MGT 322 SEU Supply Chain Management and Logistics Discussion Question:
What are Third party logistics firms?
Explain the motivational factors for going internationally?
On what ground companies choose developing countries location for offshoring? Use examples. (Mention the country and decisive factors)
Assess the reasons for using third party logistics service in Saudi Arabia? Using examples, Explain
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4.1Drivers and logistics implications of internationalization:
Key issue: What are the trade-offs between responsiveness to local markets and economies
of scale? The business approach towards internationalization is not taking place according
to any common pattern.
In assessing the nature of cross-border logistics, three questions can be asked: Does
internationalization imply a universal global approach to supply chain management? Does
internationalization require a ‘global’ presence in every market? Does internationalization
distinguish between the companies that globally transfer knowledge and those that do not?
The arguments presented in this section suggest that the answer to each of these questions
In response to local crises in quality, and suffering from local competition, the corporate
headquarters were downsized to help empower the local organization. Some- where
between local and global extremes, Procter & Gamble and Unilever will meet each other in
a new competitive area. Looking at the different drivers of internationalization, three basic
global shifts in international investment and trade have been identified, with a possible
fourth coming to the forefront in modern markets. The ‘fourth generation’ recognizes the
logistics trade-off between responsiveness to local mar- kets, environmental and risk
concerns with the benefits of internationalization.
At a company level, generic drivers of internationalization include:
-a search for low factor and supply costs( land , labor, materials).
-the need to follow customers internationally in order to be able to supply locally and fast.
-a search for new geographical market areas.
-a search for new learning opportunities and exposure to knowledge.
Table 4.2 provides examples of strategic contexts, and – in the bottom row – the logistics
implications of those strategies. The multi-domestic and global strategies represent two extremes,
while the integrated network strategy represents a balance be- tween them. The consequences of this
‘balancing act’ for logistics are analyzed.
1- Logistical implications of internationalization
Internationalizing logistics networks holds consequences for inventory, handling and transport
Inventory:Centralizing inventories across multiple countries can hold advantages in terms
of inventory-holding costs and inventory levels that are especially relevant for high-value
Handling:Logistics service practices may differ across countries as well as regulation on
storage and transport.
Transport: Owing to internationalization, logistics pipelines are extended and have to cope
with differences in infrastructure across countries, while needing to realize delivery within
Time-to-market has particular significance for the management of the global logistics
pipeline. Although we shall touch on the following issues here:
● product obsolescence;
● inventory-holding costs.
Product obsolescence: The extended lead time inherent in international logistics pipelines means
that products run the risk of becoming obsolete during their time in transit.
Inventory-holding costs: Lead time spent in the logistics pipeline increases the holding cost of
inventory. In addition to the time spent in physical transit, goods traveling internationally will incur other
3-Global consolidation: Global consolidation occurs as managers seek to make best use of their
assets and to secure lowest-cost resources. This approach leads to assets such as facilities and capital
equipment being used to full capacity, so that economies of scale are maximized. Resources are sourced on a
global scale to minimize cost by maximizing purchasing leverage and to pursue economies of scale. The types
of resource acquired in this way include all inputs to the end-product, such as raw materials and components,
and also labour and knowledge.
Familiar features of global consolidation include: sourcing of
commodity items from low-wage economies; concentration at specific sites; bulk transportation.
Sourcing commodity items from low-wage economies: Two sourcing issues are used by
internationally operating organizations: consolidation of purchasing of all company divisions and companies;
sourcing in low-wage economies. Internationally operating organizations seek to consolidate the purchasing
made by all their separate divisions and operating companies. This allows them to place large orders for the
whole group, which enables them to minimize costs by using their bargaining power and by seeking
economies of scale. Internationally operating companies are on a constant quest to find new, cheaper sources
of labour and materials. These advances in social standards raise the cost of labour and other resources.
The relentless search for the lowest production cost has led to some companies re-sourcing commodity items
to lower-wage countries in Asia, North Africa and South America. In some cases this movement of facilities
around the globe has come full circle, with Asian companies setting up plants in the UK not only to gain
access to the EU market but also to take advantage of lower overall costs.
Concentration at specific sites: Consolidation of purchasing applies not only to commodity goods but
also to high- value or scarce resources. Research and development skills are both high value and scarce.
Therefore there is an incentive to locate at certain sites to tap into specific pools of such skills. Examples of
this are ‘Silicon Valley’ in California and ‘Silicon Fen’ near Cambridge as centers of excellence in IT.
Companies originally located in these areas to benefit from research undertaken in the nearby universities.
Companies become more influential in directing such research and benefiting from it if they have a significant
presence in these locations. This is helped if global research is consolidated onto a single site.
While this may mean missing out on other sources of talent, consolidated R&D gives a company a presence
that helps to attract the bright young minds that will make their mark in these industries in the future, and it
allows synergies to develop between research teams.
