GLOBAL LOGISTICS

Domestic and Global Logistics:

What makes Global logistics different from logistics in general?
Firstly, the fundamental concepts & functions are the same, however:
Global logistics is fuelled by the process of globalisation world as the potential market
sourcing, manufacturing, researching, raising capital, selling
Global logistics gains significant attention mainly because of
its complexity and uncertainty (associated with the geography of Global Logistics)
Global logistics management is more complicated because of the differences in the Global
trading environment
We can see four similarities:
Structural characteristics are the same (both involve managing the movement and storage of
products)
Similar Framework (linking supply sources, plants, warehouses and customers)
Functional processes are the same (inventory management, warehousing, order processing,
carrier selection, procurement and vendor payment)
Information is crucial to both (customer service, inventory control, service quality monitoring
and cost control)
On the other hand, the differences are suggested as followed:
Different operational domains
Systems and user capabilities vary widely
Distance Usually longer supply chains
Global logistics is difficult to manage through one platform, because the users are large and
spread around the world
In addition, these differences must be viewed in two parts:
Part of Global logistics systems where the flow of network ties one nation to another. The
differences in this system can be classified as basic differences, Which includes:
o Physical distance
o Currency variation and exchange rate differences
o Border-crossing regulations and documentation
o Transportation modes
The other part of an Global logistics system is that set of subsystems which exists within
each nation, state, or market. The differences here are classified as country-specific differences (e.g.
Cultural, Political, Governmental, Infrastructural), which includes:
o Intermediaries vary
o Reliability of carriers may be different
o Computation of freight rates may be different
o Packaging and labeling requirements differ

Furthermore, briefly here are the impacts of Global logistics:
Logistical costs are 10% to 30% of the total landed cost of an Global order
Logistics has become an instrument of competitive advantage in Global trade
Factors necessary for the use of logistics as a competitive tool:
Close collaboration with suppliers and customers
o Technologically advanced information processing and communication exchange capabilities
o An integrated business infrastructure
The next section is showing the complexities of Global logistics:
Nature of Global Markets
o tastes, languages, cultures, traditions, political system
Nature of Procurement or Sourcing
o Different expectations from customer service, difficulty of control over deliveries and
inventories, problem with quality control (cost, quality, environment, etc.)
Global Trade
o divergent currencies & exchange rates, complex documentation and terms of sale, more
intermediaries
Divergent Nations and Trading Blocs (192)
o tariffs and non-tariff barriers, preference for national carriers, requirement for joint ventures
with national carriers
Multinational or Global corporations
o Intra-firm trading
Differences in Infrastructure: (concord)
o Size of ports, roads, railways, railcars, warehouses
Different Customs and Legal Framework:
o Environmental regulations, customs & labelling laws (recent trade security regulations from
U.S. Customs; Security and Accountability for Every Port Act)

Additionally, there are five points illustrating the magnitude of Global logistics:
The logistics systems have had the effect of shrinking the world, empowering competitive
trade.
Lower labour cost from Global outsourcing is a critical component of the supply chain.
Focused manufacturing fits well into an Global logistics strategy
To gain a competitive advantage, global sourcing is a given for companies engaging in global
marketing strategies.
The longer the supply chain, the more cooperation and coordination is required between
production, marketing, purchasing and the logistics management.
As we can see, with the global market developing, trade barriers continue to fall, which is
accelerating global business activities. And this results from the general homogenisation of global
needs and wants. Firstly, Local needs suborned to lower-priced, higher-quality products. Secondly,
preferences for Global products can also be related to attempts to copy other more prosperous
cultures (e.g. Coca cola, MTV, BBC, Sony, McDonalds, Burger King, and KFC)

To effectively serve global markets, firms should consider adopting integrated worldwide
strategies. These firms are more likely to search for global sourcing for materials and components,
depots, assembly, distribution centers, and logistics. Specifically, Global firms typically design
synchronous strategies around technology, marketing, manufacturing, and logistics.

For global markets, customer service strategies contain four characteristics:
Marketing becomes standardised yet customised (advertisements/commercials)
Product life cycles shorten, sometimes to less than one year (cars 5, PCs 3, Clothing 1
season)
Outsourcing and offshore manufacturing are becoming more prevalent.
Marketing and manufacturing activities and strategies tend to converge and be better
coordinated in firms operating globally.


As a result, Logistics networks tend to become more expansive and complex. Reasonably, lead
times and inventory may rise and Logistics activities must be operated as a system to provide a
countervailing force. Most importantly, the service needs of Globally-dispersed customers must
drive the design and implementation of the logistics system.
Conclusion
Logistics has become an important area of business activity in recent times
It is a critical part of supply chain management
With the development of new technology and processes, logistics-related costs have been
declining globally
Logistics adds place and time value to products
Logistics has an important relationship to manufacturing, marketing, finance, and other areas
of companies
Global Corporation
Global company is more than a multinational company. Global company operates as though the
entire world were a single market, with close integration between various foreign subsidiaries.
In the global business, materials and components are sourced world-wide, manufactured off-shore
and sold in many different countries with local customisation. They are also the leading
beneficiaries of globalisation. Here is a table to show you the example:


Global supply Chain Strategy
Globalisation and Logistics
Global corporations are a driving force behind the developments in international logistics and
shipping.
Products are sourced, manufactured and marketed in many countries
Complex and simultaneous decisions need to be made about many logistics factors such as
inventory location, consignment size and transport times over vast distances.
Important decisions about production and appropriate levels of customer service will also have a
serious impact on logistics.
Here is a conceptual map of supply chain:
And then, this is the international supply chain:
Moreover, we have three common features of global business, which are:
Materials and components are sourced in more than one country
Assembly and manufacturing take place in more than one country
Products are marketed world-wide
As a result, here is the figure to show the business environment of Global Organisations and
Production Location Decisions:
The next is a case of TV manufacturing industry to show you the impact of globalisation on
business:
Prior to 1970, TV manufacturing (like most manufacturing 30 years ago) was vertically integrated
(a single manufacturer designed, produced and assembled each part).
TV production was concentrated in US, Japan and Germany three top industrialised nations.
Today's supply-chain model is - virtual integration (companies rather than manufacturing every
component depend on a virtual and dynamic co-ordination of external suppliers.
This led to a large degree of standardisation in product design and hence manufacturing
simplicity.
By standardising TV sets, companies are able to easily replicate the manufacturing process around
the world.
Arguably, this is the single most important innovation that has set the wheels in motion for the
globalisation.
TV sets are no longer manufactured, but assembled.
Over 40 countries from Ethiopia to the US have TV assembly lines.
More than a dozen new factories open yearly in less developed countries. A handful of them close
or shift to better locations.
TV makers will keep moving to low-cost, high-skill labour locations that become available as
less-developed countries engage on the road to development.
A TV set does not travel a long way from its assembly point to the store, but its internal
components travel a long way to get to the assembly point.
It's cheaper to ship millions of small parts bought at competitive prices than to build millions of
TVs at a single location and ship them around the world.
This phenomenon is not exclusive to TV manufacturers but also to other sectors.
Global corporations continuously switch part of their business operations to low-cost countries.
A desirable low cost location has plenty of skilled workers, affordable labour rates, a large market
at proximity and choice of component sourcing either in the same country or within local areas.
Previously suppliers had to be located nearby assembly plants, today they don't have to.
Advances in logistics allow the precise co-ordination of shipments according to a complex
optimisation of JIT delivery schedules.
On the other hand, here are three factors why globalise is needed:
In search of raw materials Moving raw material from countries with surplus natural resources.
In search of cheap labour Companies taking advantage of low regional labour costs to maximise
profitability on labour-intensive manufacturing (South East Asia, China, India, and Bangladesh).
In search of markets Companies taking advantage of the globalisation process and lowering of
global trade barriers.


Global Strategies
I. Concentrating production at a few major sites
The benefits of concentration are related to economies of scale, which allow longer production
runs and hence overall cost reduction
Concentration also permits more rapid introduction of new products into a wider market
Prerequisites required for concentration
o Products must have a significant degree of commonality.
o Transport costs must be low relative to other resource costs (raw materials and storage).
o Transport must be reliable.
o The company must have centralised marketing control.
Concentration of production create problems for the manufacturer
o Ford Motor Company concentrated production of Fiesta at Saarlouis (Germany), Dagenham
(England) and Valencia (Spain).
o It would be cheaper to have a single mega production point.
o But this might be a dangerous example of putting all one's eggs in one basket, should there be
transport disruption such as a port strike or a lorry border blockade.


II. Limited range of production (focused production at a single site)
Focused Factory - a company produces a few products to achieve very high volumes economies of
scale.
Companies are able to switch production from one factory to another depending on changing local
circumstances and exchange rates.
o VWs future is pessimistic. In US, its cars are sold at a loss, because of the strength of the euro
and the relative inefficiency of VWs German factories. VW is unable to downsize its labour force.
o VWs bizarre decision to axe low-cost production in Belgium, Spain and Portugal and to
repatriate production to more costly German plants is to make better use of its capacity.
Focussed production create problems for the manufacturer
o Transport costs and delivery lead times are likely to increase
o Special local market features (e.g. other language labelling) may be required
o A single customer order may require a range of products manufactured at different plants
o The company may be slow to respond to changing market circumstances


III. Centralized Inventories and Information
The concentration of inventory can reduce the overall level of inventory in the system or supply
chain.
Gillette wanted a two-day order-to-delivery time across Western Europe, which could be achieved
by eight warehouses instead of thirteen.
Energizer (European wing of Eveready Battery) reduced its distribution centres from 60 to 6 in
Western Europe, with the aim of focusing on two European heartland warehouses with satellite
distribution centres outsourced to third parties.

