Connecting to Compete: Trade Logistics in the Global Economy

Mexico has been a strategic place to invest. The Country offers business opportunities for companies all around the world because it has a privileged geographic position, low manufacturing costs, corporate tax advantages, exchange rate competitiveness and global market access. These are just some of the characteristics that make Mexico an investment paradise.

According to the Ministry of the Economy, manufacturing in Mexico provides global firms a better position to face changing conditions in the economic environment.

Most costs in manufacturing move in the same direction as the business cycle and when the global demand (U.S.) is growing, costs go up. This includes the cost of raw materials, labor, overhead, and freight. In addition, and comparison with China, for example, if you take into account costs like duties, exchange rate volatility, 45 day incremental in-transit inventory for intercontinental (inland transpiration, ocean freight, customs, etcetera) and just seven days for Mexico, you will conclude that Mexico is an excellent place to run your business.

The World Bank (WB) recently published the report Connecting to Compete in 2010. The Logistics Performance Index (LPI) and its indicators are a joint venture of the World Bank, logistics providers, and academic partners. The LPI is a comprehensive index created to help countries identify the challenges and opportunities they face in trade logistics performance. The World Bank conducts the LPI survey every two years.

Logistics encompasses an array of essential activities; everything from transport, warehousing, cargo consolidation, and border clearance to in-country distribution and payment systems. All this involves a variety of public and private agents. The 2010 LPI highlights new areas that need further attention, such as the coordination of agencies involved in border clearance and also the quality of domestic trucking and customs brokerage services.

With the LPI, the World Bank aims to focus attention on an issue of global importance and provide a platform for dialogue among government, business and civil society. Exhibit 1 shows the LPI ranking and scores for the year 2010. The facts being emphasized are that this index is led by Germany, followed by Singapore, Sweden and the Netherlands.

Among North American entities, the highest ranked country is Canada in the 14th position. From Latin America we have Brazil (number 41), followed by Argentina, Chile and Mexico located in the 48th, 49th and the 50th positions respectively.

This 2010 LPI features a snapshot of selected performance indicators in nearly 130 countries, including expanded information on the time, cost, and reliability of import and export supply chains, infrastructure quality, performance of core services, and the friendliness of trade clearance procedures. And we should add, this is how every country is graded, as shown in the 2010 LPI.

Germany and Singapore receive the highest ratings in the 2010 LPI with scores over 4.08. At the same time Somalia ranks last with a 1.34 score. The level of logistics service available in the best performing countries is about double that in the lowest performing countries. Income is not the only determinant of a country’s logistics environment.

Even in low-income countries, policymakers can do much to boost performance. Liberalizing logistics services markets, for instance, can encourage local service providers to increase quality and price competitively. Globalization has made the demand for logistics services more sophisticated, and means pushing for integration and diversification of services to help operate uninterrupted supply chains.

Facilitating trade and transport is essential for countries to compete in the global marketplace. Traders in this context need to be able to move goods and services across borders on time and with low transaction costs. Countries wishing to improve trade logistics may need to reform and modernize border management institutions, change transport regulation policy, and, in some cases, invest significantly in trade-related infrastructure.

The quality and competence of core logistics service providers is also an important aspect of overall country performance. There is a higher correlation between quality of services and overall level of logistics performance, for example, than is the case for infrastructure. This is an observation consistent with the indicators on level of service.

The LPI also includes several indicators of border procedures and time. Another case of dependence is that of landlocked countries, which depend on trade corridors to access ports or regional trade partners. But overall, the reliability of the supply chain is the most important aspect of logistics performance.

As noted earlier, Mexico has been ranked as number 50 in the LPI ranking. Mexico features good ratings in infrastructure, logistics quality and competence, as well as tracking and tracing. According to the LPI, Mexico lacks competitiveness in conditions for international shipments, customs and timeliness. Please see Exhibit 2.

The LPI includes several indicators of border procedures and time. A useful outcome measure of logistics performance is the time taken to complete trade transactions. The median import lead time, as measured by the LPI survey shows that lead time for port or airport supply chains is nearly twice as long in low performance countries as in high performance ones. For land supply chains the contrast is even stronger: Lead time in low performance countries is more than five times longer. Customs is not the only agency involved in border management; collaboration among all border management agencies including standards, sanitary, phyto-sanitary, transport, and veterinary agencies. Also, the introduction of modern approaches to regulatory compliance is especially important. Regarding Customs, Mexico had a lower ranking than its overall position (50th), and is located in the 62nd position as seen in Exhibit 3. In infrastructure, Mexico is a competitive country, and holds the 44th position.

Two pronounced trends emerge in the percentage of LPI survey respondents who consider that infrastructure in their country is of high or very high quality. Differences among the four other groups are relatively small compared with the difference between them and the top performers. This is especially true for infrastructure such as logistics facilities (warehousing) or airports that are dependent on management quality or public–private partnerships.

Infrastructure quality appears to be a widespread constraint on logistics performance in developing countries. Exhibit 4 describes the most competitive countries in infrastructure and their competition with Mexico.

For international shipments, Mexico lacks quality as interpreted in the LPI ranking because the country occupies the 77th position (Exhibit 5). The case of trans-shipment shows how a country’s connectivity to its market through the hierarchical hub-and-spoke network of international shipments can affect trade. Lack of connectivity primarily affects smaller countries and southsouth trade.

The World Bank’s Logistics Performance Index (LPI) summarizes the performance of countries in six areas that capture the most important aspects of the current logistics environment:

  • Efficiency of the customs clearance process.
  • Quality of trade and transport-related infrastructure.
  • Ease of arranging competitively priced shipments.
  • Competence and quality of logistics services.
  • Ability to track and trace consignments.
  • Frequency with which shipments reach the consignee within the scheduled or expected time.

These areas range from traditional issues and also include new concerns such as tracking and tracing shipments, timeliness in reaching a destination, and the competence of the domestic logistics industry.

Logistics quality and competence is another area where Mexico shows competitiveness and is ranked in position number 44. In tracking and tracing, according to the LPI, the nation is the 45th most competitive country. In timeliness Mexico is the 54th country.

Exhibit 6, 7 and 8 illustrate Mexico’s overall position in these aspects. Based on a worldwide survey of global freight forwarders and express carriers, the Logistics Performance Index is a benchmarking tool developed by the World Bank that measures performance along the logistics supply chain within a country. According to the report, government and the private sector in many developing countries should improve these areas—or face the large and growing costs of exclusion.