How to reduce logistics cost

Important mission

Vietnam has highest potential to develop logistics services in the region. According to a research by the FPT Securities JSC, the average growth of the sector in the period 1992 - 2014 is 20.3 per cent per year. This is an impressive record because average annual growth of 10 per cent during a long period of 10-15 years is rarely in other sectors. (Logistics costs in other developed countries range between 10 and 13 per cent)

In addition, up to 2020, annual growth of logistics in Vietnam is forecast to remain in the range of 24 per cent -25 per cent; then keep its path of at less 20 per cent in the period of 2020-2030.

How did logistics services in Vietnam remain its sustained and rapid growth for several decades? It was strongly backed by foreign trade activities with the export growth of 10 per cent to 30 per cent in 30 years.

In reverse, logistics have participated actively in the whole process of foreign trade activities. With the main function of managing and adjusting the flow channels from the "manufacturing base" to "final consumer", including the following services: forwarding, transportation, storage, warehousing, customs procedures, customer consulting, packaging, marking, delivery, logistics have really become key factors promoting the development of production, distribution and trade of goods in imports as well as exports.

Characteristics of Vietnam’s geography and economy have created three array of logistics value chain, consisting of (i) delivery of goods through ports operation (sea and air); transport (domestic and international); (ii) supply chain management, and (iii) storage. In particular, the first one has much chance of all, because 90% of goods are imported to Vietnam by sea transport According to data from the Vietnam National Maritime Bureau under the Ministry of Transport, total throughputs of the country’s sea ports are estimated at around 405 million tonnes in 2015. The number should climb to 606 million tonnes by 2020 and 1.1 billion tonnes by 2030.

Service itself also has strong progress. According to the World Bank (WB), the index measuring the efficiency of logistics (LPI) of Vietnam in 2014 reached 3.5 /5 points, up 5 places from 2013.

However, our country's logistics services are not really effective. In Vietnam Logistics Forum, Deputy Minister of the Ministry of Industry and Trade, Mr. Tran Tuan Anh said that the cost of the Vietnam logistics activities accounting for 20-25% of GDP was still high and, therefore, the mission of this Forum is seeking to reduce logistics costs, helpingVietnam’s economy to improve competitiveness in the context of economic integration.

Previously, on 07 March, 2015, the Prime Minister issued the Decision No. 1012/QD-TTg approving the development planning of logistics by 2020 and orientation until 2030, setting the target to reduce logistics costs to 20% of GDP by 2020 and to 15% by 2030.

A picture of market share

According to the Vietnam Logistics Association (VLA), Viet Nam has around 1,200 domestic logistics businesses, which only handle 25 per cent of the total business, leaving the rest of the market share to foreign-owned companies. Most of these home-grown businesses are small-scale companies with limited financial and human resources.

These figures can cause frustration and impatience for some people. However, analysts are enough calm and objectivity to say that the overall picture of market share is understandable. Literally speaking, what you earn (your market share) was fitting for what you spend (your resources and intellectual resources).

Indeed, logistics is still very new to Vietnamese enterprises. Statistics of Vietnam Logistics Association showed that the average age of Vietnamese enterprises are 5 years, while the foreign companies already present in Vietnam for decades as DHL Supply Chain, Kuehne + Nagel, Damco , FedEx, APL and Maersk ...

Of over 1,200 Vietnamese logistics businesses, 80% are small and medium enterprises with the capital size of only 4-6 billion VND, while only one investment deal from DHL Supply Chain into its second distribution center in Bac Ninh province reached 300 billion VND.

Focus on infrastructure

It is undeniable that corporate performance, level of information and technology and capital size of logistics companies are all limited. But that's not the key point making logistics in Vietnam higher costs than other countries in the region.

Even in standpoint of comparative advantage, Vietnamese enterprises still have the advantage in transport (which accounts for more than half of logistics’ value) due to the ability to deploy packet transport contract multimodal including inland carrier’s selection, transport of goods to the port; they have also advantage in selecting carriers and airlines international traffic. In a 2014 report, the World Bank noted that a more competitive transport and trade logistics system in Vietnam could be a new driver of sustained economic growth in the country, enhancing productivity as well as boosting business competitiveness.

The key is that the service sector depends heavily on infrastructure, economic and technical level The frequency of cargo traffic depends on the development of ports, services in import and export depend on the capacity of ICD, while storage services depends on "the distribution center (DC)", because big customers like Unilever, P & G, or Vinamilk require logistics service with high speed and precision.

Therefore, Vietnam is building the development planning of the logistics for the transport sector. The Ministry of Transport is drafting the planning for the logistics center serving commercial development which are built by the Ministry of Industry and Trade then promulgated by the Vietnamese Government in 2015.

On 7 May, 2015, the Ministry of Industry and Trade has issued the Decision on the establishment of the Editor group enhancing the competitiveness and development of logistics services. Deputy Minister Mr.Tran Tuan Anh is the group head, other members come from the Ministry of Industry and Trade, the Ministry of Transport, theMinistry of Planning and Investment and the General Department of Customs and some associations and research institutes. The editor team studies the current situation and needs of companies to draft a plan of action on logistics development and will be submitted to the Prime Minister. The planning has inherited long-term strategy has been shown in two planning of logistics for the transport and the trade sector as stated above.

This proposal raises the goals, long-term requirements and programs, with specific solutions representing a serious commitment to FTAs, while exploiting opportunities from economic and social integration. In particular, the construction of inland transport infrastructure serving logistics development is a very important content of the action program.

When action program of developing the logistics in Vietnam go into practice, we will have the first-class logistics center nationally and internationally, as the original center. From here, developed in the form tidbits the logistics center class II at regional, sub-regional level and economic corridors; supporting the circulation of goods from production to consumption, connecting to the ports system including IDC, sea ports, airports, railway stations, road networks, national border crossings, international border gate, economic zones, industrial parks, manufacturing concentrating zone, etc.