LOGISTICS FOR COMPETITIVENESS: IMPACT AND AGENDA Jose Luis Guasch World Bank and Economics Professor, University of California at San 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 Productive/Exportable Supply Quality and Standards Human Capital Innovation; Knowledge and Technology Transfer Value Chains and Clusters Logistics and Facilitating Trade Tariff System Free Trade Treaties 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 approach Logistics costs as a % of GDP 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) Micro approach Logistics performance based on firms´ surveys. Costs as a % of product value 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) Perception Recent Logistics Perception Index New exercise: World Bank, GFP and Turku Perception-subjectivefrom 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. AVERAGE STRUCTURE OF LOGISTIC COSTS 1/ DESCRIPTION OF COSTS Administrative costs and losses 20.5% • Procedures - Customs, phytosanitation if applicable, etc. Warehousing 19.0% Licenses and procedures • Administrative costs Inventories (and financial costs) 10.1% 18.7% Transport: port-related 17.8% Transport: roads and/or railways 14.0% - 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 Transport Cost = 31.8% 1/ 36 interviewees responded to the question. Source: Survey with companies using cargo transport services, 2000 – Consultation Support - 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%. MINING PRODUCTS AGROINDUSTRY PRODUCTS Warehousing 28% Administrative costs 29% Administrative costs 19% Inventories (financial costs) 27% Procedures 9% Transport: Port-related 12% Procedures 6% Transport: Port-related Transport roads and/or railways 5% Administrative costs Warehousing 33% Warehousing 19% 23% Procedures 9% Transport: Port-related 14% 16% TEXTILE PRODUCTS Administrative costs Procedures 12% Transport: roads and/or railways 20% SEAFOOD PRODUCTS 17% Warehousing 12% Inventories (financial costs) 17% Inventories (financial costs) 12% Transport: roads and/or railways 12% Source: Survey with companies using cargo transport services, 2000 -- Consultation Support. Transport: Port-related 9% Inventories (financial costs) 24% Transport: roads and/or railways 16% Logistics Costs in Latin America On the average, 24% of product’s value Impact of Logistics on Competitiveness Reduces Competitiveness/Productivity: Generating High transport costs Delays in time-financial cost High levels (costs) of inventories High percentages of deterioration Increases 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 Productivity gain (percent) 30 OECD LAC 25 20 15 10 5 0 Losses to markets. Proportion of goods not reaching markets (primary sector) Logistics cost as a proportion of value of products Inventory levels Source: Guasch (2008) Latin America: Logistics costs are especially high for SMEs 45 42 40 35 12.7 30 25 18 20 15 29.4 18 6.28 7.31 11.36 10.63 18 11 10 5 6.9 0 Les s than US$ 5 M US$ 5 M to US$ 50 M US$ 50 M to US$ 500 M Invento ry Management &Wareho us ing Mo re than US$ 500 M Trans po rt &Dis tributio n Source: Centro Logístico de Latinoamerica, Bogota, Colombia. Benchmarking 2007: Estado de la Logística en America Latina Anexo, María Rey, Logistic Summit 2008. 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 Mean 2.17 2.82 4.19 4.20 2.22 Minimum 0.00 0.30 0.10 0.11 1st quarter 0.36 1.87 1.25 Median 1.28 2.61 3rd quarter 2.66 Maximum 68.92 Source: Guasch and Kogan, 2001 Colombia Ecuador Mexico Brazil 5.06 1.58 2.98 0.52 0.86 0.42 0.80 1.39 1.45 2.55 1.06 1.60 2.30 2.90 1.80 3.80 1.36 2.00 3.12 3.90 4.49 2.52 5.64 2.06 3.10 7.21 31.1 34.97 13.59 20.61 3.26 7.10 PRW (Public Refrigerated Warehouse) Capacity, 2008 Source: IARW Relation between Freight Rates and Connectivity, 2006 1 0.9 0.8 Freight rate index 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 0.1 0.2 0.3 0.4 0.5 Connectivity Index Source: Wilmsmeier (2008) 0.6 0.7 0.8 0.9 1 