Global Logistics
Reference:
Logistics and Supply Chain Management by
Martin Christopher (FinancialTimes/PrenticeHall, 1998)
Outline
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Globalisation and its implications
Challenges for global logistics
How the leading-edge companies manage
logistics
The new organisational paradigm
Managing the supply chain of the future
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Globalisation Trends
Worldwide cross-border trade is estimated to increase from US$5.9 trillion
in 1999 to US$8.4 trillion in 2005.
51 of the 100 largest economies in the world are corporations, not
countries. Wal-mart is bigger than Indonesia, NTT is bigger than
Ireland.
Global brands now dominate most markets: Coca- cola, IBM, Toyota, etc.
These companies seek to extend its markets worldwide
whilst seeking cost-reductions through scale
economies by sourcing globally
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Drivers of Globalisation
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Global trade liberalisation; Trade barriers diminishing
Multi-national companies evolving into real global
organisations
Production out-sourcing to lower cost regions
Improved logistics infrastructure and operations
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Why Companies Go Global?
Global Market Forces
•Local market saturation
•Foreign demand growth
•Competition at home
Global Cost Forces
•Labor cost
•Raw materials cost
Globalization
Political and Economical Forces
•Regional trade agreements
•Tariff & tax incentives overseas
•Local content requirements
© Zhi-long Chen
Technological Forces
•Access to specific technologies
•Speed to market (integrate R&D and
manufacturing)
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But…Global Operations are Not Simple
• Issues & risks in global supply chains:
-- Infrastructure in developing countries
-- Cultural, language, labor skill differences
-- Government stability, legal systems, regulations
-- Currency exchange rate fluctuation
-- Duties & tariffs
-- Different corporate tax rates
-- Import/export quotas
-- Local content rules
-- Product design issues (local customer needs)
-- Longer transportation lead times
-- Quality/reliability of local suppliers
© Zhi-long Chen
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Nike: the logistics challenge of global business
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Nike: re-created the sport shoe as “high-tech, high-performance”
products that is an icon of youth subculture, with a price to match!
Core business:
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state-of-the-art R&D capabilities
ruthless low-cost manufacturing
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“Air Max Penny” basketball shoe: designed in Oregon and Tennessee, manufactured in
South Korea and Indonesia from 52 components sourced from Japan, South Korea,
Taiwan, Indonesia and USA.
Nike markets over 300 new shoe design each year, leading to costly
overstocks if sales forecasts not achieved.
Distribution in USA is outsourced to third-party logistics providers with
IT linkage to Nike’s global sales and customer support systems,
enabling sales/inventory information to be accesible to all decision
makers concerned.
When the supply chain is global and the products are fashion-oriented,
the management of logistics becomes a key determinant of business
success or failure.
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Domestic vs. Global Business
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What is a global business?
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More than just a company that exports
source materials and components from more
than one country
geographically dispersed
manufacturing/assembly locations
market products worldwide
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Challenges facing global businesses
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local variations in markets (consumer
preferences)
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e.g. left-hand drive and right-hand drive cars
e.g. voltage and socket variations by country
production process complications
complex logistics of global supply chains
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co-ordination of production and transportation
cross-docking, merge-in-transit
economies of scale --> global cost competition
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Key Issues in Global Logistics Strategy
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Appropriate degree of centralisation?
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Management
Manufacturing
Distribution
How can the needs of local markets be met
while gaining economies of scale through
standardisation?
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Focussed Factories
Limit the range and mix of products manufactured
at a single location to achieve economies of scale
 Instead of “local-for-local” production, each
location produces a few items for the world market
 e.g. Heinz makes all the ketchup for Europe in only
3 plants and switches production depending on
local costs, demand, and currency fluctuations
Is using the global lowest-cost producer always the
best strategy?
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Focussed Factories: Concerns
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Effect on transportation costs?
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Effect on delivery lead times?
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For high-tech products, usually < 10% is direct labour
Local variations in product requirements
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More local safety-stock needed
Effect on overall savings
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Especially on low-value, low-margin products
e.g. packaging styles, language labels
Customers order a variety of products from the
same producer on a single order; but product now
produced in focussed factories in diverse locations
Product flexibility? Variety? Responsiveness?
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Centralisation of Inventories
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Pooling of inventories reduces cycle stock
(EOQ square-root rule!)
