Supply Chain Risk Management

PAGE Factors Affecting Logistic Performance: A Global Supply Chain Perspective 2

Factors Affecting Logistic Performance: A Global Supply Chain Perspective

by

MUHAMMAD ZAIN SIDDIQUI

Reg #: 8709

Submitted to: Mr. Farhan Mehboob

A thesis

submitted in partial fulfillment of the requirements

for the degree of Master of Business Administration

tothe Iqra University.Karachi, Pakistan

JANUARY, 2015

Abstract

The underlying objective and purpose of this thesis is to test a model that studies relationship between costs to export, cost to import, GDP, trade services, per capita income and IT on logistics performance index. This research will assist the logistics industry for identifying the opportunities and challenges in terms of their trade logistics performance, what factors affect this benchmarking tool and what steps can the logistics industry take to improvise their performance.

Table of Contents

2Abstract

1Chapter 1 Introduction

11.0 Overview

21.1 Background

31.2 Problem Statement

31.3 Purpose of Research

41.4 Objectives of Research

41.5 Research Questions

51.6 Research Hypothesis

51.7 Limitation of Study

51.8 Scope

7Chapter 2 Literature Review

82.1 Theoretical Background

82.2 Logistics

92.3 Empirical Studies

102.4 Logistics Framework

122.5 Trade Services

122.6 Cost to Export / Cost to Import

132.7 Conceptual Framework

14Chapter 3 Methodology

153.1Research Purpose

153.2Research Approach

153.3 Research Design

163.4 Secondary Data:

163.7 Research Model

173.8 Variables Description

173.8.1 Dependent Variable:

17LPI: Logistic Performance Index (overall).

183.8.2 Independent Variable:

18Trade Services

18Cost to Export / Cost to Import

19References

Chapter 1 Introduction

1.0 Overview

Logistics form a significant base for success of organizations and businesses around the world. In terms of global comparison, the importance of logistic services largely depends on the nations economic power. For instance, the prospects of logistics services have been quite strong in Europe, Japan, and United States for a long time. There are certain factors that affect a dynamics of logistics in a country.

First of all foreign trade, especially export is quite important to increase a countrys economic growth rate (Johnson, 2013). Moreover, export plays a key role for the countries to receive a greater share of the global market. Satisfactory and sustainability levels of countries export depend on exporting high value-added products and increasing the diversity of products and markets. Meanwhile, foreign trade transactions exhibit a complex view and have enhanced the importance of logistics. Logistics is considered as an important constituent in the field of service, manufacturing and agriculture industry. Moreover logistics has to be smoothly managed so that distribution and production functions can operate effectively.

The research findings reveal that cost to import & import of goods and services; cost to export & export of goods and services and GDP are indirectly proportional to logistics performance index. On the other hand IT expense is directly proportional to logistics performance. In this regard, countries that work on controlling their cost of import, cost of export, GDP, IT enhances the quality of logistics and ensures competitiveness and eventually reach the top positions in the Logistics Performance.

According to the statistically analysis of data, efficiency of logistics can be measured through the application of logistics performance index (LPI). This index primarily depends on the quality and competence of customs and border management, trade and transport infrastructure and logistics services. In this paper, it is worked on the model that studies relationship between costs to export, cost to import, GDP, trade services, per capita income and IT on logistics performance.

This study investigates the affect of various factors on LPI. The introductory chapter of this study will provide background information relevant to research questions, its contextual framework, and problem identification, purpose of study, research question, justification and limitation of this research.

1.1 Background

The prospect of logistics performance starts with its definition. According to World Bank, the logistic performance of countries at the same level of per capita income with the best logistics performance experience additional growth of 1% in gross domestic product (GDP) and 2% in trade. So its essential to improve a countries logistics performance as it has significant valuable affects on the statistics of a countries economy. Additionally no matter if there is successful logistics or not the trade cycle is always present and it eventually relies on the pace and extent of government strategy and measures that will liberalize logistics supply (Havenga, 2011).Furthermore World Bank denotes LPI as an index that captures mainly the main features of the existing logistics environment. LPI is deliberated by the efforts of BRIC countries (Brazil, Russia, India and China); World Bank; and various other sophisticated emerging economies. Efficient supply chain and logistics of any country can become its competitive advantage over its competitor, so focus should be on improving the Logistics Performance Index of a country.

