CHAPTER 16

GLOBAL LOGISTICS AND MATERIALS MANAGEMENT

Chapter Outline

A. A Definition of International Logistics

B. Supply Chain Management
C. The Impact of International Logistics
1. The New Dimensions of International Logistics
D. International Transportation Issues
1. Transportation Infrastructure
2. Availability of Modes
3. Choice of Transportation Modes
E. The International Shipment
1. Documentation
2. Assistance with International Shipments
F. International Inventory Issues
1. Order Cycle Time
2. Customer Service Levels
3. Inventory as a Strategic Tool
G. International Storage Issues
1. Storage Facilities
2. Outsourcing
3. Foreign Trade Zones
H. International Packaging Issues
I. Management of International Logistics
1. Centralized Logistics Management
2. Decentralized Logistics Management
3. Contract Logistics
J. The Supply Chain and the Internet
K. Logistics and Security
L. Recycling and Reverse Logistics

Chapter Objectives

This chapter explains that international logistics encompasses the entire flow of materials into,
through, and out of international corporations. It highlights the benefits of the systems concept,
total cost concept, and trade-off concept of logistics applied to optimize the performance of the
firm. By taking a supply chain perspective, the marketing manager can develop logistics systems
that are highly customer focused and very cost efficient. Implementation of such a system
requires close collaboration and information exchange between all members of the supply chain.

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International transportation is discussed with emphasis on the transportation infrastructure and
the availability and choice of modes. The issues of transit time, reliability, and cost are
explained. The chapter further discusses the various documents necessary for international
shipment and the important intermediaries involved in the distribution process.

The later part of the chapter focuses on international inventory management which aims at
reducing order cycle times, providing acceptable customer service levels, and using inventory as
a strategic management tool. Packaging and warehousing must be responsive to international
constraints, be they restrictive (e.g., due to antiquated loading facilities) or driven by
modernization (e.g., scanning systems.) The management of international logistics needs to be
responsive to local conditions, yet, in order to facilitate trade-off considerations, must also focus
on the needs of the overall organization. Logistics must also take security concerns into account.
With the growth of recycling laws, the need for reverse logistics systems is increasing.

Suggestions for Teaching

Students often equate logistics with warehousing, a subject they find rather boring. Therefore, it
is useful to make reference to the various "international marketplace" items which highlight how
much money can be saved in the corporation through coordinated logistics activities, and
therefore how the individual concerned with these activities within the corporation can quickly
obtain a very high profile.

Individual students or teams can be asked, to prepare a short paper on how an export shipment
can be made or an import shipment can be brought in. By varying the type of shipment and the
country of destination, overlap can be reduced. Frequently, this is an eye-opening experience to
students, who simply thought that a package is brought to the postal service and shipped off.

Term projects which require students to determine freight rates, assess inventory trade-offs, and
make choices among modes of transportation have also proven to be very insightful.

The important issue to highlight during instruction is the fact that individual logistic components
may have to operate sub-optimally in order for the greatest possible benefit for the corporation to
be achieved. Such sub-optimization in turn requires guidance by headquarters, since individual
units are neither capable nor willing to accept the role of sub-optimizers.

In order to help students understand the need for the implementation of security measures for
international freight and shipping piracy, examples of recent terrorist and pirate attacks in
Somalia, Nigeria and Indonesia presented in Exhibit 16.8 can be discussed in the class to explain
how such attacks disrupt the flow of supply and demand and damage economic systems.
Students can be asked to provide examples of some products which can be recycled, or retrieved
from the market for subsequent use. This will also help students to understand the role of
logistics in reverse distribution systems.

