Description
In 2009, Canada ranked ninth among OECD countries with a per capita gross domestic product (GDP) of $46,243,1 a measurement generally used to compare societies’ standards of living. That same year, our main trading partner, the United States, ranked third with a per capita GDP of $56,109—21.3% higher than the figure for Canada.
Logistics and the Competitiveness of Canadian Supply Chains
313
Logistics and the Competitiveness of
Canadian Supply Chains
Jacques Roy
HEC, Montréal
Introduction
In 2009, Canada ranked ninth among OECD countries with a per capita
gross domestic product (GDP) of $46,243,
1
a measurement generally used to
compare societies’ standards of living. That same year, our main trading partner,
the United States, ranked third with a per capita GDP of $56,109—21.3% higher
than the figure for Canada. It is generally acknowledged that an increase in a
country’s standard of living is linked to growth in labour productivity, that is, the
relationship between the GDP and the number of hours worked. Based on this
criterion, Canada placed 17th among OECD countries in 2009, with labour
productivity of $53.79 per hour worked, while the United States ranked 7th, with
labour productivity of $64.91—20.7% higher than the figure for Canada. This lag
on Canada’s part is nothing new. Between 1981 and 2009, average annual labour
production growth in Canada was among the lowest for industrialized OECD
member countries. In fact, only Italy and Switzerland had lower growth rates
during that period.
2
Between 1984 and 2006, growth in labour productivity in Canada came
essentially from the services sector, including a positive contribution from the
wholesale and retail sectors. However, virtually none of this growth came from
the transportation and warehousing industry.
3
More recently, between 2002 and
2008, the increased labour productivity in Canada’s retail sector was much higher
than the private sector average. This good performance may be attributable to
investments made by companies in that sector in innovative practices, particularly
in the area of logistics management (Industry Canada, 2010).
It is therefore appropriate and important to compare Canada’s supply chain
management performance, both in terms of international trade and from the
perspective of innovative practices adopted by Canadian companies in the
domestic market. This chapter begins with a comparative analysis of Canada’s
performance with the performance of 155 countries from the perspective of their
global supply chain as measured by an index developed by the World Bank. Next,
the relationship between logistics performance and business productivity is
1
Canadian dollars in 2008.
2
Centre sur la productivité et la prospérité (2010), Productivité et Prospérité au Québec – Bilan
2010, HEC Montréal.
3
Ibid
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314
examined. In the third section, the logistics performance of Canadian companies
is compared with the performance of American companies on the basis of various
cost categories and by key economic sector. The fourth section covers innovative
practices for managing supply chains and the degree of success achieved by
Canadian companies in adopting these practices. The chapter concludes with final
observations and implications for government decision makers and policy.
1. Comparative analysis of the performance of global supply chains
The World Bank has just published its second classification of countries
based on a Logistics Performance Index (LPI) it developed using the following six
criteria (Arvis et al., 2010).
1. Efficiency of the customs clearance process and security measures
2. Quality of transport-related and communication infrastructure
3. Ease of arranging competitively priced international shipments
4. Competence and quality of logistics services
5. Ability to track and trace consignments
6. Frequency with which shipments reach the consignee within the
scheduled or expected time.
This index is calculated on a scale of 1 to 5, with a rating of 5 for the best
performance and 1 for the worst. It is obtained for 155 countries by assessing
each of the criteria listed above using a questionnaire sent to nearly 1,000
managers and specialists working for freight forwarders (e.g., DB Schenker,
Kuehne + Nagel and Panalpina) and international courier companies (e.g., DHL,
Fedex and UPS). The scores obtained for each of the six criteria used are
statistically analyzed using principal component analysis in order to obtain a
composite index of logistics performance. The results are presented in Table 1.
Logistics and the Competitiveness of Canadian Supply Chains
315
Criteria
Rank and Score
Table 1: Classification of the 20 leading countries based on the World
Bank’s international Logistics Performance Index (LPI)
Rank
Country
(or territory) LPI
Customs
(rank) score
Infrastruc-
ture
(rank) score
Interna-
tional
Shipments
(rank) score
Logistics
Competence
(rank) score
Tracking
and
Tracing
(rank) score
Timeliness
(rank) score
1 Germany 4.11 (3) 4.00 (1) 4.34 (9) 3.66 (4) 4.14 (4) 4.18 (3) 4.48
2 Singapore 4.09 (2) 4.02 (4) 4.22 (1) 3.86 (6) 4.12 (6) 4.15 (14) 4.23
3 Sweden 4.08 (5 ) 3.88 (10) 4.03 (2) 3.83 (2) 4.22 (3) 4.22 (11) 4.32
4 Netherlands 4.07 (4) 3.98 (2) 4.25 (11) 3.61 (3) 4.15 (9) 4.12 (6) 4.41
5 Luxembourg 3.98 (1) 4.04 (9) 4.06 (7) 3.67 (21) 3.67 (19) 3.92 (1) 4.58
6 Switzerland 3.97 (12) 3.73 (6) 4.17 (25) 3.32 (1) 4.32 (1) 4.27 (15) 4.20
7 Japan 3.97 (10) 3.79 (5) 4.19 (12) 3.55 (7) 4.00 (8) 4.13 (13) 4.26
8
United
Kingdom
3.95 (11) 3.74 (16) 3.95 (8) 3.66 (9) 3.92 (7) 4.13 (8) 4.37
9 Belgium 3.94 (9) 3.83 (12) 4.01 (26) 3.31 (5) 4.13 (2) 4.22 (12) 4.29
10 Norway 3.93 (6) 3.86 (3) 4.22 (24) 3.35 (13) 3.85 (10) 4.10 (10) 4.35
11 Ireland 3.89 (18) 3.60 (19) 3.76 (5) 3.70 (16) 3.82 (13) 4.02 (4) 4.47
12 Finland 3.89 (7) 3.86 (8) 4.08 (19) 3.41 (10) 3.92 (11) 4.09 (25) 4.08
13 Hong Kong 3.88 (8) 3.83 (13) 4.00 (6) 3.67 (14) 3.83 (17) 3.94 (26) 4.04
14 Canada 3.87 (13) 3.71 (11) 4.03 (32) 3.24 (8) 3.99 (15) 4.01 (5) 4.41
15
United
States
3.86 (15) 3.68 (7) 4.15 (36) 3.21 (11) 3.92 (5) 4.17 (16) 4.19
16 Denmark 3.85 (19) 3.58 (15) 3.99 (16) 3.46 (15) 3.83 (18) 3.94 (7) 4.38
17 France 3.84 (17) 3.63 (14) 4.00 (28) 3.30 (12) 3.87 (14) 4.01 (9) 4.37
18 Australia 3.84 (14) 3.68 (18) 3.78 (3) 3.78 (17) 3.77 (20) 3.87 (18) 4.16
19 Austria 3.76 (20) 3.49 (21) 3.68 (4) 3.78 (20) 3.70 (22) 3.83 (23) 4.08
20 Taiwan 3.71 (25) 3.35 (22) 3.62 (10) 3.64 (22) 3.65 (12) 4.04 (30) 3.95
Source: Arvis et al., 2010
Canada ranks 14th with a composite index of 3.87, just ahead of the United
States. In 2007, Canada was in 10th place with a 3.92 index and a confidence
interval of ± 0.05, which means that there is not really any significant statistical
difference between Canada’s performance in 2007 and in 2010. In fact, it is risky
Roy
316
to compare the two classifications, since the definition of criteria chosen was
changed in 2010. In 2007, the United States was in 14th place with an index of
3.84 and a confidence interval of ± 0.03.
Closer examination of Canada’s performance based on the six criteria used
reveals that the third, “ease of arranging competitively priced shipments,” is the
greatest hindrance to Canada’s performance. Canada ranks 32nd for this criterion.
To gain a clearer understanding of Canada’s results, we requested and obtained
more specific information from the World Bank concerning the source of the
assessments used. We learned that Canada’s performance was assessed by 69
respondents, particularly freight forwarders, located in the United States (32%),
Mexico (15%) and Peru (9%). The remaining respondents were from Asia (10%),
South America (7%), Central America (4%), etc. Major companies such as UPS,
Panalpina, Kuehne + Nagel, DHL and Damco account for close to half of the
respondents for Canada, and the rest were smaller companies.
We discovered that the respondents based in Mexico—a NAFTA member
country and one of Canada’s major trading partners—were somewhat hard on
Canada for the criterion “ease of arranging international competitively priced
shipments to Canada,” assigning a score far below the average, while US-based
respondents provided a much more positive assessment. Considering that the
respondents based in Peru also gave Canada lower-than-average scores, nearly
25% of respondents are dissatisfied with regard to this criterion. These results
confirm the opinions expressed by managers of Canadian companies based in
Mexico who report difficulties in shipping their products to Canada. At the same
time, it is important not to read too much into this criterion, since developed
countries such as the United States appear to be experiencing similar problems.
There are no big surprises in terms of the top-ranked countries. In fact,
countries such as Germany and Singapore have policies and master plans for
developing their international logistics infrastructures and competencies. Also, it is
interesting to note that the top six countries rank first or second for at least one of
the six criteria used.
In its 2010 report, the World Bank demonstrates the connection between
logistics performance and international trade. For example, a study by Hoekman
and Nicita (2008) demonstrates that a high Logistics Performance Index (LPI) is
closely associated with bilateral trade growth. A connection is also established
between the high LPI index and the market share for parts and components in a
country’s exports. This reflects the importance of logistics in managing and
integrating global production networks. Last, reference is made to other studies
that tend to demonstrate the obvious: that good logistics performance is a
necessary condition for facilitating international trade.
