Logistics of South African economy

Logistics has a major impact on the South African Economy. Logistics costs have been increasing from year to year and a lot of South Africa’s infrastructure has room for improvement. Logistics cost entail cost of logistics activities which include procurement, materials handling, packaging, warehouse management, inventory control, order processing, logistics communications, transport, reverse logistics, customer service, demand forecasting and plant and site selection. South Africa competes globally in the free-market and this gives it more initiative to improve its logistics costs because we are a developing country competing against developed countries. Logistics and supply chain management should add value through time and place utility contributing to overall competitiveness. Time utility is the value added by goods being made available at the correct time. Place utility is the value added by moving goods to where the demand is greatest. Non-value adding activities should be eliminated and value adding activities enhanced. Non-value adding activities include the transport and warehousing, and value adding activities are service and quality improvements. The production cycle and order lead time can be reduced by coordinating the five logistics activities which include buying, selling, making, moving and storing. South Africa’s imports and exports suffer due to our current infrastructure which once again hinders our global competitiveness. This refers to the location of our major industrial hub which is Johannesburg. The Fifa World Cup is expected to be one of the greatest events in South Africa in 2010 and this has huge logistical impacts which will be both challenging to South African companies and positive to the countries development in logistics.

VALUE OF LOGISTICS

The value that logistics adds to the South African economy should be greater than the costs and should contribute to the overall competitiveness and sustainability of our country. The way to achieve this sustainability is to effectively collaborate the private and public sectors, improve processes and change structures. Focus must be put on value adding activities and on eliminating or reducing non-value adding activities. This could include reducing the movement of goods and the storing of goods and improving and enhancing quality inspections which add value.

Logistics is a crucial part of the supply chain. Focus is placed on cost reduction and efficient movement of goods from point of origin to point of consumption which adds value. Integration of business activities is necessary to add value. The customer perceives value as the trade-off between quality and price and different customers perceive value in different aspects. Some customers perceive value as the cheapest product with the highest quantity while others see products with higher prices as higher quality and hence higher value.

From an organisational point of view, logistics ensures that products are delivered to the right place, at right time in the right quantity in the desired condition. The challenge of logistics is to offer time and place utility at a competitive cost and ensure that customer value is added. The problem with this is that place utility is a serious problem because of South Africa’s long transport corridors. The industrial hub is situated in Johannesburg, 580km’s away from the closest port in Durban by road and 688km’s via rail. By travelling via road we incur tollgate costs that are constantly increasing and via rail the distance is 20% longer as it deviates from road by passing through Volksrust, Newcastle and Ladysmith. These are problems which contribute widely to increased logistics costs and decrease the value added by place utility. Time utility is value added to goods by having sales merchandise and products available to consumers at precisely the right time when customers demand it. Logistics adds value by reducing lead times and ensuring inventory levels are low. South Africa usually has issues with delivering products on time as our infrastructure and supply chain employees can cause delays through damaged, closed roads or strikes. We also make use of road transport which can increase lead time as congestion and indirect routes can be very time consuming. We do not make use of rail transport which can improve our lead time. This is because South Africa has inefficient and inadequate rail infrastructure.

Consumers are becoming wealthier with increased, diverse demand. As a result, the South African economy is experiencing increased productivity and an increased demand for a variety of goods. In order to meet this demand, logistics activities need to be efficient and effective and add customer value in each activity, function and with each supply chain partner. This is why logistics as a value adding activity is important to our economy, as improved logistics leads to greater value which leads to greater customer demand which leads to increased GDP and economic development.

CURRENT STATE OF LOGISTICS IN SA

Logistics serves as a big competitive weapon for companies all over SA. It affects overall company and economic costs as a 1% saving in logistical costs constitutes a huge savings with regard to overall economic and company costs. This is why it is so important that South Africa strives to meet the high standard of supply chain management expected globally. Our distance from the main trading hub makes this an even more imperative objective because this disadvantage means we have to be perfect in every aspect to compensate for this, and remain on the same level as our global competitors. South Africa is very inconsistent in terms of logistics at a business level. Some companies are highly competitive and successful while others struggle to meet the minimum level of logistics requirements and have inefficient supply chain management.

