. Coordination ([52] Mohr and
Spekman, 1994) is very important enabler of the relationship to move towards
the shared goal ([20] Ellram, 1991). [21] Ellram's (1995) study of partnership
success factors identified shared goals as a high-ranking factor. Other studies
([53] Moody, 1993; [20] Ellram, 1991) confirm the importance of shared goals.
Participation ([52] Mohr and Spekman, 1994) and time spent together ([11]
Bullington and Bullington, 2005) by shippers and LSP enables them to
understand capabilities of each other. [35] Jung et al. (2005) proposed a new
decentralized coordinating model based on minimum information sharing for
efficient coordination.
Involvement
In general, LSPs' involvement produces positive impact on logistics performance
and relationship. Their involvement reduces the logistics cost as well as cycle
time. LSPs' involvement produces the biggest impact on quality improvement.
According to [38] Langfield and Greenwood (1998), early involvement of LSP
provides direct assistance to shippers. Constant involvement of LSP brings good
tuning in day-to-day operation. Last minute change in the operation is easily
doctored due to mutual understanding, which cuts down the delays and logistics
cost drastically. Involvement assures that, the healthy relationship is prospered.
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Evaluation of supplier performance
Formal performance evaluation of LSP ([38] Langfield and Greenwood, 1998) is
one of the important enabler which keeps the shipper and LSP to know their
strengths and weaknesses. [11] Bullington and Bullington (2005), stressed
appreciation of supplier on their outstanding performance in order to foster good
relationship. Appreciation for the improvements is communicated throughout the
organization, the commitment becomes impregnable, which in turn feeds more
improvement or allows the partnership to survive even more crises. As per [9]
Boyson et al. (1999) LSPs can contribute up to 5 percent increase in productivity
per year by togetherness and by motivating them to bring ideas to improve
productivity. [38] Langfield and Greenwood (1998), have found out that formal
evaluation of LSPs' performance is a key success factor in their relationship with
Toyota. The range of factors that may be taken into account in the evaluation of
supplier performance must be tailored to the specific as per the customers'
requirements.
Long term contract
Long-term contracts between shipper and LSPs create an atmosphere of trust
and commitment which creates propensity to deliver. A precise long-term
contract, with clearly defined expectations, responsibilities and performance
parameters, forms the basis for an enduring relationship. Nevertheless, the
conflict resolution mechanism should also be clearly included in the contract.
Long-term contracts leading to quantifiable standards of performance forms the
basis of the good relationship. As per [10] Bradley (1994), long-term business
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relationship canprovide required transition time to improve thebusiness.
According to [79] Webb and Laborde (2005), long-term arrangements must be
amenable to changing market conditions, technologies, and customer demands.
According to [38] Langfield and Greenwood (1998), long-term contracts, is a vital
variable in long-term relationship between shippers and LSPs.
Identification of outcome variables of LSP relationship
Customer satisfaction
Good relationship between shippers and LSPs boost productivity, which in turn
results in better increased profitability and customer satisfaction. State of the art
technologies like EDI, RFID, Tracking and tracing devices used by LSPs makes
them responsive ([58] Rahman, 2004), hence lead to render better services to
customers. According to [74] Sloper (2004), improving or guaranteeing service
quality or adding new features, such as 24 × 7 working helps in customer
satisfaction. LSPs practicing TQM, JIT, Six Sigma and other world class
benchmarking techniques bring world class quality in delivery leading to
customer delight.
Dedicated resources
As per [39] Langley (2000), excellence in logistics is a must for many shippers, in
order to satisfy their strategic objective of consistency in product delivery.
Logistics outsourcing settles the logistics infrastructure requirement of shippers,
in most cases they generate dedicated resources to serve the shippers in a
better way. Logistics outsourcing provides access to dedicated group of skilled
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manpower at lower costs. It also provides access to state of the art technologies
like RFID, tracking and tracing devices at very affordable rates. As per [23]
Foster and Muller (1990), outsourcing can contribute toprofits by enabling users
to gain competitive advantage, by ways of adding measurable value to products,
enhancing customer service, assisting in opening new markets, and providing
dedicated resources to meet anticipated needs.
Customer service levels
According to [61] Razzaque and Sheng (1998), the very reason behind the
evolution of contract logistics was customer service which plays an important role
in a supply chain. Outsourcing, third-party logistics and contract logistics,
generally, mean the same thing ([45] Lieb et al. , 1993). As per [34] Hill (1994);
[41] Lieb (1992) and [68] Sheffi(1990) good customer service can be obtained
efficiently and effectively through LSP, hence this strategic value must be
emphasized by shipper. As per [82] Ying and Dayong (2005), customer service
level can be enhanced by providing accurate information from a single source in
a real time through integration.
Logistics cost saving
LSPs provide lower logistics cost and better services with more flexibility. [75]
Sohail and Sohal (2003), conducted survey on the use of 3PL services from
Malaysian perspective and revealed that contract logistics services has had a
strong positive impact on costs, system performance, and customer satisfaction.
Of the respondents, 70 percent or thereabout noted the impact as "positive",
while an average of about 20 percent had reported the impact as "very positive"
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in each of these stated areas. Good relationship helps the shipper to cut down
the logistics cost by renewing the contract repeatedly to the LSP.
Expanded outsourcing
As per [74] Sloper (2004), logistics outsourcing is generally a long-term activity
requiring both parties to manage medium and long-term uncertainties, good
relationship helps in bonding them together even for short term too, thus good
relationship encourages expanded outsourcing. Expanded outsourcing helps
shipper in many ways for instance, permit to concentrate on core business,
provides skilled manpower and advanced technologies at lower rates, enhances
productivity and customer service level. Good relationship encourages LSP to
expand their range and spread of services. Good relationship also motivates LSP
to venture into the outsourcing business in a big way.
Enhanced value
According to [15] Daugherty and Pittman (1995), LSP can enhance value
creation for customers leading them to become more competitive and profitable
through speedy and superior customer service in logistical supply chain.
According to [74] Sloper (2004), enhanced value is the first benefit sought by
most shippers, in order to get explicit cost saving and increased market share.
Enhanced value by LSP is also responsible for turn around cases for many sick
units by cutting down their overheads and offering competitive price to beat the
market competition. Thus, enhanced value fetches more market share and help,
shippers to grow their business in a competitive market.
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Productivity enhancement and competitive advantage
Effective outsourcing relationships can establish continuous improvement in
productivity ([9] Boyson et al. , 1999). Enhanced productivity enables the shipper
to capture more market share. It has been suggested ([33] Hendrick and Ellram,
1993) that relationship will be the source of competitive advantage in the future,
and that commitment or trust is essential to these relationships ([81] Yilmaz et al.
, 2005). In view of [69] Sheth and Sharma (1997) and [20] Ellram (1991)
outsourcing advantage cover broad spectrum, it may be asset/cost efficiencies,
improved customer service, marketing advantage or profit stability/growth. As per
[7] Bowersox (1990), logistics alliances are making US industry more efficient
and thus more competitive. As per [74] Sloper (2004), logistics outsourcing
improves the focus towards value chain optimization leading to enhancement of
productivity, motivation and value addition. It also provides competitive
advantage by delivering faster to market and allow accessing and assessing new
technologies, techniques or markets.
ISM introduction
Interpretive structural modeling (ISM) is an interactive learning process in which
a set of different and directly related elements are structured into a
comprehensive systemic model ([78] Warfield, 1974; [63] Sage, 1977). The ISM
process transforms unclear, poorly articulated mental models of systems into
visible, well-defined models serving varied purposes ([63] Sage, 1977). The ISM
methodology is an interactive learning process wherein a systematic application
of some elementary notions of graph theory is used in such a way that
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theoretical, conceptual, andcomputational leverage areexploited to explain the
complex pattern of contextual relationship among a set of variables ([48] Malone,
1975). It helps in identifying the inter-relationships among variables. It also helps
to impose order and direction on the complexity of relationships among elements
of a system. It is a suitable modeling technique for analyzing the influence of one
variable on other variables. The model so build depicts the structure of a complex
issue or problem, a system or a field of study undertaken, in a systematic
blended presentment of graphics as well as linguistic.
ISM Methodology
As discussed in previous section, ISM is primarily intended as a group learning
process. The method is interpretive as the judgment of the group decides
whether and how the variables are related. It is structural as on the basis of
relationship, an overall structure is extracted from the complex set of variables. It
is a modeling technique as the specific relationships and overall structure is
portrayed in a digraph model. ISM starts with an identification of variables, which
are relevant to the problem or issue and then extends with a group problem-
solving technique. Later on a contextually relevant subordinate relation is
identified. After resolving the variable set and the contextual relation, a structural
self-interaction matrix (SSIM) is prepared based on pair-wise comparison of
variables. The SSIM is transformed in to a reachability matrix which includes
variable transitivity. Lastly, the partitioning of the variables and an extraction of
the structural model, called ISM is derived. In the present paper, ISM has been
applied to show the interrelationships of among the enablers of LSP relationship
and its outcome variables. Various steps involved in the ISM methodology,
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ISM model development
The development of the ISM model begins with literature review in order to
compile the enablers and outcome variable for LSP relationship which is
discussed in earlier section. The identification of enablers and outcome variables
of LSP relationship and establishment of contextual relationship was undertaken
through brain storming process which is discussed as under.
ISM methodology infuses expert opinions using brain storming, nominal group
technique etc. in contextual variable relationship development. Three brain
storming sessions were conducted to identify the enablers and outcome
variables of LSP relationship and later on the contextual relationship was
established. A total of 18 participants including five core members and six
experts, three each from LSPs and shippers from FMCG, automobile and heavy
engineering sector took part in brain storming session. An idea collector and rest
participants were from academia and experts from the field, concerned with
teaching, learning and practicing supply chain management and logistics
management. First introductory brain storming session was held to introduce the
research agenda and its significance; later on they were issued pertaining
literature to identify the related enablers and outcome variables of LSP
relationship. Second brainstorming session was conducted after 15 days,
wherein 11 enablers and ten variables were identified from the literature review.
During the last brain storming session, ranking of enablers and variables was
carried out. Three enablers and outcome variables were dropped, from both
groups as they were found to be less significant. The dropped variables were
also ranked, lowest inoverall ranking. Thus 11 enablers were reduced to eight,
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whereas ten outcome variables were reduced to seven, the reduction of enablers
and outcome variables also alleviated the manual contextual relationship
development. Initial relationship was established during the last session; later on
it was reconfirmed from the external expert group. Expert group was hailed from
LSPs handling FMCG, automobile and heavy industry sector and from the
shippers' side dealing in outsourcing activities and having profound experience.
The enablers and outcome variables of LSP relationship identified at the end of
the brainstorming session are listed in Table III [Figure omitted. See Article
Image.]. The identification of variables and their contextual relationships leads to
the development of various matrixes. The rest of the model development process
is further described under the following broad headings: - structural self-
interaction matrix (SSIM);- reachability matrix; - partitioning the reachability
matrix; - developing conical matrix, and - developing diagraph. After the model
development, the enablers and outcome variables are classified based on their
driving and dependence using MICMAC analysis, which is discussed at the end
followed by discussion, conclusion and scope for future work.
Structural self-interaction matrix (SSIM)
During the brain storming session, enablers and outcome variables were
identified. Later on during the contextual relationship establishing session,
relationship was established between sub-variables (let i and j ) by comparing a
pair of variables and asking "leads to" type questions. This means that whether i
leads to j or vice versa, the associated direction of the relation was questioned.
Four symbols have been used for establishing contextual relationship that exists
between the two sub-variables (i and j ) under consideration are as follow:
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V =Variable i will help achieve variable j ; A =Variable j will be achieved by
variable i ; X =Variable i and j will help achieve each other; and O =Variables i
and j are unrelated.
Based on the contextual relationships the SSIM is developed for the 15 variables
identified for the LSP relationship and outcome of LSP relationship.
According to expert's opinion, two-way information sharing (1) leads to
productivity enhancement and competitive advantage (15); therefore V is
assigned to the cell obtained by intersecting row of two-way information sharing
(1) and column of productivity enhancement and competitive advantage (15).
According to expert's opinion, expanded outsourcing (5) is achieved by long term
contract (13); hence A is assigned to the cell obtained by intersecting row of
expanded outsourcing (5) and column of long term contract (13).
According to expert's opinion, there is no relation between customer satisfaction
(7) and long term contract (13); hence O is assigned to the cell obtained by
intersecting row of customer satisfaction (7) and column of long term contract
(13). Similarly, during pair comparison if variable is found to help each other than
X is assigned in the cell at intersection row and column. Based on these
contextual relationships the SSIM is developed.
Reachability matrix
The reachability matrix is obtained from SSIM. The reachability matrix indicates
the relationship between variables in the binary form. The various relationships
between variables depicted by symbols V, A, X, O used earlier in SSIM are
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replaced by binary digits of 0 and 1. The following rules are used to substitute V,
A, X, O of SSIM to get reachability matrix. If the (i , j ) entry in the SSIM is V, then
the (i , j ) entry in the reachability matrix becomes 1 and the (j , i ) entry becomes
0. If the (i , j ) entry in the SSIM is A, then the (i , j ) entry in the reachability
matrix becomes 0 and the (j , i ) entry becomes 1. If the (i , j ) entry in the SSIM
is X, then the (i , j ) entry in the reachability matrix becomes 1 and the (j , i ) entry
also becomes 1. - If the (i , j ) entry in the SSIM is O, then the (i , j ) entry in the
reachability matrix becomes 0 and the (j , i ) entry also becomes 0. The
reachability matrix thus derived is known as initial reachability matrix
The final reachability matrix is obtained by incorporating the transitivity.
Transitivity is a relation between three elements such that if relationship holds
between the first and second and relationship also holds between the second
and third, than relationship must necessarily holds between the first and third (i.e.
i [arrow right]j , j [arrow right]k than i [arrow right]k ). Final reachability matrix is
shown in Table VI [Figure omitted. See Article Image.]where in transitivity is
marked as 1*. Table VI [Figure omitted. See Article Image.]shows driving power
and dependence of each variable which is explained later on in MICMAC
analysis
Partitioning the reachability matrix
After the final reachability matrix, the partitioning is done in order to find the
hierarchy of each variable. Partitioned reachability matrix will help to generate
conical matrix, which is explained subsequently. As per [78] Warfield (1974), the
reachability and antecedent set for each variable can be obtained from final
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reachability matrix. The reachability set includes variable itself and others which it
may help to achieve, similarly the antecedent set consists itself and other
variables which helps in achieving it. Later on the intersection between
reachability and the antecedent set is attained. If the membership in reachability
and the intersection completely agrees than the top priority is assigned and the
variable is excluded from the subsequent iteration, like wise procedure leads to
final iteration leading to the lowest level.
Developing conical matrix
Conical matrix is achieved from partitioned reachability matrix by rearranging the
elements according to their level, which means all the elements having same
levels are clubbed together. Element 15 is found at level I, while elements 7 and
8 are having level II, whereas elements 6 and 12 are having level III, The conical
matrix helps in the generation of the diagraphs and later on structural model.
Development of digraph
Based on the conical form of reachability matrix, the initial digraph including
transitive links is obtained later on the indirect links may be removed for the sake
of simplicity. As per the conical matrix, the variable identified first is placed at the
top here variable 15 has level I, hence it is placed on the top, followed by two
variables 7 and 8 which are foundat level II, thus all the variables are placed at
predefined level as displayed in conical matrix. The connectivity is shown among
the variables as per the final reachability matrix. The final diagraph is obtained by
removing the indirect link.
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It is evident that top management support (3) is a very significant factor for the
logistics service relationship between shipper and LSP as it forms the base of the
ISM hierarchy. Productivity enhancement and competitive advantage (15) is the
resulting outcome variable, which can be achieved through successful logistics
relationship practices between shipper and LSP. This variable has appeared at
the top in the ISM hierarchy. The top management support (3) leads to the
development of commitment or trust enforcement (2). Success of outsourcing
depends on a user-provider relationship based on mutual trust and faith ([10]
Bradley, 1994; [67] Sheehan, 1989). The trust enhances coordination (9),
ensures two-way information sharing (1) and appreciates the TQM and JIT
supplier added distinctive value (5). Management is always keen to keep strict
vigil by having evaluation of supplier performance (11) continuously, which in fact
boosts relationship bond and encourage long-term contract (13). Top
management thus create veracious environment for the healthy relationship
leading to extended outsourcing (4), which is as per the findings of [50] Maltz and
Ellram (1997) that has recognized the importance of such relationships in making
outsourcing decisions. Expanded outsourcing (4) lead to logistics cost saving
(14) and creation of dedicated resources (6) and resulting in enhanced value (8).
As per [62] Richardson (1993) high level of understanding propagates high level
of understandable partnership for the own business and the business of the
counterpart. Shipper gets superior service because of good tuning in day-to-day
work which is evident from the model. Enhanced customer service level (12)
leads toenhancement of customer satisfaction (7). Enhanced value and customer
satisfaction together prosper the logistics services relationship, and helps in
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productivity enhancement and competitive advantage (15), which is in line with
conclusion made by many researchers for instance conclusion made by [9]
Boyson et al. (1999) as "Across many industries, logistics outsourcing is a rapidly
expanding source of cost savings, competitive advantage, and customer service
improvements." While [14] Christopher and Towill (2001), concluded as "All the
trading partners work for a common goal and interacts with each other to realize
the benefits of an integrated supply chain."
MICMAC analysis
Identification and classification of the key variables are essential to develop the
system under study. Comparing the hierarchy of variables in the various
classifications (direct, indirect and potential) leads to rich source of information. It
enables one not only to confirm the importance of certain variables but also effect
to uncover certain variables which, because of their indirect actions, play an
important role (yet, they are not identifiable through direct classification).
MICMAC is an indirect classification method based on driving power and
dependence of each variable helps to critically investigate the scope of each
variables. In MICMAC analysis, all the variables are clustered in to four
categories. Cluster I portrays autonomous variables having weak driving power
and weak dependence, which are relatively disconnected from the system, as
they possess few weak links with other variables. Cluster II portrays dependent
variables having weak driving power but strong dependence. Cluster III portrays
linkage variableshaving strong driving power andstrong dependence. These
variables are unstable due to the fact that, any change occurring to them will
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affect other variables and gets affected through feedback too. Cluster IV portrays
independent variables having strong driving power but weak dependence.
The objective of MICMAC analysis in this study is to identify and analyze the
enablers and outcome variables of LSP relationship based on their indirect
classification ([51] Mandal and Deshmukh, 1994; [64] Saxena et al. , 1990; [66]
Sharma et al. , 1995). Driving power and dependence is the summation of binary
digit "1" in their respective row and column for each variable respectively in the
final reachability matrix, These driving power and dependence for each variable
can be plotted as the matrix diagram shown in that the variable (1) is having a
driving power of "8" and dependence of "5". it is positioned at a place
corresponding to driver power of "8" and dependency of "5".
Discussion and conclusion
In the competitive market, the shipper is looking to enhance market share by
adopting different strategies. Recently, many shippers have adopted the strategy
of logistics outsourcing to capture market, by satisfying customers through value
addition and customer delight. Logistics outsourcing also helps to cut down
shippers' logistics cost, thereby enabling them to offer their products and services
at more competitive rates to beat the stiff competition. LSPs are strategically,
creates product differentiation too, by providing flexibility, speed with minimal
holding off in a logistical supply chain. Considering the important role played by
LSP, it is of prime importance to build healthy relationship with them. Shippers
can enhance their productivity and competitiveness by practicing the healthy
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relationship, whichis evident from the model developed hence it is imperative on
the part of shippers to emphasis on healthy relationship.
This study has some other implications for the practicing managers. The driver
power-dependence matrix gives some valuable insights about the relative
importance and interdependencies, among the enablers and outcome variables
of relationship. The managerial implications emerging from this study are as
follows:
- The driver power-dependence matrix. indicates that no variable is taking place
in the autonomous variable cluster.
- Variables such as productivity enhancement and competitive advantage,
customer satisfaction, expanded outsourcing, dedicated resources, customer
service level, logistics cost saving and enhanced value are possessing weak
driving powers but have strong dependency on other variables. They are seen at
the top of the ISM hierarchy These variables represent the desired outcome in
favor of shippers having healthy relationship practices with LSPs.
- No variable is seen as a linkage variable that has a strong driving power as well
as strong dependence. Thus, it can be deduced that all the enablers and
outcome variables of logistics relationship identified are stable.
- The driver power dependence diagram indicates that independent enablers
such as top management support, trust, two-way information sharing, TQM and
JIT practicing supplier added distinct value, coordination, direct assistance,
evaluation of supplier performance and long term contract are at the bottom of
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ISM hierarchy, having strongdriving power and weak dependence. Thus the
management needs to address theseenablers more carefully during their liaison
with LSPs. It can also be deduced that these enablers help to achieve the
outcome variables, which appear at the top of the ISM hierarchy. Therefore, it is
important to note that, management should devise strategies to enhance the
deployment of such enablers in order to enhance productivity and
competitiveness.
The main contributions of this research include the following.
In this paper, an attempt has been made to identify mutual impact of enablers
and outcome variables of logistics relationship. Although good amount of
literature on LSP, based on empirical study has been developed involving
various issues related to it. The relationship between shippers and LSP in terms
of enablers and variables has not been modeled in order to help the practicing
managers. The present model will help practicing managers to understand the
relationship crux. The present model will act as a base model to develop further
model using structural equation modeling (SEM), hence the present research
assumes importance in this context. A key finding of this research also draws
attention of top management, about their crucial role in the relationship initiation
with LSP. The healthy relationship practices, favors both shippers as well as
LSPs. Enhancement in productivity and competitiveness is realized by shipper
while, outsourcing activities are expanded on other hand which contribute
towards LSP's growth, ([55] Muller, 1992).
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In this research, enablers and variables of logistics relationships are modeled in
terms of their driving and dependence. Strong driving power enablers should be
dealt with strategic move as they influence productivity and competitiveness.
The present research objective of identification and ranking of the enablers of
logistical supply chain relationship and their influence on productivity and
competitiveness involves number of key variables hence a model depicting
interaction would be of great help to shippers as well as LSPs. Contextual
relationships can easily be developed between the enablers using brain storming
and ISM, while an overall structure can be extracted for the system under
consideration. Numbers of enablers influence the shipper's relationship with LSP,
that results in to productivity enhancement and competitiveness. Clear effects of
each enabler can also be interpreted when considered variables collectively
rather than individually.
Limitations and scope for future work
In the present work only eight enablers and seven outcome variables are
identified for modeling the logistics relationship in a logistical supply chain. More
number of enablers influencing logistics relationship can be identified, similarly
outcome variables leading to enhanced productivity and competitiveness can be
added to develop ISM. The experts' help have been sought to analyze driving
and dependence power of the enablers and variables in this model. The
framework developed in this research is through brain storming and experts'
opinion hence some elements of group bias and individual bias may persist.
Moreover the model so developed has not been statistically validated.