In conclusion, it is interesting to note that, with the exception of Japan, all of
the countries ranked higher than Canada in Table 1 also best Canada in OECD
country rankings for labour productivity. In short, Canada would be well-advised
to continue developing its logistics competencies, performance and infrastructure
in order to facilitate the growth of international trade, productivity and the
economy. We will come back to this topic in Section 5 with suggestions for ways
to improve, particularly in terms of customs formalities and transportation
infrastructure.
Logistics and the Competitiveness of Canadian Supply Chains
317
2. Supply chain management and business productivity
Is there a connection between supply chain management good practices and
business productivity? To answer this question, we analyzed the results of several
empirical studies (Beaulieu and Roy, 2009). Based on this analysis, we made the
following observations:
• Good logistics practices have a positive effect on operational business
performance (speed of delivery, responsiveness, flexibility and delivery
capacity) and on their trade performance (average growth of the market
share, average growth in sales volume and average growth of sales in
dollars). These results come from a survey of the American manufacturing
sector with a sample of 142 respondents from organizations with over 500
employees (Green et al., 2008).
• Using good logistics practices (integration, outsourcing and client service)
and deploying logistics competencies (quality and services, operations and
distribution, and design efficiency) would have a positive effect on
companies’ organizational performance, particularly in terms of their
competitiveness. This survey was conducted among about 100 manufac-
turing companies in the United States and Taiwan (Chow et al., 2008).
• Establishing quality management practices with suppliers strengthens their
involvement and cooperation, which in turn improves organizational
performance. These results come from a study of 103 local companies in
Hong Kong and Taiwan (Lin et al., 2005).
• Last, strategic logistics management, supported by quality improvement
efforts, positively affects service performance indicators (speed, reliability,
turnaround time and inventory turnover) and operational efficiency
(operational costs), expressed in greater client satisfaction and better
business performance (market share, sales volume and profitability). The
data come from 225 respondents in Hong Kong (though 75% of them
have their head office in the United States), Japan, the Netherlands and
other countries (Yeung, 2008).
Generally speaking, good practices should lead to better performance.
However, these best practices must be associated with a specific context and
carried out from a holistic perspective. Table 2, from a study by Laugen et al
(2005), tends to confirm the effect of introducing best practices to business
performance.
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Table 2: Exemplary logistics and performance management
Companies with an
excellent supply
chain
Companies with a
less effective
supply chain
All respondents
Delivery
time for an
order
15 days 21 days 20 days
Rate of on-
time delivery
95% 90% 93%
Financial
cycle
60 days 95 days 70 days
Annual
inventory
turnover rate
10 turns 6 turns 8 turns
Length of
new product
development
cycle
180 days 340 days
180
days
Source: Laugen et al. (2005)
These studies demonstrate that logistics practices have a positive effect on
the operational performance of companies. However, the impact on the
organization’s financial performance would be more indirect. One of the few
studies that establish a direct link is the survey by D’Avanzo et al. (2003) of 636 of
the top 3,000 international companies. This study reveals that 90% of respondents
consider supply chain management a critical aspect of an organization’s
performance. The authors suggest a very strong direct link between supply chain
management and financial performance. Other surveys reveal that companies with
more mature logistical practices are 40% more profitable than manufacturing
companies whose practices are not as highly developed (Beaulieu and Roy, 2009).
Moreover, beyond its positive impact on companies’ operational and financial
performance, there is increasing recognition that supply chain management also
constitutes a key source of competitive advantage for organizations that excel in
their business line. Examples in this regard include internationally known
companies such as Wal-Mart, Dell and Zara, whose success is essentially based on
a forward-thinking logistics strategy. In Canada, companies such as L’Oréal
Canada, Uni-Select and Groupe Dynamite also stand out for their innovative
logistics practices in their respective markets.
3. Comparative analysis of the logistics performance of Canadian
and American companies
In Section 1, we saw that Canada ranked 14th in the World Bank
classification based on the international Logistics Performance Index
classification, just ahead of the United States. In the preceding section, we
demonstrated the effect of good logistics practices on operational and general
business performance. This section answers the question of how the performance
Logistics and the Competitiveness of Canadian Supply Chains
319
of Canadian companies compares with that of American companies in terms of
the main key logistics indicators.
We will look first at the total costs of logistics and supply chain management
activities. These costs can be divided into three categories: 1) internal costs, that
is, those associated with logistics activities conducted within the company, 2) the
cost of logistics activities outsourced to external service providers such as
transportation and warehousing, and 3) inventory holding costs such as financing,
obsolescence and breakage (Industry Canada, 2008). Figure 1 illustrates the
distribution of total supply chain management costs expressed in sales percentages
for Canada’s main key sectors in 2008.
It can be seen that logistics and supply chain management costs are higher in
the manufacturing sector than in the wholesale and retail sectors. Moreover,
logistics costs vary widely from one subsector to another. For example, they are
higher for the pharmaceutical products subsector than for the motor vehicle
subsector.
Figure 1: Distribution of Canada’s supply chain total costs in 2008
Source: Industry Canada (2008)
Table 2 compares the costs of supply chain management in Canada and the
United States by sector and cost category. In all sectors, the costs observed in the
United States are lower than costs in Canada. More specifically, Canada’s logistics
costs are 12.5% higher than US costs in the manufacturing sector, 18% higher
among wholesalers and 29.6% higher among retailers. It is understandable that
costs would be higher for Canadian wholesalers and retailers because of the
smaller market and the physical size of the country from coast to coast. That said,
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320
these gaps are significant and reflect to some extent the gap referred to in the
introduction in work productivity between the two countries. This is especially
true for manufacturing companies that compete in the same North American
market as their neighbours to the south. The percentages presented in Table 2
may appear low, but it is important to bear in mind that total logistics costs in the
United States in 2008 were US$1.344 billion, which accounted for 9.4% of the
country’s GDP for that year (Wilson, 2009).
Table 2: Supply Chain Management Costs in Canada and the United States
(% of Sales, 2008)
Canada United States
Costs
Manu-
facturing
Wholesale Retail
Manu-
facturing
Wholesale Retail
Internal 2.68% 2.45% 1.22% 1.20% 1.90% 0.80%
Out-
sourced
2.10% 0.59% 0.65% 3.20% 0.90% 1.00%
Holding 1.71% 0.50% 1.50% 1.37% 0.20% 0.80%
Totals 6.49% 3.54% 3.37% 5.77% 3.00% 2.60%
Source: Industry Canada (2008)
Closer examination of Table 2 reveals that American companies have lower
inventory holding costs than their Canadian counterparts in all sectors of the
economy. The reason for this is higher inventory turnover rates than in Canada,
one of the most well-used indicators for assessing the industry’s agility. In the
manufacturing sector, then, just-in-time practices result in high turnover rates for
raw materials and other upstream components. The turnover rate observed in the
American manufacturing sector is 24% higher than the rate for that sector in
Canada. In the distribution sectors (wholesale and retail), there is an increasing
effort to supply retailers just in time in order to reduce unsold inventories and
provide product assortments that correspond more closely with demand. Here,
too, inventory turnover rates observed in the United States are higher by 10% and
29% respectively in the wholesale and retail sectors (Industry Canada, 2008).
Table 2 also indicates that the costs of activities outsourced to logistics
service providers are higher in the United States than in Canada. This is expressed
in a worldwide trend whereby logistics activities are increasingly being handled by
specialists referred to as “3PL,” which stands for “third-party logistics providers.”
The main reason companies outsource logistics services is to save money. It is
therefore not surprising to note that the total cost of logistics is relatively lower in
the United States than in Canada, partly because of the higher use of outsourcing,
as shown in Figure 2.
Logistics and the Competitiveness of Canadian Supply Chains
321
Figure 2: Distribution of logistics costs in Canada and the United States
Source: Industry Canada (2008)
4. Innovation in the supply chain for Canadian companies
In Section 2, we demonstrated that companies that have adopted best or
innovative practices for supply chain management enjoy a higher organizational
performance level than other companies. We will now examine the nature of these
practices and then determine, where applicable, the extent to which Canadian
companies use such practices.
4.1 Supply chain management best practices
A number of authors have proposed lists of supply chain management best
practices. Our objective is not to produce an exhaustive list of all of these
nomenclatures, but rather to provide an overview of the main practices that in our
opinion have garnered fairly broad consensus.
1) The use of information and communication technologies
To properly manage the supply chain, companies must adopt new
information and communication technologies to facilitate the integration of
upstream and downstream activities and enable the various stakeholders in the
chain to collaborate among themselves. These technologies include information
systems such as integrated business management systems (enterprise resource
planning – ERP), warehouse management systems (WMS) and transportation
management systems (TMS). Other communication technologies referred to are
on-board computers, global positioning systems (GPS) and radio frequency
identification tags (RFID). By extension, these practices also include all
optimization software designed to develop the best delivery routes, better manage
inventories and obtain the optimal configuration of a logistics network including
the number and location of production and distribution units, and to perform
other tasks. In short, the use of technology provides greater visibility for products
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322
along the chain and offers partners greater connectivity, which in turn facilitates
cooperation and integration.
