Global Logistics

Reference:

Logistics and Supply Chain Management by Martin Christopher (FinancialTimes/PrenticeHall, 1998)

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Outline Globalisation and its implications Challenges for global logistics How the leading-edge companies manage

logistics The new organisational paradigm Managing the supply chain of the future

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Globalisation TrendsWorldwide cross-border trade is estimated to increase from US$5.9 trillion

in 1999 to US$8.4 trillion in 2005.51 of the 100 largest economies in the world are corporations, not

countries. Wal-mart is bigger than Indonesia, NTT is bigger than Ireland.

Global brands now dominate most markets: Coca- cola, IBM, Toyota, etc.

These companies seek to extend its markets worldwide whilst seeking cost-reductions through scale

economies by sourcing globally Drivers of Globalisation

Global trade liberalisation; Trade barriers diminishing Multi-national companies evolving into real global

organisations Production out-sourcing to lower cost regions Improved logistics infrastructure and operations

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Why Companies Go Global?Why Companies Go Global?

Global Market Forces•Local market saturation•Foreign demand growth•Competition at home

Technological Forces•Access to specific technologies•Speed to market (integrate R&D and manufacturing)

Global Cost Forces•Labor cost•Raw materials cost

Political and Economical Forces•Regional trade agreements•Tariff & tax incentives overseas•Local content requirements

Globalization

© © Zhi-long ChenZhi-long Chen

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But…Global Operations are Not SimpleBut…Global Operations are Not Simple

• Issues & risks in global supply chains:

-- Infrastructure in developing countries-- Cultural, language, labor skill differences-- Government stability, legal systems, regulations-- Currency exchange rate fluctuation-- Duties & tariffs-- Different corporate tax rates-- Import/export quotas-- Local content rules-- Product design issues (local customer needs) -- Longer transportation lead times-- Quality/reliability of local suppliers

© © Zhi-long ChenZhi-long Chen

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Nike: the logistics challenge of global business Nike: re-created the sport shoe as “high-tech, high-performance”

products that is an icon of youth subculture, with a price to match! Core business:

state-of-the-art R&D capabilities ruthless low-cost manufacturing

“Air Max Penny” basketball shoe: designed in Oregon and Tennessee, manufactured in South Korea and Indonesia from 52 components sourced from Japan, South Korea, Taiwan, Indonesia and USA.

Nike markets over 300 new shoe design each year, leading to costly overstocks if sales forecasts not achieved.

Distribution in USA is outsourced to third-party logistics providers with IT linkage to Nike’s global sales and customer support systems, enabling sales/inventory information to be accesible to all decision makers concerned.

When the supply chain is global and the products are fashion-oriented, the management of logistics becomes a key determinant of business success or failure.

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Domestic vs. Global Business What is a global business?

More than just a company that exports source materials and components from more

than one country geographically dispersed

manufacturing/assembly locations market products worldwide

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Challenges facing global businesses local variations in markets (consumer

preferences) e.g. left-hand drive and right-hand drive cars e.g. voltage and socket variations by country production process complications

complex logistics of global supply chains co-ordination of production and transportation cross-docking, merge-in-transit economies of scale --> global cost competition

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Key Issues in Global Logistics Strategy

Appropriate degree of centralisation? Management Manufacturing Distribution

How can the needs of local markets be met while gaining economies of scale through standardisation?

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Focussed Factories Limit the range and mix of products manufactured

at a single location to achieve economies of scale Instead of “local-for-local” production, each

location produces a few items for the world market e.g. Heinz makes all the ketchup for Europe in only

3 plants and switches production depending on local costs, demand, and currency fluctuations

Is using the global lowest-cost producer always the best strategy?

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Focussed Factories: Concerns Effect on transportation costs?

Especially on low-value, low-margin products Effect on delivery lead times?

More local safety-stock needed Effect on overall savings

For high-tech products, usually < 10% is direct labour Local variations in product requirements

e.g. packaging styles, language labels Customers order a variety of products from the

same producer on a single order; but product now produced in focussed factories in diverse locations

Product flexibility? Variety? Responsiveness?

