19

International Operations

INTRODUCTION

A defining characteristic of the international firm today is the wide dispersal of customer locations and sourcing opportunities. In order to maintain its competitive position, firms need to successfully manage complex international networks consisting of vendors, suppliers, customers and other third parties. Neglecting the links within these complex networks can result in more expensive supplies and lower profits, leading to a loss of competitiveness and market share.

This chapter discusses the important issues in the supply chain and logistics for the international business firm. It focuses on the links between the firm, its suppliers and customers as well the related issues of transportation, inventory, packaging and storage.

SUPPLY-CHAIN MANAGEMENT

Supply-chain management refers to a series of value-adding activities that connects the supply side of the business with its demand side. It may be defined as the integration of business processes that link the buyer with the original suppliers and includes all the products, services and information included in this value-adding process.

 

The business supply chain is a co-ordinated activity encompassing materials, information, and funds from the initial raw material supplier to the end consumer.¹ A comprehensive global supply-chain strategy has elements of customer-service requirements, plant and distribution centre network design, inventory management, outsourcing and third party logistics relationships, key customer and supplier relationships, business processes, information systems, organizational design and training requirements, performance metrics and performance goals.²

Managing the supply chain may be considered synonymous with managing the value chain. The concept of the firm's value chain (illustrated in Figure 19.1), developed by Michael Porter, refers to a chain of value-creating activities meant for the satisfaction of the final consumer. They encompass the firm's supply chain and are divided into two categories:

1. Primary activities
2. Support activities

This approach addresses the supply chain of the entire extended enterprise, beginning with the supplier's suppliers and ending with consumers or end users. The perspective encompasses the entire flow of funds, products and information that form one cohesive link to acquire, purchase, convert/manufacture, assemble and distribute goods and services to the ultimate consumers. The value chain is an important source of competitive advantage for the firm.

A supply chain is made up of all the parties that play a role in fulfilling a customer request. This begins with the manufacturer and includes suppliers, transporters, warehouses, retailers and the customer himself. The supply chain thus includes all the functions that are involved in converting a customer's request into fulfilled demand. The functions involved in this include, among others, product development, marketing, operations, distribution, finance, and customer service.

 

Figure 19.1 Generic Value Chain

 

A supply chain is dynamic and constantly changing. It involves a continuous flow of information, products, and funds during different stages of customer fulfillment. In the Walmart supply chain, there is a transfer of pricing and availability information in addition to the product in response to a customer's request. The customer in turn transfers funds on delivery, and there is an automatic relay of information on sales as well as a replenishment order via trucks back to the store. Funds are transferred to the distributor after replenishment. The distributor also provides pricing information and sends delivery schedules to Walmart. Similar information, material and fund flows take place across the entire supply chain.³

A typical supply chain usually has the following stages:

1. Customers
2. Retailers
3. Wholesalers/distributors
4. Manufacturers
5. Component/raw-material suppliers

It is not necessary for each stage to be present in every supply chain. The appropriate design of a supply chain depends on both the customer's needs and the importance of the stages involved. In some cases, companies such as Dell, which you read about in the opening vignette, may fill customer orders directly.

A customer's order is the starting point of the manufacturing process at Dell, which does not have any retailers, wholesalers or distributors in its supply chain. On the other hand, the famous mail-order company L.L.Bean in the United States finds no role for the manufacturer in filling customer orders as they are filled out of an inventory of products kept by L.L.Bean itself. Compared to the Dell supply chain, the L.L.Bean supply chain contains an extra stage (the retailer, that is, L.L.Bean itself) between the customer and the manufacturer. Similarly, other retail stores may have a wholesaler or distributor between the store and the manufacturer.

These examples illustrate that the customer is central to the existence of a supply chain. The basic objective of a supply chain is to satisfy customer needs, leading to profit maximization for the firm. Supply chain activities begin with a customer order and end when a satisfied customer has paid for his or her purchase. The term “supply chain” is usually taken to mean products moving along different points of the chain—from suppliers to manufacturers to distributors to retailers and finally to the customers. It is important to understand that information, funds and products flow along both directions of this chain. It may often also be mistakenly understood that only one player is involved at each stage. In actual fact, a manufacturer may receive material from several suppliers and then supply to several distributors. Thus, most supply chains are actually networks and the term “supply network” or “supply web” may be a more accurate description of a supply chain.

Expert supply-chain management skills facilitate the identification of attractive sources of supply and help firms develop a low-cost competitive supply position in export markets. They also help develop good relationships with suppliers, and ensure quality inputs at reasonable prices delivered on a timely basis. For example, it has permitted Walmart, the largest US retailer, to reduce inventories by 90 per cent, saved the company hundreds of millions of dollars in inventory holding costs, and allows it to offer low prices to its customers. Advances in information technology have been crucial to progress in supply-chain management. Dell, for example, has reduced the length of its supply chain by removal of the retailer and taking orders online from the customer.