LPI, as implied by the acronym, places great emphasis on performance, expressed through the reliability and predictability factor, unlike the conventional performance metrics, such as average delays and direct freight costs, or more generically expressed in terms of time and costs. World Bank representatives, experts in the field, and academics, came to the conclusion that, currently important indicators such as reliability, predictability and quality of service, along with transparency of processes, cannot be comprehended solely from costs and time information. The predictability and reliability of shipments, while more difficult to measure, are more important for firms and may have a more dramatic impact on their ability to compete (Arvis, et al 2007:4).

1.2 Problem StatementKorinek and Sourdin (2011) study the relationship between logistics and trade is directly proportional. Efficient logistics facilitates trade and play a crucial role of transporting goods over international border. On the other hand if logistics performance is inefficient, it will result in trade block up due to extra money and time needed (Korinek & Sourdin, 2011). As developed countries are shifting from traditional agriculture and manufacturing model to globalized trade they are increasingly interacting in international markets and need an efficient logistics services to gain competitive advantage. Therefore in this study we try to focus on logistics of developed and developing countries and finds out how quality and competency of logistics services is affected by country specific factors such as, GDP, export and import of goods and services, cost to export and import, trade services, IT, and income per capita.

1.3 Purpose of Research

As mentioned above the quality logistics performance serves as a competitive advantage for countries. This research has tried to find factors which affect the Logistics dynamics and efficacy. For this research 41 countrys data will be assessed and influence of different variables will be examined on logistics. The independent variables which are selected for this research are also important and critical in todays world i.e. GDP, export and import of goods and services, cost to export and import, trade services, IT, and income per capita. This research can serve as a guideline for regulatory bodies to select strategic actions for improving their logistics. The fundamental idea of this research is to study the relationship between logistics performance and cost to export, cost to import, GDP, trade services, per capita income and IT (Arvis, et al 2007) on the basis of a model. This research will explore the relationship between dependent and independent variables on the basis of a model.1.4 Objectives of Research

The objective of this research is to assess the concept of logistics performance and various factors that affect its efficacy. The value of logistics performance is dependent on various factors and this paper explores the relationship among them.

1.5 Research Questions

This study proposes to study the following questions:

What is the impact of cost to export and export of goods and services on Logistics Performance?

What is the impact of cost to import and import of goods and services on Logistics Performance?

What is the impact of GDP on Logistics Performance?

What is the impact of per capita income on Logistics Performance?

What is the impact of Information Technology on Logistics Performance?

1.6 Research Hypothesis

HO1: Cost to export and export of goods and services does not affect Logistics Performance?

HO2: Cost to import and import of goods and services does not affect Logistics Performance?

HO3: GDP does not affect Logistics Performance?

HO4: Per capita income does not affect Logistics Performance?

Ho5: Information Technology does not affect Logistics Performance?

1.7 Limitation of Study

There are certain limitations in this research, as this research is only based on 41 countries based on their size. Moreover, the dynamics of logistics are influenced by various other factors apart from cost to export, cost to import, GDP, trade services, per capita income and IT. Researchers can include other factors to investigate logistics performance further. Another limitation is that this study is conducted on cross sectional data of 2010, so using panel or time series data can offer additional insights about the relationship of dependent and independent variables. Quantitative model has been applied to study association between dependent and independent variables, so qualitative aspects can also be assessed to further gain insights.1.8 Scope

This Research comprises on the data of 2010 for 41 countries. The data was taken from the website of World Bank. The countries were chosen on the basis of logistics data availability. In this study, Logistics performance index: Competence & quality of logistics services (1=low to 5=high) is dependent variable; whereas Independent variables are cost to export, cost to import, GDP, trade services, per capita income and IT. Chapter 2 Literature Review

