14. Global Logistics and Distribution

Chapter Overview Definition of Global Logistics Managing Physical Distribution Managing Sourcing Strategy Free Trade Zones International Distribution Channel International Retailing Appendix: Maquiladora Operation

Introduction Global logistics and distribution have played a critical role in the growth and development of world trade and in the integration of manufacturing on a worldwide scale. The use of appropriate distribution channels in international markets increases the chances of success dramatically. In the United States, the total logistics cost has amounted to nine to eleven percent of the country’s GDP every year in the last decade.

Introduction As firms start operating on a global basis, logistics managers need to manage shipping of raw materials, components, and supplies among various manufacturing sites at the most economical and reliable rates. The development of intermodal transportation and electronic tracking technology has resulted in a quantum jump in the efficiency of the logistic methods employed by firms worldwide.

1. Definition of Global Logistics Global logistics is defined as the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost (Exhibit 14-1).

Exhibit 14-1: Global Logistics

1. Definition of Global Logistics Materials management refers to the inflow of raw material, parts, and supplies through the firm. Physical distribution refers to the movement of the firm’s finished products to its customers, consisting of transportation, warehousing, inventory, customer service/order entry, and administration.

2. Managing Physical Distribution The following factors contribute to the increased complexity and cost of global logistics: Distance Exchange rate fluctuations Foreign intermediaries Regulation Security

2. Managing Physical Distribution Modes of Transportation—Issues Value-to Volume Ratio Perishability Cost of Transportation Modes of Transportation—Methods Ocean Shipping Liner Service Bulk Shipping Air Freight Intermodal Transportation

2. Managing Physical Distribution Warehousing and Inventory Management Hedging Against Inflation and Exchange Rate Fluctuations Benefiting from Tax Differences Logistic Integration and Rationalization E-Commerce and Logistics

2. Managing Physical Distribution Third-Party Logistic (3PL) Management The largest 3PL sector is the value-added warehousing and distribution industry. Logistical Revolution with the Internet The trend toward third-party logistics is a result of the Internet and the intranet as well as concentrating on core competencies.

3. Managing Sourcing Strategy Companies adopt international sourcing for the following reasons: Intense international competition Pressure to reduce costs The need for manufacturing flexibility Shorter product development cycles Stringent quality standards Continually changing technology

3. Managing Sourcing Strategy Procurement (Exhibit 14-2) Intra-firm sourcing Domestic Off-shore Outsourcing Also known as contract manufacturing Outsourcing Services Intellectual outsourcing

Exhibit 14-2: Types of Sourcing Strategy

Exhibit 14-3: Major Reasons for Outsourcing

4. Free Trade Zones A free trade zone (FTZ) is an area that is located within a nation (say, the United States), but is considered outside of the customs territory of the nation. US FTZ’s are licensed by the Foreign Trade Zone Board and operated under the supervision of the US Customs Service. Presently, some 700 FTZ’s are in operation. Across the US, about 335,000 jobs are directly related to activity in FTZ’s.

4. Free Trade Zones FTZs provide many cash flow and operating benefits to zone users (Exhibit 14-4): 1. Duty deferral and elimination 2. Lower tariff rates 3. Lower tariff incidence 4. Exchange rate hedging 5. Import quota not applicable 6. “Made in U.S.A.” designation

5. Exhibit 14-4: Benefits of Using a Foreign Trade Zone (FTZ) in the United States

5. International Distribution Channel Firms may reach their customers through: Direct sales Agent intermediaries who do not take title to goods Merchant intermediaries operating as independent businesses

Exhibit 14-5: International Distribution Channel Alternatives

5. International Distribution Channel Guidelines for choosing foreign intermediaries: Intermediary should be capable of developing markets, not merely have good contacts Intermediaries are long term partners MNC seeks the intermediary, not the other way around Support your partner with necessary resources

5. International Distribution Channel Get essential information from your partner including market information and sales performance data MNC controls marketing strategy as much as possible Establish links with foreign intermediaries as soon as possible after entering the market

6. International Retailing In developed countries, retailing employs between 7 percent and 12 percent of the workforce. Retailing involves very locally entrenched activities, including stocking of an assortment of products that local consumers prefer and seasonal promotion. Adaptation is a key success factor.

6. International Retailing In 2013, Wal-Mart was the largest retailer in the world with a total revenues of over $476 billion. Only 10 percent of its sales are generated outside its core NAFTA region, compared with Carrefour’s 20 percent of sales generated outside its core Europe region. In general, European retailers tend to be more willing to customize their marketing and procurement strategies to various local market peculiarities than US or Japanese retailers.

Exhibit 14-6: International Operations of the World’s Top 10 Retailers Source: “2015 Global Powers of Retailing,” Deloitte Report.

Exhibit 14-7: SWOT Analysis of Carrefour’s Operations in China and Worldwide

6. International Retailing Private Label Brands Appeal to price-conscious customers Attractive to MNCs facing strong local competition “Push” versus “Pull”: The traditional supply chain powered by the manufacturing push is becoming a demand chain driven by consumer pull, especially in the developed countries.

6. International Retailing On-Time Retail Information Management Reduced Inventory Market Information at the Retail Level Strong logistics capabilities can be used as an offensive weapon to help a firm gain competitive advantage in the marketplace. Retailing Differences Across the World Industrialized countries tend to have a lower distribution outlet density than the emerging markets.

6. International Retailing The advanced facilities available in the developed world allow a much higher square footage of retail space per resident due to the large size of the retail outlets. Large-Scale Retail Store Law (LSRSL) in Japan- this law helped to protect the small retail stores Germany (store hours limited) and China (basket shopping behavior) support adaptation approach.

6. International Retailing E-commerce and Retailing Countries such as Japan and Germany are warming up to the same e-commerce revolution as the United States has experienced. E-commerce is not limited to the developed countries. China is already the fastest growing Internet market in Asia.

6. International Retailing Brazil is the most wired nation in Latin America. Along with the growth of internet access is expected a similar growth in entrepreneurial e-commerce operators. Despite the rapid growth of the Internet, the need for local or regional distribution of products is likely to remain as important as it was before the Internet revolution.

Appendix: Maquiladora Operation The maquiladora industry, also known as the in-bond or twin-plant program, is a special Mexican version of a free trade zone started in 1965. Mexico allows duty-free imports of machinery and equipment for manufacturing as well as components for further processing and assembly, as long as 80 percent of the plant’s output is exported.

Appendix: Maquiladora Operation Mexico permits 100% foreign ownership of the maquiladora plants in the designated zone. Automobiles and electronics product assembly are most common. Most maquiladora plants are located along the U.S.-Mexico border (Tijuana, Ciudad Juarez, Nuevo Laredo). Other cities include Monterrey, Mexico City, and Guadalajara. Mexico has been an attractive location for labor-intensive assembly because of cheaper labor.