The World Bank’s Logistics Performance Index
The World Bank’s Logistics Performance Index (LPI) is constructed to assist countries in determining the key challenges and opportunities in logistics. It is an interactive benchmarking tool, which can be deployed for improving performance because it provides insight into the trade logistics environment in more than 150 countries worldwide (Logistics Performance Index, 2015).
The Construction of the LPI
The LPI is constructed as a comparison of logistics environment friendliness. It is based on the responses of operators (express carriers and global freight forwarders), who have in-depth knowledge of logistics environment in the countries of their current operation, access to qualitative assessments of the situation in other countries, and rich experience in the sphere of trade and logistics. The LPI also provides quantitative data measuring the performance of logistics chain components (Logistics Performance Index: About, n.d.). It has two dimensions: domestic and international.
Domestic LPI is an investigation of the national logistic environment. It assesses four primary areas – services, reliability of supply chain, border procedures, and timeliness, and infrastructure (Domestic LPI, n.d.). The International LPI is an evaluation of a country based on trading partners. It covers six criteria determining the friendliness of the logistics environment outside the country of origin – infrastructure, customs, shipments, logistical services, timeliness, and tracing and tracking (International LPI, n.d.). The logistics environment is ranked from 1 (low) to 5 (high).
Top Best and Worst Performers
The latest LPI was published in 2014. It covers 160 countries. The top 10 performers are Germany (4.12), Netherlands (4.05), Belgium (4.04), United Kingdom (4.01), Singapore (4.00), Sweden (3.96), Norway (3.96), Luxembourg (3.95), United States (3.92), and Japan (3.91). As of the top 10 countries with the lowest rating, they are Cuba (2.18), Sudan (2.16), Djibouti (2.15), Syrian Arab Republic (2.09), Eritrea (2.08), Republic of the Congo (2.08), Afghanistan (2.07), the Democratic Republic of the Congo (1.88), and Somalia (1.77) (The World Bank, 2014).
Key Findings of the 2014 LPI
The 2014 LPI claims that logistics performance converges slowly. For the most part, it is the achievement of the developing and the least developed countries, which are working on closing the infrastructure gap with the developed countries. However, the report stresses that infrastructure is not enough to obtain higher ratings because the quality of delivery services is more significant. Moreover, even countries with poor infrastructure can reach a higher quality of service delivery. What matters for logistics is trade facilitation together with management reforms because they are the key to diminishing the risks of delays, especially when it comes to international deliveries.
Nevertheless, these reforms are impossible without the involvement of local governments, which should prepare long-term plans for development, but are unwilling to enact changes. This problem is especially acute for post-conflict countries. Finally, countries should pay attention to the environmental footprint and political and socio-economic stability (The World Bank, 2014).
The Significance of the LPI for Building Competitive Supply Chain
The LPI findings can be beneficial for companies trying to construct a competitive supply chain because logistics and supply chain networks are closely related. For example, such companies might be interested in finding trade partners in top-ranked countries. The idea behind this statement is that the choice can be made at a regional scale if a company is too small to compete with global leaders.
Global Operations and Supply Chain Management
Competitive Alternatives Survey
A company involved in manufacturing medical devices decides to begin sourcing components internationally. As for now, it operates in the United States and Germany only. So, senior management should assess the relative manufacturing costs worldwide to choose where to source. This decision will be made based on manufacturing costs.
Cities with the Lowest and Highest Manufacturing Costs
The latest Competitive Alternatives survey was published by KPMG in 2016. It is a comparison of more than 100 cities in 10 countries all over the globe. The key finding of the report is that Mexico has the highest relative cost advantage if compared to the United States, and Japan has the lowest (KPMG, 2016). However, the area of interest of this investigation is to determine three cities with the highest and the lowest manufacturing costs for the company’s specific industry – medical devices manufacturing.