Pooling of inventories also reduces safety
stock
Philips reduced consumer electronics
products warehouses in Europe from 22 to 4
Drawbacks:
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higher transport costs
longer delivery lead times
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Virtual Inventory Consolidation
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Locating inventory near the customer, but
managing and controlling it centrally
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‘Virtual’ inventory reduces double-handling and
physical transportation costs
Requires an information system that can provide
complete visibility of demand from one end of
the supply chain to the other in as close to realtime as possible
To be response, transport costs may also increase
(e.g use of couriers for speedy delivery)
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Postponement and Localisation
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Significant local difference in customer and
consumer requirements
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e.g. refrigerators, cars
Postponement:
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design products to use common platforms,
components and modules
delay final assembly/customisation as much
as possible until final market destination and
customer requirements known
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Advantages and concerns of Postponement
Generic inventory -> fewer stock-keeping
variants
 flexibility and variety in products
 forecasting is easier at the aggregate generic level
than at individual SKU level
Mass-customisation
 “design for localisation”
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maximise variety using fewest basic components
final customisation out-sourced to local distribution
centres
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E-commerce:
Business and Logistics Concerns
Domestic --> International --> Multi-national
 Global
(Table abridged from “e-Global Logistics” by Robin Roberts,
Stephens Inc., 2000.)
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National
Brick-&Mortar
companies
doing business
internationally
National
e-commerce
companies doing
business
internationally
Physical
location
No foreign
office
No foreign
office
Foreign
trading
partners
Finite in
number
Aware and
business priority
for global
logistics
Usually Low
(not
strategic)
Suppliers:
finite
Customers:
infinite
Usually Low Usually High
(not strategic) (competitive
advantage)
Few
More
Suppliers:
finite
Customers:
infinite
Very High
(core strategic)
(logistics
integrators)
(several FFs,
brokers,
carriers)
Low
Medium
High
Issues
Intermediaries Few
in supply chain (freight
forwarders)
Global SCM
challenge
Low
Multinational
companies
Global
companies
Independent
operations in
multiple
countries
Finite in
number
Close-knit
operations in
multiple countries
regardless of
national borders
Many
(many FFs,
brokers, carriers)
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Issues
SCM System
sophistication
National
Brick-&Mortar
Some system
installed
National
e-commerce
companies
Multinational
companies
Global
companies
Not likely to
have SCM
system
SCM system
for planning
and execution
SCM system for
planning and
execution
Demand/supply Predictable.
(Few
predictability
contractual
trade partners)
Supply
predictable.
Demand
variable.
Relatively
predictable.
(Many
contractual
trading partners).
Relatively
predictable.
(Many contractual
trading partners;
projected demand).
Order
Variability
Low
Low
Medium
High
International
fulfillment
patterns
Batch
processing
(Bulk)
Real-time.
Small lot pick&-ship.
Batch
processing
(Bulk)
Batch processing
(Bulk)
Load Size
Full container
or LTL
Small package
Full container
or LTL
Full container or
LTL
Shipping
Method
Mostly ocean
Mostly air
Mostly ocean
Mostly ocean
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National
Brick-&Mortar
Issues
National
e-commerce
companies
Multinational
companies
Global
companies
Import Quota
requirements
Yes
Not likely
Yes
Yes
Local
Taxation
considerations
Relatively
complex due to
large shipment
size
Relative simple
(for small
packages)
Relatively
complex due to
large shipment
size
Very complex, use of
free trade zones and
duty regulations
Payment
mechanisms
Credit cards,
letter of credit
(LC)
Mostly credit cards
Mostly LCs,
Mostly wire
transfers, ACH
Trade
documents
requirement
Medium
complex
Relatively simple
Major
Challenge in
International
Logistics
Lack of
knowledge of
international
logistics;
Customers do
not know landed
costs for
sourcing
comparisions
Lack resource and
expertise to handle
international
logistics;
Customers do not
know landed costs
for sourcing
comparisions
documents against
acceptance,
wire transfers
Relatively
complex, due to
volume and
payment methods
Lack of easy
interface with
trading partners’
systems.
Manual process
for trade
compliance and
cost estimates
slow.
(automatic clearing
house) transactions
Very complex, due to
large shipments,
countries involved
and taxation issues
Lack of seamless
integration of
business processes
and info systems
with trading partners.
Manual process for
trade compliance and
cost estimates slow.
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Key Challenges of Global Logistics
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Extended lead times of supply
Extended and unreliable transit times
Multiple consolidation and break-bulk options
Multiple freight mode and cost options
International trade and finance issues
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Duty, tariffs, taxes, customs
Trade compliance: import ceilings and quotas, joint-venture
requirements
Cash flow, currency fluctuations, financial exposure concerns
Total landed costs can be much higher than traditional
domestic logistics (transportation + warehousing) costs
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Extended supply lead times and transit times
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Long manufacturing lead-times are sometimes artificial
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Intermediate inventory needed to buffer against unreliable
transit times
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Mind-set change from make-to-stock to make-to-order
sea freight from Rotterdam to Japan takes 5 weeks (a lot of inventory
tied up at sea!)