South Africa’s political history has impaired our logistical development. After the 1994 elections and the democratisation of South Africa, we re-entered the free market as a weakened country compared to our global competitors. There is still a visible lack of trust between South African companies which prevents the effective and efficient trade of information within and between supply chains.

South Africa currently has many logistical challenges. The first, and most important, being our lack of skilled and educated logisticians. This means that our ability to keep up with the global pace of developments and improvements in logistics is impaired. As a result our supply chains are not conducted efficiently and effectively resulting in direct and indirect unnecessary costs. One of which is resource wastage which is an indirect cost. Logistical costs currently make up a high 18% of the GDP in South Africa compared to the USA’s low 9.9%. This highlights how far behind South Africa is competitively in terms of logistics.

South Africa currently gives preference to road transport instead of rail because we believe road provides better service however there are many downsides. Road infrastructure upkeep is low. Potholes damage vehicles and pose a danger to freight increasing a companies vehicle maintenance costs. Road maintenance isn’t a priority in South Africa because of insufficient budget. A companies total logistics costs can increase by as much as 10% due to vehicle maintenance and repair for a truck travelling on a road with a bad condition rating. Congestion is a result of the current excessive road use and further encumbers the service level. Rail might be a better option but unfortunately we have insufficient rail infrastructure to provide the same level of service as road provides.

Taking into account all these factors we can conclude that South Africa does not have a comprehensive national strategy for logistics and supply chain management. The point of efficient and effective supply chain management is to integrate and make possible cooperation between and within supply chains and due to our current logistical situation this is not completely possible.

EFFECTS ON 2010 FIFA WORLD CUP

After the global economic recession South Africa is showing signs of a recovery. The Soccer World cup this year is expected to contribute to this recovery by providing injections and also lead to increased local business opportunities. A huge concern for the successful running of the FIFA World Cup was having an apt logistics system. All companies logistics and supply chain management needs to be run at the highest level and have the ability to handle the additional capacity to ensure this smooth running.

Delivery of increased products such as food supplies to the major soccer locations and tourist attraction points is the one of the first pressing factors. The increased capacity of tourists in South Africa means an increased need for accommodation and transport via road and air. Limited accommodation capacity means that tourists are unable to reside in the city where their chosen World Cup match is taking place. This means an increased amount of air and road transport to and from destinations. Many are concerned that our inadequate transport infrastructure will lead to many people missing kick-off times for their matches.

Initiatives have been launched to improve airports in all the major Fifa cities. The Airport Company South Africa announced that the upgrades of all airports are 90% complete as of 2 March 2010. The remaining 10% will be completed before the World Cup. Johannesburg airport has always been the main international airport. But Cape Town is the main tourist destination in South Africa and so when South Africa won the bid to host the Fifa World Cup it started with major improvements on the Cape Town Airport. These improvements included 8000 parking bays, the central terminal building and vehicle roads upgrade. This will all be completed by the end of March.

The World Cup has had positive effects on our logistics infrastructure. It has increased pressure to rapidly improve our logistics situation. The Public Transport Infrastructure and System Grant has invested R11.7 billion in improving public and road infrastructure, Bus Rapid Transit systems, airport-city links such as the Gautrain, passenger safety and even rail upgrades in preparation for the influx of tourists. This wouldn’t have been possible in such a short space of time were it not for the World Cup.

