LOGISTICS FOR COMPETITIVENESS: IMPACT AND AGENDA

Jose Luis GuaschWorld Bank and

Economics Professor, University of California atSan Diego

Mexico City, Mexico, July 2010

Logistics and Competitiveness?Why?Logistics are one of the five key pillars of

competitiveness

Components of Competitiveness Access to Markets and Trade Policy

Tariff System Free Trade Treaties

Productive/Exportable Supply Quality and Standards Human Capital Innovation; Knowledge and Technology Transfer Value Chains and Clusters

Logistics and Facilitating Trade Hardware: Infrastructure Software: Associated Services and Trade Procedures

Inclusion / Production of SMEs: Knowledge Transfer Coordination CITEs

Investment and Business Climate

Institutions: Competitiveness Council, Agency for Facilitation of Exports, Quality and Innovation

Context I’m a SME, and I want to export. I’ve done my homework: with my market and client identified, I’ve adapted the

appropriate production technology, and my production costs are very competitive.

Now, I need to get my product to my client:

Evaluation of export costs? Through which point can I get my product out? Permits, certificates of origin, quality and phytosanitation? Packaging? Product consolidation? Shipping scale? Bill of landing? Cold chain? Trucking service, timelines? Insurance? Customs agent? Inspections? Export financing? Inventories?

Multimodal Operator? How important is all of this? Will it impact my productivity?

How can Logistics Costs be measured?

Macro approachLogistics costs as a % of GDP

Micro approachLogistics performance based on firms´ surveys. Costs as a % of product value

PerceptionRecent Logistics Perception Index

Based on national accounts

Logistics costs as a % of GDP

Demands some assumptions

Quick and easy: Provides overall results

Example: Guasch and Kogan (2002)

Alternative approaches (Michigan State Univ)

Based on firms surveys Logistics costs as a %

of sales value Other logistics

performance indicators Needs large samples for

robustness Example: Peru (Guasch

1997), Argentina (1999), LALC Observatory

Corridor approach (USAid’s Fast Path)

New exercise: World Bank, GFP and Turku

Perception-subjective- from pooled information provided by freight forwarders

Allows for a unique indicator, which can be correlated to others (WEF, WB, etc.)

Other hard data also collected

“The logistics of international shipments is a complex combination of services and procedures involving many public and private operations and it does not lend itself easily to measurement.”

“There is no statistical indicator that proxies the performance of the entire supply chain, or even a major part of it.”

Source: Measuring Global Connections - Draft

A

B

Example of Structure of Logistics Costs: On the average transport costs are between 30% and 35% of total logistics costs.

1/ 36 interviewees responded to the question.

Source: Survey with companies using cargo transport services, 2000 – Consultation Support

Warehousing19.0%

Inventories (and financial costs)

18.7%

Transport: roads and/or railways14.0%

Transport: port-related

17.8%

Licenses and procedures

10.1%

Administrative costs and losses

20.5%

Transport Cost = 31.8%

AVERAGE STRUCTURE OF LOGISTIC COSTS 1/

DESCRIPTION OF COSTS• Procedures

- Customs, phytosanitation if applicable, etc.

• Administrative costs

- Logistics overhead - Insurance- Security - Spoilage and losses

• Warehousing

- Costs of warehouses used- Costs of deterioration and/or losses generated

in warehouses used

• Inventories (financial costs)

- Costs of maintaining stock- Costs of merchandise in transit

• Transport cost

- Freight- Cost of deterioration and/or losses generated

during transport

The structure and composition of logistics costs vary according to type of product. For mining products, the costs of warehousing and inventories represent over 45% of logistics costs. In the case of agricultural products, transport is the main component, with 36% of the total, and for seafood products, warehousing represents 33% of total costs. For textile products, transport costs represent 35% of the total, and inventories, 24%.

Source: Survey with companies using cargo transport services, 2000 -- Consultation Support.