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Structural equation modeling (SEM), a general statistical modeling technique
also commonly known as linear structural relationship approach has the
capability of testing the validity of such hypothetical model. Therefore, it may be
applied in the future research to test the validity of this model. Statistical software
like LISREL 8.8, Amos 7.0 etc. can be used in future to build correlation matrix,
confirmatory factor analysis and diagramming to validate the relationship. SEM
has the capability of statistically testing an already developed theoretical model
whereas ISM on the other hand, has the capability to develop an initial model
through managerial techniques such as brain storming, nominal group
techniques, etc. In this sense, ISM is a supportive analytic tool for the discussed
situation. Proceedings of the ASQ Customer-Supplier Division Conference,
Nashville, TN.
10.2 Performance measurement in business process outsourcing decisions: Insights from four case studies
The term outsourcing originates from the Anglo-Saxon language realm and is a
contraction of the words OUTSIDE RESOURCE USING. Outsourcing describes
the use of external resources to execute operational tasks ([20] Grover et al. ,
1994). Since the early 1990s, outsourcing has been discussed under diverse
aspects in both academic business studies and operational practice ([30] Lacity
et al. , 2008; [23] Holcomb and Hitt, 2007; [14] Espino-Rodríguez and Padrón-
Robaina, 2006; [42] Seuring, 2003; [27] Kakabadse and Kakabadse, 2000; [31]
Lonsdale and Cox, 2000). Having started with information technology,
outsourcing has now reached the so-called "white collar" realm of the companies.
Beginning with the initial takeover of computing centres only, complete
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application platforms including system operations and application support are
now outsourced with the aim of decreasing related transaction costs ([2] Arnold,
2000; [49] Williamson, 2008; [37] Müller and Seuring, 2007). This can be
interpreted that the reduction in vertical integration has reached the commercial
areas of companies.
The next level of development of outsourcing is business process outsourcing
(BPO). Companies are outsourcing whole business processes in addition to
corresponding hard- and software that has been outsourced in the past. It
involves the transfer of management and execution of one or more business
processes or entire business functions to an external service provider ([16]
Ghodeswar and Vaidyanathan, 2008).
It aims to analyse performance measurement systems applied in outsourcing
situations. This is justified as performance measurement systems were prioritised
as the most important tools for governing and controlling the outsourcing provider
([48] Weimer and Seuring, 2008; [18] Gottschalk and Solli-Sæther, 2005).
Performance management in outsourcing
In the context of an outsourcing engagement, companies are facing four
essential questions ([10] Dibbern et al. , 2004):
(1)] Why should we outsource?
(2)] Which functions should be outsourced?
(3)] How should we conduct the outsourcing engagement?
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(4)] What are the main success factors with outsourcing?
Accordingly, current outsourcing research can be divided into four main areas
that try to answer these questions ([10] Dibbern et al. , 2004):
(1)] Research activities describing outsourcing opportunities and risks, allowing
every outsourcing engagement to balance them within its own context as a key
pre-requisiteof the outsourcing decision (e.g. [17] Gonzales et al. , 2006; [21]
Harland et al. , 2005; [40] Quélin and Duhamel, 2003).
(2)] Research analysing the applicability of outsourcing to different functions,
primarily using the transaction cost theory and the resource-based theory in
order to build a theoretical framework for this kind of decision (e.g. [23] Holcomb
and Hitt, 2007; [4] Aubert et al. , 2004; [32] McIvor, 2000; for a critical analysis
see [34] McIvor, 2009).
(3)] Research dealing with guidelines on how to conduct an outsourcing project
(e.g. [33] McIvor, 2008; [8] de Boer et al. , 2006; [9] Dekkers, 2000).
(4)] Research evaluating key success factors of outsourcing project and
identifying related risks (e.g. [19] Gottschalk and Solli-Sæther, 2006; [25]
Johnson et al. , 2006).
Within the fourth area, outsourcing research has identified that permanently
governing and controlling the outsourcing provider is essential for a successful
outsourcing engagement ([18] Gottschalk and Solli-Sæther, 2005). Nevertheless,
examinations on how to set up and operate this governance in detail are missing
so far. In order to govern the outsourcing project in general and the external
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provider in particular, top management first of all needs sufficient information on
which future decisions can be based on. In the field of organisational decision
making, such information that has to be generated by a company as a pre-
requisite and basis of organisational decisions is defined as "information need"
([34] McIvor, 2009; [41] Sciulli, 2004; [38] O'Reilly, 1983).
Information is a key driver of business and business processes. It is not only
required to complete any kind of operational processes, but also to meet specific
decision making needs. This is reflected particularly in management accounting
where the provision of information for management decision making is a key task
that needs to be fulfilled e.g. [12] Drury, 2008; [3] Atkinson et al. , 2007).
Outsourcing decisions also have to be based on this kind of information ([15]
Ezzamel et al. , 2002).
[24] Jiang and Qureshi (2006) reach the conclusion that there are "three main
gaps in the current literature: lack of objective metrics for outsourcing results
evaluation, lack of research on the relationship between outsourcing
implementation and firms' value, and lack of research on the outsourcing contract
itself" ([24] Jiang and Qureshi, 2006, p. 44). In line with this, [6] Busi and McIvor
(2008) also argue that performance management in service related outsourcing
requires more research.
It seems rather surprising in the outsourcing context that almost no research on
the use of management accounting and performance management techniques to
drive outsourcing decisions has been presented so far. Using the keywords
"outsourcing", "management accounting", "information needs" and "performance
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management", we conducted a comprehensive literature search based on major
databases (e.g. EBSCO, Proquest 5000), as well as publishers (e.g. Elsevier,
Emerald, Wiley), but hardly found any related papers. As the keywords are not
too specific, many references had to be screened in detail for checking whether
they contain related information or not. Looking at this intersection, some
research addressed the outsourcing of the accounting function ([15] Ezzamel et
al. , 2002; [45] Smith et al. , 2005) or the treatment of outsourcing in company
accounts ([26] Juma'h and Woods, 1999). Closer to the issues discussed here
comes the cost estimation of outsourcing decisions, while the example presented
by [41] Sciulli (2004) basically assesses the tendering process for public
contracting. [47] Tate and van der Valk (2008) develop performance measures
for outsourced customer contact centres, thereby focussingmore on the customer
perspective than underlying business process. But no research has been
identified covering information needs or performance measurement systems in
outsourcing situations.
Therefore, [48] Weimer and Seuring (2008) conducted a Delphi study identifying
information needs in the outsourcing-lifecycle and prioritising them according to
their importance for governing andcontrolling the outsourcing provider. As a
result of the study, "service reporting" was evaluated as the mostimportant
information need."Service reporting" usually comprises the implementation and
operation of performance measurement systems to inform about the
performance of outsourced services. This paper aims to follow up the results of
the Delphi study and to further analyse performance measurement systems in
the outsourcing context.
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An analysis of performance measurement systems in the management
accounting and controlling literature that can be potentially used in the
outsourcing context led to the balanced scorecard concept. The balanced
scorecard ([28] Kaplan and Norton, 1992) plays a dominant role within current
management accounting and controlling research and is considered as the
preferred performance measurement system ([35] Malina and Selto, 2001) that is
widely used by companies ([5] Ax and Bjørnenak, 2005). Next, the theoretical
application of the balanced scorecard as a suitable performance measurement
system to analyse outsourcing contexts will be briefly discussed.
Outsourcing is applied to reach certain strategic business objectives ([11]
DiRomualdo and Gubanxi, 1998). In particular, at least one of two fundamental
business objectives is pursued:
(1)] long-term cost reduction; or (2)] focus on core business activities and
development of competitive advantage.
Both objectives aim to ensure the livelihood of the company in the long term
rather than providing short-term success ([17] Gonzales et al. , 2006).
Consequently, controlling tasks in the outsourcing context, like supply of
information, governance and controlling ("outsourcing controlling"), can be
described as strategic controlling which is defined as the execution of controlling
tasks to support long-term, strategic governance ([35] Malina and Selto, 2001). It
should be emphasised that this follows the German term "controlling", which in
English would be management accounting ([22] Hoffjan and Wompener, 2006;
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[43] Seuring, 2006). Thus, controlling tools that have been developed for
strategic controlling purposes can be applied in the outsourcing context as well.
The balanced scorecard is defined as a controlling tool that is particularly suited
to implement corporate strategies and to link operational and strategic
governance ([29] Kaplan and Norton, 2004, [28] 1992) and can therefore be
described as a strategic controlling tool. Consequently, the balanced scorecard
can also be considered as a potential outsourcing controlling tool that supports
the implementation of the corporate outsourcing strategy and thereby governs
and controls the external provider. In this respect, the balanced scorecard will be
used as theoretical background and conceptual framework for the empirical
research which allows the interpretation of the findings.
Just to repeat what is presented in many publications on the balanced scorecard,
its features are usually described as:
- operationalisation of strategies;
- four perspectives (finance, customer, internal business processes, learning &
growth);
- balanced key performance indicators (KPIs);
- limited number of key performance indicators;
- cause-effect relations; and
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- key performance indicators which are hierarchically structured (see e.g. [28]
Kaplan and Norton, 1992; [36] Martinsons et al. , 1999; [1] Ahn, 2005; [7]
Chavan, 2009; [51] Zimmermann and Seuring, 2009).
A case study design was chosen analysing four case studies in order to
empirically evaluate performance measurement systems in the outsourcing
context. "A case study is an empirical enquiry that
(1)] investigates a contemporary phenomenon within its real life context,
especially when
(2)] the boundaries between phenomenon and context are not clearly evident"
([50] Yin, 2003). [13] Eisenhardt (1989) recommends between four and seven
cases to achieve valid research results, while research on inter-organisational
phenomena is still dominated by single case research ([44] Seuring, 2008). The
research process for case studies is similar to those used for other (empirical)
research. [46] Stuart et al. (2002) propose a five-stage research process and
explain in detail how each step should be carried out when conducting case
study research (for similar descriptions see e.g. [50] Yin, 2003; [13] Eisenhardt,
1989).
It should be emphasised that while a linear, sequential approach is chosen not
only but in particular in case study research, the actual process might have to
repeat several stages. While starting at one research question and/or collecting
some evidence on a social or organisational phenomenon, the researcher might
have to return to a previous research stage, yielding a much more iterative
approach.
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The quality of research designs is determined by aiming for validity (i.e. is the
stated evidence valid?) and reliability (i.e. is the stated evidence correct?) ([50]
Yin, 2003). The excellence of qualitative research is addressed especially
through procedural reliability and validity ([46] Stuart et al. , 2002). For case
study research, [50] Yin (2003) outlines how validity of the research can be
ensured. He proposes three types of validity being relevant for case based
research: construct validity, internal validity and external validity. These three
types of validity are applied during different stages of the research process, as
reliability and validity are ensured by a clearly structured research process. The
following chapter will demonstrate the application of different measures to ensure
research quality of the presented research. The research process is based on
the five stages described above and will be outlined in the next section.
In order to investigate the research question of how to effectively design
performance measurement systems in the outsourcing context in theory and
practice, a multi-case research design has been chosen covering four
outsourcing engagements in different industries and companies that have
outsourced different business processes. Access to the cases was possible as
the first author is working for Accenture, one of the leading global outsourcing
consulting companies. This allowed access to information, else not being
available. However, the first author was not involved in either of the case study
projects and collected data purely for academic purposes. Information regarding
performance measurement systems is highly confidential for outsourcing
engagements. Hence, the respective companies insisted on not being named
when publishing this research.
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Instrument development and case selection
A case study protocol has been recorded to ensure reliability of this research and
to provide all relevant data for follow-up research activities. Case selection was
driven by the characteristics of the performance measurement systems of
available outsourcing engagements. Engagements with e.g. a very complex or
successful performance measurement system have been chosen.
Data gathering
To comply with the comprehensive, realistic claim of case study research, to
ensure construct validity and to avoid the mistakes of individual methods,
multiple data gathering methods (semi-structured interviews, analysis of
documents, websites and publications, direct observation and participant
observation) have been applied for the purposes of triangulation. Data gathering
took place in Autumn 2006. First, Accenture internal databases were accessed
on the single outsourcing cases. This allowed getting detailed insights into the
companies and the related outsourcing projects. After this preparation, the first
author visited the site of the service provider where the outsourced services are
processed. This comprised direct contact with staff members both of the
outsourcing company as well as the outsourcing service provider.
Data analysis
To ensure internal and external validity, raw data analysis applied a combination
of the case study tactics "pattern matching", "use of existing theory" and
"replication logic" ([50] Yin, 2003). Thereby, the four cases have been analysed
against a theoretical framework that was based on the balanced scorecard
characteristics outlined above. The multi-case design allowed a replication of
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identified pattern. Finally, a cross-case analysis was conducted and overall
results were derived.
Dissemination
In order to ensure construct validity, the preliminary case study protocol has been
sent to key interview contacts to verify completeness and correctness of the
protocol. Resulting feedback has been included in the final case study protocol.
Description of the four individual cases
1 - An international construction services provider
The company of the first case study is one of the three largest construction
services providers worldwide and market leader in Germany. In the fiscal year
2005, corporate revenues reached EUR 15 billion. With more than 80 per cent of
total revenues generated outside of Germany, the company probably represents
the most international construction services provider in the world. A total of
40,000 employees work for the company in all major markets around the
world.The range of services the construction services provider offers to its
national and international customers includes four closely interlinked modules
supporting the entire life cycle of construction projects:
(1)Development;
(2)Construction;
(3)Services; and
(4) Concessions and operations.
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The construction services provider wanted to reduce its total cost of purchasing.
Therefore, it centralised its different purchasing departments into one global
organisation in order to standardise business processes and to reduce related
handling cost. In this context, the construction services provider wanted to re-
negotiate purchase prices as well. Realising a lack of respective professional
capabilities in this area, the company outsourced its strategic purchasing function
(strategic sourcing) for all non-strategic and indirect goods and services to the
external provider Accenture in order to achieve significant price reductions. In
detail, the outsourcing engagement covered the following tasks:
- demand planning (evaluating and defining future purchasing demand);
- product groups strategy (developing a product groups strategy);
- tender management (preparing and handling tenders with potential future
suppliers);
- development of negotiation strategies;
- supplier selection and negotiations with suppliers;
- contract management (closing contracts with selected suppliers);
- supplier management (evaluating supplier performance);
- accompanying market and supplier analysis (continuously analysing markets
and suppliers to ensure an optimal supplier portfolio); and
- web-based procurement platform defining and supporting lean and efficient
process workflows with suppliers.
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The contractually agreed scope of the outsourcing engagement includes 18
different product groups. These represent an annual purchasing volume of
approximately EUR 60 million. The first product group only includes 8,000 to
10,000 different products. Outsourced services will be provided for all divisions of
the construction services provider in the German-speaking countries: Germany,
Austria and Luxembourg. The compensation model links the payments for the
external provider to the overall cost reductions achieved through the outsourcing
project.
2 - An international bank
The second case study evaluated an international bank which is one of the
leading financial institutes worldwide. The bank was founded in the 19th century
and controls a balance sheet total of more than EUR 1 trillion today. More than
75,000 employees are working in 75 countries around the world. The range of
services the bank is offering to its national and international customers includes
all of the key areas of a financial institute such as investment or retail banking. In
order to support the overall corporate objective of significantly increasing the
company's rate of return, the bank evaluated all functional areas and processes
whether they should stay in-house or be outsourced to an external provider. In
this context, the bank identified significant savings by outsourcing selected
processes in the purchasing and finance departments. Consequently, the bank
outsourced the end-to-end procure-to-pay process and transferred the following
sub-processes and tasks to the external provider Accenture:
- sourcing, buying and procurement support;
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- invoice processing, expenses payment and other accounts payable services;
- procurement platform;
- customer service desk; and
- reporting.
Outsourced services represent an annual purchasing volume of approximately
EUR 5 billion. They include four million transactions per year in more than 200
legal entities that interact with 50,000 suppliers. The processes described above
will be provided to all divisions of thebank. Geographically, they cover the
European countries Germany, Britain and Spain, as well as the United States
and the entire Asian region. Accenture delivers the contractually agreed services
primarily through its off-shore delivery centres in Bangalore (India) and Dalian
(China). The agreed compensation model is determined by fixed prices per unit
only depending on the transaction volumes of outsourced services.
3 - An international automotive supplier
The third case study analysed an international automotive supplier which
represents one of the world's leading companies in its industry and which is also
market leader in Germany. The supplier was founded in the 19th century and
generated total revenues of more than US-$ 30 billion in the fiscal year 2006. A
total of 136,000 employees are working for the company in more than 1,000 sites
serving customers in 125 countries around the world. The range of services the
supplier is offering includes, among other business fields, particularly the
production of various components for the automotive industry.
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Finance and accounting processes of the supplier were characterised by
heterogeneous and inefficient processes, many different IT systems and low
transparency. In order to increase efficiency and reduce costs, the supplier
decided to standardise and optimise its processes, and to support them with a
common IT platform using the expert know-how of an external provider. In
particular, the following finance and accounting processes have been
outsourced:
- accounts payable;
- accounts receivable;
- travel and expenses;
- general accounting;
- cash and banking; and
- fixed assets.
Outsourced services represent a very high transaction volume. In the accounts
payable department only, a total of 600,000 transactions have to be processed
per year. The finance and accounting processes mentioned above will be
provided to all divisions of the supplier. Geographically, they cover all European
locations. The outsourcing engagement represents a combination of near-shore
and off-shore delivery with outsourced tasks being processed in the Accenture
delivery centres in Prague (Czech Republic) and Mauritius. The agreed
compensation model is determined by fixed prices per unit only depending on the
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transaction volumes of outsourced services. (As the measures are quite
operational, no high-level description is provided in an additional column.)
4 – A high-tech global company
The company of the fourth case study is a high-tech global company belonging to
the IT industry. The high-tech company is one of the world's largest companies in
its industry and market leader in Germany. It was founded in the middle of the
last century and generated revenues of more than US-$ 100 billion last fiscal
year. A total of 150,000 employees are working for the company in 170 countries
around the world. The range of services the company is offering is one of the
most extensive product portfolios on the world market and includes a huge
variety of technological devices as well as IT services. Resulting from a merger in
the near past, the high-tech global company was faced with inflexible structures
and redundancies. Overall objective of the merger's business strategy was the
realisation of cost savings by eliminating these redundancies. Against the
backdrop of this strategy, the high-tech company decided that all "non-critical"
processes have to be outsourced to specialised external providers in order to
reduce cost as well as to increase flexibility and scalability. Thereby, the order
management processes have been identified as "non-critical" and therefore
transferred to the external provider Accenture. Objective of the outsourcing
engagement was a reduction of operational costs by 75 per cent over the next
three years. In particular, the following order management processes have been
outsourced:
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- order entry and updates, exception handling;
- backlog management;
- claims and returns management;
- transversal order fulfillment;
- customer set-up; and
- service reporting.
Outsourced services represent a high transaction volume. Approximately 25,000
direct orders plus another 20,000 orders via indirect channels have to be
processed annually. The order management services outlined above will be
provided for all business customers of the company. Geographically, they cover
all countries of the so-called EMEA (Europe, Middle East and Africa) region.
Accenture delivers the contractually agreed services through its near-shore
delivery centre in Prague. The agreed compensation model is determined by
fixed prices per unit only depending on the transaction volumes of outsourced
services.
Cross-case analysis
The cross-case analysis compared content and structure of the performance
measurement systems used in the outsourcing engagements. Content and
structure were interpreted by comparing them against the characteristics of a
balanced scorecard. Analysis results differ quite significantly for the performance
measurement systems of the four outsourcing projects.
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Looking at the first balanced scorecard attribute, only Case 1 shows an
operationalisation of its business strategy which pursues long-term cost
reduction. The other three case studies have selected a pure operationally-driven
approach compiling appropriate key performance indicators to govern and control
outsourced processes independently from the overall business objective of long-
term savings. The operationally-driven approach can be explained with the
underlying compensation model of these cases: the agreed terms and
conditionsalready include the cost savings compared to the baseline. A relation
between operational key performance indicators and their financial impact is
quite unimportant for the company that is outsourcing its processes.
The parameters of the different performance measurement systems can be
assigned to one or two balanced scorecard perspectives. While all engagements
show parameters belonging to the internal business process perspective, a
second perspective could only be identified for two of them. Case 1 uses the
finance perspective to gather the financial impact of the outsourcing project and
Case 2 controls the underlying infrastructure with key performance indicators that
can be assigned to the learning and growth perspective. The customer
perspective does not play a role in any of the cases as the external provider does
not have any direct contact with the customers of his client in any of the
outsourcing engagements.
A balance of key performance indicators can only be found in Case 1. The other
cases only use performance drivers, non-financial and internal parameters. This
allocation emphasises the already mentioned situation that the objective of these
performance measurement systems is to govern and control that the external
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provider executes the outsourced processes correctly. Due to the underlying
compensation models, output-oriented parameters as well as financial and
external key performance indicators are not needed.
The number of performance parameters in the outsourcing projects varies
between five and 40. In this respect three out of four performancemeasurement
systems are not aligned with the recommendation of [28] Kaplan and Norton
(1992).They proposerange of 16-24 parameters which is the number of KPIs
used in Case 2. Nevertheless, particularly Case 1 offers evidence that the
number of parameters is less important, than aligning all parameters with the
overall business strategy ([28] Kaplan and Norton, 1992), which is true for Case
1. Looking at cause-effect relations among the single performance measurement
systems shows significant differences between the cases: Case 1 demonstrates
the ideal type of cause-effect relations, linking all perspectives and parameters in
a way that each element is part of an overall chain of cause-effect relations that
allows the traceability of the overall financial success. On the other hand, Cases
3 and 4 do not have any cause-effect relations at all. They represent a pure
coexistence of operational key performance indicators. Case 2 can be allocated
between these extremes showing dependencies between and within the
perspectives without developing cause-effect relation chains with more than two
elements.
The last typical characteristic of balanced scorecards that key performance
indicators are hierarchically structured can be confirmed for all case studies. All
performance measurement systems offer a hierarchical evaluation of parameters
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mainly using "country" and "sub-processes" to break down the overall
performance values.
Discussion
While there is a rapidly growing body of literature on outsourcing, there is hardly
any account on performance measurement for outsourcing decisions. Based on
a multi-case research design, the performance measurement systems of four
outsourcing engagementswere evaluated within this paper. The balanced
scorecard served as asuitable performance measurement system to assess
related outsourcing projects. This is a first step to filling a gap in literature ([6]
Busi and McIvor, 2008; [24] Jiang and Qureshi, 2006). The performance
measures of four outsourcing cases present an important finding in itself, as to
our best knowledge, such measures have not been presented in related
publications so far. In line with important role governing and controlling the
outsourcing provider plays ([18] Gottschalk and Solli-Sæther, 2005; [48] Weimer
and Seuring, 2008), as well as the role of outsourcing contracts ([39] Platz and
Temponi, 2007), this research provides empirical evidence and insights for a field
that is hardly covered in outsourcing research so far.
