A few decades ago, what we now call warehouses used to be dilapidated buildings called godowns. The industry has come a long way from those days, to become the backbone of the manufacturing and burgeoning e-commerce industry. The sector is evolving fast, with both the nature of the business and technology driving it, and undergoing dynamic changes. In the face of regulatory and infrastructural challenges, is the warehousing industry changing gears fast enough to support the growth that the Indian economy is trying to achieve?

Sisir Pradhan | October 2015 Issue | The Dollar Business

Online retail stores have become popular like never before, and a major reason for their popularity is the convenience of placing an order from the comfort of your home and getting it delivered to your doorstep within a stipulated timeline. Have you ever wondered how the e-retailers manage to deliver the consignments with such ease? Apart from the many other things involved in the lifecycle of a product delivery, one element that acts as the deciding factor for seamless despatch of goods from one location to another are warehouses.

Over a period of time warehousing industry in India has evolved from just brick and mortar shelters for the purpose of storing goods to highly sophisticated stockrooms, where, thanks to advanced tracking mechanism, each consignment can be tracked on a real time basis at the click of a button. Without these state-of-the-art facilities it would have been a Herculean task for companies to ship and deliver consignments to the designated consignee, and the rise of the e-tail in India would have remained but a fairy tale. Not just e-tail, in any industry segment, which deals with physical goods, warehouses play a vital role in the entire value chain from raw material to customer delight. Specifically in the manufacturing sector, with lean manufacturing becoming the order of the day, a significant part of the functions from scheduling to labelling and packaging are being outsourced to third party logistics providers. But naturally the warehousing industry is gearing up, with the help of technology, to meet these new requirements.

The leap forward

As India evolves as an economy, sophisticated logistics and warehousing systems would be a key trigger for the manufacturing sector and the entire gamut of trade activities. And warehouses are evolving at a rapid pace with the average size of warehouses in the country increasing from around 20,000 sq. ft. to 2-3 lakh sq. ft. in a few years. Current industry estimates show that warehouse space in India will grow from the current 909.5 million sq. ft. to about 1,439 million sq. ft. by the end of 2019.

Explaining the logic behind the decision to give more importance to warehouses, Vikas Anand, MD, DHL Supply Chain India, says, “In 2012, we prepared a roadmap to strengthen our presence in India; to serve our clients better; improve our efficiency; and take the logistics sector in the country to a new level. Under this programme, we earmarked four key areas to realise our vision, one of which was multi-client sites.” DHL has built multi-client warehouses in Mumbai of about 4 lakh sq. ft., in Gurgaon of about 3 lakh sq. ft.; in Pune of about 2 lakh sq. ft. and in Bengaluru of 1.4 lakh sq. ft. Apart from being large in size, these cargo hubs have very high rooflines where goods are stored vertically in specially created racks. In fact, it’s the new norm in the industry, with almost all leading players going in for such warehouses.

Slicing the pie

According to a report by Ernst & Young and the CII Institute of Logistics, the size of the Indian warehousing industry, across verticals, is estimated to be around Rs.560 billion. The sector is growing at an average 10% per annum. While warehouses dealing with agricultural and horticulture products account for about 15% of the total warehousing industry, cold storages have a share of about 16%. It’s the warehouses catering to the industrial and retail players that hold the maximum share, at 55%.

Inland Container Depots (ICDs) and Container Freight Stations (CFSs), which directly deal with goods that are meant for export/import, account for the rest 14% share. In fact, it’s the Customs-bonded warehouses that play a key role in faster shipment of export consignments or clearance of imported goods. “From the cargo handling point of view, Indian airports have seen significant progress in Bengaluru, Delhi, Kolkata and Hyderabad. Mumbai and Chennai are also coming up but at a slower pace. The dwell time on export has come down to 30-40 hours and import is around 100 hours with 70% cargo being cleared within 72 hours,” Veli Polat, Regional Director, Lufthansa Cargo, tells The Dollar Business stressing on the importance of Customs-bonded warehouses. In fact, experts, The Dollar Business spoke to, are of the opinion that capacity management is not a major issue, it’s the peak hour clearance which continues to be a major challenge. “In general, cargo delivery on exports and imports takes place during a specific time window of the day. Warehouses are designed to manage future growth, however considerable improvements are required at Chennai and Mumbai. Rest of the airports are under-utilised,” adds Polat.

