CHAPTER 9 GLOBAL LOGISTICS

Global Logistics

The evolution of logistics in the 1990s can be traced back to “physical distribution management” in the 1970s when there was no coordination among the various functions of an organization, and each was committed to attain its own goal. This myopic approach then transformed into “integrated logistic management” in the 1980s that called for the integration of various functions to achieve a system-wide objective. SCM further widens this scope by including the suppliers and customers into the organizational fold, and coordinating the flow of materials and information from the procurement of raw materials to the consumption of finished goods.

The objectives of SCM are to eliminate redundancies, and reduce cycle time and inventory so as to provide better customer service at lower cost. The focus has shifted from the “share of the market” paradigm to the “share of the customer paradigm, wherein the goal is to create “customer value” leading to increased corporate profitability, shareholder value, and sustained competitive advantage in the long run.

Logistics involves getting, in the right way, the right product, in the right quantity and right quality, in the right place at the right time, for the right customer at the right cost. The logistic network consists of the suppliers, the retailer and the users. The purpose of an integrated logistic network in a supply chain is to fulfill customer orders through providing place utility to deliver products and services to end users. The place utility is achieved by managing a number of key functions of a supply chain. The functions include:

• Demand management • Inventory management • Transportation • Warehousing • Order processing • Information Management

Logistics is a key enabler of supply chain collaboration. Improving performance in this field allows supply chains to increase their efficiency significantly and help to create innovations in different areas. In this context, an important task is to find structures and approaches which enable all types of performance management in logistics and supply chains for a better fulfillment of customer needs.

Supply chain management is a cross-function approach including managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end-consumer. As organizations strive to focus on core competencies and becoming more flexible, they reduce their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and the velocity of inventory movement. There are four major decision areas in supply chain management:

1) Location 2) Production 3) Inventory

4) Transportation (distribution)

And there are both strategic and operational elements in each of these decision areas.

In literature, logistics and SCM are often used interchangeably, though there is a subtle difference between the two. SCM is more strategic in nature whereas logistics is more operations-oriented. While SCM deals more with the linkages in the chain, contracts and relationships, supplier selection, information and financial flows besides materials flows, creating new facilities such as plants, warehouses and distribution centre’s, and broader issues such as society, economy, government and environment, the scope of logistics is more or less confined to the routine job of transportation and storage of goods. However, if one deeply ponders, one may realize that logistics is the core of SCM, and if logistics fails, the whole chain snaps.

Though logistics deals with mundane vehicles, warehouses, layouts, material handling equipment, Motor, Vehicles Act, toll tax, sales tax, documentation etc., efficient management of it has the potential to make the chain taut and agile. Therefore, there is growing interest in logistics, and hence in SCM, around the world.

GLOBAL LOGISTICS AND SCM

Until a few years ago, logistics was rarely a subject discussed in the executive suites of large corporations. But today, in the highly competitive global world, logistics has moved from the basement to the boardroom. Initially the concept was to increase sales. Today, the concept goes beyond that to include managing costs. And the most obvious factor, why global logistics is now getting great attention is this four letter word- cost.

Logistics is applicable to every industry; be it construction, express delivery, automobiles, management of airports, retail, or any other. We increasingly find goods from all over the world around us-Korean cars, Italian fashion goods, Swiss cheese, South African wines, Indian garments, Japanese electronics and more. The focus remains not only on getting them available locally but getting the right product, at the right time, in the right quantity, at the right place, in the right condition, at the right cost. This is indeed what gives a company an edge over its competitors-and is increasingly the biggest challenge they face.

One of the most complex jobs today is of a logistics and supply chain manager. The rapid reduction of international trade barriers has led to an equally rapid growth of the logistics industry. The globalization that is a by-product of extensive use of the Internet has increased the need for a flexible logistics infrastructure to support a global supply chain, enabling the movement of goods from a growing number of source locations to meet market demand. The logistics sector comprises two primary segments – the shipper community (defined as those organizations who manufacture and sell products) and the service provider community (those organizations who provide transportation, distribution and related services). Although each of these segments has a different perspective, the key enabler for logistics excellence is information. The real-time exchange of this information, to include all parties, is a key enabler to supply chain management. This facilitates supply process visibility, exception notification, advanced receipt of shipment line item details as well as proof of delivery information.

Global Supply Chain Management

Because of competitive pressures in the global marketplace, companies are rapidly migrating to low-cost sources of labour and materials, which are typically located in countries that also represent emerging market opportunities. But the speed of this change may bring challenges associated with escalating shipping costs and increased supply chain risk, and these challenges could exceed a company’s internal skill and resource capacity. If we are adopting global sourcing practices, we may not yet have the foreign trade experience necessary to manage regulatory compliance and related global supply chain management complexities. For example, multiple, autonomous business units within an organization can contribute to a fragmented logistics process as well as create missed opportunities for leveraging economies-of-scale. Individual business units may also lack the necessary economies-of- scale needed to establish a competitive foothold and gain sufficient influence in emerging markets.

Balancing inbound and outbound supply chain logistics requires a comprehensive strategy that incorporates all the key functions of a supply chain to accelerate or expand sourcing from emerging markets. This horizontally integrated approach also helps you make strategic decisions regarding partnerships, shipping and other factors, to help ensure that savings from global sourcing are not eroded

by increased logistics costs. Even more significantly, such a strategy can enable you to go beyond sourcing to position your organization to leverage your logistics capabilities to sell and distribute products within those emerging markets.

Key Players in Logistics Arena

In addition to the shipping community, categorized as organizations that consume transportation and distribution services, the logistics market place is dominated by transportation providers, storage providers and Third Party Logistics Providers.

A growing trend for organizations focused on managing their supply chains is to outsource part or all of the logistics functions to Third Party Logistics Providers – 3PL’s. By definition, these are independent companies that design, implement and/or manage a client’s supply chain logistics needs. The key differentiating factor between a 3PL and a transportation provider is that a 3PL provider’s primary value-add is based on information and knowledge, versus providing an undifferentiated service at the lowest costs. In addition to providing expertise, a key to managing the complexities of a global supply chain with regulatory and other issues, 3PL providers leverage their infrastructure and freight rate negotiations over a large base, providing cost advantages. Additionally, for companies experiencing seasonal demand for their product, outsourcing the logistics function transforms a fixed cost into a variable cost.

The transportation industry includes water transportation, air transportation, motor freight and railroads. In an effort to enhance customer service, transportation providers are upgrading from telephone/fax to information technology. In many cases a combination of web-enabling technologies are used to receive shipment instructions, track and trace

shipments and compile/post statistical information. Electronic commerce, the Internet and the World Wide Web are key enablers for IT strategies.

In addition to the networks of storage facilities operated by the shipping and 3PL

community, there are commercial warehouse operators who provide storage facilities for both dry goods and temperature controlled product. These can be either contract

warehouses, or public warehousing facilities. Contract warehousing provides storage facilities to a single client, normally under a long-term contract. Services provided could include additional value added services such as kitting, configuration etc. This is a growth area, due in large part to the requirements of web-based storefronts. Public warehouses provide storage for a variety of clients, either on a short term, or seasonal basis, or on a longer term.

In addition to storage and transportation management these facilities also provide value- added services as required. Temperature Controlled Warehousing/Frozen Storage facilities are similar to both public and contract warehouses, the primary difference being that they are temperature controlled, based on product requirements – refrigerated, frozen etc. This type of storage is extensively used in the food industry and in response to market demand is increasing their value-added service offerings. In addition to the traditional warehouse facilities, there are specialized facilities that offer national parts distribution, or storage and distribution for products with low velocity or those of a hazardous nature.