2.1 Theoretical Background

The theories of management that can be applied to the domain of logistics management are relationship orientation (Panayides & So, 2005), resource-based view (Rungtusanatham, Salvador, Forza & Choi, 2003), and competitive advantage (Sandberg & Abrahamsson, 2011). According to Panayides and So (2005) the idea of relationship orientation denotes proactively creating, developing and maintaining strong relationships with stakeholders that would ultimately provide benefit in the form of mutual exchange and profitable opportunities. Similarly in the domain of logistics management there are varies parties or stakeholders acting hand in hand to support the intricate operations of logistics, this there is a dire need for efficient relationship orientation.

Moreover, the link between resource based view and logistics management is that capabilities and resources can only be obtained from a particular market to certain extent and after that there is a need to outsource the resources from other markets (ldrsson & Skjtt-Larsen, 2004). In this regard the concept of logistics becomes very important because it shows that its important for a country to improve it logistics services to achieve long-term mutual commitment (Rungtusanatham, Salvador, Forza & Choi, 2003). Similarly if a country wants to attain the competitive advantage it need to improve its logistics performance (Sandberg & Abrahamsson, 2011).

2.2 Logistics

Logistics by definition is considered a functional system that incorporates coordination and combination of operations of diverse transport modes as a primary pre-requisite for making sure that there is efficient service (Leal, 2012). In other words, logistics can be defined as a management framework for business planning for management of capital flows, information, service and material. Logistics function also incorporates the intricate control systems, IT and information that are needed in todays dynamic business environment. Furthermore logistics can also be defined as the replacement, distribution, maintenance and procurement of material and personnel. Logistics framework typically consists of physical distribution of services and goods, internal operations; physical distribution and internal operations; and physical supply of goods and services (Mentzer, Stank & Esper, 2008). Simultaneously, logistics framework can be seen as a structure that ensures that a country have the right type of service or product designated at the right order, place and time. However, our expectations for a firm or company are directly related to logistics. 2.3 Empirical Studies

A report taken from the World Bank gives the idea that LPI is produced to close the knowledge gap related to logistics and to facilitate nations in developing reforms of to improve their competitive circumstances. The results of LPI ranking introduce some interesting findings; first, the higher the score in terms of LPI, the greater the countries role in logistics industry, and vice versa. On a second note, scoring low in LPI terms can be interpreted as being trapped in a vicious circle of overregulation, poor quality services, and under- investment (Arvis, et al 2007).

In the study performed by Mohan in 2013, it was showed that the logistics management has effect on global competitiveness. Furthermore, the paper also examined the salient features of Indian logistics systems (Mohan 2013). The prospect of logistic performance index is built upon previous literature (Arvis, Mustra, Panzer, Ojala & Naula, 2007). Its focus however, is primarily on supply chain performance, and its indicators have been developed in such a way that, they complement the existing competitive indicators in the two fore-mentioned studies.

According to Islam (2014) LPI consists of two main parts, namely International and Domestic LPI. The former has encompassed a range of metrics, they estimate as crucial in the current international trading environment, and conditions:

Shipments timeliness in reaching target location

Effectiveness of clearance process monitored by customs agencies

Quality of transport infrastructure that is needed for efficient logistics

Affordability and easiness of arranging shipments

Ability to trace and track shipments

Proficiency in local logistics industry (for instance, customs brokers and transport operators)

Costs of domestic logistics (for instance, warehousing, terminal handling and local transportation)

The second constituent of logistics performance is domestic logistics performance indicator that provides quantitative and qualitative assessments of a countrys logistics by professionals working inside it. According to Solakivi, Tyli, Engblom and Ojala (2011) domestic logistics tend to include comprehensive information on the cost data, performance time, institutions, and core logistics processes and logistics environment.