The strength of the approach is that a detailed description of the design of
performance measurement systems in the outsourcing context in practice has
been developed. Furthermore, the balanced scorecard offers an interpretative
framework for analysing performance measurement systems in the outsourcing
context that allowed drawing important conclusions which will be discussed later
in this paper. Thereby, the underlying compensation model or outsourcing
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contract has been identified as a key determinant. Considering the frequently
reported strategic relevance of outsourcing decisions (e.g. [23] Holcomb and Hitt,
2007; [21] Harland et al. , 2005), it is rather surprising that such "simplistic"
performance measurement models are put into practice. In this respect, the
paper contributes to outsourcing performance management. It emphasises the
need for future research into the role of performance measurement and how
such systems need to be designed and used to justify and support
outsourcingdecisions and the ongoing management of outsourced processes.
Traditional theoretical approaches appliedfor determining outsourcing decisions,
such as transaction cost economicsor resource-based view ([34] McIvor, 2009;
[49] Williamson, 2008; [2] Arnold, 2000) are not able to assess such details of
outsourcing decisions as they rather deal with why and what then with how
questions.
One major limitation of our approach lies in only selecting cases from outsourcing
projects conducted by Accenture. This might have biased the results, but was the
only possibility to get access to the highly confidential information on
performance measurement in the outsourcing context. As described in the
research methodology and process sections, different measures were put into
place to achieve high research quality for this study.
Conclusion
The study aimed to further develop the so far little considered research area of
performance measurement for outsourcing decisions. It considered the results of
four case studies to describe in detail the design of performance measurement
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systems in the outsourcing context as well as to derive the determinants driving
performance measurement system characteristics. The balanced scorecard
served as a suitable performance measurement system to assess related
outsourcing projects.
The cross-case analysis results show that elements of the balanced scorecard
can be found in practical outsourcing projects. Yet, just Case 1 uses a
performance measurement system that fulfils all characteristics of a generic
balanced scorecard. On the other hand, comparing these characteristics with the
performance measurement systems in theremaining three case studies
demonstrates that these performance measurement systems lack most of the
characteristics of the balancedscorecard concept. Itsapplicability inthe
outsourcing context depends mainly on contractual agreements and
compensation models determining the characteristics of the performance
measurement systems.
This research identified the underlying compensation model as the key
determinant for the characteristics of a performance measurement system. The
compensation model manages payment terms and conditions and has a
significant impact on the performance measures used for controlling the
outsourcing provider. The key objective of all outsourcing engagements is a long-
term cost reduction of outsourced services irrespective of the underlying
compensation model.
The compensation model of the first case study links the payments for the
external provider to the overall cost reductions achieved through the outsourcing
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project. The company which is outsourcing its services has a strong interest in
tracking the overall savings. Consequently, a performance measurement system
has been developed that is primarily focused on controlling the overall cost
reductions and that has aligned all parameters, respectively. Overall savings
have been linked with all operational parameters impacting them. Therefore, the
characteristics "strategy operationalisation" (with overall savings as a starting
point), multiple "perspectives" (finance and internal business processes
perspective) and "cause-effect relations" linking perspectives and respective
parameters to explain overall cost reductions can be identified. A "limited number
of parameters" can be confirmed as well as it is less important in case that all
parameters are aligned with the overall business strategy. The performance
measurement system in case study 1 captures all characteristics of a balanced
scorecard.
Case studies 2-4 operate with fixed-price or volume-dependent contracting or
compensation models. In these cases, both parties negotiate fixed payments or
fix prices per unit only depending on the transaction volumes of outsourced
services. These compensation models realise the pursued cost reductions
against the baseline independent of the operational cost generated by the
external provider. The company which is outsourcing its services has no interest
in a performance measurement system tracking the overall cost savings as
central parameter. It is rather interesting that the outsourcing provider executes
the outsourced processes in a contractually compliant way and therefore focuses
on a detailed controlling of all outsourced process steps. Consequently, the
underlying performance measurement system does not operationalise the overall
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outsourcing strategy. Working only with key performance indicators of the
internal business processes perspective is sufficient in general. The single-sided
allocation of parameters to performance drivers, non-financial and internal
parameters emphasises the characteristics of these performance measurement
systems as well. Finally, parameters do not have to be linked via case-effect
relations, as long as all relevant process steps are tracked. Within these case
studies, the balanced scorecard characteristics "perspectives", "balance" and
"cause-effect relations" cannot be identified. Having these compensation models
in place, the balanced score characteristics do not represent an appropriate
performance measurement system in the outsourcing context.
From a theoretical point of view, the overall results of the case study analysis can
be summarised as follows: the balanced scorecard characteristics represent
under certain conditions an appropriate performance measurement system in the
outsourcing context with the underlying compensation model being the major
determinant for their applicability as it basically drives the characteristics of
performance measurement systems in the outsourcing context. Companies
should therefore use the compensation model as a starting point to select and
design the performance measurement system for their outsourcing engagements
in order to effectively govern and control the external provider which is
considered essential by outsourcing research. This should allow successful
outsourcing engagements.
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CHAPTER 11
FUTURE OUTSOURCING STRATEGIES
TRANING FUTURE LOGISTICS MANAGERS
THE ROLE OF BALANCED, STRATEGIC,
CASCADED,& ALLIGNED PERFORMANCE
MEASUREMENT IN ENHANCING FIRM
MEASUREMENT
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CHAPTER 11
FUTURE OUTSOURCING STRATEGIES
11.1 Training future logistics managers: Logistics strategies within the
corporate planning framework
Bose Corporation, the audio equipment company, has entered into partnerships
with transportation carriers, suppliers of plastic and metal parts, and printing
vendors in a program it refers to as JIT II.(1) Under this program, big volume
improvements are front loaded for the supplier, resulting in the elimination of
certain conventional sales and purchasing activities and leading to a more active
involvement of the vendors' in-plant representatives with Bose's manufacturing
operations. Recently, Xerox slashed inventories and related assets by nearly $1
billion by coordinating the product flow through its channel of supply and
distribution.(2) Sears has contracted its LTL and intermodal transportation
requirements to third-party logistics firms.(3)
As these examples suggest, logistics strategies are undergoing a transformation
to a form more complex, longer lasting, less easily reversible, and having more at
stake than ever before. This transformation has also been accompanied by
greater visibility for logistics in the corporate executive suite. A recent CLM-Ohio
State University report on strategic planning in logistics states that logistics is
becoming an integral part of corporate strategic planning and that logistics is
benefitting from recent emphasis on customer service and JIT systems.(4)
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Given the on-going transformation of logistics strategies and the increased
visibility of logistics, how can educators teach this subject to students, the
logistics managers of the future? The premise of this is that logistics strategies
can neither be taught nor understood by students without a framework that
relates logistics to corporate strategy. To underscore this point, the authors use
simulation courseware that leads students to adopt different logistics strategies
for a hypothetical manufacturing firm--all successful as measured by long term
financial performance--but each contingent on the chosen corporate strategy.
The Strategy Framework
Corporate Strategy
The subject material on corporate strategy can be divided into two parts: (1)
elements of corporate strategy, and (2) the strategic planning process. Elements
refers to areas of the business enterprise for which options are evaluated and
decisions are made. For example, the decision to offer a particular set of
products is a corporate choice falling into the line-of-business element. Certain
other aspects of strategy are also better developed at the corporate level,
through the CEO, the board of directors, and the senior executives. These
policies set the tone for the enterprise and dictate the choices and evaluation
criteria for more detailed decisions at the (lower) functional levels.
In addition to corporate policies which set the groundwork for functional
strategies, the planning framework is also important. The planning process's
contribution comes from the integration it spawns and the learning process which
it engenders within the firm. The planning process can play a very influential role
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in suggesting the type of strategies that might be fruitful because of the careful
attention paid to the business environment during the planning process.
Elements of Corporate Strategy
The corporate strategic decisions fall into clusters that are referred to as
elements in this paper. The key elements of corporate strategy consist of
answers to the following questions:
* What lines of business should we (the firm) be in or exit? What product groups
should we develop?
* What should be the geographical scope of our markets?
* What are our growth strategies and financial objectives?
* What commitments should we make to our stakeholders?
* What are our core competencies and capabilities?
Lines of Business. Decisions by AT&T to enter the computer business, Dow
Coming to exit the silicone breast implant line of business, and attempts by
television cable and local telephone companies to seek the ability to invade each
other's product lines are corporate strategic choices that will affect the companies
involved for years if not decades.
The input data for such decisions should come from all functional departments
within the firm so that the ability to profitably manufacture, market, distribute, and
finance the product line can be accurately assessed.
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Geographical Scope. Decisions by Fujitsu to enter, abandon, and then reenter
the supercomputer business in the U.S., Federal Express to cease serving
Europe through its dedicated fleet, and Coors to enter the eastern U.S. market
are also corporate decisions that have a heavy impact on logistics both in terms
of sourcing capabilities and requirements, and also for distribution.
Growth Strategy. Firms may decide to grow by acquisition or through internally
generated expansion. Acquisition may involve diversification or integration into
related lines of business. Examples include conglomerates such as General
Electric and ITT, integrated steel producers such as Inland Steel, and minimills
such as Nucor. Stakeholder Commitments. Many firms create certain
expectations in the minds of their stakeholders, either explicitly through policy or
implicitly through a history of actions. For example, shareholders may come to
expect certain dividend distribution policies and levels of earnings growth;
employees may come to expect job security, pension benefits, wage increases,
and other aspects of worklife; and customers and suppliers may develop
expectations of quality and reliability in various aspects of doing business with
the firm. General Electric expects to be the first or second leading firm in market
share in each market it serves, 3M expects a significant portion of its revenues
each year to come from new products, IBM (until recently) had a no-layoffs
policy.
Core Competencies. In a recent Harvard Business Review article, Hamel and
Prahalad focused on core competencies which firms might have and which they
can capitalize on to fuel their growth.(5) Examples include Honda's competency
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in engines and power trains, Sony's edge in miniaturization, and Toshiba's in
screen technology.
Core Capabilities. In another HBR article, Stalk, Evans, and Shulman argue that
in addition to the core competencies that are rooted in technology and production
skills, firms may also possess core capabilities derived in a basic understanding
of and exploiting of key processes central to the firm's business.(6) Examples
include Wal-Mart's capabilities in managing its cross-dock logistics, Honda'
capabilities in dealer management and product realization, and 3M's capabilities
in nurturing an innovative environment.
The Planning Process
The corporate strategy planning process typically starts with a vision, a mission
statement, and a set of objectives that the firm wants to achieve to satisfy its
stakeholders: customers, suppliers, employees, and shareholders. Next, the firm
assesses the resources available to it by identifying its strengths and
weaknesses, in both its internal operations and customer and channel
relationships. In addition, the external threats and opportunities that will have an
impact on company's performance in the future are also pinpointed. Levi Strauss
& Co.'s corporate and logistics strategy planning process illustrates this approach
well.(7) Rushton and Shaw have described the overall planning process and
some of the common pressures influencing logistics systems.(8) In this analysis
of strengths, weaknesses, opportunities, and threats (SWOT), the firm must
detect both ongoing and potential changes in society which are relevant--
including social, demographic, behavioral, and environmental changes--as well
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as both societal and governmental responses to these changes, such as
adjustments in taxes, services, andregulatory policies. The market and the
competitors are also, of course, studied to see how they might respond to the
changes and where the company should position itself against the competitors in
the market.
The external and internal environment analysis described above is sometimes
referred to as environmental scanning. The company needs to know the
environmental factors that are external to the company so that major strategies
will anticipate and respond to environmental changes. It also needs to know the
resources that are available to the company and use them efficiently and
effectively to achieve the objectives. Usually the company's strengths and
weaknesses study will reveal its overall health condition in comparison to its
competitors. Then an opportunities and threats analysis in the industry will show
where the industry stands in the future. The social trends, consumption changes,
demographic shifts, and technology advances are studied jointly and separately
to gain insights of these changes. Further analyses may follow to see how these
changes and their implications will affect the company's bottom line performance.
Next, the company needs to develop several corporate strategies and make the
strategic choice to pick up the one that best fits the company's mission, the many
objectives, and the operating environment. (These are discussed further below
under elements of corporate strategy.) Later, functional strategies in marketing,
operations, finance, and logistics are developed following the same process of
developing thecorporate strategy. The planning process keeps moving down to
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the company management hierarchy until all strategic, tactical, and operational
plans have been developed to the formal extent necessary and appropriate.
The action plans are a result of the strategic thinking, and represent a feasible
approach to achieving the objectives in a shorter term. They cover details in
implementing the strategies, with a schedule indicating what and how much of
each key resource is used by whom at what time. Action plans also close the
loop in the strategic planning process by providing feedback and enabling
corrective actions to be taken to respond to changes in the marketplace.
The decisions at the corporate level on the various elements of corporate
strategy, coupled with the planning process, provide the framework within which
functional strategies can be formulated and linked to each other. The
relationships between corporate strategy and functional strategies are obvious
and straightforward in most cases. For example, a corporate decision to
manufacture multinationally or to source globally would lead to a different
logistics network than otherwise. Similarly, a corporate decision to seek
significant export sales would lead to greater attention being paid to aspects of
international logistics.
The relationships between corporate and functional strategies could also be
more subtle, however. Stalk, Evans, and Shulman in the previously referenced
article argue that Wal-Mart's success comes from its corporate focus
on"capabilities-basedcompetition."
Thisin turn leads to certain logistics strategies that are difficult to execute and
implement. Wal-Mart facilitates these functional strategies by investing, as a
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corporate strategic decision, in satellite-based communication systems, a
proprietary transportation system, extensive training, and numerous other
supporting infrastructure investments affecting its business processes and
organization practices.(9)
The implication, then, is that logistics managers must be well attuned to their
firm's corporate strategies and to its key business processes and practices.
Experience and insight are necessary to develop good judgment about what
logistics strategies are likely to work and succeed within this larger framework.
Logistics Strategy
Functional strategies must be developed within the framework of corporate
strategy where decisions are made about lines of business to pursue and
geographic markets to enter, based on core competencies and capabilities,
which will meet stakeholders' expectations and provide the desired pattern of
growth. Logistics strategies must not only consider these overarching corporate-
level considerations but also take into account relevant functional strategies,
particularly in terms of manufacturing capacity available and the product-price-
promotion mix.
The growing visibility of logistics is at least partly due to the pervasive nature of
logistics' interaction across the functional spectrum of thefirm. The challenge to
logistics managers is how to develop a coordinated logistics approach inthis
environment--and the answer increasingly is a method referred to in the literature
as supply chain management.
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The management of the logistical supply chain as an integrated system has long
been advocated by academics as well as by other students and practitioners of
the logistics concept. The term "supply chain" as used here denotes the channel
of firms and intermediaries through which a product (or group of products) moves
from the original sources of its basic raw materials through
conversion/manufacture and then distribution in its finished form to the ultimate
consumers. Thus it supersedes the logistical operations of any one firm. The
concept is closely related to the channel of distribution, but that term typically
connotes the chain for finished goods only, with a strong emphasis on marketing,
as opposed to logistical, issues. We will use the term "logistics system" to
indicate the specific set of fixed facilities (of suppliers, producers, and customers)
and the transportation and information processing/transmittal choices linking
those fixed facilities used to implement the supply chain concept. There have
been no definitive studies either determining the exact circumstances under
which integrated supply chain management is clearly superior to other
alternatives or measuring the extent of that superiority. However, several studies
have shown that managing inventories independently and/or with simplistic
decision rules at each of the various points in the chain leads to higher
inventories or dysfunctional fluctuations in demand at upstream (supplying)
locations than would be the case when coordinating techniques are
employed.(10)
In any case, it is faith among logistics professionals in general that integrated
supply chain management will result in logistical performance in the channel of
distribution (or supply) superior to that of channels not employing such
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integrating approaches.(11) The means for achieving integration typically involve
the sharing of information, particularly with regard to projected demands and
planned production. In addition, integration requires a comprehensive look at all
of the critical elements The discussion below describes these elements first and
then presents a model for their integration.(12)
Customer Service Levels. This element involves determining the appropriate
levels of customer service for the appropriate product-market combination. In
order to evaluate strategic options, it is necessary to survey and study
customers, determine opportunities for differentiation, identify and benchmark the
performance of competitors, and define the best network options and associated
costs of offering various levels of service. Xerox has been cited as a firm that
decided to make field service its competitive advantage to replace its expired
patent rights.
Channels of Supply and Distribution. How many channel members should there
be and what should be the working relationships with them? Pursuing total
quality management (TQM) and JIT, many firms have moved to reduce the
number of suppliers, carriers, and distributors/dealers they do business with and
bolster their relationships with those remaining, often entering into long term
contractual and partner shipping arrangements. 3M is one of the few firms to
formalize this strategy, calling it its "Channel Approach."(13) Under this
approach, 3M has identified five logistics channels to serve 90 separate
businesses, with teams established to develop customized logistics strategies for
each channel.
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Facility Locations. What raw material supply sources, supply consolidation
points, distribution facilities, field service centers should be part of the logistics
network and what should be their capabilities? Answering these questions
involves close liaison with manufacturing and marketing departments so that the
whole supply chain is working in a satisfactory manner. Allocations. Coupled with
the facility element above, these strategies involve the best use of the facilities.
In other words, how should raw material supplies be best allocated and deployed
to meet manufacturing needs and how should plant output be allocated to
distribution centers and eventually to customer locations? Inventories. What
should be the inventory management system, how much inventory should be
carried, of what products, and where should they be carried? Traditionally,
inventories have served a buffer function to smooth seasonal peaks in demand
and provide for production economies. As the hidden cost of large inventories
has become better known, there has been a move to reduce these assets,
requiring a much more coordinated operation to manage product and goods
flows. Practices such as postponement, standardization, and speculation can still
be useful when viewed in a systems context.
Transportation. What modes of transportation to use, what carriers and shipment
sizes and who should make the transportation decision, shippers or receivers?
Deregulation has opened this area as a major opportunity for cost savings and
quality improvement.
Information Management. What planning, operational, and control systems are
appropriate, and what type of telecommunication systems are needed to track
product flows throughout the logistics pipeline? Therapid growth of barcoding and
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other forms of automatic identification, electronic data interchange (EDI), and
imaging facilitating transaction processing and communications as well as
sophisticated decision support and expert systems for planning attest to the
significant role of this strategic element.
Organization. The proper motivation, delegation of authority and responsibility,
and organization of logistics personnel, in terms of line and staff and the degree
of centralization vs decentralization, are important issues to be addressed for a
well functioning logistics operation. The interrelationship of the logistics
organization to the rest of the firm is also critical. Some firms, such as Sony
Corporation of America, have established their logistics organization as a
separate enterprise (in Sony's case. its Logistics Services Company), which
renders services in a fashion not unlike a third-party logistics provider.(14)
The Hierarchical Model
The authors' approach to teaching students how to develop logistics strategies
consistent with corporate objectives, as well as to achieve integration across the
logistics elements, is through a concept referred to as the hierarchical model.
This model goes beyond strategic planning and bridges into strategic
management--that is, aspects of directing and controlling in order to implement
strategic plans. The first two levels of the model deal with designing and
optimizing the logistics system, while the next two levels deal with aspects of
planning, directing, and controlling logistics transactions and flows.
The hierarchical model is based on the premise that the planning and control
process follows a top down approach in which decisions are made by the various
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levels of management, with higher level decisions circumscribing the range of
choices available for lower level decisions. Thus strategic resource decisions--
such as building new plants or revamping the distribution system to offer higher
levels of service--are made by top management, often with the use of appropriate
computerized decision support systems. Operational planning decisions--such as
how much of a given product group to produce by month for the next twelve
months given the available resources anticipated in the strategic plan--are made
by upper middle level managers. And day-to-day scheduling decisions are made
by first- and second-level supervisors within the resource availabilities and
constraints provided by operational plans, the suggested frequency with which
they are performed, and the approximate time horizon covered by the plans at
each stage. Typically this process must be performed for each strategic business
unit--separately if they are truly independent or jointly where there are common
suppliers, customers, or production/distribution of resources. Obviously this
process is related closely to the typical planning and control process described in
the manufacturing literature. However the approach here is broader in that
customer service issues, and the entire supply chain and associated resource
needs are considered explicitly. The manufacturing literature generally takes
customer service levels and the broader issues of the supply chain management
as given in their prescriptions for the manufacturing planning process.
Tanning in Logistics Strategy Formation & Management
Having described the authors' view of how corporate strategy and functional
strategies are linked and how the hierarchical model can assist students to
appreciate the manner in which logistics planning can be comprehensive and
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integrated with flow planning, the paper now delves into the methods of
instruction. The primary mode of instruction is a simulation courseware.
The use of simulation for pedagogical purposes is, of course, not a new concept,
In the logistics field, there are several general- and special-purpose simulation
programs that have been widely used, including the Stanford Business Logistics
Game,(16) Michigan State University's Distribution System Simulator,(17)
Industrial Dynamics,(18) BLAST,(19) and others.(20) The courseware described
in this paper has some objectives in common with these other simulators: provide
users insight into logistics tradeoffs, network design, and network operation. A
further objective of this courseware is to show the interdependency between
logistics and the rest of the corporate planning and decision framework.
Prior to students' exposure to this courseware, they are instructed through two
other means: lectures and case studies. The lectures involve assigned readings
in both corporate strategy and logistics strategy and instructor presentations on
the subject matters previously described. The strategic planning process and the
hierarchical model are also described and illustrated. These lectures and
readings then lead into case studies exploring some elements of strategy in
depth.
Case Studies
The case studies are used in two ways. First, one case is drawn from logistics
literature to demonstrate the formulation or application of some specific logistics
strategy. For example, the 1991 fall semester saw the use of the Lotus
Development Corporation case, which focused on channel issues and
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strategies.(21) The case describes the founding of the company and key
corporate responses to the business environment it faced following the
introduction of its successful spreadsheet software but prior to the introduction of
WINDOWS from Microsoft. Logistics strategies in terms of channel interfaces
with software wholesalers and dealers and customer service issues are explored
in the case and related back to the corporate strategy and the business
environment.
The second use of case studies is a logistics article that summarizes seven
cases in different industries, each involving different product and industry profiles
and each pursuing a different logistics option to accomplish the company's
objectives.(22) This article focuses more on the context of the strategic logistics
decisions, lines up the logistical alternatives, and through this process
establishes linkages between the two.
In summary, both of these sets of cases, coupled with the lectures and reading
assignments, prepare students for the simulation courseware that is administered
during the last six weeks of the course. The MAS case, programmed in
FORTRAN, simulates the long term operations of a logistics system under a wide
variety of configurations and conditions. It calculates total logistics costs, net
profits, and customer service performance for any configuration provided by the
students. Students may change the markets served; the location of DCs, plants
and their capacities, and supply points; modes of transportation and shipment
sizes; the levels of forecast accuracy; the two flow planning methodologies (DRP,
Reorder Point); the set inventory availability targets; and a linear programming
subroutine that performs allocation tasks. This section describes the courseware
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in greater detail and the subsequent section delves into how this courseware is
used to instruct students in logistics strategy.
MAS Manufacturing produces a line of household cleaners, chemicals. and
associated accessories in Denver, Colorado. These products are currently sold in
the West and Midwest, but not on the East Coast. Founded in the early 1950s,
the company has had its ups and downs as it has struggled toward stable.
profitable growth. The CEO recently asked her top managers to consider the best
way for the company to "bring our growth under control so we can increase
profits and return on investment." A meeting called by the CEO to discuss this
issue leads, to an interchange between the department heads shown in Exhibit 5.