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Centralisation of Inventories Pooling of inventories reduces cycle stock

(EOQ square-root rule!) Pooling of inventories also reduces safety

stock Philips reduced consumer electronics

products warehouses in Europe from 22 to 4 Drawbacks:

higher transport costs longer delivery lead times

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Virtual Inventory Consolidation Locating inventory near the customer, but

managing and controlling it centrally ‘Virtual’ inventory reduces double-handling and

physical transportation costs Requires an information system that can provide

complete visibility of demand from one end of the supply chain to the other in as close to real-time as possible

To be response, transport costs may also increase (e.g use of couriers for speedy delivery)

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Postponement and Localisation Significant local difference in customer

and consumer requirements e.g. refrigerators, cars

Postponement: design products to use common platforms,

components and modules delay final assembly/customisation as much

as possible until final market destination and customer requirements known

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Advantages and concerns of Postponement Generic inventory -> fewer stock-keeping

variants flexibility and variety in products forecasting is easier at the aggregate generic level

than at individual SKU level

Mass-customisationMass-customisation “design for localisation”

maximise variety using fewest basic components final customisation out-sourced to local distribution

centres

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E-commerce:Business and Logistics Concerns

Domestic --> International --> Multi-national Global

(Table abridged from “e-Global Logistics” by Robin Roberts, Stephens Inc., 2000.)

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IssuesNationalBrick-&-Mortar

companies doing business internationally

Nationale-commerce

companies doing business

internationally

Multi-national

companies

Global companies

Physical location

No foreign office

No foreign office

Independent operations in multiple countries

Close-knit operations in multiple countries regardless of national borders

Foreign trading partners

Finite in number

Suppliers: finiteCustomers: infinite

Finite in number

Suppliers: finiteCustomers: infinite

Aware and business priority for global logistics

Usually Low(not strategic)

Usually Low(not strategic)

Usually High(competitive advantage)

Very High(core strategic)

Intermediaries in supply chain

Few (freight forwarders)

Few(logistics integrators)

More(several FFs, brokers, carriers)

Many(many FFs, brokers, carriers)

Global SCM challenge

Low Low Medium High

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IssuesNationalBrick-&-Mortar

Nationale-commercecompanies

Multi-national

companies

Global companies

SCM System sophistication

Some system installed

Not likely to have SCM system

SCM system for planning and execution

SCM system for planning and execution

Demand/supply predictability

Predictable.(Few contractual trade partners)

Supply predictable. Demand variable.

Relatively predictable.(Many contractual trading partners).

Relatively predictable.(Many contractual trading partners; projected demand).

Order Variability

Low Low Medium High

International fulfillment patterns

Batch processing(Bulk)

Real-time.Small lot pick-&-ship.

Batch processing(Bulk)

Batch processing(Bulk)

Load Size Full container or LTL

Small package Full container or LTL

Full container or LTL

Shipping Method

Mostly ocean Mostly air Mostly ocean Mostly ocean

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IssuesNationalBrick-&-Mortar

Nationale-commercecompanies

Multi-national

companies

Global companies

Import Quotarequirements

Yes Not likely Yes Yes

Local Taxation considerations

Relatively complex due to large shipment size

Relative simple (for small packages)

Relatively complex due to large shipment size

Very complex, use of free trade zones and duty regulations

Payment mechanisms

Credit cards, letter of credit (LC)

Mostly credit cards Mostly LCs, documents against acceptance,wire transfers

Mostly wire transfers, ACH (automatic clearing house) transactions

Trade documents requirement

Medium complex

Relatively simple Relatively complex, due to volume and payment methods

Very complex, due to large shipments, countries involved and taxation issues

Major Challenge in International Logistics

Lack of knowledge of international logistics; Customers do not know landed costs for sourcing comparisions

Lack resource and expertise to handle international logistics;Customers do not know landed costs for sourcing comparisions

Lack of easy interface with trading partners’ systems.Manual process for trade compliance and cost estimates slow.

Lack of seamless integration of business processes and info systems with trading partners. Manual process for trade compliance and cost estimates slow.

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Key Challenges of Global Logistics Extended lead times of supply Extended and unreliable transit times Multiple consolidation and break-bulk options Multiple freight mode and cost options International trade and finance issues

Duty, tariffs, taxes, customs Trade compliance: import ceilings and quotas, joint-venture

requirements Cash flow, currency fluctuations, financial exposure concerns

Total landed costs can be much higher than traditional domestic logistics (transportation + warehousing) costs

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Extended supply lead times and transit times Long manufacturing lead-times are sometimes artificial

Mind-set change from make-to-stock to make-to-order Intermediate inventory needed to buffer against unreliable

transit times sea freight from Rotterdam to Japan takes 5 weeks (a lot of inventory

tied up at sea!) air-freight options may be attractive if total costs considered

International shipping, consolidation and customs delays are significant

As variability increases, local managers tend to compensate by over-ordering, double-buffering and requesting more allocation Instead, should explore transportation options and examine supply chain to

reduce variability, increase shipment visibility and tracking

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Complex Consolidation/BreakBulkConsolidation/BreakBulk Supply Network