2.4 Logistics Framework

The significance of having an efficient logistics framework is currently acknowledged by decision makers worldwide. Private operators move commerce and trade are moved and within borders. Logistics performance actually measures the competence of these supply chain -logistics performance. The value of logistics performance depends on government policy that is formulated by regional economic groups and individual countries in development and regulation of services, infrastructure provision or trade facilitation all the way with the help of friendly border procedures that substantially facilitate in efficient performance of logistics (WTO 2014). According to Puertas, Mart and Garca (2013) the provision of International LPI is based on assessment of foreign operators and that consider the average of six components, namely, tracking and tracing; services quality; infrastructure; customs; timeliness; and international shipments.

Fig 2.4

Retrieved From: (WTO 2012)

The components of supply chain delivery and logistics are selected on the basis of empirical and recent theoretical research and moreover on practical understanding of logistics professionals that are concerned with international freight forwarding (as shown in Fig 2.4). There have been four logistics performance surveys made so far accordingly in 2007, 2010, 2012 and 2014. On the basis of the worldwide survey of express carriers and global freight forwarders, the LPI is regarded as a benchmarking tool that evaluates performance of a country in terms of the efficacy of its logistics supply chain. This index allows comparisons of 160 countries, and therefore helps the countries in identifying opportunities and challenges in improving their logistics performance (WTO 2014). The value of logistics LPI ranges from 1 to 5, in which higher the number of index, the better comparative performance of the country (The World Bank 2014).2.5 Trade Services

According to Korinek and Sourdin (2011) trade logistics serves a very important job in facilitating trade services as it supports the transportation of international goods and services. On the other hand, if the logistics services are inefficient then they tend to impede trade services as there is imposition of extra money and time cost. Now a days developed nations are shifting from traditional agriculture and manufacturing and are progressing towards international vertical specialization, so due to this transition there is greater need for competent logistics services. Furthermore when quality of logistics services is enhanced, it improves a countrys competitive position by decreasing the overall costs that are involved in transporting good. So cost of imports and exports are closely link of logistics performance index (Korinek & Sourdin, 2011).2.6 Cost to Export / Cost to Import

According to Arvis, Saslavsky, Ojala, Shepherd, Busch and Raj (2014) there is a strong association between logistics performance, consistency of supply chains and the service delivery certainty. So this denotes the idea that efficient logistics of a country directly supports its export function. Moreover, according to Puertas, Mart and Garca (2013) in terms of assessing a countrys export competitiveness; logistics performance has evolved as a decisive factor. According to World Economic Forum (2013) there is massive potential for enhancing global trade and export by reducing barriers of logistics and supply chain. Furthermore it is not easy for an exporter to export their goods and services at competitive prices if the logistics and transport sector is dysfunctional or inefficient. This means that if there is lack of certainty in logistics and transport, poor service and high prices, then it will translate in the form of isolating the country from world markets (Arvis et al., 2013).

2.7 Conceptual Framework

The research is based on a conceptual framework that seeks to analyze the effect of cost to export (Arvis, Saslavsky, Ojala, Shepherd, Busch, & 2014; Hausman, Lee & Subramanian, 2005; Naud & Matthee, 2012; Turkson, 2011); cost to import (Arvis, Saslavsky, Ojala, Shepherd, Busch, & 2014; Hausman, Lee & Subramanian, 2005; Naud & Matthee, 2012; Turkson, 2011); GDP and Trade services (Diop, 2010; Havenga, 2011); and per capita income (Portugal-Perez & Wilson, 2012) on logistics performance.

Chapter 3 Methodology

The main goal of this research is to analyze the effect of cost to export, cost to import, import and export of goods and services, GDP, trade services, per capita income and IT on logistics performance.

3.1Research Purpose

The underlying objective of this thesis is to analyze the effect of cost to export, cost to import, GDP, trade services, per capita income and IT on logistics performance. This research will assist the logistics industry for identifying the opportunities and challenges in terms of their trade logistics performance, what factors affect this benchmarking tool and what steps can the logistics industry take to improvise their performance. Logistics industry is growing at an increasing pace but on the other hand, according to Business Recorder estimate, Pakistan is losing $2.6 billion annually because of inefficiencies in its logistics despite the significant growth in the efficiency of the road transport system. So if logistics industry focuses on leveraging the key logistics performance indicators (LPI) then they can gain competitive advantage in long-run.

