Various Aspects Of Integrated Logistics Economics Essay

A New Zealand entrepreneur is planning to launch a business in Western Europe; Japan; China and CIS/Eastern Europe and they have appointed you as a consultant to advice on opportunities and challenges facing firms seeking to perform logistics activities in the above mentioned countries. (Your answer should not exceed 1500 words)

Global Logistics Opportunities and Challenges

Western Europe consists of United Kingdom, Netherlands, Belgium, Luxembourg, France, Germany, Italy, Ireland, Denmark, Norway, Sweden, Finland, Austria, Switzerland, Portugal, Spain, Greece, Malta and microstates of Vatican City, San Marino, Monaco, Andorra and Liechtenstein. Western Europe is considered as major contributor of the European economy. Its determining characteristics are common currency, tax equalization, political homogenization and standards homogenization. Logistically speaking Western European markets offer a great opportunity for exploiting economies of the scale and size in moving goods throughout the Europe opting from a number of transportation modes. European transport networks have grown because of deregulation of transportation; shipments, optimal route and plan scheduling, and the development of national services. The number of long-distance transports has grown significantly with the largest share of freight transports as road transports. The preferred modes of transportation in the area are roads and rails, closely followed by sea freight. In addition, the ‘Chunnel’ links the UK with the rest of Europe reducing the transportation cost to a great extent.

Figure 1: Logistics Hubs in Western Europe

Source: (“DHL Discover Logistics,” n.d.-a)

The logistics systems in Western Europe are characterized more by political change associated with EU enlargement than by geographic features. In Western Europe transport, storage, packaging and administrative jobs are becoming noticeably more efficient due to uniform regulations. The transport networks are very well developed but average shipping distances have grown principally in the wake of the European Union’s enlargement. Outsourcing activities are increasingly affecting logistics in Western Europe because companies no longer consider logistics to be a core business. Instead, larger distribution networks are developing at a rapid pace. Global firms prefer vertical integration and go for direct marketing and distribution in order to reduce inventory and total logistics costs. The changes in the logistics sector have generated challenges of increased efficiency in shipping, packaging and labelling. Here, the reduction of customs processing plays a critical role. In addition, technological improvements throughout Europe are almost uniform and not just clustered in individual countries. As a result, order processing, inventory management, warehousing and IT technology are being further centralized. In nutshell, the competitive situation in Western Europe is intense as compared to the rest of Europe.

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Japan

Japan has evolved into an economic powerhouse of Asia and created a highly developed logistics system in spite of challenging geographic conditions. On one hand, such a system is necessary to offset the Japanese islands lack of raw materials. On the other hand, it is the foundation for expanding the positive growth of the export nation. The country’s main manufacturing and therefore, logistics hub lies in a triangle around the cities of Tokyo, Nagoya and Osaka on the island of Honshu. Air transport, in particular, plays an important role here. The most important means of freight transport in Japan are road transports and coastal shipping. Almost ninety percent of the transport is carried by trucks. The role of rail transports is almost non-existent. But this could change in the years ahead. A portion of sea freight has been shifted to air transport in recent years. As a result of this shift, international air transports on trans-Pacific routes have climbed tremendously.

Compared with other industrial countries, Japan’s distribution system is very complex and inefficient leading to high distribution costs. Most aspects of goods distribution in

Figure 2: Logistics Hubs in Japan

Source: (“DHL Discover Logistics,” n.d.-b)

Japan is tightly regulated by the government. Joint distribution is typical; competitors who make deliveries to the same businesses tend to use joint delivery capacities and trucks. The logistics market in Japan is opening up to international service providers which are already successfully competing against Japanese companies in areas such as storage, distribution and complex contract logistics. The major logistics challenge is traffic congestion in metropolitan areas around the industrial hub. Just-in-time systems require small and frequent shipments to meet customer requirements. The distribution system in Japanese market is characterised by non-store channels, carrying least inventory. It is helpful in introducing new products through mail order, catalogue sales, and tele-shopping. Shared distribution system is common among competitors. Uniform palletization is used to avoid complicacy in operations.

China

China’s logistics market is opening up gradually to the outside world. Logistics enterprises are reorganizing and integrating in the competitive environment. It is more and more obvious that state owned, private owned and foreign funded enterprises are surviving and thriving in the competitive markets. With the increasing demand of logistics, the logistics service for enterprises is changing from low value fundamental services to the high value added services. Logistics infrastructure, integrated logistics, traffic and transportation, and delivery services provide huge investment opportunities. However, the related risks must be put into account, and firms should be cautious when choosing investment projects.

