Topic 8 – Logistics in the Global Marketplace Outline 1.1Factors Influencing Companies to Enter...

Topic 8 – Logistics in the Global Marketplace

Outline

1.1 Factors Influencing Companies to Enter Global Markets

1.2 International Market Entry Strategies

1.3 The Global Marketplace – Uncontrollable Environmental Elements

1.4 The Global Marketplace – Controllable Logistics Elements

1.1 Factors Influencing Companies to Enter Global Markets

Market potential

Geographic diversification

Excess production capacity

Advantage of a low-cost position due to experience-curve economies & economies of scale

Products near the end of their life cycle in the domestic market that could generate growth in the international market

Source of new products & ideas

Foreign competition in the domestic market

Global sourcing


Strategic options available:

a. Exporting

b. Licensing

c. Joint ventures

d. Ownership


Combination of options involves consideration of:

a. Commitment to international involvement

b. Types & levels of risk

c. Degree of control desired

d. Profit potential


Exporting

a. Most common entry-level strategy

b. 3rd party companies can be used to carry out logistics & marketing functions

c. Advantages:

No direct foreign investment needed

Less risky

Low exit barriers

d. Useful experience-gaining tool before expansion of production and marketing operations overseas


Exporting

e. Disadvantages:

Difficult to compete with firms located in foreign market

Little control over pricing, promotion or distribution

High dependency on export intermediaries


Licensing

a. Licensing involves agreements that allows a firm in one country (the licensee) to use the manufacturing, processing, trademark, technical know-how & assistance, merchandising knowledge or some other skill provided by the licensor located in another country, to produce and/or distribute specific products or services.

b. Licensee pays the licensor a royalty or percentage of sales.

c. Typically used by small and medium-sized companies, useful for markets with high tariff barriers or strict import quotas


Licensing

d. Advantages:

More control over distribution since agreement usually covers distribution strategy

Does not require large capital outlays

Less risky

e. Disadvantage:

Licensee may develop into competitor


Joint Ventures

a. Equity position is established with foreign partner

b. Useful for companies wanting greater control over international operations but does not want to establish a freestanding manufacturing plant in the foreign market

c. Only option available in countries which prohibit wholly-owned subsidiaries

d. Requires greater knowledge of the international market

e. Higher risk accompanied by higher potential profits


Ownership

a. Can come about through acquisition or expansion

b. Acquisition minimizes start-up costs in foreign market – locating and building facilities, hiring employees, establishing supply chain relationships.

c. Requires more knowledge of international market compared with other entry strategies

d. Firm is totally responsible for marketing & distribution


Ownership

e. Advantages:

Highest degree of control over international operations

Allows company to compete more aggressively on price because of elimination of transportation costs, customs duties and import taxes


Ownership

f. Disadvantages:

High exit barriers because of sunk investments

Risk of government nationalization of foreign-owned businesses, especially in politically unstable countries

Exposure to exchange rate fluctuations affecting relative value of foreign investments


Countertrade

a. Countertrade is any transaction in which part of the payment is made in goods instead of currency

b. Applies to the requirement that a firm import something from the country in which it has sold something else

c. Countries that enforce this requirement usually has:

Balance-of-payments problem

Weak demand for its products

Shortage of foreign currency or credit


Five basic forms of Countertrade:

a. Barter

Goods of equal value are exchanged, no money is involved

b. Buyback

Selling firm provides equipment and agrees to buy back a certain portion of production output



c. Compensation

Occurs when a barter transaction is specified as a ratio of the value of goods being traded to the value of the product being sold

d. Counterpurchase

Involves more cash in the transaction, smaller volumes of goods flowing to the multinational corporation over a shorter period of time, and goods unrelated to the original deal.



e. Switch

A switch transaction uses at least one party outside the host country to facilitate the trade.

Countertraded goods or the multinational company’s goods are sent through a third country, for purchase in hard currency or for distribution.


Duty Drawbacks

a. Refund of Customs duties paid on imported items

b. Applicable to organizations that:

Import goods used in manufacturing

Export products that contain imported materials

c. Represent significant cost savings


Economic

a. Difficulty in increasing prices - pressure put on logistics to improve efficiency/reduce costs

b. Slow growth in specific foreign markets – productivity pressures on logistics

c. High inflation resulting in high interest rates on short-term borrowing to meet cash flow requirements

d. Poor investment climates in some countries or regions require strong profit performance to provide retained earnings for re-investment and to attract available investment monies


Economic

e. Development of trading blocs – affects all aspects of logistics

f. Foreign currency exchange rate fluctuations – add complexity and uncertainty to decision-making

g. Improving economic conditions in less-developed countries – affects international trade and associated logistics operations

h. Companies & countries change their views on use of barter and countertrade

i. Recession pressures on profits - greater corporate emphasis on cost reduction


Competition

Competition comes from both traditional, e.g. low cost producers, and non-traditional sources, e.g. e-commerce companies.

Logistics responses to competition have included:

a. Increasing number of cross-border partnerships, alliances, mergers and/or acquisitions

b. Expansion into international markets

c. Development of global communication networks operating 24 hours a day, 7 days a week


Competition

(Logistics responses to competition)

d. Establishment of country and regional warehouses in major world markets

e. Identifying and developing relationships with logistics service providers with comprehensive suite of services and global coverage

f. Using 4th party logistics service providers


Technology

a. New technology speeds up product obsolescence.

b. Products with shorter life cycles put pressures on distribution and inventory management functions.


