In this article, Samyukta Ramaswamy pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the compliance required for starting a Transport and Logistics Company.

Introduction

In present day, the occurrence of many rapid changes in the realm of the business sector has made the market increasingly complex and unstable, which has had a concomitant effect on companies and other organizations resorting to making changes in their organizational structure as well as their business processes in order to combat stiff competition and stay in the race. The primary focus while changing the organizational strategy is on the extensive use of party logistics, which when coupled with the usage of modern tools of information technology as well as the integration of supply chain, facilitates the outsourcing of logistics operations, consequently enhancing customer satisfaction and simultaneously enabling companies and other organizational bodies to concentrate on their core competencies and other crucial areas of organization not coming within the ambit of outsourcing. Logistics management plays a crucial element in determining the profitability and the overall success of a company. In most of the developed economies, logistics management is a booming industry that accounts for the ever-increasing proportion of the Gross National Product. Furthermore, it is often employed as a weapon by big market-oriented companies in their struggle to stay in the competition at both the domestic and international level.

This article is an attempt to first understand fully the concept of a logistics company and its working mechanism, paying particular attention to third-party logistics, to which genus transportation companies form a part of.

What are logistics companies

According to Council of Logistics Management, “Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customer requirements.”[1] Companies that are engaged in these logistics contracts usually engage in activities such as warehousing, transporting and distribution of goods, designing and planning supply chains, designing facilities, and certain aspects of customer service.

The outsourcing of logistics is a recent trend observed in the management sector in the last twenty five years, and outsourcing of logistics contracts is currently very cutting-edge. The term ‘outsourcing’ is to a large extent used in the context of activities that are coordinated previously within a single firm that is now being allocated to subsequent different firms where there is a coordination of activities spanning the boundaries of those firms.[2] It lays emphasis on the inter-organizational coordination of activities of several firms thereby causing an integration across the boundaries of several firms, which in turn helps in building concrete business relationships. Such companies that are primarily engaged in outsourcing focus on a limited part of activity pattern in which it is involved in, thereby substantially improving their performance. In addition, this specialization further gives rise to benefits in the undertaking of the remaining in-house activities of the firm.[3] Furthermore, outsourcing, to a large extent also improves the utilization of resources in the network, and this is by far its main advantage. These contracts utilize to the maximum extent, the investments of external suppliers, specialized capabilities and innovation that would otherwise be extremely expensive or simply impossible to achieve internally.[4]

At this juncture, it is also necessary to mention that the increasing popularity of the IT sector has contributed largely to almost all of the logistics activities. These activities at present, have become automated, thereby improving the quality of service and enhancing customer satisfaction, and simultaneously proving to be extremely cost-effective and flexible. The tremendous use of Information Technology has further aided in the improvement of logistics companies.[5]

These logistics companies thus form a part of outsourcing logistics contracts by acting as external logistics service providers offering single or multiple logistics activities working on a contractual basis. From the point of the service provider, these types of outsourcing contracts provides solutions to both simple and advanced logistical problems, while from the customer’s viewpoint, the outsourced activities and the degree of outsourcing varies with a wide margin.

What are third-party logistics Companies

As was earlier mentioned, third-party logistics companies, commonly referred to as 3 PL Companies or integrated logistics[6], act as an external logistics service provider offering single or multiple logistics activities to its customers on a contractual basis. To put it simply, third-party logistics involves the use of an external company that performs the logistics activities that have traditionally been performed internally. The Council of logistics management has defined third-party logistics as “Outsourcing all or much of a company’s logistics operations to a specialized company.”[7]

However, the term ‘Third-party logistics’ has no uniform definition and is open to interpretation. While some having a broad and inclusive definition, others have a more narrow and exclusive definition. In light of the same, many academicians have put forward their own definitions with regard to third party logistics. According to Stank and Maltz, 3 PL is “a firm that produces goods and services that it does not own”.[8] Bergland defines 3 PL as a “logistics service company providing service on behalf of a shipper responsible for the management, transportation and warehousing of goods.”[9]Yet another definition was put forward by Sink and Langley stating that a 3 PL was an “external organization performing all or a part of a producer’s or consumer’s logistical functions.”[10] It can thus be concluded that the primary aim of a 3 PL company is to perform all its related functions that its producer does not want to manage.