Figure 3: Logistics Hubs in China

Source: (“DHL Discover Logistics,” n.d.-c)

In some parts of China, due to advancement in technology, the road network now approaches Western standards. Modern freeways have been built in the Pearl River delta as well as in Shanghai and Beijing. Parts of this network extend far into the country’s interior but the standards and quality of the road drops as we move away from the cities particularly in the areas located away from the metropolitan areas. As a result of the underdeveloped infrastructure outside the metropolitan areas, logistics costs are high in an international context. In comparison to other means of transport, the rail network is almost inappropriate for logistics operations due to poorly built rail lines. For example, a container takes five days to journey by train from Hong Kong to Shanghai (“DHL Discover Logistics,” n.d.-c). A transport by ship takes about the same amount of time, but is much cheaper. Rail transports play a major role only in the shipment of bulk cargo like coal or iron ore. As a result, rail transports are not particularly attractive to international companies for general logistics operations.

The key challenges for the Chinese logistics industry are:

Poor infrastructure: insufficient integration of transport networks, information technology (IT), warehousing and distribution facilities.

Regulation: exist at different tiers, imposed by national, regional and local authorities and often differ from city to city, hindering the creation of national networks.

Bureaucracy and Culture: companies need to build links with political agents at various levels. Moreover, it is difficult to repatriate profits back to home country.

Poor training: in logistics sector and the manufacturing and retailing sectors, both at a practical level, i.e., IT, transportation and warehouse as well as at a higher strategic level.

Information and communications technology: lack of IT standards and poor systems integration and equipment. At a very basic level, there is no consistent supply of energy.

Undeveloped domestic industry: logistics sector is fragmented and dominated by commoditized and low quality transport and warehousing, unable to meet the growing supply chain demands for industrial and commercial enterprises.

High transport costs: almost 50% more than Japan, Europe and North America, mainly due to high tolls on roads. Logistics costs (including warehousing, distribution, inventory holding, order processing, etc.) are estimated to be two to three times the normal.

Poor warehousing and storage: high losses, damage and deterioration of stock, especially in the perishables sector.

Regional imbalance: of goods flows from the developed east of the country to the more undeveloped west leading to higher costs for haulage companies which are then passed on to their clients.

Domestic trade barriers: besides lowered trade barriers such as tariffs and quotas for international shipments, there are still problems such as unofficial border tolls from an inland manufacturing location to a port city or vice versa.

Commonwealth of Independent States (CIS) and Eastern Europe

Four out of fifteen former Soviet Republics belong to CIS are in Europe: Russia, Ukraine, Belarus, and Moldova. Eastern Europe is made up of Poland, Czechoslovakia, Hungary, Romania, Bulgaria, Serbia, Croatia, Slovenia, Bosnia, Macedonia, Albania, and the Baltic states of Lithuania, Latvia, and Estonia. The countries of Eastern Europe occupy a strategically central position on the continent and are located at Western Europe’s interface with Russia. As a result of the European Union’s enlargement to the east, they are increasingly serving as a bridge. As a result, many manufacturing companies have moved their production facilities to Eastern Europe for cost reasons. Logistics service providers entered either following these companies or to exploit the new markets by carrying out mergers or acquisitions. The opportunities for the companies interested in entering these markets vary significantly from country to country. Although, these countries have relatively well developed transport networks but they do not meet western European standards. Despite the rapid growth of road transports, railroads remain the dominant means of transport.

Figure 4: Logistics Hubs in Eastern Europe

Source: (“DHL Discover Logistics,” n.d.-d)

The Eastern European logistics market is characterized by wide regional differences. While the Czech Republic, Slovakia, Slovenia, Hungary and Poland have made major strides, Romania, Bulgaria and Croatia are trailing far behind. The infrastructure is in even worse shape farther to the east. The road-based freight transports have limited ability to meet the demands of European industry in a cost effective manner. The causes of these limitations include traffic jams, the limited potential for expanding network capacity, rising energy costs and growing intermodal competition from railways. Eastern European harbours, particularly the major sea ports in Poland, perform a significant amount of trans-shipping and are being increasingly expanded. The European Union’s enlargement and the increasing transport volumes have resulted in intensified storage and distribution activities in the countries of Central and Eastern Europe. One of the major challenges is to overcome the barriers that exist between Eastern and Western Europe, including the transport infrastructure.

