Study Notes on Global Logistics and International Trade

Supply Chain Management

Chapter 10: Global Logistics & International Trade

Video Introduction

  • Video Duration: 3:40 minutes

  • Discussion Outline:

    • Global Location Decisions

    • International Trade Management

Global Location Decisions

  • Context:

    • Increased globalization, technology, transportation, and open markets allow companies to be located worldwide.

    • Facility location is critical to a firm’s supply chain strategy.

  • Decisions Involve:

    1. Defining each facility’s strategic role: Types of facilities to be established.

    2. Determining the location for each facility: Geographical placement on a global scale.

    3. Identifying the market(s) that each facility serves.

Global Facility Types

  1. Offshore Factory

  2. Source Factory

  3. Server Factory

  4. Contributor Factory

  5. Outpost Factory

  6. Lead Factory

  • Progression: Facility types go from basic (1) to complex (6).

Facility Types Explained

  • Offshore Factory:

    • Manufacturing low-cost products with minimal technical and managerial resources.

    • Characteristics:

    • Leverages low labor costs.

    • Imports or acquires parts locally for export.

    • Local management has a supervisory role, not decision-making.

    • Example: Clothing produced in Bangladesh, Indonesia.

  • Source Factory:

    • Similar to Offshore Factory but with added management involvement. 

    • Characteristics:

    • Local management participates in supplier selection and production planning.

    • Develops infrastructure and skilled workforce.

    • Example: Hewlett-Packard factory in Singapore for manufacturing calculators and keyboards.

  • Server Factory:

    • Utilizes government incentives and incorporates minor improvements to products and processes.

    • Characteristics:

    • Set up for local market needs with lower taxes and tariffs.

    • Example: Coca-Cola bottling that mixes ingredients for local market needs.

  • Contributor Factory:

    • Evolves from a Server Factory by focusing on product development and engineering.

    • Characteristics:

    • Involves procurement decisions and supplier development.

    • Example: Sony factory in Wales that transitioned into a Contributor factory.

  • Outpost Factory:

    • Located near advanced suppliers, competitors, and research institutions.

    • Example: Research Triangle Center in Raleigh, Durham, Chapel Hill, NC.

  • Lead Factory:

    • A source of product/process innovation and competitive advantage for the organization.

    • Example: Intel factory in Penang, Malaysia, serving as a “Go-To” factory for innovation.

Global Location Factors

  • Factors to Consider:

    • Competitiveness

    • Taxes and Incentives

    • Currency Stability

    • Access & Proximity to Markets

    • Labor Issues

    • Right to Work Laws

    • Access to Suppliers & Cost

    • Utility Availability & Cost

    • Environmental Issues

    • Land Availability & Cost

    • Quality of Life Issues

    • Business Clusters

    • Trade Agreements

Pillars of Competitiveness

  • Includes: 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, and Innovation.

Taxes and Incentives

  • Importance of understanding various governmental levels when assessing locations.

  • Definition of Tariffs: Federal taxes aimed at protecting local businesses, influencing local production.

Access and Proximity to Markets

  • Manufacturing trend leads firms to locate near customers to reduce logistics costs and enhance service efficiency.

  • Service industries require close proximity for effective service delivery.

Labor Issues

  • Factors such as availability, productivity, skill sets, and wage rates affect location decisions.

  • Right to Work Laws: Protect employees’ rights to join/support unions.

    • Recent Supreme Court ruling altered union fee structures in the public sector.

Access to Suppliers and Cost

  • Proximity to suppliers enhances material delivery efficiency.

  • Utility availability is crucial, with power supply affecting operational capabilities.

Land Availability and Costs

  • As urban costs rise, companies increasingly move to suburban or rural areas.

Environmental Issues

  • Address the impact of industrialization on global warming and pollution, and the need for environmental cooperation.

Quality-of-Life Issues

  • Assess regional aspects like healthcare, political stability, public safety, and education for workforce attraction.

Business Clusters

  • Geographic concentrations of companies that enhance innovation and competition.

  • Successful due to close cooperation among local businesses and access to a shared skilled workforce.

Regional Trade Agreements Impact

  • Examples Include:

    • European Union (EU) - 27 members.

    • North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico.

    • MERCOSUR - Argentina, Brazil, Paraguay, Uruguay.

    • ASEAN - Southeast Asian nations.

World Trade Organization (WTO)

  • Functions:

    • Administer trade agreements, serve as a negotiation forum, resolve trade disputes, monitor policies, assist developing countries.

  • Membership: 164 member countries.

Location Evaluation Techniques

  1. Weighted-Factor Rating Model:

    • Compares locations using quantitative and qualitative dimensions by identifying factors, assigning weights, scoring, and summing totals to identify the best location.

  2. Break Even Model:

    • Useful when fixed and variable costs are known; involves identifying locations, determining costs, constructing cost lines, and finding break-even points.

International Trade Management

  • Discussion Topics:

    1. Global Trade Opportunities and Challenges

    2. Trade Legislation

    3. U.S. Regulatory Authorities

    4. International Trade Compliance

    5. Import Process

    6. Export Process

    7. Penalties for Violations

    8. Global Logistics Intermediaries

Global Supply Chain Opportunities

  • Benefits Include:

    • Trading groups formation (e.g., EU, NAFTA).

    • Increased revenues and sourcing options.

Global Supply Chain Challenges

  • Include tariffs, complexity in transport, and varied foreign regulations.

International Freight Security

  • Increased complexity in transportation security post-9/11, impacting international shipments.

Major U.S. International Trade Legislation

  • Key Acts:

    • Tariff Act of 1930, Anti-Smuggling Act of 1935, Trade & Tariff Act of 1984, Trade Act of 2002, etc.

    • Not necessary to memorize all acts.

U.S. Department of Homeland Security (DHS)

  • Mission:

    • Prevent terrorist attacks, reduce vulnerability, and minimize damage from disasters.

  • In charge of securing borders and transportation systems post-3/1/2003.

U.S. Customs and Border Protection (CBP)

  • Role:

    • Acts as the gateway agency for other government agencies.

    • Controls import processes and protects U.S. borders.

International Trade Compliance

  • Involves numerous documents and compliance with a large number of laws and regulations.

  • Consequences for Violations:

    • Significant fines up to 40% of merchandise value, physical inspections, and delayed shipments.

Trade Compliance Systems

  • Automate regulatory checks to improve compliance and reduce penalties.

Import / Export Process Flow

  • Visual process map detailing the flow of goods through various mediums (Air, Rail, Truck) during import/export activities.

Import Process

  • Goods can only enter the U.S. after several requirements are met, including CBP review and duty payments.

Foreign Trade Zones (FTZs)

  • Areas where goods can be managed without being subject to U.S. tariffs until moved for consumption.

Export Process

  • Includes filing documentation like Shippers Export Declaration and ensuring compliance with regulations and restrictions.

Deemed Exports

  • Involves releasing controlled technology to foreign nationals in the U.S. and requires strict compliance to prevent penalties.

Penalties for Violations

  • Significant criminal and civil penalties, including fines and loss of trade privileges.

Global Logistics Intermediaries

  • Roles of Key Intermediaries:

    • Customs Brokers: Handle customs processes.

    • International Freight Forwarders: Facilitate transport to/from foreign destinations.

    • Trading Companies: Connect buyers/sellers and manage documentation.

    • Non-Vessel-Operating Common Carriers (NVOCC): Utilize scheduled shipping lines for transport.