Global Supply Chain Management

Global Supply Chain Management

Chapter #11 The Global Logistics Environment

The Logistics System

Overview • We will restate the definition and purpose of a supply chain • We will examine some of the changing market opportunities • We will reemphasize the importance of cultural issues • We will identify the leading global logistics strategies

Overview • We will discuss the impacts of documentation, customs regulations and foreign trade zones • We will examine the role of logistics facilitators in a global market logistics strategy

Introduction • The World Trade Organization (WTO) came into being in 1995 • Replaced the General Agreement on Tariffs and Trade • Mission is to administer international trade law • Significant impact on ease of conducting global trade • Committed to simplifying international business

Introduction • Management’s challenge today is to develop a logistics system that will meet customers’ often radically different needs by understanding • The cultural differences • The business environment differences • Maximizing customer value and business profit

The Global Supply Chain • Global logistics requires management to make decisions that recognize the contributions of the entire supply chain • The supply chain includes all the actors impacting the value delivered to the final customer • Vendors • Producers • Intermediaries • Logistics providers, etc.

The Global Supply Chain • World wide logistics cost estimated > US $3.4 trillion for 1996 in a 1998 study…and going up! • United States logistics cost during 2003 were: • US $650 billion • 8.5% of the Gross National Product

Changing Market Opportunities • New markets in developing nations • Lots of sales potential • But high accompanying risk • Developing markets will surpass industrial nations in share of global economic consumption in the next 10 years

Changing Market Opportunities • Direct result of increasing • World population • Standards of living • Per-capita income • Foreign investment and shifting financial flows

Changing Market Opportunities • Multi-lateral trade organizations encourage countries to engage in economic cooperation • More efficient use of resources • Expanded market opportunities • Minimization of cross border costs and other issues

Changing Market Opportunities • Some such organizations include: • European union…finally making real progress • North American Free Trade Agreement • Latin America’s Mercosur • Pacific rims ASEAN • Encourages businesses to trade within their block but often inhibit trade between blocks

Changing Market Opportunities • Global integration of trade is slowly: • Reducing red tape • Reducing documentation hurdles • Smoothing transportation issues • Standards are making economies of scale achievable in logistics and business in general

Changing Market Opportunities • Reduction of trade barriers has increased competition and has obvious benefits for customers…still, many oppose this liberalization • But, requires managers to change outlook and strategies…constantly, and not all can!

Changing Market Opportunities • As we have seen in this country during the later half of the 20th century, the more people have, the more they want • This means new markets are opening at an increasing rate…all opportunities for the firms that can compete

Changing Market Opportunities • As with the development of any strategy, the first issue is to figure out what the “new” customer really wants…where is the value added • Cultural differences  local business focus • Economics force global strategy, especially for logistics

Changing Market Opportunities • Cheap and efficient labor and transportation require competitive strategy to include global sourcing of • Raw materials • Parts • Components • Products • Services

Changing Market Opportunities • Global sourcing is increasingly important for all companies and both products and services • Must find the right suppliers…but must manage on a day-by-day basis

Cultural Issues in Logistics • Logistics managers (really all managers) must understand the cultural factors influencing their global customers • Our products and services must be delivered within a context that is comfortable for the customer

Cultural Issues in Logistics • A successful strategy for one market may be a total flop in another…some times even another area of the same country • Bottom line is to deliver customer satisfaction and the appropriate value…or our competitors will displace us

Global Distribution Strategies • There are a number of strategy alternatives available to us when we decide to enter a new global market • The basic trade-off to consider is between investment risk and extent of control

Global Distribution Strategies • Once again, we point out that a viable business and logistics strategy may require different strategies for each market • Little risk in the industrialized nations • High risk in developing nations…but also the potential for high gain

Global Distribution Strategies • Exporting is the strategy of engaging a middleman to sell our products in some markets • Such middlemen may: • buy goods and resell • act as a broker finding a foreign buyer for our products/services

Global Distribution Strategies • Risk is minimized…no investment, but control is released • We can easily fail in a market without knowing why • Good strategy for firms just entering the global market place

Global Distribution Strategies • Licensing involves contractually transferring the right to make our products or provide our services in a country to a third party • Still very little risk…accept possibly to our reputation • But, more control, at least to the extent it is formalized in the contract

Global Distribution Strategies • Two issues to consider with licensing: • How do you terminate the relationship if you are unhappy with performance • Your licensee may become your competitor at the end of the contract…licensing agreement

Global Distribution Strategies • Joint Ventures involve investment in a local company…often the only way to obtain some ownership if foreign investment is discouraged • Allows us to use the skills of a local partner • Certainly increases our level of control, although we most often have a minority position

