The U.S. Isn’t On The Top 5 Global Logistics Performance Index List: How Can We Get There?
The role of logistics in the global economy is better recognized today than it was 10 years ago, because good logistics services reduce the cost of trade. Logistics performance is about how efficiently supply chains connect firms to domestic and international opportunities, and the capacity of developing countries to efficiently move goods and connect manufacturers and consumers with international markets is improving –– albeit slowly. But, much more is needed to close the existing "performance gap" between high and low performers. Supply chains are only as good as their weakest link, and sustainable improvements require complex changes in a range of policy dimensions in areas including infrastructure, trade facilitation and services.
Because facilitating trade and transport is at the core of stimulating economic development, several countries have developed comprehensive national logistics strategies. Well-functioning domestic and international logistics is a precondition of national competitiveness. And, fact-based metrics can provide reliable benchmarks, assess policy impacts, and compare global advances in logistics. The World Bank Logistics Performance Index (LPI) is a unique benchmarking tool, providing the same measure for more than 160 countries.
The LPI attempts to capture how logistically accessible, or how well connected to the physical internet of global logistics, a country is. Since the LPI was launched, gaps in performance have persisted between low-performing countries and high-performing ones, mostly in Europe and East Asia, where logistics has developed into an important service sector. The last comprehensive report was released three years ago in 2018, and the US was nowhere to be seen in the top five performing global countries, which included Germany, Sweden, Belgium, Austria, and Japan.
Surely the pandemic further demonstrated weaknesses in supply chains throughout the world and now is the time to assess ways the United States can push into the top shelf of logistics in the world. What can we learn from those nations who earned top marks?
Implement Blockchain
Blockchain, the digital record-keeping technology behind Bitcoin and other cryptocurrency networks, is a potential game changer in supply chain management. Blockchain can greatly improve supply chains by enabling faster and more cost-efficient delivery of products.
It helps participants record price, date, location, quality, certification, and other relevant information to more effectively manage the supply chain. The availability of this information within blockchain can increase traceability of material supply chain, lower losses from counterfeit and gray market, improve visibility and compliance over outsourced contract manufacturing, and potentially enhance an organization's position as a leader in responsible manufacturing.
Organizations can digitize physical assets and create a decentralized immutable record of all transactions, making it possible to track assets from production to delivery or use by end user. Adopting more blockchain technology in the United States can help bolster our logistics efficiencies and reduce risk.
The U.S. should look to the fifth top ranking nation, Japan, who adopted blockchain NTT Data, one of the largest information technology companies. They collaborated with Mitsubishi UFJ Financial Group (MUFG) and Singapore’s National Trade Platform to launch a blockchain POC that would foster trade between Singapore and Japan. With Skuchain, NTT DATA developed a business collaboration platform for Japanese manufacturers to boost supply chain efficiency.
However, it’s not without its challenges. Replacing slow, manual processes is tough. Although supply chains can currently handle large, complex data sets, many of their processes, especially those in the lower supply tiers, are slow and rely entirely on paper—such as is still common in the shipping industry. The U.S. would also need to find a way to pay for it. With block chains, a human person is currently paid to validate each block or transaction, and requires people who propose a new block to include a fee in their proposal. Such a cost would likely be prohibitive in supply chains because their scale can be staggering. Still, it's a problem that needs to be worked through if the U.S. wants to push ahead.
Improve Infrastructure
China’s Belt and Road Initiative (BRI), sometimes referred to as the New Silk Road, is one of the most ambitious infrastructure projects ever conceived. Launched in 2013 by President Xi Jinping, the vast collection of development and investment initiatives would stretch from East Asia to Europe, significantly expanding China’s economic and political influence. It’s a massive trade and infrastructure project that aims to link China—physically and financially—to dozens of economies across Asia, Europe, Africa, and Oceania.
The BRI consists of two parts: the "Belt," which recreates the old Silk Road land route, and the "Road," which is not actually a road, but a route through various oceans. According to the China National Development and Reform Commission, the BRI has five different priorities: policy coordination, unimpeded trade, enhanced connectivity, financial integration, and bonds among people. The BRI is also often discussed as a policy for rebalancing the Chinese economy, stimulating Western regions, and advancing China’s strategic and geopolitical goals.
China has invested at least $900 billion (£635 billion) in projects along the belt and road, mainly in transportation and telecommunications infrastructure, rural infrastructure, energy and power, agriculture development, water supply and sanitation, environmental protection, and urban development and logistics. One of the key opportunities of the BRI is that it opens up many new alternative trade routes and modal choices for companies doing business between China and the Belt and Road countries through physical infrastructure improvements being made, involving upgrades of existing rail tracks as well as expanded rail tracks.
Even though this ambitious plan is seeing major benefits, some analysts see the project as a disturbing expansion of Chinese power, and the United States has struggled to offer a competing vision. The initiative has also stoked opposition in some countries involved in Belt and Road that have taken on high levels of debt. The U.S. should look to China’s model of prioritizing physical infrastructure reform like rail systems and ports –– without overspending.
Reform Customs and Border Management
Germany performs at the top of the LPI, mostly in part due to efficient border clearance and custom processes. Customs processes can cause a bottleneck on trade and those countries with streamlined systems have the most cost effective and business friendly logistics. According to the 2018 LPI, logistics performance is heavily influenced by the quality of public sector institutions, and the effective coordination of border clearance processes among all border management agencies. In this area, customs performs better than many other agencies, pointing to the need for border management reforms. In low performing countries, on average, half of the containers are physically inspected and one container out of seven at least twice.
Customs and other government agencies play a pivotal role in the facilitation of international trade. Besides having to efficiently manage the clearance and ensure the security of international cross-border movements of goods and conveyances, these organizations also have to apply coordinated cross-border management principles to foster cooperation and to coordinate their respective regulatory activities. Border formalities must be accomplished with Customs and the other governmental players in both the export and import countries (and often during transit).
The U.S. can look to Germany and other top LPI ranking nations in how they handle cross-border coordination of government activities within their own, country and among countries (e.g. through mutual administrative assistance and exchange of relevant information), which is vitally important for the free, smooth and unhindered flow of international trade.
The U.S. ranked 15th on the LPI and, while that is by no means near the bottom of the list, we are one of the largest, wealthiest, and most powerful nations in the world. There are clear areas for improvement, and examples of solutions to learn from, if we choose to prioritize logistics services the way other top ranking nations have.