IV. Low-cost sources of supply
Outsourcing to low-cost countries has become very common in recent years
Outsourcing continues despite the obvious difficulties in purchasing from another country
o Language difficulties
o Currency problems
o Differences in legal systems
o Contract arrangements for transport
o Contract arrangements for insurance in transit
o Customs clearance and documentation
o Methods of payment
Apart from these difficulties, there are issues associated with remote suppliers that are more
closely related to modern logistics
o Longer, less predictable delivery times
o Small, frequent JIT deliveries difficult
o Quality difficulties (especially returns and replacements) lead to higher inventories
o Difficult communications
o Suppliers have many customers, leading to poor cus¬tomer service
o Low productivity of suppliers


V. Acquisitions and mergers
Alliances (e.g. joint ventures, licensing arrangements) are aimed at minimising the risk undertaken
by a single firm.
Such developments can have far reaching implications for logistics companies. For example, if
two merged manufacturers have been using different logistics providers, they may decide to
consolidate their business with only one provider.

Global Supply Chains and Logistics
Clashes between the demands of globalisation and time-based competition
o Improvements in manufacturing can be made through global concentration or focusing of
production
o However, the goods will have to be taken to market often on the other side of the world
Modern logistics and Global Distribution
o Minimal inventory levels, with small shipments being delivered close to the time of customer
demand
o Given the large distances from production to market, there are particular problems for inventory
management
o On the one hand, there is scope for effective inventory management with fewer inventory
locations. However, where exactly inventory is located requires careful consideration
Five factors critical to global supply chains:
o Extended supply lead times
o Lengthy and unreliable transit times
o Complex consolidation options
o Complex freight options; and
o Shipping of intermediate components
Given the large distances in global transport, a company with a few manufacturing sites
worldwide would have problems of supply to a global market
One solution is to provide intermediate inventory points between manufacturing and the market.
However, an increase in the inventory points increases the overall level of inventory in the supply
chain

Principle of Postponement in Global Distribution
o Requires the delay of specific product decisions until the last moment, enabling a flexible
response to markets
o Due to uncertainty, local managers in the market over-order and raise inventory safety stock
levels. This leads to an increase in transport cost
o The principle of postponement advocates the maintenance of a generic stock until the last possible
moment, when the goods are then customised to suit the needs of a particular market
o Zinn and Bowersox - five different types of postponement (labeling, packaging, assembly,
manufacturing, and time)

Global Supply Chains and Low Transport Costs
Beginning of 20th century - International trade was dominated by raw materials (wheat and iron
ore carried as bulk cargo). With their low prices, the cost of transporting them was relatively high
Since then the world economy has evolved and manufactured products have grown in importance
Many modern products (those with advanced technology) have a high value that transport costs
form a negligible proportion of total costs and are of limited importance in decisions about
production location
Transport costs continue to be significant for many other products. For example, steel produced in
Asian countries cannot be exported if transport costs exceed around 50% of steel production costs
Scale economies in bulk shipping have been gained through specialisation and the use of larger
ships, thus generating cheap transport
Specialised ships such as chemical carriers, LPG and LNG carriers can carry large amounts of
cargo and can load and discharge efficiently
Global supply chains are facilitated by low transport costs
Freight transport costs have diminished relative to costs of many other products, so that it is
cheaper to transport goods around the world than before
Between 1980~1999, the value of world trade grew at 12% per year, whilst total freight costs
during this period increased by only 7%, demonstrating the falling unit costs of marine
transportation. Here are two figures to show the typical ocean freight costs:

The transport cost element in the shelf price of consumer goods continues to be marginal
For example, transport costs account for only 2% of a television shelf price and only 1.2% of a
kilo of coffee
The cost of shipping continues to fall sharply, which has accentuated the global manufacturing
process
In the past, all the production processes for manufactured goods were completed within the
boundaries of a single nation
At present, with relatively low transport costs, outsourcing of components from any part of the
world is possible
Fragmentation of production mostly takes place between areas with low trade barriers and/or
transport costs

Chapter II
Introduction to International Logistics : Logistics in global economy,
Logistics is also important on the global scale. Efficient logistics systems throughout the world
economy are a basis for trade and a high standard of living for all of us. Lands, as well as the people
who occupy them, are not equally productive.
That is, one region often has an advantage over all others in some production specialty. An efficient
logistics system allows a geographical region to exploit its inherent advantage by specializing its
productive efforts in those products in which it has been an advantage by specializing its productive
to other regions. The system allows the products landed cost (production plus logistics cost) and
quality to be competitive with those form any other region. Common examples of this
specialization have been Japans electronics industry, the agricultural, computer and aircrafts
industries of United States and various countries dominance in supplying raw materials such as oil,
gold, bauxite, and chromium.
Furthermore Logistics has gained importance in the international marketing with the following
reasons:
1. Transform in the customers attitude towards the total cost approach rather than direct cost
approach .
2. Technological advancement in the fields of information processing and communication.
3. Technological development in transportation and material handling.
4. Companies are centralizing production to gain economies of scale.
5. Most of the MNC organizations are restructuring their production facilities on a global basis.
6. In many industries, the value added by manufacturing is declining as the cost of materials and
distribution climbs.
7. High volume data processing and transmission is revolutionizing logistics control systems.
8. With the advancement of new technologies, managers can now update sales and inventory
planning faster and more frequently, and factories can respond with more flexibility to volatile
market conditions.
9. Product life cycles are contracting. Companies that have gone all out to slash costs by turning to
large scale batch production regularly find themselves saddled with obsolete stocks and are unable
to keep pace with competitors new-product introductions.
10. Product lines are proliferating. More and more product line variety is needed to satisfy the
growing range of customer tastes and requirements, and stock levels in both field and factory
inevitably rise.
11. The balance of power in distribution chain is shifting from the manufacturers to the trader.
Stages of international development, managing the
Employees of a major international third-party logistics provider refused to work in a distribution
facility in Mexicowhich they thought was haunteduntil the 3PL arranged for exorcism rites to
be performed.
A major electronics firm with high quality standards discovered that factory personnel in some
countries were modifying quality testing scores to make it appear that those factories were making
perfect product.
At an employee-of-the-month ceremony, the American manager of a facility in China recognized a
worker's superior performance by giving him a clock. "You could hear a gasp throughout the
audience. In China, giving a clock as a present signifies oncoming death," says Frank W. Lange,
director of international development for Menlo Worldwide Logistics, Redwood City, Calif.
These examples illustrate how cultural complexities can add layers of challenges to global
logistics and supply chain management
. When doing business internationally, "people with the best intentions can create huge problems for
themselves," Lange says. "It's very easy to take a misstep."
"If you throw very good U.S.-based logistics experts into another country, no matter how smart they
are, they will make all sorts of mistakes unless they're sensitized to cultural differences," says Paul
S. Bender, a consultant with Supply Chain Executive Advisors LLC, Miami, Fla.
With the United States' percentage of the world economy half what it was 50 years ago, "there's
increasing pressure to do business globally," Bender says. "Companies have to be prepared to do
international and global logistics, not just domestic."
THE THREE STAGES OF GLOBAL
The first step to preparing for international logistics is understanding what stage of global business
your company is in currently.
Companies that simply export and import product are in the first stage of globalization, explains
Gene Tyndall, associate director of the Center for Advanced Supply Chain Management at the
University of Miami, Florida. This includes companies that export products to countries where they
are sold, as well as companies in the United States (or elsewhere) that import everything they sell
within their domestic market.
Companies in Stage Two are doing business internationally. They often work through distributors
or subsidiaries, and may have some regional production and sourcing. They tend to have
decentralized management and operations, Tyndall says, and different processes and IT in place.
Companies in Stage Three are considered global, have global brands, and do business around the
world. "Global companies have global sourcing and distribution, and more centralized planning,"
Tyndall says. "They think globally, operate regionally, act locally." A global company will have
common processes, so that, except for local differences, a distribution center in China will operate
similarly to a DC in Ohio.
Operating globally creates different requirements than operating internationally. "If you move to a
global proposition, you have to think in terms of the entire organization, which can no longer be
headquarters-driven. Instead, it should be network-driven," saysNicholas J. LaHowchic, president
and CEO of Limited Logistics Services Inc., Columbus, Ohio.
Having a global mindset requires a new way of looking at how the company does business,
internally as well as externally. "For example, a global company would ask, 'are our accounting,
business, and sales practices prepared to take us into the areas our customers demand that we go?
Do we have a diversified workforce with many cultures?'" says Frank Lange.
INCREASED COMPLEXITY
Whether you work internationally or globally, the challenges are far different than those of working
domestically. "The complexity is much higher. Risks are much higher. The uncertainty is much
greater," Bender says.
For example, logisticians working internationally "have to understand currency implications from a
logistics point of view," he says. "Financial matters such as exchange rates can change the selection
of suppliers, transportation modes, inventory levelsthey can have a direct impact on very
important logistics variables."
Distance is also a critical factor in international business. "Distance always provides a challenge
logistically," says Robert Gifford, vice president of global logistics for Hewlett-Packard
Company, Palo Alto, Calif. "When you buy your chips from Korea to go to China to be assembled
for a product launch in Indianapolis, that's much more challenging than having the chips come in
from Chicago." HP serves customers in more than 160 countries on five continents.
Other factors such as differences in inflation and political risk can come into play in international
and global logistics.
In addition, "you're putting together a supply chain that has all the nuances of each region.
The Chinese New Year, the Cherry Blossom Festival, Oktoberfest, and the Fourth of Julythose
all play into operations," Gifford says. The hard part is that you don't have the familiarity around
the world that you have with occurrences in your home country.
"I know when the Fourth of July is coming, but I'm not as familiar with the Australian holiday
for independence. If that interrupts my supply chain, particularly in a just-in-time environment, the
ramifications could be big," he says.
Add cultural differences to the mix, which "are probably the greatest area of complexity," Bender
says, "and it becomes even more of a challenge. That's where most mistakes tend to be made."
While most large companies have or can get the expertise required to cope with
international finance, exchange rates, and inflation, "they may not have the smarts to find out the
differences among people, including cultural, historical, language, and laws," he says.
Despite what Bender calls "a tendency to assume that the rest of the world must be very similar to
our part of the world, that what works here will work everywhere," cultural differences can be
tremendously important.
"Cultural differences exist whether you operate domestically, internationally, or globally," Tyndall
says. The relevance of culture increases sharply as companies go global.
Logistics professionals who don't pay attention to such cultural differences "could make significant
mistakes that would create a veiled resistance to others doing business with them," Bender warns.
Breaking taboos in another culture may cause others not to want to do business with you, or
introduce barriers to achieving optimum results.
Resolving cultural differences will never happen by itself. Doing so requires sensitivity, awareness,
and savvy. But becoming globally competent means more than knowing "how to use chopsticks in
Asia or drink wine in France," notes Frank Lange, who has been involved in international business
for 20 years.
Some areas where cultural differences may come into play in the logistics/supply chain arena are:
Establishing relationships. "Cultural differences can have a huge impact when setting up an initial
relationship," says Gene Tyndall. "In the United States, you may be able to do it over the phone. In
Asia, it takes face-to-face time, contact, and trust.
"In the United States, business is business. As long as there's a profit, we'll tend to do business with
someone. That's not the case everywhere," he notes. "In Asia, for example, people won't do
business with you unless they feel very comfortable with you. Selling yourself and establishing a
cordial relationship, is a prerequisite to doing business."
Establishing such relationships doesn't happen overnight, Bender warns. "You have to be very
patient. If you push, you may drive people away."
Use of third parties. "In some parts of Asia, inviting a third party to design and implement a
supply chain management model for your business can imply you have not done your job properly,"
says Rick Moradian, APL Logistics president for Asia/Middle East. "This type of scenario must be
treated with sensitivity and highlights the need to have team membersregardless of their
nationalitywho are familiar with the cultural and linguistic sensibilities of client companies."
Contracts. "In the United States, we believe firmly that a commitment, a contract, has to be
honored. If you sign the contract, you either live by it or you're taken to court," Paul Bender says.
But in other parts of the world, "a commitment is a statement of intent, and if the situation changes
significantly, you're not expected to fulfill your part of the commitment."
For example, a major devaluation in your currency or your supplier's currency may cause your
trading partner to feel that it's no longer in their interest to honor the commitment. "While that's
unacceptable in the United States, it's perfectly acceptable in their culture," says Bender.
Differences in working style. "When you deal in an international situation, you have to be aware
of people chemistry," says Robert E. Murray, president, REM Associates, a management and
supply chain consulting firm based in Princeton, N.J. Murray and colleagues helped a global
consumer products company implement a new production planning and scheduling system in 10
countries in the Far East, Middle East, Africa, and Central and South America.

