The Importance of Measuring Philippines Logistics Performance Ruth Banomyong (PhD) World Bank/IFC Consultant ruth@banomyong.com PhilExport GMM September 2017

Outline Outline Why is it important to understand logistics performance? Methodology & Data Collection Respondents characteristics & freight flows Philippines logistics cost/sales By sector By region Philippines logistics performance Logistics strategy development Outsourcing and LSP capability Logistics human resource Summary and way forward…

Why is it important to understand logistics performance? Logistics is a key opportunity to improve profitability and firms’ competitive performance. Obtaining industrial sectors’ logistics performance is necessary for country to improve overall logistics capability. Logistics costs increase with decreasing logistics performance. Most of this increase comes from lower reliability and the need to increase inventory (“other costs”) However, “cost” cannot be the only logistics performance dimension

Methodology & Data Collection A questionnaire was developed based upon existing questionnaires developed by the World Bank for assessing industrial logistics performance The DTI supported the data collection and key-in process Data was collected in workshop format in key locations across the country in collaboration with main professional organizations in the country (i.e PhilExport) Most respondents were SMEs

Data Collection Location No. Period Manila 32 Feb/March 2017 Clark, Pampanga 18 March 22, 2017 Batangas 10 April 4, 2017 Cebu 13 April 20, 2017 Iloilo 14 Davao 8 April 25, 2017 Tagaytay (Laguna and Cavite) 45 April 28, 2017 Cagayan De Oro 15 May 11, 2017 General Santos 4 May 16, 2017 TOTAL 159 respondents 

Location of respondents The main respondents are from Manila and Laguna Other respondents are scattered across the country

Main Manufactured Products Products & Markets Main Manufactured Products Main Markets

Import flows

Export flows

Logistics cost/sales Cost/Sales Philippines Transport 10.71% Warehousing 5.20% Inventory carrying 8.78% Logistics administration 2.47% Logistics Cost/Sales 27.16% Vietnam Indonesia Thailand 7.04% 8.81% 5.57% 3.78% 3.45% 2.49% 4% 7.19% 2.04% 1.48% 1.95% 1.01% 16.3% 21.40% 11.11%

Logistics cost/sales by sector Philippine Automotive 23.08% Chemical products 43.30% Construction materials 16.44% Electronics 13.57% Food 32.72% Furniture & Decors 18.07% Jewelry 16.87% Textile & Garment 20.35% Vietnam Indonesia Thailand 33.55% 16.84% 14.75% 27.14% 27.01% 10.09% 28.60% 35.13% 10.46% 4.40% 34.43% 12.14% 17.60% 20.97% 10.32% NA 45.32% 11.44% 20.47% 14.30% 16.01% 8.55%

Transport Cost Comparison by Sector Transport and cargo handling cost (incl. transport packaging) Philippines Automotive 6.67% Chemical products 11.90% Construction materials 7.54% Electronics 4.93% Food 13.74% Furniture & Decors 5.71% Jewelry 6.75% Textile & Garments 10.75% Vietnam Indonesia Thailand 8.00% 4.35% 7.11% 9.00% 11.08% 5.30% 15.00% 11.54% 4.95% 3.00% 12.98% 4.84% 14.00% 9.04% 5.03% NA 8.50% 6.21% 9.33% 6.20% 3.89%

Warehouse Cost Comparison by Sector Warehousing (cost of running own warehouse or buying the service) Philippines Automotive 6.00% Chemical products 7.46% Construction materials 4.66% Electronics 4.00% Food 5.55% Furniture & Decors 5.43% Jewelry 0.25% Textile & Garments 2.75% Vietnam Indonesia Thailand 1.00% 1.77% 4.37% 6.00% 3.42% 1.73% 5.00% 3.83% 2.46% 10.83% 4.36% 3.70% 2.28% NA 6.70% 2.18% 2.60% 2.39% 1.88%

Inventory Cost Comparison by Sector Inventory carrying cost (incl. cost of capital tied in inventory) Philippines Automotive 8.31% Chemical products 20.00% Construction materials 2.74% Electronics 3.40% Food 10.45% Furniture & Decors 5.29% Jewelry 8.33% Textile & Garments 5.00% Vietnam Indonesia Thailand 21.50% 9.19% 1.93% 9.67% 10.05% 2.14% 6.00% 16.57% 2.10% 0.00% 7.49% 1.84% 1.00% 6.32% 2.07% NA 26.00% 2.01% 6.68% 9.00% 5.96% 2.00%