(Exhibit 5 omitted) MAS Manufacturing's existing logistics network and the
optional additions to that network are shown in Exhibit 6. (Exhibit 6 omitted)
Products and Markets. The MAS line of household cleaners and chemicals is
sold in 27 Western and Midwestern states, primarily through grocery and
discount channels. The company has no direct sales force, but rather uses food
brokers to sell to customers on a commission basis. Ten district sales managers
are located around the market, each supervising several brokers. While the
company promotes sales in a variety of ways, its primary promotional
expenditures are devoted to television, with spot ads on afternoon soap operas
and late night news programs. On the average, the products sell to the grocery
and discount chains for $32.00 per case (or $2.00 per pound), FOB destination.
There is one price for each item throughout the market. Demand is seasonal,
with the peak occurring during the spring cleaning season. Students are given
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the percentage of annual demand shipped from distribution centers each period,
and annual demand forecasts by metropolitan area.
The Distribution System. Because of the large number of LTL shipments to
customers (shipments are generally between 1000 and 5000 lbs.), and the long
from distribution centers each period, and annual demand forecasts by
metropolitan area.
The Distribution System. Because of the large number of LTL shipments to
customers (shipments are generally between 1000 and 5000 lbs.), and the long
distances to be covered, MAS has several distribution centers. These are located
in Los Angeles, Denver, (separate from the plant--the plant does not make LTL
shipments to customers due to the limited loading area), Dallas, Chicago, and
Detroit. The latter was added recently in an effort to get closer to K-Mart
headquarters and increase shelf space in those stores. There is some evidence
that this strategy has led to higher sales in Michigan and Ohio.
The distribution centers are resupplied primarily by rail in order to reduce
transportation costs. Rail carload rates are available at 50,000 and 90,000 pound
minimums. Truckload rates are available at 24,000 and 40,000 pound minimums.
Examples of these rates--both to some of the existing DC's and to possible new
DC's--are given to the students. Also shown are typical public warehousing
charges paid by MAS, and freight rates to metropolitan areas.
The inventories at the distribution centers are controlled by means of reorder
points. The reorder point (ROP) for an item is that item's safety stock plus the
demand expected during the resupply lead time. The general rule the company
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has been following is to set the safety stock equal to one and a half times the
demand expected in the period. The lead time for rail resupply is generally
considered to be two weeks. Thus the ROP is set at about two periods' worth of
sales for each item at each location. Whenever an item's inventory level at a DC
reaches its reorder point, a resupply is requested from the factory warehouse. In
order to fill a carload, other items close to their ROP may be added to the
shipment. Students have the option of switching from ROP to a Distribution
Requirements Planning (DRP) method of operation, in which case the
courseware automatically develops time phased flows and feeds them to the
production scheduling module.
Production. While the vice president for manufacturing indicated that the plant
capacity at the Denver location is close to 27 million pounds of product per year
(see Exhibit 5), that assumes 7 days a week, 24 hours a day operation (21 eight
hour "turns" per week). In general, the plant can turn out 25,000 pounds of
product in an eight hour work turn, allowing for standard preventive maintenance
procedures. Adding afternoon, midnight, and weekend turns increases many of
fixed and variable costs of production. This is due to wage premiums required for
extra shifts and weekends, as well as the increased wear on the equipment.
Denver production economics are given to the students, including both fixed and
variable costs of operation.
It is also possible to purchase some adjoining land and expand production
operations in Denver. The expansion would involve not only new facilities, but
also some revamping of the old facilities. The overall result would be to reduce
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variable costs by $.02 to $.03 per pound. Students are shown the projected
economics of any Denver expansion.
After a good deal of study, six sites have been selected as potential locations for
a new plant in the East. These are: Covington, Kentucky; Parkersburg, West
Virginia; New Kensington, Pennsylvania; Allentown, Pennsylvania; Richmond,
Virginia; and Raleigh, North Carolina. Any new plant will use new technology, so
that even though Eastern labor costs may be higher than those in Denver, less
manpower will be used. The estimated economics for each new plant site are
given to the students for three sizes of plant. The capacity figures are based on
15 work turns per week.
Also located at the Denver plant is a warehouse for holding raw materials and
finished goods. The finished goods stored there consist of stocks used for
replenishing the distribution centers, and stocks resulting from production
smoothing. It is possible to reduce the investment required for expansion of the
Denver plant to $450,000 (and fixed costs to $100,000) if the finished goods
section of the plant warehouse is eliminated. In this case, production would be
allocated to the distribution centers as it comes off the production line. It is
undecided whether to include a plant warehouse in any new Eastern plant. The
costs of operating the Denver plant warehouse (and the associated sunk
investment allocated to it) are given to the students as are the projected costs
and investments for any of the six new plant locations.
Purchasing and Supply. The raw materials for the company's cleaners come
primarily from petrochemical producers located along the Gulf Coast. At least
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one supplier is also available on the West Coast near Los Angeles. In addition,
several of the suppliers operate water-supplied terminals on the East Coast and
in major cities along the Mississippi and Ohio Rivers.
Prices are quoted either FOB the refinery or FOB the terminal point. They are
competitive for the most part, with any differences partially reflecting varying
degrees of quality and delivery performance. The materials can be received in
24,000 and 40,000 pound truckloads, and 50,000 and 90,000 pound carloads.
The material prices and freight charges for the major supply sources are given to
students both for the existing plant in Denver as well as a potential future plant in
the eastern United States.
Making Decisions. The simulation is designed to highlight the effect production
and logistical decisions can have on corporate strategies and operating
performance. Even though certain aspects of the business have been held
invariant (such as pricing and promotion), students find themselves concerned
about marketing issues--such as market penetration and customer service--and
about financial performance. Students see that their decisions do have an
important impact, and can work for or against the marketing and financial
objectives, and are contingent on the overall strategies at the corporate level. To
do the planning, students (organized into teams of 4 to 6) configure a
market/logistical system which will be simulated for a year on the computer. (The
courseware can conduct simulations for 10 years beyond the base year, with
built-in changes in demand and other parameters.) At the end of the year the
results--sales, profits, investment, and customer service--are printed out for each
team, broken out by manufacturing/logistics facility and market area. Students
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typically run several simulations for each of the two assignments, which are
described later.
Use of the MAS Simulation Courseware
The MAS simulation case is used in two phases. In the first phase, students
retain the current network but alter operating policy elements. These elements
include inventory availability levels at each location, safety stock of raw materials
and finished goods at plants, transportation modes and shipment sizes used,
production capacity adjustment, forecasting and inventory planning
methodologies used, and the mix of procurement from raw material sources. This
exercise allows them to see how efficiently the existing logistics system can
operate. Students learn during this phase that it is possible to fine tune the
logistics operation through a better forecasting process and the substantial
reduction of inventories. The benefit of this phase is primarily in understanding
the tradeoffs within logistics among such various elements as customer service,
transportation choice, production scheduling, and inventories.
In the second phase of the case study, students make strategic decisions,
altering the logistics structure over a five- to ten-year time frame. They can
change the number and location of plants, and distribution centers, enter or close
markets, and expand production capacity of plants. Since the courseware does
only simulation, it does not produce an optimal solution. However, via
comparison of alternate runs, it shows students the sensitivity of performance to
changes in strategic variables.
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Students learn during this second phase that it is possible to succeed with
different logistics networks and strategies depending upon what the corporate
policies are regarding its scope of business, success being measured in terms of
profit and return performance over at least a five-year period.
A natural question that arises is whether learning is enhanced with the use of this
courseware. The authors have reported elsewhere the results of a preliminary
evaluation of the benefits of this courseware used in three separate sections of
the course taught by different instructors. In all three cases, there was an
extremely favorable response from students to the hands-on experience obtained
with the courseware.
Summary
In the past few years, many companies have recognized the strategic value of
logistics and used it as a source of savings as well as a source of service
advantage. Logistics' role in the overall corporate strategic framework has
become more prominent as firms have attempted to cut costs and become more
competitive without sacrificing service. The increasing attention to time-based
and capabilities-based strategies has elevated the role of logistics managers in
the strategic context. In this environment, the challenge facing instructors in
logistics is how to make logistics students--the managers for the future--both well
versed in elements of logistics strategy as well as better attuned to the overall
corporate strategic framework. The authors' approach has involved a mixture of
lectures, assignments, and case studies as well as a capstone simulation
courseware.
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Describing a hierarchical model approach used to instruct students in the
integration of the various elements of logistics strategy. Finally, it has shown how
a simulation courseware, MAS SIMULATION, enables students to obtain hands-
on experience in making strategic decisions and observing their impacts over a
long term.
11.2. The Role of Balanced, Strategic, Cascaded &aligned Performance Measurement in enhancing Firm Measurement
Although it has long been recognised that performance measurement has an
important role to play in the efficient and effective management of organisations,
it remains a critical and much debated issue. After about a decade of being
presented in the literature, one of the most compelling questions remains
whether the implementation of contemporary performance measurement models
such as the Balanced Scorecard (Kaplan and Norton, 1996) and several other
performance measurement frameworks (Keegan, Eiler and Jones, 1989;
Fitzgerald et al., 1991; Lynch and Cross, 1991; Atkinson, Waterhouse and Wells,
1997; Neely, Adams and Crowe, 2001) actually enhances company profitability.
It has been suggested that companies adopting these systems would improve
their corporate profitability by identifying the causal relationships between actions
and performance. Their authors argue that through a better alignment with the
strategy corporate performance is improved since the goals of managers and
their subordinates are then aligned with corporate strategy, and this alignment
should lead to a better performance.
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However, little consideration has been given to providing comprehensive
evidence of relations that might explain how contemporary performance
measurement systems and the congruence between the different elements of
management control systems in a broader sense (strategy setting, incentive
systems, cascading of performance measurement through hierarchical levels in
particular) have beneficial effects on financial performance. While there is some
evidence that non-financial performance measures are positively associated with
performance (e.g. Abernethy and Lillis, 1995; Ittner and Larcker, 1995; 1997;
Chenhall, 1997; Perera, Harrison and Pole, 1997, Ittner et al., 2003, Kaynak,
2003, Said et al., 2003, Davis and Albright, 2004), the empirical evidence is
mixed. It is questionable if any of the isolated relations such as the alignment of
performance measurement systems (PMSs) with the corporate strategy or the
introduction of non-financial performance measures per se are powerful enough
to stimulate the efforts of the organisational members and to channel these
efforts toward the achievement of the organisational goals. Even carefully
designed and cascaded PMSs may fail to co-ordinate employees' efforts and
their decision-making if not linked to an incentive system. More empirical
evidence is needed to understand the reasons for the diversity of PMSs and their
impact on organisational performance. We use a multiple case study approach
consisting of in-depth interviews and a survey with managers from different
hierarchical levels to investigate these questions. Eight Slovenian companies
from different industry sectors were selected for the study. Altogether, 119
managers from the first three managerial levels participated in the survey and 48
managers were interviewed.
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It is found that organisations without a Balanced Scorecard type of a
performance measurement system were achieving high levels of integrative
information from their specific PMS. Focused performance measurement that is
also well-aligned with the business strategy and further supported by tight control
mechanisms may actually improve firm profitability. Also, in complex and
dynamic business environments effective organisations may combine PMSs of
tight controls with moreopen, informal and flexible information and
communication systems to stimulate and channel employee behaviour towards
achievement of the overall organisational goals.
The influence of contextual variables such as the external environment,
technology, organisational structure, size, strategy, and national culture on the
design of an effective PMS has long been recognised in the performance
measurement and accounting literature. Originally, however, this field developed
as a contingency framework in the organisational literature (Burns and Stalker,
1961). Contextual variables may, in effect, have a direct affect on a company's
performance. Nevertheless, when studying the influence of a PMS on a
company's performance, the important question is how well a PMS is designed
for the context in which the company operates. There are two views of how the fit
between contextual variables and structure, in our case - the PMS - develops:
the first one says that the fit is a continuum that allows frequent, small
movements by organisations from one state of fit to another; whereas a
contrasting view says there are only a few states of fit between the context and
structure with organisations having to make major jumps from one state of fit to
another (Gerdin and Grève, 2004). The contingency view claims that the higher
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the degree of fit the better the performance, with all other things being equal. An
extensive body of accounting research has provided evidence that the
appropriate design of performance measurement systems is influenced by the
context within which the companies operate (for a review, see Chenhall, 2003). It
is beyond the scope of a single study to consider the influence of all individual
contextual variables on performance. Rather, we focus here on the fit between all
of them together and the PMS, which is allowed by a holistic field research
approach.
The attempts to make three contributions to the current literature. First, by
undertaking multiple cases we attempt to extract from the perspectives of
individual organisations that are characterised by the idiosyncratic conditions
underlying each organisational context (Flyvbjerg, 2001) to a higher and more
general level of abstraction applicable to a greater number of companies. The
applied method helps us better understand the critical factors underlying the
mediating role of performance measurement and incentive systems' alignment in
the association between the company's strategy and its financial performance.
second, this study investigates eight different types of performance measures
(e.g. financial, customer, quality, processes, environmental, employees,
suppliers, and research and development) and how they are aligned with
incentive systems. This approach may provide different and more meaningful
insights than those provided by prior studies that typically investigate a
dichotomy of financial vs. nonfinancial measures (Said, HassabElnaby and Wier,
2003). Finally, the paper attempts to contribute to a better understanding of how
combinations of different types of controls can be combined to suit the particular
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circumstances of the organisations. Management control system is a broader
term that encompasses PMSs and also includes other controls such as personal
or clan controls (Chapman, 1997; Otley, 1994; Chenhall, 2003), but a limited
number of studies examine broader elements of control (Ittner and Larcker,
1998b). The paper is organised as follows. section 2 provides a discussion of the
background literature on management control, performance measurement,
RAPM (Reliance on Accounting Performance Measures) and incentive systems,
and develops the hypotheses.
The management accounting literature has long maintained that one of the
primary roles of internal accounting and control systems is to facilitate the
development and implementation of business strategies (Simons, 1990; Ittne
rand Larcker, 1997). Simons (2000, p. 5) defines performance measurement and
control systems as 'the formal, information based routines and procedures
managers use to maintain or alter patterns in organisational activities'. In this
role, management accounting and control systems can support the formulation
and communication of strategies, along with the development of controls to
monitor the success of implementation steps and the achievement of strategic
objectives (Govindarajan and Gupta, 1985; Simons, 1987; Govindarajan and
Shank, 1995). Performance measures provide managers with information used
to track the implementation of business strategy by comparing actual results
against strategic goals and objectives (Simons, 2000). With the growing speed of
changes and complexity of today's business environments (Bartlett and Ghoshal,
2000; Harvey, Novicevic and Kiessling, 2001), contemporary PMSs must
encompass multiple financial and non-financial performance measures (Garrison,
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1990; Eccles, 1991; Fisher, 1992; Kaplan and Norton, 1996; 2004; Merchant and
Bruns, 1996). While financial performance measures primarily report how the
organisation has performed, non-financial indicators provide leading information
of future performance and enable managers to track progress with strategic
success factors and processes. Economic theory also explains why companies
place importance on both financial and non-financial performance measures:
importance will be placed on additional, non-financial measures as long as the
measure provides information beyond that contained in financial measures
(Feltham and Xie, 1994). Gersbach (1998) specifically demonstrated that the use
of multiple control measures will induce higher effort among managers than
relying on an aggregated financial measure. With respect to the evidence about
the impact of performance measurement diversity on firm performance, Ittner and
Larcker (1998a) found that firm-level customer satisfaction measures are
associated with the firms' current and future market value but not with
contemporaneous accounting measures. Chenhall (1997) reported that firms
using both TQM and non-financial manufacturing performance measures achieve
higher performance that those using TQM without the non-financial measures.
Kaynak (2003) similarly confirms the positive relationship between TQM
practices and performance levels. From a more general perspective, Davis and
Albright (2004) specifically study the Balanced Scorecard implication for superior
financial performance and confirm it, however, based on a case study. Said,
Hassab Elnaby and Wier (2003) find that the adoption of non-financial
performance measures improves a firm's future accounting- and market-based
returns. Ittner, Larcker and Randall (2003) find that firms making more extensive
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use of a broad set of financial and (particularly) non-financial measures than
firms with similar strategies or value drivers have higher measurement system
satisfaction and stock market returns. In a Slovenian study, Cadei (2002) finds no
support that the provision of strategic accounting information results in better
performance. Relevant information cannot translate into better performance if
management does not incorporate this information in the decision-making
process. According to the survey, the insufficient exploitation of provided
accounting information for decision-making was related to the lack of accounting
knowledge to interpret the provided information. Four other Slovenian studies
(Cadei, 2002; Hocevar et al, 2002; Rejc, 2003; Rejc, 2004) investigate the
inclusion of contemporary performance measures in performance evaluations.
Increasingly, it has been found that companies implement balanced performance
measures with highly ranked non-financial performance measures such as
employee satisfaction, customer satisfaction and loyalty, and care for the
environment. One should note, however, that concerns about employee
satisfaction are related to the traditionally embedded care for employees and
social matters.
Generally, the literature is still inconclusive about the role and importance of
performance measurement diversity and its link to increased firm performance.
However, companies will design multidimensional PMSs but still place more
importance on those performance measures that provide information directly
relevant to their respective strategies and strategic success factors (Simons,
2000). A number of studies have attempted to examine how the diversified
performance measures are linked to organisational strategy. Perera, Harrison
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and Pole (1997) argued that a customer-focused strategy comprises dimensions
that are not well captured in traditional financial accounting information and,
therefore, non-financial information would be morerelevant. We posit that it is
more likely that the diversity of performance measurement positively affects
financial performance on the condition that it is clearly associated with the
strategic orientation of the company. This leads us to investigate that The
diversity of performance measurement positively affects firm performance when
associated with the company's strategy.
A number of accounting and strategic management studies indicate, however,
that in many companies managers at lower hierarchical levels rely exclusively on
financial control systems that place too much emphasis on budgets and short-
term profits, potentially hiding strategic problems from management and causing
business managers to be shortterm in their decisions (Ittner and Larcker, 1997).
Strategic control systems, on the other hand, include the development of action
plans and targets for achieving the chosen strategic objectives, but also the
assignment of responsibilities and alignment of reward systems with strategic
objectives to ensure that manager' actions are consistent with the strategy's
goals and avoid an over-emphasis on short-term financial results (Govindarajan
and Gupta, 1985; Goold and Quinn, 1990; Govindarajan and Shank, 1995;
Chenhall, 2005). As the purpose of performance measures includes aligning
employees with the business strategy and mission (Kaplan and Norton, 1996;
Simons, 2000), the company's overall PMS would ideally be broken down into
sets of local measurements for lowerlevel units to cascade the company's
strategic objectives into more manageable subsets. The cascading of key
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performance indicators throughout the company may represent an important
mediating variable in the association between the PMS and performance. The
cascading of performance measures along the organisational structure is
important as it focuses a lower level manager's attention on the strategic success
factors and the achievement of overall objectives which enhances the likelihood
of the company's financial success (Kaplan and Norton, 1996; 2004). This leads
to an investigation of the role of performance measurement cascading for
increased firm performance that there is a significant association between well-
cascaded performance measurement systems and increased firm performance.
Management control also deals with the challenge of how to induce individuals to
behave in ways which contribute to overall organisational performance. Within
the management control literature, considerable attention has been paid to the
behavioural and organisational effects of using accounting information for the
performance evaluation of subordinates. Research in management accounting
traditionally predicts that the use of budget-based accounting performance
measures in complex, dynamic and uncertain environments results in
dysfunctional managerial attitudes and behaviours and low performance, which
suggests that they should be replaced or complemented by a qualitative or
subjective performance measurement (Hartmann, 2005).
Most of the literature on management control and performance measurement
relies on an alignment of strategy with performance measures but ultimately with
compensation. In an earlier study, Govindarajan and Gupta (1985) examined the
association between strategy and remuneration and concluded that perceived
organisational performance was higher when reward systems were matched to
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organisational strategies. Simons' investigation of the relations among
accounting control systems, business strategy and firm performance also found
preliminary evidence that the return on investment was higher when control
systems and strategies were more closely linked (Simons, 1987). Symons and
Jacobs (1995) indicated that in companies pursuing quality strategy TQM-based
reward systems are associated with higher performance. According to
conventional wisdom, a well-developed incentive scheme may represent a
crucial link between PMS and organisational performance by guiding employee
behaviour in the direction of strategy implementation and thus contributes to goal
congruence. Since the alignment between performance measures in a PMS and
incentive system additionally stimulates and channels employees' efforts toward
a common goal, we investigate
A significant association between the alignment of performance indicators in
formal performance measurement and incentive systems leads to increased firm
performance.
The effectiveness of performance measurement depends on its intertwining with
all mechanisms of management control. By management control, we understand
a wide range of formal and informal control mechanisms whereby informal
mechanisms include the selection, training, transfer, career path of managers
etc. (Martinez and Jarillo, 1989; Bartlett and Ghoshal, 1989), or the
communication of values and beliefs (Simons, 1995). They are commonly
labelled behaviour control (Ouchi, 1977). Formal control, on the other hand, is a
group of mechanisms that next to performance measurement and incentive
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system encompasses organisational structure, formalisation and standardisation
expressed in written rules, policies, job descriptions etc.
If performance measurement is systematically linked with other organisational
controls, studies that exclude or do not control for these elements within the
research method may report spurious findings (Chenhall, 2003). For example,
one may argue that formal budget systems are unsuitable in uncertain operating
conditions as they include incomplete information and lack flexibility. However, it
may be that successful companies operating in such environments have formal
budgets but they are systematically combined with open and flexible informal
communications between managers. Chapman (1998) argued that in uncertain
conditions effective organisations can employ formal accounting but they should
take place within a situation that involves intense verbal communication between
organisational groups. Thus, since the effectiveness of management control
systems depends on the appropriate combination of different types of controls
determined by the particular circumstances of the organisation, we are interested
in performance measurement will positively affect firm performance if it is
congruent with the company's broader management control system.
while it is likely that a well-formulated strategy has a direct and positive
association with company performance, the importance of an aligned and
cascaded performance measurement system will intervene in that relationship.
Further, a well-designed, balanced and cascaded performance measurement
system may also have a direct and positive relationship with a company's
financial performance, but an aligned incentive system will intervene in that
relationship. In other words, if companies properly implement their strategies by
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placing importance on measures that provide critical feedback on the strategic
drivers of success and the outcomes, cascade the most important performance
measures throughout the organisationand include them in incentive systems,
then the company will realise more benefits from that strategy. Finally, the
effectiveness of performance measurement depends on how congruent they are
with the overall management control system.
We investigated the hypotheses in the field research by combining in-depth semi-
structured interviews with a survey. Based on Ravetz's (1971) advice that every
discipline needs to utilise methods appropriate for its own subject matter,
numerous management accounting researchers acknowledge the value of field
research in providing richer and more complex descriptions of the phenomena
under investigation (Smith, 2003; Lindsay, 2004, Lillis, 1999, Chua, 1996).