INTERNATIONAL LOGISTICS SYSTEM ELEMENTS

The following are the system elements of logistics:
1. Order processing
2. Warehousing
3. Inventory control
4. Transportation
5. Information monitoring
6. Facilities
Let us discuss the above said Elements in detail.
1. Order processing:
The starting point of physical distribution activities is the processing of customers orders. In order
to provide quicker customer service, the orders received from customers should be processed within
the least possible time. Order processing includes receiving the order, recording the order, filling
the order, and assembling all such orders for Transportation, etc. the company and the customers
benefit when these steps are carried out quickly and accurately. The error committed at this stage at
times can prove to be very costly. For example, if a wrong product or the same product with
different specifications is supplied to the customer, it may lead to cancellation of the original order
(apart from loss in the credibility of the firm).
Similarly, if the order is not executed within a reasonable time, it may lead to serious consequences.
High speed data processing techniques are now available which allow for rapid processing of the
orders.

2. Warehousing:
Warehousing refers to the storing and assorting products in order to create time utility. The basic
purpose of the warehousing activity is to arrange placement of goods, provide storage facility to
store them, consolidate them with other similar products, divide them into smaller quantities and
build up assortment of products. Generally, larger the number of warehouses a firm has the lesser
would be the time taken in serving customers at different locations, but greater would be the cost of
warehousing. Thus, the firm has to strike a balance between the cost of warehousing and the level
of customer service.

4. Inventory Control and Management:
Linked to warehousing decisions are the inventory decisions which hold the key to success of
physical distribution especially where the inventory costs may be as high as 30-40 per cent (e.g.,
steel and automobiles). No wonder, therefore, that the new concept of Just-in-Time-Inventory
decision is increasingly becoming popular with a number of companies.
The decision regarding level of inventory involves estimate of demand for the product. A correct
estimate of the demand helps to hold proper inventory level and control the inventory costs. This is
not only helps the firm in terms of the cost of inventory and supply to customers in time but also to
maintain production at a consistent level. The major factors determining the inventory levels are:
The firms policy regarding the customer service level, Degree of accuracy of the sales forecasts,
Responsiveness of the distribution system i.e., ability of the system to transmit inventory needs to
the factory and get the producs in the Market. The cost inventory consists of holding cost (such as
cost of warehousing, tied up capital and obsolescence) and replenishment cost (including the
manufacturing cost).
4. Transportation:
Transportation seeks to move goods from points of production and sale to points of consumption
in the quantities required at times needed and at a reasonable cost. The transportation system adds
time and place utilities to the goods handled and thus, increases their economic value. To achieve
these goals, transportation facilities must be adequate, regular, dependable and equitable in terms of
costs and benefits of the facilities and service provided.
5. Information monitoring:
The physical distribution managers continuously need up-to-date information about inventory,
transportation and warehousing. For example, in respect on inventory, information about present
stock position at each location, future commitment and replenishment capabilities are constantly
required. Similarly, before choosing a carrier, information about the availability of various modes
of transport, their costs, services and suitability for a particular product is needed. About
warehousing, information with respect to space utilization, work schedules, unit load performance,
etc., is required. In order to receive all the information stated above, an efficient management
information system would be of immense use in controlling costs, improving services and
determining the overall effectiveness of distribution. Of course, it is difficult to correctly assess the
cost of physical distribution operations. But if correct information is available it can be analyzed
systematically and a great deal of saving can be ensured.
6. Facilities:
The Facilities logistics element is composed of a variety of planning activities, all of which are
directed toward ensuring that all required permanent or semipermanent operating and support
facilities (for instance, training, field and depot maintenance, storage, operational, and testing) are
available concurrently with system fielding. Planning must be comprehensive and include the need
for new construction as well as modifications to existing facilities. Facility construction can take
from 5 to 7 years from concept formulation to user occupancy. It also includes studies to define and
establish impacts on life cycle cost, funding requirements, facility locations and improvements,
space requirements, environmental impacts, duration or frequency of use, safety and health
standards requirements, and security restrictions. Also included are any utility requirements, for
both fixed and mobile facilities, with emphasis on limiting requirements of scarce or unique
resources.
CHAPTER III
INTERNATIONAL SOURCING
Global Sourcing
One of todays major business challenges specificly impacting logistical management is the
dramatic increase in international sourcing, particularly from low-cost countries such as China.
Firms in virtually all durable goods industries are investigating Asia, Eastern Europe, Latin
America, and Africa as potential sources for finished goods or, at least, component parts. This
section reviews the rationale for international sourcing from low-cost countries, identifies some of
the specific challenges, and offers some guidelines regarding sourcing strategy.
Rationale for Low-Cost-Country Sourcing
Increased need for global competitiveness is driving many firms, particularly those in durable and
fashion industries, to identify and establish relationships with suppliers in low-cost countries. There
are a number of justifications for such sourcing initiatives. First, sourcing from countries with low
wage rates typically reduces manufacturing cost. While such strategies may reduce manufacturing
cost, some firms do not consider the total cost impact of international sourcing particularly with
respect to the logistics cost components of transportation and inventory. Second, seeking out
suppliers in low-cost countries can also increase the number of possible sources and thus increase
the competitive pressure on domestic suppliers. Third, low-cost-country sourcing can increase the
firms exposure to state-of-the-art product and process technologies. Without pressure from global
suppliers, there may be reluctance on the part of domestic suppliers to investigate or invest in new
technologies because they have significant assets tied up in older technologies. Conversely, global
suppliers may place significant focus on new technologies to establish a competitive position in
foreign markets regardless of the issues discussed earlier regarding extended supply chains. A final
rationale for low-cost-country sourcing is to establish a local presence to facilitate sales in the
international country. For example, while the U.S. automobile industry is significantly increasing
sourcing from low-cost countries to reduce component cost, it is also seeking to facilitate
automobile sales in the local country. Due to political or legal constraints, it is often necessary for a
firm to have local relationships and production operations to be allowed to sell their product in the
local country. The combination of these makes a strong case for sourcing from a low-cost country,
but it is necessary to also consider the challenges.
Challenges for Low-Cost-Country Sourcing
While the rationale for low-cost-import sourcing is substantial, there is also a long list of issues and
challenges related to such sourcing strategies. These issues and challenges are further complicated
by the fact that the benefits and costs related to low-cost-country sourcing accrue to different
organizational units. Procurement or manufacturing may receive the benefits through lower-cost
materials or components. Many of the costs and the challenges to ship and guarantee delivery of the
materials are the responsibility of logistics. Benefits and costs must be integrated across the full
supply chain process in order to make the correct sourcing decision.
The first challenge is the identification of sources capable of producing the materials in the
quality and quantity required. While it is becoming easier to achieve the quality objective, ensuring
that the potential supplier has the ability to meet volume and seasonal fluctuation demands in a
suitable time frame often remains a challenge.
The second challenge considers the protection of a firms intellectual property as products or
components are produced and transported. The suppliers and countries involved need to have legal
constraints in place to protect product designs and related trade secrets.
The third challenge relates to understanding import/export compliance issues. There may be
government regulations regarding the volume of a commodity that can be imported before duties or
other restrictions are enforced. The percentage of materials that are foreign-sourced may also
restrict a firms ability to sell to select customers. Government contracts may require a specific
level of domestically made components. For example, if the contract requires that the product is
Made in the U.S.A., 95 percent of the material must be of domestic origin.
The fourth challenge relates to communication with suppliers and transportation companies.
While the procurement negotiation with low-cost countries is not easy, there is often a greater
difficulty in dealing with carriers, freight forwarders, and government customs as a result of time
zone, language, and technology differences.
The fifth challenge is the need to guarantee the security of the product while in transit. Not
only does supply chain security require that the product is secure, the process must also secure
containers and vehicles involved that are both full and empty.
The sixth challenge concerns the inventory and obsolescence risk associated with extended
transit times. With the longer transit times associated with low-cost-country sourcing, it is not
uncommon for the firm to have one or two months supply of product in transit, which must be
counted as an asset and incur related inventory carrying cost. Extended leadtimes also increase the
potential for obsolescence, as orders have longer leadtimes and there is generally little flexibility for
change. Such extended leadtimes also can impact recovery when a quality issue develops. It is not
unusual for firms to fly components from offshore suppliers to recover from unexpected quality
problems or delayed shipments.
The final challenge, which synthesizes the previous ones, focuses on the need to understand
the difference between piece price and total cost. While the piece price may include the material as
well as direct and indirect labor, the total cost perspective needs to consider other cost elements,
including freight, inventory, obsolescence, duties, taxes, recovery, and other risk considerations.
Guidelines for Sourcing
The decision to source material and components domestically or from a low-cost country is a
complex one. While direct and indirect product costs represent one major factor, there are many
other factors that must be considered and weighed appropriately. Products and components that
have extended times between manufacturing changeovers are ideal for low-cost-country sourcing.
A counterexample would be the life cycle for an electronics component, which is typically quite
short and therefore would generally trend toward domestic sourcing. Products and components that
have numerous variations should also generally be domestically sourced because the extended
leadtimes associated with low-cost-country sourcing make it difficult to forecast the precise mix of
product that will be demanded. Products or components with high labor content should take
advantage of the typically low labor rates in low-cost counties. Products or components with high
intellectual property content should be sourced domestically, as the legal systems in many of the
low-cost countries do not provide adequate trade secret protection. Domestic sourcing is generally
appropriate for products and components with relatively high transport cost such as those that are
bulky or damage easy. Due to increasing energy prices, many firms are beginning to reconsider
more localized sourcing. Products or components with relatively low value are ideal for low-cost-
country sourcing, as the inventory carrying cost while it is in transit is not significant. Products and
components that are constrained for security or other types of import restrictions by a domestic
government should tend toward domestic sourcing. For example, there may be customs delays in
importing electronic goods when the supplier does not have the trust of the importing government
because of the potential for importing contraband. Finally, products or components that have a high
degree of transport uncertainty because of relatively low volumes or location on trade lanes with
limited service would suggest domestic sourcing.
There is no simple answer regarding which products or components should be domestically
sourced, as a number of the criteria are somewhat qualitative. lists the general sourcing
criteria. The final determination depends on the specific item and the firms expertise. As firms
increase their global operations and marketing efforts, logistics managers should be increasingly
involved to provide a realistic assessment of the total cost and performance implications.
Sourcing Guidelines
As a supply chain strategy becomes more global, increased complexities are encountered.
These complexities result from longer distances, demand differentials, cultural diversity, and
complex documentation. Nevertheless, firms will increasingly confront the need to expand
operations into the global arena. Strategies to achieve a share of the rapidly expanding world market
range from export/import to local presence to true globalization. Regardless of the strategic focus,
success will, to a large extent, be dependent upon a firms logistical capabilities.
Supply chain security
Supply chain security refers to efforts to enhance the security of the supply chain, the transport
and logistics system for the world's cargo. It combines traditional practices ofsupply chain
management with the security requirements driven by threats such as terrorism, piracy, and theft.
Typical supply chain security activities include:
Credentialing of participants in the supply chain
Screening and validating of the contents of cargo being shipped
Advance notification of the contents to the destination country
Ensuring the security of cargo while in-transit via the use of locks and tamper-proof seals
Inspecting cargo on entry
There are a number of supply chain security initiatives in the United States and abroad,
including:
1. The Customs Trade Partnership against Terrorism (C-TPAT), a voluntary compliance
program for companies to improve the security of their corporate supply chains.
2. The World Customs Organization (WCO) adopted the Framework of Standards to Secure
and Facilitate Global Trade in 2005, which consists of supply chain security standards for
Customs administrations including Authorized Economic Operator(AEO) programs.
3. The Container Security Initiative(CSI), a program led by U.S. Customs and Border
Protection in the Department of Homeland Security focused on screening containers at
foreign ports.
4. The Global Trade Exchange, a DHS data-mining program designed to collect financial
information about shipments, with the objective of determining safety of cargo shipments
are safe.
5. Efforts for countries around the world to implement and enforce the International Ship and
Port Facility Security Code (ISPS Code), an agreement of 148 countries that are members of
the International Maritime Organization (IMO).
6. Pilot initiatives by companies in the private sector to track and monitor the integrity of cargo
containers moving around the world using technologies such as RFID and GPS.
7. The International Organization for Standardization have released a series of Standards for
the establishment and management of supply chain security. ISO/PAS 28000 Specification
for Security Management Systems for the Supply Chain, offers public and private enterprise
an international high-level management standard that enables organisations to utilise a
globally consistent management approach to applying supply chain security initiatives.