Logistics cost/sales by region   Avg Transport and cargo handling cost (incl. transport packaging) Luzon 7.78% Visayas 9.40% Mindanao 10.93% Warehousing (cost of running own warehouse or buying the service) 3.94% 3.80% 5.79% Inventory carrying cost (incl. cost of capital tied in inventory) 4.17% 9.60% 10.85% Logistics administration (10% of above costs) 1.59% 2.28% 2.76% Total Logistics Cost/Sales 17.48% 25.08% 30.32%

Logistics Performance issues Reliability is the most important logistics performance dimension The symptoms of low reliability is high logistics cost Manufacturers consider that reliability of the logistics system in the Philippines need to be improved

Overall Logistics Performance KPIs Mean Philippines Vietnam Indonesia Thailand Delivery In Full On Time 89.62% 90.99% 81.92% 87.84% Damage rate 3.70% 2.18% 2.01% 4.16% Cash Conversion Cycle (C2C) days 21.77 20.29 19.00 NA Customer Complaint Rate 5.97% 6.65% 6.61% 2.64% Forecasts Accuracy 80.15% 75.53% 81.68% 84.40% Ratio of Returns 5.15% 2.26% 3.55% 3.58%

Sector Comparison vs other ASEAN countries DIFOT Philippines Vietnam Indonesia Thailand Automotive 97.18% 98.00% 83.75% 82.45% Chemical products 85.71% 100.00% 81.17% 87.57% Construction materials 81.44% 75.00% 95.58% 86.36% Electronics 88.05% 80.00% 95.32% 85.36% Food 88.02% 100% 91.14% 89.41% Furniture & Decors 96.30% NA 90.22% 86.09% Jewelry 99.60% 89.64% Textile & Garments 91.55% 93.75% 90.66%

Sector Comparison vs other ASEAN countries Damage rate Philippines Vietnam Indonesia Thailand Automotive 0.28% 0.22% 3.91% 4.31% Chemical products 2.13% 3.50% 3.23% 3.95% Construction materials 2.76% 7.50% 1.56% 4.00% Electronics 2.29% 0.08% 2.10% 4.24% Food 5.06% NA 2.19% 4.07% Furniture & Decors 3.26% 3.07% 4.48% Jewelry 0.88% Textile & Garments 5.21% 0.50% 4.94% 4.41%

Sector Comparison vs other ASEAN countries C2C (days) Philippines Vietnam Indonesia Automotive 0.38 22.40 22.42 Chemical products 21.15 33.33 26.00 Construction materials 25.94 4.00 9.10 Electronics 21.71 28.00 27.33 Food 22.10 34.00 17.00 Furniture & Decors 14.50 NA 25.60 Jewelry 38.83 45.00 Textile & Garments 24.55 26.50 32.00

Sector Comparison vs other ASEAN countries Complaint rate Philippines Vietnam Indonesia Thailand Automotive 1.95% 3.21% 8.45% 2.79% Chemical products 5.79% 9.00% 11.82% 2.71% Construction materials 5.28% 10.00% 3.56% 2.68% Electronics 9.38% 5.00% 2.70% 2.66% Food 6.48% 3.85% 2.72% Furniture & Decors 4.31% NA 6.00% 2.55% Jewelry 3.75% 1.51% Textile & Garments 8.62% 7.50% 8.78% 2.51%

Sector Comparison vs other ASEAN countries Forecast Accuracy Philippines Vietnam Indonesia Thailand Automotive 87.07% 74.00% 89.50% 82.20% Chemical products 85.55% 55.00% 83.70% 85.70% Construction materials 76.87% 87.50% 90.89% 80.90% Electronics 75.71% 70.00% 85.00% 82.80% Food 80.61% 88.31% 86.70% Furniture & Decors 80.00% NA 83.13% 82.00% Jewelry 88.60% 87.33% Textile & Garments 70.91% 82.78% 87.90%

Sector Comparison vs other ASEAN countries Return Philippines Vietnam Indonesia Thailand Automotive 1.71% 1.40% 5.89% 4.21% Chemical products 5.27% 2.50% 5.91% 2.36% Construction materials 2.53% 4.00 1.25% 3.98% Electronics 3.31% 0.80% 3.19% Food 7.37% 3.44% 3.00% Furniture & Decors 4.58% NA 6.50% 4.50% Jewelry 3.20% 0.83% Textile & Garments 3.81% 5.00% 5.42% 2.66%

