Creating Global Value Through Efficient Trade

Logistics

Warren H. Hausman

Hau L. Lee

Uma Subramanian

Overview

• Motivation for logistics indicators research

• Survey instrument for logistics indicators

• Assessment of logistics indicators in different countries

• Logistics indicators as determinants of bilateral trade

• Supply chain-based logistics index

The Growing Global Economy

• Global trade grew 10.2% in 2004; constituting 10% of world’s GDP

• Global economy grew 5% in 2004

• Foreign exchange transactions:$10 billion a day in 1970;$10 billion a second today

• World trade growth has exceeded output growth rate every year since 1950

• 1973-1999: World trade grew at an annual rate nearly three times higher than world GDP

• Trade to GDP Ratio:– U.S.: tripled since 1970– World: doubled since 1970

Source: Gene Long, UPS, 2005

Selling and Sourcing Trends

Revenue Generated Outside Home Market

Sourcing of Raw, Semi-finished and Finished

Goods Outside Home Market

27%

35%

42%

FY02

FY05

FY08

22%

31%

38%

FY02

FY05

FY08

Source: Accenture Global Operations Survey, 2005

Growing Global Market

• Growing global middle class:– 95% of consumers live outside of U.S., 60% in Asia– 52 developing nations with population of

1.5 billion reaching middle class– China middle class at 300 million, with 1% annual growth– India tripled middle class since 1985

• Emergence of BRICs (Brazil, Russia, India, China):– Today their economies constitute 15% of G6.– Economies will be half of G6 by 2025– Economies will surpass G6 in less than 40 years

What Determines Bilateral Trade?

What Determines Bilateral Trade?

Propensity to Import

Propensity to Export

Shipping Cost & Time

Logistics Frictions

Institution QualityInfrastructure

Institution QualityInfrastructure

Past Studies on Bilateral Trade

GDP GDPDistance

Institution QualityInfrastructure

Institution QualityInfrastructure

Our Focus

GDP GDPDistance

Institutional QualityInfrastructure

Institutional QualityInfrastructureLogistics

Frictions

Research Opportunities

• Institutional quality and infrastructure variables have been based on subjective indices or expert assessments.

• Quantifiable and measurable logistics performance indicators have not been used.

• Variables used are not operational, i.e., not directly actionable.

• Best results without using country-specific dummy variables explain 66% of variability in bilateral trade.

Objectives of Research

• Determine the significance of logistics performance in influencing bilateral trade through the use of measurable and quantifiable logistics indicators.

• Perform a critical assessment of logistics performance of countries globally.

• Develop supply-chain logistics index to guide resource allocation and deployment for improving logistics efficiency.

Survey Instrument

2005 Study

• Textiles• Apparel• Coffee, tea,

cocoa, spices

80Countries

Questionnaire Survey

(17 pages)Answers from

Panalpina Experts

Focus on containerized

imports & exports

Follow-up Phone Checks by World Bank

Examples of Logistics Indicators

• Trade procedure

• Customs clearance

• Vessel turnaround

• CSI times• Waiting time

for berth• Container

dwell time

Time

• Port & terminal charges

• Document Processing

• CSI costs• Trade

procedure costs

• Custom clearance incentives

• Inland freight

Cost

• No. of documents per transaction

• % of containers inspected

• Level of inspection

• No. of signatures for customs clearance

Complexity

• No. of containers unloaded per berth hour

• Port shutdown days

• Inland transport speed

• Frequency of vessel calls at port

Efficiency

14

2833

46

36

49

37

49

41

53

4448

58

69

020

4060

Days

OECD EAP LAC MENA SAS ECA AFR

Source: World Bank Global Logistics Indicators Survey, 2005

Average Time for a Typical Import Transaction

Germany

United StatesJapan

New ZealandDominican RepublicPhilippines

FranceChileTurkeySenegal

ArgentinaChinaNepal Nicaragua

Nigeria

ZimbabweMongolia

KazakhstanNiger

Burundi Kyrgyz Republic

050

100

150

Day

s fo

r an

Impo

rt T

rans

actio

n

10 20 30 40GDP per capita (thousands of dollars)

Trade Transactions Processing Time and GDP

Source: World Bank Global Logistics Indicators Survey, 2005

Total Cost for a Typical Import Transaction

501

506

550

700

821

841

1242

1335

1409

1428

1631

1800

2029

22484616 5787

0 1000 2000 3000 4000 5000 6000

Thailand

Norway

Sweden

Spain

Ireland

Malaysia

South Africa

Brazil

India

United States

Korea

China

Kazakhstan

Algeria

Zambia

Cameroon

Source: World Bank Global Logistics Indicators Survey, 2005

US $

Cost for a Typical Import Transaction

983

1120

1130

1277

1370

1677

1983

0 500 1,000 1,500 2,000

US DollarsOECD

MENA

EAP

SAS

ECA

LAC

AFR

73

74

77

104

286

438

0 100 200 300 400

Percent (Cost/Per Capita GDP)

OECD

LAC

MENA

ECA

EAP

SAS

AFR

Source: World Bank Global Logistics Indicators Survey, 2005.

23333

555

677

815

1721

3940

42

0 10 20 30 40

Number of SignaturesSingapore

Finland

France

Indonesia

Korea

Ireland

Italy

United States

Venezuela

China

Colombia

Senegal

Bangladesh

Lao PDR

Mongolia

Nigeria

Azerbaijan

Congo, Dem.Rep.