CHAPTER IV
Outsourcing and Logistics Service Providers: Intermediaries
What is Third Party Logistics?
Third-party Logistics (abbreviated 3PL): The use of an outside company to perform all or part of
the firms materials management and product distribution function (Prof. Simchi-Levi, 2000).

3PL Services Provider: A firm which provides multiple logistics services for use by customers.
Preferably, these services are integrated together by the provider. These firms facilitate the
movement of parts and materials from suppliers to manufacturers and finished products from
manufacturers to distributors and retailers.
This is a conceptual modal of Global Logistics (Long, Complex, Supply Chains Often with
Disparate Systems):


Notes:
TMS - Transportation Management System;

ERP - Enterprise Resource Planning;

WMS - Warehouse Management System;

DMS - Distribution Management System

CRM - Customer Relationship Management



Generally, we can list out three functions of 3PL:

The functions performed by the third party can encompass the entire logistics process or selected
activities within that process
.
3PL involves logistics functions such as transportation, warehousing, cross-docking, inventory
management, packaging and freight forwarding that have traditionally been performed within the
organisations.
3PL providers specialise in integrated warehousing and transportation services that can be scaled
and customised to customers needs based on market conditions and the demands and delivery
service requirements for their products and materials.


Here is a figure to show these functions:


Additionally, we have four points of Characteristics of 3PL:
Perform outsourced logistics activities.

Process management / multiple activities.

Mutually beneficial and risk-sharing relationship.

Long-term commitments (1~ 3 years).

And also, here are the five elements of 3PL:

Transportation: Shipping, forwarding, Contract delivery, Household goods relocation, load
tendering, Brokering

Warehousing: Storage, receiving, assembly, return goods, labelling

Inventory: Forecasting, location management analysis, network consulting, layout designing

Information systems: EDI, scheduling

Packaging: Design, recycling

Why Do Firms Undertake 3PL

There are numerous reasons why using 3PL can help to run a business more efficiently.
By outsourcing to a 3PL, products will be stored, distributed and fulfilled more efficiently, costs
will be decreased, resources will be maximised and customer satisfaction rates will be improved.

To compete in this fast-paced, international marketplace, more and more manufacturers are
relying on third-party logistics providers to supply their customers with a higher level of service, as
well as a measurable cost savings to their bottom line.

Outsourcing logistics helps businesses preserve valuable time. By freeing up resources in the
organisation, more time can be allocated to focusing on core competencies

It is also important to note that having the required resources available does not guarantee success.
3PL providers exist because they have an expertise in providing logistics support and therefore can
potentially add value to the business supply chain

Outsourcing to a 3PL provider creates shared responsibility for the business. The 3PL share
responsibility for a variety of services, such as supply chain management and locating economies of
scale.
Utilising a 3PL provider can also help to re-engineer distribution networks by plugging the
business into new markets.

All of the benefits of outsourcing logistics to a 3PL provider contribute to gaining a competitive
advantage in the market.


This is the figure of Evolution of Logistics Outsourcing:


Logistics Decision Making
An important channel decision is whether to use 3PL or run an own-account (in-house) distribution
system. As a result, channel decision making is a very crucial process and it must be handled very
carefully, and looking for a perfect partner in logistics can be an indomitable challenge.

Here are the crucial steps to make this decision:

1. Whether logistics is part of core competency?
If logistics and distribution are the core areas for the success of the business, then the service
should be provided by in-house logistics providers, since the company can control the entire
logistics activity (Royal Mail - Delivery)

If, it is not so, then it is better to outsource a major part or the entire process
2. Mapping the Supply Chain
Map the entire process in the supply chain.
Study the cost involved in every link of the supply chain (i.e.) from inbound logistics to
warehousing to distribution centre to the final delivery.
The process map of cost and others should be formulated after due consultation with the channel
partners and suppliers as they are also form a part of the entire supply chain.
Once the cost analysis of the supply chain is undertaken, the logistics manager can decide as to
which part of the distribution channel should be handled in-house and which part or parts can be
outsourced.

3. Reading the Signal to Outsource Logistics Functions:
Regular delivery mishaps
Increase in vehicle maintenance cost
Investment in new technologies
Underutilisation of warehouse
Above than average inventory

4. Selection criteria for 3PL
Cost
On-time deliver
Level of customer service
Flexibility demand fluctuation
Past experience and client reference
Infrastructure capabilities
Here are the categories of 3PL Service Providers:
Asset based logistics companies Service firms owned by or affiliated with truck, rail, air,
shipping, warehouse, or forwarding companies that use their own fixed assets in providing services.
Non-asset based logistics companies - Independent firms that rely on information systems (an
interconnected set of information resources hardware, software, information, data, applications,
people and communications) or management skills to service their customer needs instead of
owning hard assets.

