Logistical nightmares

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.