Kasanen et al. (1993) found that the majority of significant management
accounting innovations have come from practice or consulting bureaus and not
from academic accounting research. Illustrative examples of the most significant
control models arising from field research are the development of Activity Based
Costing and the Balanced Scorecard by Robert Kaplan and his colleagues, the
development of the Beyond Budgeting Model by Jeremy Hope and Robin Fraser,
and the development of Interactive Control Systems by Robert Simons (Lindsay,
2004).
However, progress in field research may be facilitated if the role of case study
research is expanded to include the development and testing of theory by
following Eisenhardt's (1989; 1991) methodology, which is grounded in the use of
a comparative, multiple case logic of replication and extension. The researcher's
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intimate connection with the organisational reality along with the multiple data
and cases facilitates the discovery of pattems among the comparison cases,
obtaining of anecdotes explaining the patterns observed, detecting of the
boundaries that shape and limit relationships and providing of the construct
validity that is ultimately required in developing high-level theory (Lindsay, 2004).
In addition, researchers should also begin to conceive of generalisation
differently. In scientific situations where the focus is on making predictions
regarding some process or cause-system (e.g. will the balanced scorecard work
in my organisation) the representative model with its focus on aggregate
measures of central tendency impedes the acquisition of empirical generalisation
and the development and refinement of theory. Thus, we designed research
methodology that includes two distinct components: a survey and semi-
structured interviews. The study started in 2004. As we proceeded, we were
continuously adding new companies to be able to replicate the methodology and
permit empirical generalisations. Altogether, eight Slovenian companies are
included in the study. The selection primarily relied on the feasibility and
accessibility of the higherlevel managers.
The companies studied
Companies come from various industry sectors and have a wide variety of
competitive and organisational characteristics, which introduces diversity into the
sample. To provide some anonymity of the companies, we named them after the
industries they operate in. Financial performance lies in the core of our interest
but, as the analysed companies come from different industries, have different
sizes while, in addition, some are closely held and others are publiccompanies a
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direct comparison of their financial results is clearly inappropriate.Therefore, our
clustering based on financial performance is qualitative. Theclassification criteria
rely on acombination of financial performance measures. We selected two highly
related profitability ratios (ROA and ROE), a real profit growth, and a real sales
growth, the last one being one of the least susceptible indicators to earnings
manipulation. The second criterion was a company's world market share which
indicates the ability of the company to break through and establish an important
position among the world's largest competitors.
We divided all companies into three groups: Group 1 comprises 'Companies in
financial distress'; Group 2 includes 'Average performers'; and Group 3 'Above-
average performers'. Evidently, the worst performers are the two companies that
have for a number of years suffered financial distress and are still subject to a
restructuring programme. On the other extreme are two outstanding companies
that have the highest value of the selected financial indicators. Both of them are
important world players - the household appliance company counts among the
eight largest companies in the industry, whereas being part of a multinational
corporation the telecommunication company controls considerable market shares
in Eastern Europe and ex-Soviet Union countries.
Company 1 - Shoemaker 1 - used to be one of the biggest Slovenian producers
of women's and men's fashion footwear. The company had 362 employees at the
end of 2004 and is still in the ownership of the Republic of Slovenia (82%). 15
percent is owned by two commercial banks and the rest by the employees. Over
50 percent of its sales is created by its own collection; but it also produces
footwear for recognised foreign trademarks. Its markets are in Slovenia, Italy and
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Croatia. The company is, due to financial distress, under a restructuring
programme.
Company 2 - Ferrite Components · was recently taken over by a larger
international corporation of a related industry, manufactures soft ferrite and
magnetic components. Most of the products are exported to well-known
companies worldwide and used in various segments of application
(telecommunications, industrial electronics, sensors, automotive industry, data
processing systems etc.). The company currently has 420 employees. In 2005,
the start-up of production in China was planned and 20 percent of the production
range of ferrite cores was to be redirected to the new manufacturing site in
China.
Company 3 - Food Processing - a publicly held company with 550 employees, is
one of the leading producers of food and non-alcoholic beverages in Slovenia
and in the Balkans. The company's most important product lines include water,
non-alcoholic beverages, baby food, the Unilever line, and the production of food
additives. 70 percent of its products are sold in Slovenia; an additional 20 percent
are sold in South-east Europe. The company has three production units in
Slovenia and numerous subsidiaries in ex Yugoslavia, Germany and Russia. The
ten largest investors are all portfolio investors which hold 64 percent of the
company ownership. The rest of the ownership is widely dispersed.
Company 4 - Medical Supplies - is a publicly held company engaging in the
manufacture of hygienic-medical products (60 percent of the company's turnover)
and a general consumption line of products for personal hygiene, infants and the
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household. Manufacturing sites are all located in Slovenia; trading subsidiaries
are established in ex-Yugoslav countries as well. With 740 employees, it markets
over 300 different products and 11 sets of products are protected by a trademark.
About 15 percent of the company's turnover is generated by exports to
demanding European markets, while two-thirds of its production is sold in the
Slovenian market. The company is controlled by six investment funds, two of
them are governmental, that hold 64 percent of ownership. 5 percent of the
company is owned by the employees. The rest of it is dispersed among over
2,000 small shareholders.
Company 5 - Warehouse and Real Estate Renting - is a management-owned
company whose activities include the development and management of property
intended for business, trading, entertainment, sports and recreation, together
with the development of business and technical process of logistics and
distribution. It started up with warehousing; today, its premises include shopping
malls, logistics, offices, sports and leisure, and parking garages, all within an
area of over 360,000 m^sup 2^. It has 362 employees. With recent investments it
has become the largest business, shopping, sport-leisure and cultural centre of
South-east Europe.
Company 6 - Shoemaker 2 - manufactures sport and fashion footwear. It is the
leading producer of cross-country ski boots with a 30 percent world market
share. Sport lines also include downhill ski boots (2 percent of the world's
downhill ski boots), and mountain climbing boots. The fashion lines in both
women's and men's footwear account for two-thirds of its entire production. It has
a well-organised network of retail stores in Central and Eastern Europe as well
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as distributors and representatives around the world. Each year 847 employees
in manufacturing sites in Slovenia, Bosnia and Herzegovina, and Romania
produce over 1.5 million pairs of shoes and boots. Over 65 percent of the
production is sold abroad under the company's own brand name.Among the four
largest shareholders are the two governmental funds with 25 percent and the
European Bank for Reconstruction and Development with 16 percent. An
important influence on corporate governance is exerted by a family whose
members own 15 percent of the company and are also among executive
directors. The rest of the ownership is dispersed among small shareholders.
Company 7 - Household Appliances - is a public limited liability company that has
managed to maintain its position among the eight largest household appliance
manufacturers in Europe. The company manufactures electric and non-electric
domestic appliances and electro-thermic appliances within three programmes:
Cooling programme (washing and drying machines), Wet and Dry programme
(washing and drying machines), and Cooking programme (electric cookers, gas
cookers, and ovens). With 9,486 employees it is one of Slovenia's largest
manufacturing corporations. The company makes most of its sales in the
European Union, South-east Europe and Russia. The two governmental funds
hold 33 percent of the shares and together with a few investment funds they
control 54 percent of the company ownership. 8 percent of the ownership is
owned by the employees of the company.
Company 8 - Telecommunication Systems - is a privately held company and a
telecommunications equipment, service and solution provider in the carrier and
enterprise segments. The company has 1,000 employees of which more than
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400 work in the R&D department. The company has established technological
partnerships with Intel, Motorola and Siemens. Target markets include countries
from Central, Eastern and South-east Europe, and Asia. 48 percent of the shares
are owned by a multinational corporation and a further 26 percent by a
commercial bank. The rest is widely dispersed among small shareholders.
Interviews
In each of the eight companies, we interviewed the CEO, the CFO, two heads of
strategic business units (SBU), and two managers who directly report to the
interviewed SBU heads. In the eight companies 48 semi-structured interviews
were conducted. Semi-structured interviews provide in-depth knowledge of the
company context, a better understanding of the managers' views of performance
measurement and its use in their company, and an opportunity to gain additional
data. The interview protocol is described and the list of questions is presented in
the Appendix.
Clearly, in field research there is nothing like the Cronbach alpha or control
groups and experiments to demonstrate the reliability and validity of the
constructs (Smith, 2003, p. 135). Rather, our attempt is to lean on the existing
theory and literature and to seek to provide convincing explanations that justify
practice choices and facilitate the development of the theory.
Survey
To provide additional depth and a substantial context for the arguments we
combined the findings from the interviews with data collected by a survey.
Despite the fact that we surveyed 119 managers, no statistical testing of
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hypotheses is feasible as our units of observation are companies and there are
only eight of them. The questionnaire focused on the use of performance
measures for decision-making as well as for incentive purposes and covered a
larger number of managers in each company. We surveyed managers at the first
three managerial levels to provide different perspectives of the performance
measurement systemand the particular measures that managers at different
hierarchical levels actually use. Surveying top managers, managers in both
strategic business units and functional units, and their subordinate managers
allows for the identification of both the degree of alignment and whether the
measures have been cascaded and used throughout the organisation. This
approach is specifically important as most studies solely survey the top
management, and top managers are likely to overestimate the understanding
and use of critical performance measures at lower levels. The large number of
managers in each company also provides inter-rater reliability and lends greater
support to the findings. We are also able to evaluate whether the managers at
different levels in the organisation are being evaluated on the performance
measures they think are most relevant to their performance.
The survey covers seven CEOs of eight companies, 13 executive directors, 22
and 26 business function and business unit managers (2nd-level managers),
respectively, and 51 department managers from various areas. 20 managers
come from the first managerial level (CEOs and executive directors), 54
managers come from the second managerial level, and 45 managers represent
the third managerial level.
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In all the studied companies performance measurement systems collect
numerous performance measures. With respect to evaluating the performance
measurement diversity, a representative selection of both financial and non-
financial performance measures was taken from the underlying literature.
Altogether, 41 performance measures were listed. Each respondent was asked
to grade their importance on a scale from 1 to 4. If a performance measure was
of no importance to the manager, they omitted it. A missing value, hence, marks
no importance and/oruse. We normatively grouped those 41 measures into eight
dimensions of performance measurement.1 These dimensions are (see Table 1
in the Appendix): (1) Financial Performance; (2) Customer Perspective; (3)
Quality; (4) Processes; (5) Environmental Performance; (6) Employee Relations;
(7) Supplier Perspective; and (8) Research and Development. The eight
dimensions of performance are composed variables and the score each
company gets for a dimension is calculated as the mean value of the
performance measures.
In the second step we analysed each company's PMS profile. We calculated
average grades the executive directors and business unit managers ascribed to
the different dimensions. The grouping of their responses is justified by the fact
that executive directors are in charge of the overall performance of the company.
Business unit managers may also be looked at as a single group of managers as
their performance is assessed along similar performance measures. second-level
managers in charge of business functions are too heterogeneous so it is no
longer reasonable to group their answers. The same holds for the third-level
managers, who are in charge of very specialised activities, and comparable
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directly neither within the company nor across companies. According to the mean
values ascribed to each dimension we ranked the dimensions in each company.
Comparisons of the ranks of dimensions on the first and second managerial
levels allows for inferences about the cascading of PMSs.
Result & Discussion
Our findings are broken down into four subsections according to the four research hypotheses.
The first hypothesis addresses the association between the company strategy
and the performance measurement system diversity (use of multiple perspectives
of performance measurement). Our first observation is that all but one company
are predominantly export-oriented and pursue growth strategies based on new
product and new technology development. Their export orientation has led the
companies to strive to differentiate themselves from their competitors. Most
SBUs in the sample companies pursue a product differentiation strategy. As
markets are driven more by value than cost companies are being forced to
consider quality, customer service, response and other such attributes at the
same time, and this change of focus has created the need for performance
measures to facilitate the control of these attributes. The relevance of the well-
known strategy archetypes developed in the 1970s and 1980s and focusing on
either costs or differentiation is 20 and more years later becoming less clear
(Kotha and Vadlamani, 1995) and managers seem to realise that the multiple
orientation of the strategy has to be supported with performance measurements.
Similar to the traditional understanding of a balanced PMS we define a balanced
PMS as one in which first-level managers ascribe relatively equal (balanced)
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importance to several dimensions of performance. The Balanced Scorecard, for
example, implies that a balanced PMS is one where relatively equal importance
is placed on the financial, customer, internal processes, and learning and growth
dimensions of performance. In contrast, in a focused PMS some performance
dimensions are given strikingly more consideration: usually this is the financial
aspect of performance, but it may well be some other or a few of them.
The companies' performance measurement systems are presented in Figures 1
to 8 in the Appendix. The lines represent the average scores of the first- (CEOs
and executive directors) and second-level managers (SBU managers) on each
performance measurement dimension. The first-level managers' responses allow
for inferences about their corporate PMSs' diversity and balance. As can be seen
from these figures, CEOs and executive directors monitor several aspects of
performance, however, at varying degrees. Some companies are particularly
specific in that they pursue the low costs leadership strategy. For these
companies the financial perspective of the PMS is the most important. This is
true for Company 2 - Ferrite Components, and Company 4 - Medical Supplies. In
other companies where the prevalent source of competitive advantage is, for
example, innovation (Company 8 - Telecommunication Systems) and intellectual
property, the profile of the PMS is focused on other dimensions such as R&D.
We found that some of the non-financial dimensions, such as customer, quality,
and processes dimensions, are equally critical for all companies and received
high scores they have been incorporated in all types of strategies. Other non-
financial dimensions' importance should be related to the specific contingencies
of the companies - their technology, in particular. Thus, while it is true that
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balanced PMSs provide more direct and timely feedback on managerial effort,
focus attention on the long-term perspective and allow managers to understand
the relations among various strategic objectives, which should all lead to
improved financial performance, one cannot firmly conclude that balanced
performance measurement is a must in all circumstances. Three companies in
our sample, with Company 8 being an above-average performer, the other two
(Companies 4 and 6) average performers, have considerably more financially
focused PMSs at the first managerial level.
The second research hypothesis is directed at the association between the
cascading of performance measures and increased financial performance.
Cascading refers to the characteristic of how well the importance of different
performance measures is communicated to the lower levels. Based on the
overlapping (or its absence) of the importance of different PMS dimensions
between the first-level managers and business unit managers we draw
conclusions on this association and its impact on financial performance.
Companies that want to achieve financial success are supposed to communicate
the importance of the financial aspect of actions well throughout the company.
The cascading of financial performance measures can, on one hand, be
relatively easy decomposed to a very detailed level but, on the other, it
strengthens the importance that every action must have a beneficial financial
effect.
The level of cascading of the financial measures varies considerably among the
companies. The highest levels of cascading can be found in Companies 52 and
7. Company 5 Warehouse and Real Estate Renting - managed to achieve an
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outstandingly high level of overlapping of (financial) performance measures
throughout the company. A brief story based on the interviews will reveal how
and why. Company 5 implemented an integrated PMS with a strong financial
focus in 2002. At that time, the company was divided into responsibility centres
as detailed as single buildings in the shopping centre area. Performance
measures were assigned to managers and targets were set according to the
desired overall profitability. Financial measures at the upper level (ROA, ROI,
and profit margin) are decomposed to more detailed financial and some non-
financial measures at lower levels. Measures as well as targets for financial
ratios are imposed by superiors, non-financial measures and their targets, on the
other hand, are developed by the managers of individual units. Managers of the
business units are checked monthly for their financial results and asked to react
immediately if they are below target. There is no performance-related incentive
system in place at the lower levels (but a profit-sharing scheme was introduced
to stimulate upper-level managers who are also major owners of the company).
Throughout the company, the alignment of interests is primarily exercised
through tight control. The clearly focused performance measurement system -
with a focus on financial performance, processes (specifically capacity utilisation)
and quality, along with the consistent cascading of performance measures (see
Figure 5 in the Appendix) and frequent formal control give clear guidance for the
lower managers' decision-making. Although a focused performance
measurement system appears to be in contradiction with the prevailing notion of
comprehensive and balanced performance measurement, the cascading of
performance measures and tight control, which acts as a substitute for
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performance-related compensation, may impact on the company's financial
performance.
Company 7 - Household Appliances - also has an exemplary cascading of
financial performance measures. Company 8 - Telecommunication Systems -
has well-cascaded financial measures at the first two managerial levels and, also
customer, quality and R&D dimensions of PMS. As discussed earlier, Company 8
focuses heavily on the financial and R&D dimensions of its PMS and the
importance of both perspectives is well-communicated along hierarchical levels.
Dimensions of performance that are not considered as strategically important at
the top have also been evaluated as less important at the lower levels. 'Formal
monthly management meetings are important', says one of the interviewees, 'but
informal communication is even more important.' Of the two companies in
financial distress, Company 1 has a particularly poor cascading of all PMSs.
Company 2, on the other hand, has a relatively well-cascaded PMS in general; in
addition, the performance measures are well-balanced. The CEO of the company
specifically noted that all managers receive reports on the most critical
performance measures. A new PMS, however, has just been recently
established and is expected to improve the company's financial performance
because of its alignment with the new incentive system.
Based on empirical evidence from our study, we may conclude that the
cascading of critical areas of performance to lower levels is important and that it
may contribute to increased financial performance.
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The third research hypothesis stated that the alignment of performance indicators
in formal performance measurement and incentive systems leads to increased
financial performance. In fact, there was a general consensus among the
interviewed managers that the alignment between performance measurement
systems and incentive systems is critical for the channelling of employees' efforts
towards the achievement of the organisational goals. Yet, the alignment between
the two was managed with varying degrees of success. In an earlier Slovenian
study by Rejc and Slapnicar (2003) investigating the relationship between
management compensation contracts and performance measurement systems,
the authors found that the use of performance measures in the executive
compensation contracts and the PMS design are not associated. In most of our
companies under study fixed compensation is in place. As a consequence, while
the interviewed managers or questionnaire respondents use several indicators
for business decision-making and control over operations, only a smaller number
of indicators are used for rewarding purposes.
There are several explanations of this phenomenon. First, the roots for the
prevailing fixed compensation can be found in the previous egalitarian
compensation model (Warner et al., 2005) and continuity with old compensation
practices. second, managers fear implementing formal incentive systems
because of a poor understanding of the magnitudes of the incentive effect
(MacLeod, 1995). Several interviews revealed this fear. The underlying reason is
explained by the fact that, given the environmental complexity, complete
contingent contracts cannot be written and, hence, principals use implicit
contracts including high morale, loyalty and team-spirit. According to the theory
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of self-enforcing contracts, these objectives help align the incentives of the group
(Alchian and Demsetz, 1972).
Financially distressed Company 1 - Shoemaker 1 - currently has no incentive
system in place. While the company had an incentive system in place before
1990 with variable compensation linked to sales, the collapse of ex-Yugoslavia
and subsequent loss of its main markets forced the company to abandon the
incentive system. This has been explained by the pressure to cut labour costs,
but also the managers' belief that an incentive system linked to sales can only be
put in place when the company's strategy (products, markets and technology) is
determined and successfully launched, otherwise it will not produce a motivating
effect.
Company 5 and Company 7 have already been discussed for their well-
elaborated cascading of financial performance measures, accompanied by tight
control. In Company 5 - Warehousing and Real Estate Renting - the managers of
business units are checked monthly for their financial results and sanctioned for
poor performance. In Company 7 Household Appliance - below-target
performance is sanctioned as well: with a negative stimulation up to 20 percent of
the fixed pay. The head of the Controlling Unit specifically noted that 'poor
performers are benchmarked with their peers to get an objective evaluation of
their actual achievements' which then form the basis for their potential dismissal.
In both companies, the alignment of interests and stimulation of people's efforts
is primarily exercised through tight control.
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Despite the increasing trend to incorporate non-financial performance measures
(such as customer satisfaction, quality etc.) in performance measurement
systems, the sample companies rarely apply them in their incentive systems.
Even though advantages have been widely discussed and empirically evidenced,
their common argument was that they prefer to measure the performance of
teams rather than individual performance. Yet using them for rewarding purposes
might violate the principle requiring that a measure is controllable from the point
of view of the controlled employee. In addition, in the interviews, when we
discussed the importance of aligned performance measurement and incentive
systems, the issue of measurability was often raised. Managers would imply it is
very difficult to design fair incentive systems, in particular, for middle
management in charge of diverse projects and functions (i.e. quality manager,
environmental manager, controller etc.), whose job performance is often only
indirectly linked to final outcomes. Although the notion of being accountable
(only) for what one is able to directly influence may be viewed as conforming to a
commonly held concept of justice, it should be noted that a strict application of
the principle would imply that in most cases even the use of budgets for
managerial performance evaluation (and management control) would not be
feasible since, especially in uncertain and complex organisations, with people
working in joint effort the possibility to single out individual responsibilities is
severely limited (Hartmann, 2000). In practice, budgets are used for evaluating
and rewarding managerial performance in Companies 5 and 7 in particular, but
also in Companies 2 and 8, and many non-financial performance measures are
applied as well.
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In most companies modestly using either financial or non-financial performance
measures formally included in the incentive system, other forms of motivating
and stimulating human behaviour are in place. These include public disclosures
of individual results (on the Internet, ina company newspaper, or at company
gatherings where the CEO publicly rewards the best performing managers as in
Company 8); regular meetings and discussions of individual or team
performance, promotions, training and education and granting of fringe benefits.
But the general impression from the interviews was that 'soft' or qualitative
measures and opinions that are used to substitute for more formal and
quantitative measurements are not well-accepted among employees. On one
hand, they generally view them as unfair; on the other, the practice shows that
the superiors responsible for performance evaluations are gradually reducing
their efforts in fair evaluations or abandon this practice altogether. Few or none of
the employees are proposed for rewards or promotions.
In the majority of the companies the incentive system does not incorporate an
explicit bonus formula and individual performance is only indirectly linked to the
salary through, for example, promotion. In other companies, the variable part of
the compensation is too small to change the behaviour of the incumbent. In the
light of the expectancy theory, it is not important which measures are used to
measure performance if a negligible reward is associated with performance
measurement. Such incentives cannot stimulate and channel the employees'
behaviour toward the achievement of the overall company goals. All in all, we
may conclude that in accordance with earlier empirical evidence in complex and
dynamic business environments effective organisations may combine tight
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controls with more open, informal and flexiblein formation and communication
systems
(Simons,1987; Chenhall and Morris, 1995; Chapman, 1998) to stimulate and
channel employee behaviour towards the achievement of the overall
organisational goals. Empirical evidence from the eight companies shows that
explicit incentive systems are typically narrower than performance measurement
systems in the sense that they only include a handful of performance measures.
We can conclude that the alignment of performance measurement and incentive
systems in the studied companies has received little attention: one of the major
reasons is that the managers in charge of rewarding believe the noise when
measuring an individual's performance is too strong and the cost of eliminating it
would be too high. Moreover, companies want to motivate group achievements
(not individual ones) and, hence, focus more on building commitment. All in all, it
is perceived as quite doubtful that the alignment of performance measurement
and the incentive system alone will bring about a better financial performance.
