CC BY
136Russian Journal of Logistics and Transport Management, Vol.1, No. 2, 2014
© Elina Silvennoinen Saimaa University of Applied Sciences
3PL MARKETS IN RUSSIA (Review article)
Abstract
The aim of this article is to familiarize with the status quo of 3PL markets in Russia. The study is based on lectures in Saimaa University of Applied Sciences, scientific articles, books and researches found from the internet. 3PL market in Russia was chosen for topic, because it supposedly benefits the author' work as a Service Manager at the Savonlinna Business Services.
Keywords: 3PL markets, service providers, logistics, supply chain management. 1 Logistics and supply chain management
Approximately thirty years ago the term logistic was combined with business and mainly used to refer to the total flow of finished products main direction from the plant to the customers. Earlier logistics has been associated with military activities when coordinating the movements of troops, armaments and supplies to given locations in the most efficient way. Nowadays, the term 'supply chain management' has been used alternatively with 'logistics', covering the entire chain from supply of raw materials through manufacture and assembly to distribution to the end customer (Wall et al., 2010).
Logistics is responsible for moving materials/products and aiming to get the right product to the right place at the right time. Logistics refers to the planning, implementing and monitoring purchasing management, warehousing, transportation and distribution of materials in a productive and cost-effective way taking into account the customers' requirements (Logistiikan maailma, 2013).
Stavrulaki and Davis (2010) identify three key supply chain elements that are required to make products available to customers:
the supply chain network;
the supply chain processes the network operates with and
supports;
the supply chain decisions required for managing the
network.
A supply chain network can be defined (Stavrulaki and Davis, 2010) as the infrastructure (suppliers, manufacturing places, and warehouses) and the material (raw material, work-in-process, and finished goods inventory) that flows between the facilities to satisfy end-customer demand. Supply chain processes are outlined as the set of procedures used to carry out the movement of material through the supply chain network, including both production and logistics processes (activities relating to the forward and reverse flows, transportation and warehousing). Supply chain management refers to the management of supply chain processes covering planning, organizing, controlling, and implementing activities.
The Council of Supply Chain Management Professionals (2014) has defined term "supply chain management" as follows: Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.
2 3PL Logistics
Globalisation trend, integrated logistics and development of information and communication technology (ICT) have been reshaping world's trading patterns, and, therefore, physical trade flows in international business. International competitiveness demands organizing worldwide networks that can deliver efficient and high-quality response to demand of any segment of the world market. Supply chain management has become the core of global competitive power. Via effective supply chain management a company can make new profits and maintain competitive advantage as well as reduce total cost and improve the quality of services provided to customers.
Figure 1 describes different stages of logistic services from the first-party logistics (1PL) to the 5PL management of the whole supply chain.
5PL
Supply chain manager
3PL
Logistics services provider
2PL
Forwarder
1PL
Haulier
Fig. 1. From 1PL (transport services) to 5PL (supply chain management). Source: Vasiliauskas and Jakubauskas (2007).
Rodrigue et al. (2014) describe logistic layers from 1PL services to 4PL services
as follows:
First Party Logistics (1PL)
- beneficial cargo owners: shipper (such as a manufacturing firm delivering to customers) or the consignee (such as a retailer picking up cargo from a supplier).
- distribution is an entirely internal process assumed by the firm.
Second Party Logistics (2PL)
- carriers that are providing a transport service for a particular segment of a transport chain, e.g., a maritime shipping company, a rail operator or a trucking company hired to haul cargo from an origin (e.g. a distribution center) to a destination (e.g. a port terminal).
Third Party Logistics (3PL)
- freight forwarders that are offering outsourcing and comprehensive freight distribution services along transport chains.
- involving, e.g., warehousing, trans-loading, terminal operations and even forms of light manufacturing, such as packaging and labeling.
- organizing tasks related to physical distribution so that parts and finished goods can be carried from their origin to their destination.
Fourth Party Logistics (4PL)
- specialized consulting firms (independent and neutral actors) that are organizing and managing complete supply chains strategies for their customers.
- can be involved in outsourcing decisions, supplier selection and the routing of cargo to support supply chain management.
- often involve agreements (subcontracting) with 3PLs and 2PLs.
Fifth Party Logistics (5PL)
- applies when the switch is made from supply chains to supply networks.
- service provider guarantees the management of networks of supply chains and develops and implements, preferably in close consultation with the client, the best possible supply chains or networks.
- third parties are hired by the industrial actor for the supply of strategic, innovative logistical solutions and concepts.
- often linked to E-business and E-Logistics (Logisticsglossary.com, 2014).
3 Russian Logistics
Russian is in the transformation stage what comes to transportation and logistics services. Growth potential is tremendous, but there is still a long way to go comparing to Western supply chain management services and business practices.
