Global Logistics

Chapter 1: Introduction New market are opening up and existing market are expanding worldwide A global financial network has developed that allows multi-national enterprises to expand their operation Manufacturers have increased new material and component acquisition from other countries (i.e., global sourcing)

The world economy is becoming more interdependent

To support non-domestic markets a company must have a distribution system or network that satisfies the particular requirement of those market

Chapter 1: Introduction To support non-domestic markets a company must have a distribution system that satisfied the particular requirement of those markets Distribution Systems in Developing Countries

Distribution Systems in Developed Countries

Africa, South America or Asia Inadequate transportation and storage facilities a large labor force of mainly unskilled workers An absence of distribution support systems

Japan, Canada, United States and most Western Europe have good transportation systems Have high-technology warehousing Skilled labor force

Chapter 2: International Distribution Channel Strategies

Factors that influence a companys decision to enter international markets;

1. 2. 3. 4.

Market potential Geographic diversification Excess production capacity Products near the end of their cycle in the domestic market could generate growth in the international market 5. Source of new product and ideas 6. Foreign competition in the domestic market

Chapter 2: International Distribution Channel Strategies

International Market Entry Strategies

2. Licensing

3. Joint ventures 4. Ownership

1.Exporting

5. Importing 6. Countertrade

Chapter 2: International Distribution Channel Strategies

1. Exporting
Refers to selling products in another country Requires the least amount of knowledge about foreign markets because domestic firms allow an international freight forwarder, distributor, trading company or some other organization to carry out the logistics and marketing function
Advantages

Disadvantages

greater flexibility & less risk

No additional production facilities or logistics distribution asset investment Firms produce the product domestically and allow the exporting intermediary to handle distribution of the product abroad

Difficult to compete in foreign market

tariffs (taxes assessed on goods entering a market) import quotas (limitation on the amount of goods to enter market) unfavorable currency exchange rate

Less control over pricing, promotion or product distribution

Chapter 2: International Distribution Channel Strategies

2. Licensing
Involves agreements that allow a firm in one country (the licenser) to use the manufacturing, processing, trademark, know how, technical assistance, merchandising knowledge or some other skill provided by the licenser located in another country
Advantages

Disadvantages

more control to distribute product

because distribution strategy is usually part of the preliminary discussions

Licensing agreement cannot be terminated in short period

there is a time lag between the decision to terminate and the actual date of termination

less risk and increasing flexibility

does not require large capital outlays

Licensees can become future competitors

As licensees develop their own knowhow and capabilities, they may end the licensing agreement and begin to compete with licensers.

Chapter 2: International Distribution Channel Strategies

3. Joint Ventures
Refers to have more control over the foreign firm than is available in a licensing agreement, but at the same time dont want to establish a freestanding manufacturing plant or facility in a foreign market The risk is higher and the flexibility is lower for a company because an equity position is establish in a foreign firm Requires a greater knowledge of the international markets the firm is trying to serve

Chapter 2: International Distribution Channel Strategies

4. Direct Ownership
Complete ownership of a foreign offers the domestic firm the highest degree of control over its international marketing and logistics strategies Direct ownership takes place through acquisition or expansion

Advantages VS Disadvantages of Direct Ownership

Advantages

Disadvantages

Minimizes the start-up costs; locating and building facilities, hiring employees and establishing distribution channel relationships Totally responsible for marketing and distributing the product Compete more effectively on a price basis transportation cost, custom duties and import taxes

Less flexibility long term commitment Fixed facilities and equipment cannot be disposed quickly if sales decline Exchange rate fluctuations change the relative value of foreign investments because they are valued in local currency

Market-Entry Strategies In general, firms follow more than one market-entry strategy Markets, product lines, economic conditions and political environments change over time, so the optimal market-entry strategy may change A firm considering exporting, licensing, joint venture or ownership should establish a formal procedure for evaluating each alternative. A firm should decide on a method of international involvement only after it has made a complete analysis of each marketentry strategy

Chapter 2: International Distribution Channel Strategies

5. Importing
Involves the purchase and shipment of goods from an overseas source Imported items can be used immediately in the production process or sold directly to customers

Items can be transported to other ports of entry, stored in bonded warehouses (where goods are stored until import duties are paid) or places in a free trade zone (where goods are exempted from customs duties until they are removed for use or sale)

Chapter 2: International Distribution Channel Strategies

6. Countertrade
Applies to the requirement that a firm import something from a country in which it has sold something else Any transaction in which part of the payment is made in goods instead of money

The need for countertrade is driven by the balance of payment problems of a country and by weak demand for the countrys product

5 Forms of Countertrade
The selling firm provides equipment/ entire plant and agrees to buy back a certain part of the production

Buyback

Involves transactions with more cash, smaller volumes of goods flowing to the multinational corporation over a shorter period of time and goods unrelated to the original deal

Counterpurchase

Occurs when goods of equal value are exchanged and no money involved Transaction uses at least one third party outside the host country to facilitate the trade

Barter

Takes place when barter is specified as a percentage of the value of goods being traded to the value of the product being sold

Compensation

Switch

Chapter 2: International Distribution Channel Strategies

7. Duty Drawback
Is a refund of customs duties paid on imported items 1. U.S car manufacturer issues purchase order to German parts manufacturer 2. German manufacturer receives purchase order; manufactures parts 3. German parts shipped via ocean enter U.S port; importer pays duty at port of entry to U.S Customs 4. U.S manufacturer produces cars using U.S made and German parts 5. U.S manufacturer ships cars to port of export; files documentary proof of original import and subsequent manufacture to collect refund 6. Export cars containing U.S made and German parts to Australia; provide proof of export to U.S Customs

Chapter 3: Managing Global Logistics Key Questions for Analysis, Planning and Control 1. Environmental analysis
What are the unique characteristics of each national market? What characteristics does each market have in common with other national markets?