Logistics Performance by regions   Average Average Order Cycle Time (days) Luzon 29.15 Visayas 27.76 Mindanao 14.83 Transportation Lead Time (days) 10.94 19.16 11.65 Delivery In Full On Time (%) 90.76 83.81 86.46 Damage rate (%) 3.10 5.46 3.96

Logistics Performance by regions   Average Cash Conversion Cycle (C2C) (days) Luzon 21.93 Visayas 23.60 Mindanao 13.45 Customer Complaint Rate (%) 5.65 8.64 4.46 Forecasts Accuracy (%) 79.88 82.18 80.00 Ratio of Returns (%) 4.90 4.67 7.56

Philippines International LPI vs. WB LPI International logistics LPI 2016 Score/5 a) The effectiveness of Customs and other authorities in customs services 2.61 3.23 b) The quality of transport and telecommunications infrastructure 2.55 3.34 c) The quality of port infrastructure 3.30 d) The quality of airport infrastructure e) The quality of road infrastructure 3.19 f) The availability of logistics infrastructure (i.e. warehouse, distribution centres, etc.) 3.58 g) The availability of reliable transport services 3.01 3.66 h) The quality of logistics services and competence of service providers 2.70 3.73 i) Possibility to track and trace shipments 2.86 3.67 j) The probability of shipments arriving at the promised time 3.35 3.49 Average 3.45

Philippines International LPI vs. WB LPI International logistics Score/5 Luzon Visayas Mindanao a) The effectiveness of Customs and other authorities in customs services 2.61 3.33 3.04 3.11 b) The quality of transport and telecommunications infrastructure 2.55 3.36 3.42 c) The quality of port infrastructure 3.24 3.56 3.35 d) The quality of airport infrastructure 3.28 e) The quality of road infrastructure 3.15 f) The availability of logistics infrastructure (i.e. warehouse, distribution centres, etc.) 3.64 3.43 3.55 g) The availability of reliable transport services 3.01 3.76 3.70 h) The quality of logistics services and competence of service providers 2.70 3.80 i) Possibility to track and trace shipments 2.86 3.77 j) The probability of shipments arriving at the promised time 3.62 3.20 Average 3.48 3.44

Philippines Domestic LPI vs. WB LPI Domestic logistics LPI 2016 Score/5 a) The quality of transport and telecommunications infrastructure 2.61 3.23 b) The quality of port infrastructure 2.55 3.14 c) The quality of airport infrastructure 3.39 d) The quality of road infrastructure 3.02 e) The availability of logistics infrastructure (i.e. warehouse, distribution centres, etc.) f) The availability of domestic shipping services 3.41 g) The availability of reliable transport services 3.01 3.47 h) The quality of domestic shipping services 2.70 i) The Quality of logistics services and competence of service providers 3.57 j) Possibility to track and trace shipments 2.86 3.37 k) The probability of shipments arriving at the promised time 3.35 3.26 Average 3.34

Philippines Domestic LPI vs. WB LPI

Developing Logistics Strategy Documented logistics plan Strategy development

Logistics outsourcing Most outsourced activities are: Domestic transport Domestic freight forwarding International transport Customs brokerage Most in-house activities are: Warehouse Inventory management Logistics IT system Value-added services In-house Outsource Indonesia 51% 49% Vietnam 32% 68%

Outsourced LSP activities & revenue Most outsourced logistics activities Revenue generation

Logistics Service Level Agreements (SLAs) It is interesting to note that not all providers are under SLAs. More than 1/3 of outsourcing is done with no SLAs. Only 1/5 respondents have SLAs with all their service providers.

Most common performance issues Customs process is considered the most problematic issue for LSPs However, congestions and weather issues are also key issues Need to address issue related to delays in receiving cargo

Summary Logistics cost/sales is higher than in other ASEAN countries Large variations by regions and sectors in terms of performance and cost Reliability is the dominant logistics performance issue Outsourcing still focused on traditional logistics activities Overall logistics performance is perceived higher than the WB’s LPI score and ranking

Way forward… Create awareness related to the importance of a well developed logistics plan Conduct supply chain studies on best/worse performing sectors Conduct logistics corridor studies to identify waste in the system Professionalise the logistics industry and its human resources. Ever changing job requirements Establish “peer groups” to share logistics best practices Support more logistics outsourcing with LSP quality assurance scheme Need to harmonise domestics logistics with international logistic standards

If reliability improve, then… Way forward… The focus needs to be on assuring the reliability and the removal of uncertainties in the logistics system in the Philippines…. If reliability improve, then… Manufacturers/LSPs can design and plan more optimized logistics systems and be more competitive Logistics costs can be reduced Focus can then move to time based competition