Chapter 4 Managing logistics internationally

Management of international logistics Framework Management of international logistics Commoditized transportation Information and communication technology Enablers Network design Risk management Governance Activities Factor costs Economies of scale Local responsiveness/Time to market Inventory and handling costs Transportation breakdowns Geopolitical threats (war, terror) Drivers Risks

Content Drivers and logistics implications of internationalization The tendency towards internationalization The challenge of international logistics and location Organizing for international logistics Managing for risk readiness

Drivers and logistics implications of internationalization Key issue 1 What are the trade-offs between responsiveness to local markets and economies of scale?

Drivers and logistics implications of internationalization Motivations for International Expansion Increase Market Share domestic market may lack the size to support efficient scale manufacturing facilities Return on Investment large investment projects may require global markets to justify the capital outlays weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

Drivers and logistics implications of internationalization Motivations for International Expansion Economies of Scale or Learning expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution can spread costs over a larger sales’ base increase profit per unit Location Advantages low cost markets may aid in developing competitive advantage may achieve better access to: Raw materials Lower cost labor Key customers Energy

Drivers and logistics implications of internationalization International Corporate-Level Strategy Need for Local Responsiveness Need for Global Integration Low High Global strategy Transnational Multidomestic

Drivers and logistics implications of internationalization Multidomestic strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe Logistical network: Mainly national; Sourcing, storage and shipping on a national level and duplicated by country

Drivers and logistics implications of internationalization Global strategy Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage) Logistical network: Limited number of production locations that ship to markets around the globe through a highly internationalized network with limited localized warehouse and resources.

Drivers and logistics implications of internationalization Transnational strategy Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements strong central control and coordination to achieve efficiency decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage Balanced local sourcing and shipping (e.g. for customized products and local specialties) and global sourcing and shipping (for example for commodities).

Drivers and logistics implications of internationalization The International Supply Chain Physical Distribution Management Transportation Corporation Suppliers Customers Domestic/Import Sourcing Domestic/Export Throughflow Inbound Materials Outbound Forward and Reverse Flow of Information, Products, and Funds Order Processing Placement Inventory Customer Service Storage Costumer-Firm Interface Supplier-Firm

Drivers and logistics implications of internationalization Inventory Transport Internationalization Handling

Drivers and logistics implications of internationalization Scale economics Global consolidation Sourcing of commodity items from low-wage economies Concentration at specific sites Bulk transportation

Drivers and logistics implications of internationalization External risks Language and culture uncertainty Political risks Macroeconomic risks Risks in international logistics Internal risks Supply options Inventory policy Transportation and distribution arrangements

Case study The Deskjet-plus is one of several printers manufactured by the Vancouver Division of HP.

Factory-localization Case study Factory-localization Stage 2: final assembly and test (FAT), performed at factory Application-specific integrated circuits Read-only memory Raw logic board Motors Flex cables Key pad board Plastic mechanics Plastic-skin Carriage motor Plastic-gears North America DC Logic board Head driver board Raw head driver board Stage 1: printed circuit board assembly and test (PCAT), performed at factory Europe DC Asia Pacific DC Vancouver plant shipment to different DCs

Case study Three major sources of uncertainty can affect HP’s supply chain: Delivery of incoming materials (late shipments, wrong parts, and so forth) Internal process (process yields and machine downtimes) Demand Delays in replenishing stocks at the DCs Inventory buildup or backorders at the DCs

Case study Under ‘factory-localization’, HP ships different versions of the Deskjet-Plus to two non-US DCs by sea, with a transit time of about a month. This long lead time limits DC’s ability to respond to fluctuations in the demand for different versions of the product. To ensure prompt service for the customers, European and Far East DCs have to maintain high levels of safety stocks.

Content Drivers and logistics implications of internationalization The tendency towards internationalization The challenge of international logistics and location Organizing for international logistics Managing for risk readiness

The tendency towards internationalization Key issue 1 How can we picture the trade-offs between costs, inventories and lead times in international logistics?

The tendency towards internationalization Focused market Vs. focused factory

The tendency towards internationalization The advantages and disadvantages of focused factory Cost Lead time Advantages Lower production costs through economies of scale Specialized equipment may be able to manufacture quicker Disadvantages Higher transport cost Longer distance from market will increase lead time

The tendency towards internationalization Centralized inventory Distribution costs most important Inventory costs Local inventories Centralized inventories Shorter delivery time Longer delivery time Lower demand volatility Greater demand volatility

The tendency towards internationalization Centralized inventory C B A Factory/Vendor Regional distribution centers Local trans-shipment point Lead time Inventory level Slowest-moving lines, least predictable. Inventory of medium velocity, less predictable demand line. Direct shipment of fast-moving, predictable lines.

Case study DC-localization Localization at DCs Improving the forecast accuracy of product-mix demands is very difficult. 1 Improve process yields, and to reduce machine downtimes at the plant. DC-localization 2 3 Reduce shipment lead time between manufacturing and distribution, for example, shipping by air. Localization at DCs Factory DCs manufacture and ship a generic Deskjet-plus printer without the power supply module and manual localize the generic product to different specific options as needed Quick shipment is costly.