2. Planning

Who should make logistics decisions? What are the customer service needs of the target market?

3. Structure

How do we structure our logistics organization to optimally achieve our objectives?

4. Plan implementation

How do we develop effective operational logistics plans?

5. Control of the logistics program

How do we measure and monitor plan performance?

Chapter 3: Managing Global Logistics Key Issues in Global Logistics Decision Making 1. Cost-Service Trade Off Analysis The ability to proper identify, evaluate and implement the optimal cost-service mix is always important to the firm and its customer Some particularly important cost and service considerations concern the use of integrated logistics systems to effectively and rapidly manage order completeness, shipping accuracy and shipment condition

Chapter 3: Managing Global Logistics

2. Guidelines in Developing a Global Logistics Strategy In developing a global logistics strategy, some general guidelines apply a) Logistics planning should be integrated into the companys strategic planning process b) Logistics department need to be guided by a clear vision and must measure output regularly c) Import-export management should try to ensure integrated management of all elements of the logistics supply chain from origin to destination d) Opportunities to integrate domestic and international operations should be pursued to leverage total company volumes with globally oriented carriers

Chapter 3: Managing Global Logistics

3. Organizing for Global Logistics Should you centralize or decentralize Logistics Globally? Many companies operating in the global marketplace centralize a large number of logistics activities while decentralizing others Example: management of customer service tends to work best when it is under local control in the foreign market On the other hand, material flows into the organization are often centralized, because technology can quickly overcome spatial distances

4. Financial Aspect of Global Logistics

A firm participating in global logistics faces a financial environment quite different from that of a strictly domestic firm

It has concerns about currency exchange rates, costs of capital, the effect of inflation on logistics decision and operations, tax structures and others
Working Capital require financing for inventory, credit, investment in buildings and equipment, and accommodation of merchandise adjustment that may be necessary Inventories are an important aspect of global logistics. Higher level of inventory are needed to service foreign markets because of longer transit times, greater variability in transit times, port delays, customs delays and other factors It is important to use the proper inventory accounting procedure because of the impact of inflation on company profits.

LIFO
LIFO is an acronym for "last in, first out" Firm records the last units purchased as the first units sold

Since prices generally rise over time because of inflation, this method records the sale of the most expensive inventory first and thereby decreases profit and reduces taxes
When prices are increasing, they must replace inventory currently being sold with higher priced goods. LIFO is attractive to business in that it delays a major detrimental effect of inflation, namely higher taxes the most appropriate strategy because the cost of sales is valued closer to the current cost of replacement

FIFO
FIFO is an acronym for First in, first out" gives a larger profit figure than LIFO because old costs are matched with current revenues, although this will increase the tax liability method presumes that the next item to be shipped will be the oldest of that type in the warehouse.

it is common for beginning companies to use FIFO for reporting the value of merchandise to bolster their balance sheet.
Having the higher valued inventory and the lower cost of goods sold on the company's financial statements may increase the chances of getting a loan However, as it prospers the company may switch to LIFO to reduce the amount of taxes it pays to the government.

Chapter 3: Managing Global Logistics

5. The Global Marketplace Uncontrollable Elements

Political and legal systems of the foreign markets Economic condition Degree of competition in each market Level of distribution technology available or accessible Geographic structure of the foreign market Social and cultural norms of the various target markets

Chapter 3: Managing Global Logistics

Key Issues in Global Logistics Decision Making

5. The Global Marketplace Controllable Elements Customer service Inventory Packaging Transportation Warehousing and storage

Chapter 3: Managing Global Logistics

Customer Service Strategies CS levels may be higher in international markets

Example: the order cycle time in Japan is generally shorter than in the US (geographical differences, the physical facilities of many retailers and financial consideration permit in Japan to be delivered in 24 hours or less)
For that reason, many international firms operate owned facilities in foreign markets in order to compete effectively on a customer service basis The cost of providing a specified level of customer service often varies between countries A company must examine the service requirements of customers in each foreign market and develop a logistics package that best serves each area

Chapter 3: Managing Global Logistics

Inventory Strategies Inventory control is particularly important to an international company and requires awareness of the many differences between international and domestic Depending on the length of transit and delays that can occur in international product movements, a firm may have to supply its distributor with higher than normal levels of inventory

Chapter 3: Managing Global Logistics

Packaging and Containerization International shipments require greater protection than domestic shipment, especially when they are not containerized Other issues to consider include the handling of products, climate, potential for pilferage, communication and language differences, freight rates and customs duties The greater number of handlings of international goods increases the possibility of damage Logistics executives can help to ensure that goods arrive safely at their international destinations through the proper planning, implementation and control of packaging decisions

Chapter 3: Managing Global Logistics

The Usage of Containers Advantages

Disadvantages

Costs due to loss or damage

Labor costs in freight handling

Easily stored and transported Available in a variety of sizes

ports/ terminals with container facilities may not be available in certain parts of the world Large capital expenditure