In the last few years we have witnessed several large conglomerates such as Mahindra & Mahindra, Tata Motors, Jindal Group, and Future Group launch their own dedicated logistics and supply chain business as a separate entity, instead of having a small in house team. While some may question the rationale behind this trend, the strategy is quite logical and hardly surprising for supply chain experts.
Here are some of the reasons that companies prefer this strategy:
1. Change a cost center to a profit center:
Transportation and logistics have traditionally been a large cost center for manufacturing companies. However, transportation – as I have always said – is an extremely profitable business and there is no reason that it should be a cost center for the company. By making supply chain logistics as a separate entity, the parent company hopes to be able to create better valuation and profits for their group.
2. Make their supply chain more efficient:
Supply chain logistics is a complex subject that has been a topic for research and study across the top institutions of the world, including MIT, Stanford, Princeton, Georgia Tech, Berkeley, etc. Running an efficient supply chain process not only requires skilled manpower, but also extensive big data analysis, investments in technology and focused leadership. The larger the company size, the greater is their operational complexity and the costs for improving the operations are prohibitively high for a single manufacturing unit. Creating a separate profit generating entity enables the company to invest in these initiatives that makes their supply chain operations more efficient.
3. Additional revenue opportunities
With the new investments, focused leadership and better technologies, the new entity can leverage its strengths to also cater to other businesses outside of their parent company at marginal cost. This helps it increase its revenues, profitability and create more value for the parent group.
The new entity has an inherent competitive advantage than other logistics companies because of the captive business that it enjoys from its parent companies. This helps it absorb the costs of new investments without the stress of cash flows and a long gestation period.
5. Additional services
The inherent strengths and competencies that the companies develop over time can then be utilized to provide additional services to their clients like warehousing, 3PL, consultancy, multi-modal, courier services, etc. which further enhances the value of the parent group as a whole.
Overall, the Indian logistics market today has the highest growth potential amongst all emerging economies of the world. The industry is expected to become a $300 billion market by 2020, making logistics the next lucrative growth story for the Indian corporate sector. Aided by information technology and the growing push for digitization, several tech-driven start-ups are already championing the industry’s transformation. The entry of large companies into the fray is exciting news and will only