Logistics and Supply Chain Management, potentially the “last frontier” for company’s cost reduction potential, has been heatedly discussed for over half a century. In recent years it has emerged as a key business concern and moved higher up the agenda in organisations in every industry sector. Adequate and reliable supply is the key to the success of not only battles in war, but also equally intense battles in the business arena. But does a specific region also need to develop a focus on logistics capability?
Today we are living in a world where distances are no longer prohibitive. Transformations in transportation and communications technologies have indeed shrunk the world. The relative ease and speed of air travel allow for frequent face-to-face interaction whenever necessary. Moreover, rapid IT development provides us with high speed and easily accessible communications technologies and makes it possible to communicate to suppliers and customers around the world almost as easily as with suppliers and customers next door. As a result, the expansion of global trade in manufactured goods became one of the most remarkable economic trends of the last 40 years, which shows no sign of abating. However, the significance of the spatial separation of nations and regions in economic life is not lessened. As our lives increasingly rely on international trade, the crucial role of logistics is gaining more and more focus for enhancing competitive advantage for not only specific companies, but also on a larger scale – economies.
Logistics is important to the economic development of countries and regions around world and it has always been a central and essential feature of all economic activity. The World Bank’s Logistics Performance Index Reports provide clear evidence of the positive correlation between logistics performance and economic growth at national level. The best logistics performers could gain better access to more distant markets and consumers, and achieve more benefits from globalisation.
This close logistics-economy relationship is found at the regional level too. The physical flow of goods is an essential element of the trade and linkages among different regions across the world. Improved access to input materials and to markets will cause firms in a region to be more productive, more competitive and hence more successful than those in regions with inferior accessibility. A capacity to network, which ties a region to relevant external partners, has become a stronger determinant for regional development. Those regions which are successful in forging these links are likely to witness a significant increase in competitiveness and rapid economic growth. Logistics capacity therefore has a crucial role in regional economic development.
The concept of Regional Logistics Capability (RLC), defined as “the effectiveness and efficiency of a region in facilitating logistics activities both within the region and across regional borders”, is crucial to both regions seeking to develop and companies planning their spatial strategy.
Many factors together determine RLC. Firstly, the location of a region is obviously crucial to its connectivity and economic development. Adam Smith in the Wealth of Nations put great stress on geography as a determinant of economic development. Secondly, transport infrastructures such as road, rail, water, air and pipeline facilities are strongly related to the quality of interregional accessibility and economic development. Human capital is another important resource for logistics performance. Like any other industry, the logistics industry depends on a sufficient workforce base to operate, especially in those labour-intensive areas such as cargo handling in warehouses. Moreover, the quality and competence of core logistics service providers is also a useful measure of logistics performance. Finally, efficient government administration and support in facilitating logistics activities is another important factor in determining the international competitiveness in a region’s logistics capability.
Research has recently been undertaken by one of our Analysts to fill this gap by discussing the logistics-economy relationship among the regions in Great Britain. This study has developed a measurement framework which aggregates an overall numerical evaluation (RLC score) of the logistics performances from all factors discussed above. This RLC score is then used to confirm a close relationship between the logistics capability and economic development at the regional level in GB. More in-depth analysis also identifies the key factors determining a region’s logistics capabilities to be Infrastructure, Location and Workforce, which has significant implications in developing the RLC in GB.
GB Regional Logistics Capability ranking
This research has also identified four groups of regions by their logistics capabilities, as illustrated by the red lines: the top performers (Top group) in regional logistics are the South East with RLC near 70 and the North West (RLC around 65). East of England, Yorkshire & Humber, Scotland and London come in the upper-medium group with RLC around 50. The Midlands and the South West score around 40 on RLC in the Lower-medium group. Wales and the North East are the worst performers with RLC scores around 28 and 21 respectively (Bottom group).
GB Regional Logistics Capability structure
Each region has seen specific strengths and weaknesses in logistics capabilities, as illustrated by the above figure. In light of the key RLC factors and the actual GB regional conditions, this research suggests a list of guidelines to develop RLC.
The priority for the top regions should be to continue maintaining the existing transport infrastructure as an asset and to reduce the adverse impacts of logistics activities by switching to more sustainable modes of transport and reduce unnecessary freight movement. For the regions in the medium RLC performance groups, great efforts should be made to fill the gaps in their weaker areas of RLC for a more balanced overall logistics capability development. As for the bottom regions, significant improvements are needed in every aspect of RLC though priority should be given to Infrastructure, Location, and Workforce capacity developments to firstly raise regional significance, connectivity and international market penetration, and then through fully capitalising on developing new freight infrastructure, these regions could seek to further increase their RLC to regenerate economic development. In the meantime, it is necessary to development a large and well-trained workforce to support the growth in the logistics activities in these regions.
This study is among the few early attempts to address logistics capability at a regional level. For more details, please contact us at The Logistics Business.