Logistics has become an enormously important component of the gross domestic product (GDP) of industrialized nations: Managing System & Science Assignment, UBA, Malaysia

University Universal Business Academy (UBA)
Subject Managing System & Science

Logistics has become an enormously important component of the gross domestic product (GDP) of industrialized nations and thus affects the rate of inflation, interest rates, productivity, energy costs and their availability and other aspects of the economy as well. Ever changing business environment due to globalization, lead time reductions, customer orientation, and outsourcing has contributed to the interest in logistics (Hertz & Alfredsson, 2003).

The increase in global production sharing, the shortening of product life cycles, and the increase of global competition all underline logistics as a strategic source of competitive advantage (Arvis, Mustra, Panzer, Ojala, & Naula, 2007). Moreover, in order to remain in a competitive marketplace and earn reasonable profits, organizations’ interest in logistics has increased. Logistics operations have become more efficient due to technological advancements which make it possible to deliver goods on time while reducing the cost involved.

Global market access has been improved over time with the advancement in technology and trade liberalization resulting in the economic growth and development of the countries. Patterns in the market competition situation are continuously dictating the supply chain flows (i.e. product, price, and information flows) in a predictable, timely, and cost-effective way. Global firms’ corporate decisions regarding which country to locate in, which suppliers to buy from, and which consumer markets to enter are largely based on logistics costs, quality, and service level. Therefore, countries with higher overall logistics costs are more likely to miss the opportunity of globalization.

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Nearly every sphere of human activity is affected, directly or indirectly, by the logistics process. Certainly, the improved logistics are expected to have important economic effects. Lower logistics costs and services affect positively in production, distribution and trade, and/or retail activities of the firms. Reduced/minimum logistics costs enable a production or distribution facility to serve a wider market area, with potential gains from economies of scale. It also means that a firm can draw supplies from a wider area with potential gains in terms of the cost and/or quality of parts and materials.

Logistics costs include transportation costs, costs of owning and operating warehouses, ordering costs, and carrying costs of inventory (Consulting & Decision-Economics, 2002). To understand, how logistics productivity improvement helps in boosting economic growth, the following Figure 1 represents how investments in transportation infrastructure (a sub-sector of logistics) can lead to generative effects and growth in the national economy. It can also be drawn that a reduction in shipping costs and transit time and an increase in schedule reliability can be expected to have significant impacts on inventory management at the supply chain level.

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Consequently, the efficiency and reliability of the logistics system affect economic productivity which is the most important determinant of economic performance. Therefore, the logistics industry is the artery and the basic industry of the national economic development in the world. Its development level is one of the important marks to evaluate the level of state modernization and comprehensive national strength. Logistics is the accelerator of economic development and growth.

The World Bank, with its professional and academic partners, has produced the Logistics Performance Index (LPI) to help countries develop logistics reform programs to enable trade and enhance their competitiveness. The LPI is a comprehensive index created to help countries identify the challenges and opportunities they face in trade logistics performance (Arvis, et al., 2007).

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