The Hindu Business Line : Time to get logistics on the move

To close the logistics gap, policymakers should look to reforms in the market for logistics services and reduce co-ordination failures. An initiative in this direction would call for a more integrated, comprehensive approach to reforms all along the supply chain

Freight forwarders and express carriers are at the heart of the present wave of globalisation.

Raghu Dayal

As the country bemoans the inadequacy of infrastructure and its inefficiency impairing its competitiveness, a World Bank survey, ‘Connecting to compete: Trade logistics in the global economy, 2007,’ reinforces the clamour for India’s logistics framework to be urgently revamped.

‘Connecting to Compete’ has for the first time produced the Logistics Performance Index (LPI) to help countries develop a reform programme to enhance competitiveness. The LPI is built on information from a Web-based questionnaire completed by more than 800 logistics professionals worldwide, each respondent rating performance in seven areas:

Efficiency of the clearance process by Customs and other border agencies;

Quality of transport and information technology infrastructure for logistics;

Ease and affordability of arranging international shipments;

Competence of the local logistics industry;

Ability to track and trace international shipments;

Domestic logistics costs; and

Timeliness of shipments in reaching destination.

The LPI and its indicators are based on a numerical scale, from 1 (worst) to 5 (best). Based on a 1 to 5 scale (lowest to highest performance), it aggregates more than 5,000 country evaluations by professionals trading with the country on various dimensions of performance. The top 30 countries are mostly developed economies with which some of the Third World economies keep company, viz., Hong Kong, Taiwan, South Korea, Malaysia and China. In fact, Singapore ranks right at the top with a score of 4.19 while, with a score of 3.07, India ranks 39th. Countries with the top LPI ranking are major global transport and logistics hubs (Singapore) or the base for a strong logistics service industry (Switzerland).

At the other extreme are low-income countries, some of them landlocked and geographically isolated, or countries afflicted by conflict or severe governance problems. There are significant differences among developing countries at similar incomes, e.g., China — a middle income country — ranks 30th among 150, whereas countries in higher income groups, such as oil producers, perform below their potential.

For developing countries, where trade has been an important factor in accelerating growth, logistics performance is also significantly better than in other countries at similar incomes. Examples include South Africa (24), Malaysia (27), Chile (32), and Turkey (34) among the upper middle income countries; China (30) and Thailand (31) among the lower middle income; and India (39) and Vietnam (53) among the low income category.

Critical factor

Trade logistics in the global economy is critical for developing countries to harness trade and reap the benefits of globalisation. The LPI and its indicators point to significant differences in performance across countries and regions. Country performance is largely influenced by the weakest link in the supply chain: poor performance in just one or two areas can have serious repercussions on overall competitiveness.

Logistics performance is more and more determined by the availability of quality, competitive private services — such as trucking, customs brokering, and warehousing. This demands a more integrated, comprehensive approach to reforms all along the supply chain. Improving logistics requires the capacity to move toward the virtuous circle —connecting services, infrastructure investments, and streamlined administrative processes.

The survey emphasises reliability as the biggest concern of logistics professionals: suppliers to the same automobile manufacturer will carry seven days of inventory in Italy but 35 days in Morocco; some retailers in African countries maintain three months of inventories or more.

Firm-level competitiveness is extremely sensitive to the quality of the logistics environment in which it operates. Firms bear the direct costs associated with moving goods, such as freight costs, port and handling charges, procedural fees, agent fees, and side payments.

They also absorb the induced costs associated with hedging for the lack of predictability and reliability of the supply chain. They may need to carry higher inventories of supplies or finished products, or switch to more expensive modes of transportation to be sure to meet delivery schedules.

Higher overall import costs are observed in low logistics performers. The LPI and its indicators suggest that policymakers need to expand traditional facilitation measures focused on trade-related infrastructure and Customs information technology, and pursue improvements in the markets for logistics services.

Poor integration among the agencies involved in border processes neutralises the benefit of a Customs modernisation programme. In this highly competitive world, the quality of logistics can have a major bearing on a firm’s decisions about which country to locate in, which suppliers to buy from, and which consumer markets to enter.

Expanded scope

Of late, the rise of express carriers and third-party logistics providers has expanded the scope of services available to traders. Freight forwarders and express carriers are at the heart of the present wave of globalisation: they facilitate an ever more demanding system that connects firms, suppliers, and consumers on what The Economist characterises as “the physical Internet.”

The survey combines qualitative and quantitative assessments of the domestic logistics environment, institutions, and performance of domestic supply chains (costs, delays) by international professionals located in the countries evaluated. These differences reflect the disparities between developed and emerging economies (such as Singapore, which ranks first) and other developing countries, especially the least-developed or landlocked countries (Afghanistan ranks last). Countries at the bottom of the LPI ranking are found to be typically trapped in a vicious circle of overregulation, poor quality services, and underinvestment. The survey recommends that policymakers should look beyond the traditional “facilitation agenda”.

To close the logistics gap, they should look to reforms in the markets for logistics services and reduce coordination failures. An initiative in this direction would call for a more integrated, comprehensive approach to reforms all along the supply chain. The LPI and its indicators may help countries break out of the vicious circle of “logistics unfriendliness”.

A comprehensive reach of the survey distinguishes it from some of the familiar exercises which are by now well known. For example, for trade activities, ‘Doing Business’ focuses on red tape obstacles to the movement of goods across borders and the ease of export and import for small and medium-size enterprises.

Composite index

As an illustration, it looks at the number of documents and signatures for imports and exports. The Global Competitiveness Index 2006–2007 (GCI), produced by World Economic Forum, is a composite index based on macro and micro data as well as interviews with key business and societal stakeholders featuring the 12 pillars of competitiveness.

The LPI claims to have used a broader approach to supply-chain performance to measure some of the critical factors of trade logistics performance, including the quality of infrastructure and logistics services, the security of property, the transparency of government procedures, macroeconomic conditions, and the underlying strength of institutions. Additionally, the LPI provides a global benchmark of logistics efficiency and service quality not treated specifically in the GCI or in Doing Business.

(The author is a former Managing Director, Concor.)

More Stories on : Infrastructure | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Going global

The pompous Ps

Development over two centuries

Time to get logistics on the move

Dimming the Red Lights of Den Wallen

Of good roads and HR challenges

Boost farm output to check inflation

Mess of our making