These developments open up supplier relationships for companies outside the buyer's domestic market; however, the supplier's capability of providing goods and services that are able to satisfy consumer demand completely will play the most critical role in securing long-term contracts. In addition, the physical delivery of goods often can be old-fashioned and slow. Nevertheless, the use of such strategic tools will be crucial for international managers to develop and maintain key competitive advantages.

INTERNATIONAL LOGISTICS

International logistics is the design and management of a system that controls the forward and reverse flow of materials, services and information into, through and out of the international corporation. It encompasses the total movement concept by covering the entire range of operations concerned with movement, including, therefore, both exports and imports. By taking a systems approach, the firm explicitly recognizes the links among the traditionally separate logistics components within and outside a corporation. By incorporating the interaction with outside organizations and individuals such as suppliers and customers, the firm is able to build on jointness of purpose by all partners in the areas of performance, quality and timing. As a result of implementing these systems considerations successfully, the firm can develop just-in-time (JIT) delivery for lower inventory cost, electronic data interchange (EDI) for more efficient order processing, and early supplier involvement (ESI) for better planning of goods development and movement. In addition, the use of such a systems approach allows a firm to concentrate on its core competencies and to form outsourcing alliances with other companies. For example, a firm can choose to focus on manufacturing and leave all aspects of order filling and delivery to an outside provider. By working closely with customers such as retailers, firms can also develop efficient customer response (ECR) systems, which can track sales activity at the retail level. As a result, manufacturers can precisely coordinate production in response to actual shelf-replenishment needs, rather than based on forecasts.

 

Two major phases in the movement of materials are of logistical importance.

1. The first phase is materials management, or the timely movement of raw materials, parts and supplies into and through the firm.
2. The second phase is physical distribution, which involves the movement of the firm's finished product to its customers. In both phases, movement is seen within the context of the entire process and includes storage and inventory. The basic goal of logistics management is the effective coordination of both phases and their various components to result in maximum cost effectiveness while maintaining service goals and requirements.

The key to business logistics is based on three major concepts:

1. Systems concept: This is based on the notion that material-flow activities within and outside of the firm are so extensive and complex that they can be considered only in the context of their interaction. Instead of each corporate function, supplier and customer operating with the goal of individual optimization, the systems concept stipulates that some components may have to work sub-optimally to maximize the benefits of the system as a whole. The systems concept intends to provide the firm, its suppliers and its customers, both domestic and foreign, with the benefits of synergy, which is the result of the coordinated application of size.

   The systems concept is successful only in the presence of proper information flows and partnership trust. Logistical capability is highly information dependent, since information availability is the key to planning and to process implementation. Long-term partnership and trust are required in order to forge closer links between firms and managers.

2. Total cost concept: A logical outgrowth of the systems concept is the development of the total cost concept. To evaluate and optimize logistical activities, cost is used as a basis for measurement. The purpose of the total cost concept is to minimize the firm's overall logistics cost by implementing the systems concept appropriately.

   Implementation of the total cost concept requires that the members of the system understand the sources of costs. To develop such an understanding, a system of activity-based costing has been developed, which is a technique designed to more accurately assign the indirect and direct resources of an organization to the activities performed based on consumption. In the international arena, the total cost concept must also incorporate the consideration of total after-tax profit by taking the impact of national tax policies on the logistical function into account. The objective is to maximize after-tax profits rather than minimizing total cost.

3. Trade-off concept: This recognizes the links within logistical systems that result from the interactions among their components. For example, locating a warehouse near the customer may reduce the cost of transportation. However, additional costs are associated with new warehouses. Similarly, a reduction of inventories will save money, but may increase the need for costly emergency shipments. Managers can maximize performance of logistical systems only by formulating decisions based on the recognition and analysis of such trade-offs.

GLOBAL SUPPLY CHAIN DECISIONS

The key to making supply chains work is information. The use of electronic data interchange (EDI) is the central link between suppliers, manufacturers and customers. EDI is used by leading global firms such as Walmart. However, EDI has limited usage and does not adapt easily to the global marketplace. It is also fairly expensive, so small and medium enterprises find it difficult to install and implement.

Another useful technological resource in a supply chain is enterprise resource planning (ERP), which is a software that links information flows from different parts of a business and from different geographical regions. Its only drawback is its inability to link up with the customer. In this context, the evolution of e-commerce has been a major breakthrough in supply-chain management. For instance, Dell, as explained in the opening vignette, practices e-commerce, for which the company takes orders via the Internet. It also has an extranet for its suppliers to links them to its information system.

 

Quality

Another key ingredient of global supply-chain management is total quality management. Quality may be defined as the ability of a product or a service to conform to certain norms or specifications of value, fitness for use, support and psychological impression. There are various ways of looking at this.