Number of Signatures for Typical Export Transaction

Source: World Bank Global Logistics Indicators Survey, 2005

42

9

5

13

8

29

16

010

2030

Num

ber

of S

igna

ture

s fo

r Im

port

s

High income Upper middle income Lower middle income Low income

Process Inefficiencies and Wealth

Total For Customs

Source: World Bank Global Logistics Indicators Survey, 2005

Percentage of Import Containers Inspected

0

20

40

60

80

100

Mal

aysi

a

Germ

any

USAJa

pan

South A

frica

Mex

ico

Jord

an

Bangla

desh

Colum

bia

Domin

ican

Rep

.

Turkey

Pakis

tan

Sri Lan

ka

Niger

ia

Source: World Bank Global Logistics Indicators Survey, 2005

11

29

44

69

020

4060

Per

cent

of I

mpo

rt

Con

tain

ers

Insp

ecte

d

High income

Upper middle income

Lower middle income

Low income

Logistics Impediments and Income

Source: World Bank Global Logistics Indicators Survey, 2005

Augmented Gravity Model

Basic Attraction

Logistics Indicators

Institutional Quality

• Exporter GDP• Importer GDP• Distance

Bilateral Trade• Time

• Cost• Variability

• Exporter’s corruption index• Importer’s corruption index• Regional trade agreement dummy

Critical Global Logistics Indicators

Time

Cost

Variability

• Exporter’s average time for all procedures• Importer’s average time for all procedures

• Importer’s total costs for import-related procedures

• Exporter’s Max Time – Average Time for all procedures

• Importer’s Max Time – Average time for all procedures

Augmented Gravity Model Results

Log GDP exporterLog GDP importer

Log distanceLog Exporter’s Avg Time for ProceduresLog Importer’s Avg Time for Procedures

Log of Importer’s Total Cost for ProceduresLog Exporter’s Max Time – Avg TimeLog Importer’s Max Time – Avg TimeExporter’s Corruption Perception IndexImporter’s Corruption Perception Index

Regional Trade Agreement Dummy

Adjusted R-SquaredObservationsF-Statistics

1.2620.940-1.379-0.453-0.072-0.294-0.2640.0330.7490.5930.314

Coefficient

74.3752.63-38.09-6.53-0.94-6.9

-4.780.428.996.184.33

t-Statistic

0.7105149

1263.3

Observations

• Measurable and quantifiable logistics indicators improve explanatory power of gravity model for bilateral trade.

• Logistics indicators results show efficient logistics in time and cost can contribute to increased trade.

• Variability matters – higher variability in processing time can be a deterrent to bilateral trade.

Supply-Chain Based Logistics Index

• A single metric to evaluate and measure logistics efficiencies

• Weights of each variable in the Logistics Index show relative benefits

• Use weights to guide resource allocation and deployment of logistics improvements

• A single measure enables quick and easy benchmarking

Supply Chain-Based Logistics Index

Distance

Total Cost of Processing

Total Time (Freight + Ports)

Shipping Cost

Trade-Related Costs

Inventory cost(In-Transit)

Total Landed

CostCoeff of Var of Total Time

Inventory cost(Safety Stock)

Product Cost

Three-Stage Logistic Index Estimation• Log Exporter GDP• Log Importer GDP• Exporter’s Corruption Perception Index• Importer’s Corruption Perception Index• Regional Trade Agreement Dummy

Stage 1

Stage 2

Bilateral Trade

• Stage 1 variables plus• Logistics IndexStage 3

Bilateral Trade

Residual from Stage 1

• Log Distance• Total Total Processing Cost• Total Time• Coeff of Variation of Total Time

LogisticsIndex

Stage 1 Logistics Index Model Results

Log GDP exporter

Log GDP importer

Exporter’s Corruption Perception Index

Importer’s Corruption Perception Index

Regional Trade Agreement Dummy

Adjusted R-Squared

Observations

F-Statistic

1.200

0.888

0.298

0.252

1.005

Coefficient

61.67

46.04

24.09

17.85

11.5

t-Statistic

0.620

5149

1710.0

Stage 2 Logistics Index Model Results

Log Distance

Log of Total Processing Costs

Total Time (Fright + Ports)

Coeff of Var for Total Time

Adjusted R-Squared

Observations

F-Statistic

-1.282

-0.129

-0.009

-0.874

Coefficient

-34.19

-3.64

-4.9

-4.18

t-Statistic

0.221

5149

376.4

Stage 3 Logistics Index Model Results

Log GDP exporter

Log GDP importer

Exporter’s Corruption Perception Index

Importer’s Corruption Perception Index

Regional Trade Agreement Dummy

Logistics Index

Adjusted R-Squared

Observations

F-Statistic

1.278

0.921

0.244

0.179

0.345

1.077

Coefficient

75.45

55.06

21.87

13.73

4.85

40.37

t-Statistic

0.710

5149

2293.5

Model Comparisons

Number of Variables

Adjusted R-Squared

F-Statistic

11

0.710

1263.3

6

0.710

2293.5

Augmented Gravity Model

Logistics Index Model

Logistics Index Observations

• It is possible to derive a single logistics index that captures all the explanatory power of all the logistics indicators.

• The logistics index is a significant determinant of bilateral trade.

• The logistics index is derived from distance, time, cost and variability measures.

Summary• Logistics indicators are a significant determinant

of bilateral trade.• A single Logistics Index has equal explanatory

power to the set of logistics indicators.• Countries and enterprises should collaborate to

improve logistics performance and reduce logistics friction in order to foster trade.

• The Logistics Index can be used to guide resource allocation and deployment for such improvement projects.