Many developing countries, out of necessity, concentrate on building critical
infrastructure such as airports, highways, and shipping ports to foster their growing economies.
But once the basics are in place, less visible efforts to improve the flow of goods through a country can have a stronger economic impact than another pier, runway, or paved mile, a recent McKinsey study shows.
Governments in
markets such as Dubai, Hong Kong, and Singapore already understand the need to balance brick-and-mortar projects with policies, regulations, and enforcement measures.
But many other developing nations have a single-minded devotion to expanding their hard infrastructure and thus overlook network components-such as
efficient customs clearance and quality
trucking services that can strongly affect GDP.
We estimate that one Asian country, for example, could increase its GDP by 1.5% to 2% as of 2010 if it reduced its
logistics costs by 15% to 20%.
Cutting
indirect costs, such as excessive inventory resulting from inefficient supply chains, would account for the bulk of the savings.
This estimate doesn''t include multiplier effects, which, we believe, could contribute an additional percentage point to GDP growth. Our experience in other countries shows that these savings are well within reach.
By contrast, ongoing infrastructure projects, costing a total of about $10 billion, would generate only a 0.7% to 1% increase in this country''s GDP over the same period.
Without question, countries in the early stages of development should focus on building serviceable roads and adequate ports.
But initiatives to make supply chains more efficient should rapidly supplement core infrastructure programmes. The time is right for a shift if, for instance, the domestic logistics industry is fragmented and has few international players despite a high-quality infrastructure.
In other words, if old, rattletrap delivery trucks clutter up pristine multilane highways, there is substantial room for improvement.
In any economy, the logistics industry bears substantial direct and indirect costs. In
emerging markets, where networks have significant shortcomings, they are even larger. Direct costs, including transport, warehousing, and handling, tend to be transparent. Indirect ones, such as stock-outs, unnecessarily high inventories, and obsolescence, are much less visible and thus often overlooked, particularly by small or unsophisticated companies.
Governments looking to manage their logistics networks must first identify the system''s pain points. For the Asian country cited earlier, we estimate that policy changes or better enforcement of existing regulations could cut annual transport and logistics expenses by $600 million to $960 million. In just three years, the total value created could exceed 1% of GDP. The savings would either increase corporate profitability or cut prices for customers. Both would fuel economic growth.
Indirect costs account for the bulk of these savings, though direct ones can contribute as well. A close look at trucking costs in a typical Asian market shows how this approach could work.
At some companies, up to a quarter of all deliveries arrive late and 2% to 4% of all goods are damaged in transit. The root of these problems is the overloading of trucks, which causes them to age faster and to break down more frequently. Late or damaged deliveries add $100 million to $140 million a year in indirect costs to inland transport.
Paradoxically, trucks overloaded in one direction are usually empty on the return trip, so overall asset utilisation is low and price competition severe. This environment fuels a vicious circle, since incumbents can''t afford to invest in maintenance or new equipment, and potential attackers have no incentive to enter the fray.
In emerging markets, no one party can make supply chains more efficient. Too few companies understand indirect logistics costs well enough to see the value in paying m for reliable trucking services, for instance, and those that do are hard-pressed to find quality suppliers. Generally, governments are responsible for enforcing weight limits more strictly (as in the example of trucking), reducing the corruption that allows overweight trucks on the road, and lowering barriers for new entrants. Other measures could improve the quality of a country''s logistics network. Speeding up customs clearance and making processing times more consistent, for example, would allow companies to reduce their inventory levels, since they could depend on supplies arriving punctually. Or governments could educate logistics suppliers and customers-many of them mom-and-pop stores and other small businesses-about the benefits of better speed and reliability.
Improving logistics and encouraging a more efficient supply chain would provide an extremely attractive growth opportunity for emerging economies.
While such initiatives are relatively inexpensive and don''t have to compete for capital with highly visible infrastructure projects, they do need attention. It is much easier for a government to approve and embark on an expensive infrastructure project involving only one ministry than to improve the efficiency of supply chains by carefully coordinating the work of several branches of government.
But a close look at the numbers makes the advantages of a better logistics network for any developing country plain to see.