EFFECT ON IMPORTS AND EXPORTS

South Africa as a country is known for it’s abundance of resources and minerals. This has resulted in a great demand for our resources and therefore increasing amounts of exports. Our resources include Gold and other precious metals, diamonds, raw steel, ferro-alloying materials and aluminium. South Africa is also a large importer of products from the rest of the world, mainly importing those products that are cheaper to import than manufacture. These include TV’s and other electrical products. Exports and imports are increasing every year, leading to the transport of these products and making the logistics involved more important than ever. High costs and inadequate in-land and cross-border transportation are some of the constraints facing the South Africa’s logistics industry.

There are a number of different modes of transport used in the logistics systems of exporting and importing air courier, air freight, sea freight, bulk and roll-on-roll-off are a few of the modes of transport used. South Africa is currently upgrading and improving the standard of its ports and rail infrastructure to make the flow of imported and exported products more effective and efficient. Road remains our main means of transport even though our road infrastructure is deteriorating and this hugely affects our exporting and importing abilities. Rail is cheaper and more sufficient, especially with transporting products in bulk, and also decreases congestion and better serves the environment, but because our rail system can’t cope with the amounts and volume of goods transported, companies are turning to other means of transport.

The other constraint on South Africa’s import and export logistic systems is the high costs involved. Fuel has one of the biggest impacts on these costs as well as unskilled employees. We manufacture many of our products to be exported in Johannesburg, and this increases the amount of fuel consumed as these products must be transported to the coast before they are exported. Exports and Imports need to be done in a timely manner, with the lowest lead time possible and unskilled logistics employees prolong the lead time.

South Africa is seen as the gateway to the rest of Africa, making it the hub to imports and exports into Africa. It has the potential of being the central logistics hub of the Southern African Development Community region. However, to increase the effectiveness of export and import logistics South Africa needs to improve their relations with the other African countries, for example Zimbabwe. The resurrection of Zimbabwe could lead to a large increase in investment and capital inflow to Zimbabwe via South Africa, Zimbabwe then acting as an essential part of our supply chain. Thus by having good relations, improved port and rail infrastructure and improved skills on South Africa’s logistics systems, we are better ready and able to handle exports and imports, with, via and into our country.

SOLUTIONS

South Africa does not make use of its potential to decrease logistics costs. We make use of too much road transport because our rail infrastructure is not at the level it should be. To improve on total logistics costs we need to improve and develop our rail infrastructure which will ease congestion on roads and therefore decrease potholes and damage to vehicles. By putting constraints on the times that trucks travel and only allowing them to travel at night we can also reduce congestion. Trucks should also only be used for short distance transport and rail should be used for long distance transportation.

To improve on our rail infrastructure we should decrease the rail corridor between Johannesburg and Durban as this will decrease our overall travel time by rail and increase the time and place utility and therefore the value added. By slowly developing the industrial areas at the coastline such as Durban, pressures on Johannesburg can be relieved and less transport between Johannesburg and Durban will be needed for importing and exporting.

To improve our Supply Chain Management and Logistic we need higher skilled and educated logisticians and employees within the supply chain. Educated employees lead to lower order lead times as they work more efficient and effectively. We should attempt to prevent the ‘Brain Drain’ from South Africa by keeping our skilled work force content and providing them with salaries and employee benefits in line with what is globally acceptable. Focus should also be on attracting skilled logisticians from other countries to help improve our supply chain management and logistics.

SOUTH AFRICAN ECONOMY LOGISTICS EFFECTS OVER THE YEARS

Before the recession South Africa’s rate of economic expansion was spurred by domestic consumption, investment growth and international demand for commodities. In 2007 the World Bank ranked South Africa 124th out of 150 countries in terms of domestic logistics costs. In 2008 total logistics costs were R339 billion, representing an increase of 6.9% from 2007. Road infrastructure has deteriorated at an ever increasing rate. The percentage of bad roads in the secondary road network has increased from 8% in 1998 to 20% in 2008. This road network has many deliveries routed on it. Transport costs by roads contribute to 55% of total logistics costs while rail contributes to 20%. Increasing use of roads due to being a developing country leads to higher road repair and maintenance costs. At the moment our government is unable to contribute enough to meet these requirements. This means that motorists are experiencing the negative effects of un-kept road infrastructure by damage to vehicles due to potholes and high, increasing tollgate rates as an attempt by Government to make funds available for the upkeep of roads. Therefore we can see that logistics costs have been increasing over the years and South Africa needs to control these costs to remain competitive.