Information systems based logistics companies - Rely almost entirely on information systems,
offering data management and pipeline product flow visibility options to customers with little or no
physical product handling.
Hybrid based logistics companies They combine an asset and non-asset philosophy. They
operate assets on behalf of specific customers and providing them with information systems to
leverage information support capabilities to their fullest extent.
Here are the types of 3P Distribution System:

Dedicated (exclusive) distribution system: Complete distribution provided by a third party
company. The 3P addresses customer distribution requirements on a national or regional basis. The
resources used are: warehouses, distribution centres, transport fleets, managers, etc. These 3PL
providers are confined to large companies common in UK and adopted in other EU and North
American countries.

Multi-User Distribution System: Similar to the above but here the 3PL providers address the needs
of small group of client companies. The clients are manufacturers of goods and their products are
all delivered to the same or similar customers. E.g. groceries to grocery stories, supermarkets,
catering establishments. Also known as shared-user operation as expensive distribution costs are
shared between the clients, so all parties enjoy the benefits.

Specialist Distribution System: Used for storage and movement of products those require special
facilities or services. E.g. Frozen food and hanging garment distribution, distribution of leisure
equipment.
Regional Multi-Client Distribution Operation: Service provided for any number of clients and for
most products.
National Multi-Client Distribution Operation: National-wide operation.
Joint Venture: Client and Operator form a distribution operation. This occurs where an operator
has underutilised resources.

Satellite or Cross Docking Operation: Operator is not involved in storage, but only provides a
collect, break-bulk and delivery service. No stocks are held although minor stock-holding occur
occasionally.
International Distribution Operation: Dedicated service provider enables the client achieve
international movements. Difficult to find a single 3P operator that could provide such a service.
Occasional Use: Service providers are used on an occasional basis (seasonal fluctuations; non-
standard products; non-coverage areas; non-standard operations such as returns, etc.).

With an increase in outsourcing, the need for collaboration and integration also increases:
Integration and Commitment in 3PL:

Without collaboration, integration and control, major risks would arise in the supply chain:
Coordination costs.
Loss of internal logistics management capabilities.
Biased choices of service providers.
Leakage of sensitive data and information.
Service degradation.
o Less reliable?
o Longer order cycle time?
o Emergency response?
Loss of control and representation.
Reduced contact with final customer.

Advantages of 3PL are shown as below:
Decreased time to market.
Higher productivity; increased sales.
Reduced staffing and operating costs.
Cost reduction; Focus on core competency.
Improved efficiency and customer service.
Quick entry in markets.
Build-to-order systems.
Improved customer service and retention.
Access to best-of-breed expertise.
Ability to invest more time and money on core competency.

It deserves to be mentioned that even with advantages the supply chain could break as these
reasons:
Failure to reach an understanding.
Promises that cannot be fulfilled (intolerable service failure).
A money losing contract.

Moreover, using 3PL also offers some disadvantages:
Loss of control over supply chain.
Loss of in-house logistics expertise.
Impact on in-house workforce.
Increase in cost.
Impaired credibility with customers.
Increased supplier dependence.

As a result, here are some Essential Observations in 3PL, which involves the main point of
Continuous Monitoring:
Observe Customer Satisfaction complaints, marketing dept. interaction.
Logistics cost compare the present costs to earlier costs with capital investment.
On-time shipment Number of delays in deliveries.
Desired market reach.
Forecasting accuracy.
Inventory accuracy.

Additionally, here are some introductions of 4PL:
Fourth-party logistics (4PL) is a term coined by Accenture.
A 4PL is an integrator that assembles the resources, capabilities and technology of its own
organisation and other organisations to design, build and run comprehensive supply chain solutions.
4PL is a refinement on the idea of 3PL, a firm that provides third party logistics services to
companies for part or sometimes all of their supply chain management function.
A 4PL uses a 3PL to supply service to customers, owning only computer systems and intellectual
capital.
Outsourcing, once a mere option, has today become a competitive imperative. The growth of
the Internet, customer revolution, rise of mass customization, severe competition etc. has forced the
companies to focus on core competencies instead of vertical integration. This means that original
equipment manufacturers (OEMs) must ideally contract out part or all of manufacturing, assembly,
distribution, and support operations. What to outsource has historically been decided by the
question, Is it strategic to my business? If the answer is yes, you would keep it. If no, farm it out.
Today, companies are asking a different question : Is it my core competency? If no, then it is ripe
for outsourcing, whether it is strategic or not.

The trendsetter barometer conducted by Coopers and Lybrand LLP, contraction shows that 83 per
cent of Americas fastest growing companies have turned to out-sourcing for one or more
functions.
WHAT IS OUTSOURCING?

Outsourcing is defined as the contracting of one or more of a companys business processes to an
outside service provider to help increase shareholder value, by primarily reducing operating cost
and focusing on core competencies.

CIO defines outsourcing as an arrangement in which one company provides services for another
company that could also be or usually have been provided in- house.

Automatic data processing Inc. (ADP) defines . outsourcing as the contracting out of a companys
non- core, non-revenue-producing activities to specialists. It differs from contracting in that
outsourcing is a strategic management tool that involves the restructuring of an organization around
what it does best its core competencies.

WHY DO COMPANIES OUTSOURCE?

There are several reasons why outsourcing is becoming a habit. The simplest reason to outsource is
to alleviate administrative burdens and focus on strategic areas.
As the companies move from non-outsourcing environment to an outsourcing environment the
profile of the time spent by the executives on various activities change dramatically. According to
Figure 1 in a non outsourcing environment, executives spend 60 per cent of their time on
administration matters, while 30 per cent on tactical issues and this leaves only 10 per cent of their
time to focus on strategic matters. On the contrary when they switch to an outsourcing environment
and outsource some of the activities they need to spend only 10 per cent of their time on handling
administration issues, 30 per cent time they focus on tactical matters while 60 per cent of their time
they can devote to thinking, strategizing and planning.

Some other reasons behind outsourcing are:
1. Reduce costs: A company may emphasize costsavings for a variety of reasons, such as being in
a poor financial position, or because of a goal to increase profits. Reducing costs by using a supplier
is possible, but not in all situations. A supplier has clearly lower costs, if it can centralize the work
of several companies at one location, such as central truck maintenancefacilities or a data
processing centre. It can also lower costs if materials or supplies can be bought at lower costs by
using volume purchasing. It can also purchase assets from a company and then lease the assets back
as a part of an outsourcing deal, thereby giving the companies an upfront cash infusion.Power of
Outsourcing in Supply Chain ManagementIts not what you dont known that hurts you. Its what
you know that aint so. Otherwise, its costs will be higher than those of the company, for it must
include a profit as well as sales and marketing costs in its budget an internal department does not
have to earn a profit, nor does it have a sales force. Thus, there are a few situations in which a
company can reduce its costs by outsourcing, but there are many more cases where this is not a
realistic reason for outsourcing.
2. Focus on core functions : A company typically has a small number of functions that are key to
its survival while other functions or activities are required to be done but are non-core. It may want
to focus all of its energies on those functions and distribute all other functions among a group of
suppliers who are capable of performing them well enough that the company management will not
have to be bothered with any of the details associated with running them. The company may even
what to outsource those functions that are core functions at the moment, but which are expected to
become less important in the near future due to changes in the nature of the business. In addition, a
company could even outsource a function that is considered key to the companys survival if it can
find a supplier that can perform the function betterin short, only keep those functions that are
core functions and which the company can do better than any supplier. For example, a company
may be thelow cost manufacturer in its industry, which allows it to maintain a large enough, pricing
advantage over its competitors, that it is guaranteed a large share of the market.
3. Acquire new skills : A company may find that its in-house skill set is inadequate for a given
function. This is the most common reason and is used for outsourcing those functions that require
high skill levels, such as engineering and computer services.
4. Acquire better management : A company may find that an in-house function is not performing
as expected not because of any problem with the staff but because of inadequate management
support or capability. Symptoms of this are high turnover, absenteeism, poor work products and
missed deadlines. It can be very hard to obtain quality management, so outsourcing a function to a
supplier just to gain access to the suppliers better management can be a viable option. It may also
be possible to rent management from the supplier. This can be a good option in all functional areas,
though it is more common in areas requiring high levels of expertise such as engineering.
5. Assist a fast growth situation: If a company is rapidly acquiring market share, the management
team will be stretched to its limit, building the company up so that it can handle the vastly increased
volume of business. In such situations, the management team will desperately need additional help
in running the company. A supplier can step in and take over the function so that the management
team can focus its attention on a smaller number of core activities. For example, a company in a
high growth situation may outsource its customer support function to a supplier, who already has
the phone line capacity and trained staff available to handle the deluge of incoming calls.
6. Avoid labour problems: If a company is constantly bogged down by labour problems which
start affecting its productivity and performance, outsourcing becomes a viable option. Companies
can in such cases use suppliers infrastructure, manpower and facilities for production and
concentrate on marketing or getting business.
7. Focus on strategy: A companys managers typically spend the bulk of each day handling the
detailed operations of their functional areasthe tactical aspects of the job. By outsourcing a
function while retaining the core management team, a company can give the tactical part of each
managers job to a supplier, which allows the management team to spend far more time in such
strategy related issues as market positioning, new product development, acquisitions, and long-term
financing issues.
8. Avoid major investments: A company may find that it has a function that is not as efficient as it
could be, due to lack of investment in the function. If the company keeps the function in-house, it
will eventually have to make a major investment in the function in order to modernize it.
Outsourcing this function can avoid any major investments. For example, by outsourcing
transportation. activity, the company that owns an ageing transportation fleet can sell the fleet to a
supplier, who then can provide an upgraded fleet to the company as part of its service.

