Global Logistics and SCM

1.1 INTRODUCTION

1.1 Evolution of Logistics and SCM

The evolution of logistics and SCM in the 1990s can be traced back to “physical
distribution management” in the 1970s when there was no coordination among the
various functions of an organization, and each was committed to attain its own goal.
This myopic approach then transformed into “integrated logistic management” in the
1980s that called for the integration of various functions to achieve a system-wide
objective. SCM further widens this scope by including the suppliers and customers
into the organizational fold, and coordinating the flow of materials and information
from the procurement of raw materials to the consumption of finished goods.

The objectives of SCM are to eliminate redundancies, and reduce cycle time and
inventory so as to provide better customer service at lower cost. The focus has shifted
from the “share of the market” paradigm to the “share of the customer paradigm,
wherein the goal is to create “customer value” leading to increased corporate
profitability, shareholder value, and sustained competitive advantage in the long run.

Logistics involves getting, in the right way, the right product, in the right quantity and
right quality, in the right place at the right time, for the right customer at the right cost.
The logistic network consists of the suppliers, the retailer and the users. The purpose
of an integrated logistic network in a supply chain is to fulfill customer orders through
providing place utility to deliver products and services to end users. The place utility is
achieved by managing a number of key functions of a supply chain. The functions
include:

• Demand management
• Inventory management
• Transportation
• Warehousing
• Order processing
• Information Management

Logistics is a key enabler of supply chain collaboration. Improving performance in

this field allows supply chains to increase their efficiency significantly and help to
create innovations in different areas. In this context, an important task is to find
structures and approaches which enable all types of performance management in
logistics and supply chains for a better fulfillment of customer needs.

Supply chain management is a cross-function approach including managing the

movement of raw materials into an organization, certain aspects of the internal
processing of materials into finished goods, and the movement of finished goods out
of the organization and toward the end-consumer. As organizations strive to focus on
core competencies and becoming more flexible, they reduce their ownership of raw
materials sources and distribution channels. These functions are increasingly being
outsourced to other entities that can perform the activities better or more cost
effectively. The effect is to increase the number of organizations involved in satisfying
customer demand, while reducing management control of daily logistics operations.
Less control and more supply chain partners led to the creation of supply chain
management concepts. The purpose of supply chain management is to improve trust
and collaboration among supply chain partners, thus improving inventory visibility
and the velocity of inventory movement. There are four major decision areas in supply
chain management:

1) Location
2) Production
3) Inventory
4) Transportation (distribution)
And there are both strategic and operational elements in each of these decision areas.

1.2 Distinguishing Logistics and SCM

In literature, logistics and SCM are often used interchangeably, though there is a
subtle difference between the two. SCM is more strategic in nature whereas logistics is
more operations-oriented. While SCM deals more with the linkages in the chain,
contracts and relationships, supplier selection, information and financial flows besides
materials flows, creating new facilities such as plants, warehouses and distribution
centre’s, and broader issues such as society, economy, government and environment,
the scope of logistics is more or less confined to the routine job of transportation and
storage of goods. However, if one deeply ponders, one may realize that logistics is the
core of SCM, and if logistics fails, the whole chain snaps.

Though logistics deals with mundane vehicles, warehouses, layouts, material handling
equipment, Motor, Vehicles Act, toll tax, sales tax, documentation etc., efficient
management of it has the potential to make the chain taut and agile. Therefore, there is
growing interest in logistics, and hence in SCM, around the world.
2.0 GLOBAL LOGISTICS AND SCM

Until a few years ago, logistics was rarely a subject discussed in the executive suites
of large corporations. But today, in the highly competitive global world, logistics has
moved from the basement to the boardroom. Initially the concept was to increase
sales. Today, the concept goes beyond that to include managing costs. And the most
obvious factor, why global logistics is now getting great attention is this four letter
word- cost.

Logistics is applicable to every industry; be it construction, express delivery,

automobiles, management of airports, retail, or any other. We increasingly find goods
from all over the world around us-Korean cars, Italian fashion goods, Swiss cheese,
South African wines, Indian garments, Japanese electronics and more. The focus
remains not only on getting them available locally but getting the right product, at the
right time, in the right quantity, at the right place, in the right condition, at the right
cost. This is indeed what gives a company an edge over its competitors-and is
increasingly the biggest challenge they face.

One of the most complex jobs today is of a logistics and supply chain manager. The
rapid reduction of international trade barriers has led to an equally rapid growth of the
logistics industry. The globalization that is a by-product of extensive use of the
Internet has increased the need for a flexible logistics infrastructure to support a global
supply chain, enabling the movement of goods from a growing number of source
locations to meet market demand.

