Chapter 10 - Global Logistics and International Trade v6 [Instructor Taitt Version]

Global Location Decisions

Defining each facility’s strategic role (i.e., what type of facility)

Determining the location for each facility (i.e., where in the world)

Identifying the market(s) that each facility serves

Global Facility Types

Offshore Factory

Source Factory

Server Factory

Contributor Factory

Outpost Factory

Lead Factory

Offshore Factory

labor or raw materials are less expensive for eventual import back into the manufacturer's home country

• low labor costs

• Import or acquire parts locally, then export to the manufacturer or directly to customers

Example: Clothing produced in Bangladesh, Indonesia

Source Factory

Manufactures products at low cost but with skilled workers and significant managerial resources.

• Plant management involvement in supplier selection

• Plant management involvement in production planning

• More developed local infrastructure

• Access to skilled workforce

• Low production costs

Example: Hewlett-Packard Singapore factory produced calculators and keyboards

Server Factory

A factory set up to take advantage of government incentives and/or reduced tax/tariff barriers to meet regional or local market needs.

• Firm uses government incentives

• Low exchange risk and tariff barriers to reduce taxes and logistics costs.

• Makes minor improvements to product and processes

• Set up to serve the local market

Example: Coca-Cola bottling. Mix the final ingredients to take advantage of exchange rates, tariff, & taxes.

Contributor Factory

Focused on product development and engineering for products that they manufacture.

• Product development.

• Production planning.

• Procurement decisions.

• Supplier development.

Example: 1973 Sony built a Server factory in Wales and then 15 years later got involved in development, planning, etc. and now is a Contributor factory

Outpost Factory

A factory set up in an area with abundant advanced suppliers, competitors, research facilities, etc.

• Advance suppliers.

• Competitors.

• Research facilities & universities for materials, components, and products.

Example: Raleigh, Durham, Chapel Hill NC. Research Triangle Center. UNC, Duke, IBM, Cisco, Silicon Valley, CA.

Lead Factory

Source of product and process innovation and competitive advantage across the entire organization (world-class).

• Competitive advantage of the organization.

• Source of innovation.

Example: Intel factory in Penang, Malaysia opened in mid 1970’s, now is a lead factory. - “Go-To” factory

Global Location Factors (12 Pillars of Competitiveness)

Institutions

Infrastructure

Macroeconomic stability

Health and primary education

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market sophistication

Technological readiness

Market size

Business sophistication

Innovation

Countries with high tariffs _____ _____ goods into the country and encourage multinational corporations to produce locally.

discourage importing

Access and Proximity to Markets

The trend in manufacturing is to be within delivery proximity of your customers.

• Logistics timelines and costs are the concerns, reinforcing a clustering effect of suppliers and producers to places offering lower-cost labor and real estate prices.

In the service industry, proximity to customers is even more critical.

• You can’t service a washing machine if your technician is 3000 mi away.

Right-to-Work Laws

28 states have laws protecting employees’ right to join or support a union.

• unionizing laws = expenses increase

Business Clusters

Geographic concentrations of interconnected companies and institutions.

Research parks and special economic/industrial zones serve as magnets for business.

define European Union (EU)

[1950] Following WWII, consists of 26 member countries in Europe

define North American Free Trade Agreement (NAFTA)

[1994] Removed most barriers to trade and investment between the U.S., Canada, and Mexico

define Southern Common Market (MERCOSUR)

[1991] among Argentina, Brazil, Paraguay, and Uruguay

define Association of Southeast Asian Nations (ASEAN)

[1967] Among 10 member countries in SE Asia

Common Market of Eastern and Southern Africa (COMESA)

[1993] among 19 member countries in Eastern and Southern Africa

World Trade Organization (WTO)

deals with the global trade rules between nations (164 countries)

• main goal: ensure that trade flows as smoothly, predictably, and freely as possible

• functions include:

  • Administering agreements

  • Forum for trade negotiations

  • Trade disputes

  • Monitor trade policies

  • Aid for Developing countries

  • International organizations

The Weighted-Factor Rating Model

A company is choosing between Location A, Location B, and Location C.
They evaluate them based on three factors:

1. Cost (weight = 0.40)

2. Access to customers (weight = 0.35)

3. Labor availability (weight = 0.25)

Weights sum to 1.0

Break Even Model

Useful location analysis technique when fixed & variable costs can be determined

Choose the locations you want to compare

• Find fixed costs for each location

  • (land, property taxes, insurance, buildings, equipment)

• Find unit variable costs for each location

  • (materials, utilities, transportation per unit)