There are several reasons for growth. For example: 1) Russia is the fastest developing market area in the world, 2) overall standard of living has raised the demand of Western commodities and a huge market has been formed around luxury products, especially on areas of St. Petersburg and Moscow, 3) logistics sector around oil and petrochemical products is big and still growing, 4) improving road infrastructure creates a base for formation of full-service logistic markets, 5) need for global logistic service providers is increasing in the future. (Soiletsalo, 2011.) Many investments have been done in order to improve infrastructure and develop the legislation in more harmonized way (Korovyakovskiy, 2014).
There are also many issues that hinder the growth and globalization of Russian logistics industry. To mention few problems:
Russia is a vast country with poor road conditions and heavy
traffic
lack of high-quality warehousing facilities and the overall fragmentation of warehouse markets
absence of route terminals for a landbridge from East to West empty containers and wagons - how to utilize in a lucrative
way?
bureaucracy and regulations are still a significant problem in international logistics towards/from Russia
logistics market is undeveloped, and, therefore, efficiency is
very low
customs ICT systems are not entirely integrated on railway ICT system, e.g., between Finland and Russia
development of central transport infrastructure is in a state of stagnation and desperately needs private investments (Korovyakovskiy, 2014.)
Overall, Russia should be better linked to the rest of the world by shipping services, airports and airlines, roads and rail, as well as levels of customs efficiency (Globallogisticsmedia.com, 2014).
4 3PL Services in Russia
By Dennis Mazurin (RZD-Partner.com, 2013), Director for Business Development at RZD Logistics OJSC, the share of outsourcing at the Russian market of transport and logistics services amounts to 22%. In other countries, the proportion of outsourcing services is larger (65% in Europe, 48% in China) and has a significant impact on the logistics sector. In Russia, companies are still afraid of outsourcing their logistic processes to external companies, even though; the service quality is understood to be high.
Transportation cost component has exceeded 20% in production costs (mostly due to bad road conditions and the fact that the products of extractive industries form the majority in Russian export structure and the value of transport costs here is about 50-80%) of the commodities prices). In developed countries, this figure does not exceed 8% (and for the high-tech products it is less than 1 -4%) (Fisenko, 2011).
The logistics market in Russia is not yet saturated and has an enormous potential in the future. Currently, the market is still dominated by Russian companies, but some foreign competitors are very active and are constantly increasing their presence on the Russian market. By specialists the prospects of multinational logistics service providers in Russia are good, because they are more competitive than domestic players due to bigger financial resources and leading experience, especially in 3PL and 4PL sectors (PricewaterhouseCoopers, 2010).
There are 4000-6000 logistic companies in Russia, out of which about 100 federal operators can be called logistics service providers (LSP) (Korovyakovskiy, 2014). To mention few: Eurosib, Nienshants Logistics, Interterminal Group, STS-Logistics, RZD-Logistics and TransContainer. As stated before, there are also global logistics services available at Russia. For example, DHL, Schenker RUSSO, Panalpina, Kuehne&Nagel, FM Logistic and Hellmann World Wide Logistics.
3PL and 4PL service providers can offer customers many benefits on Russian logistic markets that differ a lot from Western markets. The pros of using 3PL service providers are e.g.:
Saving in time by delegating the distribution process to a specialized company - 3PL providers can organize a better and more effeccient distribution process that leads to faster time to market and enhanced customer satisfaction
Reduced total cost through elimination of additional tasks of the supply chain
Efficient customs clearance through expertise Visibility, control and trade compliance of the full supply chain (distant management of the flow of goods)
Economy of scale through optimum routes and means of transportation and an optimum range of services to each client
Expenses decreased by combining several cargo in one vehicle - result: customers pay for part of the vehicle rather than for all of it
Cutting-edge technology and information systems on clients use (clients could rarely afford to buy those for their purposes)
3PL makes financial economy possible - by using 3PL, companies can decrease the amount of VAT and profit tax they pay
3PL eliminates some of the risks associated with the transportation process -large logistics companies monitor situations at seaports and on major roads so that possible transportation problems can be avoided, and e.g. alternative routes used to avoid losing time Security through the entire network.
Challenges of 3PL Start Ups
3PL market of Russian companies is relatively new. There are several obstacles that the young companies encounter when starting as 3PL operators. First of all is high technological investments in expensive equipment and the technologies used in modern logistics needs to be done and that requires big investments from a young company. Operational costs are also high, and it is hard to find skilled labor. Russian companies lack the logistic experience (that western companies have since 18th century). Additionally, the irregularities in legislation hinder the development. That, of course, concerns not only Russian logistic companies, but also international investors.
Finding customers is also one challenge. Since the Russian companies have earlier usually organized their transportation needs in-house, they are still a bit reluctant to outsource these services. They are afraid of losing power and in-house know-how if they let another company take care of their supply chain.
Entering 3PL Markets in Russia
Especially the international customers are looking for trustworthy logistic partner(s) in Russia with a broad market footprint, strong experience and reputation, as well as ability to help to deploy and carry out applicable logistics model for Russian markets (DHL, 2013).