Warehousing28%

27%

5%

12%

Procedures9%

19%Administrative costs

Inventories (financial costs)

Transport roads and/or railwaysTransport:

Port-related

MINING PRODUCTS

SEAFOOD PRODUCTS

AGROINDUSTRY PRODUCTSWarehousing

12%

17%

16%20%

Procedures6%

29%Administrative costs

Inventories (financial costs)

Warehousing33%

12%

12%

14%

Procedures12%

17%Administrative costs

Inventories (financial costs)

Warehousing19%

16%

9%

Procedures9%

23%

24%

Administrative costs

Inventories (financial costs)

TEXTILE PRODUCTS

Transport: roads and/or railwaysTransport:Port-related

Transport: roads and/or railways

Transport:Port-related

Transport: roads and/or railways

Transport:Port-related

Logistics Costs in Latin America

On the average, 24% of product’s value

Impact of Logistics on Competitiveness

Reduces Competitiveness/Productivity: GeneratingHigh transport costsDelays in time-financial cost High levels (costs) of inventoriesHigh percentages of deteriorationIncreases in freight-connectivity Eliminates development of new products and

new exports

Elements of Logistics Distance to destination Inventories

Times Each day is equivalent to 0.8 tariff (Hummels 2001). Each day is equivalent to 1 percent of trade or 70 km,

Djankov, Freund and Pham (2006). Freight

Eliminating market power of shipping companies would increase trade by 5-15% (Hummels, Lugovskyy and Skiba, ).

Insufficient Infrastructure Reduces Competitiveness: translating into high loss rates, high logistics costs,

high inventory levels, 2008

0

5

10

15

20

25

30

Losses to markets.Proportion of goods not

reaching markets (primarysector)

Logistics cost as aproportion of value of

products

Inventory levels

Pro

duct

ivity

gai

n (p

erce

nt)

OECDLAC

Source: Guasch (2008)

Latin America: Logistics costs are especially high for SMEs

Source: Centro Logístico de Latinoamerica, Bogota, Colombia. Benchmarking 2007: Estado de la Logística en America Latina Anexo, María Rey, Logistic Summit 2008.

29.4

11.36 10.63 6.9

12.7

6.28 7.31 11

051015202530354045

Less than US$ 5 M US$ 5 M to US$ 50 M US$ 50 M to US$ 500 M More than US$ 500 MInventory Management & Warehousing Transport & Distribution

42

18 18 18

Latin America: Companies’ inventory levels in relation to those in the United States (all industries)

Raw Material Inventory Levels: Ratio to U.S. Level by Industry (average of all available data for 2000s)

Chile Venezuela Peru Bolivia Colombia Ecuador Mexico Brazil

Mean 2.17 2.82 4.19 4.20 2.22 5.06 1.58 2.98

Minimum 0.00 0.30 0.10 0.11 0.52 0.86 0.42 0.80

1st quarter 0.36 1.87 1.25 1.39 1.45 2.55 1.06 1.60

Median 1.28 2.61 2.30 2.90 1.80 3.80 1.36 2.00

3rd quarter 2.66 3.12 3.90 4.49 2.52 5.64 2.06 3.10

Maximum 68.92 7.21 31.1 34.97 13.59 20.61 3.26 7.10

Source: Guasch and Kogan, 2001

PRW (Public Refrigerated Warehouse) Capacity, 2008

Source: IARW

Relation between Freight Rates and Connectivity, 2006

Source: Wilmsmeier (2008)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Frei

ght r

ate

inde

x

Connectivity Index

Furthermore, a study of maritime transport costs in the Caribbean Basin suggests that freight rates are also sensitive to and can be reduced by increases in infrastructure endowment and port efficiency.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

frei

ght r

ate

inde

x

Port Infrastructure Index

Freight rate index

Expon. (Freight rate index)

Relationship between Port Infrastructure Endowment and Maritime Freight Rates in the Caribbean

Source: Wilmsmeier (2008)

Price Decomposition

10%

Producer Price

LandTransport

Ocean Transport+ Port CR

Port Miami

Wholesale Consolidated

Cost

Other Costs

OceanTransport + Port SL

Duties

LandTransport & Handling

Land Transport+ Storage

Retail Profits+ Other Costs

8%

35%

17%

15%

15%

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Farm Gate(CR)

CR FAS Ocean toMiami

Miami Port MiamiWarehouse

Miami FOBPrice

Ocean to St.Lucia

St. Lucia Port Wholesale Distribution Retail Price FinalDecomposition

Costa Rica (CR) ------------> --------------> St. Lucia (SL)

US

$/lb

Total Transport -Land Total Transport - Ocean+Port Wholesale -profits, logistics and other costs

Import Duties Retail - profits, logistics and other costs

High-Value Food Imports: Supply Chain Analysis of Pineapples Imported into Saint Lucia

… However, an analysis of productive chains for high-value food imports in Latin America and the Caribbean indicates that the costs associated with logistics processes—in this case, maritime transport—frequently represent the greatest portion of products’ final prices…

Source: Authors, freight forwarder and shipper interviews, and OECS Backward Linkages Study (2008).