Bulk transportation:One of the more obvious advantages of operating a company in a global manner is
the cost advantage of consolidated transportation. Taking Procter & Gamble as an example, 350 ship
containers, 9,000 rail car and 97,000 truck loads are trans- ported every day. The opportunity for cost saving
by coordinating these move- ments and maximizing utilization is significant.
4-Risk in international logistics: In addition to time-to-market and inventory risks, events of recent
years have forced companies to adapt to the new supply chain reality of expecting the unexpected.
Geopolitical threats: The 2003 SARS crisis and the second Gulf War were major events in and of themselves; they were also consecutive and had huge impacts on supply chain continuity and execution feasibility.
Major trade routes had to be altered and global travel was limited. In addition, structurally heightened
government security measures and screening are indicators of risks involved in international logistics.
Logistics making the global economy a reality can never be a given that deserves no second thought.
Transportation breakdowns:A several-week strike in the US west coast ports in 2002 lasted long
enough to almost cripple the US economy. With hundreds of cargo ships floating outside the ports, shipments
were not arriving at US destinations. For example, return shipments were delayed because no ships were
leaving the ports either. And in fact a resulting global short- age of containers caused a slowdown of
shipments in many other port regions. So shipments on other routes, in different harbors and even shipments
using different modalities were affected.
4.2 The tendency towards internationalizationKey issue: How can
we picture the trade-offs between costs, inventories and lead times in international logistics?In order to remain
competitive in the international business environment, companies seek to lower their costs while enhancing
the service they provide to customers. Two commonly used approaches to improve the efficiency and
effective-ness of supply chains are focused factories and centralized inventories.
Focused factories from geographical to product segmentation:Many international companies,
particularly in Europe, would have originally organized their production nationally. In this situation,
factories in each country would have produced the full product range for supply to that country. Over
time, factories in each country might have been consolidated at a single site, which was able to make
all the products for the whole country. This situation, in which there is a focus on a limited segment
of the geographical market. The focused factory strategy involves a company’s consolidating
production of products in specific factories. Each ‘focused factory’ supplies its products
internationally to a wide market and focuses on a limited segment of the product assortment.
Centralized inventories: In the same way that the consolidation of production can deliver
cost benefits, so can the consolidation of inventory. Through centralizing inventory, major savings
can be achieved by lowering overall speculative inventories, very often coupled with the ability to
balance peaks in demand across regional markets from one central inventory. In product
environments where inventory costs are more important than the distribution costs, centralized
inventories are a relevant concern.
Microchips are an extreme example: these products are of such high cost per volume unit that
distributing from the moon could still be profitable! Distribution costs have a marginal impact on
logistics costs per product, assuming of course that transport costs are mainly a function of volume
and weight. Centralizing inventory may lead to lower factory-to-warehouse distribution costs
because shipments can be. In general, transport costs have continued to decline over time as a
relative cost item because of innovations in transport technology, the commoditization of transport,
and the oversupply of transport capacity for basic transport. Centralized inventory management and
focused factories enable different de- livery strategies to be combined.
4.3 The challenges of international logistics and location
Key issues: What are the risks in international logistics in terms of time and inventories, and how can
they be addressed?
International logistics is complex, and different from localized logistics pipelines. The main
differences that need to be taken into consideration are:
● extended lead time of supply;
● extended and unreliable transit times;
●multiple consolidation and break
● multiple freight modes and cost
● price and currency fluctuations.
Information technologies can help to circumvent these challenges in general, and the proper location
of international operations in particular can help to re- solve some of these challenges.
1. Extended lead time of supply:In an internationally organized business most products
produced in a particular factory will be sold in a number of different countries. In order to manage
the interface between the production and sales teams in each territory, long lead times may be
quoted. This buffers the factory, allowing it to respond to the local variations required in the different
2. Extended and unreliable transit times:Owing to the length and increased uncertainty of
international logistics pipelines, both planned and unplanned inventories may be higher than optimal.
A comparison of the length of domestic and international product pipelines and their associated
inventories. Variation in the time taken for international transport will inevitably lead to increased
holding of inventory with the aim of providing safety cover.
3. Multiple consolidation and break points: Consolidation is one of the key ways in which
costs in pipelines can be lowered.Products manufactured in India should be consolidated at the site
on the east coast for shipping to Singapore. Here they are combined with the output from the Thai
and Singapore factories and shipped to Hong Kong. Products are consolidated at a Chinese port,
possibly Shanghai, and transported by rail or sea to Hong Kong. All the other manufacturing sites
deliver direct to Hong Kong, where products from all the various facilities are consolidated and
shipped to Los Angeles. It is worth noting that, after arrival in LA, this process runs in reverse. The
consignment will be broken down at various ‘break points’ throughout North America and the goods
distributed to market via hubs.
