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Creating Global Value Through Efficient Trade Logistics

Creating Global Value Through Efficient Trade Logistics. Warren H. Hausman Hau L. Lee Uma Subramanian. Motivation for logistics indicators research Survey instrument for logistics indicators Assessment of logistics indicators in different countries

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Creating Global Value Through Efficient Trade Logistics

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  1. Creating Global Value Through Efficient Trade Logistics Warren H. Hausman Hau L. Lee Uma Subramanian

  2. 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 Overview

  3. 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 The Growing Global Economy • 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

  4. Revenue Generated Outside Home Market Sourcing of Raw, Semi-finished and Finished Goods Outside Home Market Selling and Sourcing Trends Source: Accenture Global Operations Survey, 2005

  5. Growing global middle class: 95% of consumers live outside of U.S., 60% in Asia 52 developing nations with population of1.5 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 Growing Global Market

  6. What Determines Bilateral Trade?

  7. What Determines Bilateral Trade? Propensity to Import Propensity to Export Shipping Cost & Time Institution Quality Infrastructure Institution Quality Infrastructure Logistics Frictions

  8. Past Studies on Bilateral Trade GDP GDP Distance Institution Quality Infrastructure Institution Quality Infrastructure

  9. Our Focus GDP GDP Distance Institutional Quality Infrastructure Institutional Quality Infrastructure Logistics Frictions

  10. 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. Research Opportunities

  11. 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. Objectives of Research

  12. Survey Instrument • Textiles • Apparel • Coffee, tea, cocoa, spices Focus on containerized imports & exports 80 Countries 2005 Study Questionnaire Survey (17 pages) Follow-up Phone Checks by World Bank Answers from Panalpina Experts

  13. Trade procedure Customs clearance Vessel turnaround CSI times Waiting time for berth Container dwell time Examples of Logistics Indicators Time Cost Complexity Efficiency • Port & terminal charges • Document Processing • CSI costs • Trade procedure costs • Custom clearance incentives • Inland freight • No. of documents per transaction • % of containers inspected • Level of inspection • No. of signatures for customs clearance • No. of containers unloaded per berth hour • Port shutdown days • Inland transport speed • Frequency of vessel calls at port

  14. Average Time for a Typical Import Transaction Days 69 60 58 53 49 49 48 46 44 40 41 37 36 33 28 20 14 0 OECD EAP LAC MENA ECA AFR SAS Source: World Bank Global Logistics Indicators Survey, 2005

  15. Trade Transactions Processing Time and GDP 150 Kyrgyz Republic Burundi 100 Niger Kazakhstan Days for an Import Transaction Mongolia Zimbabwe Nigeria 50 Nepal Nicaragua China Argentina Senegal Turkey Chile France Japan Philippines New Zealand Dominican Republic United States 0 Germany GDP per capita (thousands of dollars) 10 20 30 40 Source: World Bank Global Logistics Indicators Survey, 2005

  16. Total Cost for a Typical Import Transaction Cameroon 5787 Zambia 4616 Algeria 2248 Kazakhstan 2029 1800 China Korea 1631 United States 1428 India 1409 Brazil 1335 South Africa 1242 Malaysia 841 Ireland 821 700 Spain Sweden 550 Norway 506 US $ Thailand 501 0 1000 2000 3000 4000 5000 6000 Source: World Bank Global Logistics Indicators Survey, 2005

  17. Cost for a Typical Import Transaction AFR AFR 1983 438 LAC SAS 1677 286 ECA EAP 1370 104 SAS ECA 1277 77 EAP MENA 1130 74 MENA LAC 1120 73 OECD OECD 983 US Dollars Percent (Cost/Per Capita GDP) 0 500 1,000 1,500 2,000 0 100 200 300 400 Source: World Bank Global Logistics Indicators Survey, 2005.