The Japanese approach to quality is through the concept of total quality management (TQM). TQM is a process that emphasizes customer satisfaction, employee involvement and continuous quality improvement by focusing on benchmarking world-class standards, product and service design, and purchasing. The goal of TQM is to eliminate all defects. The belief in the zero-defects philosophy is reflected in a process of continuous improvement called kaizen, which is the essence of TQM.

 

An alternate tool of quality management, called Six Sigma, is a highly focused system of quality control that aims to eliminate defects, reduce product cycle time and cut costs after a scrutiny of the firm's entire production system. Introduced in the 1980s by Motorola, it has been subsequently adopted by several TNCs, including General Electric Company, GlaxoSmithKline plc and Lockheed Martin Corporation.

 

We classify the decisions for supply-chain management into two broad categories—strategic and operational. As the term implies, strategic decisions are typically made over a longer time horizon. These are closely linked to the corporate strategy, and guide supply-chain policies from a design perspective. On the other hand, operational decisions are short-term, and focus on activities on a day-to-day basis. The effort in these types of decisions is to effectively and efficiently manage the product flow in the “strategically” planned supply chain.

Third-Party Logistics (3PL)

The process of outsourcing logistics is known as third-party logistics. The use of 3PL enables a firm to save time and money and have a major increase in revenue if the 3PL provider is reputed and reliable. Customers have greater faith in business enterprises that are likely to deliver goods on time and accurately. As firms look towards global expansion, they find that in-house development of the supply-chain function is both costly and time-consuming. This makes them look towards outsourcing the function and utilizing the services of a 3PL service provider.

Global logistics as an industry encompasses transportation, warehousing and storage facilities. Increasing globalization has led to the growth of new technologies related to both physical and informational flows. Some commonly used logistical strategies are as follows.

Cross docking

The strategy of cross docking pertains to directly linking inbound flows of goods from suppliers to customers with a minimal use of warehousing. The distribution centre directly receives goods from the supplier and sorts them to be shipped as a consolidated batch to a group of customers.

Milk runs

This refers to a schedule meant to make full use of vehicle capacity and reduce transportation costs. The same vehicle is used for delivery of products to the customer and to collect empty cans, giving customers the benefit of frequent deliveries at a low cost. It involves having fixed routes and destinations for loading and unloading.

Kitting

This is the process of organizing components into logically interrelated bins before assembly to ensure effective JIT manufacturing process, and is a critical element of inventory control. It helps in easy storage and quick shipment and delivery.

Location Decisions

The geographical placement of production facilities, stocking points and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows to the final customer. These decisions are of great significance to a firm as they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs and production limitations. Although location decisions are primarily strategic, they also have implications on an operational level.

Production Decisions

The strategic decisions include what products to manufacture, which plants to manufacture them in, and the allocation of suppliers to plants, plants to distribution centres, and distribution centres to customer markets.

A basic dilemma the firm faces is the make-or-buy decision. In taking a call on this, the firm should focus on manufacturing parts that are critical to the product and in which it has a distinct edge. It should outsource those where the comparative advantage, form and scale of operations, low costs, and strong performance incentives lie elsewhere.

In taking the decision to outsource, the TNC establishes various kinds of supplier relationships. For instance, Toyota Motor Corporation pioneered the Toyota Production System, where it sent a team of manufacturing experts to each of its key suppliers to observe production and other processes and advise them on methods that help to cut costs and boost quality. This helps it to ensure uniform quality according to its high performance metrics. Another interesting strategy employed by Toyota is to create competition between two suppliers and give greater business to the one who performs better.⁴ This is typical of the Japanese approach of developing close relationships with their suppliers, which helps it to reduce the number of supplier relationships it has to keep. For instance, Toyota has 150 parts suppliers for its British operations, a small number compared to the 500 to 1,000 suppliers that European carmakers typically have.⁵

As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities, and this largely depends on the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

Purchasing Decision

The TNC's procurement decision goes through four distinct phases: domestic purchasing, foreign need-based purchasing, foreign procurement strategy and the integration of procurement into a global strategy. The procurement decision moves from the simple to the complex based on the firm's internationalization strategy. As the TNCs orientation becomes more global, it faces a centralization/decentralization dilemma of whether to keep procurement a centralized activity or to let a subsidiary handle some of it. Firms usually begin by domestic purchasing and then move towards integrating and coordinating procurement globally. Large firms sometimes coordinate global purchasing with competitors to keep costs under check. For instance, in 2003, Hyundai Motor Company, DaimlerChrysler and Mitsubishi Motors made joint worldwide purchases of motor parts and helped to establish localized supply chains.⁶

Inventory Decisions

Inventories exist at every stage of the supply chain as either raw materials, or semi-finished or finished goods. They can also be work-in-process between locations. Their primary purpose is to act as a buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 per cent of the firm's total cost of production, their efficient management is critical in supply-chain operations. Inventory decisions are strategic in the sense that top management sets the goals, but have an operational perspective. These include deployment strategies (push versus pull), control policies—the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Inventories tie up a major portion of corporate funds. Capital used for inventory is not available for other corporate opportunities. Annual inventory carrying costs (the expense of maintaining inventories), though heavily influenced by the cost of capital and industry-specific conditions, can account for 15 per cent or more of the value of the inventories themselves. Therefore, proper inventory policies should be of major concern to the international logistician. Firms are, therefore, increasingly using just-in-time inventory policies, which minimize the volume of inventory by making it available only when it is needed. The just-in-time method is increasingly required by multinational manufacturers and distributors engaging in supply-chain management. They choose suppliers on the basis of their delivery and inventory performance, and their ability to integrate themselves into the supply chain. Proper inventory management may therefore become a determining variable in obtaining a sale.

