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CHAPTER 4
Managing logistics internationally
Objectives
The intended objectives of this chapter are to:
●
identify challenges that internationalisation presents to logistics
management;
●
analyse the structure and management of a global logistics network.
By the end of this chapter you should be able to:
●
understand the forces which are shaping international logistics;
●
understand challenges of international logistics networks;
●
understand how to begin to balance these in organising for international
logistics – bearing in mind risks and sustainability considerations
Introduction
The early roots of logistics are in international transport, which was a central element of many fundamental models in economic theory. In traditional location
theory, for example, transport costs were optimised in relation to distance to
market and production locations. The origins of internationalisation can be
traced back to the expanding trade routes of early civilisations. Discoveries made
in excavations from Europe, Asia, Africa and the Americas reveal artefacts made
hundreds or even thousands of miles away from the site, at the edges of their
respective known worlds. Developments in transport, navigation and communication have progressively expanded our horizons. Measured in transport time
and costs, the world has shrunk to the dimensions of a ‘global village’. Many take
for granted the availability of products from around the world and safe, fast intercontinental travel on container carriers and aircraft. It is in this context that a
clear link exists between logistics and economic development. The connectivity
of all regions of the world is essential for international trade. As a result, many
projects aimed at supporting regional economic development focus on the infrastructure needed to support integration into the global economy.
The logistics dimension of internationalisation conjures up a vision of parts
flowing seamlessly from suppliers to customers located anywhere in the world,
and a supply network that truly spans the entire globe. Often basic products such
as deep-freeze pizzas combine a multitude of locations from which ingredients
are sourced, and an international transport network that links production
110 Chapter 4 • Managing logistics internationally
locations to warehouses and multiple stores. The enormous geographical span of
this logistics system cannot be recognised in the price of the product. This can be
explained by transport having become just a commodity in the global village. At
the micro level of the individual company, however, the reality is that there are
few examples of truly global supply chains. There are many barriers to such a
vision. For example, local autonomy, local standards and local operating procedures make the integration of information flow and material flow a challenging
task. Local languages and brand names increase product complexity. Global
supply chains are made more complicated by uncertainty and difficulty of control. Uncertainty arises from longer lead times and lack of knowledge over risks
and local market conditions. Coordination becomes more complex because of
additional language and currency transactions, more stages in the distribution
process, and local government intervention through customs and trade barriers.
But there are many instances where a truly globalised logistics system is not
necessary, and where ‘internationalisation’ is a more accurate description.
Internationalisation is an increasing feature of the majority of supply chains.
International sourcing of component parts and international markets for
finished goods are extending as world trade increases. The move of supply and
production to ‘off-shore’ locations has been steady and stable. However, this does
not mean that internationalisation is without risks. Challenges in migrating
supply to remote locations, breakdowns in product flow, environmental considerations resulting from greater shipping distances and corporate social responsibility considerations are added challenges and considerations.
The factoring in of risks, environmental and social considerations into the
design of international logistics operations has made longstanding logistics formulas more problematic to apply. And it has helped the mindset of logistics managers
to move beyond ‘available everywhere at low cost’ towards a more qualified
approach of ‘available at a certain price and within a defined risk/reliability’.
Within the context of this changing global landscape for logistics, the overall
aim of this chapter is to analyse the internationalisation of logistics, and to
explore how to begin to organise international supply chains. Figure 4.1 shows
the framework for this chapter: drivers and enablers need to be countered by risk
Enablers
• Commoditised
transportation
• Information and
communication
technology
Drivers
• Factor costs
• Economies of scale
Activities
Management of
international logistics
• Network design
• Risk management
• Governance
Risks
• Local responsiveness/time to market
• Inventory and handling costs
• Transportation breakdowns
• Geopolitical threats (war, terror)
Figure 4.1 Decision framework for international logistics
Drivers and logistics implications of internationalisation
111
factors in organising logistics internationally. Essentially, this means developing
and designing an international logistics network, managing risks and developing
international governance structures, while keeping social responsibility and environmental concerns in mind.
Key issues
This chapter addresses seven key issues:
1 Drivers and logistics implications of internationalisation: the trade-off facing
internationally operating businesses.
2 The tendency towards internationalisation: three strategies for improving the
transition to global supply chains.
3 The challenges of international logistics and location: barriers to international
logistics.