3.2Research Approach

The approach of this research is based on multiple regressions that are focused on learning more about the relationship between several independent or predictor variables and a dependent or criterion variable. This thesis utilizes multivariate regression analysis that describes and evaluates the relationships between a given dependent variable and one or more independent variables.

3.3 Research Design

A general perception of quantitative research is to assess the association between dependent and independent research variables. In this cross-sectional research focus has been on statistical and numeric data collected from World Bank to study the effect of dependent variables on independent variables with the help of a proposed mode. Historical statistics has been used in this research. The research design connects the whole idea of research project together. The main approach is to conduct a quantitative analysis by gathering data from authentic sources. The criteria for selecting particular countries in data selection have been the size of the countries. The research data for this research was obtained from World Bank on the basis of size of country and the list of countries that are included in the data set for quantitative research is attached as Appendix 1.

3.4 Secondary Data:Data is collected from the World Banks website. In this, sample size of the study Top 41 countries on the basis of country sizes. In this study (OLS) ordinary least is used. This is a procedure to determine the relationship between the dependent and independent variable. In this study sample size top 41 countries based on year 2010. Ordinary least (OLS) is used in this study. It is a procedure to work out the relationship between the predictor (dependent) variable and predicted (independent) variables.

3.5 Research Model

Figure 3.7 Factors Affecting LPI

LPI = + 1(ImpCost) + 2(ImpG&S) + (Equation 1)

LPI = + 1(ExpCost) + 2(ExpG&S) + (Equation 2)

LPI = + 1(GDP) + 2(Trade Srvce) + (Equation 3)

LPI = + 1(Income per capita) +

(Equation 4)

LPI = + 1(IT) +

(Equation 5)3.6 Variables Description

3.6.1 Dependent Variable:

LPI: Logistic Performance Index (overall).

Data relevant to the logistics performance is collected from World Bank. In logistics performance Index survey of 2009 more than 5,000 countries were included in evaluation that was carried out by almost 1,000 international freight forwarders. The research respondents evaluated eight markets on a scale of 1 to 5, on the basis of six dimensions. The dimensions are neighboring countries connecting country with global markets, landlocked countries, random selection, significant import and export markets of respondent's country.

3.6.2 Independent Variable:

Trade Services

According to Korinek and Sourdin (2011) if there is efficient trade logistics in any country then it will facilitate trade services of the country. Moreover the quality of logistics services serves an integral role in terms of supporting transportation of goods in international trade.

Cost to Export / Cost to Import

According to Puertas, Mart and Garca (2013) the notion of logistics performance has become a decisive factor in export competitiveness. At the same time, and as a result of the continuous enlargement processes it has undergone, the European Union is a very interesting case to study how the reforms that enhance logistics performance have affected exports.

ReferencesArvis, J. F., Mustra, M. A., Ojala, L., Shepherd, B., & Saslavsky, D. (2012). Connecting to compete 2012: Trade logistics in the global economy.

Arvis, J. F., Mustra, M. A., Panzer, J., Ojala, L., & Naula, T. (2007). Connecting to compete: Trade logistics in the global economy.World Bank. Washington, DC. http://www. worldbank. org/lpi.

Arvis, J. F., Saslavsky, D., Ojala, L., Shepherd, B., Busch, C., & Raj, A. (2014). Connecting to Compete 2014: Trade Logistics in the Global Economy--The Logistics Performance Index and Its Indicators.

Collingridge, D. S., & Gantt, E. E. (2008). The quality of qualitative research.American Journal of Medical Quality,23(5), 389-395.

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Creswell, J. W. (2013).Research design: Qualitative, quantitative, and mixed methods approach. Sage.

Diop, N. (2010).Trade competitiveness of the Middle East and North Africa: policies for export diversification. World Bank Publications.

Gill, J., & Johnson, P. (2010). Research methods for managers. Sage.

Halldrsson, A., & Skjtt-Larsen, T. (2004). Developing logistics competencies through third party logistics relationships.International Journal of Operations & Production Management,24(2), 192-206.

