CHAPTER 16 LOGISTICS AND SUPPLY-CHAIN MANAGEMENT Chapter Objectives To understand the escalating importance of logistics and supply-chain management as crucial tools for competitiveness To learn about materials management and physical distribution To learn why international logistics is more complex than domestic logistics To see how the transportation infrastructure in host countries often dictates the options open to the manager To learn why international inventory management is crucial for success Opening Case Distribution and Supply-Chain Management Logistics in China Summary: This case points out how the logistical infrastructure in China is still poor and costs the country lost revenue. Total shipping costs are 40 to 50 percent higher than in the U.S. One solution is to use third party logistics (3PL) providers who represent several manufacturers and therefore have greater leverage with freight carriers to demand lower costs and better service. However the Chinese Ministry of Foreign Trade and Economic Co-operation regulates the logistics industry with such a complicated approval process, that it is an obstacle to 3PLs entry into China. On the positive side China is improving its logistical infrastructure. Chapter Outline I. INTERNATIONAL LOGISTICS—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 A. Materials Management—the timely movement of raw materials, parts, and supplies into and through the firm B. Physical Distribution—the movement of the firm’s finished product to its customers C. Systems Concept—materials-flow activities within or outside the firm are so extensive and complex that they can be considered only in the context of their interaction D. Total Cost Concept—one must evaluate and optimize all logistical costs E. Trade-off Concept—one can maximize logistics but costs of other items may increase II. Supply-Chain Management—a series of value-adding activities connects a company’s supply side with its demand side A. Views the entire supply chain B. Can help the firm develop a low-cost competitive supply position C. The Impact of International Logistics 1. Make up 10 to 30 percent of the total landed cost of an international order 2. Advances in technology and communication can improve these systems III. The New Dimensions of International Logistics A. International Transportation Issues 1. Transportation Infrastructure a. Sometimes only entry into the country and exporting have good facilities and infrastructure within the country is poor b. Transportation networks often ignore newer population centers c. The logistics managers must learn about existing and planned infrastructure Focus on Entrepreneurship Late, Lost, and Damaged Goods Summary: This case tells of shipments that were lost, broken, or even burned. It illustrates that a host of bizarre circumstances can turn an ordinary shipment into a comedy of errors. 2. Availability of Modes a. Ocean shipping 1) Types of services i. Liner service offers regularly scheduled passage on established routes ii. Bulk service provides contractual services for individual voyages or for prolonged periods of time iii. Tramp service is available for irregular routes and is scheduled only on demand 2) Type of cargo a vessel can carry i. Conventional (break bulk) cargo vessels—for oversized and unusual cargoes ii. Container ships—standardized containers iii. Roll-on-roll-off (RORO) ships—oceangoing ferries iv. Lighter Aboard Ship (LASH)—barges stored on the ship and lowered at the point of destination to operate on inland waterways 3) Limited by what the port can accommodate b. Airfreight (Figure 16.2, page 536) 1) High value items 2) High weight to volume ration (high density) B. Selecting a Mode of Transport 1. Transit Time—affected by type of goods, selling price, and market distance 2. Predictability—subject to weather and tracking becomes important 3. Cost of transportation Focus on eBusiness Product Tracking: “the Best Thing Since the Barcode!” Summary: RIFD smart tags are a microchip processor with an antenna that can be read by readers to track what and where to product is. This helps companies keep track of products until the reach the destination. They can also be used to track goods leaving a store and to automatically reorder them as well as compute the price of an entire cart full of goods for consumers making purchases. Consumers can have readers at home that generate shopping lists when they consume the products. 4.Noneconomic Factors a. Government involvement to pressure use of national carriers even if more economical alternatives exist (preferential policies) b. International quota systems of transportation have been proposed for balance of payments reasons C. Export Documentation 1. Bill of Lading is a contract between the exporter and the carrier indicating that the carrier has accepted responsibility for the goods and will provide transportation in return for payment a. Straight bill of lading is a nonnegotiable bill used in prepaid transactions b. Shipper’s order bill of lading are negotiable (can be bought sold, or traded while the goods are in transit) and are used for letter of credit transactions 2. Commercial Invoice is a bill for the goods staging basic information 3. Other export