At the same time, essential food products with a low value-to-weight relation are not exempt from high transport and logistics costs. In this case, however, the costs of domestic land transport is relatively more significant.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Wheat

Rail, Canada

Port, VancouverInsurance

Ocean Port Manta

Land to MillStorage

Extr. Losses

MillingPacking Other

Mill's Profit

Price in Huaquillas

Price in Tulcan

Price in Ambato

Land to Quito

Farmgate, SaskatchewanCanada

Ecuador Mill Customer

US$

cen

ts p

er k

g of

Whe

at F

lour

Wheat

MillingLosses &

Profits Costs

55%

17%

28%

Transport &Logistics

60%

17%

23%

CanadaT&L

FOBT&L

EcuadorT&L

Source: Authors’ calculations, data from Manifiestos, Ecuadorean millers, interviews and Winnipeg Board of Wheat.

Cost Contributions to the Average Price of Wheat Flour Sold in Quito and other Ecuadorean Cities

As demonstrated by the two Intra-Regional Food Imports distribution chains, domestic logistics costs represent as much as 25% of the total costs of domestic shipping, inventory and loadout, as a consequence of inefficiencies, losses, bribery and time delays.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Soybean - Paraguay to Brazil by truck Chilled Meat - Paraguay to Chile by truck

over costs from inefficiencies: Payments

over costs from inefficiencies: Customs

over costs from inefficiencies: Road transport

over costs from inefficiencies: Pre-shipment

Payments

Customs

Road transport

Pre-shipment

Pre-shipment

Road Transport

Customs

Payments

Over costs

Roads Customs

Pre-shpmt

Customs Bribes

Soybeans

To Brazil from Paraguay

by Truck

Chilled Meats

To Chile from Paraguay

by Truck

Logistics costs for importing soybeans from Paraguay to Brazil, and chilled meats from Paraguay to Chile: “Over Costs” Due to Inefficiencies, Losses, Time Delays and Bribery

Impact of a 10 percentage point reduction in logistics costs

Sector Increase in Demand

Increase in Employment

Agro-Industry

9% 5%

Wood and Furniture

10% 12%

Textiles 6% 7%Leather and Footwear

12% 10%

Mining 7% 2%

347.9

469.7

0

100

200

300

400

500

Without roads With roads

Ann

ual E

arni

ngs

per C

apita

Increase in household earnings from improving access to markets, by rebuilding rural roads

(in US$ annually)

Source: INEI 2004-2006

What we must attack: Infrastructure Platform and Related Services

HardwareInfrastructure

SoftwareAssociated services

HardwareExport Corridors: highways, railway,

riversPorts and access to ports-connectivityRegional exit points: ports and airportsNetworks of logistics terminalsExport and/or productive special zonesBorder crossings

Software Service Centers Network Ventanilla Unica Inspections: Dedicated-perishable lines; priority-by

profile lines Customs Warehousing Cold chain Multimodal Law and third party operators Insurance Single bill of landing Transport services: Trucks, railway Quality and phytosanitation certificates Digitalization of Certificates of Origin Exporta Facil Coordination-Scale Institutionality: Logistics Council: Public Private

… and we must not forget to support the smaller ones!

Exporta Facil Export by mail From any part of the country Avoids all intermediation and logistics costs Filing one page through internet Limits in value, up to 5,000 US$ Limits in size, 30 to 50 Kilos But unlimited sends Insurance available Extraordinary impact on micro and SMEs

2007 2008 2009 -

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

0

1,000

2,000

3,000

4,000

5,000

6,000Va

lor F

OB

Exp

orta

cion

es

# Ex

porta

cion

es

Performance Easy Export

RESULTS OF EXPORTA FACIL IN PERU

Source: Serpost

Developed by: PROMPERU

2,000 new exporters

40% of provinces60% of the greater Lima area

20 new countries