If a Finnish company would start offering 3PL services in Russia, St. Petersburg and Moscow would be presumably starting locations because of their
proximity to Finland. Moscow is located in the focal point of railway and road network, and that way is strategically in an excellent place. In addition, the infrastructure is more developed compared to other areas in Russia. However, Moscow is expensive: warehousing and other costs are considerably higher than in any other logistic areas (Soiletsalo, 2011).
St. Petersburg and surrounding areas would also be interesting from a logistics point of view because the area is the second largest consumer market in Russia, importance as a hub of foreign trade and producer of terminal services is still growing, there are well-trained employees and international business is familiar with the region. In St. Petersburg and surrounding areas, there is a vast amount of warehousing facilities, but those are relatively old and small, and some are missing modern warehousing logistics. The city has decided to move terminal activities away from the city centre to alongside the ring road surrounding the city. St. Petersburg has also actively developed its harbours in order to be able to answer the needs of importing industry (Soiletsalo, 2011).
Russia's economic focus has started to move to another metropolis alongside with Moscow and St. Petersburg. The entire 13 metropolis in Russia are potential market areas and fiercely competed logistics business is less competitive in other cities than in Moscow and St. Petersburg. On the other hand, other areas might suffer from lack of qualified and a linguist personnel, old-fashioned business culture and of weak knowledge of international business (Soiletsalo, 2011).
If any foreign company is going to start providing logistics outsourcing services, or is in need of those in Russia, it would be advisable to benchmark with companies that already have several years of experience in the field and on the Russian business/logistics environment. Local expertise should be highly valued and planning the partner selection in advance is in critical role in order to succeed. One should give time to socialise with the possible partners and share similar values and approach.
Primary risks for a logistic company are still political and legislative. Legal protection of an investor has so far been weak. Among other things the legislation concerning land owning and long-time rent of plots is ambiguous and inconsistent (Soiletsalo, 2011).
Often Russia has been seen as especially difficult and challenging business environment, where one needs the knowledge of all Russian special characters in order to succeed. World Economic Forum, WEF publishes yearly "Global Competitiveness Report" that handles competitiveness of different countries and factors that effect on competitively. Figure 2 states the factors that are evaluated as the most problematic for doing business in Russia (the respondents were Russian business executives).
Foreign currency regulations Poor public health Gavenment instability/coups Policy instability Restrictive labor regulations Poor work ethic in national labor force Insufficient capacity to Innovate Crime and theft Inadequately supply of infrastructure Inadequately educated workforce Inflation Access to financing Inefficient goverrnment bureaucracy Tax regulations Tax rates Corruption
0.8 0.9 ■ 1.6 " 1.8 2.3
6.6 ■ 7.1
9.2 9.8
10.7
13
19.1
10
15
20
25
Fig. 2. The most problematic factors for doing business in Russia 2012.
Source: Schwab (2014).
In addition to all previously mentioned, according to Finpro (2010), risks that affect business in Russia are finance crisis and its negative effects, incomplete development of bank sector and financial system and negative population development.
5 Conclusions
When starting this research paper, some scientific articles about international logistics and supply chain management were read in order to understand the field and get some theory background for the studies. It must be said though that finding actual information and researches of 3PL markets/outsourcing logistics in Russia was quite hard without Russian language skills. Market evaluations (in English) of different consulting firms are available, but of course at high price. The Russian government sees the transportation and logistics industry as one of the top priorities of the economy and is willing to use public-private partnership (PPP) tools actively to develop infrastructure projects. The government has introduced a law on concessions and has established a special investment fund to finance infrastructure projects in order to help facilitate PPP activity. By securing private investment toll roads, is planned to be build and as a means of accessing modern technology and expertise along financial resources government is also aiming to attract foreign players (PricewaterhouseCoopers, 2010.)
Supply chains are changing fast, and logistics providers are forced to improve and broaden their services to keep up with the completion. Russian market sets enormous challenges for logistics companies. The amount of orders is significant and margins relatively small due to harsh competition. Additionally, the infrastructure in Russia sets up immense challenges. There is no
comprehensive nationwide transportation network available which makes commissions sometimes difficult, occasionally even impossible. DHL Global Forwarding has recently informed that it has formed partnership to develop rail forwarding services on the China-Europe route with the soon be incorporated United Transport and Logistics Company (UTLC). UTLC will operate as an integrated provider of logistics and container rail transportation services between Europe and China. In order to develop rail forwarding on the China-Europe route the company is going to answer to the need of frequent, fast and reliable services in terms of both delivery times and pricing. DHL is going to provide 3PL and door-to-door delivery in a "one-stop, one price service" in regular rail forwarding services between China and Europe of a container delivery time of three weeks door-to-door. UTLC will be responsible for operating station-to-station rail service, including procurement of the rolling stock, and all related services on the route as well as pricing (Transportweekly, 2014.)
In future, Russia is presumably going to benefit more from its location between Europe and Asia, but before it is going to be noted as an important transport corridor between two continents railways and roads need to be developed further in order to ensure rapid and cost-effective transportation. When the infrastructure gets better, it opens up new possibilities for Russian and international 3PL service providers in Russian market.
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