Logistical nightmares

A recent study of 75 large export-oriented companies at four of Indonesia's largest seaports concluded that logistics services accounted for an average of 14 percent of total production costs. This finding, released on Monday, simply confirms what most businesspeople have long complained about -- the relative high cost of doing business here -- that makes exports less competitive internationally.

The study, conducted by the University of Indonesia's Institute for Economic and Social Research, found that the high costs derived mainly from poor infrastructure, illegal fees and arduous bureaucratic procedures.

The timing of the report could not have been better because the issues surrounding the cost of doing business will again become an increasingly hot topic within the next few weeks in connection with the government's plan to increase fuel prices in October. Higher gasoline, diesel and kerosene prices certainly will increase the burdens on businesses as the prices of electricity and other goods and services will follow those hikes. Companies also will face strong demands from trade unions for higher wages so employees can cope with an increase in daily expenses.

Businesses have often argued they would easily be able to weather the upcoming rise in fuel prices, if the high-cost factors of doing business here could be reduced. Citing one small example, the Food and Beverage Industries Association claims that hauling cargo from Jakarta to Surabaya requires an average of only 200 liters of diesel fuel which, based on the current price, amounts to only Rp 440,000 (US$44). However, illegal fees imposed on trucks by officials at the 14 weigh stations and bridges in between the two cities often reaches well over Rp 400,000 (usually a standard Rp 30,000 at each). If these illegal payments were removed, businesses could easily absorb the additional costs derived from higher fuel prices.

But why is there so much fuss about the logistics of moving merchandise to and fro? The logic is quite simple. Lower logistics costs -- lower transport costs, shorter transit times, reliable delivery schedules, careful handling of goods in cold storage chains -- are vital for trade and smooth distribution of goods. Reducing the costs of moving goods between markets reduces the price paid by consumers and increases the profit for producers.

Large companies cannot manufacture goods without the inputs they need and, in the case of Indonesia, most manufacturers still rely on a lot of imported materials, parts and components. Hence, if delivery times are expedient and reliable, manufacturers would not need to hold large inventories of raw material, thereby cutting down on their inventory costs.

Superior logistics management is the key to making Hong Kong and Singapore an efficient trans-shipment hub for their neighbor countries. In addition to their highly efficient port-handling systems, their auxiliary services like customs and freight forwarding are also smooth.

Foreign investors will be encouraged to enter Indonesia if the country can offer efficient logistical services. However, an efficient supply chain requires a minimum set of conditions, notably efficient transport and expedient customs services to ensure the free flows of goods and services (including labor).

Inefficient logistical services are a major reason why Indonesian products remain grossly uncompetitive on the world markets and why the country remains among the least favored places for doing business, as confirmed by the latest survey by the International Finance Corporation released here on Tuesday. The IFC, the World Bank's arm for private sector development, ranks Indonesia 113th out of 155 countries surveyed for its Doing Business in 2006: Creating Jobs report, which measures the competitiveness of a country as a place for doing business.

Modern production systems indeed require much more than simply efficient transport services but, more importantly, many other sophisticated logistical needs, which make up an efficient supply-chain management to allow for lower warehousing costs, lean manufacturing, right-on-time delivery.

International studies have shown that supply chains in Indonesia are still very inefficient, as evidenced by the high portion of production/operating costs needed for distribution and logistics, and their affect on the prices of goods. Reduction in transportation and telecommunications costs and significant improvements in supply-chain management will help make the country a viable place doing business as a regional production base.