Logistics Performance Indicator
In a highly competitive world, the quality of logistics can determine where companies choose to locate, which suppliers they use and which consumer markets they enter. The World Bank has developed an index to benchmark countries on logistics performance. The Logistics Performance Indicator (LPI) suggests that customs reforms, better border management, improved infrastructure and less transport regulation have a significant impact on logistics. The LPI seems to be a strong indicator of trade growth.
The LPI is based on surveys of more than 5,000 companies which cover 150 countries. The LPI includes seven performance areas:
- Efficiency of the clearance process by customs and other border agencies
- Quality of transport and information technology infrastructure
- Ease and affordability of arranging international shipments
- Competence of the local logistics industry
- Ability to track and trace international shipments
- Domestic logistics costs
- Timeliness of shipments in reaching destination
Countries that top the LPI rankings are major global transport and logistics hubs, such as Singapore, or the base of a strong logistics service industry, such as Switzerland. They tend to benefit from economies of scale and generate innovative technologies. The lowest rankings tend to be geographically isolated or suffer from poor governance. Landlocked countries of Africa and Central Asia tend to face severe constraints. They tend to face geographic disadvantages that cause high costs and delays, limited access to competitive markets for logistics services and are dependent on the performance of transit countries.
There are significant differences among countries of the same income level. Countries where trade has been an important growth factor tend to have better logistics performance than other countries with similar income levels. Oil exporting countries often have low LPIs, while countries with export-oriented manufacturing tend to have stronger logistics sectors led by demand from manufacturers. Malawi and Zambia, while land locked, benefit from a fairly efficient logistics industry and being connected to the South African gateway. Landlocked countries in West and Central Africa, by contrast, suffer from a fragmented and over regulated services industry.
Good logistics performers tend to benefit more from globalization. They attract more trade and FDI which leads to a greater diffusion of innovation and new technologies. Increased trade can put pressure on government to streamline regulatory requirements/procedures and for the private sector to reform outmoded systems. Trade provides a market for improved logistics services. Poor logistic systems can impede the spread of knowledge and know-how and slow the growth of productivity.
The LPI queried factors affecting logistics performance. In modern logistics, moving information is as critical as the movement of goods. The dependability of information flows is a critical factor in building a strong logistics provider network and to modernization of the processing of customs and other border agencies. Timeliness is used in the LPI as a measure of consistent service delivery and predictability in the import system.
Reliability and predictability can be more important than cost. Firms have to bear the direct costs of moving goods and the induced costs of hedging for late delivery. For example,
- Suppliers to the same auto manufacturer allow 7 days for delivery from Italy and 35 days from Morocco.
- Some retailers in Africa allow 3 month inventories to insure products are in stock
- Bangladesh has to ship 10% of garments by air to insure delivery on contracted schedule
Firms in the lowest performing countries face a double problem, high transport costs and high induced costs of carrying extra inventory, paying for more expensive transport to insure delivery, informal payments to facilitate processing of shipments, etc. In using the LPI, it is necessary to look at each indicator individually. Just one or two low ranks, can send buyers to other regions. The evaluation cannot really be done by averaging and countries using the LPI to benchmark progress should target the specific problem areas first.
In conclusion, countries need to not only target traditional areas of trade facilitation, but also create a conducive environment for logistics service providers. They need to focus not only on costs and delays, but also on predictability and reliability of shipments. To achieve results, it is important to have good coordination among government agencies and to encourage modernization of the private sector. Where officials benefit from informal payments, they are likely to work for the status quo. To achieve results, it is important to build a wide constituency for reform. The LPI provides data to compare one's own systems with others in the region, globally and by income category. Countries can benchmark their logistics performance and measure progress over time.