The fourth research question investigates the overall fit of the performance
measurement and management control system. Incentive systems as well as
performance measurement systems represent only a fraction of a management
control system that is directed at influencing (stimulating and channelling) human
behaviour. Other control systems may assist in the achievement of organisational
goals. But we know verylittle about how managers use these systems and
whether it is their negligence that leads to a poor or insufficient increase in
financial performance. Earlier studies reveal there are systematic differences in
management control systems among companies that compete in different ways
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(Simons,1990). In our study we were able to identify somecontextual variables
that influenced the nature of the management control system in place.
The presence of a controlling shareholder has been found to be one of the main
determinants of the tightness of a management control system. A major owner
can well articulate his interests, which are communicated by various mechanisms
to lower level managers. Company 2 - Ferrite components - has been taken over
by a larger company which tightened control of all processes including control of
the company's PMS. Following a management buy-out, Company 5 -
Warehousing and Real Estate Renting - has established very clear financial
objectives and a financially focused PMS. Company 6 Shoemaking 2 - is family-
owned with the top and some middle managers and their relatives being its major
owners. Here, the specific location of the company (poor labour force access)
and the family ownership have created a unique management control system
focused on softer mechanisms such as building employee commitment and an
informal organisational climate. All the other companies have a dispersed
ownership structure and less tight management control systems.
Organisational structure is another formal mechanism of control. The larger the
company the more hierarchical and the more it controls its units with accounting
and financial performance indicators to make the performance of units
comparable in terms of profitability. The size of the company affects information
asymmetry between different managerial levels and, hence, the reliance on
formally measured performance indicators rather than intuition and subjective
indicators. We found that larger companies have clearly more elaborated
accounting reporting and rely on it more. However, we could not conclude that
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the size or organisational structure of the company affects the emphasis of
financial indicators in the boardroom and there was no evidence that the size and
organisational structure would affect the formalisation or design of an incentive
system.
Conclusions, Implications & Solutions
The research reported in this paper provides some additional empirical evidence
as to the performance measures used and the relevance of those performance
measures to the improvement of performance. Interestingly, we find evidence
contrary to the notion that only a collection of balanced performance measures
can properly align the efforts of an enterprise with its strategic objectives (Kaplan
and Norton, 1996) and by further tying compensation to the performance
measurement system the company's corporate financial performance should
improve. While it may be true that balanced PMSs provide more direct and timely
feedback on managerial effort, focus attention on the long-term perspective and
allow managers to understand the relations among various strategic objectives,
which should all lead to improved financial performance, one cannot firmly
conclude that balanced performance measurement is a must in all
circumstances. Three of the companies in our sample, all relatively good or
above-average performers, have strategically focused (unbalanced) PMSs. We
thus find that focused performance measurement that is also well-aligned with
the business strategy and further supported by tight control mechanisms may
actually improve firm profitability. In companies with comprehensive and
balanced performance measurement, on the other hand, poor cascading and a
lack of alignment to incentive systems appear to be the most critical factors
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preventing companies increasing their financial performance - despite the
relatively consistent alignment of performance indicators with the corporate and
business strategy.
On the other hand, although the need for aligned performance measures in
PMSs and incentive systems was recognised in the sample companies, the
alignment between the two was managed with varying degrees of success. In
fact, in most companies under study fixed compensation is put in place and only
a smaller number of indicators are used for rewarding purposes. But companies
use other control tools such as use of sanctions and dismissals as a way of
controlling managers' behaviour and decision-making. Tight control may
substitute for incentive systems in specific circumstances. Also, other forms of
motivating and stimulating human behaviour are in place. These include public
disclosures of individual results, regular meetings and discussions of individual or
team performance, promotions, training and education as well as other fringe
benefits. We may conclude that in complex and dynamic business environments
effective organisations may combine tight controls with more open, informal and
flexible information and communication systems to stimulate and channel
employee behaviour toward the achievement of overall organisational goals.
Thus, it is not any one variable in isolation that makes a company perform better,
such as its strategy or its performance measurement system; it is a combination
of all of the pieces working together in an integrated package consistently and
over time. Except in the case of Company 2 - Ferrite Components none of the
companies has introduced its existing PMS overnight or as a package of new
solutions based on the inventions of contemporary performance measurement
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models. Rather, they have built up their PMSs gradually, over time. New
managers in charge introduced new measures which they felt are more
appropriate and abandoned some old ones. This indicates that the fit between
PMS and the contextual variables is being realised in small steps and that PMSs
are constantly being adapted to environment and management practices.
Theories are not universal in scope; they are always context dependent (Lindsay,
2004) and it may be the increased uncertainty of the business environments in
which the sample companies operate in led to somewhat different conclusions.
All in all, the study found that organisations without a Balanced Scorecard type of
performance measurement system were achieving high levels of integrative
information from their specific PMS. This suggests that the adoption of a well-
known PMS such as the Balanced Scorecard is not necessary as other
integrative performance measurement systems will provide integrative
information as well. Some Balanced Scorecards may even not be designed to
provide high levels of integrative information; rather they may be limited to
supplying a mixture of financial and non-financial measures (Ittner and Larcker,
2003).
In earlier studies, uncertainty was related to the usefulness of broad scope
information (Chenhall and Morris, 1986; Gul and Chia, 1994; Chong and Chong,
1997); a performance evaluation characterised by a more subjective evaluation
style (Moores and Sharma, 1998); less reliance on incentive-based pay (Bloom,
1998) and a non-accounting style of performance measurement and evaluation
rather than either a budget-constrained or profitoriented style (Ross, 1995).
Some evidence suggests combinations of traditional budgetary controls and
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more interpersonal and flexible controls in conditions of environmental
uncertainty. Chenhall (2003) reports that a consistent stream of research over
the past 20 years has confirmed that uncertainty has been associated with the
need for more open, externally focused, non-financial styles of management
control systems. Many of these findings were confirmed in our study.
As with most studies this study has some limitations. One limitation is that the
current selection of cases does not ideally suit the requirements posed by
Eisenhardt (1989; 1991) about the replication logic of case studies. Another
limitation is that the study uses self-reported survey data, which led to overly
positive responses from the respondents at all managerial levels. Finally,
contingency-based research has approached the study of management control
systems assuming that managers act with the intent to adapt their organisations
to changes in contingencies in order to attain fit and enhanced performance. Our
study has confirmed some of the earlier findings; but to maintain the relevance of
management control systems of contingency-based research researchers need
to focus their attention on the contemporary dimensions of management control
systems. According to Chenhall (2003), much can be gained by reflecting on
recent thinking in areas such as strategy, organisational and cultural change,
information technology and human resource management, but also psychology.
Contingency-based research can provide an ordered way to integrate thinking
about the sociological processes effecting management control systems in
action, perhaps combining these insights with conventional elements of
contingency-based models.
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Footnote
1 It was unfeasible to perform a factor analysis due to the wide variety of
hierarchical and functional positions of the managers included in the study and
because of the relatively low frequencies on each of the 41 performance
measures (respondents focused on a relatively few indicators of performance
that were the most relevant). As a consequence, the data matrix is non-singular.
Company S has an orthodox divisional organisational structure and, hence, no
business function managers at the second level.
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CHAPTER 12
CHALLENGES & OPPURTUNITIES FOR INDIAN
LOGISTICS OUTSOURCING COMPANIES
KEEPING A WATCHFUL EYE ON PILFERAGE PREVENTION
BUILDING WAREHOUSING-KEY TO FASTER LOGISTICS
GROWTH
MARITIME TRANSPORTATION
MEGA TRENDS IN AIR CARGO
RAIL FREIGHT IN INDIA
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CHAPTER 12
CHALLENGES & OPPURTUNITIES FOR INDIAN LOGISTICS
OUTSOURCING COMPANIES
12.1 Keeping a Watchful Eye on Pilferage Prevention
―The fast-paced growth of the Indian logistics industry has brought with it various
challenges that demand urgent attention. One of the common concerns faced by
logistics companies is pilferage of goods during transit and storage, by building a
safe supply chain model and investing in technology to ensure high goods safety
companies can now prevent losses that occur due to pilferage.‖
Robust economic growth and liberalization have led to considerable increase in
domestic and international trade volumes over the past five years, Consequently,
the requirement for transportation, handling & warehousing is growing rapidly
and is driving the demand for integrated logistics solutions. With integrated
logistics solutions & services provided by 3PL players already in the market, a
key concern for the logistics industry lies in the pilferage of goods during storage
& transportation. To create a safe zone for the goods being transported as well
as stored, the needs to build a robust supply chain that is not only cost-effective
but also safe from pilferages and other inventory damages is vital.
Tamper-Proof Supply Chain:
To address changing consumer demands, companies are challenged to become
more flexible in their manufacturing operations so that they can manage multiple
new stock keeping units (SKUs) while maintaining operational reliability and
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ensuring quality standards. Furthermore, companies must find ways to optimize
their existing manufacturing infrastructures due to growing profitability pressures.
A safe, orderly and efficient supply chain is key to a successful and safe
operation, It plays an essential role in the way goods are sent, received, stored
and circulated throughout the facility with so much going on and so much to keep
track of a supply chain is highly vulnerable to face pilferage of goods, inventory
and other inventory damages during storage & transit. Commenting on the
attitude of logistics players on the implementation of a safe supply chain, Sanjiv
Kathuria, Director-Sales & Marketing, TNT India says, We believes that the
implementation of a safe supply chain is multi-pronged and includes steps like
quality warehouse design with adequate security measures such as 24*7
electronic surveillance, etc. Moreover shipments can be assured protection from
varying weather conditions when being transferred in quality closed body
vehicles with a tamper-proof sealing system, Vehicles monitoring through GPS
helps in real-time visibility & ensure high degree of control. In addition, security
quality certifications like TAPA & ISO 28000 help in building a safe supply chain.
Risk assessment with corrective action clear escalation matrix system and a
strong investigation team helps in handling any untoward incident or situation,
while CCTV surveillance at key areas help keep a check on the movement of
goods and records evidence, providing adequate road safety training to drivers
and the safety management team helps deal with such situations.
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Checking for Discrepancies:
There are no set rules to build a safe supply chain. However most companies
have developed a few practices that help them minimize pilferages and ensure
inventory safety. According to kathuria, a dedicated closed- storage facility with
access to the control centre is normally deployed CCTV systems, as mentioned
earlier are thepreferred options to ensure minimum pilferage, It is necessary to
have the goods moved through gate-pass and physical checks. Some of the
other ways that can ensure lower pilferages are through metal detectors, bar
codes scanners, vertical stackers and inventory management through unique bar
codes with stackers support, It is very important that quality recruitments and
background checks are made before appointing an employee, It is also
necessary to work with quality vendors who are aware, trained and well versed
with best in class security measures and its effective implementation, tamper-
proof and quality travel-worthy packing materials, investments in electronic
surveillance and proper structure with supervisory skills.
― To minimize pilferage during storage, it is important to ensure a proper storing
place, good warehouse design, electronic access control, control over
movements of goods, regular stock taking process, well defined and established
escalation process, physical security deployment, bar coding system for parts
and alarm system,‖
Pilferage can be minimized through proper deployment of a mix of manual and
technological resources, Rajeev Saxena, Sr V.P.- Contract Logistics, Agility
Logistics opines, ― Regular & rigorous frisking of people moving out of facilities,
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though it may sound trivial is still the most effective solution to check pilferages.
Restricted entry and exit points to facilities would ensure that no unnoticed
movement of people takes place. Moreover, a daily perpetual inventory count in
the facilities help in finding out if any pilferages may have taken place during
earlier instances. Any shortage reported in perpetual inventory, which cannot be
attributed to any transactional errors would alert the facility management of any
possibilities of pilferages taking place in the facility and corrective action can
immediately be initiated to stop further pilferage.‖
―Moreover, approximately 80% of cargo thefts are either perpetrated by internal
employees or involve some internal collusion. Hence the deployment of labour
and contracted staff needs to be done only after a through verification and
registration process,‖ Saxena says, adding, ―Sending escorts with vehicles could
be another measure through not a foolproof one to check transit pilferages, In
addition automation to avoid manual handling wherever it is feasible and cost-
effective also reduces chances of pilferages.‖
Safety, a Challenge?
While the deployment of security systems during storage and ensuring full
visibility of inventory during transit might be solutions to prevent pilferages, it is
difficult to implement these in the supply chain. According to Saxena, while most
companies face the challenge of pilferage and other inventory damage little can
be done to prevent it. The adaptation of technology in Indian companies is very
slow and thus investing in such high technology solutions is difficult.
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―Most logistics companies look at investment in security systems as an overhead
cost rather than an opportunity to save inventory damage or theft, They tend to
ignore the fact that investment in good security systems can help them improve
product safety, reduce tampering improve inventory management, reduce excess
inventory and increase reported on-time delivery, this further leads to more
efficient customs clearance process reduction in cargo delays and reduction in
cargo inspection or examination. It enhances speed reduces the transit &
delivery time window andabove all attains higher customersatisfaction thereby
reducing the customer attrition rate and increasing the number of new
customers.‖
According to Saxena one of the key challenges is changing the mindset of the
industry. This industry has been spending only about 0.5% of its turnover on IT
and getting it to invest in cutting-edge technologies is a challenge. ―This industry
is highly fragmented and its needs are ever changing as it is undergoing
metamorphosis for example small customs house agents (CHAs) are getting into
freight forwarding and freight forwarders are getting into warehousing and so on
and so forth, therefore the needs of these companies are changing very fast as
well. Hence, investing in system to prevent pilferage will also depend on how
much flexibility and agility the technology vendor can provide through their
solutions,‖
Kathuria also elaborated on some of the other challenges faced by companies,
―Some of the other challenges faced by companies are the process violation
during shipment inadequate infrastructure (transport & storage), lack of trained
manpower and gaps in security along with the space constraints in warehouses,‖
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Technology as an enabler:
Many MNCs have forayed into the Indian logistics industry and have set
benchmark service standards that smaller organizations ought to emulate. To
meet the service standards set by large MNCs in India there is no option for
smaller players but to adopt technology in order to survive and excel in such a
competitive business environment, Shippers are constantly demanding complete
supply chain visibility, which has further necessitated the need to have good
system with big &small logistics players. Moreoverthe need to provide enhanced
customer service to include web-based order entry as well as a real-time order
and shipment visibility to avoid theft & pilferage has compelled companies to
invest in technology upgradations. ―Technologies like TAPA certification (FSR A
level for warehouse management and TSR 1 level for transportation), electronic
access control, advance GPS tracking, panic alarm system, X-ray, advanced
CCTV installations, perimeter security, metal detectors etc are some of the latest
technology developments observed in the industry. Apart from these, the use of
biometric devices and radio frequency identification (RFID) devices to allow the
entry of only registered people inside the facilities is currently used in the
industry, says Saxena, ―While using CCTV & electronics surveillances definitely
acts as a deterrent to pilferages, one needs to do a cost benefit analysis before
deployment. The deployment of effective WMS, if required having EDI with a
billing system or ERP and ensuring that all processes in the facility are driven by
the system, would ensure quick detection of any pilferages, which can be
subsequently checked. Another technology observed in the industry include
mobility solutions that provide better tracking facilities & enhance customer
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satisfaction. Mobility solutions like usage of handled devices also improve
productivity.‖
12.2. Building Warehousing-Key to Faster Logistics Growth
―With the country‘s GDP posting higher growth rates, major sectors like
automobile, retail FMCG, will require robust logistics support, Under these
circumstances, the development of warehouse infrastructure has become all the
more critical‖.
―Union Government has plans to create a Special Purpose Vehicle (SPV) to
undertake studies on food grain storage handling and transportation. Beside, the
Planning Commission is also conducting a comprehensive study to suggest
measures for the development of a modern storage infrastructure to boost the
growth of the warehousing sector.‖
The warehousing segment has been attracting attention from many, this is not
only true for venture capitalists who are eyeing this major market, but also the
policy makers who are planning to bring revolutionary measures to maximize
warehousing efficiency, Union Government has plans to create a special
Purpose Vehicle (SPV) to undertake studies on food grain storage handling and
transportation, Beside the planning Commission is also conducting a
comprehensive study to suggest measures for the development of a modern
storage infrastructure to boost the growth of the warehousing sector. The Centre
has also introduced a negotiable warehouse receipt system in the country, & with
a view to provide much-needed renovations to warehouses, diversification of
services aimed at improving the agro-supply chain has been initiated on a wide
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scale. The efficiency of the private sector & the fundamentals of the public sector
can be combined & the riskscan be shared, The logistic market is valued at Rs
5.6 trillion in 2010 & it is likely to touch around Rs 17 trillion by 2015.
Warehousing Potential:
Warehousing accounts for about 20% of the domestic logistics market and is
expected to grow at a rate of 35-40% annually displaying high potential for
growth over the next few years. ―It is imperative for the sector to not only
modernize but also adopt best practices to achieve a world class infrastructure
plat-form,‖ said R. Dinesh Joint Managing Director, TVS & Sons.
In the past few years, the space and size of the warehouses in automotive
industry are growing as it is developing at a rapid pace in India, Manufacturing
companies are facing difficulties managing the warehouses due to this
unprecedented growth. The transition time for the supply chain has also reduced
as compared to few years ago, as the technology is implemented at every stage
right from taking orders, distributor confirmation for releasing the dispatch to
invoice processing all these create pressure on warehouses, to overcome these
complications, it is necessary for warehouses to modernize as the pull-push and
internal processing is becoming much faster. According to Pranil Vagama,
president Chep India, another challenge in the Indian supply chain is the huge
volume of inventories to overcome this collaborations in the supply chain viz
equipment pooling will help the companies to drive the efficient flow of materials
and information.
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Aiming for a Smooth path:
According to CII-Institute of Logistics and a Pwc study, the dynamic market
requirements have made it imperative for Indian warehousing players to
overcome challenges and maintain, improve and sustain competitiveness,
Various measures such as skill development, policy initiatives and government
measures, IT adoption and increased investments in the sector can be effective
in increasing the competitiveness of the Indian warehousing players.However,
this journey can be smoothened and simplified if the challenges and concerns
are addressed with collaborative efforts among all stakeholders including the
government and its agencies, policy makers, entrepreneurs, investors, logistics
service providers, manufacturers, farmers and sellers. The mutual integration
among them will rewrite the success story for the logistics and warehousing
industry.
12.3.Maritime Transport
Ninety per cent of the world‘s international trade is transported by sea. The
customs and practice associated with this form of transport have been refined
over centuries of worldwide trade. Sending cargo by sea is ideal for high-volume
cargo that are not necessarily time sensitive or have long lead time for delivery.
However, this mode of transport is slow & fraught with possibilities for delay. As
globalization has increased and sources of manufacturing moved eastwards to
India and China more companies have outsourced their manufacturing to this
part of the globe. As a consequences, due to the elongated supply lines and
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slowness of this form of transport, higher levels of in-transit inventory need to be
accounted for.
The Use of shipping containers has revolutionized the way that cargo is handled
and transported, this modules aims to give a general overview of maritime
transport or as it is often called sea-freight. The reference to maritime transport
as ‗Shipping‘ has been avoided to prevent confusion as many people often use
the term ‗ Shipping,‘ especially in the USA, in the context of dispatching cargo
from its origin, whatever the mode of transport used.
Structure of the industry:
Liner Conferences:
Liner conferences are formal groups of shipping lines that operate on
certain shipping routes, they were 1st set up to control the trade
betweencolonial powersand their colonies. Today they are seen by many
as being a very controversial anachronism as they work together to agree
tariffs for certain routes. They work fundamentally for the interests of the
member shipping lines to help to avoid destructive price competition. For
their part the shipping lines would argue that there would be much more
price and capacity volatility without the stability that the liner conferences
provide a way of managing forward revenue streams.
The European Union (as well as many of the conference‘s customers)
has criticized them for anti-competitive actions and is examining ways of
changing the status quo. As a matter of record the liner conferences are
the only industry that is currently exempted from anti competition laws in
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Europe and the USA (it is called anti-trust legislation in the USA). There is
a huge body of opposition to these price fixing organizations and it is very
likely that further legislative action will be taken against them.
Shipping lines:
They own and operate the various types of ships in their fleets. Their role
is to provide the physical means by which cargo may be safely &
efficiently transported by sea.
Ship’s agents:
They provide services to the shipping lines in the ports where the ship
call. A ship‘s agent will deal with many important and diverse matters on
behalf of the shipping lines. These services may include: provisioning with
food and spare parts, arranging any necessary repairs for the ship,
dealing with localports andcustoms authorities, organizing berths, pilots,
tugboats (if required), crew change and refueling.
Freight forwarders:
Often referred to as freight management companies these days their role
is to oversee and manage the movement of the freight from the point of
origin to the point of destination. Freight management companies provide
integrated door-to-door solutions for their customers that may include
arranging different modes of transport, customs clearance and
documentations, arranging port handling and generally supervising all
aspects of the movement. In order to do this effectively they usually have
worldwide networks of offices and agents in many countries.
Common Shipping terms:
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As with many specific areas of industry sea-freight has developed a whole
plethora of terms and abbreviations over a period of time that spans
centuries. The terms that are listed below are the ones that most
commonly causes problem for the newcomer to the trade.
Full container load ( FCL)
As the terms implies, this refers to a load that will fill a given
container.
Less than container load( LCL)
Once again, as the terms implies, this is a shipment that will not fill
a container and therefore will require to be consolidated with other
LCLs in order to economically fill a shipping container.
Hook to hook:
This term is used by many shipping lines when quoting prices for
break-bulk sea freight. It means that the shipping line‘s price
includes loading the goods on to the vessel and unloading the
goods at the destination port. It also includes the cost of
transporting the goods between the origin and destination ports. It
is important to note that this price does not typically include
insurance nor does it include the stevedoring cost at both ports to
attach or detach the cargo from the ship‘s lifting gear. In addition it
does not include other port handling costs.
Full liner terms:
This means the same as hook to hook.
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Liner in:
The shipping line is responsible for the cost of loading the cargo on
board the vessel.
Liner out:
The shipping line is responsible for the cost of unloading the cargo
at the destination port.
Free in and / or Free out:
In effect this is the opposite of hook to hook. Many purchasers of
sea-freight who are new to the industry make the mistake of
interpreting „free‟ as meaning free to them. Whenever the term
„free‟ is used in this context it means free to the shipping line.
Therefore the partypurchasing thesea-freight will be responsible for
the cost of loading and unloading the goods on and off the ship.
Break bulk cargo:
This is a general term for non-containerized loose freight. Out-of-
gauge cargo and heavy weight items that are unsuitable for
containerization fall into this category. Bulk cargo such as crude oil,
loose grain or bulk powders, and iron ore would not be classified
as break bulk.
Vessel classification:
Ships are classified by organizations that survey and classify vessels. They are
licensed by government who issue ship certificates for ships registered in their
country. This is commonly known as being registered under a certain ‗flag‘.
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Classification societies are licensed by these governments to issue these
certificates on their behalf.
Ship‘s certificates are often required by insurance companies and shippers when
engaging the services of a shipping line. This helps them establish the class, age
and minimum standard of maintenance related to the ship being used to carry the
cargo. As a general rule insurance companies would increase their insurance
premium for older vessels.