Figure 3 presents the results of a survey by Poirier and Quinn (2006) among
supply chain management professionals in North America, Europe and Australia
(120 respondents). The survey indicates the percentage of respondents using one
of these technologies. It reveals that 14% of respondents would adopt all of these
technologies, and that of the five most popular technological applications (actually
six, since two are tied), four involve technologies with internal applications for an
organization (ERP, inventory planning and optimization system, WMS and APS).
Figure 3: Use of various supply chain management technologies
Source: Poirier and Quinn (2006)
2) Cooperation between supply chain partners
Over the last decade, the just-in-time philosophy was adapted to the
distribution of finished goods from factory to sales outlets and distribution
centres. This has given rise to continuous replenishment practices known as
Quick Response (QR) or Efficient Consumer Response (ECR), and more
recently, to collaborative planning, forecasting and replenishment (CPFR) over
the Internet. Essentially, these practices facilitate partnerships between members
of a distribution network to better plan replenishment of finished goods for
retailers on the basis of information coming from the sales outlets as well as from
collaborative forecasting among network members. This approach differs from
Logistics and the Competitiveness of Canadian Supply Chains
323
the traditional replenishment method based almost exclusively on the independent
processing of orders received at each level of the network.
A recent technological innovation, flowcasting, sets forth the idea of an
information system through which a database can be developed that is shared by
the various stakeholders in a supply chain. The system is based on a single set of
forecasts, made at sales outlets, to plan replenishment of retail stores and
distribution centres. Tests were performed in the United States between a large
retailer and a major food product supplier, and the results are extremely
interesting: there was a significant reduction in the inventory level and an increase
in the level of service and rate of coverage of in-store products. (Beaulieu and
Roy, 2009).
3) Outsourcing of logistics services
With globalization and market liberalization, companies are increasingly
looking to focus on activities in which they excel, be it motor vehicle assembly or
product marketing. In many cases, however, these activities exclude product
supply and distribution, which is outsourced to companies specializing in logistics,
better known as 3PLs (third party logistics providers). These companies handle
some or all of their clients’ logistics activities: transportation, warehousing,
handling, order processing and preparation, inventory management, supply,
distribution, etc.
These logistics service providers have developed rapidly over the past decade
and continue to increase steadily. Figure 4 illustrates this trend by showing how
the 3PL market in the United States has grown over nearly 20 years, whereas
Figure 2 demonstrates that Canadian companies were less likely to outsource their
logistics activities to 3PLs. As a result, the Canadian logistics services industry
grew by 47% between 1998 and 2007, according to Industry Canada (2008). Still,
it is difficult to compare this figure with the American percentage, because the
Canadian definition includes transportation service providers. Even so, it is
interesting to note that the GDP for Canadian logistics service providers should
increase by 40% between 2007 and 2015 to C$56 billion, according to Industry
Canada (2008), a rising trend similar to that observed in the United States.
Figure 4: Changes in the 3PL market in the United States between 1990 and
2008
Sources: Chow and Gritta (2002) and Wilson (2009)
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324
4) Approaches for measuring and improving performance
Operational excellence is based on a performance management approach that
includes process mapping and improvement, performance measurement using key
indicators often grouped into management dashboards, activity based costing, and
comparative analysis, better known as benchmarking. Though this performance
management approach is not specific to supply chain management, it is still
recognized as a necessary condition and best practice. In fact, companies that use
key performance indicators report better logistics performance than those that do
not (Industry Canada, 2006).
4.2 Use of electronic systems linked to logistics in Canada
In Canada, there has been a relatively low rate of adoption of electronic
information systems to manage logistics functions, with use at slightly over 20%
by medium-sized and large companies, and a mere 10% by small companies. In
the United States, the rate of use is 30% higher than in Canada, regardless of the
size of the company (Industry Canada, 2010a). Though use remains low for all
sectors, wholesalers boast the highest rate, with 35% adopting electronic logistics
management systems. Moreover, retailers and wholesalers are relatively more
inclined to use electronic systems to coordinate replenishment activities with their
suppliers such as CPFR. This does not prevent manufacturers from increasingly
adopting collaborative approaches such as CPFR with their own suppliers.
Last, we know how important it is to integrate electronic information systems
to achieve excellence in managing supply chains. Barely half of Canada’s major
companies have succeeded in integrating electronic supply management systems
with their other internal systems as indicated in Figure 5. Naturally, this
percentage decreases inversely with the size of the companies. Also, the degree of
integration with client and supplier systems is a key indicator of business
performance in terms of collaboration and exemplary management of the supply
chain. However, relatively few companies have reached this degree of integration
with their suppliers. Retailers have achieved the highest adoption rate (close to
40%), which is a result of their efforts in terms of collaborative planning,
forecasting and replenishment, or CPFR (Industry Canada, 2010a).
Few surveys have been done to assess the degree to which Canadian
companies have adopted logistics practices. One of the most exhaustive such
survey was conducted in 2001 in Quebec and was based on a sample of 668
respondents (Roy et al., 2002). The results are presented in Table 3.
Logistics and the Competitiveness of Canadian Supply Chains
325
Figure 5: Integration of electronic logistics systems
Source: Industry Canada (2010a)
These results indicate that for all of the statements in Table 3 (except for the
choice of suppliers on the Internet), deployment is based on the size of the
respondents, with the large companies systematically adopting practices and
technologies in greater numbers than the small and medium-sized companies.
Care should be taken in interpreting these results today, since the survey is several
years old and the portrait is bound to have changed, even simply on the basis of
new perspectives or technologies such as RFID.
Canadian companies would be well-advised to make a greater effort to adopt
and integrate electronic management software. By doing so, they could catch up
with their American counterparts, enjoy substantial savings in terms of logistics
costs and improve the quality of client services to give them an advantage over
their competitors. In fact, adopting supply chain management best practices is not
just a matter of saving money, but also—and most importantly—it is a way to
obtain a lasting competitive edge.
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326
Table 3: Adoption of Logistics Practices by Quebec Companies
(In Percentages)
Logistics practices
Companies
Small
Medium-
sized
Large
Inventory management by
the supplier
30.0 38.0 43.8
Management of your
clients’ inventory (VMI)
29.6 31.1 40.0
Alliances or partnerships
with transportation or
logistics companies
28.0 48.5 60.4
Alliances or partnerships
with suppliers (other than
transportation or logistics)
44.5 57.2 72.5
Establishment of quality
standards (ISO or others)
45.5 52.0 75.0
Use of bar code and optical
scanning systems
25.1 48.8 70.0
Training of teams of
employees with clients or
suppliers
29.5 39.1 46.2
Development or re-
engineering of processes
with clients or suppliers
26.9 38.9 51.6
Just in time 45.7 55.0 62.9
Forecast sharing with
clients and suppliers
(CPFR)
34.2 44.8 59.9
Tracking system or logistics
performance dashboard
25.6 31.3 61.6
Choice of suppliers on the
Internet
25.1 23.9 31.9
Electronic product
catalogue
28.2 40.1 52.5
Continuous replenishment
method (ECR, Quick
Response)
12.3 19.8 35.2
Sharing of information
gathered at sales outlets
25.9 44.9 47.5
Source: Roy et al. (2002)
4.3 Outsourcing to countries with low production costs
Market globalization and increased international competition is prompting
companies to focus increasingly on competencies in which they excel, and
consequently, to outsource to third parties the activities at which they are less
adept or for which emerging countries have a significant competitive cost
advantage. China is obviously central to this phenomenon by reason of its size
and very high and sustained growth rate. In 2007, 90% of Canadian manufacturers
Logistics and the Competitiveness of Canadian Supply Chains
327
outsourced to China (Industry Canada, 2007). Foreign subsidiaries of
multinationals in China account for over a quarter of that country’s industrial
production and 58% of Chinese exports and provide jobs for over 10 million
people (Sydor, 2006). However, offshoring production activities also benefits
other Asian countries and growth is being observed in emerging countries in
Central and South America as well as in Eastern Europe.
In Canada, this phenomenon certainly affects companies working in
traditional sectors such as clothing (Gildan) and furniture (Shermag), but the same
trend can be seen in hi-tech sectors such as aeronautics. In fact, Pratt& Whitney
Canada has production activities in Poland and Bombardier Aerospace
manufactures electrical harnesses and other components in Mexico and China.
There are numerous consequences of this globalization of supply sources
(global sourcing). First, companies obviously enjoy the advantages associated with
lower production costs, which unfortunately come with ever-increasing
transportation costs and the need to maintain more inventories locally to ensure
the continuity of their operations during the supply period, and this in turn
generates increased warehousing and inventory holding costs. In some cases,
more rapid transportation methods such as air transport are preferred, rather than
the slower method of shipping by sea, but there again, this increases
transportation costs significantly. According to Industry Canada (2007), the time
frame for outsourcing products to China varies from a minimum of one to three
months, to a maximum of three to six months.
There are other consequences of this phenomenon such as additional delays
owing to port congestion and capacity problems experienced by foreign suppliers
as their popularity increases. Other challenges are errors in the orders received
and problems with the quality of the products delivered. Avoiding these risks
often means increasing the level of inventory kept locally or setting up alternative
supply sources, which increases complexity and operating costs.
The 1990s brought predictions that conventional distribution centres would
disappear because of the increasing popularity of cross-docking centres. Today,
the use of outsourcing to countries with low production costs makes it necessary
to keep more inventories locally and the number of distribution centres is virtually
exploding. In fact, investment in new distribution centres rose by 60% between
2001 and 2007 (Industry Canada, 2007). Examples of such centres are the new
facilities of The Aldo Group, The Hockey Company, Alimentation Couche-Tard
and Canadian Tire, and these are just the ones in Greater Montreal.