The 2016 report specifies that Monterrey and Mexico City in Mexico offer the lowest prices if taking into consideration facility cost (factory rent). The same is true about utility (electricity and natural gas), labor (salaries, statutory plans, etc.), and transportation (surface and air freight) costs. In general, Mexico is an attractive destination for sourcing because manufacturing costs are almost 22 percent lower than in the United States (Medical devices, 2016). The second cheapest country is Canada. In Canada, the most attractive city is Moncton (if taking into consideration average costs levels among the four groups of costs mentioned above). Three cities with the highest manufacturing costs are Osaka and Tokyo in Japan and London in the United Kingdom.
Changing the Company’s Sourcing Strategy
The primary question for the company is whether changing its sourcing strategy will help solve the problem of competitiveness and how the key findings from the KPMG 2016 Competitive Alternatives survey will amend a sourcing strategy.
First of all, it should be noted that Germany is one of the countries with the highest costs for medical devices manufacturing – it is just 7 percent cheaper to produce in Germany than it is in the United States (Medical devices, 2016). However, we do not know what is the country of the company’s origin. Nevertheless, manufacturing costs in both Germany and the United States are at nearly the same level, so, in this case, the company has chosen a high-cost country sourcing strategy. Even though it is expensive to manufacture medical devices in these countries, quality is what comes first. So, this strategy is seen as some kind of guaranteeing the high quality of the company’s products because it promises strong engineering organization, technological expertise, and prosperity in the long run (Jacoby & Fugueiredo, 2008; Ball, Geringer, Minor, & McNett, 2012).
The findings from the KPMG survey reveal options for changing the company’s sourcing strategy. First and foremost, the company found out that there are attractive destinations for sourcing components. They can be either relatively low-cost cities such as those located in Mexico and Canada or high-cost cities such as Japanese and European ones. Because the company is interested in becoming more competitive, it might want to choose one of the cities with the lowest manufacturing costs as the next destination for sourcing.
The justification for such a statement is that moving capacities to countries with a low level of manufacturing costs might be beneficial because it will entail decreasing prices for products and, thus, improving performance. In addition to it, only the combination of low-cost and high-cost country sourcing is the key to operational success (Jacoby & Fugueiredo, 2008).
However, senior management should keep in mind that this decision is just the first step to improving the company’s position in the global economy. To become even more successful and competitive, it might be beneficial to win new markets through sourcing components to new regions. In this case, the company has two alternatives: either strengthen positions in the regions of the current operation, i.e. countries located in North America and Europe, or extend to new destinations. For example, it might be Asia, especially Japan and China, which are known for the high competence of their labor. In either case, the company should stick to a rule of combining two sourcing strategies mentioned above.
In conclusion, it should be said that changing the sourcing strategy is one of the ways to solve the company’s current problems. However, senior management should bear in mind various significant factors when redesigning it. They should be aware that having an alternative destination is always a good option, and the KPMG survey can become a perfect tool for finding the necessary alternative. Nevertheless, changing sourcing strategy will help the company become more competitive only if the new one includes not only new sourcing destinations but also short and long-term strategic objectives, quality expectations, target consumers of products, and company’s growth (Lindén & Schalén, 2012).
It means that if the firm is interested in producing medical devices of the highest quality, it might want to conduct additional investigation to find out whether higher manufacturing costs imply higher quality. If yes, choose Japan. If the goal simply becomes more competitive, the right choice is to the source to Mexico or Canada.
References
Ball, D. A., Geringer, J. M., Minor, M. S., & McNett, J. M. (2012). International business: The challenge of global competition (13th ed.). New York, NY: McGraw-Hill Education. Web.
Jacoby, D., & Fugueiredo, B. (2008). The art of high-cost country sourcing. Supply Chain Management Review, 12(5), 32-38. Web.
KPMG. (2016). Competitive alternatives: KPMG’s guide to international business location costs. Web.
Lindén, M., & Schalén, V. M. (2012). Competitive advantage through strategic sourcing.
Medical devices. (2016). Web.
Domestic LPI. (n.d.)
International LPI. (n.d.)
Logistics Performance Index: About. (n.d.)
Logistics Performance Index. (2015).
The World Bank. (2014). Connecting to compete in 2014: trade logistics in the global economy. The logistics Performance Index and its indicators. Washington, DC: The World Bank. Web.