Logistic services involve planning and managing the transport of goods throughout the delivery process. Demand for logistic services is largely driven by (1) manufacturers’ needs to manage more efficiently the flow of goods across increasingly complex supply chains and (2) Just-In-Time production techniques, which enable manufacturers to eliminate waste and to reduce inventory costs.

      Advances in information technologies and increased trade liberalization can also facilitate logistic services by more efficient document transmission and by lowering barrier costs, such as tariffs. Lingering impediments to better logistic services still occur, however, especially in the transportation sector, where regulations may hinder market access and require use of domestic suppliers for some delivery routes. This leads to higher transportation costs and less service reliability, ultimately reducing consumer welfare. Trade agreements may reduce or eliminate such impediments. This article surveys logistic services, including major industry players and factors driving demand; examines impediments to the international provision of logistic services; and discusses the potential of reducing impediments through trade agreements.

      Logistic services involve a complex web of activities designed to ensure the efficient movement of raw materials, intermediate inputs, and finished goods between suppliers, manufacturers, and consumers. Logistic services professionals manage these factors and product flows by combining transportation services with storage and warehousing, assuring timely deliveries while sparing client firms the expense of storing and maintaining large inventories. Although such services may be provided in-house, often by internal shipping departments, companies are increasingly outsourcing logistic activities. Reportedly, logistic specialists offer customers greater expertise in managing supply chains, which are increasing in complexity due to the greater geographic scopes of factor and product markets. Firms may choose to outsource discrete logistic functions, such as order fulfillment, freight forwarding, or warehouse management; or they may outsource the entire logistics management process. Firms that provide the full range of logistic services integrate their own resources and capabilities with those of other logistic service providers to create a comprehensive service.

Industry overview

      Armstrong & Associates, Inc., a consulting and market research firm, estimates that the U.S. third-party logistics market is currently worth $77 billion. In terms of total revenues, the top-five U.S.-based logistic services firms reportedly are UPS Supply Chain Solutions, C.H. Robinson Worldwide, Menlo Worldwide, Expeditors International of Washington Inc., and Penske Logistics: Together these 5 firms generated 2002 revenue of about $19.3 billion, representing approximately 25 percent of U.S. third-party logistic service revenues in that year.

            Another major player in the logistics industry is Roadway Express, a subsidiary of Yellow Roadway Corporation. Roadway Express is a leading transporter of industrial, commercial and retail goods offering service between all 50 states, Canada, Mexico and Puerto Rico. Roadway Express also offers export/import services to more than 100 countries worldwide

      The third-party logistic services market includes non-asset- and asset-based firms that provide domestic and international transportation management services, value-added warehousing, distribution services, and IT services. Non-asset-based firms arrange for the transportation and storage of freight, in effect acting as intermediaries between their clients and asset-based transportation companies. For example, Minneapolis-based C.H. Robinson arranges freight transportation for its clients, contracting with approximately 30,000 asset-based carriers. Similarly, Caterpillar Logistics arranges freight transportation for its parent company, Caterpillar Inc., and for approximately 50 other client companies.

      Some non-asset-based distributors are also starting to offer logistic services, by contracting with trucking and other asset-based transportation companies to ensure that products get to market on time. As global supply chains become more complex, customers are increasingly relying on single providers to manage their entire logistics and transportation processes. Such suppliers are better able to integrate raw material supply with finished product delivery, providing a complete door-to-door logistics service. This level of integration improves service reliability thereby appealing to many manufacturers, especially those that use the JIT production process. Asset-based transportation firms that provide truckload, less-than-truckload, air freight, or sea freight as a core service often provide logistics as a key value-added service. For example, the Penske Corp. truck leasing division relies on a fleet of over 200,000 vehicles to offer logistic services, such as transportation management and warehousing services. In the last several years, asset-based suppliers of integrated express delivery services also have expanded their service offerings to include logistic services. After a series of logistic-related acquisitions, in February 2002, United Parcel Service announced the creation of its Supply Chain Solutions division, which combined the resources of various related subsidiaries. Similarly, in 2001 FedEx Corp. (FedEx) announced the realignment of its logistic services unit to provide transportation management and logistic services through the company’s FedEx Services division. Both UPS and FedEx consider logistics a key component to their respective growth strategies.

Demand drivers and outsourcing trends

      Globalization, JIT manufacturing, and electronic commerce (e-commerce) are driving demand for third-party contract logistic services. Globalization has extended product distribution channels and increased the geographic scope of sourcing networks for component parts.

      At the same time, manufacturers are making efforts to centralize production processes. Although this enables companies to maximize production scale economies, it increases transportation costs and lengthens the time it takes for products to get to markets. Global manufacturers are therefore increasingly looking for ways to reduce transportation-related costs and improve supply chain efficiencies.

      One such cost-saving mechanism is JIT manufacturing, which enables firms to produce to order, thereby reducing the need to maintain costly inventories. An example can be found in the automotive industry, where TNT Logistics, a subsidiary of Netherlands-based TPG, manages the inbound supply of parts for a BMW manufacturing facility located in the United States. As such, TNT monitors both the movement of physical goods into the facility as well as the flow of shipping information to plant managers. By outsourcing logistic services to third parties, manufacturers can realize significant cost savings. For example, when Lucent Technologies overhauled its supply chain in 2001 by outsourcing key logistics functions, the company reduced its total number of warehouses from over 300 to 54, scaled back its inventory from $8 billion to $806 million, and streamlined its purchasing processes.