9. Handle overflow situations: A company may find that there are times of the day or year when a
function is overloaded for reasons that are beyond its control. In these situations it may be cost
effective to retain a supplier to whom the excess work will be shunted when the in-house staff is
unable to keep up with demand. This is a reasonable alternative to the less palatable option of
overstaffing the in-house function in order to deal with overflow situations that may only occur a
small percentage of time. This is a popular option for help desk services as well as customer
support, where excess incoming callsare sent to the supplier instead of having customers wait on
line for an excessively long time.
10. Improve flexibility: This is similar to using outsourcing to handle overflow situations, except
that the supplier gets the entire function, not just the overflow business. When a function
experiences extremely large swings in the volume of work it handles, it may be easier to eliminate
the fixed cost of an internal staff and move the function to a supplier who will only be paid for the
actual work done. This converts a fixed cost into variable costthe price of the suppliers services
will fluctuate directly with the transaction volume it handles.
11. Improve ratios: Some companies are so driven by their performance ratios that they will
outsource functions solely to improve them. For example, outsourcing a function that involves
transferring assets to the supplier will increase the companys return on assets (which is one of the
most important measurements for many companies). The functions most likely to improve this ratio
are those heavy in assets, such as maintenance, manufacturing and computer services. Another ratio
that can be improved is profitability per person. To enhance this, a company should outsource all
functions involving large numbers of employees, such as manufacturing or sales.
12. Jump on the bandwagon: A company may decide to outsource a function simply because
everyone else is doing it, too. Also, a large amount of coverage of outsourcing in various national or
industry specific publications will give company management the impression that outsourcing is the
trend, and they must use it or fail. For example, due to the large amount of publicity surrounding
some of the very large computer services outsourcing deals, the bandwagon effect has probably led
to additional outsourcing deals for the computer services function.
13. Enhance credibility: A small company can use outsourcing as a marketing tool. It can tell
potential customers the names of its suppliers, implying that since its functions are being
maintained by such well-known suppliers, the companys customers can be assured of a high
degree of quality service. In these instances, the company will want to hire the best known
suppliers, since it wants to draw off of their prestige. Also, for key functions, the company may
even want to team up with a supplier to make joint presentations to company customers, since
having the suppliers staff present gives the company additional credibility.
14. Maintain old functions: A company may find that its in-house staff is unable to maintain its
existing functions, while transitioning to new technology or to a new location. Outsourcing is a
good solution here, for it allows the company to focus its efforts on implementing new initiatives
while the supplier maintains existing day-to-day functions. This reason is most common in
computer services, where suppliers are hired to maintain old legacy systems while the in-house
staff works on transitions to an entirely new computer system.
15. Improve performance: A company may find that it has a function that has bloated costs or
inadequate performance. To shake up the function, company management can put the function out
to bid and include the internal functions staff in the bidding process. The internal staff can then
submit a bid alongside outside suppliers that commits it to specific service levels and costs. If the
bid proves to be competitive, management can keep the function in-house, but hold the functions
staff to the specific cost and performance levels noted in its bid. As long as suppliers are told
upfront that the internal staff will be bidding and that the selection will be a fair process, they
should not have a problem with this type of competition. This approach can be used for any
functional area.
16. Begin a strategic initiative : A companys management may declare complete company
reorganization and outsourcing can be used to put an exclamation point on its determination to
really change the current situation. By making such a significant move at the start of the
reorganization, employees will know that management is serious about the changes and will be
more likely to assist in making the transition to the new company structure.
Usually one of the above reasons dictates an outsourcing decision. But before finally taking the
plunge, company should exhaustively evaluate the working and functioning of the
department/function concerned. Many a time there is a deeper problem where the function in
question is not doing a good job of presenting its benefits to management. In such a case, the
function manager may not be able to showcase its accomplishments, or showing management that
the cost of keeping the function in- house is more favourable.
If the management suspects that this may be the reason why outsourcing is being considered, it is
useful to bring in a consultant who can review the performance of the in-house employees and see
if they are, in fact doing a better job than they are saying. Sometimes investigating the ability of in-
house staff prior to outsourcing functions will keep the outsourcing from occurring.

The manager who is making the outsourcing decision should also consider that it is not necessary to
outsource an entire functional areainstead the manager can cherry pick only .those tasks within
the function that are clearly worthy of being outsourced and keep all other tasks inhouse. This
reduces the risk to the company of having the chosen supplier do a bad job of handling its assigned
tasks, since fewer tasks are at risk, and it allows the company to hand over the remaining functional
tasks to the supplier as it becomes more comfortable with the suppliers performance. For example,
a company can outsource just the maintenance of its computer services function, or it may add
network services, telephone services, application development, or data centre operations task to one
or more suppliers.

These options are all available to the manager who is edging into a decision to outsource.

The typical path that a company follows starts with a function that has minimum strategic value and
will not present a problem even if the suppliers does a poor job of providing the service. If the
companys experience with these low-end functions prove successful, then company management
will be more likely to advance to outsourcing those functions with more strategic value or with
more company threatening consequences, if the provided service is inadequate. These functions
include accounting, HR and materials management. Finally, if the company continues to perform
well with all or part of these functions; typically these are manufacturing, computer services and
engineering (though this may vary by industry). Only by considering the reasons in favour of
outsourcing alongside the associated risks can a manager arrive at a considered decision to
outsource a function.
OUTSOURCING RISKS
These can range from pricing issues to non- performance by a supplier of a key function. The
person making the outsourcing decision must be aware of these risks before making the decision to
hand over a function to a supplier. Broadly, these risks can be classified into short-term risks and
long-term risks. Companies indulging in outsourcing have to guard against both of these risks.
Short-term risks can include among others operational issues at suppliers end, while long-term
risks can be nonalignment of companys goals with suppliers goals in the long term.

Suppliers situation may change in the future, causing problems in the outsourcing relationship. For
example, the supplier may have financial difficulties, be bought out by a company that does not
want to be in the outsourcing business, or undergo a shift in strategy that forces it to provide
different services. Also, the technology needed to service the companys needs may change over
time and the supplier may no longer be able to service that new technology. These risks can be
lowered by ensuring that there is a termination clause in the outsourcing contract that allows the
company to back out of the contract if any of the above circumstances occur. Also, these risks are
less important if there is a large number of competing suppliers to whom the business can be
shifted. Alternatively, the risk is greater if there are few competing suppliers to whom the
companys business can be shifted. Suppliers inability to grow in the same proportion as the
company, can be another big risk. But this is a long-term risk and can be gauged and understood
beforehand.

OUTSOURCING PROCESS

1 . Understanding company goals and objectives
Outsourcing decisions have to be taken within the framework of a companys goals and objectives.
Both the short-term goals and long-term strategies have to be considered, understood and acted
upon. Outsourcing suppliers also have to appreciate these goals and functions accordingly.
2. A strategic vision and pla n
Drafting an outsourcing vision and plan is the next important step. Once again, this plan has to be
both long-term and short-term. Long-term plan can contain the overall companys policy towards
outsourcing in general, clarity on the functions, activities to be outsourced, etc. while the short-term
plan contains an immediate plan of action.
3. Selecting the right vendor
This is one of the most vital and important activities. It is also a long-drawn out activity which
should involve activities such as collecting supplier intelligence, collecting supplier background
information, evaluation of this information, etc. Vendors attitude, his growth potential, past
performance, etc. need to be evaluated.
4. Management of the relationships
Relationship management is an extremely important task in outsourcing. The more one indulges in
outsourcing, the more relationships one has to manage. Hence it is essential to have a structured
method of managing the relationships.
5. A properly structured contrac t
Structuring an outsourcing contract is both an art and a science. This contract needs to have all the
necessary clauses, scope for growth, scope for incentives and all other clauses built into it. This
contract will be the main document that will govern the relationship.
6. Open communication
When the company takes outsourcing-related decisions for the first time, it is always one of the
activity/function initially done internally. This either causes closure of an
internal function/activity or pruning it substantially. Hence this action displaces an internal group
and can cause a lot of unrest within the company. Therefore, handling this situation effectively is
also a part of an outsourcing process. This is applicable even for situations where the company
decides to increase outsourcing or outsource some other activity/function.

7. Section executive support

This is essential initially to garner support for outsourcing. Also inputs from these senior executives
can be helpful for drafting the contract.

8. Use of outside expertise

It is sometimes essential to involve an outside consultant to help the company through the process,
especially when the company is doing it for the first time. This person should be an expert in
outsourcing and should have adequate experience in drafting the outsourcing contract.

OUTSOURCING IN SCM

Outsourcing logistics has been a favourite with companies since several years. It is only recently
that companies have started thinking about outsourcing other aspects of SCM.
Despite the wide acceptance of outsourcing logistics functions, a variety of organizational concerns
inhibit the outsourcing of logistics processes, including:
1. Fear of losing control. Companies are hesitant to hand over important logistics processes to a
third party. As the third party might also be managing the logistics processes of competitors,
companies are afraid that trade secrets might be misused, mismanaged, or lostor in the worst
case, pass through the third-party provider into the hands of competitors.
2. Lack of confidence. Compounding the fear of loss of control is the lack of confidence compan
feel about the ability of third-party providers to meet their needs.
3. Lack of outsourcing education. Many companies are familiar with outsourcing, in terms of the
IT and bnsiness-process enhancements that logistics service providers can offer. However, they lack
a through understanding of the experience of managing the outsourcing service provider throughout
the life of the relationship.
4. Management philosophy and tradition. Many companies simply resist change. They may
reject the concept of outsourcing logistics activities due to a perceived potential negative effect on
their business model and operations. In addition, these companies may have had poor outsourcing
relationships in the past and may be less inclined to initiate new outsourcing contracts. Furthermore,
they may believe that the geographical separation between them and their outsourcer could cause
service management issues.
For example, some companies feel that an outsourcer may not be sensitized to the unique logistics
needs of their product lines. Others feel that outsourcers are not equipped to deal with dynamic or
mission-critical operations. Due to this lack of confidence, companies are cautious about getting
locked into a long-term contract with an outsourcer and are concerned about the associated legal
fees and penalties that would be incurred if disputes arose.
CHAPTER V
Planning Global Logistics: Planning the global logistics,
Globalization has created staggering opportunities for companies around the world in growing
markets like Brazil, Russia, India and China. It has also ushered in a more competitive business
environment. Today, whether or not a company produces or sources outside its home country, it is
often competing against global organizations.
To survive and thrive under these conditions, organizations must develop efficient and
effective global supply chains that can ensure a smooth supply of goods anywhere in the world.
Many enterprises expect transportation and logistics executives to determine how to move products
freely and efficiently across oceans and borders. While it is valuable to develop a knowledge
resource regarding the population, infrastructure, languages, politics, economy, customs, currencies,
tax laws, and tariffs for each country that shipping routes touch, it is not enough. The variables of
global transportation change faster than the knowledge can be compiled.
Taking advantage of global opportunities requires a strategy that transcends continually changing
markets. This white paper offers key considerations to enterprises of any size that are looking to
initiate or expand their international logistics capabilities while developing global businesses.
Understanding Globalization and the Changing World
To succeed in global markets, enterprises and logistics professionals must be mindful of the factors
that drive change in the international movement of goods:
Infrastructure development. While some market and transportation infrastructures are currently
insufficient to handle fast growth, its anticipated that government agencies will shift greater
resources toward that development.
From a logistics perspective, this includes the creation and/or expansion of intermodal terminals,
roads, airports, railways and ports. Monitoringgovernment investment in these initiatives is critical
to the development of an effective global transportation plan.
The global grid. A highly connected digital and physical network is emerging that is expected to
transcend physical, social, cultural, and technological borders. While such a network should
help streamlineinternational logistics, it could be hindered by periodic instability and volatility.
Global logistics plans should prepare alternate strategies to cope with these conditions.
Government attitudes toward economic growth and social stability.
Views regarding the balance of strong economic growth, environmental policy, community and
social responsibility, product safety, and social services vary by country and culture. These
considerations often dictate the development of tariffs, duties, taxes, customs declaration processes,
and general import/ export compliance.
Regulatory materials and energy pricing. Fuel costs will be a determining factor in the decision
to approach global markets, source raw materials from abroad, or outsource manufacturing to low-
cost jurisdictions. Companies also need to consider the costs associated with sourcing scarce
materials.
Logistics must be part of any global business strategy to source products and grow market share.
Whether a company handles global logistics internally or outsources some or all of its
transportation management, they must understand the crucial role logistics will play in their
ultimate success.