Handysize:
This is a smaller sized ship used to carry bulk commodities or
crude oil. It will have a size of between 10,000dwt (dead weight
tones) and 30,000dwt.
Handymax:
This is a vessel used to carry bulk commodities or crude oil of a
size between 30,001 dwt and 50,000 dwt.
Aframax:
A crude oil tanker of between 80,001 dwt and 119,000 dwt which is
capable of remeasurement to deadweight of 79,999 long tons. This
is the largest crude oil tanker in the Average Freight Rate System
(AFRA) Large Range 1 category compiled by London Tanker
Broker‘s Panel.
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Suezmax:
The maximum size of ship that can pass through the locks of the
Suez Canal is 200,000 dwt. Ships below this size may be referred
to as Suezmax.
Capesize:
These ships are too large to pass through either the Suez or the
Panama Canal. They are therefore forced to take the long route
around either the cape of Good Hope at the southernmost tip of
Africa or Cape Horn. Which is at the southernmost point of South
America. Their size also requires them to service only deepwater
terminals. They are used for the transport of bulk commodities
such as mineral ores.
Ports and cargo handling:
Terminal handling Whenever cargo is sent to a port due consideration needs to
be given to the nature of terminal handling facilities available. Not all ports are
capable of handling all types of cargo and some ports are solely established to
handle onetype ofcargo only, for example crude oil terminals other may have
separate facilities for handling different types of cargo, for example ISO
containers and break-bulk cargo.
Charges for terminal handling will vary from port to port and by the type of cargo
handled. Many ports will offer free periods of storage prior to loading of the ship
or after unloading of the vessel. If these periods of free time are exceeded for
any reasons then changes known as demurrage or detention will usually be
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charged in addition. If goods are unloaded from a ship directly on to a truck, and
vice versa, then this is usually referred to a direct delivery and ports will offer a
reduced charge for allowing this activity to take place. This can speed up vessel
turn-around times in the port but needs careful planning to ensure sufficient
trucks are continuously available to maintain the direct delivery process until the
ship is fully discharged or loaded.
Future Challenges Abound Maritime Industry Gearing up to tackle global
competition:
―Is India ready to take on the global position as the shipbuilding nation? The
answer today is perhaps ‗no‘. But this scenario is soon going to change with the
maritime industry witnessing resurgence and making its way towards becoming
global competitive by eliminating the shortfalls in its operational processes and
product development. With such promising initiatives in place, the Indian
shipbuilding industry is set to ensure that the ‗Indian Flag‘ keeps flying high‖.
Characterized by low capacity, poor productivity and lack of modernization,
Indianshipbuilding has miles to travel to become the global shipbuilding nation of
the world. The good news is that India has already started taking proactive
measures to becomeglobally competent. Let us first start with the facts to
understand the potential ithas. According to Frost & Sullivan, the market earned
$ 1.60 billion as revenues in 2010. It expects this figure to reach $3.50 billion in
2016. ―About 40 per cent of the India-owned fleet is more than 20 years old, and
Indian owners will need to spend about $4 billion to replace these during 2010-
2015‖, says Srinath Manda, Transportation & Logistics Programme Manager,
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Frost& Sullivan in a statement. In addition International Maritime Organization
(IMO) has mandated the phasing out of all single-hull vessels by 2010, and
single-hull tankers constitute about 15.8 per cent of the total vessels owned by
Indian shipping companies. As per the Indian Shipbuilders Association‘s (ISBA)
estimates, the industry can grow at a rate of more than 30 per cent and this
momentum can be maintained for the next 10 years to reach a level of 5 million
DWT order book in the 11th Five Year Plan as against 1.3 million in the 10th Five
Year Plan. With this, the shipbuilding industry would also be able to achieve a
world share of 2.2 per cent and an annual turnover of Rs 18,000 crore in the last
year of the 11th Five Year Plan. It is expected that in 2017 by the time the
shipbuilding industry matures, it would have attained more than 7.5 per cent of
the global order book and will have a turnover of Rs 40,500 crore.
The Indian shipbuilding and repair market is poised to pick up momentum with
the increasing penetration of Indian shipbuilding companies in the offshore
vessels (OSVs) segment. India has proven its might in the building and repair of
OSVs, thereby resulting in a spike in order for such vessels from the Indian
industry, The limited capacities related to OSVs in leading shipbuilding nations
such as Japan and South Korea, have resulted in a diversion of orders to India,
thereby driving up the fortunes of the Indian shipbuilding and repair market. The
aging fleet of shipping companies in India augurs well for the shipbuilding and
repair market in the country. But this is just one side of the story; the
shortcomings possessed by Indian shipbuilders are blocking their path towards
attaining global competitiveness.
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Challenges abound:
India lags behind China, Japan, Korea, Vietnam and Philippines in shipbuilding
and ship repair. But what prevents India from becoming a world leader in
shipbuilding? This is probably one of the biggest questions that the industry
needs to address.
Lack of a mentor:
During a recently held summit, this question was discussed in detail and the
outcome drawn was lack of vision, resolve and management i.e. the lack of a
‗Sam Pitroda‘ in Indian shipbuilding. Although at first these hurdles seemed like
they were easy to overcome, but in hindsight the absence of a mentor has been
hampering the growth prospects of this industry since long.
Poor production technology
India‘s ship design capabilities may be fairly good for warship, but the quality of
designs related to merchant ships, including coast guard ship are poor. The
country is unable to use the latest IT tools in shipbuilding as India still lacks basic
ship design and production technology. According to experts, for the last eight
years, due to non-availability of expertise in ship design and production, most of
the orders to build ships were either cancelled or postponed. We have to be
‗proactive‘ in this area instead of remaining ‗reactive‘. ―India has a vast coastline,
but there is anacute shortage of deep draft water space along the coast‖, says
Srinath, adding, ―This restricts the type and size of ships that can be built or
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repaired in India and curbs the full growth potential of the Indian shipbuilding and
repair market.‖
Need for government support
In the face of a global recession and in the absence of government support in the
form of a shipbuilding subsidy scheme, which expired post August 2007, Indian
shipyard have been far behind their competitors for the want of new orders. The
yards could book very few orders-for export or domestic shipping lines as foreign
yards. Commenting on the same, Captain Rahul R Pathak Principal Consultant,
Mantrana Maritime Advisory, says ―Indian shipbuilding is going through a
challenging phase Very few new building orders have been placed by the private
sector. Most of the orders that have come to Indian shipyards, in the commercial
and naval segment in the last two years are from the Indian Government. Most of
the shipyard are executing past orders. Once completed, the situation at
shipyards could worsen. There is little hope for the revival of commercial
shipbuilding in the next two years. The shipping industry is oversupplied and
underutilized.‖
―Even through shipping companies have large cash on their books, they are not
placing orders for new ships and their existing fleet has low utilization. Moreover,
they do not see the trade and other maritime activity picking up to the extent that
they absorb the surplus ship already in market. Hence, no company other than
government owned firms is thinking of acquiring new tonnage. This leads to poor
order outlook for shipyard‖, he says, adding ― The immediate future opportunities
for Indian shipyard would come from the government-owned companies such as
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ONGC, SCI, Indian Navy, Coast Guard, Ports, etc, Whose requirement are
budget driven.‖
Other Factors
Additionally, the shipyard‘s low productivity and delayed delivery schedules due
to factors such as lack of management and commitment, short term policies
&appointment of CMDs in shipyards, lack of experienced design engineers,
production engineers, lack of development in ship design technology and
production technology poor labour relations, outdated government policies lack of
support from ship owners etc are preventing India from competing in the world
shipbuilding market.
Action Agenda
Shipbuilding has a long gestation period. It needs a lot of funding as it is labour
intensive and requires the installation of costly equipment. This combination can
prove to be highly rewarding if handled properly. Industry leaders vouch for the
fact that the National Shipbuilding Capability Index for shipyards has to be
brought out. The ship breaking or recycling industry must not be neglected and
norms have to be set for this industry. Apart from this some of the other initiatives
that the industry needs to implement on an urgent basis include:
Delivery schedule of ship:
The industry needs to tackle issues pertaining to non-standardization of
material, equipment, non-freezing of design & specification, etc, which
lead to a ship‘s delayed delivery that in turn leads to cost and time
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overrun. Alsofrequent layout changes between sister vessels of the same
class should be avoided.
Dearth of skilled manpower in design:
Private & government institutions need to intervene and solve this problem
by starting design courses in naval architecture. AMET University,
Chennai has already started a naval architecture programme.
Lack of skilled manpower in shipyards:
In private shipyards there is acute shortage of skilled manpower.
Government shipyards already have apprenticeship schools to meet their
manpower requirement and institutions throughout the country like ITI to
train students.
No industry-academia connect:
There has to be industry-academia connect to create awareness among students
about the immense career opportunities that maritime offers. Major industries can
provide scholarships to students and train them about the maritime sector. There
is also a need for industry people to visit academic institutions regularly and talk
to students about the importance and relevance of maritime affairs in India and
the prospects that it can offer students.
Consortium of ship designers deeded:
An association or consortium of ship designers needs to be formed so that the
design load can be shared among them, Shipbuilding at the sub contractor‘s
level is an unorganized sector in India and workers are not given benefits as per
labour regulations, Additionally the safety requirements are to be looked into and
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regulated. Multiple professional associations must work together to bring up the
shipping industry in close association with the government.
Need for subsidy scheme:
The shipbuilding turnover for private and public sector shipyards, excluding
defence shipyards has grown 14 fold in the last nine years from about Rs 440
crore in 2001-2002 to Rs 6,200 crore in 2010-2011 But the introduction of a
shipbuilding subsidy scheme would immensely benefit the industry. ―Subsidy is
required to provide a level playing field. Unlike other industries that are protected
by customs and duty barriers the shipbuilding industry has to compete on global
pricing levels as there is no duty imposed by the government on the import of
ships and dredgers. In addition the Indian yards have to pay excise and VAT on
all indigenous items as well as on complete ships, which is not the case with
ships imported says a report. ―Without this the industry is likely to collapse and
there will be no shipbuilding industry left in the country‖, the report adds.
Much needed policy on shipbuilding:
The National Manufacturing Competitiveness Council ( NMCC) has been
emphasizing on the need for a shipbuilding policy to enable Indian yards to
compete effectively in both the domestic and export markets to help build a
strong shipbuilding sector in the country, given its potential for employment
generation as well as its strategic importance. In a meeting held in January 2010,
NMCC recommended that the shipbuilding industry in India needs to be granted
infrastructure status and also be declared a strategic sector.
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Navigating towards the future:
With sustained support from the government, India can become a preferred
shipbuilding nation and can contribute more to the global shipbuilding industry, if
the existing regulatory mechanism is eliminated or relaxed. India can soon
compete with nations like China, Korea and Vietnam. Also the labour intensive
nature of the shipbuilding industry and the availability of low-cost labour can play
a key role in making India highly competitive in the global shipbuilding industry.
The future of the Indian shipbuilding and repair market looks promising and is
likely to double in the next 5-6 years. The growth potential is further enhanced
with the Indian Government aiming for the nation‘s shipbuilding sector to attain a
5% share in the global market by 2017, of late the Indian Government is
encouraging greater private participation in the sector and a new world-class
commercial shipyard is being built on the eastern coast. These factors will speed
up the growth prospects for the market. The government is also facilitating
improvements in port & infrastructure facilities and easing regulations and taxes
to assist the industry in addressing the challenges and overcoming its barriers.
The prospect are rip for the industry to capitalize on. It is just the industry‘s
preparedness and forthright attitude that will be enable them to make the right
decision in the long run and become the world‘s most preferred shipbuilding
nation!
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12.4 Mega Trends in Air Cargo
―Despite the global economic downturn, the Indian international market has
expanded 7% from 1.11 million tones in 2007 to 1.19 million tone in 2009. With
India‘s freight industry expected to grow at 10% per annum by 2014 & the air
freight sector set to expand by 8.5% per year for the next 5 years, the air cargo is
all set to witness highly promising prospects.‖
The air cargo sector has grown to become a vital mode of transport for India‘s
international trade, especially for products with high cost and value addition, The
current air cargo traffic in the country is around 2.64 million tone this year with
almost half of this coming from Delhi and Mumbai. Delhi accounts 6,00,000 tone,
while Mumbai accounts for 5,00,000 tone in 2010-11. Further, with the Indian
Government raising the limit of FDI in cargo airlines from 49% to 79% the growth
rate of the aviation sector in the next 10 years is expected to be approximately
25% thereby making the Indian market even more lucrative for foreign players to
enter into the air cargo space. ―The Indian air cargo industry has become highly
competitive with service providers investing in infrastructure, acquisitions and
technology in order to provide the best possible services to customers like FedEx
are doing.
As per a Boeing report ‗World Air Cargo Forecast 2010-2011,‘ India is the largest
submarket in South Asia, comprising of about 69% of international flows in the
region, India also enjoys a significant domestic market from 1999 to 2009, the
total Indian air cargo domestic and international markets have averaged a 6.6%
growth annually. The Indian domestic market had been growing rapidly before
the global economic downturn in 2008 and in the 10 years between 1997 and
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2007, the domestic air cargo market averaged a 10.8% growth annually India‘s
leading trade partners are Europe & Middle East and Asia but until 2007 Europe
was India‘s biggest air trading partner.
India’s International Standards:
According to the International Air Transport Association (IATA) Economic briefing
ever since liberalization in the air transport market began in the late 1970s, actual
yields have fallen by almost 50%. Air travel and air freight have become
considerably cheaper and clearly this has boosted volumes, However this impact
has been marked by a steady trend. Economic growth & GDP have been the
principle drivers of changes in global revenue passenger kilometers (RPKs).
Economic forecasts imply that airline traffic will remain below the previous trend
over the medium-term with passenger travel forecast to be 9% lower by 2016
than pre-crisis industry forecasts the report points out.
The key to any cargo player to succeed is to understand and listen to customers
and get their feedback and respond to what they want, this focus will ensure that
customers continue to get the superior experience and value they expect. ‗The
service providers are aware of the environment they have an eye on the current
economic scenario and work at par with the international standards.‘ a senior
TNT official highlights.
Logistics providers are further enhancing their services by implementing
technology and developing infrastructure. After much research & study it was
established three gateways in India—one each in Mumbai, Delhi and Bengaluru.
This has enabled them to provide 31 international flights to India-15 flight to
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Delhi, 11 to Mumbai &5 to Bengaluru- the maximum offering by any express
service provider in India. They also offer 12 clearance gateways from Indian
cities, the maximum for any carrier.‖
Major Trends:
According to the Planning Commission, Indian air cargo movements would grow
at over a compound annual growth rate (CAGR) of 11.5% from 2007-08 to 2011-
12. The major reasons which can be attributed to this increase, are increase in
overseas trade, Indian economic policies and e-commerce developments. On the
major trends in the air cargo sector the senior TNT officials comments, ― Air
cargo, trade and the GDP of a country are interdependent and have a direct
relationship. Air cargo enables nations regardless of its location to efficiently
connect to distant markets & global supply chains in a speedy and reliable
manner. The rapid growth of international trade has boosted prospects for the air
cargo market in India, increasing globalization, establishment of manufacturing
facilities and India‘s growing might in the IT space have contributed to the boom
in the country‘s economy thus resulting in an increased aggregate demand from
India driving the air cargo services market.‖
As India emerges as a key growth economy on a global platform, there is an
emerging need for logistics services operating on global standards in order to
effectively integrate Indian enterprises with the global economy. This is fuelling
globalization and consolidation within the industry with the entry of global players
as well as Mergers & acquisitions in the Indian market. ―Another emerging trend
is the broad-basing of service and product portfolios of express delivery
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companies with more players offering comprehensive portfolios covering an array
of services ranging from express services ground services, value-added
services, warehousing, 3PL etc, like it have done at FedEx.‖
Globalization and rapidly evolving demands of the industry are also increasingly
driving the use of technology in operations to improve efficiencies and offer
enhanced value-added services.
Use of Technology:
In today‘s world, keeping up with the latest technologies provides enhanced
speed & quality of service, Various technological investments have enabled
Indian players to automate many processes to save time, increase productivity,
improve operational efficiencies, customer relations and reduce cost. Here is a
list of technologies that FedEx uses to provide services to its customers.
Handheld scanning devices, also referred to as the FedEx Power Pads, to
update the package status at every stage. As soon as a package is
scanned the information is uploaded onto the FedEx network.
FedEx Billing Online (FBO) enables customers to receive and pay their
invoices online.
Automation at clearance operations at the company‘s automated gateway
in Delhi include automated conveyor belts, supported by scanning devices
that can produce clearance type information on a label which is used for
efficient sorting.
Tracking tools that help customers keep track of their packages such as
Sense Aware. Sense Aware enables customers to monitor their shipments
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in near real time with information like temperature, location & exposure to
light and continually share this information with their supply chain partners.
Future of Air Cargo in India:
India is the leading economy and international air trade hub of South Asia of the
1.73 million tone of international traffic that moved into and out of the region in
2009, more than 1.19 million tone moved through India, ―India‘s domestic air
cargo market will return to rapid growth expanding 10.6% per year on an average
to reach 2 million tone per year by 2029,‖ as per the report.
Today, India is among the top four biggest economies globally and is predicted to
be among the top three economies by 2020. Economic growth also reflects the
growth of the air express industry in India. The Indian domestic & international
express cargo industry is among the fastest growing in the world and worth close
to US$2 billion. Over the last decade it has witnessed a CAGR of 33%.
According to the senior TNT official, ‗The growth rate of the aviation sector in the
next 10 years is expected to be in the range of 25%.‖ The demand for air
transportation is ever increasing particularly from the trading pharmaceuticals
and manufacturing sectors in India.
12.5 Rail Freight in India
―While the world is shifting towards high-speed metro rail and monorails, Indian
cargo rails still await an opportunity to move beyond the average speed of
25kmph, Passenger trains in the country are gaining momentum, as a new set of
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express freight trains are still toiling for a proper footing. There is a dire need for
Indian Railways to step up the efficiency of freight trains to improve services.‖
With the introduction of bullet trains, the pace of transportation has reached
speeds unimaginable in the last century. Oblivious to these developments, the
Indian Rail freight still awaits for a silver lining.
Cargo trains are one of the most lucrative businesses of the Indian Railways,
which bring in a major chunk of its revenues and is still waiting for initiatives by
the government to increase its transit speed, In the past few years Railway‘s
share of goods moving across the country has reduced and is expected to further
decrease from the present 36% to 25%, as compared to this percentage, the
relative share of rail transportation in China and the US is almost 50 per cent.
Even though transportation by train is less costly & three times fuel-efficient than
road transportation, people prefer transporting goods through road and not train.
A recent Mckinsey study reveals that if the Railways do not regain their lost
market share, the loss can increase due to the sub-optimal logistics from the
equivalent of $45 billion (or 4.3% of GDP to 140 billion (or more than 5% of GDP)
in 2020. Ashish Sehgal, Director Global Packers & Movers, says, ―Indian
Railways are an important part of the Indian transport system carring an entire
gamut of cargo. Going forward rail freight has been and will experience a steady
growth in the future.‖ Emphasizing on the present situation he avers, ―The rapid
progress in the industrial sector is creating demand for rail transport particularly
in core sectors like coal, iron & steel ores and petroleum products. With the
emergence of dedicated freight corridors across the nation rail freight is set to
witness tremendous growth opportunities, Still the government should take some
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initiatives to reduce the transit period of these cargo trains to help the Railways
gain more business.
Slow Speed of the Railways:
According to the Mckinsey report, in effect goods train can manage an average
speed of a maximum of 25kmph on the other hand the same locomotives
average more than 60 kmph when they pull passenger coaches on intercity runs.
There are a number of reasons for this slow speed of goods train in India, First
as compared with the passenger trains the trailing load of cargo train is twice-
leading to the inability of locomotives to accelerate or cruise at a faster speed.
Second, certain wagons such as those carrying coal or petroleum are not at all
designated to run on high speed and finally goods trains are almost always
necessarily sidelined at wayside stations to allow the passenger trains reach the
destination first.
―The average speed of a goods train was 17.4 kmph in 1950-51, which in 1989-
90 increased to 22.7 kmph. In today‘s fast moving world, this speed or the rate of
growth in speed is very slow. In a predominantly agriculture economy like India,
perishable goods account for a big chunk of the freight. Hence a speed of at least
100 kmph is a requirement today.‖
Speed is the need of the Day:
In order to improve the overall efficiency of rail freight services in India, Indian
Railways should focus on increasing the speed of container trains. This will help
the Railways compete more effectively with road services, Vineet Agarwal,
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Executive Director, Transport Corporation of India, says, ― Since Indian Railways
primarily focuses on improving the service levels technological upgradation
should occupy a prime slot in its future planning facilities like automatic signaling,
doubling of tracks, installation of route-relay interlocking on all major routes is
already a step in the direction towards improving the average speed of trains.‖
Hurdles on the way:
The existing infrastructure is the biggest hurdle in the way to development, the
present rail network is not adequate compared with the burgeoning rail freight
focus on the freight business of Railways, Also there is a shortage of necessary
equipment like wagons & rakes. ―Intensive monitoring for timely delivery,
increase in trailing load of trains, claim free movements of goods, improved
services like refrigerated containers for perishable goods, etc are some of the
hurdles faced by cargo trains,‖
Promising Heavens:
With the proposed Dedicated Freight Corridor ( DFC) the future of Indian
container trains appear bright, Possibilities are being explored for double-
stacking the trains and some trial runs have already been carried out. ―A plan is
proposed to run double-stacked container traffic under electric traction on the
DFC stretches, Even triple-stack container trains with special-purpose
automobile carrier containers have been proposed for the New Delhi- Pune
route,‖ The Ministry of Railways has announced a pilot project to run such triple-
decker container trains to carry cars, scooters and motorcycles in preparation for
the eventual operation of such train on the western section of the proposed DFC.
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The triple-stack trains are expected to be hauled by diesel locomotives as this
western freight corridor is expected to be un electrified, with the proposed DFC,
one can wish for the freight scenario in India to change for the better in the years
to come.
Challenges in Indian Logistics
―The issue of logistics in India remains a grave concern area for any business to
operate seamlessly – be it retail or nonretail.
The Technical Team of talk in detail about the challenges faced by the country
when it comes to logistics.‖
CII – Institute of Logistics
India has emerged as one of the top projected at 13 per cent of the transportation
and warehousing) in India is10 countries in Industrial production country's GDP.