The purpose of establishing inventory systems—to maintain product movement in the delivery pipeline and to have a cushion to absorb demand fluctuations—is the same for domestic and international operations. The international environment, however, includes unique factors such as currency exchange rates, greater distances and duties. At the same time, international operations provide the corporation with an opportunity to explore alternatives not available in a domestic setting, such as new sourcing or location alternatives. In international operations, the firm can make use of currency fluctuation by placing varying degrees of emphasis on inventory operations, depending on the stability of the currency of a specific country. Entire operations can be shifted to different nations to take advantage of new opportunities. International inventory management can therefore be much more flexible in its response to environmental changes.

An important aspect of inventory management is the quality of inventory. Defective inventory is not only a waste, it also incurs carrying costs. The geographical distance between the buyer and the supplier and language and cultural differences results in increased time to educate suppliers on methods of supplying quality products. Shoemaker Nike outsources the manufacture of its shoes to various factories in China but has a team of its own personnel to keep a check on quality.⁷ The quality of inventory also has implications for the JIT strategy, which typically implies sole sourcing for specific parts to be able to keep up with a stringent delivery schedule. If the firm uses a foreign supplier, it is a risky proposition to have just one supplier, and multiple suppliers lead to loss in terms of being unable to get the benefits of volume pricing. Firms often use a sole supplier for critical inputs and cultivate alternate suppliers for others.

Let us now look at certain variables, such as order cycle time and customer service levels, that are considered critical to inventory management.

Order Cycle Time

The period between the placement of an order and the receipt of the merchandise is referred to as order cycle time. Two dimensions are of major importance to inventory management: the length of the total order cycle time and its consistency. In international business, the order cycle is frequently longer than in domestic business. It comprises the time involved in order transmission, order filling, packing and preparation for shipment, and transportation. Order transmission time varies greatly internationally depending on the method of communication. Supply-chain driven firms use EDI rather than fax, telex, telephone or mail.

 

EDI is the direct transfer of information technology between computers of trading partners. The usual paperwork the partners send each other, such as purchase orders and confirmations, bills of lading, invoices and shipment notices, are formatted into standard messages and transmitted via a direct link network or a third-party network. EDI can streamline processing and administration and reduce the costs of exchanging information.

The order-filling time may also increase because a lack of familiarity with a foreign market makes the anticipation of new orders more difficult. Packing and shipment preparation require more detailed attention. Finally, of course, transportation time increases with the distances involved. Larger inventories may have to be maintained both domestically and internationally to bridge the time gaps.

Consistency, the second dimension of the order cycle time, is also more difficult to maintain in international business. Depending on the choice of transportation mode, delivery times may vary considerably from shipment to shipment. The variation may require the maintenance of larger safety stocks to be able to fill demand in periods when delays occur.

Customer Service Levels

The level of customer service denotes the responsiveness that inventory policies permit for any given situation. A customer service level of 100 per cent would be defined as the ability to fill all orders within a set time—for example, three days. If, within the same three days, only 70 per cent of the orders can be filled, the customer service level is 70 per cent. The choice of customer service level for the firm has a major impact on the inventories needed. In highly industrialized nations, firms are frequently expected to adhere to very high levels of customer service. Corporations are often tempted to design international customer service standards to similar levels.

Yet, service levels should not be oriented primarily around cost or customary home-country standards. Rather, the international service level should be based on expectations encountered in each market. These expectations are dependent on past performance, product desirability, customer sophistication, and the competitive status of the firm.

Since high customer service levels are costly, the goal should not be the highest customer service level possible, but rather an acceptable level. Different customers have different priorities. Some will be prepared to pay a premium for speed; some may put a higher value on flexibility; and another group may see low cost as the most important issue. Flexibility and speed are expensive, so it is wasteful to supply them to customers who do not value them highly. If, for example, foreign customers expect to receive their merchandise within 30 days, it does not make sense for the international corporation to promise delivery within 10 or 15 days. Indeed, such delivery may result in storage problems. In addition, the higher prices associated with higher customer service levels may reduce the competitiveness of a firm's product. By contrast, in a business-to-business setting, sometimes even a delay of a few hours in the delivery of a crucial component may be unacceptable because the result may be a shutdown of the production process. In such instances, strategically placed depots in a region must ensure that near-instantaneous response becomes possible. For example, Storage Technology Corporation, a maker of storage devices for mainframe computers, keeps parts at seven of its European subsidiary offices so that in an emergency, it can reach any continental customer within four hours.

