Chapter 4

Managing logistics internationally

Framework
Enablers
Commoditized transportation Information and communication technology

Activities
Management of international logistics Network design Risk management Governance

Factor costs Economies of scale

Drivers

Local responsiveness/Time to market Inventory and handling costs Transportation breakdowns Geopolitical threats (war, terror)

Risks

Content

Drivers and logistics implications of internationalization The tendency towards internationalization

The challenge of international logistics and location

Organizing for international logistics

Managing for risk readiness

Drivers and logistics implications of internationalization

Key issue

What are the trade-offs between responsiveness to local markets and economies of scale?

Drivers and logistics implications of internationalization Motivations for International Expansion Increase Market Share
domestic market may lack the size to support efficient scale manufacturing facilities

Return on Investment
large investment projects may require global markets to justify the capital outlays weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

Drivers and logistics implications of internationalization

Motivations for International Expansion
Economies of Scale or Learning
expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution can spread costs over a larger sales base increase profit per unit

Location Advantages
low cost markets may aid in developing competitive advantage may achieve better access to:
Raw materials Lower cost labor Key customers Energy

Drivers and logistics implications of internationalization

International Corporate-Level Strategy
Need for Global Integration
High

Global strategy

Transnational strategy

Multidomestic strategy
Low Low High

Need for Local Responsiveness

Drivers and logistics implications of internationalization

Strategy and operating decisions are Multidomestic decentralized to strategic business units (SBU) in each country strategy Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe

Logistical network: Mainly national; Sourcing, storage and shipping on a national level and duplicated by country

Drivers and logistics implications of internationalization

Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage)

Global strategy

Logistical network: Limited number of production locations that ship to markets around the globe through a highly internationalized network with limited localized warehouse and resources.

Drivers and logistics implications of internationalization

Seeks to achieve both global efficiency and Transnational local responsiveness Difficult to achieve because of simultaneous strategy requirements strong central control and coordination to achieve efficiency decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage
Balanced local sourcing and shipping (e.g. for customized products and local specialties) and global sourcing and shipping (for example for commodities).

Drivers and logistics implications of internationalization

The International Supply Chain
Suppliers Domestic/Import Sourcing Inbound Materials Order Processing Corporation Throughflow Outbound Materials Order Processing Transportation Physical Materials Distribution Management Management Customers Domestic/Export Distribution Order Placement Transportation

Order Processing

Supplier-Firm Interface Transportation Transportation

Costumer-Firm Interface Physical Customer Distribution Service Management Inventory Management Inventory Management

Storage

Storage

Inventory Management

Storage

Forward and Reverse Flow of Information, Products, and Funds

Drivers and logistics implications of internationalization

Inventory

Internationalization

Transport Handling

Drivers and logistics implications of internationalization

Scale economics

Global consolidation

Sourcing of commodity items from low-wage economies

Concentration at specific sites

Bulk transportation

Drivers and logistics implications of internationalization

Risks in international logistics

External risks Language and culture uncertainty Political risks Macroeconomi c risks

Internal risks Supply options Inventory policy Transportation and distribution arrangements

Case study
The Deskjet-plus is one of several printers manufactured by the Vancouver Division of HP.

Case study
Factory-localization
Stage 1: printed circuit board assembly and test (PCAT), performed at factory Application-specific integrated circuits Read-only memory Raw logic board Motors Flex cables Key pad board Plastic mechanics Plastic-skin Carriage motor Plastic-gears North America DC Vancouver plant

Europe DC

Logic board Head driver board

Raw head driver board

Asia Pacific DC

Stage 2: final assembly and test (FAT), performed at factory

shipment to different DCs

Case study
Three major sources of uncertainty can affect HPs supply chain:
Delivery of incoming materials (late shipments, wrong parts, and so forth) Internal process (process yields and machine downtimes) Demand

Delays in replenishing stocks at the DCs

Inventory buildup or backorders at the DCs

Case study
Under factory-localization, HP ships different versions of the Deskjet-Plus to two non-US DCs by sea, with a transit time of about a month. This long lead time limits DCs ability to respond to fluctuations in the demand for different versions of the product. To ensure prompt service for the customers, European and Far East DCs have to maintain high levels of safety stocks.