The industry first developed in the 1970s with the advent of globalization and the increasing demand for Information Technology. The widespread application of Information Technology proved to be a vital element in third-party logistics as it integrated the logistics service provider with his clients.[11] Consequently, with the business environment becoming increasingly competitive, firms, in order to reduce costs increasingly began resorting to outsourcing their logistical functions to 3 PL’s. Thus, the first generation of 3 PLs was introduced in the 1970s and 80s which included warehousing, transportation, shipping and brokerage contracts. In order to increase customer satisfaction and further reduce costs, 3 PL consolidated their transportation and warehousing contracts and expanded to provide value-added services as well, which widely came to be known as the second generation 3 PL’s during the period 1980 and 1990. This period comprised mostly of asset and non-asset based companies having an increasing number of services to offer. The third generation 3 PL’s was introduced onwards from 2000 which was predominantly internet-based with an increase in supply-chain integration.[12] Today outsourcing logistical functions has become a widespread practise followed by almost all entities all across the globe.

Advantages and Limitations of 3 PL Companies

In recent times, 3 PL companies have expanded their services to include more complex activities and customer services than just mere warehousing and transportation. Studies have shown a large number of companies entering into 3 PL contracts which effectively handle complex supply chain management thereby obtaining a competitive edge over their competitors in terms of time and cost efficiency. Furthermore, outsourcing logistic functions to 3 PL’s helps reducing logistics costs such as inventory and transportation and allows the firm to concentrate on its core competencies. It improves the customer service level, increases efficiency, stability and flexibility, while at the same time reducing conflicts and reciprocating mutual goals.[13] Additionally, 3 PL providers also integrate the entire supply chain process through Advanced Information Technology services by having a tremendous impact on the coordination of logistics activities and sharing of information within an organization.[14] Lastly, third party logistics also increases the productivity of the firm by large margins at the same time also improving the expertise, market knowledge and the data accessibility of the firm.

On the other hand, logistics outsourcing particularly that of 3 PL, while having its benefits, has also witnessed a number of pitfalls. In some cases, it has been argued that logistics outsourcing has become a source of corporate failure and a disappointment.[15] This can be attributed primarily due to service performance, disruption to inbound flows, inadequate expertise of the provider and employee quality, and their inability to provide services to the needs of special products and effectively handle emergencies.[16] Another drawback is that in most cases, outsourcing companies have difficulty in estimating the true costs of their own operations as a result of which they have unrealistic expectations of cost reductions. What companies fail to take into account is that outsourcing of logistics activities have other consequences other than reduction of costs and increased efficiency; it affects the total pattern of activities of which the outsourced activity forms a part.[17] Lastly, it is also a perceived notion that many of the drawbacks mentioned above are a consequence of a lack of proper understanding in the relationship between the logistics service provider and the outsourced firm, that is caused to a large extent by the potential risks that buyers face that may result in losing control of their logistics operations.

Transport Companies

Transport companies are one of the companies that employ third-party logistics. These companies essentially contribute to the transportation of goods from one location to another thereby facilitating the easy accessibility of a particular company’s goods while at the same time increasing customer satisfaction in the process.

According to Council of Logistics Management, “Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of-origin to the point-of-consumption in order to meet customer requirements.”[18] From this definition, it can clearly be seen that logistics outsourcing and transportation go hand in hand. These kind of contracts involve all channels and modes of transport including trains, roads, shipping and freight management and also by air.

How to start a transport and logistics company?

Starting one’s own transport and logistics company, requires experience in the chosen industry one is working in, before anything else. Experience is extremely valuable as it helps one understand the business thoroughly and also helps in establishing a strong networking system with other companies who may become future clients. Secondly, always play to your strength. It is extremely important to establish oneself in an area where your knowledge and business relationships are thorough. This could include clients, geographical area etc.