4 Organising for international logistics: proposes principles by which international
logistics networks can be organised, including offshoring considerations.
5 Reverse logistics: developing the ‘returns’ process.
6 Managing for risk readiness: two levels of risk readiness and several specific steps
to take.
7 Corporate social responsibility in the supply chain: the need to include social
responsibility in supply chain design.
4.1 Drivers and logistics implications of internationalisation
Key issue: What are the trade-offs between responsiveness to local markets and
economies of scale?
The business approach towards internationalisation is not taking place according
to any common pattern. In assessing the nature of cross-border logistics, three
questions can be asked:
●
Does internationalisation imply a universal global approach to supply chain
management?
●
Does internationalisation require a ‘global’ presence in every market?
●
Does internationalisation 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 is ‘no’.
The ‘single business’ concept of structuring the supply chain in the form of
uniform approaches in each country is losing ground. ‘McColonisation’ was effectively abolished when McDonald’s announced localisation of its business in such
areas as marketing and local relations. In response to local crises in quality, and
suffering from local competition, the corporate headquarters were downsized to
help empower the local organisation. (This also means localising the focal firm’s
human resource practices, a point we return to in Chapter 8.) The same applied
to the Coca-Cola Company, which abandoned ‘CocaColonisation’ – based on a
112 Chapter 4 • Managing logistics internationally
universal product, marketing, and production and distribution model – for the
same reasons. In favour of local brands and product varieties, Procter & Gamble is
doing the same. In supply chains we find regional variations in the application of
international principles.
This does not mean to say that localisation is the new mainstay. Unilever, a traditionally localised competitor of Procter & Gamble, has announced a decrease in
the number of brands, and has rationalised operations away from strict localisation over the past decade, and probably will continue to do so for a while. Somewhere between local and global extremes, Procter & Gamble and Unilever will
meet each other in a new competitive area.
Looking at the different drivers of internationalisation, three basic global shifts
in international investment and trade have been identified, with a possible
fourth coming to the forefront in modern markets, as listed in Table 4.1. Such
shifts of course have an impact on international trade and the flow of goods. In
particular, destinations change as well as logistics requirements. The ‘fourth generation’ recognises the logistics trade-off between responsiveness to local markets, environmental and risk concerns with the benefits of internationalisation.
Table 4.1 The fourth-generation global shift in Europe
Generation
First
Second
Third
Fourth
Period
1950s–1960s
From 1960
From 1980
Emerging now
Primary drivers
Labour shortage
Labour costs and
flexibility
Market entrance
Responsiveness to
customer orders, risk
reduction, and social
and environmental
responsibility
Shift of labour and
investment towards
European countries
without labour
shortage
Newly industrialised
countries, low labour
cost countries
Eastern Europe,
China, Latin America
Market region for
responsiveness and
lower risk. To lowcost region for social
responsiveness
initiatives
Transport routes
Still significantly
continental
Increasingly
intercontinental
Adding additional
destination regions
Beginning to refocus
on continental
Nature of
international flow of
goods
Physical distribution
of finished products
from new production
locations
Shipping parts to
production locations
and exporting
finished products
Physical distribution
towards new market
regions
Shipping (semi-)
finished products to
markets, reduction of
eco footprint and risk
exposure where
possible
At a company level, generic drivers of internationalisation include:
●
a search for low factor and supply costs (land, labour, materials);
●
the need to follow customers internationally in order to be able to supply
locally and fast;
●
a search for new geographical market areas;
Drivers and logistics implications of internationalisation
●
113
a search for new learning opportunities and exposure to knowledge (such as by
locating in Silicon Valley – a ‘hot spot’ in development of international electronics, software and internet industries).
The importance of these drivers varies by company and with time. Considering
the sequence of global shifts, proximity to production factors such as labour and
low material costs can be considered more basic than market- or even knowledgerelated drivers. Furthermore, the importance of the respective drivers is dependent upon the internationalisation strategy of the company involved. 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 between them. The consequences of this ‘balancing act’ for logistics are analysed
below. Case study 4.1 about Airbus offers illustrations of how complex and comprehensive supply chain management in an international context can be and
how hard it can be to manage against risks for service and value.
