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International Inventory Issues
Inventories tie up a major portion of corporate funds. Capitalused for inventory is not available for other corporate opportu-nities. Annual inventory carrying costs (the expense of maintaining inventories) though heavily influenced by the costof capital and industry-specific conditions, can account for 15percent or more of the value of the inventories themselves.Therefore, proper inventory policies should be of majorconcern to the international logistician. In addition, just-in-timeinventory policies, which minimize the volume of inventory bymaking it available only when it is needed, are increasinglyrequired by multinational manufacturers and distributorsengaging in supply-chain management. They choose supplierson the basis of their delivery and inventory performance andtheir ability to integrate themselves into the supply chain.Proper inventory management may therefore become adetermining variable in ob-taining a sale.The purpose of establishing inventory systems-to maintainproduct movement in the delivery pipeline and to have acushion to absorb demand fluctuations-is the same fordomestic and international operations. The internationalenvironment, how-ever, includes unique factors such as currencyexchange rates, greater distances, and duties. At the same time,international operations provide the corporation with anopportunity to explore alternatives not available in a domesticsetting, such as new sourcing or location alternatives. Ininternational operations, the firm can make use of currencyfluctuation by placing varying degrees of emphasis on inventoryopera-tions, depending on the stability of the currency of aspecific country. Entire opera-tions can be shifted to differentnations to take advantage of new opportunities. In-ternationalinventory management can therefore be much more flexible inits response to environmental changes.In deciding the level of inventory to be maintained, theinternational manager must consider three factors: the ordercycle time, desired customer service levels, and use of invento-ries as a strategic tool.
Order Cycle Time
The total time that passes between the placement of an orderand the receipt of the merchandise is referred to as order cycletime. Two dimensions are of major impor-tance to inventorymanagement: the length of the total order cycle and its consis-tency. In international business, the order cycle is frequentlylonger than in domestic busi-ness. It comprises the timeinvolved in order transmission, order filling, packing andpreparation for shipment, and transportation. Order transmis-sion time varies greatly internationally depending on themethod of communication. Supply-chain driven firms useelectronic data interchange (EDI) rather than facsimile, telex,telephone, or mail.EDI is the direct transfer of information technology betweencomputers of trading partners. The usual paperwork thepartners send each other, such as purchase or-ders and confir-mations, bills of lading, invoices, and shipment notices, areformatted into standard messages and transmitted via a directlink network or a third party net-work. EDI can save a large partof the processing and administrative costs associated withtraditional ways of exchanging information.The order-filling-time may also increase because lack of familiarity with a foreign market makes the anticipation of neworders more difficult. Packing and shipment preparation requiremore detailed attention. Finally, of course, transportation timein-creases with the distances involved. Larger inventories mayhave to be maintained both domestically and internationally tobridge the time gaps.Consistency, the second dimension of order cycle time, is alsomore difficult to maintain in international business. Dependingon the choice of transportation mode, delivery times may varyconsiderably from shipment to shipment: The variationrequires the maintenance of large safety stocks to be able to filldemand in periods when delays occur.
Customer Service Levels
The level of customer service denotes the responsiveness thatinventory policies per-mit for any given situation. A customerservice level of 100 percent would be defined as the ability to fillall orders within a set time-for example, three days. If, withinthe ‘same three days, only 70 percent of the orders can be filled,the customer service level is 70 percent. The choice of customerservice level for the firm has a major impact on the inventoriesneeded. In highly industrialized nations, firms frequently areexpected to adhere to very high levels of customer service. Forexample, in the European Union, actual performance measuresfor on-time delivery are 92 percent, for order accuracy 93 percent,and for damage- free delivery 95 percent. Corporations are oftentempted to design international customer service standards tosimilar levels.Yet, service levels should not be oriented primarily around costor customary do-mestic standards. Rather, the level chosen foruse internationally should be based on expectations encoun-tered in each market. The expectations are dependent on pastper-formance, product desirability; customer sophistication, andthe competitive status of the firm.Because high customer service levels are costly, the goal shouldnot be the highest customer service leve1possible, but rather anacceptable level. Different customers have different priorities.Some will be prepared to pay a premium for speed, some mayput a higher value on flexibility, and another group may see lowcost as the most impor-tant issue. Flexibility and speed areexpensive, so it is wasteful to supply them to cus-tomers whodo not value them highly. If, for example, foreign customers
LESSON 37INTERNATIONAL INVENTORY ISSUES,PACKAGING ISSUES, STORAGE ISSUES & OTHERS.