      Logistic services also play an important role in electronic commerce, where some firms function as the distribution arm of online companies, thereby allowing these companies to reduce delivery costs. For example, UPS manages a large warehouse for Nike in Europe, and both UPS and FedEx have become default shippers for thousands of e-commerce sites. In addition to such business-to-consumer electronic commerce, many logistic service providers manage electronic transactions between businesses.

      As noted, TNT Logistics handles distribution of spare automotive parts to dealers. Its process is linked together by a proprietary software program called Matrix, which put the order and fulfillment processes online, thereby increasing visibility in the supply process. The company also manages the distribution of tires to retailers for Michelin, resulting in increased efficiency for Michelin’s retail distribution processes. Such transactions are facilitated by the Internet, which enables near real-time management of factor and product flows, thereby reducing the time necessary for products to get to market. The market for business-to-business e-commerce was expected to reach $2.4 trillion by the end of 2004, up from $830 billion in 2002.

Impediments and liberalization initiatives

      Logistics is a management service that is affected by a broad range of impediments. Although market access for the core management service may sometimes be hindered through such measures as establishment limitations or nationality requirements, restricted access to transportation networks is the most commonly reported trade impediment. For example, in Mexico, transportation regulations prevent foreign operators from using trucks that weigh over 4 tons. As a result, foreign delivery firms, including providers of logistic services, must bear the greater expense of using smaller vans or trucks to transport inter-city deliveries, or contract out operations to domestic firms.

      In China, trucking licenses are divided into five different categories, effectively limiting the flexibility of logistic services firms that seek to operate in that market. In Indonesia, foreign investment in local trucking or ground transportation joint ventures, which is the only form of establishment, is limited to a 49-percent ownership share.

      Customs procedures may also impede the efficient provision of logistic services. Customs impediments include restrictions on the weight and value of shipments; documentation requirements, which may stem in part from the lack of electronic data interchange (EDI) systems; and inspection requirements. All of these impediments reduce efficiency and raise costs for foreign logistic service firms that depend on open access to transportation infrastructure to ensure timely delivery for their customers.

      To date, logistics-related trade impediments have not been significantly addressed in trade agreements. In the World Trade Organization (WTO), sectors related to logistic services, such as courier, cargo handling, road freight transport, storage and warehousing, and freight agency services, garner relatively few full-General Agreement on Trade in Services (GATS) commitments from members.

      This appears to be largely due to the high degree of domestic regulation imposed on the transportation industry in many countries because of economic, social, and safety concerns. Article XIV of the GATS states that signatories remain free to adopt or enforce measures intended to promote health, safety, and overall welfare. Other transportation sectors necessary for the provision of logistic services remain largely outside of GATS disciplines. For example, international aviation is governed by a web of bilateral aviation agreements; current GATS aviation disciplines apply only to aircraft repair and maintenance, selling and marketing services, and computer reservation services. Similarly, international maritime transport is governed by shipping conferences, whose members meet regularly to set rates and monitor developments that affect the industry.

      During the Uruguay Round, GATS negotiations on maritime services proved problematic, according to many observers, largely as a result of domestic cabotage restrictions and national preference schemes, and post-Uruguay Round maritime negotiations were suspended without agreement. In the area of customs administration, WTO negotiations on trade facilitation have recently stalled in the face of strong opposition from developing countries, which often lack the resources to invest in modern customs processing technology

      Although air and maritime transportation remain subject to significant restrictions, recent U.S. free trade agreements guarantee market access and national treatment for a broad range of other logistic services. This may be due, in part, to the structure of the agreements, wherein all sectors are considered open unless the subject of a specific reservation. This contrasts with the positive list structure of the GATS, in which countries must schedule commitments to specific sectors in order to guarantee market access and national treatment.

Outlook

      In the WTO, service negotiations under the GATS recommenced in January 2000. The current negotiating round, known as the Doha Round, is anticipated by WTO members to elicit more meaningful commitments, both in terms of the number and quality of commitments. To achieve such commitments, there are advantages of addressing the entire range of sectors encompassed by logistic services. This range is referred to as a checklist. Use of the checklist approach facilitates the scheduling of meaningful commitments without requiring significant changes to the Services Sectoral Classification List, assists WTO members in developing a common agreement about the full range of applicable services, and serves as an effective mechanism by which to assess the value of market access and national treatment offers.

      In 2001, Hong Kong proposed using such an approach to negotiate logistic and related services in the WTO. Hong Kong defines logistic services as “the procedure to optimize all activities to ensure the delivery of products through a transport chain from one end to the other.” Further, Hong Kong demonstrates that, although the WTO Services Sectoral Classification List (W/120) does not identify logistic services as a distinct service, many sectors integral to logistic services are captured under the subheadings transport services and business services.

      Hong Kong encourages WTO members to consider the development of a checklist for logistic services that would consolidate the logistic-related /120 categories and indicate the scope of logistic services. Countries that prefer not to liberalize certain sectors within the logistics checklist could choose the categories where they are willing to make commitments. This may appeal to countries that maintain strict regulations over certain transportation services, such as aviation or maritime industries.

      Despite the lack of consensus at the Cancún Ministerial meeting in September 2003, the chairman of the WTO services negotiating group began in April 2004 a series of informal meetings with members designed to increase the number of negotiating offers and discuss future work. Leaders of the Group of Eight (G-8) industrialized nations recently voiced their determination to rejuvenate the WTO talks. At the same time, informal discussions on logistic services have been opened to participation by all WTO members after several years of closed-door discussions. The informal discussion group, led by Hong Kong and Australia, seeks to develop a better understanding of logistic services and to generate support for negotiations on the subject

Reprinted from Industry, Trade and Technology Review, published by the U.S. International Trade Commission.