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Reducing logistics cost, improving competitive capacity (part 1):

Identify the logistics instituents

(VLR) Logistics service area has the essential role and that is a key development field and brings high value added, providing the basis for trade growth and contributing to enhancing the competitive capacity of the economy. Therefore, a decrease of logistic service cost is one of the top target that every single enterprise (DN) and country want to obtain.

The action plan for the improvement of competitive capacity and the development of logistics services up to 2025, that was attached to Decision no. 200/QD-TTg dated on 14th Feb 2017 by Government, set an objective for 2025 as: “Logistics costs shall be cut down to approx. 16% - 20% GDP”. There were several research projects on this topic. Due to the important and significant meanings of this matter, recently (tenure 2019 – 2020), Ministry of Transport has conducted some ministerial projects studying on national logistics cost reduction. Based on the assessment of literature review and current status of the logistics cost, VLA (Vietnam Logistics Business Association) had specific recommendations to improve the logistics services parallel with reduce the logistics cost.

COMPOSITION OF LOGISTICS COST ACCORDING TO OFFICIAL RESEARCH

Logistics cost includes expenditures of transportation, inventory carrying and administration of cargoes in the supplying chain. Main elements of the logistics cost are identified to be customer services, inventory costs, transportation, warehousing, information system, order handling and goods quality. This cost may vary by different kinds of goods, logistics service suppliers and countries, the nit would be calculated in different ways (1). In short terms: “Logistics cost is all costs related to the transportation of one product from the begining... and all expenditures in between”. Logistics cost can be a logistics cost of one enterprise but also a logistics cost of one country. This chapter is all about the national logistics cost like that.

Compositions forming the logistics cost are: Transportation cost; Inventory carrying cost; Administration cost; infrastructure/facility cost. Because the infrastructure cost is mainly managed by Government so it is normally excluded of the logistics cost (2). Depending on calculation methods, many countries have applied the basis composition of the logistics cost as the following: Transportation cost (approx. 60%); Inventory carrying cost (approx. 35%) and Administration (5%). For example, the US logistics cost rate in 2018 was 63%, 33% and 4%.

In Vietnam, up to date, there are 2 studies that has been officially published on the logistics cost, including: The 2014 final report “Transport services supporting and consulting the Ministry of Transport in developing the multimodal transport” provided by ALG consutltancy for Technology and Construction JSC and World Bank (WB); and Transport and Logistics statistical Yearbook in 2018 (NGTK 2018) of Ministry of Transport with the support from WB and the cooperation of International Transport Forum (ITF) of OECD (published in 2020).

The measurement method of ALG consultancy company

ALG calculated the specific logistics cost in specific 12 commodity chains (Electronics and components; Electrical equipment; Textile; Automotive industry; Pharmaceutical; Vegetables; Footwear; Seafood; Rice; Coffee; Drinks; Furniture) then estimated interpolation and concluded that national logistics cost of Vietnam correspond to all domestic add-valued manufacturing fields. The logistics cost contains: Transportation cost 59% + Port charges 1%, Inventory carrying cost and Administration cost 40% (Warehousing: 11%, good loading and unloading: 21% and packaging: 8%). This measurement methods is the same with some logistics cost measurement methods in many countries like USA, Western Europe, Japan, Singapore, Thailand... ALG also provided the specific proportion of logistics cost composed in the product price. For example, in Electronics and Components: 1.2%; in Electrical equipment: 3.5%; in Textile: 9.3%; in Automotive industry: 2%; Pharmaceutical: 0.3%; Vegetables: 29.5%; Footwear: 11.7%; Seafood: 12.2%; Rice: 29.8%; Coffee: 9.5%; Drinks: 19.8% and Furniture: 22.8%. Based on this calculation, ALG suggested that Vietnam’s national logistics cost is about 20.9% GDP (2014), wherein transportation cost accounts for roughly 60%, that is quite high in comparison with other developing countries (3). Currently, the structure of Vietnam’ exported goods has changed dramatically.

In comparison of logistics between 10 commodity fields, among 12 fields that were mentioned in the ALG report in 2010 and updated in 2018, it can be seen that the changing in the structure of commodity chains has led to the change of logistics cost. Particularly, the logistics cost was down from 10.70% to 8.74% in 10 commodity chains (2010 – 2018).

The measurement methods of Statistical Yearbook 2018 (NGTK 2018)

NGTK 2018 calculated the logistics cost in 4 groups: Transportation and handling cost; Warehousing cost; Inventory carrying cost; and Administration cost. Basically, this method is the same with the method of ALG mentioned above.