Table 4.2 Dimensions of different internationalism strategies
Dimension
Setting in a pure multidomestic strategy
Setting in a pure global
strategy
Setting in an integrated
network strategy
Competitive moves
Stand-alone by country
Integrated across countries
Moves based on local autonomy
and contribution of lead
subsidiaries, globally coordinated
Product offering
Fully customised in each
country
Fully standardised
worldwide
Partly customised, partly
standardised
Location of valueadding activities
All activities in each
country
Concentration: one activity
in each (different) country
Dispersal, specialisation, and
interdependence
Market participation
No particular pattern;
each country on its own
Uniform worldwide
Local responsiveness and
worldwide sharing of experience
Marketing approach
Local
Integrated across countries
Variation in coordination levels
per function and activity
Logistical network
Mainly national; sourcing,
storage and shipping
on a national level and
duplicated by country
Limited number of
production locations that
ship to markets around the
globe through a highly
internationalised network
with limited localised
warehouse and resources
Balanced local sourcing and
shipping (e.g. for customised
products and local specialities)
and global sourcing and shipping
(for example for commodities)
(Source: Based on Yip, 1989, and Bartlett and Ghoshal, 1989)
CASE STUDY
4.1
Launching a new aeroplane at Airbus
When Airbus introduced its Airbus A380 double decker superplane in January 2005 to
the press and the world it was an impressive show that brought out government
leaders and made headlines all over the world. A little while later, however, delays to the
114 Chapter 4 • Managing logistics internationally
actual delivery of the first planes were announced. The causes for this were largely
found in the international supply chain and its design.
In October 2006, the then Airbus president and CEO Christian Streiff said: ‘This is a very
long and complex value chain. While everyone on board was on top of their job, the production process . . . not the aeroplane . . . but the production process has one, big flaw –
one weak link in the chain: that of the design of the electrical harnesses installation in the
forward and aft fuselage. To be clear: this is the weak link in the manufacturing chain, this
is the reason why ramping up the production is hampered. But the electrical harnesses
are not the root causes why we at Airbus are in a crisis. The issue of the electrical harnesses
is extremely complex, with 530 km of cables, 100,000 wires, and 40,300 connectors.’
This quote clearly points to the supply chain and design as the cause for delays. In addition to the wiring issues there were some further supplier-related challenges as well. A
lot of different locations are an inherent aspect of the supply chain, not least because
customers and sponsoring countries require a share of the production process to be
located in their countries. So many locations, and design and make tasks are involved.
This created a lot of challenges that needed detailed coordination. For example, one
small component was supposed to be built in a plant in Italy for which a location was
selected, but no permit had been granted by local authorities. It turned out that there
were some very old olive trees on this site that had protected status. This is just one
example of how local considerations can be specific and detailed, hard to predict yet
potentially having a big impact on the supply chain. Additionally a Japanese supplier of
seats was said to have caused further delivery delays. A complex project such as developing and building a new plane across multiple countries and locations can be very
challenging in terms of scale and scope.
When Airbus launched the A380, the early signs of supply chain shortfalls already
existed, but they were well hidden. Under the paint, screws were missing. Behind the
panels, lots of parts were missing. The launch was a great spectacle, but you cannot
hide a supply chain that is not working behind some paint for long . . . .
(Source: quote from: http://blog.seattlepi.com/aerospace/archives/107302.asp)
Question
1 Brainstorm in groups how locating parts of the supply chain around the world might
be more difficult than locating it on a single site and location.
4.1.1 Logistical implications of internationalisation
Internationalising logistics networks holds consequences for inventory, handling
and transport policies.
Inventory
Centralising inventories across multiple countries can hold advantages in terms
of inventory-holding costs and inventory levels that are especially relevant for
high-value products. On the other hand, internationalisation may lead to product proliferation due to the need for localisation of products and the need to
respond to specific local product/market opportunities.
Drivers and logistics implications of internationalisation
115
Handling
Logistics service practices may differ across countries as well as regulation on
storage and transport. Adjusting handling practices accordingly is a prerequisite
for internationalisation. Furthermore, the opportunity to implement best practice across various facilities may also be possible. Both of these practices assist the
process of internationalisation.
Transport
Owing to internationalisation, logistics pipelines are extended and have to cope
with differences in infrastructure across countries, while needing to realise delivery within the time-to-market. This may drive localisation. On the other hand,
the opportunity for global consolidation may drive international centralisation.