International Packaging Issues

Packaging is instrumental in getting the merchandise to the ultimate destination in a safe, maintainable and presentable condition. Packaging that is adequate for domestic shipping may be inadequate for international transportation because the shipment will be subject to the motions of the vessel by which it is carried. Added stress in international shipping also arises from the transfer of goods through different modes of transportation.

Packaging decisions must also take into account differences in environmental conditions, like climate. When the ultimate destination is very humid or particularly cold, special provisions must be made to prevent damage to the product. The task becomes even more challenging when one considers that dramatic changes in climate can take place in the course of long-distance transportation. A famous case is that of the firm in Taiwan that shipped drinking glasses to the Middle East. The company used wooden crates and padded the glasses with hay. Most of the glasses, however, were broken by the time they reached their destination. As the crates travelled into the dry Middle East, the moisture content of the hay dropped. By the time the crates were delivered, the thin straw offered almost no protection.

The weight of packaging must also be considered, particularly when airfreight is used, as the cost of shipping is often based on weight. In some countries, duties are assessed according to the gross weight of shipments, which includes the weight of packaging. Obviously, the heavier the packaging, the higher the duty will be. At the same time, packaging material must be sufficiently strong to permit stacking in international transportation.

The shipper must pay sufficient attention to instructions provided by the customer for packaging. For example, requests by the customer that the weight of any one package should not exceed a certain limit or that specific package dimensions should be adhered to are usually made for a reason. Often they reflect limitations in transportation or handling facilities at the destination.

Although the packaging of a product is often used as a form of display abroad, international packaging can rarely serve the dual purpose of protection and display. Therefore, double packaging may be necessary. The display package is for future use at the point of destination; another package surrounds it for protective purposes.

One solution to the packaging problem in international logistics has been the development of intermodal containers—large metal boxes that fit on trucks, ships, railroad cars and airplanes and ease the frequent transfer of goods in international shipments. Developed in different forms for both sea and air transportation, containers also offer better utilization of carrier space because of standardization of size. The shipper, therefore, may benefit from lower transportation rates. In addition, containers can offer greater safety from pilferage and damage. Of course, at the same time, the use of containers allows thieves to abscond with an entire shipment rather than just parts of it. On some routes in Russia, for example, theft and pilferage of cargo are so common that liability insurers refuse to cover container haulers in the region. Nowadays, several countries such as Germany also require biodegradable packaging for import consignments.

Container traffic is heavily dependent on the existence of appropriate handling facilities both domestically and internationally. In addition, the quality of inland transportation must be considered. If transportation for containers is not available and the merchandise must be unpacked and reloaded, the expected cost reductions may not materialize.

Overall international packaging must pay attention to cost issues. The customer who ordered and paid for the merchandise expects it to arrive on time and in good condition. Even with replacements and insurance, the customer will not be satisfied if there are delays. Dissatisfaction will usually translate directly into lost sales.

International Storage Issues

Although international logistics is discussed as a movement or flow of goods, a stationary period is involved when merchandise becomes inventory stored in warehouses. Heated arguments can arise within a firm over the need for and utility of warehousing internationally. On the one hand, customers expect quick responses to orders and rapid delivery. Accommodating the customer's expectations would require locating many distribution centres around the world. On the other hand, warehouse space is expensive. In addition, the larger volume of inventory increases the inventory carrying cost. Fewer warehouses allow for consolidation of transportation and therefore lower transportation rates to the warehouse. However, if the warehouses are located far from customers, the cost of outgoing transportation increases. The international logistician must consider the tradeoffs between service and cost to the supply chain in order to determine the appropriate levels of warehousing.

The location decision addresses how many distribution centres to have and where to locate them. The availability of facilities abroad will differ from the domestic situation. For example, while public storage is widely available in some countries, such facilities may be scarce or entirely lacking in others. Also, the standards and quality of facilities can vary widely. As a result, the storage decision of the firm is often accompanied by the need for large-scale, long-term investments. Despite the high cost, international storage facilities should be established if they support the overall logistics effort. In many markets, adequate storage facilities are imperative to satisfy customer demands and to compete successfully. For example, since the establishment of a warehouse connotes a visible presence, in doing so a firm can convince local distributors and customers of its commitment to remain in the market for the long term.

Once the decision is made to use storage facilities abroad, the warehouse conditions must be carefully analysed. As an example, in some countries, warehouses have low ceilings, so packaging developed for the high stacking of products is unnecessary or even counterproductive. In other countries, automated warehousing is available. Proper bar coding of products and the use of package dimensions acceptable to the warehousing system are basic requirements. In contrast, in warehouses still stocked manually, weight limitations will be of major concern. And, if no forklift trucks are available, palletized delivery is of little use.