Again, according to Industry Canada (2007), barely 43% of Canadian
companies that chose to outsource to countries with low production costs
reported that they had successfully lowered the total delivered cost of their
products as a result. To achieve this result, these companies adopted a number of
best practices, presented in Table 4.
Roy
328
Table 4: Practical examples of companies that decreased their total
delivered cost
Practice
Percentage of Companies
Adopting Best Practices
Analysis of total logistics cost
84%
Allocation of dedicated human resources
79%
Establishment of secondary supply
sources
79%
Use of air transportation 76%
Training of suppliers from low-cost
countries
70%
Adding supplementary inventory 21%
Source: Industry Canada (2007)
First, the companies that succeed are the ones that know their costs. This
may seem obvious, but many companies decide to outsource to low-cost
countries solely on the basis of anticipated savings in labour costs. A good analysis
of the total delivered cost can sometimes reveal surprises to companies that have
underestimated factors such as increases in the cost of transportation,
warehousing and poor quality, to name but a few.
Allocating dedicated resources to global sourcing and sending company staff
to work onsite in a low-cost country are ways of ensuring the success of the
operation, as doing so will mean, for example, that foreign suppliers are better
trained. Despite these measures, there will be unexpected and emergency
situations. In such cases, successful companies do not hesitate to use air transport
and secondary supply sources in less risky countries. Although the company
incurs additional costs, it avoids having to keep too much inventory on hand,
which successful companies are reluctant to do. However, it is interesting to note
that setting up supplementary inventory is a widespread practice in 85% of the
companies whose total cost increased after they outsourced to low-cost countries.
4.4 Green logistics
There is increasing concern over environmental and sustainable development
issues in our society. The transportation sector alone generated some 27% of
greenhouse gas emissions (GGEs) in Canada in 2007 (Transport Canada, 2009).
Logistics can therefore foster sustainable development through the design of
supply chains that reduce transportation needs. We might also add that it is also
advantageous for companies to create an environmentally friendly “green” image.
This pressure can sometimes come in the form of a requirement to obtain
environmental certification, such as the ISO 14,000 standard, to comply with the
Logistics and the Competitiveness of Canadian Supply Chains
329
requirements of certain clients or orderers. Also promoted is the green logistics
concept, which is essentially aimed at reducing the harmful effects of logistics-
related activities, such as hard-to-recycle packaging and air pollution.
In Canada, a recent study reveals that manufacturers who adopt green
logistics practices report improvements that reduce energy consumption, GGEs,
packaging and waste (Industry Canada, 2009). The study also reports that 80% of
the highest-performing green logistics manufacturers observed a reduction of
their distribution costs and a more loyal clientele. Moreover, 90% of these
manufacturers reported improvements in their compliance processes. Other
business advantages observed by these high-performing companies in terms of
green logistics were improved risk management, greater access to foreign markets,
increased sales and greater differentiation in distribution services (Industry
Canada, 2009). In short, green logistics represents another opportunity for
Canadian companies to improve their performance and make their mark in
international markets.
5. Conclusion and government policy implications
5.1 Conclusion
In this chapter, we saw that Canada lagged behind other OECD member
countries in terms of per capita GDP and labour productivity levels. The vast
majority of countries that are doing better than Canada in this regard also perform
better when it comes to supply chain management, both internationally and at the
company level. Canada ranks 14th on the World Bank’s international logistics
performance index. Performance could be improved by addressing customs
formalities, transportation infrastructure, and especially “ease of arranging
competitively priced shipments,” for which Canada ranks 32nd.
Generally speaking, it has been demonstrated that for companies, good
logistics practices foster better organizational performance. We compared the
performance of Canadian and American companies on the basis of logistics costs.
Such costs for the Canadian companies were 12.5% higher in the manufacturing
sector, 18% higher for wholesalers and 29.6% higher for retailers. To gain a better
understanding of these differences, we identified the main best logistics practices
adopted by companies known for their superior performance. It was
demonstrated that 1) the rate of use of electronic systems for logistics was 30%
higher for American companies than for Canadian companies; 2) American
companies outsourced logistics activities to designated 3PL service providers
much more than Canadian companies did; 3) the integration of electronic
logistical systems was incomplete, especially in the case of SMEs; and 4) most
companies outsourcing to low cost countries did not adopt best practices in this
regard.
5.2 Implications for government policy
We will now examine the implications of these results on possible
government policy or action by separating the more global issues from those
more specifically affecting Canadian companies.
Roy
330
5.2.1 Global issues
Because Germany ranks first on the World Bank’s Logistics Performance
Index, it is a good idea to try to understand the reasons for its high performance.
This country leads in infrastructure and ranks third for customs formalities, two
criteria for which there is government involvement. The German government
takes an active interest in logistics and has developed a master plan for freight
transport and logistics (Tiedemann, 2009). The objectives of this plan are as
follows:
• Optimize the use of infrastructure and make transportation more efficient;
• Eliminate unnecessary travel to facilitate mobility;
• Move more traffic to domestic rail and maritime routes;
• Promote clean, green transportation;
• Create good working conditions and training in the freight industry;
• Adopt measures to make Germany even more attractive as a logistics
centre.
Canada’s challenges are very similar to those facing Germany (globalization
and global sourcing, increase in traffic and congestion, labour shortages,
environmental protection and new logistics technologies). Canada could draw on
the objectives and measures proposed in Germany’s master plan. For example, to
attract the flow of goods to or from North America through Canada, it would be
helpful to align government policy with the environmental and technological
logistics mandates of multinationals. To achieve this, the Canadian government
could try to attract investment in logistics to Canada by facilitating the emergence
of logistics centres like those in countries that have received high ratings from the
World Bank. Another example from the Throne Speech and the 2010 budget is
that the government has promised to develop a strategy to make Canada a leader
in the global digital economy. Innovation in global supply chain management
could be a pillar of this strategy.
Benchmarking is good practice in logistics, and, more generally, in
management. The Canadian government should also practice benchmarking by
analyzing the high logistics performance of countries such as Germany. In
developing its master plan, the German government conducted numerous
consultations with representatives from industry, academia, professional
associations, unions, etc. In Canada, there is a similar initiative—Gateways and
Trade Corridors—in Western, Central and Eastern Canada. In this context, it is
helpful to take a look at some of the recommendations that came out of a
workshop held at the University of Western Ontario in March 2008 concerning
the Ontario-Quebec Continental Gateway and Trade Corridor (Cunningham,
2008).
• With regard to Canada’s competitiveness in North America, recommenda-
tions included 1) setting up an agency that would coordinate policy
through a number of jurisdictions, both within Canada and with the
United States; 2) strengthening the free trade agreement with the United
States to increase the flow of goods, services and capital; and 3)
considering the concept of free trade zones like in Rotterdam, Nether-
lands.
Logistics and the Competitiveness of Canadian Supply Chains
331
• In terms of border-related issues, one of the criteria of the World Bank
index, it was suggested that the focus should be on border congestion
problems, identifying bottlenecks and investing in reducing them. Another
suggestion was to expand the security perimeter to include the entire
continent and not just to limit it to the borders. Last, it was suggested that
customs formalities with Mexico and the United States be simplified. This
last recommendation lines up with the concerns of freight agents that
expressed their dissatisfaction with international shipments to Canada.
This is consistent with the advice of numerous other experts in Canada
who feel that Canada could play a bigger role as a continental port of entry
and take advantage of NAFTA if the border-related issues could be
mitigated and the regulations for various methods of transportation
harmonized (see for example Brooks, 2006).
• In terms of infrastructure, another World Bank criterion, the report
recommended adopting a continental approach for planning transporta-
tion systems and infrastructure. In fact, it is felt that road, rail, air and sea
transportation corridors must be planned at the continental level to
determine the extent and levels of current and future congestion. In
particular, rail transportation requires consideration, given the growing
need, particularly as a result of environmental pressures that are expected
to further increase its popularity.
• Last, other relevant recommendations concerned issues such as
harmonizing road transportation regulations between provinces, adopting
an intelligent transportation systems policy and developing technologies to
facilitate transportation and customs procedures and greater availability of
statistical data on the flow of goods.
5.2.2 Company-related issues
Government policy would also be relevant with regard to companies. First,
despite recent efforts by Industry Canada to better understand and support
Canada’s logistics sector, much remains to be done in terms of assessing and
understanding the performance level of Canadian companies regarding supply
chain management. Recent Industry Canada studies and surveys show that
Canadian companies are lagging when it comes to deploying and integrating
electronic systems for logistics and outsourcing. It also reveals that most
companies that outsource to low-cost countries do not adopt best practices, and
their total cost results are therefore negative.
That said, we do not know why Canadian companies lag behind in adopting
better practices. Are they less well informed? Are their managers less well trained?
Do they have the financial means for adopting and integrating the increasingly
sophisticated systems being promoted in supply chain management? Are there
concrete examples of companies that have successfully adopted best practices in
terms of logistics and demonstrated leadership in their business line? How should
this knowledge and these good practices be conveyed to companies that are
having more difficulty? Should smaller companies that are taking longer to adopt
best practices receive assistance? Does government policy on innovation also
cover logistics issues? These are issues that call for some level of government
involvement.