Within this final, central, consideration in the globalise–localise dimension of
logistics, global businesses face a challenge that can be summarised in terms of a
simple trade-off between the benefits of being able to consolidate operations
globally on the one hand, and the need to compete in a timely manner on the
other.
4.1.2 Time-to-market
Time-to-market has particular significance for the management of the global
logistics pipeline. The subject of time is considered in depth in Chapter 5,
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. This is
especially true for products in industries with rapid technological development,
such as personal computing and consumer electronics, and for fashion goods
such as clothing and footwear.
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 travelling internationally
will incur other delays. These occur at consolidation points in the process, such
as in warehouses where goods are stored until they can be consolidated into a full
load, such as a container. Delay frequently occurs at the point of entry into a
country while customs and excise procedures are followed. We review these
issues in more depth in Chapter 7.
116 Chapter 4 • Managing logistics internationally
4.1.3 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 maximised. Resources are sourced on a global scale to minimise cost by maximising
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 organisations:
●
consolidation of purchasing of all company divisions and companies;
●
sourcing in low-wage economies.
Internationally operating organisations 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 minimise costs by using their bargaining power and by seeking economies of scale.
At its extreme, a company may source all of its requirements from its range of
a given commodity, such as a raw material or a component, from a single
source.
Internationally operating companies are on a constant quest to find new,
cheaper sources of labour and materials. This trend led to the move of manufacturing from developed industrial regions to lower-cost economies. Examples of
this are:
●
Western Europe to Eastern Europe;
●
USA to Mexico;
●
Japan to China, India and Vietnam.
These developing economies have seen impressive growth over recent years.
This has led to increased prosperity for their people and rising standards of living.
However, these advances in social standards raise the cost of labour and other
resources. Therefore, 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.
Drivers and logistics implications of internationalisation
CASE STUDY
4.2
117
Logistics in the news
The subject of air miles appears regularly in media headlines today. Here are two contrasting
views of what is happening.
Supermarkets and food producers are taking their products on huge journeys, despite
pledging to cut their carbon emissions. Home-grown products are being transported
thousands of miles for processing before being put on sale back in Britain. Jason Torrance, campaigns director of Transport 2000, the environmental transport group, said
‘we are producing food in one corner of the world, packing it in another and then shipping it somewhere else. It’s mad.’
Dawnfresh, a Scottish seafood company that supplies supermarkets and other large
retailers, cut 70 jobs last year after deciding to ship its scampi more than 8,000km to
China to be shelled by hand, then shipped back to Scotland and breaded for sale in
Britain. The company said it was forced to make the move by commercial pressures.
‘This seems a bizarre thing to do but the reality is that the numbers don’t stack up any
other way’, says Andrew Stapley, a director. ‘We are not the first in the industry that has
had to do this. Sadly, it’s cheaper to process overseas than in the UK, and companies
like us are having to do this to remain competitive.’
(Source: Jon Ungoed-Thomas, Sunday Times, 20 May 2007)
Commissioned by World Flowers, a study was carried out by Adrian Williams of Cranfield
University’s Natural Resources Department to establish the actions needed to reduce
Sainsbury’s [a retailer] carbon footprint regarding Kenyan roses. Results have provided a
fresh challenge to much current thinking on local sourcing and the impact of air freight.
The high environmental cost of heating and lighting for growing roses in the Netherlands
outweighed emissions caused by flying them in from Kenya, with its naturally warm
all-year temperatures. It also indicated that carbon dioxide (CO2) emissions from Kenyan
roses were just 17 per cent of Dutch roses, including the larger impact of CO2 emissions to
high altitude by air freighting. The study found that 6kg of CO2 was produced per dozen
Kenyan roses, as opposed to 35kg for production in the Netherlands. Whereas 99 per cent
of the Dutch emissions were caused by producing the roses, only 7 per cent of the emissions from the Kenyan flowers were accounted for by growing them there. In contrast,
nearly 99 per cent of the CO2 emissions from the Kenyan roses were accounted for by the
6,000km clocked up by air freighting them to the UK.
(Source: http://www.cranfield.ac.uk/cww/perspex)
Question
1 What are the pros and cons of sourcing commodity items in low wage economies?
Concentration at specific sites
Consolidation of purchasing applies not only to commodity goods but also to highvalue 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 centres of excellence in IT. Companies originally located in
these areas to benefit from research undertaken in the nearby universities.