GLOBAL TRENDS IN LOGISTICS

International trade is a vital part of the success of any economy. Globally the transportation of freight has become extremely efficient and effective. It is possible to purchase products all over the world and gain access to international products at the click of a button. The reason for this rapid globalisation and logistics demand is due to the empowered consumer that has access to products around the world with the use of the internet as well as world class logistics organizations that ensure goods are delivered anywhere at the right time. South Africa has broken the international trade barriers and this is due to the rapid development of logistics systems and strength of the economy.

South Africa has followed the general trend of the international market, by incorporating different modes of transport to ensure the most effective and efficient movement of goods. South Africa conducts international transport via air, rail, road, pipeline as well as sea transportation. The most economical mode of international transport is sea. The majority of international trade is conducted through sea transportation. The reason for this is that large shipments of bulk goods can be safely transported. This requires harbours around the world to be efficient and accept the capacity of huge consignments. South Africa in relation to global trends is up to date and continuously improving systems as well as harbours. South Africa has noticed global trends in logistics and proactively moved focus towards global transactions and moving goods around the world. Supply chains have now become global supply chains and South Africa takes part in various supply chains and contributes to efficient logistics systems around the world. This has a positive impact on the South African economy due to the increase in international trade. In 2009 South Africa was rated 28th out of 155 countries surveyed on the trade of logistics, capacity of countries to efficiently move goods and connect manufacturers and consumers with markets. This above statement is a global trend and South African logistics has adapted to his trend and ensured the benchmark of the success of the South African logistics. 

The transportation globally of containers has increased in frequency and size. Containers are user friendly and ships are now able to carry thousands of containers, this increase in movement of goods via sea transport has placed an increase in demand for larger ports and improved loading facilities. Countries around the world have recognised this demand for increased port capacity and have spent millions on the development and improvements of ports around the world. This development of deeper ports will result in improved efficiency and cost reductions. A large amount of international trade is done by sea; South Africa is aware of global trends and is currently developing the harbours to improve global competitiveness. South Africa is developing internationally; the development of the latest harbour in Port Elizabeth is called Ngqura, and will concentrate on the movement of containers. Ngqura is becoming a internationally recognised transhipment hub in the Indian Ocean area. The reason for this is due to the port having increased capacity and one of the only harbours in South Africa that can accommodate the large ships, due to the deep water ports and excellent gantry facilities. Logistics globally is developing and changing at a rapid rate, with a significant increase in trade routes as well as the increase in percentage of GDP that logistics contributes to. Logistics is focusing more and more on the flow of information and incorporating activities with the main focus of the global supply chain.

CONCLUSION

Therefore we can conclude that logistics does have a major impact on the economy. It contributes to a large portion of the overall GDP and this means that savings in logistical costs contribute to a large saving in GDP. South Africa is rated 124th of 150 countries in terms of our logistics costs and this impairs our global competitiveness. The Fifa World Cup is definitely an event to take into consideration from a logistical perspective as it presents opportunities for logistical improvement and evaluation. It has increased the speed at which our logistical development has taken place as the influx of tourists and the reputation of South Africa has added pressure to provide efficient and effective supply chain management and logistics, and to prove that South Africa deserved to host this World Wide event. South Africa can definitely improve its logistics by improving its transport infrastructure such as road and rail, introducing deep-water ports and introducing constraints on trucks, all which contributes to cost reduction. Logistics has improved over the years and has focused more on the flow of information. Therefore logistics is directly related to the success of the economy in many ways. And the effects of logistics must not be underestimated.