Multiple Shipment options: direct ship from each source to final market in

full containers consolidate in the supply region for final market

in full containers Consolidate from each source for each

consumer region with break-bulk/intermediate inventory in region

Consolidate in the supply region and also break-bulk in the consumer region

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Multiple freight mode and costs options Variety of shipping services available Air vs sea freight:

air freight transport cost expensive, but may be worthwhile when inventory holding costs, potential lost revenue and market flexibility taken into account

Integrators provide “door-to-door” service DHL, FedEx, UPS, TNT shorter and more reliable transit times swifter and less complicated procedures, e.g. customs clearance worldwide tracking and tracing capability

Need for end-to-end pipeline management co-ordinate export dept, shipping dept, freight forwarder

Compartmentalised decision-making (e.g. shipping dept, export Compartmentalised decision-making (e.g. shipping dept, export dept) may focus on ‘wrong’ or ‘partial’ objectives and lead dept) may focus on ‘wrong’ or ‘partial’ objectives and lead to sub-optimal decisions.to sub-optimal decisions.

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Organising for global logistics Centralisation vs. Decentralisation? Efficiency vs.

responsiveness? Global vs local decision making

Local decision making preferable in sales, promotion and marketing

Key principles:Key principles: Strategic structure and control of logistics flows centralised

for worldwide cost optimisation Customer service localised for competitive advantage Global co-ordination is key, especially if many functions

out-sourced Global logistics information system is the pre-requisite for

achieving local service needs and global cost optimisation

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Logistics Structure and ControlIf the potential trade-offs in rationalising sourcing, production If the potential trade-offs in rationalising sourcing, production

and distribution across national boundaries are to be and distribution across national boundaries are to be achieved, then it is essential that a central decision-making achieved, then it is essential that a central decision-making structure for logistics is established. - Martin Christopherstructure for logistics is established. - Martin Christopher

Location decisions fundamentally affects the supply chain operations long-range impact; investments in fixed assets and

equipment exchange rate and different regional costs must consider total cost (Activity-Based Costing)

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Customer service management Local markets have their own specific

characteristics and needs opportunities for tailoring service against

local customer requirements Monitoring of service needs and

performance management of entire order-fulfillment

process

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Out-sourcing and partnerships Trend towards out-sourcing, not only for

materials and components, but also for services

Focus on core competencies Logistics: provision of warehousing, inventory

control (VMI) and transportation is increasingly out-sourced

Co-ordination and liaison with strategic partners is crucial

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Logistics Information Systems Only with updated and accessible

information can the complex flows of goods be co-ordinated to achieve cost-effective service

“Substitute Information for inventory” “ Look down the pipeline into end-user

markets” to better see true demand

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Global co-ordination vs. Local Management

Global functions:Global functions: Network structure for

production and transportation optimisation

Information systems development and control

Inventory positioning Sourcing decisions International transport

mode and sourcing decisions

Trade-off analysis and supply chain cost control

Local functions:Local functions:

Customer service management

Gathering market intelligence Warehouse management and

local delivery Customer profitability

analyses Liaison with local sales and

marketing management Human resource management

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Characteristics of Companies at the Leading Edge of LogisticsSurvey by Council of Logistics Management in North America: Exhibit an over-riding commitment to customers Emphasise planning Encompass a significant span of functional control Commit to external alliances with service providers Have a highly-formalised logistical process Place a premium on operational flexibility Employ comprehensive performance measurement Invest in state-of-the-art information technology

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Concerning organisational structure, leading edge firms:

Have had formal logistics organisations longer Tend to have logistics headed by an officer-level executive Adopt more fluid approach to logistics organisation; encourage frequent

re-organisation to take advantage of opportunities Favour centralised control Becoming more centralised as they adapt organisational structure to

corporate mission More apt to execute boundary-spanning or externally-oriented logistics

functions Tend to manage more beyond or extended functional responsibilities not

traditionally considered part of logistics

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Concerning strategic posture, leading edge firms:

Have a greater tendency to manage logistics as a value-added process Reflect a stronger commitment to achieving and maintaining customer

satisfaction Place a premium on flexibility, particularly in accommodating special or

non-routine requests Are better positioned to handle unexpected events Are more willing to use outside service providers Place a premium on how well the service company performs in managing

itself and its service to clients Are more apt to view service-provider relationships as strategic alliances Anticipate greater use of outside services in the future

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Concerning managerial behaviour, leading edge firms:

Expend more effort on formal logistics planning Are more apt to publicise their performance commitments and standards

by issuing specific mission statements Are more apt to have chief logistics officers involved in business unit

strategic planning Respond effectively to non-planned events Regularly use a wider range of performance measures, including asset

management, costs, customer service, productivity and quality Are more significant users of information processing technology and

enjoy a higher quality of information systems (IS) support Typically have more state-of-the-art computer applications and are

planning more updates and expansions Are more involved in new technology such as electronic data interchange

(EDI), artificial intelligence (AI), etc.