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. Relationship between Port Infrastructure Endowment and Maritime Freight Rates in the Caribbean 1 0.9 Freight rate index Expon. (Freight rate index) 0.8 freight rate index 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 0.1 0.2 0.3 0.4 0.5 0.6 Port Infrastructure Index Source: Wilmsmeier (2008) 0.7 0.8 0.9 1 … 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… High-Value Food Imports: Supply Chain Analysis of Pineapples Imported into Saint Lucia Price Decomposition 2 Retail Profits + Other Costs 1.8 Land Transport & Handling 1.6 Land Transport + Storage 15% Duties 1.4 1.2 US$/lb 15% Ocean Transport + Port SL 17% 1 0.8 Other Costs 0.6 0.4 0.2 Producer Price Land Transport Ocean Transport + Port CR Port Miami 35% Wholesale Consolidated Cost 8% 10% 0 Farm Gate (CR) CR FAS Costa Rica (CR) Ocean to Miami Miami Port Miami Miami FOB Ocean to St.St. Lucia Port Wholesale Warehouse Price Lucia ------------> Distribution Retail Price Final Decomposition --------------> St. Lucia (SL) Total Transport -Land Total Transport - Ocean+Port Import Duties Retail - profits, logistics and other costs Wholesale -profits, logistics and other costs Source: Authors, freight forwarder and shipper interviews, and OECS Backward Linkages Study (2008). At the same time, essential food products with a low value-to-weight relation are not exempt from high transport and logistics costs. In this case, however, the costs of domestic land transport is relatively more significant. Cost Contributions to the Average Price of Wheat Flour Sold in Quito and other Ecuadorean Cities 70.00 Price in Am bato Price in Tulcan 60.00 Land to Quito 50.00 Mill's Prof it Packing US$ cents per kg of Wheat Flour Price in Huaquillas Extr. Losses 40.00 Other 55% Milling Transport Logistics Storage Land to Mill Port Manta 30.00 Rail, Canada Ocean Port, Vancouv er Insurance 17% W heat 20.00 10.00 28% 0.00 Farm gate, Saskatchewan Canada Ecuador Mill Custom er Source: Authors’ calculations, data from Manifiestos, Ecuadorean millers, interviews and Winnipeg Board of Wheat. Milling Losses Prof its Co Wheat 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. 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 100% Bribes Customs 90% Roads 80% Customs Over costs Pre-shpmt 70% Payments over costs from inefficiencies: Payments over costs from inefficiencies: Customs over costs from inefficiencies: Road transport 60% over costs from inefficiencies: Pre-shipment Customs 50% Payments 40% Customs 30% Road transport Road Transport 20% Pre-shipment 10% Pre-shipment 0% Soybean - Paraguay to Brazil by truck Soybeans Chilled MeatChilled - ParaguayMeats to Chile by truck To Brazil from Paraguay To Chile from Paraguay by Truck by Truck Impact of a 10 percentage point reduction in logistics costs Sector AgroIndustry Wood and Furniture Textiles Leather and Footwear Mining Increase in Demand Increase in Employment 9% 5% 10% 12% 6% 12% 7% 10% 7% 2% Increase in household earnings from improving access to markets, by rebuilding rural roads (in US$ annually) 500 469.7 Annual Earnings per Capita 400 347.9 300 200 100 0 Source: INEI 2004-2006 Without roads With roads What we must attack: Infrastructure Platform and Related Services Hardware Infrastructure Software Associated services Hardware Export Corridors: highways, railway, rivers Ports and access to ports-connectivity Regional exit points: ports and airports Networks of logistics terminals Export and/or productive special zones Border 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 Performance Easy Export 2 000 000 6 000 1 800 000 Valor FOB Exportaciones 1 400 000 4 000 1 200 000 1 000 000 3 000 800 000 2 000 600 000 400 000 1 000 200 000 - 0 2007 2008 2009 # Exportaciones 5 000 1 600 000 RESULTS OF EXPORTA FACIL IN PERU 2,000 new exporters 40% of provinces 60% of the greater Lima area 20 new countries Source: Serpost Developed by: PROMPERU