The growth enabler

In recent times, due to the technological advances in automatic identification and data capture (AIDC) technology, logistics and warehousing industry has gained in terms of optimum utilisation of resources, tracking of consignment and seamless distribution of cargo. Technology for the logistics and warehousing industry has come a long way since the bar code reader of 1950s. While bar code readers are still being widely used, newer inventions like Quick Response (QR) Code are becoming popular to encode data to computer-compatible digital data, and accelerate the flow of a shipment among its beneficiaries.

Technologies like Real Time Locating Systems and Radio-Frequency Identification (RFID) have become essential for a wide range of automated data collection and identification applications that helps warehouse operator to keep a track of goods coming in or going out their perimeter. Adoption of Warehouse Management System (WMS) and other IT-driven solutions are becoming effective in increasing the competitiveness of the warehousing industry. WMS helps warehouse operators to track inventory, orders and provides data about the products stored and can also be transmitted back to the manufacturers.

As real-estate and construction costs are rising, it has become important for warehouse operators to maximise utilisation of each available square feet of space and also to build more economical structures. That’s the reason why alternative construction systems like pre-engineered steel buildings are becoming more and more popular.

The size of individual warehouses is also growing and they are now becoming cargo hubs to store goods for multiple clients. The other benefit of multi-client sites is that all goods inside a warehouse are managed by one contract manager. It allows various users of a warehouse to leverage their resources, as a lean period for one user could be the peak period for another and therefore these sites are a favourite with large corporate houses.

Partners in growth

There is no denying the fact that effective distribution of cargo is vital for the growth of manufacturing and trade. Explaining how critical role a warehouse plays in the value chain for a logistics company, Areef Patel, Vice Chairman, Patel Integrated Logistics says, “A logistics company’s efficiency depends upon how well the warehouses are equipped with facilities. To have a strong supply chain in place the type of warehouse and the location are very important. It is such a crucial part that an efficient warehouse can bring a 15-20% cost reduction in the entire logistics operations.”

 As manufacturing moves towards looking at the supply chain function as a profit driver instead of a cost factor, many manufacturers are looking at outsourcing a significant part of their operations to warehousing companies. Just-in-Time techniques have put a large responsibility on warehouses of maintaining optimum efficiencies thus enlarging their role.

The location of a warehouse is also therefore becoming increasingly important to facilitate free cargo movement and also to ensure time-bound operations. One such location is Bhiwandi, in the suburb of Mumbai, which has now become a hub for warehouses largely because of its location advantage. The Mumbai-Agra highway (NH-3), passing through Bhiwandi, ensures connectivity of the city with Mumbai, Thane, Nashik and the rest of India at low real-estate cost.

] Shortage of warehousing facilities are playing spoilsport for Indian logistics sector

Further, the e-commerce sector has been a big boon to the logistics industry. The real action in coming days is going to be in remote places of the country where the demand is picking up. The challenge is in delivering to the Tier 3 and Tier 4 cities. Logistics companies will have to set the ball rolling from now by creating more fulfilment centres in strategic locations. Reverse logistics, which is just 5-10% of the total shipments made by the retail players as of now, also offers huge opportunity and can be transformed into a revenue model. Cold storages are another area of high growth. As per industry estimates, Indian cold chain industry is expected to grow at a CAGR of 28% over the next 4 years an d is projected to reach a market size of Rs.50,000 crore in 2017.

Speed breakers

India’s warehousing industry is still at a nascent stage as compared to that of United States and European countries. While India’s warehousing industry has access to abundant labour, the mechanism to train the staff is not efficient and is evolving with time.

Several players claim that the presence of multiple taxes is impacting the growth of the logistics sector. In fact, the industry has been pressing for a unified regulatory logistics body for integrated planning at the central level. The organised sector also has great hope from the GST Bill as it will provide a level playing field to organised players against unorganised players. However, under the prevailing political scenario in the country GST still looks like a distant dream.

