Chapter 6: Global Logistics

To identify some of the controllable and uncontrollable factors that affect global logistics activities. Describing the

major international distribution channel strategies-exporting, licensing, joint ventures ownership and importing

Questions???

Handphone Laptop Car Fashion

Statistics of Car Manufacturers

Part 1: Introduction Global Logistics

• 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

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

Part 1: Introduction Global Logistics

Factors that influence a company’s decision to enter international markets;

1. Market potential2. Geographic diversification3. Excess production capacity 4. Products near the end of their cycle in the domestic

market could generate growth in the international market

5. Source of new product and ideas6. Foreign competition in the domestic market

Part 2: International Distribution Channel Strategies

• International Market Entry Strategies

1.Exporting

2. Licensing 3. Joint ventures

4. Ownership

5. Importing

Part 2: International Distribution Channel Strategies

6. Countertrade &

Duty drawbacks

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

Part 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

• less risk and increasing flexibility

– does not require large capital outlays

• Licensing agreement cannot be terminated in short period

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

• Licensees can become future competitors

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

Part 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 don’t 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

Part 2: International Distribution Channel Strategies

Advantages Disadvantages

• Provide companies with the opportunity to gain new capacity and expertise

• Allow companies to enter related businesses or new geographic markets or gain new technological knowledge

• Access to greater resources, including specialised staff and technology, while sharing of risks with a venture partner

• In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from non-core businesses.

• It takes time and effort to build the right relationship and partnering with another business can be challenging.

• There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.

• Different cultures and management styles result in poor integration and co-operation.

• The partners don't provide enough leadership and support in the early stages.

Advantages VS Disadvantages of Joint Venture

Part 2: International Distribution Channel Strategies

4. Direct Ownership

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 market-entry strategy

Part 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

Part 2: International Distribution Channel Strategies

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

• Political government issues

• Exchange rate fluctuations change the relative value of foreign investments because they are valued in local currency

Advantages VS Disadvantages of Direct Ownership

Part 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)

Part 2: International Distribution Channel Strategies

Advantages Disadvantages

• Quality product & less risk– countries will seek to import

these goods because of price and perhaps quality advantages.

• Can lead to the erosion of their national economies—especially when imports exceed exports.

• Less control over domestic made product.

6. Countertrade & Duty Drawbacks

• Applies to the requirement that a firm import something from a country in which it has sold something else

• In each a seller provides the buyer with goods and promises in return to purchase goods from the buyer.

• 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 country’s product

Part 2: International Distribution Channel Strategies

• 5 Forms of Countertrade

1. Transaction in which products are traded in exchange for other product; include barter, compensation and switch trading

2. Transaction that feature two parallel money-for-goods transaction; include buy back and counterpurchase

Part 2: International Distribution Channel Strategies

5 Forms of Countertrade

BarterOccurs when

goods of equal value are

exchanged and no money involved Switch

Switch trader will buy products for

hard currency. The switch trader will often demand of sizable fee in the

form of discount on the goods delivered

CounterpurchaseInvolves 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

CompensationTakes place when barter is specified as a percentage of the value of goods being traded to the

value of the product being sold

BuybackThe selling firm

provides equipment/ entire plant and agrees

to buy back a certain part of the

production

• Examples of Countertrade: Barter, Buyback, Compensation, counter purchase and Switch Trading

1. In 1996, Ukraine agreed to exchange its agricultural products for 2 million tons of oil from Iran.

2. Year 1990s, US company invested on production of Milk and dairy product at New Zealand and import back at a cheaper price

3. A Macedonian company agreed to pay 30 percent of the price for the purchased of Russian gas in goods/services such as medicines, pipes and construction works.

4. Sony Corporation has a mutual agreement with LG, purchasing 100 units borderless LCD TV from LG in April for promotion purpose, then sell 350 Blue ray Recorder in June

5. A U.S company exports fertilizer to Pakistan. However, the goods to be counter delivered by Pakistan are of little to the U.S seller. A Romanian company (switch trader) converts the Pakistan goods into cash, pay the U.S exporter and retains a commission.

Part 2: International Distribution Channel Strategies

• Benefits of Countertrade:

1. Increased Sales Opportunities• Countertrade generates additional sales that would

not otherwise be possible. It is also enables entry into difficult markets

2. Access to Source of Supply• Countertrade provides exporters acces to a

continuous supply of production components, precious raw materials or other natural resources in return for sales of manufactured good or technology

3. Flexibility in Prices• Countertrade enables the exporters to adjust the

price of a product in exchange for overprices commodities

Part 2: International Distribution Channel Strategies

6. Duty Drawbacks

• 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

Part 2: International Distribution Channel Strategies

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?

Part 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

Part 3: Managing Global Logistics

2. Guidelines in Developing a Global Logistics Strategy

• In developing a global logistics strategy, some general guidelines applya) Logistics planning should be integrated into the

company’s strategic planning processb) Logistics department need to be guided by a clear

vision and must measure output regularlyc) 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

Part 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

Part 3: Managing Global Logistics

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.

Part 3: Managing Global Logistics

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

Part 3: Managing Global Logistics

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.

Part 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

Part 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

Part 3: Managing Global Logistics

6. 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

Part 3: Managing Global Logistics

7. 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

Part 3: Managing Global Logistics

8. 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

Part 3: Managing Global Logistics

Manufacturing Site

Port

PortWarehouse

WarehouseRetailer/ Customer

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

Part 3: Managing Global Logistics

One of the most important business developments in recent years has been the expansion of global industry new market are opening up and existing market are expanding worldwide.

a) Describe in your own words the factors the influence a company’s decision to enter international markets.(6 marks)

b) Briefly discuss the forms of countertrade transaction (5 marks)

c) Amir has expanded his business to China and has been authorizes as a direct ownership for his business there. Guide Amir on this issue of direct ownership and the advantages also disadvantages of it.(4 marks)

Question 1

Part of global logistics is to support non-domestic markets whereby a company must have a distribution system or network that satisfies the particular requirement of those market.

a) Briefly explain in detail the 6 international market entry strategies and provide example to support your explanation (9 marks)

b) Describe in your own words the concept, advantages and disadvantages of containerization (3 marks)

c) From your opinion, if your organization is manufacturing car, which financial system would you opt to choose, LIFO or FIFO? State your reason. (3 marks)

Question 2

All forms of entry into the international marketplace require an awareness of the awareness of the variables that can affect a firms distribution system.

a) Discuss the controllable and uncontrollable elements that affects the logistics strategy of the international firm. (8 marks)

b) Describe in your own words the concept, advantages and disadvantages of licensing (4 marks)

c) From your opinion, why global logistics require a high level of customer service strategies? State your reason and provide an example of customer service implementation.(3 marks)

Question 3

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

a) Briefly discuss the factors and aspect in managing global logistics in financial perspective. (8 marks)

b) Describe in your own words the concept of packaging containerization in global logistics. (4 marks)

c) Considering that your company is selling hardware electronic appliances. Establish a countertrade form of relationships that you can explore globally. (3 marks)

Question 4

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

a) Briefly discuss the factors and aspect in managing global logistics in financial perspective. (8 marks)

b) Describe in your own words the concept, advantages and disadvantages of licensing (4 marks)

c) From your opinion, why global logistics require a high level of customer service strategies? State your reason and provide an example of customer service implementation.

(3 marks)

Quiz 5