To optimize the logistics system, the logistician should analyse international product sales and then rank products according to warehousing needs. Products that are most sensitive to delivery time might be classified as “A” products. These would be stocked in all distribution centres, and safety stock levels would be kept high. Alternatively, the storage of products can be more selective, if quick delivery by air can be guaranteed. Products for which immediate delivery is not urgent could be classified as “B” products. They would be stored only at selected distribution centres around the world. Finally, products for which there is little demand could be stocked only at the headquarters. Should an urgent need for delivery arise, airfreight could again assure rapid shipment. Classifying products enables the international logistician to substantially reduce total international warehousing requirements and still maintain acceptable service levels.

Transportation Decisions

The choice of mode of transport has huge strategic implications as the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with it. While air shipments may be fast, reliable and warrant fewer safety stocks, they are expensive. On the other hand, shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels and geographic location play vital roles in such decisions. Since transportation comprises more than 30 per cent of total cost, decisions such as routing and scheduling of equipment are key variables in effective management of the firm's transport strategy.

In the context of transportation decisions, close collaboration with suppliers is required to develop a just-in-time inventory system, which in turn may be crucial to maintaining manufacturing costs at globally competitive levels. Yet, without electronic data interchange, such collaborations or alliances are severely handicapped. While most industrialized countries can offer the technological infrastructure for such computer-to-computer exchange of business information, the application of such a system in the global environment may be severely restricted. It may not be just the lack of technology that forms the key obstacle to modern logistics management, but rather the entire business infrastructure, ranging from ways of doing business in fields such as accounting and inventory tracking, to the willingness of businesses to collaborate with each other.

Modes of Transport

International transportation frequently requires ocean or airfreight modes, which many corporations only rarely use domestically. In addition, combinations such as land bridges or sea bridges may permit the transfer of freight among various modes of transportation, resulting in intermodal movements. The international logistics manager must understand the specific properties of the different modes to be able to use them intelligently.

Water transportation is a key mode of transportation for international freight movement. Three types of vessels operating in ocean shipping can be distinguished by their service: liner service, bulk service, and tramp or charter service.

• Liner service offers regular scheduled passages on established routes.
• Bulk service mainly provides contractual services for individual voyages or for prolonged periods of time.
• Tramp service is available for irregular routes and scheduled only on demand.

Vessels can also be distinguished by the type of cargo a vessel can carry. Most common are conventional (break bulk) cargo vessels, container ships and roll-on-roll-off vessels.

• Conventional cargo vessels are useful for oversized and unusual cargoes, but may be less efficient in their port operations.
• Container ships carry standardized containers that greatly facilitate the loading and unloading of cargo and intermodal transfers. As a result, the time the ship has to spend in port is reduced, as are the port charges.
• Roll-on-roll-off (RORO) vessels are essentially oceangoing ferries. Trucks can drive onto built-in ramps and roll off at the destination.
• Lighter aboard ship (LASH) is a vessel similar to the RORO vessel. LASH vessels consist of barges stored on the ship and lowered at the point of destination. The individual barges can then operate on inland waterways, a feature that is particularly useful in shallow water.

The availability of a certain type of vessel, however, does not automatically mean that it can be used. The greatest constraint in international ocean shipping is the lack of ports and port services. For example, modern container ships cannot serve some ports because the local equipment cannot handle the resulting traffic. The problem is often found in developing countries, where local authorities lack the funds to develop facilities. In some instances, governments may purposely limit the development of ports to impede the inflow of imports. Increasingly, however, governments have begun to recognize the importance of an appropriate port facility structure and are developing such facilities in spite of the large investments necessary.

Air shipping is available to and from most countries. This includes the developing world, where it is often a matter of national prestige to operate a national airline. The total volume of airfreight in relation to total shipping volume in international business remains quite small. However, 40 per cent of the world's manufactured exports (by value) travel by air. Clearly, high-value items are more likely to be shipped by air, particularly if they have a high density, that is, a high weight-to-volume ratio.

Over the years, airlines have made major efforts to increase the volume of airfreight. Many of these activities have concentrated on developing better, more efficient ground facilities, introducing airfreight containers, and providing and marketing a wide variety of special services to shippers. In addition, some airfreight companies and ports have specialized and become partners in the international logistics effort.

Changes have also taken place within the aircraft. As an example, 40 years ago, the holds of large propeller aircraft could take only about 10 tonnes of cargo. Today's jumbo jets can load up to 120 metric tonnes of cargo with an available space of 636 cubic metres, and can, therefore, transport bulky products such as locomotives. In addition, aircraft manufacturers have responded to industry demands by developing both jumbo cargo planes and combination passenger and cargo aircraft. The latter carry passengers in one section of the main deck and freight in another. These hybrids can be used by carriers on routes that would be uneconomical for passengers or freight alone.