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 Key Terms

Materials management: The timely movement of raw materials, parts, and supplies into and
through a firm.
Physical distribution: The movement of a firm’s finished products to its customers.
Systems concept: One of three major concepts which developed from the growth of logistics as
a field of international management; based on the notion that material-flow activities within and
outside of the firm are so extensive and complex that they can be considered only in the context
of their interaction.
Total cost concept: One of three major concepts which developed from the growth of logistics
as a field of international management, in which cost is used as a basis for measurement; the
purpose of the total cost concept is to minimize the firm’s overall logistics cost by implementing
the systems concept appropriately.
Trade-off concept: One of three major concepts which developed from the growth of logistics as
a field of international management; it recognizes that linkages within logistics systems lead to
interactions; for example, locating a warehouse near the customer may reduce the cost of
transportation, but requires investment in a new warehouse.
Supply chain management: Integrates the supply and demand management within and across
companies; it is an integration of the three major concepts of logistics and encompasses the
planning and management of all activities involved in sourcing and procurement, conversion, and
logistics; also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third party service providers, and customers.
Currency variation: Changes in exchange rates which can affect the purchases and profitability
of the international firm.
Transportation mode: Choices among air-freight and ocean-freight, pipeline, rail, and trucking
for movement of products and services.
Liner service: Ocean-freight service that offers regular scheduled passage on established routes.
Bulk service: Ocean-freight service that mainly provides contractual services for individual
voyages for prolonged periods of time.
Tramp service: Ocean-freight service that is available for irregular routes and is scheduled only
on demand.
Container ships: Cargo vessels which carry standardized containers that greatly facilitate the
loading and unloading of cargo and intermodal transfers.
Density: Weight-to-volume ratio of good; high-density goods are more likely to be shipped by
air-freight, rather than ocean-freight.
Reliability: A relative measure of the delay in movement of cargo caused by the vagaries of
nature; the delay of one day for airfreight tends to be seen as much more severe and “unreliable”
than the same delay for ocean freight.
Cost of the service: The price of the international transportation service which is determined by
market demand and the monopolistic power of the carrier.
Value of the service: Qualitative measures of international transportation service in terms of the
price international marketers are willing to pay for it.
Bill of lading: An important document to the shipper, the buyer and the carrier which
acknowledges receipt of the goods, represents the basic contract between the shipper and the
carrier, and serves as evidence of title to the goods for collection by the purchaser; required for
export.

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Shipper’s export declaration: A document that states proper authorization for export and serves
as a means for governmental data collection efforts.
Shipper’s declaration for dangerous goods: Required for shipments such as corrosives,
flammables, and poisons.
Consular invoice: A document required by certain countries for data collection purposes, to
track exports/imports; also known as pro-forma invoice.
Certificate of origin: A document required by certain countries to ensure correct tariffs are paid.
Import license: A license that may be required by certain countries for transportation of
particular types or amounts of imported goods.
Foreign exchange license: A license that may be required by certain countries for an importer to
secure the needed hard currency to pay for an import shipment.
International freight forwarder: An agent who provides services in moving cargo to an
overseas destination; independent freight forwarders are regulated in the United States and should
be certified by the Federal Maritime Commission.
Customs broker: An agent for an importer with authority to clear inbound goods through
customs and ship them on to their destination.
Inventory carrying costs: The expense of maintaining inventories; comprise up to 25 percent or
more of the value of the inventories.
ABC analysis: Classification of products that are most sensitive to delivery time as “A”
products’, products for which immediate delivery is not urgent are classified as “B” product;
products for which short delivery time is not important, or for which there is little demand are
classified as “C” products.
Third-party (3PL) logistics: Outsourcing logistical management by employing outside
expertise.
Piracy: The seizure of ships or planes by an armed force without the authority of a sovereign
state; a security problem for logistics.
Reverse distribution systems: Logistics that ensure that a firm can retrieve its goods from the
market for subsequent use, recycling, or disposal.

Questions for Discussion

1. What kind of transportation issues should a logistics manager consider when a firm is going
international?

A logistics manager should consider issues of infrastructure, the availability of modes, and
the choice of modes when dealing with transportation. Some countries may have excellent
inbound and outbound transportation systems but weak transportation links within the
country. The international marketer must therefore be aware of existing and planned
infrastructures abroad. Even though goods are shipped abroad by rail or truck, international
transportation frequently requires ocean or airfreight modes, which many corporations only
rarely use domestically. The international marketer must understand the specific properties
of the different modes in order to use them intelligently. Also, the international marketer
must make appropriate selections from the available modes of transportation. The manager
must consider the performance of each mode on four dimensions: transit time, predictability,
cost, and noneconomic factors.

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2. Why should customer service levels differ internationally? Is it, for example, ethical to offer
a lower customer service level in developing countries than in industrialized countries?

The level of customer service denotes the responsiveness that inventory policies permit for
any given situation. It is a management-determined constraint within the logistics system.
Customer service levels may differ internationally because the levels of service expected and
needed in the respective countries may differ. If your competitors are offering a lower
customer service level (which is within the range expected by the customer) than you are,
your costs will be higher and you will be less competitive. Although one may argue that
one's customers will be more satisfied with the higher service level, they may be just as
satisfied with the lower service level (as long as it is within the range they are accustomed
to.) It is irrelevant whether or not varying customer service level is ethical or unethical, as
there is a cost attached to the higher service. If the customers in developing countries value
the increased service level, they will pay the extra cost associated with that level.

