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International Inventory Issues, Packaging Issues, Storage Issues & Others

International Inventory Issues, Packaging Issues, Storage Issues & Others

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Published by AnuranjanSinha
International Inventory Issues, Packaging Issues, Storage Issues & Others
International Inventory Issues, Packaging Issues, Storage Issues & Others

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Published by: AnuranjanSinha on Oct 02, 2009
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© Copy Right: Rai University
11.154 273
INTERNATIONALBUSINESS MANAGEMENT
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.
 
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© Copy Right: Rai University
INTERNATIONALBUSINESS MANAGEMENT
expect to receive their merchandise within 30 days, for theinternational corporation to promise delivery within 10 or 15days does not make sense. Indeed, such delivery may result instorage problems. In addition, the higher prices associated withhigher customer service levels may reduce the competitivenessof a firm’s product. By contrast, in a business to businesssetting, sometimes even a four-hour delay in the delivery of acru-cial component may be unacceptable, since the result may bea shutdown of the pro-duction process.In such instances, strategically placed depots in, a region mustensure that near in-stantaneous response becomes possible. Forexample, Storage Technologies, a maker of storage devices formainframe computers, keeps parts at seven of its Europeansub-sidiary offices so that in an emergency it can reach anycontinental customer within four hours.
Inventory as a Strategic Tool
Inventories can be used by the international corporation as astrategic tool in dealing with currency valuation changes or tohedge against inflation. By increasing invento-ries before animminent devaluation of a currency instead of holding cash,the cor-poration may reduce its exposure to devaluation losses.Similarly, in the case of high inflation, large inventories canprovide an important inflation hedge. In such circum-stances,the international -inventory manager must balance the cost of maintaining high levels of inventories with the benefits accruingfrom hedging against inflation or devaluation. Many countries,for example, charge a property tax on stored goods. If theincrease in tax payments outweighs the hedging benefits to thecorporation, it would be unwise to increase inventories before adevaluation.
International Packaging issues
Packaging is instrumental in getting the merchandise to theultimate destination in a safe, maintainable, and presentablecondition. Packaging that is adequate for domes-tic shippingmay be inadequate for international transportation because theshipment will be subject to the motions of the vessel on whichit is carried. Added stress in in-ternational shipping also arisesfrom the transfer of goods among different modes of transportation. Figure 12.6 provides examples of some sourcesof stress in intermodal movement that are most frequentlyfound in international transportation.The responsibility for appropriate packaging rests with theshipper of goods. The U.S. Carriage of Goods by Sea Act of 1936 states: “Neither the carrier nor the ship shall be responsiblefor loss or damage arising or resulting from insufficiency of pack-ing.” The shipper must therefore ensure that the goods areprepared appropriately for international shipping. This isimportant because it has been found that “the losses that occuras a result of breakage, pilferage, and theft exceed the lossescaused by ma-jor maritime casualties, which include fires,sinkings, and collision of vessels. Thus the largest of theselosses is a preventable loss..Packaging decisions must also take into account differences inenvironmental conditions-for example, climate. When theultimate destination is very humid or particularly cold, specialprovisions must be made to prevent damage to the product.The task becomes even more challenging when one considersthat, in the course of long-distance transportation, dramaticchanges in climate can take place. Still famous is the case of afirm in Taiwan that shipped drinking glasses to the MiddleEast. The com-pany used wooden crates and padded the glasseswith hay. Most of the glasses, how-ever, were broken by thetime they reached their destination. As the crates traveled intothe drier Middle East, the moisture content of the haydropped. By the time the crates were delivered, the thin strawoffered almost no protection.The weight of packaging must also be considered, particularlywhen airfreight is used, as the cost of shipping is often basedon weight. At the same time, packaging material must besufficiently strong to permit stacking in international transporta-tion. Another consideration is that, in some countries, dutiesare assessed according to the gross weight of shipments, whichincludes the weight of packaging. Obviously, the heavier thepackaging, the higher the duty will be.The shipper must pay sufficient attention to instructionsprovided by the customer for packaging. For example, requestsby the customer that the weight of anyone pack-age should notexceed a certain limit or that specific package dimensions shouldbe adhered to, usually are made for a reason. Often they reflectlimitations in trans-portation or handling facilities at the pointof destination.Figure 12.6 Stresses in Intermodal MovementAlthough the packaging of a product is often used as a form of display abroad, international packaging can rarely serve the dualpurpose of protection and dis-play. Therefore double packagingmay be necessary. The display package is for fu-ture use at thepoint of destination; another package surrounds it for protec-tive purposes.One solution to the packaging problem in-internationallogistics has been the de-velopment of intermodal containers-large metal boxes that fit on trucks, ships, railroad cars, andairplanes and ease the frequent transfer of goods in interna-tional shipments. Developed in different forms for both seaand air transportation, con-tainers also offer better utilizationof carrier space because of standardization of size. The shippertherefore may benefit from lower transportation rates. Inaddition, con-tainers can offer greater safety from pilferage anddamage. Of course, at the same time, the use of containersallows thieves to abscond with an entire shipment rather than just parts of it. On some routes in Russia, for example, theftand pilferage of cargo are so common that liability insurers willnot insure container haulers in the region. Container technologyhas greatly improved over the years.Container traffic is heavily dependent on the existence of appropriate handling fa-cilities, both domestically and interna-tionally. In addition, the quality of inland trans-portation must
 
