Chapter 01: Introduction

1.1 Background of the study

The logistics industry is becoming one of the most profitable and required industry in every corner of the world (Singh, 2009). It is a part of the supply chain in businesses plan process; it implements and controls the efficient flow and storage of goods and services that are tangible. It can be highlighted that the process encompasses the information flow from the point of origin to the point of consumption in order to meet the customers requirements. Generally the modern logistic industry continue to evolve as it reduces the transport and distribute cost for importer and exporters, improved customer service, improved cycle time and free up capital in manufacturers and marketers non core areas. Chin et. al (2009) highlights the changing context of the global logistics industry as follows. They state that the increase in global competition and the rapid progress of IT has led to the broadening of the scope of the logistics industry from the provision of just transport and warehousing facilities to purchasing, distribution, inventory management, packing, manufacturing and customer service. More importantly logistics is increasingly being outsourced in order to achieve competitive advantage. When it comes to the Sri Lankan context with the opening up of the new export and import markets for our products and services such as world renowned brand names in tea, garments, rubber, fiber and other value added products and services items, through air and sea gateways Sri Lankan has been able to spread out their products throughout the world. With the rapid expansion in international trade saw the growing need for efficient supply chain solutions. In this backdrop, the freight forwarding and logistics industry in Sri Lanka took on a vital and active role. The speed of its expansion created intense competition as well as haphazard growth. The Sri Lankan logistics industry has come a long way with developments in port and aviation infrastructure. The country has 3 ports in Colombo, Hambantota and Trincomalee along with the international airport in Katunayake and the other just started operations in Mattala. Waller (2012), in an interview with LBR, stated that Sri 1

Lankas advantageous location at the crossroads of East and West trade routes made the country a popular trading port for clippers in the past. However, he was keen to point out that location itself may not be enough to catch-up with other cargo hubs in the region that have better infrastructure, are far more efficient and have scale advantages. With the future of the industry looking promising given the new ports and airports coming up and booming industrialization and expansion, Sri Lanka is in the ideal position to act as a logistics hub for South Asia. Ring (2012) stated that the future lies in the bottom of the pyramid and as more and more people become affluent in Asia, global cargo flows are likely to increase in Asia. He also mentioned that the shift in Asian manufacturing to countries like Vietnam could make the Colombo port an important logistics hub. It was also highlighted that logistics is becoming increasingly important with globalization, increasing international trade and the emergence of manufacturing supply chains spread across several countries. The Sri Lanka Ports Authority (SLPA) was seen as the critical party capable of bringing together all the important stakeholders in order to create a logistics hub. Ngoc (2011) has stated that the ASEAN was beginning to take shape and develop key economic sectors in order to compete with other economic communities in the region and in the world. Shipping, ports and logistics services were seen as key in increasing trade. Further, Jayasundera (2010) emphasized that by promoting a logistics hub in Sri Lanka the country could move into a four billion dollar export industry. He also stated that the government proposes to engage in further value additions in the apparel sector. Mohandas (2011) described that history had shown how Sri Lanka during ancient times was a transit point for merchants around the globe. The countrys unique geographical positioning enabled it to connect the east and west and at one point had one of the worlds busiest ports. He further stated that Sri Lanka acted as a regional hub that connected the maritime Silk Road which stretched from modern Hanoi and went up to Alexandria, Rome and Constantinople. 2

Even as recently as 30 years ago quite a number of airlines used to transit via Colombo to Australia and beyond, Far East and even South Africa. But today aircrafts can fly longer distances without a stop and vessels are capable of going around the world with one re-fuelling. As such being on a shipping route or the geographical positioning by itself will not help in making Sri Lanka a logistics hub. Thus, it is necessary to create the required environment so that carriers and businesses have the confidence that Colombo is the ideal hub for South Asia.

1.2 Role of the Freight forwarder

Freight forwarder is an intermediary service provider that collects export cargo from the customer, re-arranges them and forwards them to cargo carriers in a most economical way. When it comes to imports they break bulk into retail and distribute locally. They also provide tracking and tracing from origin to destination point in the supply chain. Freight forwarders also coordinate transshipment cargo that move via the Colombo port or Airport. A freight forwarder books space with a carrier, who offers a special rate based on the volume of cargo to be moved. Depending on the size and nature of the cargo the freight forwarder may use a variety of modes of transport, viz. shipping lines, air, road and rail freight.