The only one difference between two methods was that NGTK2018 estimated the logistics cost based on the revenue of all enterprises over the country, including manufacturing enterprises and wholesale enterprises, but not based on the comparison with GDP as in the ALG’s method. Therefore, these two data is totally different. Normally, the logistics cost estimated in corresponding with the total revenue of enterprises will be lower than that if compared with GDP. We should count the logistics cost in comparison with GDP, similar to the ALG’s measurement that has been commonly used in calculating logistics cost of many countries all over the world, and this also presents the development of our logistics services area.

According to NGTK 2018, the logistics cost per total revenue of manufacturing enterprises in 2018 was 8.96% and per total revenue of wholesale enterprises was 9.77%. This rate had been improved higher than that in 2014. The percentage of 4 logistics composition groups is shown in the below figure. In particular, the transportation and handling cost reached the highest percentage (4.80%/8.96% in manufacturing enterprises and 4.75%/9.77% in wholesale enterprises), followed by inventory cost at 1.97% and 2.54% and warehousing at 1.41% and 1.59% and finally administration cost at 0.78% and 0.89%.

Following to the ALG method, VLA had estimated the value based on updated data on the quantity of transported goods and circulated goods then published the result in White Book – VLA 2018 “The logistics cost representing for Vietnam’s GDP in 2017 was from 14.5% - 19.2%, the logistics cost corresponding to GDP estimated was 16.8%, equivalent to US $42 billion”. Compared to the data of NGTK 2018 above, this number is very reliable.

The following figure performs the logistics cost calculated on Vietnam’s GDP and in comparison with that in some relevant countries in 2018.

MAIN CONCEPTS THAT NEED TO FOCUS TO REDUCE THE LOGISTICS COST

The national logistics cost is measured based on the transportation and handling cost, the inventory carrying cost and the administration cost. Thus, to reduce the logistics cost, our country has to focus mainly on this 3 element groups.

Transportation and handling cost

Transportation and handling cost accounts for about 60% of the logistics cost and 1/3 - 2/3 of the distribution cost. Transportation cost composes transport services cost, fuel cost, vehicle cost and vehicle maintainance cost. The report of ALG has shown that transportation cost is about 59% and handling cost takes 1%.

The transportation and handling cost much depends on how to select the transport types, drivers and routes – transport schedule (5) (In the recommendation, it will give more specific examples for this case). According to Ministry of Transport, the trade composition of Vietnam

domestic transport in 2019 was: Traffic road 76.8%, rail way 0.3%, inland waterway 18%, maritime 4.9% and aviation 0% (6). This data indicates that most of domestic goods are carried by road and inland waterway. Therefore, the reduction of logistics cost in transportation is mostly related to road transport reduction and an effective combination between road transport and other transport types.

Transportation cost also depends on the coefficient usage of transport means. An unbalance in demands of goods delivery has led to a high of cars on return with no-goods, from 50% - 75%. In addition, the urban planning has also impeded the urban delivery while the demands of last-mile delivery is boomed along with the strong growth of e-commerce, especially in COVID-19 pandemic.

Currenly, the handling cost still depends on the skill level of handling tools, especially in inland waterway transport. In particular, in many seaports, the foreign container ship lines collect a very high THC (about 2,645,000 VND/4,025,000 VND for one 20’/40’ container), causing a high increase of logistics cost.

Inventory carrying cost

This is one of the largest components of logistics cost, only after the transportation and handling cost, and accounting for over 20% of total assets of producers and over 50% of total assets of wholesalers and retailers (5). In inventory cost, there are normally 4 main costs: budget for inventory, inventory services cost (insurance and tax), space cost for inventory and inventory risk cost (damage and loss – such as loss, damage, expiration, out date and reorder of inventory). The inventory cost is often exchanged with other logistics cost, like transportation cost, customer services cost etc... Hence, a suitable logistics policy must minimize the total logistics cost but maintain well the objectives of customer services in production and circulation. The situation of the current COVID-19 pandemic proved for that conclusion when the world supply chain has bee broken and a severe lack of materials for textile was a typical example.

Administration cost

This includes the wage paid for workers serving for logistics activities and communication cost, costs for indirect HR management, supporting staff, distribution center staff, inventory planning and analysis staff and shipping department.

(Waiting for Part 2: Recommendations about solutions for reducing logistics cost in VLR157 November/2020)

Le Duy Hiep, Dao Trong Khoa, Nguyen Duy Minh, Nguyen Tuong

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