Further, they would like you to advice them on several strategies available to them to enter the above mentioned markets. Discuss all available strategies and give your specific recommendations. (Your answer should not exceed 1500 words)

Foreign Market Entry Strategies

Foreign market entry strategies are mainly categorized into:

Indirect exporting

Direct exporting

Manufacturing strategies

Cooperative strategies

Risk and Control in Market Entry

Control

Risk

Risk

Indirect Exporting

Piggybacking

Trading Companies

Export Management Companies

Domestic Purchasing

Cooperative Strategies

Joint Ventures

Strategic Alliances

Direct Exporting

Distributors

Agents

Direct Marketing

Franchising

Management Contracts

Manufacturing

Own Subsidiary

Acquisition

AssemblyFigure 1: Foreign Market Entry Strategies

Source: (Doole & Lowe, 2001, p.249)

Indirect Exporting

Piggybacking

An established international distribution network of one manufacturer may be used to carry the products of a second company without such a network. The second manufacturer is said to be piggybacking on the first in these cases. The first company has an established reputation and contacts in an international environment. It handles the logistics and administration costs of exporting for the second manufacturer. Piggybacking can offer many advantages to firms; such as cheaper and quick access to new markets, an established knowledge base of the foreign markets and economies of scale with regards to administration, shipping, marketing and distribution. Piggybacking may lead to unsatisfactory marketing arrangements such as lack of strategic fit, providing technical support, and after sales services for buyers potentially leading to disagreement. This method of exporting too is not ideal for building a long-term foreign market presence.

Trading Companies

A trading company trades on its own account. It performs many functions as; buying and selling as a merchant, handling goods on consignment, or it may act as a commission house for some buyers. Trading companies match sellers with buyers and manage all the supportive functions such as export arrangements, paperwork, transportation, and legislative requirements. Firms initially choose this mode, because of TCs extensive contacts, experience, operations and long-term commercial relationships in many different trading regions in the world. After some experience in the international market, exporting firms want more control over decision making, so TCs are not their long-term partners.

Export Management Companies

Export Management Companies are specialist companies that act as export department for a number of companies. They provide companies with access to foreign buyers, take orders from those foreign buyers, purchase finished products, and handle the transporting and distribution of the goods in the foreign market. Their core competency is in export logistics and deals with the necessary documentation and extensive knowledge of purchasing practices and government regulations in the foreign markets. This is a less risky and fast penetration strategy suitable for new entrants in the international market in the short-term. Disadvantages of EMCs include; export strategy conflict among both parties, lack of manufacturer’s control over foreign market decisions and market knowledge. Due to expertise in exporting, the EMC has complete control over all foreign market decisions. In addition, EMC may even export products that are in direct competition with each other. Therefore, manufacturers need to devote resources to monitoring the performance of an EMC and invest in managing the business relationship. As the manufacturer’s revenue from exporting increases, moving away from the EMC or eliminating EMC’s from the business may prove harmful due to lack of foreign buyer contacts or market knowledge or because of contractual agreements.

Domestic Purchasing

Domestic purchasing is a method of market entry which involves the least company involvement. This export method often involves an unsolicited purchase request from a foreign commercial buyer. The company may not even have considered the export potential of their products until approached from the foreign buyer. In general, companies can use this method to sell off excess stock with the least inconvenience. It generates a relatively low level of revenue and the company is completely dependent on the foreign buyer. The company gains limited knowledge of the international markets, as it has no direct contact with them. The foreign buyer often picks up the goods at the factory gates and proceeds to transport the goods, market them, and distribute them in one or more overseas market.

Direct Exporting

Distributors

Export distributors differ from agents in that they take ownership and responsibility for the goods. Distributors usually take limited rights for the sales and servicing of a particular territory where they represent the manufacturer in all respects. The capital investment can be particularly high for a firm exporting goods requiring specialist handling. Due to this large investment both parties undertake to maintain a long-term relationship.

Agents

Export agents are usually individuals or firms operating in a foreign market, contracted by the firm, and paid a commission to obtain orders for the product. After entering into a contractual agreement, sales targets are usually agreed with agents by the firms. Agents are usually contracted to carry non-direct competing products therefore providing a lower exposure to risk. Although agents are the cheapest and quickest form of market entry, the long-term profitability is moderate to low with a short payback period. Agents can be beneficial to the company in that they have local market knowledge, established relationships and provide adequate feedback regarding further product or market development strategies. Agents do not owner goods which limits their motivation to improve performance. They can take the form of brokers, manufacturers’ representatives, managing agents and compradors performing specific functions (Cateora & Graham, 2002).

Direct Marketing

Using database marketing tools such as mail order, telemarketing, media marketing, direct mail and the internet can be a useful technique to expand a firm’s customer base abroad. Usually, this market entry method is very useful when there are high barriers to entry exist in a foreign market or where markets have insufficient or underdeveloped distribution systems. Success using direct marketing can only be obtained if the standard product/service is customized to meet the personal needs of the target market in different markets. Issues of product promotion and privacy needed to be addressed when engaging in telemarketing, direct mail or Internet commerce.