Pointing out some of the issues with the logistics and warehousing sector, Om Logistics Business Head Akash Bansal says, “The road network in India, though extensive, is still inadequate and suffers from a number of deficiencies like inability to handle high traffic density, poor conditions of roads etc. The average productivity of a truck in India is an abysmal 200 km a day which could be increased to 350-400 km just by reducing congestion. Further, India has the lowest warehouse capacity with modern facilities when it comes to the developing world, and given the fragmented industry state (large share with unorganised players), investment in IT infrastructure is almost absent at the required scale.”

Way to the future

Logistics costs, as a percentage of GDP, in developed economies is around 7%, whereas the same in India is about 13-14%. If logistics costs can come down by 4-5%, the benefits for manufacturers could be immense. An increasingly sophisticated manufacturing industry is looking towards third party logistics providers to eliminate costs and support them as a driver of growth. This is an immense untapped opportunity for the warehousing industry.

E-commerce growth in India faces a major challenge due to lack of infrastructure and logistics support. There is an immediate need of warehouses to enable the e-tail sector to deliver goods to customers beyond the major metros. Industry insiders say that e-commerce firms are expected to invest up to nearly $2 billion in the next three years in infrastructure, warehousing, and logistics.

The potential of the warehouse sector is huge and more players, both organised and unorganised, will enter the market soon. Market experts envisage investments of up to Rs.15,000 crore annually to meet the requirements of all industry verticals. With better infrastructure through efficient use of technology and manpower and initiatives like “Make in India”, the warehousing industry is bound to play a larger role in the growth of the Indian economy.

“GST Bill & E-Commerce Will Play A Pivotal Role In Shaping The Industry’s Future.”

Areef Patel - Vice Chairman, Patel Integrated Logistics

“Warehousing industry in India is just taking off.”

Samir Gandhi, Director, Gandhi Automations Private Limited

TDB: You have been in the business of entrance automation and loading bay equipment for more than 20 years. How has the demand from warehouse operators or clients changed over the years for your products and services?

Samir Gandhi (SG): Major growth for our industry came in the last decade due to the growth of the infrastructure and warehousing sector as well as growth in the number of manufacturing facilities set up by MNCs. In the last few years we have registered a growth of 25-30%, except for some hiccups in-between. There has been a significant rise in demand in the domestic market for warehouse automation equipment. About 8-9% of our revenue comes from the overseas market and the remaining from domestic clients.

TDB: What are the key differentiators if we compare Indian warehouses with those in the West?

SG: The warehousing sector in the West is more advanced as they have a longer history of industrialisation whereas in India the sector is just taking off and there is a long way to go as far as warehousing modernisation is concerned. People associated with warehouse designing in India are yet to understand the nuances involved in warehouse design. In the developed countries, they take care of all the automation needs while constructing a warehouse and the designs are made keeping automation in mind, while in India automation is an afterthought. Many people in the warehouse sector are not aware of the kind of automation options available, so we are putting lot of effort to make people aware of various automation processes and its benefits. In many cases, we find our equipment can’t be used because of the limitations in the structure of a warehouse. There have been improvements after MNCs came into India, as they lay stress on automation while setting up their warehouses.

TDB: One of the issues raised by warehouse users is longer dwelling time at airports. To what extent entrance automation and loading bay equipment can help in bringing down dwelling time at airports?

SG: We don’t directly deal with automation of cargo handling operation at airports but we have been insisting on the use of hangar doors and use of other cargo automation equipment. In many cases, because of the cost factor and other issues, authorities are not ready to accept these changes. Airport operators need to understand that it is a one time capital expenditure that helps in keeping products safe. It also helps in reduction of manpower.

TDB: What policy and taxation related changes would you like to see for the logistics and warehousing sector?

SG: As far as policy issues are concerned, as an industry we are worried about the delay in GST. I am very keen on GST as this sector is mostly unorganised. The unorganised sector does not pay VAT and other taxes that the organised sector has to pay. This gives unorganised sector an undue advantage. We compete on the basis of better product offering and customer support and therefore MNCs prefer our service. But because we do not evade taxes, we are not price competitive when dealing with smaller players.