Logistics Expenditure Index

Author: Transport Division, Inter-American Development Bank

For the past few years, academics, researchers and practitioners have been developing methodologies to measure the performance of logistics. Logistics is a key component of the production process, and enters the supply chain throughout its length. Performance indicators are key to evaluate the logistics system and to determine its efficiency level. In Latin America, inefficiencies in the supply chain, particularly in logistics performance, are hindering competitiveness. Today, logistics costs are between 18 and 35 percent of the final product value, which are high compared to those of OECD countries, which are 8 percent. Logistics costs in the LAC region as a percentage of the GDP are between 50 and 100 percent higher than those of OECD countries. Thus, one of the key reasons to measure logistics performance is to reduce logistics costs.

Although logistics performance indicators can be evaluated in many ways, depending on the purpose, in general they fall into one of two categories: (1) costs indicators, which indicate costs consumed in carrying out logistics activities, and (2) service indicators, which indicate the results of logistics activities.

Previous studies meet the demand to measure logistics costs only partially. In some countries national surveys have been carried out to void this gap and propose varied methodologies to measure logistic expenditures. High income countries such as Germany, France, Switzerland and Finland have developed methodologies adapted to the national context. A few attempts to aggregate logistics costs using national accounts data have also been made in the United States, Canada, Sweden and Norway, for example, as well as in Brazil, Thailand, and South Africa (Rantasila and Ojala, 2012). These methodologies have been tested at the national levels, but few attempts have been made to develop a comprehensive methodology that can consistently compare performance between countries.

IDB's Regional Observatory of Freight Transport and Logistics is proposing a Logistics Expenditure Index which will combine at the macro level costs that can be measured as: (i) percentage of (aggregated) sales or turnover, (ii) percentage comparison with the GDP level, or (iii) absolute costs; and, at the micro level, costs that can be measured as percentage of sales or sales of each firm and consider the estimation of Business Logistics Cost.

As part of the comprehensive review of the methodologies to measure logistics costs, the Regional Observatory identified the studies that measure logistics costs as a percentage of GDP in South Africa, the United States, Canada, China, Switzerland, Korea, Netherlands, Germany, Morocco and Sweden; and, as a percentage of sales or turnover in the United States, Europe, Germany, the Baltic Sea region, Finland, Norway, France, Colombia, and Japan. The studies calculating logistics costs as a percentage of GDP use existing macroeconomic statistics to calculate the aggregate logistics costs. Logistics costs as a percentage of sales/turnover are calculated by using data collected through specific questionnaires, of which the Davis Methodology and Questionnaire is the most comprehensive.

Although a number of studies exist that measure logistics costs, comparisons across countries are difficult. The literature review provides evidence of estimations and comparisons of national logistics systems. Presently, two comparison categories emerge. In the first one, comparisons are based on resources, activities or combination of these (inputs). In the second category, comparisons are based on performance dimensions (outputs). One example in the first category is the World Competitiveness Yearbook, published by the International Institute for Management Development (IMD). This publication annually ranks and analyzes how each national environment supports firm’s competitiveness capabilities (IMD 2000). Another example in this category are comparisons between national logistics systems (Bookbinder and Tan 2003). One example in the second category is the research stream of logistics expenditures estimations in North America, Europe, Pacific Rim, and South America provided by Michigan State University (Bowersox 1992; Bowersox and Calantone 1998; Bowersox, Calantone and Rodrigues 2003; Rodrigues, Bowersox and Calantone 2005). This stream considers as performance measure the national expenditures on logistical activities for a representative subset of countries in the world.

One important literature gap that the development of a Logistics Expenditure Index will fill is that of the detailed analyses of the relationship between resource-based factors (the first category) and performance-based factors (the second category). This constitutes a major barrier in understanding how these factors interact and how they jointly affect national logistics performance. Additionally, the literature review also indicates the need for comprehensive conceptual frameworks related to national logistics systems.

The methodology under design by the Regional Observatory suggests that these two perspectives must be combined for a balanced and more accurate estimation of the Logistics Expenditures Index. Different methodologies available for the macroeconomic and microeconomic approaches are considered and analyzed in order to evaluate their usefulness for the proposed methodology. As part of the two-front strategy, the methodology will identify the main drivers and variables that explain the correlation between the macroeconomic and microeconomic approaches toward building a consistent index.

The proposed Logistics Expenditures Index will help measure and monitor the main drivers of logistics costs, and their impact on overall performance. More specifically, detailed indexes on costs and performance by country level should help researchers and policy makers achieve a better understanding on the relationship between national resource factors, logistics expenditures, and national performance.