Roy
332
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doc_174580310.pdf
In 2009, Canada ranked ninth among OECD countries with a per capita gross domestic product (GDP) of $46,243,1 a measurement generally used to compare societies’ standards of living. That same year, our main trading partner, the United States, ranked third with a per capita GDP of $56,109—21.3% higher than the figure for Canada.
Logistics and the Competitiveness of Canadian Supply Chains
313
Logistics and the Competitiveness of
Canadian Supply Chains
Jacques Roy
HEC, Montréal
Introduction
In 2009, Canada ranked ninth among OECD countries with a per capita
gross domestic product (GDP) of $46,243,
1
a measurement generally used to
compare societies’ standards of living. That same year, our main trading partner,
the United States, ranked third with a per capita GDP of $56,109—21.3% higher
than the figure for Canada. It is generally acknowledged that an increase in a
country’s standard of living is linked to growth in labour productivity, that is, the
relationship between the GDP and the number of hours worked. Based on this
criterion, Canada placed 17th among OECD countries in 2009, with labour
productivity of $53.79 per hour worked, while the United States ranked 7th, with
labour productivity of $64.91—20.7% higher than the figure for Canada. This lag
on Canada’s part is nothing new. Between 1981 and 2009, average annual labour
production growth in Canada was among the lowest for industrialized OECD
member countries. In fact, only Italy and Switzerland had lower growth rates
during that period.
2
Between 1984 and 2006, growth in labour productivity in Canada came
essentially from the services sector, including a positive contribution from the
wholesale and retail sectors. However, virtually none of this growth came from
the transportation and warehousing industry.
3
More recently, between 2002 and
2008, the increased labour productivity in Canada’s retail sector was much higher
than the private sector average. This good performance may be attributable to
investments made by companies in that sector in innovative practices, particularly
in the area of logistics management (Industry Canada, 2010).
It is therefore appropriate and important to compare Canada’s supply chain
management performance, both in terms of international trade and from the
perspective of innovative practices adopted by Canadian companies in the
domestic market. This chapter begins with a comparative analysis of Canada’s
performance with the performance of 155 countries from the perspective of their
global supply chain as measured by an index developed by the World Bank. Next,
the relationship between logistics performance and business productivity is
1
Canadian dollars in 2008.
2
Centre sur la productivité et la prospérité (2010), Productivité et Prospérité au Québec – Bilan
2010, HEC Montréal.
3
Ibid
Roy
314
examined. In the third section, the logistics performance of Canadian companies
is compared with the performance of American companies on the basis of various
cost categories and by key economic sector. The fourth section covers innovative
practices for managing supply chains and the degree of success achieved by
Canadian companies in adopting these practices. The chapter concludes with final
observations and implications for government decision makers and policy.
1. Comparative analysis of the performance of global supply chains
The World Bank has just published its second classification of countries
based on a Logistics Performance Index (LPI) it developed using the following six
criteria (Arvis et al., 2010).
1. Efficiency of the customs clearance process and security measures
2. Quality of transport-related and communication infrastructure
3. Ease of arranging competitively priced international shipments
4. Competence and quality of logistics services
5. Ability to track and trace consignments
6. Frequency with which shipments reach the consignee within the
scheduled or expected time.
This index is calculated on a scale of 1 to 5, with a rating of 5 for the best
performance and 1 for the worst. It is obtained for 155 countries by assessing
each of the criteria listed above using a questionnaire sent to nearly 1,000
managers and specialists working for freight forwarders (e.g., DB Schenker,
Kuehne + Nagel and Panalpina) and international courier companies (e.g., DHL,
Fedex and UPS). The scores obtained for each of the six criteria used are
statistically analyzed using principal component analysis in order to obtain a
composite index of logistics performance. The results are presented in Table 1.
Logistics and the Competitiveness of Canadian Supply Chains
315
Criteria
Rank and Score
Table 1: Classification of the 20 leading countries based on the World
Bank’s international Logistics Performance Index (LPI)
Rank
Country
(or territory) LPI
Customs
(rank) score
Infrastruc-
ture
(rank) score
Interna-
tional
Shipments
(rank) score
Logistics
Competence
(rank) score
Tracking
and
Tracing
(rank) score
Timeliness
(rank) score
1 Germany 4.11 (3) 4.00 (1) 4.34 (9) 3.66 (4) 4.14 (4) 4.18 (3) 4.48
2 Singapore 4.09 (2) 4.02 (4) 4.22 (1) 3.86 (6) 4.12 (6) 4.15 (14) 4.23
3 Sweden 4.08 (5 ) 3.88 (10) 4.03 (2) 3.83 (2) 4.22 (3) 4.22 (11) 4.32
4 Netherlands 4.07 (4) 3.98 (2) 4.25 (11) 3.61 (3) 4.15 (9) 4.12 (6) 4.41
5 Luxembourg 3.98 (1) 4.04 (9) 4.06 (7) 3.67 (21) 3.67 (19) 3.92 (1) 4.58
6 Switzerland 3.97 (12) 3.73 (6) 4.17 (25) 3.32 (1) 4.32 (1) 4.27 (15) 4.20
7 Japan 3.97 (10) 3.79 (5) 4.19 (12) 3.55 (7) 4.00 (8) 4.13 (13) 4.26
8
United
Kingdom
3.95 (11) 3.74 (16) 3.95 (8) 3.66 (9) 3.92 (7) 4.13 (8) 4.37
9 Belgium 3.94 (9) 3.83 (12) 4.01 (26) 3.31 (5) 4.13 (2) 4.22 (12) 4.29
10 Norway 3.93 (6) 3.86 (3) 4.22 (24) 3.35 (13) 3.85 (10) 4.10 (10) 4.35
11 Ireland 3.89 (18) 3.60 (19) 3.76 (5) 3.70 (16) 3.82 (13) 4.02 (4) 4.47
12 Finland 3.89 (7) 3.86 (8) 4.08 (19) 3.41 (10) 3.92 (11) 4.09 (25) 4.08
13 Hong Kong 3.88 (8) 3.83 (13) 4.00 (6) 3.67 (14) 3.83 (17) 3.94 (26) 4.04
14 Canada 3.87 (13) 3.71 (11) 4.03 (32) 3.24 (8) 3.99 (15) 4.01 (5) 4.41
15
United
States
3.86 (15) 3.68 (7) 4.15 (36) 3.21 (11) 3.92 (5) 4.17 (16) 4.19
16 Denmark 3.85 (19) 3.58 (15) 3.99 (16) 3.46 (15) 3.83 (18) 3.94 (7) 4.38
17 France 3.84 (17) 3.63 (14) 4.00 (28) 3.30 (12) 3.87 (14) 4.01 (9) 4.37
18 Australia 3.84 (14) 3.68 (18) 3.78 (3) 3.78 (17) 3.77 (20) 3.87 (18) 4.16
19 Austria 3.76 (20) 3.49 (21) 3.68 (4) 3.78 (20) 3.70 (22) 3.83 (23) 4.08
20 Taiwan 3.71 (25) 3.35 (22) 3.62 (10) 3.64 (22) 3.65 (12) 4.04 (30) 3.95
Source: Arvis et al., 2010
Canada ranks 14th with a composite index of 3.87, just ahead of the United
States. In 2007, Canada was in 10th place with a 3.92 index and a confidence
interval of ± 0.05, which means that there is not really any significant statistical
difference between Canada’s performance in 2007 and in 2010. In fact, it is risky
Roy
316
to compare the two classifications, since the definition of criteria chosen was
changed in 2010. In 2007, the United States was in 14th place with an index of
3.84 and a confidence interval of ± 0.03.
Closer examination of Canada’s performance based on the six criteria used
reveals that the third, “ease of arranging competitively priced shipments,” is the
greatest hindrance to Canada’s performance. Canada ranks 32nd for this criterion.
To gain a clearer understanding of Canada’s results, we requested and obtained
more specific information from the World Bank concerning the source of the
assessments used. We learned that Canada’s performance was assessed by 69
respondents, particularly freight forwarders, located in the United States (32%),
Mexico (15%) and Peru (9%). The remaining respondents were from Asia (10%),
South America (7%), Central America (4%), etc. Major companies such as UPS,
Panalpina, Kuehne + Nagel, DHL and Damco account for close to half of the
respondents for Canada, and the rest were smaller companies.
We discovered that the respondents based in Mexico—a NAFTA member
country and one of Canada’s major trading partners—were somewhat hard on
Canada for the criterion “ease of arranging international competitively priced
shipments to Canada,” assigning a score far below the average, while US-based
respondents provided a much more positive assessment. Considering that the
respondents based in Peru also gave Canada lower-than-average scores, nearly
25% of respondents are dissatisfied with regard to this criterion. These results
confirm the opinions expressed by managers of Canadian companies based in
Mexico who report difficulties in shipping their products to Canada. At the same
time, it is important not to read too much into this criterion, since developed
countries such as the United States appear to be experiencing similar problems.
There are no big surprises in terms of the top-ranked countries. In fact,
countries such as Germany and Singapore have policies and master plans for
developing their international logistics infrastructures and competencies. Also, it is
interesting to note that the top six countries rank first or second for at least one of
the six criteria used.
In its 2010 report, the World Bank demonstrates the connection between
logistics performance and international trade. For example, a study by Hoekman
and Nicita (2008) demonstrates that a high Logistics Performance Index (LPI) is
closely associated with bilateral trade growth. A connection is also established
between the high LPI index and the market share for parts and components in a
country’s exports. This reflects the importance of logistics in managing and
integrating global production networks. Last, reference is made to other studies
that tend to demonstrate the obvious: that good logistics performance is a
necessary condition for facilitating international trade.
