The World Bank LPI (Logistics Performance Index) 2010 has just been released. This snapshot of selected performance indicators in nearly 130 countries demonstrates clearly the correlation between logistics performance and sustainable economic growth. This year, the analysis of this bi-annual Report has been expanded to include information on the time, cost and reliability of supply chains. Detailing several major advances since 2007 in places like Brasil, Columbia and Tunisia the report highlights clear potential for low and middle income countries to boost trade performance by 15% through faster, cheaper and more reliable trade logistics – if the analysis is acted upon. Here, we build from the LPI 2010 Report to explore potential to develop a Transformational Logistics perspective to sharpen the analysis of logistics relevant to the emerging and developing world.

The missing link?

 

 

History is written by the winners and, similarly, many Retail and Logistics textbooks are written from the perspective of developed economies and, as the LPI highlights, key segments of the global logistics industry are dominated by no more than 25 large corporations – especially in the maritime, port and air freight segments. This contrasts starkly with the fact that 85% of jobs in the USA and 65% in the EU are generated by small to medium sized companies and in the majority world – that is 75% of world population – few jobs are even formal or covered by regulatory and welfare schemes. Few workplaces are even covered by legal title and health and safety is a pipedream. Conventional Logistics analysis just does not grasp the essential asymmetrical (informal / formal) nature of global sourcing, value addition, distribution and points of purchase. We see Transformational Logistics (and retail) being a better way to describe reality in the emerging and developing world.

Retail and logistics in the emerging and developing countries is largely fragmented, unorganized and dependent on traditional outlets such as mom & pop stores with an average footprint of under 100 square feet. Modern style retailing accounts for no more than 15% of the market across the BRIC countries with the top 5 retailers in each only accounting for 9% of the market. This compares to 80% across the developed countries.

In India, an estimated 90% of warehousing space is of low quality with manual handling and basic equipment being the norm. Moving cargo by road – which accounts for an estimated 36% of logistics costs – is a similar story. The transport industry is highly fragmented and informal in nature with 74% of operators owning a single vehicle. This fragmentation and inefficiency is compounded by India’s tax system. To avoid multiple taxation, companies typically have warehousing operations in every state. The result is a large number of small warehouses across the country that lack the latest warehousing processes and technologies and don’t offer economies of scale. National highways form only 2% of India’s road network, but they handle more than 40% of road freight traffic – which is 36% of total freight in all modes. This naturally leads to severe congestion and, as the Last Mile video depicts, this is most acute closest to Ports.

However, a World Bank Report highlights that despite all too visible inefficiencies in road infrastructure and smaller and less powerful vehicles – Indian trucks travel at an average of 20 mph versus 60 mph in the developed world – India’s surface transport sector is one of the lowest in the world. India’s average costs per tonne kilometre at $0.019 to $0.027 compares to China at $0.04 to $0.06. Ironically – given the state of the roads – this is an argument against modernisation in much the same way as the traditional sector’s ability to beat modern retail at home delivery. An Indian friend of mine in Mumbai cautioned me on the growth of modern retail by pointing out that local street traders offered his family virtual room service and, didn’t even expect immediate payment!

End-to-end supply chains in places like India, Africa and South America are not smoothly linear and many start out in the fields and move slowly through several pairs of hands until they reach a modern format store via a fully racked and intelligent warehouse – sometimes. Logistics, just like Retail outlets themselves, is not a zero sum game with the organized taking over from the informal all along the line. This is unrealistic and, transforming developing world logistics will depend more on hybrid models combining what works in different regions and, with different partners.

Transformational Logistics (and retail) is based on a hybrid view of the world. This is not even a transitional stage – since many markets will never evolve into a fully functioning and stable modern state across the board. Traditional outlets will not disappear and many will benefit greatly from the cash-and-carry model – acting as a virtual regional distribution centre for mom-and-pop outlets to grow their business without the capital investment. For example, the German owned Metro chain have worked hard to create incentives for rural traders to bypass the mundis, or local markets, and visit their outlets. In Bangalore, this has resulted in a 20% drop in tomato prices and 10% for cauliflower. Because sales were only to registered traders the impact has been far greater. There has been greater standardisation on products such as fresh foods and, greater transparency on revenues – meaning more taxes and less exposure to the informal market.

The LPI can be used to characterize the relative status of each country, or region within, as follows:

Retail type: Characterised by:
Modern RetailWorld Bank LPI > … World class infrastructure and high tech end-to-end logistics capacity and capability enabling high level performance for Retail and specialist logistics operators.
Transformational RetailLPI Hybrid Asymetrical supply chains moving to more inclusive value networks to support sustainable growth strategies in all sectors. A hybrid traditional and modern retail model with the informal sector seen as an integral part of the logistics and retail landscape and not something to root out.
 

Traditional Retail

World Bank LPI < …

 High degree of fragmentation and low tech asset base. Informal players dominate in all agricultural and industrial sectors and throughout the end-to-end supply chains. Footloose multinationals outsourcing strategies access this low cost model through tier one suppliers. High risk strategy.

We have not specified the specific numerical thresholds for the above classification – more research is required – though the modern contingent seems to be the first 25 countries in the LPI sample seeing  Spain at 3.63 with the lowest LPI score of this group. Spain is 88% of the leading LPI performer, Germany. Here’s a comparison of the BRIC economies compiled from the Report.

World Bank Logistics Performance Index: 2010

World Bank LPI 2010 % highestperformer
Rank: Country: LPI Score Infra. Logistics 2007 2010
41 Brasil 3.20 3.10 3.30 54.9 70.6
94 Russia 2.61 2.38 2.51 51.6
47 India 3.12 2.91 3.16 64.9 67.9
27 China 3.49 3.54 3.49 72.8 79.9

 

The need for greater understanding of transformational realities is even more acute when we take account of the nature of supply chains worldwide. As Martin Christopher makes plain; supply chains, not companies compete and, the fact is that in a world increasingly dependent on outsourcing of non-core activities many companies are part of a complex eco-system of demand, supply and aggregation that draws from both informal and formal enterprise models. The emerging auto industry model will see far less vertical integration and more dependence on suppliers way beyond a primary tier. The informal economy is not going to fade away and, as long as it remains the need for clarity on the true nature of logistics in the global economy persists. After all, modern retail and modern logistics are not the promised land and, as green supply chain perspectives assume greater significance; manual distribution on adapted bamboo bikes will not be dismissed as a better yesterday. Modern and traditional; organised and disorganised are words that come from a binary perspective and, in an asymetrical world this view of logistics is not fit for purpose.

The Retail and Logistics sectors have played a major role in shaping the economies of the developed world. Now, as the LPI demonstrates, there are significant variations from top to bottom of the near 130 sample and such measurement can catalyse change. For those obsessed by unit costs, the LPI is a timely reminder that any advantage on production costs will be wrecked by the high costs of shipment and market access. Whilst well functioning market economies have a measureable logistics cost of under 10% the sale price of manufactured goods; places like Afghanistan exceed 25% on packaged goods and even 50% on commodities such as grains and cement. India stands at over 13% and this will impact any export initiative versus competition. We advance the case for Transformational Logistics as a means to sharpen the focus of research and shared practice across the fast growing and developing world is strong.

[1] Last Mile Video.

[2] World Bank, India’s Transport Sector (2002).