4. Multiple freight modes and cost options:Each leg of a journey between manufacture and
the market will have a number of freight mode options. These can be broken down in simplistic
terms into air, sea, rail and road. Within each of these categories lies a further range of alternative
options. Each of them can be assessed for their advantages and disadvantages in terms of cost,
availability and speed. When the journey along the supply chain involves multiple modes, the
interface between them provides further complication
5. Price and currency fluctuations: When operating around the globe, fluctuations in
currencies along the supply chain can have an impact on how the supply chain is configured. While it
can take years to develop a global supply chain structure and operational footprint, currencies
fluctuate daily – and sometimes wildly. Such fluctuations do not favor operations in countries with
an unstable currency, and explain why some countries and industries do most of their business in a
single currency, even if not their own. For example, price fluctuations of fuel have impacted the
feasibility of international shipping against the benefits of lower, centralized inventories.
Location analysis:A structural component of international logistics pipeline design is the
location design, deciding where operations are going to be performed. there is a sequence to the
decision-making process involved that incorporates the business (left-hand side) and geographical
decision making (right-hand side). Business decision making evolves from a strategic commitment
through a decision support analysis project to implementation of the resulting plan at a selected
In parallel, the location analysis starts at the level of relevant continent, through consideration of
relevant countries and regions, to the selection of a location.
The typical four-phase decision-making process can be structured using the following steps:
1-Deciding upon the appropriate level of centralization–decentralization using, for example,
2- Selecting relevant location criteria.
3-Selecting criteria weightings.
4- An economic trade-off analysis of structures and relevant locations.
4.4 Organizing for international logistics
Key issue: How can supply chains be better organized to meet the challenges of international
There are at least three elements in organizing for international logistics. These are:
● layering and tiering;
● the evolving role of individual plants;
● reconfiguration processes.
These will be outlined in the following subsections.
1. Layering and tiering:A commonly used maxim is global coordination and local operation,
which relates to laying out the flow of information and coordination differently from the map of the
physical operations. For example, Hewlett-Packard (HP) operates a globally consistent and
coordinated structure of product finalization and distribution in contrast to its continental
operations. This final configuration process (which in the case of HP may include fit- ting power
leads and local instructions) is referred to as postponement. HP brings only limited management
expertise to these regional operations to assure global coordination. Thus, although HP operates in a
globalized way, its products are tuned to local markets by means of local logistics operations.In this
industry, major original equipment manufacturers (OEMs) structure their plant networks globally,
while making suppliers build their plants in the immediate vicinity of the OEM plant.The distance or
broadcasting horizon between the two plants is defined by the time between the electronic ordering
of a specifically finalized single module on the online system and the expected time of delivery in
sequence along the assembly line.
2. The evolving role of individual plants: Ferdows (1989) projects the theories by Bartlett
and Ghoshal (1989) onto the role of individual plants/factories in achieving the targeted
international capabilities of global efficiency, local responsiveness and worldwide learning, or a
combination of the three. These developments could be driven by poor location conditions, an
inability to reach supply chain objectives, or the ability to reach the supply chain objectives more
easily at other plants in the company’s network. Most relevant, the evolutionary roles and functions
of individual plants within the evolving supply chain are specific issues of concern for the realization
of global objectives.
3. Reconfiguration processes: Related to this last point, the achievement of the required
changes in international logistics pipelines is a central issue. it was found that, across companies,
large differences can be found in reconfiguration paths. This was found even in cases where the same
sup- ply chain structure (a traditional factory warehouse, was targeted. Differences included:
● Supply chain scope/activities involved. Was only final manufacturing relocated, or did sourcing
undergo the same treatment?
● Focus. Were activities moved into the market, e.g. localized or centralized within the market? Did
the move have a single or multiple focus?
● Tendency. Were activities moved out of the (European) market or vice versa, with single or
● Timetable. Was it a single-step process or did it involve various steps spanning out the process
over a longer period of time?
● Pace. Was it an overnight change or the result of a gradually changing process?
● Authority. Was it directed from a global base (top down) or built up region by region (bottom
up)?The differences can be explained through differences in the supply chain characteristics of
companies, among which are:
● Starting point: Is the base structure localized or globalized?
● Tradition: Does the company have a long preceding history with the baseline in the market, or can
it be built up from scratch, in supply chain terms (brown- field or greenfield)?
Figures 4.11 and 4.12 represent the reconfiguration process from local distribution through logistics
centralization to postponed manufacturing (final manufacturing in the warehouse). The differences in the
implementation path are based upon the different starting points. The path with a localized starting point goes
through centralization within Europe starting from autonomous, duplicated local structures. The path with a
global starting point builds a small European presence and then migrates through the increase of European
presence centrally (representing a further location into Europe, rather than a further centralization from within
4.5 Reverse logistics
Key issue: factoring in the return flow of goods when designing international networks
Reverse logistics deals with the flow of goods that go back up the supply chain for a number of reasons,
including: product returns, repairs, maintenance and end- of-life returns for recycling or dismantling.
Suggested ways forward include considering the full impact of reverse logistics and approaching it as a
● consider reverse logistics for its full cost and negative potential market impact;
● seek gree…
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