From the shipper's perspective, the products involved must be appropriate for air shipment in terms of their size. In addition, the market situation for any given product must be evaluated. Airfreight may be needed if a product is perishable or if, for other reasons, it requires a short transit time. The level of customer service needs and expectations can also play a decisive role. For example, the shipment of an industrial product that is vital to the ongoing operations of a customer may be much more urgent than the shipment of packaged consumer products.

Selecting a Mode of Transport

The international logistics manager must make an appropriate selection from among the available modes of transportation based on the needs of the firm and its customers. The manager must consider the performance of each mode on four dimensions: transit time, predictability, cost and non-economic factors.

Transit time   The period between departure and arrival of the carrier varies significantly between ocean freight and airfreight. For example, the 45-day transit time of an ocean shipment can be reduced to 24 hours if the firm chooses airfreight. The length of transit time can have a major impact on the overall operation of the firm. As an example, a short transit time may reduce or even eliminate the need for an overseas depot. Also, inventories can be significantly reduced if they are replenished frequently. As a result, capital can be freed up and used to finance other corporate opportunities. Transit time can also play a major role in emergency situations. For example, if the shipper is about to miss an important delivery date because of production delays, a shipment normally made by ocean freight can be made by air. Overall, it has been estimated that each day that goods are in transit adds about 0.8 per cent to the cost of the goods. Therefore, an extra 20-day period spent at sea adds the equivalent of a 16 per cent tariff on those goods, drastically reducing their competitiveness.

Perishable products require shorter transit times. Transporting them rapidly prolongs their shelf life in the foreign market. Air delivery may be the only way to enter foreign markets successfully with products that have a short life span. International sales of cut flowers have reached their current volume only as a result of airfreight.

At all times, the logistics manager must understand the interactions between different components of the logistics process and their effect on transit time. Unless a smooth flow throughout the supply chain can be assured, bottlenecks will deny any timing benefits from specific improvements. For example, Levi Strauss & Co., the jeans manufacturer, offers customers the chance to be measured by a body scanner in some of its stores. Less than an hour after this measurement, a Levi Strauss factory has begun to cut the jeans of their choice. Unfortunately, it then takes 10 days to get the finished jeans to the customer.

Predictability   Providers of both ocean freight and airfreight service wrestle with the issue of reliability. Both modes are subject to the vagaries of nature, which may impose delays. Yet, because reliability is a relative measure, the delay of one day for airfreight tends to be seen as much more severe and “unreliable” than the same delay for ocean freight. However, delays tend to be shorter in absolute time for air shipments. As a result, arrival time via air is more predictable. This has a major influence on corporate strategy. For example, because of the higher predictability of airfreight, inventory safety stock can be kept at lower levels. Greater predictability also can serve as a useful sales tool, as it permits more precise delivery promises to customers. If inadequate port facilities exist, airfreight may again be the better alternative. Unloading operations for oceangoing vessels are more cumbersome and time consuming than for planes. Merchandise shipped via air is likely to suffer less loss and damage from exposure of the cargo to movement. Therefore, once the merchandise arrives, it is more likely to be ready for immediate delivery—a fact that also enhances predictability.

An important aspect of predictability is also the capability of a shipper to track goods at any point during the shipment. Tracking becomes particularly important as corporations increasingly obtain products from and send them to multiple locations around the world. Being able to coordinate the smooth flow of a multitude of interdependent shipments can make a vast difference in a corporation's performance. Tracking allows the shipper to check on the functioning of the supply chain and to take remedial action if problems occur. Cargo also can be redirected if sudden demand surges so require. However, such enhanced corporate response to the predictability issue is only possible if an appropriate information system is developed by the shipper and the carrier, and is easily accessible to the user. Due to rapid advances in information technology, the ability to know where a shipment is has increased dramatically, while the cost of this critical knowledge has declined.

Cost of transportation   International transportation services are usually priced on the basis of both cost of the service provided and value of the service to the shipper. Due to the high value of the products shipped by air, airfreight is often priced according to the value of the service. In this instance, of course, price becomes a function of market demand and the monopolistic power of the carrier.

The manager must decide whether the clearly higher cost of airfreight can be justified. In part, this will depend on the cargo's properties. The physical density and the value of the cargo will affect the decision. Bulky products may be too expensive to ship by air, whereas very compact products may be more appropriate for airfreight transportation. High-priced items can absorb transportation costs more easily than low-priced goods because the cost of transportation as a percentage of total product cost will be lower. As a result, sending diamonds by airfreight is easier to justify than sending coal. Alternatively, a shipper can decide to mix modes of transportation in order to reduce overall cost and time delays. For example, part of the shipment route can be covered by air, while another portion can be covered by truck or ship.