But there are losses 31 per cent, where in the same is as per UNIDO's [United
Nations due to poor infrastructure and inept only 10 per cent in the United States
I n d u s trial development of supply chain management solution, and 18 per cent
in China. Any Organization]. The report states as reflected in 1,300,000 ton of
food improvement on this part will (under the title ―Performance of grains rotting
in storage during the directly improve the competitive-Manufacturing Industries of
India‖) last decade, due to lack of moderns of the Indian products in global that
the country is now leader warehousing. About 25 per cent of market among
developing countries in some of the agricultural produceis India isa land some
high energy - intensive getting wasted in India due to lack of of opportunity in
these segments. The 12th five year plan is requisite infrastructure. A study global
trade. The logistics infrastructure under preparation with a target conducted by
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KPMG & Cygnus true growth is also tremendous due growth of 9 per cent - 9.5
per cent. Business consulting has revealed to government schemes and private
India, with a sustained growth in the that the total spend on wastage and
investments. But this infrastructure approaching years, expects to other
expenses (excluding transport growth could not keep up with the become one of
the top three economies in the world by midcentury. India is also emerging as
one of the leading consumer state. The logistics sector plays a major
role to support his cause. Connectivity and convenience in operations is the key
for sustaining the trade growth in the global arena. The logistics industry in India
is recording staggering revenue of about $ 82.1 billion with a growth of about 9.2
per cent in the fiscal year (2010 – 11). The total spend on logistics and aided
services in India is pace of the trade growth. Hence there is a severe backlog in
infrastructure development and the industry is finding it difficult to enjoy a
convenient operation. The supply chain and the logistic sector will be on utmost
focus in this decade. Major Areas of focus for improvement in the industry, to
enable a sustained growth and endow with support to the demand from the
global trade, are majorly on the below grounds.
Uniform Tax Policy
Trade across pan India is more complex now with the varying tax procedures of
each state. The supply chain strategies are majorly based upon tax saving
instead of operational convenience and cost optimization. Tax cascading across
the supply chain is adding up to the cost and affects the price competitiveness.
Though the proposal of GST implementation came as a reliever, the delay in
implementation is causing anxiety to the industry and the stake holders could not
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formulate strategies for their future action. Post GST strategy for trade growth in
India is phenomenal. further improve the support from logistics and inventory
carrying, But the growth of logistics sector is this sector to the supply chain could
not be determined due to the still lagging behind. The supply industry.A study by
World Bank delay in implementation. Various turnaround time is much below the
reports that it takes 195 days and 37 initiatives are taken in the industry desired.
In addition to development, procedures to construct a legally to prepare
themselves for the GST improvement and maintenance of compliant &
operational warehouse regime and once implemented; the proper road facility,
development of in India. The warehousing sector is supply chain is the area will
benefit dedicated rail routes and exploitation- majorly unorganized and scattered
the most from the GST scheme of waterways in and around the About 92 per
cent of the warehouse country, also connecting the B and C space used in the
country is Infrastructure and Connectivity class cities, is the need of the hour.
Unorganized Warehousing another major area of apprehension constitute 20 per
cent of the Indian Land conversion in India is infrastructure. Lack of for
warehousing, Logistics Industry. The country has efficient infrastructure for both
infrastructure development and 1800 million sq.ft. of Warehouse transportation
and warehousing is a dedicated clusters for warehousing space of which only 8
per cent is huge cause of concern in India. The is also demanded in the industry
to organised. Most of this organized space is functional under private body.
According to KPMG, of the unorganized warehouses, 27 per cent percentage is
unaccounted supply, 29 per cent is public sector and 44 per cent is in-house. In
terms of weight, the existing capacity is approximately 80 million Metric ton. India
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will need additional capacity of 35 million Metric ton in next 5 years. The industry
is also growing at a steady pace and is expected to develop additional 45million
sq.ft. organized warehouse space in next 5 reduce the complexity and difficulty in
port clearances. The KYC assessment has improved process efficiencies. The
industry is also focusing on making the logistics activities leaner
and greener by reducing and compensating on carbon footprints they leave on
the environment. The need for carbon emission control and introduction of
innovative Green supply chain initiatives by the industry players are also yielding
cost benefits. About 70 per cent of domestic cargo movement in India happens
through roads and enables last mile delivery. The cargo movement through
years. The industry is growing at and certifies the warehouse a road leaves
CAGR 12 –13 per cent. propos the relevant certification more carbon footprints
than the echelon. This process not only does movement through rail and sea. It
Introduction of Warehouse an audit on process efficiency, has also proved to be
more expensive Development and Regulation Act effectiveness and adaptability
and posting a regulatory authority to also enlightens the management to monitor
the implementation of the focus on critical areas for sustained Use of sea routes
wherever possible Act is also a welcome move from the process improvement.
Thus it will be cost effective and greener. government. This has addressed
encourages more unorganized More corporate, particularly most of the storage
issues of food players in the sector to move automobile and manufacturing grains
and retail market towards organized operations and sectors have already started
working Introduction of negotiable reduce cost wastages on using sea route as
best as Warehouse Receipt is also proved to possible. Government of India is
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also be a growth inducing tool ensuring The port infrastructures are being
encouraging the cargo movement availability of critically needed funds developed
to the world class through waterways and has started to have a sustained trade.
The latest standard and the focus is now mainly initiatives to develop better
trends seen in Warehousing industry on developing connectivity to the
infrastructure to ensure connective service oriented architecture, ports. Projects
are being taken up in it to major and high volume ports. consolidation, large &
multi- developing dedicated freight Inland water transport where ever purpose
warehouses, automation corridors by rail and road to the possible is also being
exploited. and integration of WMS & TMS. p o r t s . The private public Skilled
Manpower Partnerships are encouraged in CII Institute of Logistics, on its part,
developing and promoting FTWZs Acute shortage of skilled man power
contributed WAREX (Warehouse and SEZs to be in the closest vicinity in the
Supply Chain industry is also a Excellence Certification) to the of the ports for
better logistics threat and is expected to escalate industry. This process
qualitatively services. The introduction of faster than the industry growth.
assesses the warehouse operations Authorized Economic Operator Shortage of
truck drivers, skilled against the industry benchmarks scheme has addressed the
need to warehouse operators, forklift operators etc are raising alarm in the
industry. Intense training is needed to support the cause. Fully equipped and
dedicated education centers to train manpower on specialized Logistics skills are
immediate requirements .Awareness of innovative techniques and latest
technology is now far from the market reach. This is now one of the major
concerns. Implementation and reach of Technology High cost of implementation
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of IT in supply chain is another bottleneck. Latest technology implementation
Emergence of 3PL service providers sector to a cost is perceived as far high and
less larger extend. The confidence on ROI in such invest- and usage of latest
technology in the advantage of using 3PL are less has kept away the technology
sector could provide boost to the investment on capital, support of from the
industry players. Initiatives growth of the sector. Contribution of technical know-
how, possible are taken in the industry to extract 3PL to the Indian logistics
sector is utilization of latest technology in the Government support in the form of
only 9 per cent where in the sector, reach to new markets, assess subsidy on IT
implementation. The contribution of 3PL in Japan, US and to market information,
flexibility technology market in Indian Europe are 80 per cent, 57 per cent and
cost convenience. Selecting the Logistics Industry alone expects a and 40 per
cent respectively. If the right 3PL service provider and growth of 19.8 per cent
and to cross usage of 3PL could improve the implementing apt SLAs are vital for
$600 million by 2015. quality of deliverables and could success in outsourcing.
possibly improve the growth of the We acknowledge and appreciate the
promotion schemes are offered by the government at various areas. Generating
skilled manpower, technology implementation and improving the infrastructure
are the most needed support to the industry. A collective approach to the entire
supply chain will support sustained growth. Logistics Summit 2011 organized by
CII Institute of Logistics in association with Industry focuses on improving the all
the key areas identified. Collectively we should be able to address this need.
And what are the best practices ???
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The complexity surrounding Supply Chain makes it a difficult task to narrow down
on common best practices that each organization should follow in order to have a
fool-proofsystem in place. shares some very interesting practices which should
be a part of any company's supply chain management system and which in
today's market condition can be termed as the 'best practices' that one can
follow.
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CHAPTER 13
MAJOR FINDING
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CHAPTER 13
MAJOR FINDING
Major Findings of the Research
1. The level of decision making depends on job profile of the managers i.e
whether he is logistics managers, financial, production managers, or Director of
the company it has an Positive impact on the profitability of company.
2. There is significant association between activities (Outbound transportation,
pack & labels, transportation management, inventory management, distribution
network planning) and job positions of the managers of the companies, i.e
Logistics Managers contribute significantly to the profitability of the company
through competitive advantage.
3. There is significant positive association between manager‘s view on efficiency
of important parameters like production, distribution and sales. Production
aspects depends on number of packaging lines, uncertainty of production output
time. At the same time Distribution aspects depends on number of customers
domestics or international, warehouses, channel variety, delivery frequency,
order lead time, & sales & demand fluctuations.
4. Logistics performance of a company depends on certain prime factors. They
include low logistics cost, promised delivery time, ordered quantity. This can
directly affect the long-term profitability of the company.
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5 .Processed Food Usually have a small Shelf life and therefore the long chain of
intermediaries between the farmer and the market, adds cost but no value to the
product. The escalation in the cost of the produce is to an extent of 250% of the
cost of production at the farm level .
The concept of an Agri-Logistics Hub (ALH) is essentially a strategically located
multi-modal logistics platform, allowing efficient operations by including truck-stop
facilities, such as container cranes and gantries, terminal stacking, warehousing
facilities, high end food processing facilities and other value added services. ALH
tackles these issues effectively as they would enable supply chain/logistics to
function much efficiently by removing the cargo bottlenecks in the transitrelated
activities. Integration of such facilities helps in reducing the supply chain for the
producers who had to deal with long marketing channel to reach the market due
to unavailability of the necessary infrastructure. From a mere combination of
transportation and storage services, agri-logistics is fast emerging as a strategic
function that involves end-to-end solutions that improves efficiencies and which
would enable apportionment of associated capital costs across a larger base of
users leading to significant costs reduction.
6. The need for Positioning arises out of the fact that a product cannot be
‗everything to everyone‘ and that it has to be something to some segment.
Normally, some unique feature of the product, some special needs of the market,
or some noticeable gap in competing offers is picked up and the product offer is
positioned around them in a manner appropriate for the target audience.
Identifying such features and using them imaginatively as the plank on which to
project the product is the essence of positioning, products are positioned in
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different ways, depending on what they have to offer and to whom they are
offered. Some products may be positioned for the higher segments of the market;
some may be positioned for the middle segments; Products can be positioned on
claims of luxury, distinctiveness, convenience, economy, uniqueness, novelty or
usage. They can also be positioned directly against competing brands.
The Companies that undertake Logistics outsourcing activities can positioned
themselves as Outbound transportation, or Transportation Management or
Inventory Management, or Distribution Network planning expertise and good
logistics will help positioning the product to be timely delivered and will be made
available on retail counters for maximum period, without affecting the quality of
the products.
7. Food wastage has been a perennial problem for India with estimates ranging
from 58000 crores in 2004 to 30000 crores in 2010, with over 30 percent of
produce being wasted. The perishable nature of products makes it necessary to
have adequate storage facilities, optimal handling of produce and efficient
transportation and distribution network percentage of produce stored in
temperature ambient conditions only 2% of produce that needs to be stored in
temperature controlled environment are currently being handled this way.
To make these processed food freely available in interiors & rural areas, one
requires good logistics in the form of refrigerated or Chilling van & warehouse, so
that the product does not perish.
8. There is lack of awareness among the common man about some of the
processed food made by S.B.U these products to popularize them, one requires
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to do promotion through ATL OR BTL activities, along with this they need to do
R& D and innovate new products to bring some major revolution to get the
product into Blue Ocean strategy.
9. The disadvantageous position that exist in the current system of marketing of
fresh produce in the country. Some of them are as set out below.
i. High level of wastages due to lack of proper handling, storage and transport
infrastructure.
ii. Lack of grading facilities based on the quality.
iii. Long and inefficient value chain with many intermediaries.
iv. Lack of packaging facilities.
v. Lack of price-sharing mechanism.
vi. Lack of efficient prices discovery mechanism.
vii. Inefficient linkages between the producers and the off-takers (retailers/
institutional off-takers/consumers).
Efficient logistics may help marketers to make better strategies & gives Marketing
Manager flexibility in adjusting Marketing Mix, So the Sales could
improve, If buyers are targeted to adjust the demand as per the requirement it will
increase the market size.
10. Government should acts like a Santa in constructing Warehouses with Cold
Storage facilities to prevent the food from being perished, In interior‘s of the
nation this facilities needs to be improved.
13.1 Limitations of the Study 1.This study was conducted in the city of Mumbai which is considered to be
representative of the Companies Outsourcing Logistics activities.Companies
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outsourcing logistics across the country and the sample frame was determined
accordingly at the time of deciding the research design . However, this research
does not cover other metros and hence might not have captured regional factors
affecting Companies outsourcing Logistics Activities.
2.Researcher has assumed that the information provided by the Logistics
Executives and managers is transparent and accurate. However there can be
constraints while sharing information by the Logistics executives & Managers for
general and academic survey. Hence more accurate information can be gathered
only if such survey is commissioned by large Outsourcing Companies for their
own use.
3 The literature search and review was dependent upon the availability and
access to research information on the subject in India. It must be acknowledged
that as organized logistics outsourcing is in fledgling state and hence not many
research projects in this field has been conducted and consequently only limited
authentic published work is available and a source for secondary data.
4. It must be mentioned that in an academic research work of this nature only
illustrative factors affecting Logistics Outsourcing research hypothesis could be
included in the survey. To get deeper insight about the holistic picture of
companies Logistics outsourcing many more specific parameters needs to be
included.
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CHAPTER 14
CONCLUSION
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CHAPTER 14
CONCLUSIONS
Conclusion
Last couple of years have been packed with several significant developments for
Indian Logistics industry, including the entry of many large corporate houses and
growing acceptance of modern formats. Though Logistics outsourcing is
relatively new in India . It is heartening to note that they have quickly adopted
required processes in their operations.
Given the industry‘s changing landscape and emerging challenges, the focus of
Logistics industry players too is changing. They are concentrating on
strengthening the existing operations and assessing options for profitable growth
through enhancing efficiency in Supply chain, embracing appropriate technology
, upgrading skills of employees and are moving towards consolidation and
innovation of processes.
In today‘s world of Internet and wide media reach and connectivity, consumers
are well informed and are able to exercise their option in deciding their preferred
area of Outsourcing. One of the major challenge logistics outsourcing
companies are facing is in attracting and retaining new customers. This explains
the reason why all Logistics Outsourcing Companies are working on improving
supply chain alignment with consumer demand. This is a right focus for the
Companies as can clearly be concluded from the research that supply chain
alignment has important bearing on achieving customer satisfaction which is the
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only way to remain viable and ensure sustainable growth. Only happy customers
come back for repeat and regularly buying and help in consolidating base of loyal
customers.
Further the study reveals that they are focusing on enhancing employee
productivity and operational efficiency and outsourcing of logistics to improve
delivery of goods and services and managing inventory to remain profitable.
However, the focus differs among different Logistics outsourcing companies in
general barring few exceptions have still a lot of ground to cover in adapting to
their processes modern Logistics activities
Further the Study reveals that while taking Major decision of logistics
outsourcing 75% of logistics Managers are involved and decision is being taken
at Multi-factory Level (91%), Further it has been seen that there is 10-20%
increase in total sales Volume after outsourcing logistics activities by the
companies at Single & Multi factories level. Interesting fact which comes out that
initially the Directors are reluctant to outsource the Logistics activities, but after
outsourcing these activities 10 – 20% increase is seen.
Further, the Directors, Financial Managers & the Logistics Managers are of the
opinion that Distribution Network Planning contribute highly competitive
advantage to the companies, and further they are of opinion that Packing & Label
and Transportation Management are costly to outsource these activities.
Further Logistics Managers & Directors find the Inventory Management difficult
in measuring the performance of logistics service, at the same time they are of
the view that perishability of end product complicates the logistics process.
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Further the study revealed that there is a high level of enthusiasm and
commitment among executives and employees of Logistics companies in
implementing the technology. They all feel that technology helps them in their
work and also improves efficiency. This augurs well for the organized logistics
industry.
The study also showed that though a lot of data is collected on items like
wastage, slow moving items , customer complaints , there is no structured
approach in processing this data and comparing it with any set target. Logistics
companies have to move to the next phase and make use of this information in
achieving measurable targets for operational efficiency improvement.
14.1 Recommendation & suggestions
Upgrading technology to improve efficiency
There is a scope to upgrade the application of technology to improve
operational efficiency For this it is recommended that logistics
outsourcing companies should hire the services of reputed technology
solution providers to optimize their processes for Improving forecasting
accuracy, reducing stock outs, increasing sourcing efficiency and product
movement, reducing lead time and optimizing transportation.
Data Tracking
At present there is hardly any effective system in place at the logistics
outsourcing companies which generates data to track individual customer
spends and their outsourcing preferences. This data is extremely
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important for stores as it has to be integrated into sourcing design to
ensure that companies aspirations are met and he gets the goods that he
needs and prefers. It is recommended that a system like companies
loyalty cards need to be effectively implemented using appropriate
technology. Data generated from this must be regularly monitored and
used for sourcing.
Similarly, it is recommended that companies explore new tracking and
identification system like RFID. Online information on stock availability will
give accurate feedback on stock as this system will capture the sales.
This will help a great deal in planning, procurement and avoiding stock
outs.
Manpower Skill Upgradation
With sudden increase in logistics outsourcing companies acute shortage
of skilled and trained manpower is already being felt . Since trained
manpower is scarce it is recommended that compaies have a proper
training module which ensures that all new employees are exposed to
orientation program before being deployed for the operations. Also
properly designed regular skill upgrading and refresher courses for the
employees to be implemented. Companies must focus on ensuring that
their employee separation rate is at manageable level by providing them
with working environment which has opportunities for career growth.
Manpower Development
Logistics operation involves long working hours and fluctuating
quantum of work both during the day and during the week. Thus it is
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necessary to find innovative solutions for optimizing manpower deployment.
One of the suggestion in this regard is to have a minimum number of
permanent employees which are required for the normal operation and to
meet the requirements of peaking during rush hours, promotional days,
weekends have a pool of trained manpower who can be employed
temporarily on part time basis for this work as an when required. Such
temporary resource will be cost effective and can consist of men/women who
have spare time and want to supplement their income, students in
companies who want to have exposure to and experience of logistics
management from this. The companies can benefit from their fresh ideas.
Customer Feedback &complain redressal system
A proper customer feedback and complaint redressal system goes a long way in
ensuring customer loyalty and improving the image of the company. It is
recommended that company have a range of options for the customers to give
feedback. It could be through a Toll free number, online website, customers
feedback box placed in the store or even logistics manager periodically mingling
with the customers and asking them relevant questions to get feedback on their
experience. However this feedback must be seriously deliberated and proper in
time action must be taken so that customer feels that the company is responsive
to their feedback which will enhance his image of the company.
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REFERENCE SECTION
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Reference section
Annex 1
Questionnaire
Logistics Outsourcing & its Effect on Stakeholders
(Food Processing Industries)
Part 1 : General Information
1. Your job position? Logistics manager Financial manager Production manager Director Other---------------
2. In your company, at what level the decision of logistics outsourcing is taken? One factory level Multi-factories level
3. To what degree, are you involved in decision making of logistics outsourcing ? Highly Moderately Little bit Not involved
4. How many full-time employees are there at your company? Less than 40 41- 50 51-100 101-150 151-200 More than 200
5. What was the development of your total sales volume over the last three years ? 2008-2010----------% ( increase or decrease in %) & the expected development of your total sales volume over the last three years ? 2005-2007------------% ( increase or decrease in % )
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6. Pl rank your product groups w.r.t. sales 1= highest, 5= lowest ?
1. 4. 2 5. 3. 7. What is the sales percentage of this group to your company? 1. 2. 3. 4. 5. Part 2 : Outsourcing of Logistics activities in your product group We would like to obtain the insights of your current practice of logistics outsourcing in your product group we would also like to know the reasons why you outsource some of the logistics activities.
Strongly disagree Strongly agree
1 2 3 4 5 6 7
1. Outsourcing of outbound transportation. 2. Outsourcing of Pack & labels 3. Outsourcing of Transportation Mgt 4. Outsourcing of Inventory Mgt 5. Outsourcing of Distribution Network Planning
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1. The following activity contributes highly to the company‘s competitive
advantage
a. Outbound transportation b. Pack & labels c. Transportation Mgt
d. Inventory Mgt e. Distribution Network planning
2. The following activity is essential to support our core activities
a Outbound transportation b. Pack & labels c. Transportation Mgt
d. Inventory Mgt e. Distribution Network planning
3. Compared to our rivals, this activity is performed efficiently
a Outbound transportation b. Pack & labels c. Transportation Mgt
d. Inventory Mgt e. Distribution Network planning
4. We have invested in special equipment to conduct this activity
a Outbound transportation b. Pack & labels c. Transportation Mgt
d. Inventory Mgt e. Distribution Network planning
5. We have acquired special knowledge and skills to perform this activity
a Outbound transportation b. Pack & labels c. Transportation Mgt
d. Inventory Mgt e. Distribution Network planning
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6. It is very costly to outsourced this activity a Outbound transportation b. Pack & labels c. Transportation Mgt d. Inventory Mgt e. Distribution Network planning
7. We specify precise measures for evaluating the performance of this activity a Outbound transportation b. Pack & labels c. Transportation Mgt d. Inventory Mgt e. Distribution Network planning
8. It is difficult to measure the performance of logistics service providers for this activity. a Outbound transportation b. Pack & labels c. Transportation Mgt d. Inventory Mgt e. Distribution Network planning
Part 3: Logistics complexity in your product group
We would like to know to what extent you agree if the following factors complicate the management of logistics process in your product group. 1= strongly disagree,
7= strongly agree
End product characteristics
A Perishability of end product complicates the logistics process B. Logistics process is effected with number of SKU
C. Logistics process is effected with number of product group
D Variety of product in storage condition complicate the logistics process
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Production Characteristics
Number of packaging lines 1 2 3 4 5 6 7
Uncertainty of production- 1 2 3 4 5 6 7
output time, quantity and quality
Sales / Demand Characteristics
Annual demand volume 1 2 3 4 5 6 7
Demand uncertainty 1 2 3 4 5 6 7
Demand fluctuation 1 2 3 4 5 6 7
Distribution characteristics
Number of customers 1 2 3 4 5 6 7
Number of International Customer 1 2 3 4 5 6 7
Number of warehouses 1 2 3 4 5 6 7
Distribution channel variety 1 2 3 4 5 6 7
Delivery frequency 1 2 3 4 5 6 7
Order lead time 1 2 3 4 5 6 7
Distribution size time 1 2 3 4 5 6 7
Uncertainty of distribution time, 1 2 3 4 5 6 7
quantity, & quality
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Part 4: Your logistics strategy
Please indicate at a scale of 0- 100 points the relative importance of the following objectives
Logistics objectives Points
Low logistics cost
High reliable & consistent logistics service
Short delivery lead time
High flexibility to accommodate demand changes
Total 100
If there are other objectives, please specify
Part 5 : Your logistics performance
Please provide the following information with respect to your current logistics performance. 1= strongly disagree, 7= strongly agree
Comparing with our competitors…
Our logistics costs are relatively low 1 2 3 4 5 6 7
We always meet the promised delivery time 1 2 3 4 5 6 7
We always meet the ordered quantity 1 2 3 4 5 6 7
We quickly respond to the needs of 1 2 3 4 5 6 7
our key customers
We offer shorter lead-time 1 2 3 4 5 6 7
We relatively offer longer shelf life 1 2 3 4 5 6 7
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ANNEX 2
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