Global Transportation Essentials
By definition, global opportunities bring logistics and transportation to the forefront of the
discussion. To capitalize on sourcing and sales in global marketsand to successfully price goods
and servicesan enterprise needs information and analysis unique to logistics, as well as several
essential areas of expertise.
1. Supply Chain Finance. Organizations can maintain a free and timely flow of goods across
borders by understanding international trade agreements and requirementsletters of credit, tariffs,
terms of sale, and other financial considerations.
All financial documentation must be in order to avoid profit-killing delays in buying, selling, and
sourcing.
2. Integrated Workflow. Reaching global profitability goals will likely require an integrated
workflow approach. While some transportation management systems (TMS) offer software
platforms to integrate global inbound and outbound transportation, strategic silos still remain in
many enterprises. The information and technology are available to bridge the gaps, but the strategic
intent is missing.
Logistics and transportation groups should lead this unification process to create a truly global
infrastructure.
3. Real-Time, Dynamic Routing. Global instability and rapidly changing infrastructures in
countries around the world call for dynamic routing approaches.
The most efficient route in December may not be in January, since bad weather, political instability,
fuel prices, capacity, or any number of other factors can influence that determination. To account
for all the variables, effective global transportation strategies will likely employ TMS technology,
processes, and expertise, which allow for real-time agility and risk mitigation.
4. Control Tower Visibility. Global logistics will greatly magnify the inefficiencies of spending
too much time on tactical or low-value tasks. Granted, international transportation can be far more
complex than domestic shipping.
Its not uncommon for global shipments to touch many intermediaries, each of whom has a distinct
set of regulations, cultural beliefs, and IT capabilities.
Nor is technology alone the answer; too many shippers have deployed TMS software, only to have
it fail and drive users back to their old, laborious duties.
The most successful global companies use strategies that allow for acceptable tolerances in their
transportation networks. They rely on event management features of technology to alert operators
when attention is needed for out-of-the- ordinary situations. In addition, effective TMS solutions
and services should allow users to generate a real time, global control tower view of their
networks, and to drill down into the specifics of each shipment, such as P.O.s, freight bills,
SKUs, etc.
5. International Portals. While IT savvy and bandwidth vary from country to country, the global
IT infrastructure is generally sound enough to allow for visibility into offshore supplier
organizations. The ability to communicate with offshore customers or providers is a critical part of
the global control tower.
Global supply chains demand access to current information, from advance ship notices
and inventory planning to purchase orders and production status updates. While there are often
significant hurdles to overcome in terms of language, customs processes, time zones, and
currencies, an effective TMS platform supported by a strong strategic plan can greatly reduce
delays and other costly problems posed by international borders.
6. Security Compliance. Border controls and customs procedures in many countries pose
significant and costly barriers for shipments of all kinds.
Automation can overcome manual data entry errors that are often the cause of significant delays and
fines. Organizations must also develop processes around security, safety, and compliance in various
jurisdictions to prevent unnecessary difficulties and delays, and ensure that suppliers understand
and follow those procedures.
7. Total Landed Costs Analysis. Analyzing the total landed cost seems straight-forward, but some
shippers have found it can be much higher than expected. Accurately calculating total landed cost
especially as it fluctuates due to a variety of global forces moves transportation to the center
of the pricing and profitability discussion, since it is crucial to helping senior leaders avoid
surprises.
8. Managing Risk. Even the most perfectly planned global shipment can be ruined by theft,
counterfeiting, hurricanes, floods, political unrest, labor disputes, documentation errors, and
mechanical problems. The best practice course of action requires a strategic view of supply
chain risks.
Although preventing and managing risk associated with disruptions is clearly more difficult on a
global level than it would be regionally or locally, the risk management role is essential for global
supply chains. Even in organizations with dedicated risk management staff, questions can arise
about who is responsible headquarters, regional offices, or third-party transportation providers
for predicting, tracking, and resolving disruptions, and for understanding Incoterms
(International
Commercial Terms)
1
and associated risks around contracts, liability, and insurance.
Companies must decide how much time, money, and effort should be allocated to prevention vs.
response. While strategic responsibility should reside at the top of the supply chain, ensuring that
suppliers understand the risk priorities, prevention strategies, and response plans is imperative. A
plan should include:
Awareness. Many providers in the supply chain may have little or no risk management
capabilities, so identifying the relative strength of core suppliers is important. Keep senior
management aware of potential risks, since these vulnerabilities can have an impact on decisions
regarding where to source, manufacture, and market products. Awareness and understanding of
Incoterm
2
can help minimize confusion and misunderstanding of trade contract responsibilities and
avoid the associated, costly risks.
Accountability. Developing a risk management plan that clearly spells out the responsibilities of
regional offices and third party providers establishes accountability. Developing and promoting a
plan will contribute to vendor selection criteria and help regional offices and third-party
providers understand the expectations for communication and response. Rather than wonder
whether they need authorization from the home office, they can take responsibility for resolving
issues and communicate updates accordingly.
Scorecards. A risk management plan should include detailed scorecards for evaluating both in-
house and contracted supply chain providers. The scorecards will help everyone understand which
capabilities and responsibilities are most critical. They can also provide the data needed to make
decisions regarding sourcing, manufacturing, distribution, internal preparedness, and vendor
selection. Scorecards should balance risk mitigation, contract, and response capabilities.
Quarterly reviews. Suppliers and in-house operations should be reviewed quarterly for their
handling of incidents to promote proactive risk monitoring.
Data collected before and during these reviews will likely contribute to the strengthening of risk
management planning.
Visual Mapping. A visual map of all transportation routes, with identified risks called out as hot
spots, promotes a greater understanding and assessment of risk. By monitoring weather events,
political unrest, and other elements of risk and visually displaying them on a global map, shippers
can develop highly effective prevention and response plans. In addition, a global sales team can use
a consolidated visual map of Incoterms during contract negotiations and trade operations, giving
them crucial insight as they navigate the conditions of each transportation transaction

Network design for global logistics management
Logistics managers must be capable and more responsive to redesigning distribution networks more
frequently to operate at the lowest costs while providing the best customer service.
As recently as the 1990s, a company would review and restructure its distribution network once
every five to 10 years, says Edward Frazelle, founding director of Georgia Institute of
Technologys The Logistics Institute and president and CEO of Logistics Resources International of
Atlanta. Thats no longer the case as the issues affecting the network configuration are changing so
fast that they have to be monitored much more frequently, and in some cases, on a daily basis.
Security requirements, new trade agreements, shifting labor rates, space costs, supplier and
customer locations, new carriers and products, lane congestion, and fuel costs play significant roles
in network logistics, Frazelle says.
Optimal network design/redesign minimizes inventory carrying, warehousing, and transportation
costs while satisfying customer response-time requirements, according to Frazelle. Specifics
include the networks distribution levels and centers, location and mission of each facility,
assignment of supplier and customer locations to each center, and inventory deployment.
To create an optimal network design/redesign, Frazelle recommends a 10-step logistics network
design process:
1. Assess/evaluate current network.
2. Design and populate network optimization database.
3. Create network design alternatives, such as more or fewer hierarchies, multi-commodity flows,
pooling opportunities, merge-in-transit, direct shipping, cross docking, and supply-flow
optimization concepts.
4. Develop network optimization model.
5. Choose network optimization tool.
6. Implement network model in chosen tool.
7. Evaluate alternative network designs.
8. Practicalize recommended network structure.
9. Compute reconfiguration cost.
10. Make go/no-go decision.