1.3 Apparel Industry

Kelegama (2005) discussed about the history and the prominence of the apparel industry in Sri Lanka as follows. Sri Lanka was remarkably famous for their agricultural exports before the liberalized economy took place. When Sri Lanka liberalized their economy in 1977 the industrial sector accelerated its growth in a significant way. Especially the countrys garment sector took off large part of this sector. Mainly as a result of quota-hopping East Asian garment exporters who were attracted by the countrys liberal trade regime and relocated their already wellestablished garment businesses to Sri Lanka. Sri Lanka was able to provide the labor 3

at a considerable lowest price when compared to other countries. Local entrepreneurs starts their own garment enterprises to exploit the garment quota which was assist by the liberal trade agreements and subsequently incentives granted by the Board of Investments (BOI) to selected industries. Kelegama (2005) explained about the history of the Sri Lankan apparel industry as follows. In the early 1980s, garment exports were growing rapidly and by 1986 garments accounted for the largest share of all exports (27 per cent). By the late 1980s, garment industry in Sri Lanka was referred to as glorified tailor shops because, despite a decade of growth, its links with other industries remained low and the value added remained low as before. The garment exporters found it difficult to compete without a devaluation of the Sri Lankan currency, and started to lobby the Government to this effect. Since the Government did not allow a devaluation of the currency, the garment industry lobbied for duty-free status for textile imports with the aim of bringing down their production costs. The Government granted this request without considering the repercussions on the domestic textile industry. Consequently, the textile industry virtually collapsed and no effort made by the government, for example, by offering subsidized interest rates to rescue the textile industry, had any major impact. In fact, three of the privatized textile factories (Veyangoda, Pugoda and Mattegoda) that were gradually switching to manufacture textiles to meet the needs of the export-oriented garment producers had to be closed down. Table 1.1: Textile Sector performance
Textiles and Garments Manufactured Woven Fabrics Knitted /Crocheted Fabrics Yarn Garments Other Made Up Textile Articles Other 2006 4,956 1,244 2,435 303,263 4,530 4,401 2007 4,278 2,058 3,992 347,670 8,681 2,784 2008 3,789 2,795 2,959 355,995 8,181 2,306 2009 3,835 2,045 3,089 358,374 6,634 2,169 2010 4,501 2,329 3,483 374,041 8,029 3,020

Source: Central Bank Annual Report (2010) According to the Central Bank Annual Report of Sri Lanka (2010), the textile sector grew by 5.2% during 2010 compared to 0.6% in 2009. Currently this sector is facing a number of problems, high level of competition drawn by regional manufacturers, 4

withdrawal of GSP+ concession, high cost of skilled labor and imported raw materials fueled the problems. But industry remains competitive market due to the high quality state, despite the increase in the cost. Though the strategy of the ethical garment helped to uplift the industry, the increase in cost still remains a problem. The Central Bank of Sri Lanka states that when it comes to logistics cost the following points can especially be noted. The number of vessels arrived has increased; but it is noted that this has been decreasing during last few years. Total cargo handled has also not that much increased and total Transshipment Containers are also not considerably high. Though the revenue has not increased in last few years there is a small increase in the last year by 20% and the cost has also increased by 11%. Logistic practices are one of the most important practices in the garment industry. Customer service, Transport, Inventory Management, Order processing, Warehouse and distribution center and Information management are all important elements of the logistics chain (Appelbaum and Gereffi, 1994). Eryuruk et. al (2011) explained that large clothing companies have used logistics as a globalization strategy and outsourced operations such as sourcing, inbound logistics and manufacturing to Asian countries. Outbound logistics, after sales service and marketing are usually tied to the buyers location. It is worthwhile to note that certain vital functions such as inventory management, quality control, order management and forecasting are provided by leading firms in the logistics sector. As a result, clothing companies can focus on their core activities by outsourcing non-core functions to logistics specialists. The ability to attract clothing companies would depend on the infrastructure and the efficiency of logistics in the respective countries.

1.4 Research Problem

Sri Lanka at present faces several critical issues when it comes to the point of creating a global logistics hub. Firstly, the Shipping Licensing Act of Sri Lanka restricts foreign ownership of freight forwarding companies to 40% (Daily FT, 2011). It is unlikely that globally-renowned freight forwarders and logistics companies will come to Sri Lanka if they cannot operate with 100% ownership and the freedom to do business, which India and other regional countries offer. Secondly, Mohandas (2011) points out that the country must simultaneously invest in upgrading its physical resources as well as look to streamline and improve the processes of export, import, transshipment, multi country consolidations and entre port trading. The Colombo port should provide an efficient, quality and timely service. However, this has been constrained by prolonged delays in implementing development projects and outdated attitudes among politicians and officials. Thirdly, the country needs to improve the professional competency and eliminate the causes of delays. Next, the failure to link the various agencies and trade via an automated system has resulted in huge time delays, immense paperwork and red tape in the processing of exports and imports. In addition, Kumarage (2007) had stated that the rapid development of neighbouring country ports could undermine the countrys competitive position despite geographical advantages. Finally, Mohandas (2011) states that the country must be competitive in terms of tariffs and charges. This would be of paramount importance in order to make Sri Lanka internationally competitive and make it a hub for South Asia. Waller (2012) stated that if Sri Lanka is going to realize its dreams of becoming a logistics hub there needs to be an investment in infrastructure and government support backed by an investment in skills. 6

Kadawatharatchie (2007) elaborated that delays in modernizing port and other transport infrastructure, introducing electronic commerce and improving efficiency had drastically reduced the islands competitiveness. He also pointed out that the government should do away with red tape that hinder private sector investment and discourage foreign investors whose skills were required if the island was to emerge as a maritime hub. Though Sri Lanka has a remarkable name for their garments worldwide it could be seen to be faced with some major issues (Dheerasinghe, 2003), especially because of logistic industry failures which has become a significant constraint. The problems can be simplified as follows: Due to the limited size of Sri Lankas domestic market, targets set by the government on export growth cannot be met without a significant improvement in export performance Lack of focus on Asian supply chains, especially emerging economies such as India and China Concerns by foreign buyers over perceived long delivery time and unreliable supply in Sri Lanka garments sector When considering the annual export and import container throughput in Sri Lanka shown in Tables 1.2 and 1.3 below it can be seen that export throughput has been reducing with the empty ratio going upto 50%, whereas import throughput has been increasing with the empty ratio coming down to 6% from 14%.

