PE (Private Equity Fund) and Logistics Companies October 18, 2009Posted by Ramnath Rangaswamy in Emerging Markets, India, Indian Economy, Logistics, Supply Chain.
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The Indian logistics industry is projected to grow at fast clip given the growth in the economy. With GDP slated to grow between 6% and 9% depending on who gave the numbers and when!
Given this growth in the logistics industry, many PE companies want to invest in this space and in logistics service companies.
How does a PE (Private Equity) Investor pick out the companies that will come out winners and will deliver money on the table.
I read this book by Malcolm Gladwell called BLINK. There Malcolm Gladwell discusses a concept called Thin Slicing – predicting something based on just 2-3 criteria or data (literally, in the blink of your eye).
In this writeup, I write of what I think would be the predictors of success, (thin-slicing), in this logistics space.
The logistics service provider must own the required infrastructure – trucks, rakes, vessels, warehouses. The logistics service provider cannot depend on the market for trucks or hire rakes from container rake operators. Yes, for some short-term needs or to cater to a sudden peak, the logistics service provider can hire from the market. But hiring cannot be the primary strategy.
The reason, a logistics service provider should own their own infrastructure, is so that the logistics service provider can provide superior service to the customers. By depending on others, the reliability reduces and in turn the logistics service provider’s service level drops.
And to be a winner in this space reliability and service is extremely important.
In my view one of the issues with Reliance Logistics was that they did not invest in infrastructure. Their business model was to depend on the market for trucks. They were not able to provide reliable service and the results are there for all to see.
On the other hand DHL owns it’s aircrafts, trucks, ships and is able to provide reliable service. Blue Dart in India owns aircrafts. Safexpress owns their trucks and warehouses. India Post has now taken aircrafts on lease. India Post already owned trucks and rail cars. By owning, I also include leasing. It is as good as having your own asset.
Many container rake operators have invested in CFS (Container Freight Stations) to have full control of their operations.
The logistics service provider should provide a complete and holistic solution. Companies do not want a warehouse or a truck. Companies want seamless and hassle-free movement of their products and raw materials.
The logistics service provider should be able to load all the raw material or project cargo in China or Europe, bring it on a vessel to India, discharge the vessel, clear all custom formalities and deliver it at the customer’s doorstep.
Or it should be able to take finished product from the assembly line, transport it to a port, clear customs, export it and deliver the bill of lading to the customer.
Or the logistics service provider should bring together different parts from across the globe, assemble the product, customize the product as per the local requirement i.e., put in leaflets and accessories as per the local requirement and then distribute the product in the local markets.
A company will be able to provide this end-to-end service only if it owns the complete supply-chain.
Or if it has strategic tie-ups with freight forwarders, CFS owners, vessel charterers, rake-operators not only in India but across the globe.
Or it should have the wherewithal to form consortiums and offer a single-window solution to customers.
Many logistics service providers bought firms specializing in one part of the supply-chain. This enabled logistics service providers to provide customers across the supply-chain.
No two supply-chains are similar. No two customer needs and requirements are the same.
The logistics service provider must be able to provide bespoke solutions to meet the needs of the unique customer needs. One size fits all does not work here.
Examples of such solutions abound; Indian Railways has developed special parcel vans to carry Maruti cars. Adani transports Maruti cars to the south by shipping them in vessels from Mundra. Adani Agri logistics has developed special purpose wagons to carry foodgrains. Adani is planning to import special purpose wagons to carry cars.
The level of customized solutions that the company can provide, separates the men from the boys. It requires a certain confidence, conviction and courage to invest money in infrastructure for customized solutions and then to implement the customized solutions.
Some logistics service providers operate in a niche and cater to only certain supply chains.
G4S or CISCO service the cash supply-chain for banks. They replenish the ATMs with cash and transfer cash from and to banks. PN Writer only deals with documents and household goods. Some companies specialize in healthcare and pharma supply chains. Some companies do only reverse logistics. Some companies specialize in spare parts supply chains.
As mentioned earlier , no 2 supply chains are similar. By operating in a niche, the logistics service provider are able to provide superior services to their customers.
Of course, it goes without saying that these strategies should be supported by able, experienced, intelligent and smart people who have the capability to understand the customer’s supply-chain needs, develop a solution to meet the customer needs and then run the supply-chain.
IT solutions and support – RFID, GPS, ERP- would be a key support required to deliver the supply-chain and logistics solutions.
I hope this helps you “thin slice” the logistics service providers and PE you invest your money in the ones that will succeed.
As the theory of thin slice quotes, “ a little knowledge goes a long way”!