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The new organisational paradigm Traditionally, organisations are hierarchical,

vertical and functionally defined Current and future business environment:

focus on “speed”, just-in-time, short product life-cycles

volatile demand flexibility in customer requirements

Challenge: how to be a responsive organisation?

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Distinguishing features of the responsive organisationFocus will shift: From functions to processes From profit to performance From products to customers From inventory to information From transactions to relationships

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From functions to processes Conventional organisations

organised around functional silos inwardly focussed, concentrates on use of resources

Organisations actually compete on “capabilities” product development, order fulfilment, etc. through these processes are the customers satisfied capabilities reflect processes which require co-

ordination and co-operation horizontally across t he organisation

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From profit to performance Profit is the end, but the means important too “What gets measured gets managed” Performance drives profitability “New” performance indicators

customer satisfaction: customer retention, brand preference, dealer satisfaction, service performance

flexibility: commonality of components, reduction of process complexity, set-up times

people commitment: employer turnover, suggestions submitted and implemented, internal service climate and culture, training and development

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From products to customers Move away from focus on products e.g. brand

managers, product group managers Re-focus on customer satisfaction and demand

management Emphasis on customer value Need to be supported by accounting systems that

better identify the cost of servicing the customers Logistics and marketing need to be managed

conjointly

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From inventory to information “uncertainty is the mother of inventory” “forecasts are never right” Feedback information on actual usage!

Substitute information for inventory

Benetton: capture information at point-of-sale early in the season flexibility in production process reduce reliance on (highly inaccurate) fashion forecasts

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From transactions to relationships Tradition: focus on market share and winning customers Keeping customers important

the longer customers stay, the more profitable customers who drift from one supplier to another more difficult

to satisfy than loyal and committed customers

Benefits of “single sourcing”: improved quality innovation sharing reduced costs integrated scheduling of production and deliveries barriers to entry of competitors

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Managing the supply chain of the futureSince it is through people that change is

created, attention must be paid to how the organisation develops a set of skills and competencies that are appropriate to the constantly changing external environment.

- Martin Christopher

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Managing the supply chain of the futureParadigm shift Leading to Skills required

From function to processes

Integral management of materials and goods flow

Cross-functional management and planning skills

From products to customers

Focus on markets and the creation of customer value

Ability to define, measure and manage service requirements by market segments

From revenue to performance

Focus on the key performance drivers of profit

Understanding of the “cost-to-serve” and time-based performance indicators

From inventory to information

Demand-based replenishment and quick response systems

Information systems and information technologies

From transactions to relationships

Supply chain partnerships Relationship management and win-win orientation

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Role of information in the virtual supply chain

Internet and other IT technologies can now link the customer directly to the supplier, and allow the supplier to react, sometimes in real-time.

Geographically dispersed “network” of specialists can be joined together to create innovative and cost-effective solutions for complex designs e.g. Boeing, Airbus, Infosys

Tesco’s sets up information exchange extranets to implement efficient

consumer response (ECR) to reduce waste and improve product availability

on average, 5 to 10 % of products on promotion suppliers can access Tesco sales data and track their products enables the firm to estimate stock levels to fulfil promotions specifications for new products can be available on-line

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The extended enterprise and

the virtual supply chain Boundary-less

horizontal process management across vendors, distributors, customers value-added exchange of information between

partners

Supply chain becomes a synergistic confederation of organisations with agreed common goals, each bringing specific strengths to the overall value creation

Example: Smart Car

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Making Change happen Clear vision of the role of logistics in the

organisation significant organisational change new ways of working with upstream and

downstream partners in the supply chain underpinning information systems

established Effective leadership crucial

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Summary Continuing trend towards globalisation global brands, global sourcing, focussed factories serving the world

market Increased complexities: longer supply chains, more out-sourcing Need to balance the varying needs of local markets against the

economic advantages of standardised procedures/products

Challenge: a flexible and agile supply chain yet achieves economies of scale/scope

Requires organisational change within firm and with supply change partners

Integrated logistics planning; information technologies