Franchising

In franchising, the firm grants the legal right to use branding, trademarks and products, and transfers the method of operation to a third party (the franchisee) in return for a franchise fee. Franchising is less risky and less costly due to the nature of the agreement. The franchisee provides the local market knowledge, capital, time and resources needed to develop the franchise. The two types of franchise agreement used by franchising firms are that of a master franchise and licensing. A master franchise often operates a multi-unit franchising agreement or it may take the form of a trading company whereas in licensing the franchiser uses the property, trademark and intellectual rights for a royalty or fee.

Management Contracts

Management contracts usually involve selling the skills, expertise and knowledge of firms in an international context. The contracts undertaken are usually those for installing management operating and control systems and the training of local staff to take over when the contractors are finished (Doole & Lowe, 2001).

Manufacturing Strategies

Own Subsidiary

This form of market entry requires the maximum commitment in terms of management and resources and offers the fullest means of participating in a market. Before investing huge capital, the firm must evaluate the pros and cons of the business as the cost of withdrawing from the market would be significant. Although sole ownership provides high level of control, the firm may not only incur the costs if withdrawal is eminent but also the company’s reputation can be damaged both in the foreign and domestic market. The advantage is of avoiding communication and conflict of interest problems which may occur through other methods like acquisitions and joint ventures.

Acquisition

Acquisition occurs where an organization develops its resources and competences by taking over another organization. It is a faster entry strategy in new product or market areas. A firm may acquire cost efficiencies, immediate access to a trained labour force, recognized brands, existing customer and supplier contacts, an immediate source of revenue and an established distribution network or otherwise as a result of acquisition. In return, the acquiring company may have to make certain sacrifices.

Assembly

Assembly involves establishing plants in foreign markets simply to assemble components manufactured in the domestic market by the firm. This method of market entry is attractive for certain companies when they see that the importation of components is subject to lower tariff barriers than assembled goods which eventually decrease their costs. Moreover, it can be more advantageous if the finished product is large and transportation costs are high. The domestic plant in addition, can focus on development and production skills and investment, hence, profiting from economies of scale. Assembly firms also take advantage of lower wage costs and government incentives.

Cooperative Strategies

Joint Ventures

Joint venture (JV) is a market entry option in which the exporter and a domestic company in the target country join together to form a new incorporated company. Both parties provide equity and resources to the JV and share in the management, profits and losses. The JV should be limited to the life of a particular project. This option is popular in countries where there are restrictions on foreign ownership, e.g. China. Its advantages include; acquisition of competencies or skills not available in-house, risk sharing of a large project with other firms, faster market entry/penetration and payback, and avoiding technical trade barriers. Its disadvantages are; divided management control, difficult to recover capital invested, disagreement on new export markets, and different views of partners on expected benefits.

Strategic Alliances

Strategic alliances are a wide range of cooperative partnerships and joint ventures which unite to follow a set of important, agreed goals while in some way remaining independent subsequent to the formation of an alliance. The partners share both the benefits of the alliance and control over the performance of assigned tasks during the life of the alliance. The partners contribute on a regular basis in one or more key strategic areas, for example, technology or products. Strategic alliances are usually formed in three areas – technology, manufacturing and marketing. The main reason behind strategic alliances is competition. Other reasons include; the reduction of risk, the attainment of economies of scale and complementary assets such as a brand name and government procurement. Firms, which employ strategic alliances, have the advantage of simultaneously penetrating several of their key markets.

Specific Recommendations

The decision of, which foreign market to enter, depends on firms’ external as well as internal factors and foreign country’s market conditions. The strategy to be adopted should be based on firm’s short and long-term corporate objectives. Initially, the firm should choose among direct or indirect exporting leading to cooperative and then manufacturing strategies. If exporting is a long-term goal of the firm, then indirect exporting methods may not prove to be the wisest strategic choice. In long-run, the firm has to trade off among costs and control over the decision making.

