CHAPTER FOUR: Logistics value chain Contents: Introduction, Overview on Logistics Value Chain, Key Elements for Value Chain Analysis for RURB, The Seven-step Sea Freight Transportation Model, Logistics Value Chain Models, Sea Freight Logistics Stakeholder Analysis, Standard Industrial Classification of Freight Logistics, Logistics Trade Directory, Appendix Key Points 1. This chapter has identified the various conceptual frameworks that have been developed for logistics studies. The frameworks are generally process or activity-based, focusing on the chain of activities involved in import-export logistics. The number of different frameworks shows the complexity of logistics activities, as each framework focuses its own specific purpose. 2. This RURB study focuses on sea freight import-export logistics. It is using the process-based model that resembles the industry’s perspectives of logistics activities. As such the industry Seven-step Sea Freight Transportation framework provides clarity on the analysis of the logistics value chain. To support value chain analysis, consideration is made on the product-based perspective of logistics activities. 3. The WTO Trade Facilitation framework’s main purpose is to ensure a common understanding of trade rules between economies so that goods can move smoothly and efficiently between them. 4. The World Bank Trading Across Borders framework serves to benchmark between economies in the import-export sea freight logistics. This particular benchmark indicator is one of ten indicators to rank economies by the ease of doing business. 5. Another World Bank benchmarking framework is the Logistics Performance Indicators that measures and benchmarks logistics quality among economies. The measures are made from perception studies of freight forwarders in the import-export activities. 6. The UN/CEFACT Buy-Ship-Pay framework provides a process-based perspective of the international supply chain. The purpose is to have a model that can be used as a reference for all parties engaged in the supply chain in order to assist in harmonization of trade processes and data, use of best practice, promotion and training. 7. The Frost and Sullivan Framework is specially developed is a snapshot study of the logistics infrastructures and capacities to analyse the “as-is” logistics capability of the country. The aim is to propose the strategic development of the logistics sector in the medium-term. 8. The review of these frameworks enables a compressive stakeholder analysis to be made. The MISC2008 provides the industrial classification of the logistics business activities of interest. 52 9. The Malaysian Logistics Directory portal provides a large samples of logistics businesses, while the Malaysian Trade Facilitation portal is able to identify four categories of stakeholders in sea-freight export-import logistics. Introduction Malaysia is a fast developing economy that has been dependent on its capacity to trade globally. Since the early eighties, until recently, the economic emphasis has been on industrialisation through the manufacturing industry and the export of manufacturing. The earlier years of industrialisation was focused on employment growth through low cost labour intensive industry. As the country achieved full employment, the continuing growth of the economy was supplemented by imported foreign labour. The country also began to focus on higher added value output and the need to improve the capacity of manufacturing-related services in the Second Industrial Master Plan (1996-2005). The emphasis was on the Manufacturing++ Strategy1 (Figure 4.1). The emphasis of the Manufacturing++ Strategy is to encourage the investment into high technology, high added value industry. It also calls for the development of more knowledge-based manufacturing-related services industry. Distribution or logistics is also the focus of Manufacturing++. This strategy continues into the third Industrial Master Plan (2006-2020). Being a highly export-oriented economy, Malaysia has a mature export logistics sector. The emphasis over the last many years has been on the continuous growth of ports and airports, which are the main across-border trading outlets. The World Bank’s Logistics Performance Index 2014 puts Malaysia at the top ranking of the upper income economies. Malaysia is grouped together with many high income economies as a “logistically friendly” country2. 1 MITI (1996), Second Industrial Master Plan, 1996-2005 – Executive Summary, Ministry of International Trade and Industry, Malaysia, pp. 10-13 2 World Bank (2014), Connecting to Compete 2014 – Trade Logistics in the Global Economy 53 Figure 4.1: IMP2 - Manufacturing++ Strategy Continuous Productivity Improvement (High technology emphasis) Backward integration IMP-1 Forward integration of value chain Emphasis of value chain R&D Product Assembly & Distribution Marketing Design Production Source: MITI (1996) Overview on Logistics Value Chain Logistics is basically concerned with moving physical goods from one location to another for the purpose of trade. It may be from business to customers within the country’s borders or across borders. When it involves cross border trade, trades facilitation becomes crucial to economic growth. Logistics, according to the Council of Logistics Management3, “is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements." Note that this definition includes inbound, outbound, internal and external movements, and return of materials for environmental purposes. The logistics value chain4 is one part of an enterprise’s value chain, which includes such external logistics activities as delivery of raw materials and finished goods, and also involves such internal logistics activities as production and selling. Logistics is used to optimize and integrate the resources, while the logistics value chain is used to design and plan the value-added activities in the logistics process. Figure 4.2 illustrates a conceptual view of a logistics value chain. 3 Council of Logistics Management, http://www.clm1.org/mission.html , 12 Feb 98 4 Xingjian Zhou (2013), Research on Logistics Value Chain Analysis and Competitiveness Construction for Express Enterprises, American Journal of Industrial and Business Management, 2013, 3, 131-135, (http://www.scirp.org/journal/ajibm) 54 Figure 4.2: Logistics Value Chain Source: Zhou (2013) Import and export procedures largely refer to: "the activities (practices and formalities) involved in collecting, presenting, communicating and processing the data required for movement of goods in international trade"5. Trade facilitation6, which is the simplification and harmonisation of international trade procedures including import and export procedures, is an important aspect of cross border trading activities. Trade facilitation is a key policy for customs. Customs has a major role to play at all levels of facilitation, in particular: i. helping to define the policy space ii. drawing up the framework and rules of implementation, and then iii. putting into place the tools and processes at operational level The OECD believes that trade facilitation agreements can reduce trade transaction costs by 13% to 15% in developing countries. However, there are the immediate costs of implementing measures covered by a trade facilitation agreement. According to the World Bank, this would cost from $7million to $11million. It is argued that the costs of not implementing the agreement may be far higher than the immediate implementation 5 European Commission: Trade Facilitation http://ec.europa.eu/taxation_customs/customs/policy_issues/trade_falicitation/index_en.htm 6ITC 2013, WTO Trade Facilitation Agreement – A Business Guide for Developing Countries. International Trade Centre, Geneva 55 costs, in terms of how trade facilitation can contribute to reaching development goals as illustrated in Figure 4.3. Malaysia has focused its trade facilitation7 efforts on developing a new agreement on trade facilitation aimed to address issues relating to: freedom of transit of goods fees and formalities connected with importation and exportation publication and administration of trade regulations Figure 4.3: Outcome of Trade Facilitation Agreement8 Source: ITC 2013 Such an agreement would ensure reform in multilateral rules and bring benefits in terms of providing faster and more efficient clearance of goods, reduction in cost of doing business and more transparent and predictable international trade. These efforts would contribute to the efficiency of the logistics chain. Trade facilitation in Malaysia is closely aligned with the World Trade Organisation, WTO definition which states that: “The Trade Facilitation Agreement contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities on trade 7 MITI: Trade Facilitation: http://www.miti.gov.my/ 8 Note: The ultimate objective of Trade Facilitation Agreement is poverty reduction. In the case of Malaysia, the objective outcome would be achieving a high income status. 56 facilitation and customs compliance issues. It further contains provisions for technical assistance and capacity building in this area.” Key Elements for Value Chain Analysis for RURB There are different logistics