Increased logistics costs undermining recovery of supply chain industry - Report

Ghana’s logistics industry continues to make a steady, yet significant recovery following the disruptive impacts of the COVID-19 pandemic; however, increased costs associated with the industry’s activities remain a threat to full recovery ­– a report of the 2022 3rd Quarter Logistics Managers Index (LMI) has revealed.

Although the logistics industry’s current (Q3) LMI value of 63.1 highlights growth in logistics activities, this value also indicates a 2.8 and 1.6 decline in major logistics activities from the Q2 (65.9) and Q1 (64.7) LMI values, respectively. These include the high cost of inventory and the associated cost of warehousing and transportation prices.

The LMI Report quarterly assesses growth or decline of Ghana’s logistics industry along three components: inventory, warehousing, and transportation activities.

The report draws on eight metrics from the three components—inventory levels and costs; transportation capacity, utilisation, and prices; and warehousing capacity, utilisation, and prices—to capture Ghana’s LMI.

An overall LMI value is then calculated as a composite of these components and expressed as a percentage with a mid-value or threshold of 50 percent. An LMI value above 50 percent indicates a growing logistics industry, while a value below 50 percent indicates a contracting one. From this angle, an overall LMI of 63.1 indicates a growing logistics industry.

However, logistics costs were on constant rise in the third quarter, with the three cost-related indicators – i.e., inventory cost, warehouse prices, and transport prices – once again recording the highest values of the eight metrics – 94.2, 84.5, and 97.1, respectively. In fact, costs of inventory and transportation were both at an all-time high for the year, said the report.

This trend, fuelled by the consistent depreciation of the cedi against the dollar, transcends the first three quarters’ LMI, and accounts for the substantial decrease in inventory levels as companies experienced capital loss and low liquidity, and were unable to replenish their inventories.

The decline in inventory levels was rather worrying, given how highly they correlate with logistics growth. For instance, dwindling inventory levels pulled warehouse capacity and utilisation to all-time lows of 55.8 and 51.1, respectively as managers could not utilise warehouse spaces.

Similarly, the report indicated a decrease in transport capacity and utilisation metrics emanating from the significant (-13.7) drop in inventory levels. “Transport capacity and utilisation will bounce back when inventory levels pick up in Q1 and Q2 of 2023,” the report hoped.

While growth in Ghana’s logistics sector has slowed, a comparison with the LMI value of the United States shows significant similarities. Yet, inventory levels below the 50 percent threshold raise a red flag and are an indication of a possible recession in the Ghanaian economy, unless emergent measures are taken to prevent a free fall of the economy, the report warned. It further hoped that the ongoing negotiations with the IMF will be concluded in time to provide an economic stimulus for the economy.

Respondents, however, remained optimistic that the logistics sector’s observed growth in the third quarter of 2022 would increase in the future, and predicted an overall future LMI value of 65.8.

Specifically, respondents foresee a steady decline in value across all three cost indicators, and significant growth across capacity and utilisation metrics as well as inventory levels. These predictions and an imminent IMF bail-out should bring about a boost in logistics activities and spearhead the industry’s full recovery.

The Logistics Managers Index (LMI) is a new tool developed by the Centre for Applied Research and Innovation in Supply Chain-Africa (CARISCA), based at Kwame Nkrumah University of Science and Technology, Kumasi – Ghana.