Content

Drivers and logistics implications of internationalization The tendency towards internationalization

The challenge of international logistics and location

Organizing for international logistics

Managing for risk readiness

The tendency towards internationalization

Key issue

How can we picture the trade-offs between costs, inventories and lead times in international logistics?

The tendency towards internationalization

Focused market Vs. focused factory

The tendency towards internationalization

The advantages and disadvantages of focused factory

Cost

Lead time

Advantages

Specialized Lower production equipment may be costs through able to manufacture economies of scale quicker Longer distance from market will increase lead time

Higher transport Disadvantages cost

The tendency towards internationalization

Centralized inventory
Distribution costs most important Shorter delivery time Inventory costs most important Lower demand volatility

Local inventories

Longer delivery time

Centralized inventories

Greater demand volatility

The tendency towards internationalization

Centralized inventory
Slowest-moving lines, least predictable. Inventory level Lead time Inventory of medium velocity, less predictable demand line. Direct shipment of fastmoving, predictable lines.

Factory/Vendor

Regional distribution centers

Local transshipment point

Case study
Improving the forecast accuracy of product-mix demands is very difficult.

DC-localization
3

Improve process yields, and to reduce machine downtimes at the plant.

2

Localization at DCs
Factory
manufacture and ship a generic Deskjet-plus printer without the power supply module and manual localize the generic product to different specific options as needed

Reduce shipment lead time between manufacturing and distribution, for example, shipping by air. Quick shipment is costly.

DCs

Case study
Localization materials Stage 1: printed circuit board assembly and test (PCAT), performed at factory Application-specific integrated circuits Read-only memory Raw logic board Motors Flex cables Key pad board Plastic mechanics Plastic-skin Carriage motor Plastic-gears Logic board Head driver board

US version

Raw head driver board

Unlocalized printer Localization materials

US version European versions Far East versions

Stage 2: final assembly and test (FAT), performed at factory

performed either at factory or at DC

Case study
Inventory levels at all sites of Deskjet-plus printers supply chain FactoryDClocalization localization Far East DC European DC US DC Factory
Printers Localization materials
Printers

13.4 0
5.2

9.8 11.0
3.5

Localization materials
Printers Localization materials Printers

0
3.2 0 2.8

5.2
3.2 0 2.8

Localization materials

3.9

Content

Drivers and logistics implications of internationalization The tendency towards internationalization

The challenge of international logistics and location

Organizing for international logistics

Managing for risk readiness

The challenge of international logistics and location

Key issues
What are the risks in international logistics in terms of time and inventory? How can the risks be addressed?

The challenge of international logistics and location

Extended lead time

The complexity of international logistics

Multiple freight modes and cost options

Extended and unreliable transit times

Multiple consolidation and break points

The challenge of international logistics and location

Domestic logistics

Inventory in supply chain=90 units

supplier
3 0 2 0 3 0 DC 1 0

customer

Plant

transit

transit

International logistics

Inventory in supply chain=170 units

supplier
3 0 Plant 2 0 Transit 2 0 2 0 2 0 2 0 3 0 DC 1 0

customer

Origin Ocean Destination transit forwarder transit forwarder

transit

The challenge of international logistics and location

Activity: Multiple freight modes and cost options

Freight mode
Air

Industry O

Cost O

Speed O

Availability O

Sea
Rail Road

O
O O

O
O O

O
O O

O
O O

The challenge of international logistics and location

Location analysis Phase
Strategic decision to restructure and invest in plant network

Project plan

Specification of project plan

Implementation of plan

Geographical scope
Regions within selected countries

Continent (e.g. Asia, Europe)

3 to 4 countries

Location within regions

Selected location

The challenge of international logistics and location

Four-phase decision making process
1. Deciding upon the appropriate level of centralization-decentralization 2. Selecting relevant location criteria
The availability of physical infrastructure The availability of warehouse sites Central position in the regional market

3. Selecting criteria weightings 4. An economic trade-off analysis of structures and relevant locations

Content

Drivers and logistics implications of internationalization The tendency towards internationalization

The challenge of international logistics and location

Organizing for international logistics

Managing for risk readiness

Organizing for international logistics Key issue

How can supply chains be better organized to meet the challenges of international logistics?