air-freight options may be attractive if total costs considered
International shipping, consolidation and customs delays are
significant
As variability increases, local managers tend to compensate by
over-ordering, double-buffering and requesting more
allocation
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Instead, should explore transportation options and examine supply chain to
reduce variability, increase shipment visibility and tracking
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Complex Consolidation/BreakBulk Supply Network
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Multiple Shipment options:
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direct ship from each source to final market in
full containers
consolidate in the supply region for final
market in full containers
Consolidate from each source for each
consumer region with break-bulk/intermediate
inventory in region
Consolidate in the supply region and also
break-bulk in the consumer region
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Multiple freight mode and costs options
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Variety of shipping services available
Air vs sea freight:
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Integrators provide “door-to-door” service
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air freight transport cost expensive, but may be worthwhile when
inventory holding costs, potential lost revenue and market flexibility
taken into account
DHL, FedEx, UPS, TNT
shorter and more reliable transit times
swifter and less complicated procedures, e.g. customs clearance
worldwide tracking and tracing capability
Need for end-to-end pipeline management
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co-ordinate export dept, shipping dept, freight forwarder
Compartmentalised decision-making (e.g. shipping dept,
export dept) may focus on ‘wrong’ or ‘partial’ objectives
and lead to sub-optimal decisions.
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Organising for global logistics
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Centralisation vs. Decentralisation? Efficiency vs.
responsiveness?
Global vs local decision making
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Local decision making preferable in sales, promotion and
marketing
Key principles:
 Strategic structure and control of logistics flows centralised
for worldwide cost optimisation
 Customer service localised for competitive advantage
 Global co-ordination is key, especially if many functions
out-sourced
 Global logistics information system is the pre-requisite for
achieving local service needs and global cost optimisation
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Logistics Structure and Control
If the potential trade-offs in rationalising sourcing,
production and distribution across national boundaries
are to be achieved, then it is essential that a central
decision-making structure for logistics is established. Martin Christopher
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Location decisions
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fundamentally affects the supply chain operations
long-range impact; investments in fixed assets and
equipment
exchange rate and different regional costs
must consider total cost (Activity-Based Costing)
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Customer service management
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Local markets have their own specific
characteristics and needs
opportunities for tailoring service against
local customer requirements
Monitoring of service needs and
performance
management of entire order-fulfillment
process
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Out-sourcing and partnerships
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Trend towards out-sourcing, not only for
materials and components, but also for
services
Focus on core competencies
Logistics: provision of warehousing,
inventory control (VMI) and transportation
is increasingly out-sourced
Co-ordination and liaison with strategic
partners is crucial
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Logistics Information Systems
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Only with updated and accessible
information can the complex flows of
goods be co-ordinated to achieve costeffective service
“Substitute Information for inventory”
“ Look down the pipeline into end-user
markets” to better see true demand
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Global co-ordination vs. Local Management
Global functions:
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Network structure for
production and
transportation optimisation
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Information systems
development and control
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Inventory positioning
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Sourcing decisions
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International transport
mode and sourcing
decisions
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Trade-off analysis and
supply chain cost control
Local functions:
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Customer service
management
Gathering market intelligence
Warehouse management and
local delivery
Customer profitability
analyses
Liaison with local sales and
marketing management
Human resource management
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Characteristics of Companies at the
Leading Edge of Logistics
Survey by Council of Logistics Management in North
America:
 Exhibit an over-riding commitment to customers
 Emphasise planning
 Encompass a significant span of functional control
 Commit to external alliances with service providers
 Have a highly-formalised logistical process
 Place a premium on operational flexibility
 Employ comprehensive performance measurement
 Invest in state-of-the-art information technology
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Concerning organisational structure,
leading edge firms:
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Have had formal logistics organisations longer
Tend to have logistics headed by an officer-level executive
Adopt more fluid approach to logistics organisation; encourage frequent
re-organisation to take advantage of opportunities
Favour centralised control
Becoming more centralised as they adapt organisational structure to
corporate mission
More apt to execute boundary-spanning or externally-oriented logistics
functions
Tend to manage more beyond or extended functional responsibilities not
traditionally considered part of logistics
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Concerning strategic posture,
leading edge firms:
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Have a greater tendency to manage logistics as a value-added process
Reflect a stronger commitment to achieving and maintaining customer
satisfaction
Place a premium on flexibility, particularly in accommodating special or
non-routine requests
Are better positioned to handle unexpected events
Are more willing to use outside service providers
Place a premium on how well the service company performs in managing
itself and its service to clients
Are more apt to view service-provider relationships as strategic alliances
Anticipate greater use of outside services in the future
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Concerning managerial behaviour,
leading edge firms:
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Expend more effort on formal logistics planning
Are more apt to publicise their performance commitments and standards
by issuing specific mission statements
Are more apt to have chief logistics officers involved in business unit
strategic planning
Respond effectively to non-planned events
Regularly use a wider range of performance measures, including asset
management, costs, customer service, productivity and quality
Are more significant users of information processing technology and
enjoy a higher quality of information systems (IS) support
Typically have more state-of-the-art computer applications and are
planning more updates and expansions
Are more involved in new technology such as electronic data interchange
(EDI), artificial intelligence (AI), etc.