Explain why it is usually more difficult for a firm to provide the same level of customer service in its international markets that it provides in its domestic markets. Under what circumstances may an organization actually be able to provide better customer service to international markets than to domestic markets? (Your answer should not exceed 1250 words)

Customer Service

When a firm becomes extensively involved in international business, logistics is seen as a critical part of the strategic planning process and a deterministic factor of customer service level. The complexity of the international business environment, including different business customs, inadequate/inappropriate transportation infrastructure, restrictive regulatory frameworks, and different levels of logistics services, presents barriers that make operations in foreign countries far more complicated and less controllable than in domestic markets. Generally, existing or emerging barriers result in longer order cycle times, higher logistics costs, and greater customer dissatisfaction. The customer service level chosen for use internationally is based on expectations encountered in each market. These expectations are dependent on past performance, product desirability; customer sophistication, and the competitive status of the firm and industry. Therefore, additional logistics costs are required to support operations which may be so important that, if not handled properly, they may offset any potential cost savings from using inexpensive labor and other resources in foreign countries. The need for cost-service trade-off analysis becomes inevitable for the managers in such an indifferent situation. Under these circumstances, logistics barriers obviously make it difficult for firms to gain a competitive advantage from their international operations.

Table 1 summarizes the firms’ major external factors affecting its logistic performance (and therefore, customer service) at domestic and global level. It also depicts how difficult it becomes for the firms to provide same level of customer service at international level. Another major external (and therefore, uncontrollable) factor which has made international logistics more vulnerable and complex is security risks after 9/11 terrorist attacks. As a result security clearance procedures have lengthened and transit times of shipments have extended. Insurance rates for cross-border shipments have also climbed. Some factors internal (and therefore, controllable) to the firm, for example, centralized logistics activities, do not make the customer service work best, as it can be under local control in foreign market. Financial aspects such as working capital, inventory, capital investments in buildings and equipments, and accommodation of merchandise are also difficult to manage in the case of international operations. The managerial capability of logistics management in deciding optimal cost-service mix plays a major role in determining the customer level.

Table 1: External Factors Affecting Customer Service Level

Factors

Domestic Conditions

Global Conditions

Culture

Homogeneous

Heterogeneous

Currency

Uniform

Different currency and exchange rates

Economy

Stable and uniform

May be variable and unpredictable

Government

Stable

May be unstable

Labor

Skilled workers available

Skilled workers may be hard to find

Language

Generally a single language

Different languages and dialects

Marketing

Many media, few restrictions

May be fewer media and more restrictions

Transport

Several competitive modes

May be inadequate

Source: (Marilyn & Gale, 2006)

In order to establish an efficient logistics system to support international operations, especially customer service, a firm should be able to evaluate when and where logistics barriers may disrupt materials flows in the distribution channel. The identification of barriers is important in designing an effective international operations network. A better understanding of those barriers enables a firm to take actions to reduce or avoid them so that it can improve its competitive position in international markets. The firms entering in the international market should obtain as much as possible information about the business conditions and operating expenses of potential markets. As the customer service levels and hence the cost incurred, vary between countries, the firm must examine the service requirements of customers in each foreign market.

A flexible and responsive global customer service strategy is based on inventory policy and control procedures, packaging and containerization, sourcing raw materials, managing export shipments and terms of trade. International logistics is characterized by inventory points at more levels between suppliers and customers making it much complicated than at domestic level, leading to longer transportation times. Depending on the length of transit time and more inventory volume needed to cover the resultant delays, the firm can develop inventory policies and control procedures most appropriate for each market area. Another component of customer service is the products’ physical condition (must be in right condition). Packaging and containerization are important for product handling, climate effects, potential pilferage, communication and language differences, freight rates, and customs duties when a product moves across the borders. The quality of a product is determined by the quality of its raw materials. International sourcing may enable a firm to optimize products quality at lowest possible cost.

The services of many facilitator organizations involved in international logistics activities are continuously utilized by almost all of the firms operating internationally. These organizations include export distributors, customs-house brokers, international freight forwarders, trading companies, and non-vessel-operating common carriers (NVOCC). These organizations are highly professionalized in performing their functions and operate at economies of the scale. A firm involved in exporting for the first time would likely utilize the services of a facilitator organization. There are a number of shipment modes/terms, each one of them having its own pros and cons. These terms of trade/shipment used in international logistics are Ex-Works, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAF, DES, DEQ, DDU and DDP. Terms of shipment have a major impact on a firms’ logistics performance as each of them yields a different cost of shipment and value to the customer.

Finally, integrated logistics management (ILM) is the ultimate strategy to deal with the international customers efficiently. ILM integrates all the logistics activities; facility location and network design, information management, transportation management, inventory management, warehousing management, material handling, and packaging into a single activity or process of logistics directed towards servicing the customer effectively and at the lowest total cost of all the functional activities taken together. The methodology of integrated logistics conforms to the logistics objectives; getting the right item to the right customer, in the right quantity, in the right condition, at the right place, at the right time and at the right cost.

Customer service level of a firm is the representation of managerial capability of its management team. A firms’ executive management is likely to use any or a combination of some or all of the above mentioned customer service strategies to deliver value