Organizing for international logistics

Organizing for international logistics

Layering and tiering

Evolving role of individual plants

Reconfiguration processes

Organizing for international logistics

Postponed manufacturing
A specific combination of the three generic types of postponement (Bowersox and Closs,1996)
Form postponement: postponement of final manufacturing or processing activities Time postponement: delaying of the forward movement of goods until customer or orders have been received Place postponement: positioning of inventories upstream in centralized manufacturing or distribution operations to postpone the forward or downstream movement of goods
Logistics postponement

Organizing for international logistics

Product assembly and product improvement and recommendation

Postponed manufacturing

Achieving worldwide learning capabilities

Activity at site

Product customization

Continental DC

Changing role of DC
Product packaging

Achieving global efficiency Factory warehouse

Access to production supplies

National warehouse and deferred packaging National warehouse

Proximity to markets

Warehousing and shipment

Achieving local responsive capabilities

Access to qualified suppliers

Primary strategic contribution of the plant

Organizing for international logistics

Reconfiguration processes for companies
Starting point Heritage in market Supply chain scope Focus Global structure
Little, greenfield approach
Narrow, involving inventory and final manufacturing Decentralizing final manufacturing and inventory into market Single, placing activities into market

Localized structure
Extensive, brownfield approach
Broad, involving inventory, manufacturing and sourcing Centralizing inventory and final manufacturing at continental level and globalizing manufacturing and sourcing Multiple, relocating within market and moving outside market

Tendency

Timetable
Authority

Short (1-10 months)

Global, top-down directions

Long (number of years)

Local, bottom-up iterative process

Stage 1:national organizations sourcing manufacturing

inventory

distribution

sales Country 1

Country 2

Country n Stage 2:cross-border migration and logistics centralization sourcing manufacturing inventory distribution

sales Country 1

Stages in the implementation of postponed manufacturing: local starting point Stage 3:postponed manufacturing
sourcing Primary manufacturing

Country 2

Country n Inventory final manufacturing distribution

sales Country 1

Country 2

Country n

Activities outside region

Activities in region

Activities outside region Stage 1:Direct export sourcing manufacturing inventory distribution

Activities in region sales Country 1 Country 2 Country n

Stage 2:National warehouse sourcing manufacturing

inventory

distribution

sales Country 1

Stages in the implementation of postponed Stage 3:Logistics centralization sourcing manufacturing manufacturing: global starting point
Stage 4:Postponed manufacturing Sourcing and primary manufacturing

Country 2 Country n Inventory, distribution

sales Country 1 Country 2 Country n

Inventory final manufacturing distribution

sales Country 1 Country 2 Country n

Organizing for international logistics

Supply chain reconfigurations involved in postponed manufacturing

Industry

Sourcing and primary manufacturing

Inventory keeping

Final distribution manufacturing

Service and sales

software Wine Transport Telecom Pharma Fashion

Content

Drivers and logistics implications of internationalization The tendency towards internationalization

The challenge of international logistics and location

Organizing for international logistics

Managing for risk readiness

Managing for risk readiness

Short term risk readiness
Inventory policies to reflect volatility Transportation network redesign Reconsider sole and global sourcing arrangements

Long term risk readiness

Develop contingency plans and risk protocols Audit preparedness Train plant management and staff Report to senior management on risk profiles and preparedness

Managing for risk readiness

DELL case: global sourcing and transportation post 9-11
The events of 9-11 changed the dynamics of importing and exporting products into the USA
Air traffic control post 9/11 customs and security requirements for global trade Order increasing

Managing for risk readiness

Flexible Strategy
Flexibility to take advantages of different scenarios Requires a flexible supply chain
multiple suppliers flexible facilities various distribution channels

Can be expensive to implement

coordination mechanisms capital investments loss of economies of scale

Managing for risk readiness

Implement Flexible Strategy
Production shifting: flexible factories and excess capacity and suppliers Information sharing: anticipate market changes Global coordination Political leverage