International Logistics

Logistics is a total systems approach to management of the distribution process that includes the cost-effective flow and storage of materials or products and related information from point of origin to point of use or consumption.

There are two categories of business logistics:

1. Materials management: In the context of export-import trade, logistics applies to the timely movement or flow of materials/products from the sources of supply to the point of manufacture, assembly, or distribution (inbound materials). This includes the acquisition of products, transportation, inventory management, storage, and the handling of materi­als for production, assembly, or distribution. For example, products can be assembled in Canada for distribution in Canada and the United States.
2. Physical distribution: The second phase relates to the movement of the firm’s product to consumers (outbound materials). It includes outbound transportation, inventory man­agement, and proper packaging to reduce damage during transit and storage.

Materials management primarily deals with inbound flow, whereas physical distribution is concerned with the outbound flow of materials or products (David and Stewart, 2010; Guelzo, 1986). Both inbound and outbound activities are interdependent and influence the company’s objective of reducing cost while conforming to customer needs. The interdepen­dence of such activities can be illustrated by the example of U.S. flower imports from Latin America. Atlantic Bouquet, a U.S. company, purchases most of its flowers from its sister company, which has flower farms in Latin America. Continental Air freights the flowers from company-owned farms in Latin America to a warehouse in Miami before they are moved nationwide by air or by truck (for distances of less than 300 miles). A proper management of the logistics system, that is, the unique combination of packaging, handling, storage, and transportation, will ensure that the product is imported and made available to the customer at the right time and place and in the right condition.

The interdependence of functional activities has been articulated through various new approaches or concepts:

1. The systems approach: The systems concept is based on the premise that the flow of ma­terials within and outside the firm should be considered only in the context of their in­teraction (Czinkota, Ronkainen, and Moffett, 2010). This approach puts more emphasis on maximizing the benefits of the corporate system as a whole as opposed to that of individual units.
2. Total-cost approach: This is a logistics concept based on evaluation of the total cost impli­cations of various activities.
3. The opportunity-cost approach: This approach considers the trade-off in undertaking cer­tain logistic decisions (e.g., the benefits and costs of sourcing components abroad versus buying from domestic sources). Additional costs associated with transportation, increases in safety stock inventory, warehousing costs, and so forth are examined to ensure that the total opportunity cost of outsourcing abroad is not greater than other available options.

What is the importance of logistics to international trade? One of the major contributions of logistics to international trade is in the area of efficient allocation of resources. Interna­tional logistics allows countries to export products in which they have a competitive advan­tage and import products that are either unavailable at home or produced at a lower cost overseas, thus allowing for efficient allocation of resources. For example, natural resource advantages and low-cost labor have enabled Colombia to export flowers to the United States and to import technology. Colombian flower exports have driven less-efficient U.S. produc­ers out of their own markets and forced the Dutch out of the rose and carnation markets in the United States (Thuermer, 1998). Such advantages from international trade cannot be realized without a well-managed logistics system. To the extent that logistics facilitates in­ternational trade, it contributes to the expansion of economic growth and employment. As import firms expand their ability to procure needed raw materials or components for their customers, international logistics management becomes a critical source of competitive ad­vantage for both the firms and the customers. Such material procurement and sourcing deci­sions include the number and location of warehouses, levels of inventory to maintain, as well as selection of the appropriate transportation mode and carrier (Christopher, 1992). The development of advanced logistics systems and capabilities has also increased the efficient production, transportation, and distribution of products. For example, by outsourcing logis­tics to third-party operators, pharmaceutical and health-care companies can reduce costs as­sociated with inventory, overhead, labor, and warehousing. The use of various transportation modes facilitates rapid and consistent delivery service to consumers, which in turn reduces the need for safety stock inventory. Transportation cost is also reduced through shipment consolidation and special contracts with carriers for large shipments without adversely af­fecting delivery time. In short, a well-managed international logistics system can result in op­timal inventory levels and optimal production capacity (in multiplant operations), thereby maximizing the use of working capital. All this helps to strengthen the competitive position of domestic companies in global trade.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.