In conclusion, it is interesting to note that, with the exception of Japan, all of
the countries ranked higher than Canada in Table 1 also best Canada in OECD
country rankings for labour productivity. In short, Canada would be well-advised
to continue developing its logistics competencies, performance and infrastructure
in order to facilitate the growth of international trade, productivity and the
economy. We will come back to this topic in Section 5 with suggestions for ways
to improve, particularly in terms of customs formalities and transportation
infrastructure.
Logistics and the Competitiveness of Canadian Supply Chains
317
2. Supply chain management and business productivity
Is there a connection between supply chain management good practices and
business productivity? To answer this question, we analyzed the results of several
empirical studies (Beaulieu and Roy, 2009). Based on this analysis, we made the
following observations:
• Good logistics practices have a positive effect on operational business
performance (speed of delivery, responsiveness, flexibility and delivery
capacity) and on their trade performance (average growth of the market
share, average growth in sales volume and average growth of sales in
dollars). These results come from a survey of the American manufacturing
sector with a sample of 142 respondents from organizations with over 500
employees (Green et al., 2008).
• Using good logistics practices (integration, outsourcing and client service)
and deploying logistics competencies (quality and services, operations and
distribution, and design efficiency) would have a positive effect on
companies’ organizational performance, particularly in terms of their
competitiveness. This survey was conducted among about 100 manufac-
turing companies in the United States and Taiwan (Chow et al., 2008).
• Establishing quality management practices with suppliers strengthens their
involvement and cooperation, which in turn improves organizational
performance. These results come from a study of 103 local companies in
Hong Kong and Taiwan (Lin et al., 2005).
• Last, strategic logistics management, supported by quality improvement
efforts, positively affects service performance indicators (speed, reliability,
turnaround time and inventory turnover) and operational efficiency
(operational costs), expressed in greater client satisfaction and better
business performance (market share, sales volume and profitability). The
data come from 225 respondents in Hong Kong (though 75% of them
have their head office in the United States), Japan, the Netherlands and
other countries (Yeung, 2008).
Generally speaking, good practices should lead to better performance.
However, these best practices must be associated with a specific context and
carried out from a holistic perspective. Table 2, from a study by Laugen et al
(2005), tends to confirm the effect of introducing best practices to business
performance.
Roy
318
Table 2: Exemplary logistics and performance management
Companies with an
excellent supply
chain
Companies with a
less effective
supply chain
All respondents
Delivery
time for an
order
15 days 21 days 20 days
Rate of on-
time delivery
95% 90% 93%
Financial
cycle
60 days 95 days 70 days
Annual
inventory
turnover rate
10 turns 6 turns 8 turns
Length of
new product
development
cycle
180 days 340 days
180
days
Source: Laugen et al. (2005)
These studies demonstrate that logistics practices have a positive effect on
the operational performance of companies. However, the impact on the
organization’s financial performance would be more indirect. One of the few
studies that establish a direct link is the survey by D’Avanzo et al. (2003) of 636 of
the top 3,000 international companies. This study reveals that 90% of respondents
consider supply chain management a critical aspect of an organization’s
performance. The authors suggest a very strong direct link between supply chain
management and financial performance. Other surveys reveal that companies with
more mature logistical practices are 40% more profitable than manufacturing
companies whose practices are not as highly developed (Beaulieu and Roy, 2009).
Moreover, beyond its positive impact on companies’ operational and financial
performance, there is increasing recognition that supply chain management also
constitutes a key source of competitive advantage for organizations that excel in
their business line. Examples in this regard include internationally known
companies such as Wal-Mart, Dell and Zara, whose success is essentially based on
a forward-thinking logistics strategy. In Canada, companies such as L’Oréal
Canada, Uni-Select and Groupe Dynamite also stand out for their innovative
logistics practices in their respective markets.
3. Comparative analysis of the logistics performance of Canadian
and American companies
In Section 1, we saw that Canada ranked 14th in the World Bank
classification based on the international Logistics Performance Index
classification, just ahead of the United States. In the preceding section, we
demonstrated the effect of good logistics practices on operational and general
business performance. This section answers the question of how the performance
Logistics and the Competitiveness of Canadian Supply Chains
319
of Canadian companies compares with that of American companies in terms of
the main key logistics indicators.
We will look first at the total costs of logistics and supply chain management
activities. These costs can be divided into three categories: 1) internal costs, that
is, those associated with logistics activities conducted within the company, 2) the
cost of logistics activities outsourced to external service providers such as
transportation and warehousing, and 3) inventory holding costs such as financing,
obsolescence and breakage (Industry Canada, 2008). Figure 1 illustrates the
distribution of total supply chain management costs expressed in sales percentages
for Canada’s main key sectors in 2008.
It can be seen that logistics and supply chain management costs are higher in
the manufacturing sector than in the wholesale and retail sectors. Moreover,
logistics costs vary widely from one subsector to another. For example, they are
higher for the pharmaceutical products subsector than for the motor vehicle
subsector.
Figure 1: Distribution of Canada’s supply chain total costs in 2008
Source: Industry Canada (2008)
Table 2 compares the costs of supply chain management in Canada and the
United States by sector and cost category. In all sectors, the costs observed in the
United States are lower than costs in Canada. More specifically, Canada’s logistics
costs are 12.5% higher than US costs in the manufacturing sector, 18% higher
among wholesalers and 29.6% higher among retailers. It is understandable that
costs would be higher for Canadian wholesalers and retailers because of the
smaller market and the physical size of the country from coast to coast. That said,
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320
these gaps are significant and reflect to some extent the gap referred to in the
introduction in work productivity between the two countries. This is especially
true for manufacturing companies that compete in the same North American
market as their neighbours to the south. The percentages presented in Table 2
may appear low, but it is important to bear in mind that total logistics costs in the
United States in 2008 were US$1.344 billion, which accounted for 9.4% of the
country’s GDP for that year (Wilson, 2009).
Table 2: Supply Chain Management Costs in Canada and the United States
(% of Sales, 2008)
Canada United States
Costs
Manu-
facturing
Wholesale Retail
Manu-
facturing
Wholesale Retail
Internal 2.68% 2.45% 1.22% 1.20% 1.90% 0.80%
Out-
sourced
2.10% 0.59% 0.65% 3.20% 0.90% 1.00%
Holding 1.71% 0.50% 1.50% 1.37% 0.20% 0.80%
Totals 6.49% 3.54% 3.37% 5.77% 3.00% 2.60%
Source: Industry Canada (2008)
Closer examination of Table 2 reveals that American companies have lower
inventory holding costs than their Canadian counterparts in all sectors of the
economy. The reason for this is higher inventory turnover rates than in Canada,
one of the most well-used indicators for assessing the industry’s agility. In the
manufacturing sector, then, just-in-time practices result in high turnover rates for
raw materials and other upstream components. The turnover rate observed in the
American manufacturing sector is 24% higher than the rate for that sector in
Canada. In the distribution sectors (wholesale and retail), there is an increasing
effort to supply retailers just in time in order to reduce unsold inventories and
provide product assortments that correspond more closely with demand. Here,
too, inventory turnover rates observed in the United States are higher by 10% and
29% respectively in the wholesale and retail sectors (Industry Canada, 2008).
Table 2 also indicates that the costs of activities outsourced to logistics
service providers are higher in the United States than in Canada. This is expressed
in a worldwide trend whereby logistics activities are increasingly being handled by
specialists referred to as “3PL,” which stands for “third-party logistics providers.”
The main reason companies outsource logistics services is to save money. It is
therefore not surprising to note that the total cost of logistics is relatively lower in
the United States than in Canada, partly because of the higher use of outsourcing,
as shown in Figure 2.
Logistics and the Competitiveness of Canadian Supply Chains
321
Figure 2: Distribution of logistics costs in Canada and the United States
Source: Industry Canada (2008)
4. Innovation in the supply chain for Canadian companies
In Section 2, we demonstrated that companies that have adopted best or
innovative practices for supply chain management enjoy a higher organizational
performance level than other companies. We will now examine the nature of these
practices and then determine, where applicable, the extent to which Canadian
companies use such practices.
4.1 Supply chain management best practices
A number of authors have proposed lists of supply chain management best
practices. Our objective is not to produce an exhaustive list of all of these
nomenclatures, but rather to provide an overview of the main practices that in our
opinion have garnered fairly broad consensus.
1) The use of information and communication technologies
To properly manage the supply chain, companies must adopt new
information and communication technologies to facilitate the integration of
upstream and downstream activities and enable the various stakeholders in the
chain to collaborate among themselves. These technologies include information
systems such as integrated business management systems (enterprise resource
planning – ERP), warehouse management systems (WMS) and transportation
management systems (TMS). Other communication technologies referred to are
on-board computers, global positioning systems (GPS) and radio frequency
identification tags (RFID). By extension, these practices also include all
optimization software designed to develop the best delivery routes, better manage
inventories and obtain the optimal configuration of a logistics network including
the number and location of production and distribution units, and to perform
other tasks. In short, the use of technology provides greater visibility for products
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322
along the chain and offers partners greater connectivity, which in turn facilitates
cooperation and integration.