Localization materials Case study Localization materials Stage 1: printed circuit board assembly and test (PCAT), performed at factory Motors Flex cables Key pad board Plastic mechanics Plastic-skin Carriage motor Plastic-gears US version Application-specific integrated circuits Read-only memory Raw logic board US version European versions Far East versions Logic board Unlocalized printer Raw head driver board Head driver board Localization materials Stage 2: final assembly and test (FAT), performed at factory performed either at factory or at DC

Factory-localization Case study Inventory levels at all sites of Deskjet-plus printer’s supply chain Factory-localization DC-localization Far East DC Printers 13.4 9.8 Localization materials 11.0 European DC 5.2 3.5 US DC 3.2 Factory 2.8 3.9

Content Drivers and logistics implications of internationalization The tendency towards internationalization The challenge of international logistics and location Organizing for international logistics Managing for risk readiness

The challenge of international logistics and location Key issues 1 What are the risks in international logistics in terms of time and inventory? 2 How can the risks be addressed?

The challenge of international logistics and location The complexity of international logistics Multiple consolidation and break points Extended lead time Extended and unreliable transit times Multiple freight modes and cost options

The challenge of international logistics and location Domestic logistics 10 30 20 customer supplier Plant transit DC Inventory in supply chain=90 units International logistics 20 30 customer supplier Plant Transit Origin forwarder Ocean transit Inventory in supply chain=170 units 10 Destination forwarder transit DC

The challenge of international logistics and location Activity: Multiple freight modes and cost options Freight mode Industry Cost Speed Availability Air O Sea Rail Road

The challenge of international logistics and location Location analysis Phase Strategic decision to restructure and invest in plant network Project plan Specification of project plan Implementation of plan Geographical scope Selected location Continent (e.g. Asia, Europe) 3 to 4 countries Regions within selected countries Location within regions

The challenge of international logistics and location Four-phase decision making process Deciding upon the appropriate level of centralization-decentralization Selecting relevant location criteria The availability of physical infrastructure The availability of warehouse sites Central position in the regional market Selecting criteria weightings An economic trade-off analysis of structures and relevant locations

Content Drivers and logistics implications of internationalization The tendency towards internationalization The challenge of international logistics and location Organizing for international logistics Managing for risk readiness

Organizing for international logistics Key issue 1 How can supply chains be better organized to meet the challenges of international logistics?

Organizing for international logistics Layering and tiering Evolving role of individual plants Reconfiguration processes Organizing for international logistics

Organizing for international logistics Postponed manufacturing A specific combination of the three generic types of postponement (Bowersox and Closs,1996) Form postponement: postponement of final manufacturing or processing activities Time postponement: delaying of the forward movement of goods until customer or orders have been received Place postponement: positioning of inventories upstream in centralized manufacturing or distribution operations to postpone the forward or downstream movement of goods Logistics postponement

Organizing for international logistics Primary strategic contribution of the plant Product assembly and product improvement and recommendation Product customization Product packaging Warehousing and shipment Access to production supplies Access to qualified suppliers Proximity to markets Postponed manufacturing Factory warehouse National warehouse National warehouse and deferred packaging Continental DC Changing role of DC Activity at site Achieving worldwide learning capabilities Achieving global efficiency Achieving local responsive capabilities

Organizing for international logistics Reconfiguration processes for companies Starting point Global structure Localized structure Heritage in market Little, greenfield approach Extensive, brownfield approach Supply chain scope Narrow, involving inventory and final manufacturing Broad, involving inventory, manufacturing and sourcing Focus Decentralizing final manufacturing and inventory into market Centralizing inventory and final manufacturing at continental level and globalizing manufacturing and sourcing Tendency Single, placing activities into market Multiple, relocating within market and moving outside market Timetable Short (1-10 months) Long (number of years) Authority Global, top-down directions Local, bottom-up iterative process

Stages in the implementation of postponed manufacturing: local starting point

Stages in the implementation of postponed manufacturing: global starting point

Organizing for international logistics Supply chain reconfigurations involved in postponed manufacturing Industry Sourcing and primary manufacturing Inventory keeping Final manufacturing distribution Service and sales software Wine Transport Telecom Pharma Fashion

Content Drivers and logistics implications of internationalization The tendency towards internationalization The challenge of international logistics and location Organizing for international logistics Managing for risk readiness

Managing for risk readiness Short term risk readiness Inventory policies to reflect volatility Transportation network redesign Reconsider sole and global sourcing arrangements Long term risk readiness Develop contingency plans and risk protocols Audit preparedness Train plant management and staff Report to senior management on risk profiles and preparedness

Managing for risk readiness DELL case: global sourcing and transportation post 9-11 The events of 9-11 changed the dynamics of importing and exporting products into the USA Air traffic control post 9/11 customs and security requirements for global trade Order increasing

Managing for risk readiness Flexible Strategy Flexibility to take advantages of different scenarios Requires a flexible supply chain multiple suppliers flexible facilities various distribution channels Can be expensive to implement coordination mechanisms capital investments loss of economies of scale

Managing for risk readiness Implement Flexible Strategy Production shifting: flexible factories and excess capacity and suppliers Information sharing: anticipate market changes Global coordination Political leverage