• FORMULA: Total Cost = Fixed Cost + (Variable Cost*Quantity)

• Graph the total cost lines for each location

• Find the break-even points where lines intersect

• Choose the best location over the output range where its total cost is lowest

Operating your supply chain globally can present opportunities:

• Increased revenue through global business (i.e., more customers) and economic opportunities

• Increased sourcing options with more potential sources of supply to choose from, including potential economic opportunities

Operating your supply chain globally can also present challenges:

• Tariffs or duties (i.e., import taxes)

• Transporting goods across borders can be complex and involve new/different partners

• Customs, business practices, and regulations vary by country

• Foreign markets are not homogeneous even within the country

International Freight Security

• Transportation across national boundaries introduces added complexity, particularly security.

• Since 9/11, there has been more conflict between the U.S. government and industry regarding more security and restrictions for international shipments.

US Dept of Homeland Security/DHS is the government agency whose mission is to:

• Prevent terrorist attacks within the United States

• Reduce America's vulnerability to terrorism

• Minimize the damage from potential attacks and natural disasters

Dept’s priority is to prevent the entry of terrorists and the instruments of terrorism while ensuring the efficient flow of lawful traffic and commerce.

U.S. Customs and Border Protection (CBP)

• Originally established in 1789, U.S. Customs and Border Protection (CBP) controls the import process.

• CBP became part of the US Department of Homeland Security in 2003

• It is the “gateway agency” for more than 20 other government agencies, each of which has some control over various aspects of international trade.

• CBP works to secure and facilitate imports arriving in the U.S., accommodating the increasing volume and complexities of international trade.

  • “Pushing the borders back”

International Trade Compliance

Managing international trade activities is a complex process.

A typical cross-border shipment involves:

• Accurately completing and filing about 35 documents.

• Compliance with over 600 laws and 500 trade agreements, which are constantly changing.

• Interfacing with about 25 parties, including Customs, carriers, freight forwarders, other government agencies, etc.

Trade regulations and related content are at the heart of ITC, but staying up-to-date is a significant challenge because:

• The information changes frequently

• It’s often made available only in a foreign language

• It’s not always produced in an electronic form

Businesses violating trade regulations face fines of up to 40% of the value of the merchandise for “negligence,” which can mean simply failing to keep certain necessary records.

Trade Compliance Systems (or Global Trade Management systems)

• Have become a vital tool for every major importing and exporting company in the US.

• The only way to keep current with the continuously changing laws, regulations, and procedures.

Benefits of Trade Compliance Systems

• Increased level of compliance compared to a manual process.

• Decreased number of physical inspections by US Customs & Border Protection

• Faster release of shipments by US Customs & Border Protection.

• Avoidance of fines and penalties.

• Opportunity to interface with other systems

Import Process

When a shipment reaches the US, the Importer of Record (i.e., the owner or purchaser) must file entry documents at the port of entry.

Goods are not legally entered into US commerce until:

• The shipment has arrived within the port of entry

• Delivery to the shipping destination has been authorized by CBP (following submission and review of required documentation)

• Estimated duties have been paid.

Foreign Trade Zones (FTZ’s)

Physical areas inside the US supervised by U.S. Customs and Border Protection that are considered outside of the U.S. territory. Usually located at or near a port of entry.

Export Process

• When a shipment is ready to be exported, the shipper will file export documents for the goods at the port of departure.

• Shipments must conform to Export Administration Regulations

• Complete and submit a Shippers Export Declaration (SED)

• Submit a Commercial Invoice for the product.

Deemed Exports

• release of technology or source code subject to the Export Administration Regulations to a foreign national (i.e., non-US citizen) located in the United States.

• intentional or unintentional export of controlled technology can easily occur within the walls of your company, even if located within the borders of the United States.

Criminal Penalties

Substantial Fines (and/or)

10+ years imprisonment

Civil Penalties

Substantial fines per occurrence

Individual and/or company sanctions

Statutory Sanctions

Seizure and forfeiture of items in violation, including the vessels and aircraft carrying the items.

Loss of import and/or export privileges for a business unit, division, or company.

Detailed inspections of every shipment and delayed release by US Customs & Border Protection.

Customs Brokers

Move global shipments through customs and handle documentation.

International Freight Forwarders

Move goods to and from a foreign destination

Trading Companies

Put buyers and sellers from different countries together and handle export/import arrangements, documentation, and transportation.

Non-Vessel-Operating Common Carriers (NVOCC)

Operate like freight forwarders but use only scheduled ocean liners.