Global Distribution Strategies • Obviously, the risk is higher; we are invested in-country • Also limits our options with respect to changes in our approach to the market • Often JVs end up being most advantageous to the in-country partner

Global Distribution Strategies • Ownership of a foreign subsidiary provides the firm with the maximum amount of control • Much higher risk, of course • Can eliminate many costs such as import duties since we are now a “local” firm • Perhaps enough to offset higher risk

Global Distribution Strategies • Certainly ownership has market impact - the appearance of permanence as we have discussed earlier • Once again, however, we have limited our ability to respond or withdraw as a result of investment • Bottom line is to find the right strategy for each market as we move globally

Documentation • Documentation of international shipments can be overwhelming • We have discussed the issue with transportation and purchasing but a quick review is in order • Number of documents varies by country and product • Must often be prepared in multiple languages • Regulations are constantly changing

Documentation • Problems are being resolved…slowly • Multiple documents with same information • Lack of coordination between various agencies • Real progress coming with EDI and other electronic information systems

Documentation • Errors in documentation can result in • Shipment delays • Penalties • Added costs as we try to satisfy the customer • New, expedited shipments • Big problem is impact on our customers and thus their satisfaction

Documentation • US Customs is striving for paperless import customs declarations within 10 years • Providing external interfaces to their system • Other countries are changing as well • But it is a long, long road • Since 9-11, new security concerns are responsible for new programs such as: • “Secure Container” program • “Green Lane” programs

Customs Regulations • Customs laws are implemented to: • Generate revenues • Through fees and duties • Protect domestic industries • By keeping the price of foreign imports high

Customs Regulations • Customs laws are implemented to (continued): • Guard against illegal imports • Not just drugs, arms, etc • Products that don’t meet safety codes • Products that may have environmentally harmful effects, agricultural goods for example • Customs regulations are local, often don’t make any sense, but are still the law

Customs Regulations • Once again, our failure to understand local customs regulations can directly impact our customers • Stranded goods • Higher cost through penalties, etc. • Customs can be a bottleneck adding significant cost to our supply chain and ultimately the cost of our goods and services

Customs Regulations • Speeding up the process by inspecting and assessing at point of origin • Recognized inspection companies • Inspect at a place of our choosing • Seal the shipment…RFID • Green Lane programs • Secure container initiatives, etc.

Foreign Trade Zones • FTZs are designated areas within a country that are treated by Customs as foreign soil • Created to smooth the flow of goods by easing impact of customs regulations • Can be one or more buildings or just a designated area within a larger facility • Don’t pay duties/fees until the products are moved out of the FTZ, “imported” into the country

Foreign Trade Zones • In many countries, FTZs can be used to repackage, assemble and even manufacture goods for final import…or even shipment to another market

Foreign Trade Zones • For business, FTZs offer the opportunity to take advantage of quantity discounts and economics of transportation • Carrying cost is lower…duties not yet paid • Assembly and manufacturing may save on final import cost…don’t pay on waste • Use of cheaper labor • Duties based on final product or raw materials, whichever is cheaper • Sole purpose of FTZ is to facilitate international business

Intermediaries and Facilitators • Firms just moving into the global market may not have the skills necessary to effectively conduct business • To reduce risk, many new ventures are launched using some form or middleman • Exist in virtually every country • Know the local laws and culture • The exporter we discussed earlier is one broad type of intermediary • May be a short term entry strategy or a long term part of our strategy…and vary by market

Intermediaries and Facilitators • International Freight Forwarders focus on arranging international transportation • Combine small shipments to achieve economies of scale • Take care of virtually all activities including our agent • Documentation • Payment • Shipment, etc.

Intermediaries and Facilitators • Minimizes knowledge required on our part • Cost known ahead of time • Long term or single shipment contracts

Intermediaries and Facilitators • Non vessel-owning common carriers specialize in less-than-container load ocean shipments • Perform many of the functions of a freight forwarder • But don’t act as our agent, just another type of common carrier • Reduce our transportation costs through consolidation

Intermediaries and Facilitators • Export management companies act as our agents in non-domestic markets • As we discussed earlier • May sell our products themselves • Or broker sales with foreign companies • A good strategy for new entrants in global market

Intermediaries and Facilitators • Export trading companies locate overseas buyers and • Handle most of the documentation • Transportation • Risk with respect to meeting foreign government regulations

Intermediaries and Facilitators • Export packers provide packaging services for overseas shipments • Saves us the expense of investment • They know what is required • Package for protection and security • Provide special labeling as required • Insure packaging meets any special “local” regulations

Intermediaries and Facilitators • Customs brokers get our goods through local the local customs process • Ensure compliance with laws • Ensure documentation is complete • Resolve any disputes in a timely, favorable fashion • Often used as consultants by experienced global firms

Global Supply Chain Management