  18. Number of Signatures for Typical Export Transaction Congo, Dem.Rep. 42 Azerbaijan 40 39 Nigeria 21 Mongolia Lao PDR 17 15 Bangladesh 8 Senegal 7 Colombia 7 China 6 Venezuela United States 5 5 Italy 5 Ireland Korea 3 3 Indonesia 3 France Finland 3 2 Singapore Number of Signatures 0 10 20 30 40 Source: World Bank Global Logistics Indicators Survey, 2005

  19. Process Inefficiencies and Wealth 30 29 Total For Customs 20 Number of Signatures for Imports 16 13 10 9 8 5 4 2 0 High income Upper middle income Lower middle income Low income Source: World Bank Global Logistics Indicators Survey, 2005

  20. Percentage of Import Containers Inspected 100 80 60 40 20 0 Jordan Mexico Turkey Japan Columbia Pakistan Nigeria USA Bangladesh Malaysia Germany Sri Lanka Dominican Rep. South Africa Source: World Bank Global Logistics Indicators Survey, 2005

  21. Logistics Impediments and Income 69 60 44 40 Percent of Import Containers Inspected 29 20 11 0 High income Upper middle income Lower middle income Low income Source: World Bank Global Logistics Indicators Survey, 2005

  22. Augmented Gravity Model Basic Attraction • Exporter GDP • Importer GDP • Distance Bilateral Trade • Time • Cost • Variability Logistics Indicators Institutional Quality • Exporter’s corruption index • Importer’s corruption index • Regional trade agreement dummy

  23. Critical Global Logistics Indicators Time • Exporter’s average time for all procedures • Importer’s average time for all procedures Cost • 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 Variability

  24. Augmented Gravity Model Results Coefficient t-Statistic 1.262 0.940 -1.379 -0.453 -0.072 -0.294 -0.264 0.033 0.749 0.593 0.314 74.37 52.63 -38.09 -6.53 -0.94 -6.9 -4.78 0.42 8.99 6.18 4.33 Log GDP exporter Log GDP importer Log distance Log Exporter’s Avg Time for Procedures Log Importer’s Avg Time for Procedures Log of Importer’s Total Cost for Procedures Log Exporter’s Max Time – Avg Time Log Importer’s Max Time – Avg Time Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistics 0.710 5149 1263.3

  25. 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. Observations

  26. 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

  27. Supply Chain-Based Logistics Index Distance Shipping Cost Total Cost of Processing Trade-Related Costs Total Landed Cost Total Time(Freight + Ports) Inventory cost (In-Transit) Coeff of Var of Total Time Inventory cost (Safety Stock) Product Cost

  28. 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 Bilateral Trade Stage 1 • Log Distance • Total Total Processing Cost • Total Time • Coeff of Variation of Total Time Logistics Index Residual from Stage 1 Stage 2 • Stage 1 variables plus • Logistics Index Bilateral Trade Stage 3

  29. Stage 1 Logistics Index Model Results Coefficient t-Statistic 1.200 0.888 0.298 0.252 1.005 61.67 46.04 24.09 17.85 11.5 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 0.620 5149 1710.0

  30. Stage 2 Logistics Index Model Results Coefficient t-Statistic -1.282 -0.129 -0.009 -0.874 -34.19 -3.64 -4.9 -4.18 Log Distance Log of Total Processing Costs Total Time (Fright + Ports) Coeff of Var for Total Time Adjusted R-Squared Observations F-Statistic 0.221 5149 376.4

  31. Stage 3 Logistics Index Model Results Coefficient t-Statistic 1.278 0.921 0.244 0.179 0.345 1.077 75.45 55.06 21.87 13.73 4.85 40.37 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 0.710 5149 2293.5

  32. Model Comparisons Augmented Gravity Model Logistics Index Model Number of Variables Adjusted R-Squared F-Statistic 11 0.710 1263.3 6 0.710 2293.5

  33. 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. Logistics Index Observations

  34. 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. Summary

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