Hausman, W. H., Lee, H. L., & Subramanian, U. (2005). Global logistics indicators, supply chain metrics, and bilateral trade patterns.

Havenga, J. H. (2011). Trade facilitation through logistics performance: The enabling role of national government.Journal of Transport and Supply Chain Management,5(1), 123-148.

Havenga, J. H. (2011). Trade facilitation through logistics performance: the enabling role of national government.Journal of Transport and Supply Chain Management,5(1), 123-148.

Islam, D. M. Z. (2014). Advances in logistics performance in selected developing and developed countries.International Journal of Business Performance and Supply Chain Modelling,6(3), 336-357.

Johnson, H. G. (2013).International trade and economic growth: studies in pure theory. Routledge.

Ju, S. D., & Xu, J. (2007). The Logistics Network Theory and Its Significance & Research Method [J].China Business and Market,8, 10-13.

Korinek, J., & Sourdin, P. (2011).To what extent are high-quality logistics services trade facilitating?(No. 108). OECD Publishing.

Mangan, J., Lalwani, C., & Gardner, B. (2004). Combining quantitative and qualitative methodologies in logistics research.International Journal of Physical Distribution & Logistics Management,34(7), 565-578.

Mentzer, J. T., Stank, T. P., & Esper, T. L. (2008). Supply chain management and its relationship to logistics, marketing, production, and operations management.Journal of Business Logistics,29(1), 31-46.

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Naud, W., & Matthee, M. (2012). Do Export Costs Matter in Determining Whether, When, and How Much African Firms Export?.

Panayides, P. M., & So, M. (2005). The impact of integrated logistics relationships on third-party logistics service quality and performance.Maritime Economics & Logistics,7(1), 36-55.

Portugal-Perez, A., & Wilson, J. S. (2012). Export performance and trade facilitation reform: hard and soft infrastructure.World Development,40(7), 1295-1417.

Puertas, R., Mart, L., & Garca, L. (2013). Logistics performance and export competitiveness: European experience.Empirica, 1-14.

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Rungtusanatham, M., Salvador, F., Forza, C., & Choi, T. Y. (2003). Supply-chain linkages and operational performance: a resource-based-view perspective.International Journal of Operations & Production Management,23(9), 1084-1099.

Sandberg, E., & Abrahamsson, M. (2011). Logistics capabilities for sustainable competitive advantage.International Journal of Logistics: Research and Applications,14(1), 61-75.

Solakivi, T., Tyli, J., Engblom, J., & Ojala, L. (2011). Logistics outsourcing and company performance of SMEs: evidence from 223 firms operating in Finland.Strategic Outsourcing: An International Journal,4(2), 131-151.

Tyli, J., Hkkinen, L., Ojala, L., & Naula, T. (2008). Logistics and financial performance: An analysis of 424 Finnish small and medium-sized enterprises.International Journal of Physical Distribution & Logistics Management,38(1), 57-80.

Turkson, F. E. (2011).Logistics and bilateral exports in developing countries: A multiplicative form estimation of the logistics augmented gravity equation(No. 11/06). CREDIT Research Paper.

World Economic Forum (2013). Outlook on the Logistics & Supply Chain Industry 2013. Retrieved from: http://www3.weforum.org/docs/WEF_GAC_LogisticsSupplyChainSystems_Outlook_2013.pd

Appendix 1: Sample CountriesCountries taken from World Bank Site, on the basis on country size in ascending order. Russian Federation

Canada

China

USA

Brazil

India

Argentina

Kazakhstan

Algeria

Saudia Arabia

Mexico

Indonesia

Peru

Angola

South Africa

Colombia

Egypt, Arab Rep.

Nigeria

Venezuela, RB

Pakistan

Turkey

Chile

Ukraine

France

Thailand

Spain

Iraq

Sweden

Paraguay

Japan

Germany

Malaysia

Oman

Norway

Poland

Finland

Philippines

Italy

New Zealand

Ecuador

UK

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