The first step in starting a transport and logistics company is to get sufficient funding and investment. In order to do that, it is important to first identify the niche services that you wish to target and draft an investment plan based on it[19], and convince potential investors that you have the capability to make your company run at a profit. The second requisite for starting a transport and logistics company is to procure the equipment necessary to run the company depending on the nature of the work. For instance, purchasing loading equipment for transporting freight like ships, trucks, airplanes etc., cargo, and shipments etc. out of the capital of the company. The third is to obtain the necessary licenses for the company to begin functioning and satisfy the requisite registration and compliance requirements. In India, registration with the International Air Transport Association (IATA), Air Cargo Agent Association of India (ACAAI) is necessary for companies acting as freight forwarders.[20] Sometimes, it also becomes necessary to become members of industry forums like CII Institute of Logistics to raise logistics industry related issues. Other important registrations in India include Director General of Foreign Trade’s (DGFT) registration, acquiring registration with the Income Tax Department, the Registrar of Companies and other related Government Departments.[21]

References

[1] K. Dhayanidhi et. al., The Use of Third Party Logistics Services- A Literature Review, 1 International Journal of Operation System and Human Resource Management 27, 30 (2011).

[2] Lars-Erik Gadde & Kajsa Hulthen, Logistics Outsourcing and the Role of Logistics Service Providers from an Industrial Network Perspective, at p.4 available on http://www.impgroup.org/uploads/papers/6746.pdf last seen on 25th March, 2016.

[3] J. Quinn & F. Hilmer, Strategic Outsourcing, 4 Sloan Management Review 35, 43-45 (1994) as cited in Lars-Erik Gadde & Kajsa Hulthen, Logistics Outsourcing and the Role of Logistics Service Providers from an Industrial Network Perspective, at p.4 available on http://www.impgroup.org/uploads/papers/6746.pdf last seen on 25th March, 2016.

[4] Id. at P.5.

[5] Zaryab Sheikh & Shafaq Rana, Role of Third Party Logistics Providers with Advanced IT to Increase Customer Satisfaction in Supply Chain Integration, 2 International Journal of Academic Research in Business and Social Sciences 546, 547 (2012) available at http://www.hrmars.com/admin/pics/569.pdf last seen on 25th March, 2016.

[6] Y. Sheffi, Third party Logistics: Present and Future Prospects, 11 Journal of Business Logistics 27, 28 (1990).

[7] K.Dhayanidhi et. al., supra note 2.

[8] T.P Stank & A.B. Maltz, Some Propositions on Third Party Choice: Domestic vs. International Logistics Providers, 4 Journal of Marketing Theory and Practise 45, 46 (1996).

[9] Bergland et. al., Third-Party Logistics: Is There a Future?, 10 International Journal of Logistics Management 59, 61 (1999).

[10] H.L. Sink & C.J. Langley, A Managerial Framework for the Acquisition of Third Party Logistics Services 18 Journal of Business Logistics 163 (1997).

[11] Xu Yang, Status of Third Party Logistics- A Comprehensive Review 3 Journal of Logistics Management 17 (2014).

[12] See K. Dhayanidhi et. al., supra note 2.

[13] Xu Yang, supra note 12 at P.2.

[14] Zaryab Sheikh & Shafaq Rana, Role of Third Party Logistics Providers with Advanced IT to Increase Customer Satisfaction in Supply Chain Integration, 2 International Journal of Academic Research in Business and Social Sciences 546, 551 (2012) available at http://www.hrmars.com/admin/pics/569.pdf last seen on 25th March, 2016.

[15] Boyson et. al., Managing effective third party logistics relationships: What does it take?, 20 Journal of Business Logistics 73, 81 (1999).

[16] K. Selviardis & M. Spring, Third Party Logistics: A Literature Review and Research Agenda, 18 International Journal of Logistics Management 125, 138 (2007).

[17] Id.

[18] K. Dhayanidhi et. al., The Use of Third Party Logistics Services- A Literature Review, 1 International Journal of Operation System and Human Resource Management 27, 30 (2011).

[19] For further reference, look at http://www.fibre2fashion.com/industry-article/5745/how-to-start-a-logistics-business-in-india last seen on 6th December, 2016.

[20] Id.

[21] Id.