Strategic Issues in Global Logistics

The process of managing the flow of inventory and information across the global supply chain is more complex than managing logistics operations within the country. This is because of the diver­sity in markets in terms of the following:

• Customer needs
• Economic and regulatory environment
• Logistical infrastructure

The dominant factors need to be identified during the planning stage and proper strategies evolved to overcome the barriers.

1. Internal Issues

Logistics Planning. For companies with global operations, logistics network planning is crucial for gaining competitiveness. The formulation of a logistics network strategy will also depend on factors such as unit value of the product, markets and competition. For example, when a firm decides on developing new markets and relocating facilities, the sourcing of raw materials becomes important as far as the delivery time frame, logistics cost and reliability are concerned. There­fore, the formulation of logistics strategy should take into consideration the location of production facilities, sourcing of raw materials and components, and the product-market characteristics. The following are some options for firms to plan their logistics for truly global operations:

• The firms may concentrate their manufacturing and sourcing at a few locations, despite selling their products across global markets, for example, BMW and Thomson. The major focus of these companies is on outbound logistics for distribution of finished products in global markets.
• The next category of firms includes those that manufacture at one place and sell their products in the global markets. These are the companies manufacturing very high value products such as aircrafts and defence products. They source their raw material and components from all over the world. The major focus of these companies is on inbound logistics.
• Companies in the third category manufacture mass-consumed low-value products such as soft drinks. Firms like McDonalds, Coca Cola and Pepsi adopt the strategy of supplying the finished products to the markets from local manufacturing plants. The products are sold within 200 kilometres of the plants. Beyond a particular distance the logistical cost makes the finished products uncompetitive.
• The fourth category includes companies that source from and distribute to many locations. They focus on both inbound and outbound logistics. Some examples are the Japanese car and consumer electronics manufacturing companies such as Honda, Toyota and Sony, and so on.

Inventory: “Make-to-Order” or “Make-to-Stocks.” A major shift in inventory planning is “make-to-order” to deliver the products directly to the customer to reduce inventory levels. The approach followed here is to consolidate the global production in a single or a few focused factories to cater to the needs of various markets. The variations in the needs of the individual customer or local markets are fulfilled through a strategy based on rationalization of product design. The local needs are taken care of through the modular approach to product design, wherein the product can be configured to its final shape at the distribution centre catering to the local markets. This is the “pull” system wherein the execution is after the customer places an order. The internal system is flexible so as to gear itself for execution of orders for product volumes and variety.

Product Variables. The unit value of the product decides the reach of the logistical system. In the globalized marketing environment, the firms with low unit value products invariably resort to a local manufacturing system to extend better customer service. For products like soft drinks, the distribution is mostly restricted within 200 kilometres of the bottling plant. The cost of serving the customer becomes uneconomical beyond a certain distance. The configuration of plants for such products depends, to a great extent, on the logistical reach of the product. However, in the case of high-value products, the logistical reach is wider and the transportation cost as a percentage of the total cost of the product is insignificant and, therefore, a centralized manufacturing or distribu­tion centre for better inventory control is thinkable. It is an important consideration for consumer products sourcing and distribution network in the global markets.

Flexibility. Invariably, the global players focus on the strategy of economies of scale for cost advantage. But this strategy has an element of inflexibility to respond to a dynamic market and demanding customers. The logistics system associated with the aforesaid strategy also becomes inflexible in responding to the changing distribution needs. For example, the emphasis on freight consolidation with few dispatch schedules has shifted to frequent and small consignments to reduce the inventory-related costs.

2. External Issues

Short Lead Time. In the global markets, the emphasis is on responsiveness with a lean supply chain. In such circumstances, the customers bank on the shortest lead time for the inputs going into the product manufacture to compress the performance cycle resulting in superior customer service and simultaneously reduced overall inventory levels. However, in case of inflexibility in manufacturing system, the supplier needs to keep some buffer stocks to maintain the desired level of customer service, sacrificing the benefits of lean inventory.

Transit Time Extensions and Delays. The freight cost is directly proportional to the speed of transportation mode. Air transportation may be obviously costlier than sea transportation, but inventory carrying cost over a longer period of sea journey will offset its benefits due to low freight charges. Moreover, this will pose constrains to the basis logistics principle of postpone­ment. The documentation and customs clearance may further add to the cost of in-transit inven­tory shipped through slow speed transportation modes.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.