Geography

a. Varying topography of different market regions

b. Distribution of population centers

c. Varying concentration of customer base across countries

d. All the above affect:

Mode/carrier selection

Warehouse location

Inventory volumes


Social & Cultural

a. Social & cultural components include:

Language

Education

Religion

Values

Technology


a. Social & cultural components include: (con’t)

Social organization

Politics

Infrastructure development

Regulatory systems


Social & Cultural

b. Social & Cultural trends of interest to logistics:

Continuing shift from industrial to service economies in major developed countries reflects a continuing trend towards higher levels of production and consumption of services and information in these countries.

Shift of production centers to lower-cost Eastern Europe, south America and Asia


Social & Cultural

(Social & Cultural trends)

Ability to obtain information almost instantaneously has affected areas such as structure of national and international commodity markets, outsourcing of labour, materials and components used in manufacturing, and individual views of world markets, governments and products.

Higher educational levels and more sophisticated customers with greater awareness of product/service alternatives are demanding faster and more reliable service at lower cost.


Political & Legal

a. Includes following factors:

Laws & regulations

Political climate

Levels of consumerism activity

Judicial interpretation of anti-trust laws

Trade barriers


a. Includes following factors: (con’t)

Transportation regulations

Regulations on foreign-owned subsidiaries

b. Affects marketing mix, international operations, merger & acquisition strategies, competitive responses and personnel administration decisions


Political & Legal

c. Certain marketing & logistics actions may be prohibited, limited in some way, or made mandatory.

d. Three questions must be addressed by logisticians:

What specific supply chain, corporate and/or logistics strategies are affected?

What are the financial impacts (i.e. costs) of trends and changes occurring or anticipated in the political-legal environment?

What opportunities exist for the organization as a result of trends and changes in the political-legal environment?


Customer Service

a. More difficult to achieve consistency globally

b. Requirements and therefore costs (and profitability) vary across countries.

c. Customer service programs must be tailored to fit local requirements.

d. Key area for control is the order fulfillment process – reducing cost of processing orders and shipping.


Inventory

a. International and domestic inventory management systems differ in several aspects:

International systems usually have more inventory points at more levels between manufacturers and customers.

In-transit inventories are higher for international logistics with similar sales volume due to more locations, more levels and longer transportation times.


Inventory

b. Control mechanisms available in domestic markets to influence demand and therefore inventory investment, may not be applicable for foreign markets.

c. Different inventory policies and control procedures must be deployed for each market area.


Transportation

a. Transportation modes, infrastructure and inter-modal combinations often have different characteristics across countries/regions.

Differences in degree of in-house versus outsourced transportation

Condition of infrastructure due to government ownership or subsidy


Transportation

Pre-dominance of one transportation mode e.g. water transport over the rest, due to topography or availability of modes

Differences in transportation regulatory climate

Service capabilities of carriers in each country may differ.

b. Selection of transportation modes & carriers are more complex for international logistics.

c. Customization to unique market conditions is often required.


Warehousing

a. Differences between international and domestic warehousing arise from:

Size of market area served

Types of product stored

Availability of suitable facilities

More complex labour management

Requirement for bonded warehousing

Requirement for value-added services like product localization


Warehousing

b. Basic questions to be addressed by logisticians:

Does the market for the organization’s product justify a local warehouse?

Are suitable facilities available?

Is good warehouse labour available?

What degree of automation is available?

How quickly do customers need products delivered?

Are third parties an option?

What are the relevant costs associated with public versus private warehousing?


Packaging

a. Packaging requirements for international shipments differ from domestic shipments in the following areas:

Greater protection needed due to greater distances and more handling involved.

Possibility of damage and pilferage is higher.

Climatic changes affecting temperature and humidity as shipment cross geographic regions.

Customs physical inspection and repacking

Freight rates – need to minimize weight, volume


Packaging

b. Some basic guidelines:

Know the merchandise.

Analyze the transportation environment and pack for the toughest leg of the journey.

Know the supplier.

Determine packaging regulations applicable in the country of origin, on each of the carriers and at the port of entry.

Arrange for prompt pickup at port of entry.


Information Systems

a. Track and trace systems take on added significance for international shipments.

b. International trade logistics software facilitate shipping and clearance of shipments through Customs at port of entry.

c. Global positioning systems are used for monitoring cross- border movement of high-value, high-tech, security-sensitive shipments.

Topic 8

Summary and

Conclusion

1. Companies can enter foreign markets through exporting, licensing, joint ventures, direct ownership and countertrade.

2. Each of these entry strategies have varying degree of control, risk, flexibility and cost.

3. While the components of a global logistics system may be similar to a domestic system, the characteristics of the system very often differ and require vastly different management and administration.

4. The international logistician must manage logistics operations in market characterized by uncontrollable environmental elements in the following areas: economic, competition, technology, geography, social & cultural, and political & legal.

5. At the same time, there are controllable logistics elements that must be managed and these include customer service, inventory, transportation, warehousing, packaging and information systems.

Topic 8 – Logistics in the Global Marketplace Outline 1.1Factors Influencing Companies to Enter...

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