Chapter 4
Managing
logistics
internationally
Framework
Enablers
Commoditized
transportation
Information and
communication
technology
Factor costs
Economies of
scale
Drivers
Activities
Management of
international logistics
Network design
Risk
management
Governance
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
1
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
Need for Global Integration
International Corporate-Level Strategy
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
Global
strategy
• 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)
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
Order
Processing
Corporation
Inbound
Materials
Throughflow
Order
Processing
Supplier-Firm
Interface
Transportation
Transportation
Storage
Storage
Physical
Materials
Distribution
Management Management
Inventory
Management
Storage
Customers
Outbound
Materials
Domestic/Export
Distribution
Order
Processing
Order
Placement
Transportation
Transportation
Costumer-Firm
Interface
Physical
Customer
Distribution
Service
Management
Inventory
Management
Forward and Reverse Flow of Information, Products, and Funds
Inventory
Management
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
Raw head driver
board
Logic board
Head driver
board
Stage 2: final assembly and test
(FAT), performed at factory
North America
DC
Vancouver plant
•Application-specific
integrated circuits
•Read-only memory
•Raw logic board
•Motors
•Flex cables
•Key pad board
•Plastic mechanics
•Plastic-skin
•Carriage motor
•Plastic-gears
Europe DC
Asia Pacific DC
shipment to different
DCs
Case study
• Three major sources of uncertainty can
affect HP’s 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 DC’s 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
1
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
Advantages
Lead time
Specialized
Lower production
equipment may be
costs through
able to manufacture
economies of scale
quicker
Higher transport
Disadvantages cost
Longer distance
from market will
increase lead time
The tendency towards internationalization
• Centralized inventory
Distribution costs
most important
Shorter
delivery
time
Longer
delivery
time
Inventory costs
most important
Local inventories
Centralized inventories
Lower
demand
volatility
Greater
demand
volatility
The tendency towards internationalization
• Centralized inventory
Slowest-moving lines,
least predictable.
Lead time
Inventory level
Inventory of medium
velocity, less predictable
demand line.
Direct shipment of fastmoving, predictable
lines.
C
Factory/Vendor
B
Regional
distribution
centers
A
Local transshipment
point
Case study
1
Improving the forecast
accuracy of product-mix
demands is very
difficult.
Improve process yields, and to reduce
machine downtimes at the plant.
DC-localization
2
3
Localization at DCs
Factory
manufacture and ship a
generic Deskjet-plus printer
without the power supply
module and manual
DCs
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.
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
Raw head driver
board
•Motors
•Flex cables
•Key pad board
•Plastic mechanics
•Plastic-skin
•Carriage motor
•Plastic-gears
Logic board
Head driver
board
Stage 2: final assembly and test
(FAT), performed at factory
US version
Unlocalized
printer
Localization
materials
•US version
•European
versions
•Far East
versions
performed either at
factory or at DC
Case study
Inventory levels at all sites of Deskjet-plus printer’s supply chain
FactoryDClocalization localization
Far East DC
European DC
US DC
Factory
13.4
9.8
0
11.0
5.2
3.5
0
5.2
3.2
3.2
0
0
Printers
2.8
2.8
Localization materials
3.9
0
Printers
Localization materials
Printers
Localization materials
Printers
Localization materials
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
1
2
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
Extended and
unreliable transit
times
Multiple freight
modes and cost
options
Multiple
consolidation and
break points
The challenge of international logistics
and location
Domestic logistics
Inventory in supply chain=90 units
3
0
2
0
3
0
1
0
Plant
transit
DC
transit
supplier
customer
International logistics
Inventory in supply chain=170 units
supplier
3
0
2
0
Plant
Transit
2
0
2
0
2
0
2
0
Origin
Ocean Destination transit
forwarder transit forwarder
3
0
1
0
DC
transit
customer
The challenge of international logistics
and location
Activity: Multiple freight modes and cost options
Freight mode
Industry
Cost
Speed
Availability
Air
O
O
O
O
Sea
O
O
O
O
Rail
O
O
O
O
Road
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
Continent
(e.g. Asia,
Europe)
3 to 4
countries
Regions
within
selected
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
1
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)
Logistics postponement
• 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
Organizing for international logistics
Activity at site
Product assembly
and product
improvement and
recommendation
Achieving
worldwide learning
capabilities
Postponed
manufacturing
Product
customization
Continental DC
Changing role of DC
Product
packaging
Warehousing
and shipment
Primary strategic
contribution of
the plant
Achieving global
efficiency
Factory
warehouse
Access to
production
supplies
Achieving local
responsive
capabilities
Access to
qualified
suppliers
National
warehouse and
deferred packaging
National
warehouse
Proximity to
markets
Organizing for international logistics
Reconfiguration processes for companies
Starting point
Heritage in
market
Global structure
Localized structure
Little, greenfield approach
Extensive, brownfield approach
Narrow, involving inventory
and final manufacturing
Broad, involving inventory,
manufacturing and sourcing
Decentralizing final
manufacturing and
inventory into market
Centralizing inventory and final
manufacturing at continental
level and globalizing
manufacturing and sourcing
Tendency
Single, placing activities
into market
Multiple, relocating within
market and moving outside
market
Timetable
Short (1-10 months)
Long (number of years)
Authority
Global, top-down directions
Local, bottom-up iterative
process
Supply chain
scope
Focus
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
Stages in the
implementation of
postponed
manufacturing: local
starting point Stage 3:postponed manufacturing
sourcing
Primary
manufacturing
sales
Country 1
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
centralization
postponed Stage 3:Logistics
sourcing
manufacturing
manufacturing:
global starting point
Country 2
Country n
Inventory,
distribution
sales
Country 1
Country 2
Country n
Stage 4:Postponed manufacturing
Sourcing and
primary
manufacturing
Inventory
final manufacturing
distribution
sales
Country 1
Country 2
Country n
Organizing for international logistics
Supply chain reconfigurations involved in postponed manufacturing
Industry
software
Wine
Transport
Telecom
Pharma
Fashion
Sourcing and
primary
manufacturing
Inventory
keeping
Final
distribution
manufacturing
Service
and
sales
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