Table 1.2: Annual Export Container Throughput Year 2008 2009 2010 Laden 229,206 223,398 244,268 Empty 176,816 154,000 226,328 Empty % 44% 41% 48%

Source: Sri Lankan Freight Forwarders Association (2011)

Table 1.3: Annual Import Container Throughput Year 2008 2009 2010 Laden 358,994 317,732 415,291 Empty 48,255 51,200 46,357 Empty % 12% 14% 10%

Source: Sri Lankan Freight Forwarders Association (2011) This shows that the use of Sri Lanka as an export destination is reducing in significance, despite the favourable country conditions. However, the use of Sri Lanka as a transshipment destination has been emphasized by the continuous increase in transshipment volumes. This shows the strategic importance of Sri Lanka from a global logistics perspective. Table 1.4: Transshipment via Colombo Port Year 2008 2009 2010 Laden 2,215,777 2,277,090 2,767,833 Empty 569,645 355,965 327,756 Empty % 20% 14% 11%

Source: Sri Lankan Freight Forwarders Association (2011) The World Banks logistics performance index (LPI) by Arvis et. al (2010) highlighted the following weaknesses in the Colombo port. Sri Lanka was particularly weak in clearance by border control agencies (particularly customs), logistical competence and ability to track and trace consignments. There has been slow progress in implementing customs reform. There were logistics related problems with both road and rail infrastructure. These include congested road access to the Colombo port and the poor quality of trucking and rail services. Both trucking and rail costs exceeded those in Bangladesh and India. The railway sector accounts for only about one percent of freight movements and is characterized by a large cost structure.

The logistics sector has been slow to provide value added services for transshipment through the Colombo port. Failure to do this can make Colombo vulnerable to losing market share to Indian ports that are being upgraded.

An article in the Sunday Times (2011) commented that the ability of Sri Lanka to remain competitive in terms of logistics would determine on how effectively the level of efficiency attained by the South Asian Gateway Terminal (SAGT) can be replicated in the operations run by the Sri Lanka Ports Authority (JCT Jaya Container Terminal) and the new facilities at the Hambantota port. The outcome of all this was the fact that the country slid down in its rankings in the World Banks logistics performance index (LPI). The 2009 LPI ranked Sri Lanka 137th out of a total of 155 countries, lagging behind even Bangladesh (BottomLine, 2011). Singapore was ranked 2nd, Hong Kong 13th and Vietnam 53rd indicating the competition from South East Asian nations. Singapore was determined to be the most efficient in terms of its timeliness and infrastructure.

1.4 Objectives of the Research

The objectives of this research can be outlined as follows. Understand the present status of the logistics industry in Sri Lanka. Identify the barriers in making Sri Lanka a Global Logistics hub. To make recommendations to improve logistics in the Sri Lankan Apparel Industry.

1.5 Significance of the Research

1.5.1 Academic significance This is a pioneering study in a Sri Lankan context which attempts to identify possible improvements in infrastructure and logistics in order to improve the competitiveness of Sri Lanka as a global logistics destination with specific application to the apparel industry. 9

1.5.2 Practical significance With the end of the war, Sri Lanka experienced a significant inflow of FDIs and rapid economic growth. This in effect resulted in an increase in trade volumes. However, if the country is to sustain its economic growth levels it is essential that its port infrastructure and logistics performance is at a competitive level. As such this study deals with both the private and public sector involvement that is required to boost port volumes, and position the Colombo port as a Global Logistics Hub.

1.6 Scope of the study

This study will attempt to identify the logistics problems faced by the apparel industry in Sri Lanka, and will be limited to cover the Sea Freight operations at the Colombo port. Further, the study will capture all stakeholders of the logistics supply chain in order to understand the problems that persist.

1.7 Preview of Dissertation

The remainder of the dissertation is organized as follows: Chapter 2 contains a brief discussion of the apparel value chain. This is followed by a discussion of empirical articles on logistics problems and measurements of logistics performance. Chapter 3 presents the model specification and detailed discussion of the variables and data set utilized in the study. In addition, it outlines the research design used for data collection. Chapter 4 details the data analysis process. In addition, it will seek to prioritize the barriers experienced by the logistics industry. Chapter 5 attempts to re-cap the aims, objectives and hypotheses as well as determine the consistency of the findings with past literature.

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Finally, the conclusions of the major findings and recommendations, and suggestions for further research are discussed in Chapter 6.

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