118 Chapter 4 • Managing logistics internationally
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.
Activity 4.1
Sales
Distribution
Assembly
Inbound
supply
Materials
R&D
End-customer
Marketing plans
An international logistics pipeline is represented in Figure 4.2 as a set of logistics processes
that are connected together like sections of a pipe. However, the sections may be in different
countries – requiring planning and coordination of the processes on a global scale. The international pipeline therefore has a number of special characteristics, some of which are suggested in
Case study 4.2 on the previous page. Use Table 4.3 to make a list of the characteristics that you
believe make a global logistics pipeline different from one that operates only nationally.
Figure 4.2 The international logistics pipeline
Table 4.3 Characteristics of the international pipeline
Elements of the pipeline
Special characteristics of the international pipeline
Research and development
Material/component sourcing
Inbound supply
Assembly
Distribution
Selling/retailing
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 transported every day. The opportunity for cost saving by coordinating these movements and maximising utilisation is significant.
Drivers and logistics implications of internationalisation
119
4.1.4 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. Companies are not only responding to current volatility and geopolitical
risks, they are also developing new risk management approaches based upon the
realisation that decades of globalising supply chains has come at a price: a heightened and different risk profile.
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
Transportation may be a commodity, but that does not mean that nothing can go
wrong. 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. This meant
that factories were shut down and stores were emptying. It also had a ripple effect
on global trade overall. For example, return shipments were delayed because no
ships were leaving the ports either. In addition, with so many ships and containers tied up, other routes could not be served. And in fact a resulting global shortage of containers caused a slowdown of shipments in many other port regions. So
shipments on other routes, in different harbours and even shipments using different modalities were affected.
Risk and security concerns are not a one-time issue but require continuous risk
management. Helferich and Cook (2002) found that this is necessary because, for
example:
●
only about 61 per cent of US firms had disaster recovery plans;
●
those that do typically cover data centres, only about 12 per cent cover total
organisational recovery;
●
few plans included steps to keep a supply chain operational;
●
only about 28 per cent of companies have formed crisis management teams,
and even fewer have supply chain security teams;
●
an estimated 43 per cent of businesses that suffer a major fire or other major
damage never reopen for business after the event.
According to Helferich and Cook (2002) this can partially be explained by the fact
that there are competing business issues, managers might not recognise their vulnerability and might assume that the government will bail them out. Peck (2003) has
published a self-assessment for supply chain risk and an operational-level tool kit.
120 Chapter 4 • Managing logistics internationally
4.2 The tendency towards internationalisation
Key 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 effectiveness of supply chains are focused factories and centralised inventories.
4.2.1 Focused factories: from geographical
to product segmentation
Many international companies, particularly in Europe, would have originally
organised 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, is shown
in Figure 4.3a.
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. This situation is shown in Figure 4.3b.
(a)
(b)
Figure 4.3 (a) Focused markets: full-range manufacture for local markets
(b) Focused factories: limited range manufacturing for all markets
The tendency towards internationalisation
121
Traditional thinking is that this organisational strategy will deliver cost advantages to a global company. While this is true for production costs, the same is not
necessarily true for inventory-holding costs and transport costs.
Activity 4.2
Focused factories have an impact on the important trade-off between cost and delivery lead
time. Make a list of the advantages and disadvantages of focused factories. One example of each
has been entered in the table below to start you off.
Cost
Lead time
Advantages
Lower production costs through
economies of scale
Specialised equipment may be
able to manufacture quicker
Disadvantages
Higher transport cost
Longer distance from market
will increase lead time
4.2.2 Centralised inventories
In the same way that the consolidation of production can deliver cost benefits, so
can the consolidation of inventory. Rather than have a large number of local distribution centres, bringing these together at a small number of locations can save
cost. Savings can be achieved in this way by coordinating inventory management
across the supply pipeline. This allows duplication to be eliminated and safety
stocks to be minimised, thereby lowering logistics costs and overall distribution
cycle times. Both may sound contrary to the fact that the transport pipeline will
extend, owing to the longer distribution legs to customers from the central warehouse in comparison with a local warehouse. Nevertheless, through centralising
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. Figure 4.4 characterises the different operating environments where centralised inventory may be a more relevant
or a less relevant consideration, based upon logistics characteristics.
In product environments where inventory costs are more important than t