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The new organisational paradigm
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Traditionally, organisations are
hierarchical, vertical and functionally
defined
Current and future business environment:
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focus on “speed”, just-in-time, short product
life-cycles
volatile demand
flexibility in customer requirements
Challenge: how to be a responsive
organisation?
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Distinguishing features of the
responsive organisation
Focus will shift:
 From functions to processes
 From profit to performance
 From products to customers
 From inventory to information
 From transactions to relationships
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From functions to processes
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Conventional organisations
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organised around functional silos
inwardly focussed, concentrates on use of resources
Organisations actually compete on “capabilities”
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product development, order fulfilment, etc.
through these processes are the customers satisfied
capabilities reflect processes which require coordination and co-operation horizontally across t he
organisation
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From profit to performance
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Profit is the end, but the means important too
“What gets measured gets managed”
Performance drives profitability
“New” performance indicators
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customer satisfaction: customer retention, brand preference,
dealer satisfaction, service performance
flexibility: commonality of components, reduction of process
complexity, set-up times
people commitment: employer turnover, suggestions submitted
and implemented, internal service climate and culture, training
and development
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From products to customers
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Move away from focus on products e.g. brand
managers, product group managers
Re-focus on customer satisfaction and demand
management
Emphasis on customer value
Need to be supported by accounting systems that
better identify the cost of servicing the customers
Logistics and marketing need to be managed
conjointly
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From inventory to information
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“uncertainty is the mother of inventory”
“forecasts are never right”
Feedback information on actual usage!
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Substitute information for inventory
Benetton:
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capture information at point-of-sale early in the season
flexibility in production process
reduce reliance on (highly inaccurate) fashion forecasts
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From transactions to relationships
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Tradition: focus on market share and winning customers
Keeping customers important
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the longer customers stay, the more profitable
customers who drift from one supplier to another more difficult
to satisfy than loyal and committed customers
Benefits of “single sourcing”:
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improved quality
innovation sharing
reduced costs
integrated scheduling of production and deliveries
barriers to entry of competitors
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Managing the supply chain of the
future
Since it is through people that change is
created, attention must be paid to how the
organisation develops a set of skills and
competencies that are appropriate to the
constantly changing external environment.
- Martin Christopher
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Managing the supply chain of the future
Paradigm shift
Leading to
Skills required
From function to
processes
Integral management of
materials and goods flow
From products to
customers
Focus on markets and the
creation of customer value
From revenue to
performance
Focus on the key
performance drivers of
profit
From inventory to
information
Demand-based
replenishment and quick
response systems
Supply chain partnerships
Cross-functional
management and
planning skills
Ability to define, measure
and manage service
requirements by market
segments
Understanding of the
“cost-to-serve” and timebased performance
indicators
Information systems and
information technologies
From transactions to
relationships
Relationship
management and win-win
orientation
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Role of information in the virtual supply chain
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Internet and other IT technologies can now link the customer directly
to the supplier, and allow the supplier to react, sometimes in realtime.
Geographically dispersed “network” of specialists can be joined
together to create innovative and cost-effective solutions for complex
designs e.g. Boeing, Airbus, Infosys
Tesco’s
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sets up information exchange extranets to implement efficient
consumer response (ECR) to reduce waste and improve product
availability
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on average, 5 to 10 % of products on promotion
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suppliers can access Tesco sales data and track their products
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enables the firm to estimate stock levels to fulfil promotions
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specifications for new products can be available on-line
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The extended enterprise and
the virtual supply chain
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Boundary-less
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horizontal process management
across vendors, distributors, customers
value-added exchange of information between
partners
Supply chain becomes a synergistic confederation
of organisations with agreed common goals, each
bringing specific strengths to the overall value
creation
Example: Smart Car
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Making Change happen
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Clear vision of the role of logistics in the
organisation
significant organisational change
new ways of working with upstream and
downstream partners in the supply chain
underpinning information systems
established
Effective leadership crucial
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Summary
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Continuing trend towards globalisation
global brands, global sourcing, focussed factories serving the world
market
Increased complexities: longer supply chains, more out-sourcing
Need to balance the varying needs of local markets against the
economic advantages of standardised procedures/products
Challenge: a flexible and agile supply chain yet achieves
economies of scale/scope
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Requires organisational change within firm and with supply change
partners
Integrated logistics planning; information technologies
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