© Copy Right: Rai University
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INTERNATIONALBUSINESS MANAGEMENT
be considered. If transportations for containers is not availableand the merchandise must be removed, the expected costreductions may not materialize.In some countries, rules for the handling of containers may bedesigned to main-tain employment. For example, U.S. unionrules obligate shippers to withhold con-tainers from firms thatdo not employ members of the International Longshoremen’sAssociation for the loading or unloading of containers within afifty-mile radius of Atlantic or Gulf ports. Such restrictions canresult in an onerous cost burden.Overall, cost attention must be paid to international packaging.The customer who ordered and paid for the merchandiseexpects it to arrive on time and in good condition. Even withreplacements and insurance, the customer will not be satisfied if there are delays. Dissatisfaction will usually translate directly intolost sales.
International Storage Issues
Although international logistics is discussed as a movement orflow of goods, a sta-tionary period is involved when merchan-dise becomes inventory stored in warehouses. Heatedarguments can arise within a firm over the need for and utilityof warehous-ing internationally. On the one hand, customersexpect quick responses to orders and rapid delivery. Accommo-dating the customer’s expectations would require locating manydistribution centers around the world. On the other hand,warehouse space is expensive. In addition, the larger volume of inventory increases the inventory carry-ing cost. Fewer ware-houses allow for consolidation of transportation and thereforelower transportation rates to the warehouse. However, if thewarehouses are located far from customers, the cost of outgo-ing transportation increases. The international logistician mustconsider the tradeoffs between service and cost to the supplychain in order to determine the appropriate levels of warehous-ing.
Storage Facilities
The location decision addresses how many distribution centersto have and where to locate them. The availability of facilitiesabroad will differ from the domestic situa-tion. For example,while public storage is widely available in some countries, suchfa-cilities may be scarce or entirely lacking in others. Also, ‘thestandards and quality of facilities can vary widely. As a result, thestorage decision of the firm is often accom-panied by the needfor large-scale, long-term investments. Despite the high cost, in-ternational storage facilities should be established if theysupport the overall logistics effort. In many markets, adequatestorage facilities are imperative to satisfy customer demands andto compete successfully. For example, since the establishmentof a ware-house connotes a visible presence, in doing so a firmcan convince local distributors and customers of its commit-ment to remain in the market for the long term.Once the decision is made to use storage facilities abroad, thewarehouse condi-tions must be carefully analyzed. As anexample, in some countries warehouses have low ceilings.Packaging developed for the high stacking of products istherefore un-necessary or even counterproductive. In othercountries, automated warehousing is available. Proper barcoding of products and the use of package dimensions accept-able to the warehousing system are basic requirements. Incontrast, in warehouses still stocked manually, weight limita-tions will be of major concern. And, if no forklift trucks areavailable, palletized delivery is of little use.To optimize the logistics system, the logistician should analyzeinternational prod-uct sales and then rank order productsaccording to warehousing needs. Products that are mostsensitive to delivery time might be classified as “A” products.“A” products would be stocked in all distribution centers, andsafety stock levels would be kept high. Alternatively, the storageof products can be more selective, if quick delivery by air can beguaranteed. Products for which immediate delivery is not urgentcould be classi-fied as “B” products. They would be stored onlyat selected distribution centers around the world. Finally,products for which there is little demand would be stocked onlyat headquarters. Should an urgent need for delivery arise,airfreight could again assure rapid shipment. Classifyingproducts enables the international logistician to substan-tiallyreduce total international warehousing requirements and stillmaintain accept-able service levels.
Special Trade Zones
Areas where foreign goods may be held or processed and thenreexported without in-curring duties are called foreign tradezones. The zones can be found at major ports of entry and alsoat inland locations near major production facilities. For example,Kansas City, Missouri, has one of the largest foreign tradezones in the United States.The existence of trade zones can be quite useful to the interna-tional firm. For ex-ample, in some countries, the benefitsderived from lower labor costs may be offset by high duties andtariffs. As a result, location of manufacturing and storagefacilities in these countries may prove uneconomical. Foreigntrade zones are designed to exclude the impact of duties fromthe location decision. This is done by exempting merchan-disein the foreign trade zone from duty payment. The internationalfirm can there-fore import merchandise; store it in the foreigntrade zone; and process, alter, test, or demonstrate it -allwithout paying duties. If the merchandise is subsequentlyshipped abroad (that is, reexported), no duty payments are everdue. Duty payments become due only if the merchandise isshipped into the country from the foreign trade zone.Trade zones can also be useful as transshipment points toreduce logistics cost and redesign marketing approaches. Forexample, Audiovox was shipping small quantities of car alarmsfrom a Taiwanese contract manufacturer directly to distributorsin Chile. The shipments were costly and the marketing strategyof requiring high minimum or-ders stopped distributors frombuying. The firm resolved the dilemma by using a Miami tradezone to ship the alarms from Taiwan and consolidate the goodswith other shipments to Chile. The savings in freight costsallowed the Chilean distributors to order whatever quantity theywanted and allowed the company to quote lower prices. As aresult, sales improved markedly.All parties to the arrangement benefit from foreign trade zones.

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