Although the demand for bigger warehouses catering to larger coverage is rising, unrealistic cost and quality expectations and short-term investments are hampering the real growth of warehousing as a factor of overall economic growth, argues Chris Buckthorp.
The government initiatives in the budget of 2011-12 have given a fillip to the cold storage industry. National Bank of Agriculture and Rural Development (Nabard) has recently come out with a new loan scheme to encourage the creation of such storage facilities by private sector. Under the new scheme, which has received the Centre´s nod, Nabard can advance direct loans to the public as well as the private sector for construction of warehouses, cold storages, cold chains and silos. For the first time, Nabard has extended its loan facility for warehouse construction to private parties, which earlier had the only option of approaching banks for finance.
Better infrastructure has definitely helped in growth of warehousing industry. Better road infrastructure, clubbed with GST implementation, will lead to change in distribution patterns. Regional warehousing hubs will emerge near to well connected highways catering larger geography.
Growth prospects: Warehousing forms a crucial link in the overall logistics value chain. Logistics and warehousing industry continued to witness growth during the first half of 2013 despite a weak economic scenario. The growth in warehousing in India is driven by growing manufacturing activity, rising domestic consumption, increasing international trade and the emergence of organised retail in the country.
The demand for logistics is expected to increase on the back of relaxation in the FDI regulation in the retail sector. Increasing private and foreign investments ininfrastructure and easing of government regulations are further strengthening the growth of the warehousing sector in India.
The demand for warehousing services is not expected to increase on the back of relaxation in the FDI regulation in the retail sector, however. Most of warehousing activities will be managed by these retailers in-house. For the movement of goods industry will witness growth in logistics.
Free, missing zones: The government conceptualised a FTWZ policy five years ago, but not much has happened since. The issues are from both the policies and the way supply chains are executed in India. Growth of FTWZ is expected in longer run of 10-12 years and will depend on changes in value addition requirements along with policies of land acquisition, duty structure.
Unrealistic cost expectations: Indian warehousing industry is in a transitional stage: customers seek low-cost solutions with costs similar to unorganised conventional warehousing, but with the improved infrastructure and facilities. Gradually, customers have started realising overall cost of supply chain instead of only warehousing.
The low-cost focus on logistics propagates a reluctance to invest in modern systems. Low-cost labour and an abundance of older, low-cost facilities have set a low cost benchmark for operations. Any investment in modern systems translates directly into an increase in direct operational costs. In order to change this approach, there needs to be a broader understanding of the productivity and service level improvement and inventory reduction potential of modern systems.
In India, the appreciation of these factors and their impact on overall total logistics costs and business performance is still in a nascent stage. 3PL vendors understand the benefits that can be realised through the deployment of modern systems. However, this does not translate into reality when the customer´s basis of evaluation is on a cost-per-square foot basis. While there is a willingness of vendors to invest in these systems, the only option is to extend the period of the investment in order to minimise the magnitude of increase to direct operational costs.
The author is Chief Strategy and Managed Services, GATI-KWE Private Ltd, the Hyderabad-based logistics major.