3. How can an improved logistics infrastructure contribute to economic development of China?

The lack of logistics infrastructure serves as a major handicap in the participation by

Chinese firms in the global market place. Poor transportation alternatives, insufficient
information exchange between suppliers and their customers all contribute to these high
costs. The country is also combating problems like insufficient transportation systems, poor
lines of supply, and intellectual property theft. As a result, Chinese firms are at a
disadvantage when trying to enter international markets. In addition, these logistics
shortcomings also affect the performance of current or potential foreign direct investors.
Investments into the improvement of the logistics infrastructure can therefore be
instrumental in encouraging the international participation of Chinese firms and in
promoting inward investment flows.

4. What are the major differences between centralized and decentralized logistics management?

A significant characteristic of the centralized approach to international logistics is the

existence of headquarters staff that retains decision-making power over logistic activities
affecting international subsidiaries. This approach is valuable in instances where
corporations have become international by rapid growth and have lost the benefit of a
cohesive strategy. Since headquarters exert control it becomes their primary responsibility
for taking decisions. For this, headquarters staff must possess adequate information and
expertise. Moreover, to avoid internal problems, both headquarters staff and local logistics
management should report to one person. This person, whether the vice president for
international logistics or the president of the firm, becomes the final arbiter to decide the
firm’s priorities.

Decentralized logistics management occurs when a firm serves many international marketers
that are diverse in nature. In such situations, total centralization would leave the firm
unresponsive to local adaptation needs. Hence, if each subsidiary is made a profit center in
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 itself, each one carries the full responsibility for its performance, which can lead to greater
local management satisfaction and to better adaptation to local market conditions. However,
decentralization deprives the logistics function of the benefits of coordination. For example,
where as headquarters, referring to its large volume of total international shipments, it would
be able to extract bottom rates from transportation firms, individual subsidiaries by
themselves may not have similar bargaining power.

5. What options are available for securing logistics systems from terrorism?

Firms worldwide have been exposed to the mutability of terrorism, which often aims to
disrupt the flow of supply and demand in order to damage economic systems. Due to this
reason, governments are devoting major efforts to improve security measure such as the
screening of shipments and shippers. Companies are locating nearer to their suppliers in
order to reduce their vulnerability. Another solution for companies may be increases their
inventory holding (especially when inventory comes from an international producer) in
hopes of protecting against delays caused by sudden heightened security measures against
terrorism. In spite of large corporate investments to build security, new attacks happen
daily.

6. What steps can logisticians take to make their effort more environmentally friendly?

By using logistics, the international marketer can play an increasingly important role in
allowing the firm to operate in an environmentally conscious way. One relatively new
development in aiding this cause is the reverse distribution system. Such systems ensure
not only product delivery to the customer, but also the subsequent retrieval for further use,
recycling, or disposal. Increasingly, the retrieval of not only consumer goods, but long-term
capital goods as well, such as machinery or cars, is being viewed as necessary. In terms of
actual transportation, international logisticians can ensure that only efficient modes are
utilized. Furthermore, the logistician can work on routing issues, especially of hazardous
material transports, to avoid jeopardizing ecologically sensitive areas. The use of less
packaging material and the increased environmental friendliness of those materials that
continue to be used should also be addressed.

Internet Exercises

1. What type of transportation information is available to exporters? Go to

http://www.ups.com and http://www.marad.com and give examples of transportation links
that an exporter would find helpful and explain why.

Freight services are offered by UPS in order for a company to streamline their supply chain.
Links such as “UPS Expedite,” “Air Freight,” “LTL (Less than truck load),” and “Ocean
Freight” are important to an exporter for several reasons. An exporter has options on what
type of transportation to use and when in order for products to be delivered to customers
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 around the world on time. The Marine Administration Web site provides useful links such
as “Marine Companies”, “Shipyards,” “Marine Distances,” “World Ports,” “World Ship
Agents”, “Marine News”, and a variety of news links that are important. Exporters will find
this Web site very useful when planning and executing deliveries globally.

2. Determine the length of transit time a shipment takes between two international
destinations. What else should you know before making a shipping decision? Go to
(http://www.apl.com) and click on “Schedules”.

Note: Students can click on the schedule button and select specific destinations. The site
will then let them know how often transportation between two locations is available and
how long transit takes. However, students should also think about reliability issues,
proximity of ports serviced and, of course, the cost of service.

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part.