Most important, however, are the supply-chain considerations of the firm. The manager must determine how important it is for merchandise to arrive on time, which, for example, will be different for standard garments versus high fashion dresses. The effect of transportation cost on price and the need for product availability abroad must also be considered. Simply comparing transportation modes on the basis of price alone is insufficient. The manager must factor in all corporate, supplier and customer activities that are affected by the modal choice and explore the full implications of each alternative. For example, some firms may want to use airfreight as a new tool for aggressive market expansion. Airfreight may also be considered a good way to begin operations in new markets without making sizable investments for warehouses and distribution centres. The final selection of a mode will be the result of the importance of different modal dimensions to the markets under consideration.

Non-economic factors   The transportation sector, nationally and internationally, both benefits and suffers from government involvement. Even though transportation carriers are one prime target in the sweep of privatization around the globe, many carriers are still owned or heavily subsidized by governments. As a result, governmental pressure is exerted on shippers to use national carriers, even if more economical alternatives exist. Such preferential policies are most often enforced when government cargo is being transported. Restrictions are not limited to developing countries. For example, in the United States, the federal government requires that all travellers on government business use national flag carriers when available.

Transportation Infrastructure

In industrialized countries, firms can count on an established transportation network. Around the globe, however, major infrastructural variations will be encountered. Some countries may have excellent inbound and outbound transportation systems but weak internal transportation links. This is particularly true in some developing countries, where the original transportation systems were designed to maximize the extractive potential of the countries. In such instances, shipping to the market may be easy, but distribution within the market may represent a very difficult and time-consuming task. Infrastructure problems can also be found in countries where most transportation networks were established between major ports and cities in past centuries. The areas lying outside the major transportation networks will encounter problems in bringing their goods to market.

New routes of commerce have also opened up, particularly between the former Eastern and Western political blocs. Yet, without the proper infrastructure, the opening of markets is mainly accompanied by major new bottlenecks. On the part of the firm, it is crucial to have wide market access to be able to appeal to a sufficient number of customers. The firm's logistics platform, which is determined by a location's ease and convenience of market reach under favourable cost circumstances, is a key component of a firm's competitive position. As different countries and regions may offer alternative logistics platforms, the firm must recognize that such alternatives can be the difference between success and failure. Policymakers in turn must recognize the impact they have on the quality of infrastructure. It is governmental planning that enables supply-chain capabilities and substantially affects logistics performance at the corporate level. In an era of foreign direct investment flexibility, the public sector's investment priorities, safety regulations, tax incentives and transport policies can have major effects on the logistics decisions of firms.

The logistics manager must therefore learn about existing and planned infrastructures abroad and at home and factor them into the firm's strategy. In some countries, for example, railroads may be an excellent transportation mode, far surpassing the performance of trucking, while in others, the use of railroads for freight distribution may be a gamble at best. The future routing of pipelines must be determined before any major commitments are made to a particular location if the product is amenable to pipeline transportation. The transportation methods used to carry cargo to seaports or airports must be investigated. Mistakes in the evaluation of transportation options can prove to be very costly. One researcher reported the case of a food processing firm that built a pineapple cannery at the delta of a river in Mexico. Since the pineapple plantation was located upstream, the company planned to float the ripe fruit down to the cannery on barges. To its dismay, however, the firm soon discovered that at harvest time the river current was far too strong for barge traffic. Since no other feasible alternative method of transportation existed, the plant was closed and the new equipment was sold for a fraction of its original cost.

Extreme variations also exist in the frequency of transportation services. For example, a particular port may not be visited by a ship for weeks or even months. Sometimes only carriers with particular characteristics, such as small size, will serve a given location.

All of these infrastructural concerns must be taken into account in the planning of the firm's location and transportation framework. The opportunity of a highly competitive logistics platform may be decisive for the firm's investment decision, as it forms a key component of the cost advantages sought by multinational corporations. On the other hand, if a location loses its logistics benefits due to, say, a deterioration of the railroad system, a firm may well decide to move on to another, more favourable locale. Governments must keep the transportation dimension in mind when attempting to attract new industries or trying to retain existing firms.

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International logistics

Kitting

Milk run

Order cycle time

Six Sigma

Supply-chain management

Total quality management

1. What is supply chain management? Discuss its importance for an international business firm.
2. Explain the concept of international logistics.
3. Enumerate the various issues involved in supply chain management decisions of the firm.
4. Discuss the basic international inventory issues.
5. What are the basic determinants of an appropriate mode of transport?

1. You plan to open a branch of your software development business in the United States. Using KPMG's Competitive Alternatives Survey, (http://www.competitivealternatives.com/industries/default.aspx), prepare a feasibility report of doing this and make a comparison with setting up in Europe.
2. Loblaw Companies Limited is one of the biggest retailers in Canada. Operating in an intensely competitive market provides many challenges to Loblaw's profitability. Use the information in the Web link, http://www.supplychainer.com/50226711/loblaws_supply_chain_restructuring_is_it_a_nightmare.php, and analyse Loblaw's supply-chain problems and suggest any possible solutions.