Risk management in the global context,
Risk in the context of supply chains may be associated with the production/procurement processes,
the transportation/shipment of the goods, and/or the demand markets.
Such supply chain risks are directly reflected in rms nancial performances, and priced in the
nancial market. For example, it has been estimated that the average stock price reaction to supply-
demand mismatch announcements was approximately -6.8%. In addition, supply chain disruptions
can cause rms equity risks to increase by 13.50% on average after the disruption announcements.
Supply chain risk management is the intersection of supply chain management and risk
management.
There have been dierent ways proposed of categorizing risk:
High-Impact Low-Likelihood (sometimes called Black Swan events) Low-Impact High-
Likelihood
Environment-Organization-Network
Environmental risk sources consist of any uncertainties arising from the supply chain and
environmental interactions.
These may be the result of accidents (such as res, explosions, etc.), man-made (terrorist attacks),
or natural disasters (earthquakes, tsunamis, and other extreme weather events).
Organizational risk sources
Organizational risk sources lie within the scope of the boundaries of the supply chain parties and
include labor issues such as strikes, production uncertainties (quality and machine failures) to IT-
based uncertainties.
Network-related risk sources arise from interactions between the organizations involved in the
supply chain.
Lack of Ownership
Lack of ownership risk sources is due from the blurring of boundaries between suying and
supplycing companies in the chain. With outsourcing, there may be confused lines of responsibility.
Chaos
There may be chaos eects in a supply chain due to mistrust, overreaction, and distorted
informaion.
Inertia
Such risks are due to a lack of responsiveness to changing environmental conditions and market
signals. Flexibility may be sacriced, especially in global supply chains, where they may be an
emphasis on cost reduction.
Supply Chain Risk Management Adverse Risk Consequences
Risk may have adverse consequences that can be measured ex post through performance indicators.
Ex ante they are captured in the variances of the indicator components.
Three of the most important adverse consequences are:
1. Financial consequences
2. Health and safety negative impacts
3. Reputation damage.

MITIGATION STRATEGIES:
According to Juttner, Peck, and Christopher (2003) risk mitigation strategies are:
Avoidance (dropping specic products / geohraphical merkets, etc.
Control (through vertical integration, increased stockpiling, maintaining excess capacity in
production, storage, etc., and composing contractual obligations on suppliers)
Cooperation (through joint eorts to improve SC visibility, the sharing of risk-related information,
and preparation of SC continuity plans)
Flexibility (through postponement, multiple sourcing, localized sourcing)
Logistics Performance Measurement and the 3PL Value Proposition.

The five most recent studies published by the Council of Logistics Management on the subject of
performance measurement in logistics had three significant findings in common (Kearney 1984;
Bowersox et al 1989; Byrne and Markham 1991; Global Logistics Research Team at Michigan
State University
1995; Keebler et. al. 1999):
(1) Most firms do not comprehensively measure logistics performance,
(2) Even the best performing firms fail to realize their productivity and service potential available
from logistics performance measurement, and
(3) Logistics competency will increasingly be viewed as a competitive differentiator and a
key strategic resource
for the firm.
There are three major reasons why firms measure their logistics performance. They are to
(1) Reduce their operating costs,
(2) Drive their revenue growth, and
(3) Enhance their shareholder value.
Measuring operating costs helps to identify whether and where to make operational changes to
control expenses and to discover areas for improved asset management. To attract and retain
valuable customers, the price/value of products offered can be enhanced through cost reductions
and service improvements in logistics activities. The returns on stockholder investments and the
market value of the firm are impacted by the performance of firm logistics. These seem to be
obvious reasons why companies should want to be competent in performance measurement.
What logistics measures are actually being captured?
In a recent study, logistics executives from 355 firms identified logistics measures they captured
from a list of thirty-seven choices (Keebler et al 1999). These were classified as either effectiveness
measures or efficiency measures. The percentage of firms capturing each of these measures of
logistics performance was determined (see Table 1).
A much higher level of logistics measurement was expected, especially for some of the "bread and
butter" measures in logistics such as on-time delivery, fill rates, and freight costs. Twenty-one
percent of firms apparently dont capture a measure of on-time delivery. Thirty-eight percent do not
measure order cycle time. Forty-eight percent do not capture invoice accuracy. It seems that a large
percentage of firms are not capturing important measures of logistics performance. This sets up the
observation: If firms don't measure, they probably dont plan performance and, therefore, do not
take corrective action when appropriate to do so. Consequently, firms lack control of important
activities.
The Right Way to Measure Logistics Costs?
A few weeks ago, stemming from my column on Logistics Costs, Up or Down?, we launched a
small survey to get a pulse on the practices and experiences of SCDigest readers on this subject. I
know everyone is surveyed to death, but we had 247 usable responses, which is a pretty good
number thanks for all those who took the time to do so.
Its always hard to glean real insight from these kinds of things, because (a) they arent usually truly
random or scientific, which many commentators conveniently forget, and (b) to get at real insight
youd have to have such a long questionnaire to obtain granular detail and/or make the right
correlations that it would be hard to get anyone to actually complete it.
So we went for fairly short and sweet, and as always in retrospect I would have asked some slightly
different questions after seeing the data, but I think there is still some good information here on
logistics costs and practices.
Primary Method of Measuring Logistics Costs
40% of respondents said their primary measure of logistics costs is as a percent of sales. This
compares with 25% who said the primary measure was in absolute cost, 16% who said it was cost
by some unit of weight (hundred weight, kilograms, etc.), 11% who said it was cost per some unit
sold measure (case, unit), and 8% who said they used activity-based costing as the primary
measure.
As one reader commented: The mistake of using % of sales as ones only meaningful metric will
become very obvious during the deflationary portion of the cycle. The escalation of absolute costs
can hide in the euphoria of top line growth only to surface as a huge swing in % increase when the
market and the associated top line falls, even if the absolute cost remains relatively stable.
However; all too often as budget conscious managers we are willing to take the win and
the associated credit without acknowledging the windfall aspects of the cycle.
About 25% of respondents indicated through comments that in practice they look at logistics costs
multiple ways we simply asked for the primary measure. Another respondent commented: We
use several of these measures, but exclude items that are out of our control, such as the cost of
benefits. Most companies look at logistics costs from several directions.
What is included in Logistics Costs?
100% of respondents included warehouse/distribution costs and 98% outbound transportation costs
in calculating costs of logistics (a handful said customers paid for all outbound freight).
55% included inbound transportation costs, while 45% did not. 29% included reverse
logistics/returns costs, and in somewhat of a surprise to me, only 32% of respondents included
inventory carrying costs as part of total logistics costs. 21% included customer service costs, which
are generally included when various pundits look at total logistics costs. There was a slight vertical
orientation here, with customer service more likely to be included in the consumer packaged goods,
food/ beverage, 3PL and chemical segments, and uncommon in retail (as makes sense), wholesale
distribution, and tech, to site a few.
Among manufacturers, about one-third said they included manufacturing logistics costs, but we
did not well define the term. It was meant to include costs into and out of production, as well
as material storage and handling costs in the plant. What makes this aspect hard is that its hard to
know who really is a manufacturer these days a lot of companies which used to be are now
sourcing overseas. But several respondents in comments wanted to make clear that plant transfer
costs were included in logistics costs.
Other costs cited that were not in our specific list (just a handful at most each) included:
import/export costs, freightaudit expense, and packaging costs.
Logistics Costs Up or Down in the Past Year?
The results broke out this way, by the way companies measure logistics costs:
Absolute costs:
74% said logistics costs were up
26% said logistics costs were down
As a percent of sales:
62% said costs were up
38% said costs were down
Logically, this was perhaps the most industry-specific result, as product price is often the key driver
of this metric. Virtually 100% of food and beverage and wholesale distributors, for example, said
their logistics costs as a percent of sale were higher in 2005. Conversely, a high percentage of
respondents in the chemical and the 3PL industries said their costs as a percent of sales declined.
The chemicals one makes sense, as prices in general rose heavily in that sector not sure about
3PLs.
Cost Per Weight or Unit:
71% said costs were up
29% said costs were down.
Noted one respondent: How can anyone say logistics costs are going down when the cost of diesel
has risen almost $1 a gallon in the past year. The cost of rail has increased 7-10% across the board
and the major air carriers have implemented fuel surcharges. There is no way!
So, I guess thats the real question, which we dont have answered, which is how in this
environment 25-30% said either total logistics costs or costs per weight/unit were down last year?
(Of course, both metrics can also be very volume-driven.)
As usual, were out of space. Well have more logistics costs survey information, including some
industry specific data, and graphs of this data early next week check www.scdigest.com or
subscribe to our RSS feed below to get it as its published.
What do you think is the right way to measure logistics costs? Do these results surprise you at all?
What elements do you think should be included in logistics cost measures, and why?
Benchmarking
Logistics is a fancy business term given to the process of transporting manufactured goods from the
source to the final destination, such as a retailer. At each point in the logistics or supply chain, a
company pays money that adds to the cost of each product produced. Logistics benchmarking
allows a company to review each part of this process and determine if it is paying too much.
Different business activities under the microscope of logistics benchmarking may be manufacturing
or supplier costs, wholesaler fees, transportation payments, and opportunity costs. Benchmarking
does not necessarily use a single method for review as different situations may exist for each
different business model.
The purpose of any benchmarking process is to make a comparison between two or more
businesses or a business against the industry average. Logistics benchmarking is a bit more
particular to certain industries, namely manufacturing, retail, and the like. Companies within these
industries often have to ship goods from a source to multiple outlets that sell goods to consumers.
Especially elongated supply chains can add copious costs to the standard cost of manufacturing for
each item or batch of goods. Therefore, logistics benchmarking is necessary to ensure the total cost
remains low, so the company can be competitive in the business market.
Many types of tools are available in logistics benchmarking. A company can use cost-benefit
analysis, financial ratios, cost comparison, or another method. For example, a cost-benefit analysis
starts with outlining the costs related to the entire logistics process. Next to each cost, the company
should list the benefits received, such as special discounts, securewarehousing, or short
transportation distances. Calling other logistics or supply chain providers to inquire about recent
market costs can help determine if the current logistics providers are pricing services competitively.
Two common methods for completing logistics benchmarking are to conduct a supply chainaudit or
hire a consultant to review the companys logistics. An audit with a team ofaccountants from
a public accounting firm can turn up copious amounts of information relating to both cost and
performance. It is then up to the company to make decisions on changes to the logistics process
based on this information. When using an outside supply chain consultant, a company tends to get
the same data though possibly less formal as with an audit. The consultant, however, may be
more willing to help make changes in the companys supply chain.