Chapter 13 (1)

Chapter 131

Global Logistics and Distribution

Chapter Overview2

1. Definition of Global Logistics2. Managing Global Logistics3. Free Trade Zones4. Maquiladora Operation5. Global Retailing

Introduction3

Global logistics and distribution have played a critical role in the growth and development of world trade and in the integration of manufacturing on a worldwide scale.

The use of appropriate distribution channels in international markets increases the chances of success dramatically.

In the United States, the total logistics cost has amounted to ten to eleven percent of the country’s GDP every year in the last decade.

Introduction (contd.)4

As firms start operating on a global basis, logistics managers need to manage shipping of raw materials, components, and supplies among various manufacturing sites at the most economical and reliable rates.

The development of intermodal transportation and electronic tracking technology has resulted in a quantum jump in the efficiency of the logistic methods employed by firms worldwide.

1. Definition of Global Logistics5

Global logistics is defined as the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost (see Exhibit 16-1).

Materials management refers to to the inflow of raw material, parts, and supplies through the firm.

Physical distribution refers to the movement of the firm’s finished products to its customers, consisting of transportation, warehousing,

1. Definition of Global Logistics (contd.)

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inventory, customer service/order entry, and administration.

2. Managing Global Logistics7

The following factors contribute to the increased complexity and cost of global logistics:1. Distance2. Exchange rate fluctuations3. Foreign intermediaries4. Regulation5. Security

2. Managing Global Logistics (contd.)

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Modes of Transportation Value-to-Volume Ratio Perishability Cost of Transportation Ocean Shipping

Liner ServiceBulk Shipping

Air Freight Intermodal Transportation

2. Managing Global Logistics (contd.)

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Warehousing and Inventory Management Hedging Against Inflation and Exchange

Rate Fluctuations Benefiting from Tax Differences Logistic Integration and Rationalization E-Commerce and Logistics

Third-Party Logistic (3PL) Management The largest 3PL sector is the value-added

warehousing and distribution industry.

3. Free Trade Zones10

Logistical Revolution with the InternetThe trend toward third-party logistics is

a result of the Internet and the intranet as well as concentrating on core competencies.

A free trade zone (FTZ) is an area that is located within a nation (say, the United States), but is considered outside of the customs territory of the nation.

3. Free Trade Zones (contd.)11

FTZs provide many cash flow and operating benefits to zone users and include (see Exhibit 16-2): 1. Duty deferral and elimination 2. Lower tariff rates 3. Lower tariff incidence 4. Exchange rate hedging 5. Import quota not applicable

4. Maquiladora Operation12

The maquiladora industry, also known as the in-bond or twin-plant program, is essentially a special Mexican version of a free trade zone and was started in 1965.

Mexico allows duty-free imports of machinery and equipment for manufacturing as well as components for further processing and assembly, as long as 80 percent of the plant’s output is exported.

4. Maquiladora Operation (contd.)13

Mexico permits 100 percent foreign ownership of the maquiladora plants in the designated maquiladora zone.

Most of the maquiladora plants are located along the U.S.-Mexico border, such as Tijuana across from San Diego, Ciudad Juarez across from El Paso, and Nuevo Laredo across from Laredo. Other cities include Monterrey, Mexico City, and Guadalajara.

Mexico has been an attractive location for labor-intensive assembly because of cheaper labor.

5. Global Retailing14

In developed countries, retailing employs between 7 percent and twelve percent of the workforce.

In 2002, Wal-Mart was the largest retailer in the world with a total revenues of $220 billion. Only 10 percent of its sales are generated outside its core NAFTA region.

“Push” versus “Pull”: The traditional supply chain powered by the

manufacturing push is becoming a demand chain driven by consumer pull, especially in the developed countries.

5. Global Retailing (contd.)15

On-Time Retail Information Management Reduced Inventory Market Information at the Retail Level

Strong logistics capabilities can be used as an offensive weapon to help a firm gain competitive advantage in the marketplace.

Retailing Differences Across the World: Industrialized countries tend to have a

lower distribution outlet density than the emerging markets.

5. Global Retailing (contd.)16

The advanced facilities available in the developed world allow a much higher square footage of retail space per resident, due to the large size of the retail outlets.

Large-Scale Retail Store Law (LSRSL) in JapanThis law helped to protect the small

retail stores E-Commerce and Retailing

5. Global Retailing (contd.)17

Countries such as Japan and Germany are warming up to the same e-commerce revolution as the United States has experienced.

E-commerce is not limited to the developed countries.

China is already the fastest growing Internet market in Asia.

5. Global Retailing (contd.)18

Brazil is the most wired nation in Latin America.

Despite the rapid growth of the Internet, the need for local or regional distribution of products is likely to remain as important as it was before the Internet revolution.

Despite the rapid growth of the Web, the need for local or regional distribution of products is likely to remain as important as it was before the Internet revolution.

B5M1

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QUIZ 3

1. Discuss the drivers of foreign market pricing.10 marks

2. Discuss the advertising budgeting method.10 marks

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