Figure 3 presents the results of a survey by Poirier and Quinn (2006) among
supply chain management professionals in North America, Europe and Australia
(120 respondents). The survey indicates the percentage of respondents using one
of these technologies. It reveals that 14% of respondents would adopt all of these
technologies, and that of the five most popular technological applications (actually
six, since two are tied), four involve technologies with internal applications for an
organization (ERP, inventory planning and optimization system, WMS and APS).
Figure 3: Use of various supply chain management technologies
Source: Poirier and Quinn (2006)
2) Cooperation between supply chain partners
Over the last decade, the just-in-time philosophy was adapted to the
distribution of finished goods from factory to sales outlets and distribution
centres. This has given rise to continuous replenishment practices known as
Quick Response (QR) or Efficient Consumer Response (ECR), and more
recently, to collaborative planning, forecasting and replenishment (CPFR) over
the Internet. Essentially, these practices facilitate partnerships between members
of a distribution network to better plan replenishment of finished goods for
retailers on the basis of information coming from the sales outlets as well as from
collaborative forecasting among network members. This approach differs from
Logistics and the Competitiveness of Canadian Supply Chains
323
the traditional replenishment method based almost exclusively on the independent
processing of orders received at each level of the network.
A recent technological innovation, flowcasting, sets forth the idea of an
information system through which a database can be developed that is shared by
the various stakeholders in a supply chain. The system is based on a single set of
forecasts, made at sales outlets, to plan replenishment of retail stores and
distribution centres. Tests were performed in the United States between a large
retailer and a major food product supplier, and the results are extremely
interesting: there was a significant reduction in the inventory level and an increase
in the level of service and rate of coverage of in-store products. (Beaulieu and
Roy, 2009).
3) Outsourcing of logistics services
With globalization and market liberalization, companies are increasingly
looking to focus on activities in which they excel, be it motor vehicle assembly or
product marketing. In many cases, however, these activities exclude product
supply and distribution, which is outsourced to companies specializing in logistics,
better known as 3PLs (third party logistics providers). These companies handle
some or all of their clients’ logistics activities: transportation, warehousing,
handling, order processing and preparation, inventory management, supply,
distribution, etc.
These logistics service providers have developed rapidly over the past decade
and continue to increase steadily. Figure 4 illustrates this trend by showing how
the 3PL market in the United States has grown over nearly 20 years, whereas
Figure 2 demonstrates that Canadian companies were less likely to outsource their
logistics activities to 3PLs. As a result, the Canadian logistics services industry
grew by 47% between 1998 and 2007, according to Industry Canada (2008). Still,
it is difficult to compare this figure with the American percentage, because the
Canadian definition includes transportation service providers. Even so, it is
interesting to note that the GDP for Canadian logistics service providers should
increase by 40% between 2007 and 2015 to C$56 billion, according to Industry
Canada (2008), a rising trend similar to that observed in the United States.
Figure 4: Changes in the 3PL market in the United States between 1990 and
2008
Sources: Chow and Gritta (2002) and Wilson (2009)
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324
4) Approaches for measuring and improving performance
Operational excellence is based on a performance management approach that
includes process mapping and improvement, performance measurement using key
indicators often grouped into management dashboards, activity based costing, and
comparative analysis, better known as benchmarking. Though this performance
management approach is not specific to supply chain management, it is still
recognized as a necessary condition and best practice. In fact, companies that use
key performance indicators report better logistics performance than those that do
not (Industry Canada, 2006).
4.2 Use of electronic systems linked to logistics in Canada
In Canada, there has been a relatively low rate of adoption of electronic
information systems to manage logistics functions, with use at slightly over 20%
by medium-sized and large companies, and a mere 10% by small companies. In
the United States, the rate of use is 30% higher than in Canada, regardless of the
size of the company (Industry Canada, 2010a). Though use remains low for all
sectors, wholesalers boast the highest rate, with 35% adopting electronic logistics
management systems. Moreover, retailers and wholesalers are relatively more
inclined to use electronic systems to coordinate replenishment activities with their
suppliers such as CPFR. This does not prevent manufacturers from increasingly
adopting collaborative approaches such as CPFR with their own suppliers.
Last, we know how important it is to integrate electronic information systems
to achieve excellence in managing supply chains. Barely half of Canada’s major
companies have succeeded in integrating electronic supply management systems
with their other internal systems as indicated in Figure 5. Naturally, this
percentage decreases inversely with the size of the companies. Also, the degree of
integration with client and supplier systems is a key indicator of business
performance in terms of collaboration and exemplary management of the supply
chain. However, relatively few companies have reached this degree of integration
with their suppliers. Retailers have achieved the highest adoption rate (close to
40%), which is a result of their efforts in terms of collaborative planning,
forecasting and replenishment, or CPFR (Industry Canada, 2010a).
Few surveys have been done to assess the degree to which Canadian
companies have adopted logistics practices. One of the most exhaustive such
survey was conducted in 2001 in Quebec and was based on a sample of 668
respondents (Roy et al., 2002). The results are presented in Table 3.
Logistics and the Competitiveness of Canadian Supply Chains
325
Figure 5: Integration of electronic logistics systems
Source: Industry Canada (2010a)
These results indicate that for all of the statements in Table 3 (except for the
choice of suppliers on the Internet), deployment is based on the size of the
respondents, with the large companies systematically adopting practices and
technologies in greater numbers than the small and medium-sized companies.
Care should be taken in interpreting these results today, since the survey is several
years old and the portrait is bound to have changed, even simply on the basis of
new perspectives or technologies such as RFID.
Canadian companies would be well-advised to make a greater effort to adopt
and integrate electronic management software. By doing so, they could catch up
with their American counterparts, enjoy substantial savings in terms of logistics
costs and improve the quality of client services to give them an advantage over
their competitors. In fact, adopting supply chain management best practices is not
just a matter of saving money, but also—and most importantly—it is a way to
obtain a lasting competitive edge.
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326
Table 3: Adoption of Logistics Practices by Quebec Companies
(In Percentages)
Logistics practices
Companies
Small
Medium-
sized
Large
Inventory management by
the supplier
30.0 38.0 43.8
Management of your
clients’ inventory (VMI)
29.6 31.1 40.0
Alliances or partnerships
with transportation or
logistics companies
28.0 48.5 60.4
Alliances or partnerships
with suppliers (other than
transportation or logistics)
44.5 57.2 72.5
Establishment of quality
standards (ISO or others)
45.5 52.0 75.0
Use of bar code and optical
scanning systems
25.1 48.8 70.0
Training of teams of
employees with clients or
suppliers
29.5 39.1 46.2
Development or re-
engineering of processes
with clients or suppliers
26.9 38.9 51.6
Just in time 45.7 55.0 62.9
Forecast sharing with
clients and suppliers
(CPFR)
34.2 44.8 59.9
Tracking system or logistics
performance dashboard
25.6 31.3 61.6
Choice of suppliers on the
Internet
25.1 23.9 31.9
Electronic product
catalogue
28.2 40.1 52.5
Continuous replenishment
method (ECR, Quick
Response)
12.3 19.8 35.2
Sharing of information
gathered at sales outlets
25.9 44.9 47.5
Source: Roy et al. (2002)
4.3 Outsourcing to countries with low production costs
Market globalization and increased international competition is prompting
companies to focus increasingly on competencies in which they excel, and
consequently, to outsource to third parties the activities at which they are less
adept or for which emerging countries have a significant competitive cost
advantage. China is obviously central to this phenomenon by reason of its size
and very high and sustained growth rate. In 2007, 90% of Canadian manufacturers
Logistics and the Competitiveness of Canadian Supply Chains
327
outsourced to China (Industry Canada, 2007). Foreign subsidiaries of
multinationals in China account for over a quarter of that country’s industrial
production and 58% of Chinese exports and provide jobs for over 10 million
people (Sydor, 2006). However, offshoring production activities also benefits
other Asian countries and growth is being observed in emerging countries in
Central and South America as well as in Eastern Europe.
In Canada, this phenomenon certainly affects companies working in
traditional sectors such as clothing (Gildan) and furniture (Shermag), but the same
trend can be seen in hi-tech sectors such as aeronautics. In fact, Pratt& Whitney
Canada has production activities in Poland and Bombardier Aerospace
manufactures electrical harnesses and other components in Mexico and China.
There are numerous consequences of this globalization of supply sources
(global sourcing). First, companies obviously enjoy the advantages associated with
lower production costs, which unfortunately come with ever-increasing
transportation costs and the need to maintain more inventories locally to ensure
the continuity of their operations during the supply period, and this in turn
generates increased warehousing and inventory holding costs. In some cases,
more rapid transportation methods such as air transport are preferred, rather than
the slower method of shipping by sea, but there again, this increases
transportation costs significantly. According to Industry Canada (2007), the time
frame for outsourcing products to China varies from a minimum of one to three
months, to a maximum of three to six months.
There are other consequences of this phenomenon such as additional delays
owing to port congestion and capacity problems experienced by foreign suppliers
as their popularity increases. Other challenges are errors in the orders received
and problems with the quality of the products delivered. Avoiding these risks
often means increasing the level of inventory kept locally or setting up alternative
supply sources, which increases complexity and operating costs.
The 1990s brought predictions that conventional distribution centres would
disappear because of the increasing popularity of cross-docking centres. Today,
the use of outsourcing to countries with low production costs makes it necessary
to keep more inventories locally and the number of distribution centres is virtually
exploding. In fact, investment in new distribution centres rose by 60% between
2001 and 2007 (Industry Canada, 2007). Examples of such centres are the new
facilities of The Aldo Group, The Hockey Company, Alimentation Couche-Tard
and Canadian Tire, and these are just the ones in Greater Montreal.