documents 4. Freight forwarders specialize in handling documentation D. Terms of Shipment and Sale 1. Incoterms are the internationally accepted standard definitions for the terms of sale set by the International Chamber of Commerce since 1936 as revised on January 1, 2000 (Figure 16.4, page 542) 2. EXW (ex-works)—prices apply only at the point of origin 3. FCA (free carrier)—seller is responsible for loading goods into the means of transportation and buyer is responsible for all subsequent expenses 4. FAS (free alongside ship)—the exporter quotes a price including deliver of goods alongside a vessel at the port and covers cost of unloading a wharfage 5. FOB (free on board)—price covers all expenses up to delivery of goods on an overseas vessel 6. CFR (cost and freight)—price includes cost of transportation to named port 7. CIF (cost, insurance, and freight)—price includes all these charges to point of debarkation 8. DDP (delivered duty paid)—prices includes import duties and inland transportation to buyer’s premises 9. DDU (delivered duty unpaid)—only customs duty and taxes paid by buyer IV. International Inventory Issues A. General Inventory Issues 1. Inventory carrying costs 2. Just-in-time Inventory policies 3. Establishing inventory systems B. Order Cycle Time—the total time that passes between the placement of an order and the receipt of the merchandise 1. Length of the total order cycle a. EDI—electronic data interchange can streamline processing and administration as well as reduce the costs of exchanging information b. Order filling time can increase due to lack of familiarity with foreign market, packing and shipping preparation c. Transportation time is longer due to distances involved 2. Consistency—delivery times may vary more internationally C. Customer Service Levels—ability to fill all orders with a set time 1. High levels are costly 2. Strategically placed depots can help D. Inventory as a Strategic Tool 1. Can help deal with currency valuation changes 2. Can be a hedge against inflation V. International Packaging Issues (Figure 16.5, page 546) A. Added stress on packaging due to motions of vessels, transfer to different modes of transportation B. Responsibility of the shipper C. Climate changes must also be considered D. Weight of packaging affects cost of shipping E. Customer instructions must also be followed F. May have to use double packaging if promotional value of packaging is to be maintained G. Intermodal containers help resolve many packaging issues VI. International Storage Issues A. May be needed for quicker responses to demand, but can increase carrying costs B. Storage Facilities 1. Location decision—how many and where to locate them 2. Availability, quality, costs, and physical dimensions varies by country C. Special Trade Zones 1. Foreign Trade Zones—areas where foreign goods may be held or processed and then reexported without incurring duties 2. Export Processing Zones—tax- and duty-free treatment for production facilities whose output is destined abroad 3.Special Economic Zones—no tariffs, tax incentives, low prices for land and labor in China have worked well VII. Management of International Logistics A. Centralized Logistics Management—headquarters staff retains decision-making power over logistics B. Decentralized Logistics Management—makes local managers responsive, but decreases global coordination C. Outsourcing Logistics Services 1. Collaborating with transportation firms, private warehouse, and other specialists 2. One-stop logistics allows shippers to buy all the transportation modes and functional services from a single carrier VIII. The Supply Chain and the Internet A. Can now conduct more global comparisons among suppliers B. Can learn more about the structure of the supplier network C. Some companies build own international distribution network using the web IX. Logistics and Security A. Due to terrorism and security concerns everything takes longer Focus on Politics Logistics and National Security Summary: Since the increase of terrorism The Bureau of Customs and Border Protection is now a part of the Department of Homeland Security. For international importers and exporters it means more documentation and notification time are added to the process. B. Logistics systems can be the targets of attacks C. New safeguards for international shipments are needed affecting the efficiency X. Logistics and the Environment A. Must consider environmental laws, expectations, and self-imposed goals while planning logistics B. Reverse distribution systems—insures that the firm can retrieve it from the market for subsequent use, recycling, or disposal Focus on eBusiness Reverse Logistics in Action Summary: Reverse logistics concerns the handling and disposition of returned products and use of related materials and information. This cost U.S. companies more than $35 billion annually. Both Estee Lauder and Levi Strauss have developed excellent systems to handle returns. Office Depot Online tires to prevent returns by making sure customers don’t request the wrong item by mistake. Ingam-Micro has a reverse logistics centerthat reduces disposal costs and improves supply-chain efficiencies.
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