Again, according to Industry Canada (2007), barely 43% of Canadian
companies that chose to outsource to countries with low production costs
reported that they had successfully lowered the total delivered cost of their
products as a result. To achieve this result, these companies adopted a number of
best practices, presented in Table 4.
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Table 4: Practical examples of companies that decreased their total
delivered cost
Practice
Percentage of Companies
Adopting Best Practices
Analysis of total logistics cost
84%
Allocation of dedicated human resources
79%
Establishment of secondary supply
sources
79%
Use of air transportation 76%
Training of suppliers from low-cost
countries
70%
Adding supplementary inventory 21%
Source: Industry Canada (2007)
First, the companies that succeed are the ones that know their costs. This
may seem obvious, but many companies decide to outsource to low-cost
countries solely on the basis of anticipated savings in labour costs. A good analysis
of the total delivered cost can sometimes reveal surprises to companies that have
underestimated factors such as increases in the cost of transportation,
warehousing and poor quality, to name but a few.
Allocating dedicated resources to global sourcing and sending company staff
to work onsite in a low-cost country are ways of ensuring the success of the
operation, as doing so will mean, for example, that foreign suppliers are better
trained. Despite these measures, there will be unexpected and emergency
situations. In such cases, successful companies do not hesitate to use air transport
and secondary supply sources in less risky countries. Although the company
incurs additional costs, it avoids having to keep too much inventory on hand,
which successful companies are reluctant to do. However, it is interesting to note
that setting up supplementary inventory is a widespread practice in 85% of the
companies whose total cost increased after they outsourced to low-cost countries.
4.4 Green logistics
There is increasing concern over environmental and sustainable development
issues in our society. The transportation sector alone generated some 27% of
greenhouse gas emissions (GGEs) in Canada in 2007 (Transport Canada, 2009).
Logistics can therefore foster sustainable development through the design of
supply chains that reduce transportation needs. We might also add that it is also
advantageous for companies to create an environmentally friendly “green” image.
This pressure can sometimes come in the form of a requirement to obtain
environmental certification, such as the ISO 14,000 standard, to comply with the
Logistics and the Competitiveness of Canadian Supply Chains
329
requirements of certain clients or orderers. Also promoted is the green logistics
concept, which is essentially aimed at reducing the harmful effects of logistics-
related activities, such as hard-to-recycle packaging and air pollution.
In Canada, a recent study reveals that manufacturers who adopt green
logistics practices report improvements that reduce energy consumption, GGEs,
packaging and waste (Industry Canada, 2009). The study also reports that 80% of
the highest-performing green logistics manufacturers observed a reduction of
their distribution costs and a more loyal clientele. Moreover, 90% of these
manufacturers reported improvements in their compliance processes. Other
business advantages observed by these high-performing companies in terms of
green logistics were improved risk management, greater access to foreign markets,
increased sales and greater differentiation in distribution services (Industry
Canada, 2009). In short, green logistics represents another opportunity for
Canadian companies to improve their performance and make their mark in
international markets.
5. Conclusion and government policy implications
5.1 Conclusion
In this chapter, we saw that Canada lagged behind other OECD member
countries in terms of per capita GDP and labour productivity levels. The vast
majority of countries that are doing better than Canada in this regard also perform
better when it comes to supply chain management, both internationally and at the
company level. Canada ranks 14th on the World Bank’s international logistics
performance index. Performance could be improved by addressing customs
formalities, transportation infrastructure, and especially “ease of arranging
competitively priced shipments,” for which Canada ranks 32nd.
Generally speaking, it has been demonstrated that for companies, good
logistics practices foster better organizational performance. We compared the
performance of Canadian and American companies on the basis of logistics costs.
Such costs for the Canadian companies were 12.5% higher in the manufacturing
sector, 18% higher for wholesalers and 29.6% higher for retailers. To gain a better
understanding of these differences, we identified the main best logistics practices
adopted by companies known for their superior performance. It was
demonstrated that 1) the rate of use of electronic systems for logistics was 30%
higher for American companies than for Canadian companies; 2) American
companies outsourced logistics activities to designated 3PL service providers
much more than Canadian companies did; 3) the integration of electronic
logistical systems was incomplete, especially in the case of SMEs; and 4) most
companies outsourcing to low cost countries did not adopt best practices in this
regard.
5.2 Implications for government policy
We will now examine the implications of these results on possible
government policy or action by separating the more global issues from those
more specifically affecting Canadian companies.
Roy
330
5.2.1 Global issues
Because Germany ranks first on the World Bank’s Logistics Performance
Index, it is a good idea to try to understand the reasons for its high performance.
This country leads in infrastructure and ranks third for customs formalities, two
criteria for which there is government involvement. The German government
takes an active interest in logistics and has developed a master plan for freight
transport and logistics (Tiedemann, 2009). The objectives of this plan are as
follows:
• Optimize the use of infrastructure and make transportation more efficient;
• Eliminate unnecessary travel to facilitate mobility;
• Move more traffic to domestic rail and maritime routes;
• Promote clean, green transportation;
• Create good working conditions and training in the freight industry;
• Adopt measures to make Germany even more attractive as a logistics
centre.
Canada’s challenges are very similar to those facing Germany (globalization
and global sourcing, increase in traffic and congestion, labour shortages,
environmental protection and new logistics technologies). Canada could draw on
the objectives and measures proposed in Germany’s master plan. For example, to
attract the flow of goods to or from North America through Canada, it would be
helpful to align government policy with the environmental and technological
logistics mandates of multinationals. To achieve this, the Canadian government
could try to attract investment in logistics to Canada by facilitating the emergence
of logistics centres like those in countries that have received high ratings from the
World Bank. Another example from the Throne Speech and the 2010 budget is
that the government has promised to develop a strategy to make Canada a leader
in the global digital economy. Innovation in global supply chain management
could be a pillar of this strategy.
Benchmarking is good practice in logistics, and, more generally, in
management. The Canadian government should also practice benchmarking by
analyzing the high logistics performance of countries such as Germany. In
developing its master plan, the German government conducted numerous
consultations with representatives from industry, academia, professional
associations, unions, etc. In Canada, there is a similar initiative—Gateways and
Trade Corridors—in Western, Central and Eastern Canada. In this context, it is
helpful to take a look at some of the recommendations that came out of a
workshop held at the University of Western Ontario in March 2008 concerning
the Ontario-Quebec Continental Gateway and Trade Corridor (Cunningham,
2008).
• With regard to Canada’s competitiveness in North America, recommenda-
tions included 1) setting up an agency that would coordinate policy
through a number of jurisdictions, both within Canada and with the
United States; 2) strengthening the free trade agreement with the United
States to increase the flow of goods, services and capital; and 3)
considering the concept of free trade zones like in Rotterdam, Nether-
lands.
Logistics and the Competitiveness of Canadian Supply Chains
331
• In terms of border-related issues, one of the criteria of the World Bank
index, it was suggested that the focus should be on border congestion
problems, identifying bottlenecks and investing in reducing them. Another
suggestion was to expand the security perimeter to include the entire
continent and not just to limit it to the borders. Last, it was suggested that
customs formalities with Mexico and the United States be simplified. This
last recommendation lines up with the concerns of freight agents that
expressed their dissatisfaction with international shipments to Canada.
This is consistent with the advice of numerous other experts in Canada
who feel that Canada could play a bigger role as a continental port of entry
and take advantage of NAFTA if the border-related issues could be
mitigated and the regulations for various methods of transportation
harmonized (see for example Brooks, 2006).
• In terms of infrastructure, another World Bank criterion, the report
recommended adopting a continental approach for planning transporta-
tion systems and infrastructure. In fact, it is felt that road, rail, air and sea
transportation corridors must be planned at the continental level to
determine the extent and levels of current and future congestion. In
particular, rail transportation requires consideration, given the growing
need, particularly as a result of environmental pressures that are expected
to further increase its popularity.
• Last, other relevant recommendations concerned issues such as
harmonizing road transportation regulations between provinces, adopting
an intelligent transportation systems policy and developing technologies to
facilitate transportation and customs procedures and greater availability of
statistical data on the flow of goods.
5.2.2 Company-related issues
Government policy would also be relevant with regard to companies. First,
despite recent efforts by Industry Canada to better understand and support
Canada’s logistics sector, much remains to be done in terms of assessing and
understanding the performance level of Canadian companies regarding supply
chain management. Recent Industry Canada studies and surveys show that
Canadian companies are lagging when it comes to deploying and integrating
electronic systems for logistics and outsourcing. It also reveals that most
companies that outsource to low-cost countries do not adopt best practices, and
their total cost results are therefore negative.
That said, we do not know why Canadian companies lag behind in adopting
better practices. Are they less well informed? Are their managers less well trained?
Do they have the financial means for adopting and integrating the increasingly
sophisticated systems being promoted in supply chain management? Are there
concrete examples of companies that have successfully adopted best practices in
terms of logistics and demonstrated leadership in their business line? How should
this knowledge and these good practices be conveyed to companies that are
having more difficulty? Should smaller companies that are taking longer to adopt
best practices receive assistance? Does government policy on innovation also
cover logistics issues? These are issues that call for some level of government
involvement.
Roy
332
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