The logistics sector comprises two primary segments – the shipper community
(defined as those organizations who manufacture and sell products) and the service
provider community (those organizations who provide transportation, distribution and
related services). Although each of these segments has a different perspective, the key
enabler for logistics excellence is information. The real-time exchange of this
information, to include all parties, is a key enabler to supply chain management. This
facilitates supply process visibility, exception notification, advanced receipt of
shipment line item details as well as proof of delivery information.

2.1 Global Supply Chain Management

Because of competitive pressures in the global marketplace, companies are rapidly

migrating to low-cost sources of labour and materials, which are typically located in
countries that also represent emerging market opportunities. But the speed of this
change may bring challenges associated with escalating shipping costs and increased
supply chain risk, and these challenges could exceed a company’s internal skill and
resource capacity. If we are adopting global sourcing practices, we may not yet have
the foreign trade experience necessary to manage regulatory compliance and related
global supply chain management complexities. For example, multiple, autonomous
business units within an organization can contribute to a fragmented logistics process
as well as create missed opportunities for leveraging economies-of-scale. Individual
business units may also lack the necessary economies-of-scale needed to establish a
competitive foothold and gain sufficient influence in emerging markets.

Balancing inbound and outbound supply chain logistics requires a comprehensive

strategy that incorporates all the key functions of a supply chain to accelerate or
expand sourcing from emerging markets. This horizontally integrated approach also
helps you make strategic decisions regarding partnerships, shipping and other factors,
to help ensure that savings from global sourcing are not eroded
by increased logistics costs. Even more significantly, such a strategy can enable you to
go beyond sourcing to position your organization to leverage your logistics
capabilities to sell and distribute products within those emerging markets.

2.2 Key Players in Logistics Arena

In addition to the shipping community, categorized as organizations that consume

transportation and distribution services, the logistics market place is dominated by
transportation providers, storage providers and Third Party Logistics Providers.

A growing trend for organizations focused on managing their supply chains is to

outsource part or all of the logistics functions to Third Party Logistics Providers –
3PL’s. By definition, these are independent companies that design, implement and/or
manage a client’s supply chain logistics needs. The key differentiating factor between
a 3PL and a transportation provider is that a 3PL provider’s primary value-add is
based on information and knowledge, versus providing an undifferentiated service at
the lowest costs. In addition to providing expertise, a key to managing the
complexities of a global supply chain with regulatory and other issues, 3PL providers
leverage their infrastructure and freight rate negotiations over a large base, providing
cost advantages. Additionally, for companies experiencing seasonal demand for their
product, outsourcing the logistics function transforms a fixed cost into a variable cost.

The transportation industry includes water transportation, air transportation, motor

freight and railroads. In an effort to enhance customer service, transportation providers
are upgrading from telephone/fax to information technology. In many cases a
combination of web-enabling technologies are used to receive shipment instructions,
track and trace shipments and compile/post statistical information. Electronic
commerce, the Internet and the World Wide Web are key enablers for IT strategies.

In addition to the networks of storage facilities operated by the shipping and 3PL
community, there are commercial warehouse operators who provide storage facilities
for both dry goods and temperature controlled product. These can be either contract
warehouses, or public warehousing facilities. Contract warehousing provides storage
facilities to a single client, normally under a long-term contract. Services provided
could include additional value added services such as kitting, configuration etc. This is
a growth area, due in large part to the requirements of web-based storefronts. Public
warehouses provide storage for a variety of clients, either on a short term, or seasonal
basis, or on a longer term.
In addition to storage and transportation management these facilities also provide
value-added services as required. Temperature Controlled Warehousing/Frozen
Storage facilities are similar to both public and contract warehouses, the primary
difference being that they are temperature controlled, based on product requirements –
refrigerated, frozen etc. This type of storage is extensively used in the food industry
and in response to market demand is increasing their value-added service offerings. In
addition to the traditional warehouse facilities, there are specialized facilities that offer
national parts distribution, or storage and distribution for products with low velocity or
those of a hazardous nature.

2.3 Indian Logistics Industry

The annual logistics cost in India is estimated to be 14% of the GDP, which translates
into USD 140 billion assuming the GDP of India to be slightly over USD 1 trillion.
Out of this USD 140 billion logistics cost, almost 99% is accounted for by the
unorganized sector (such as owners of less than 5 trucks, affiliated to a broker or a
transport company, small warehouse operators, customs brokers, freight forwarders,
etc.), and slightly more than 1%, i.e. approximately USD 1.5 billion, is contributed by
the organized sector. So, one can see that the logistics industry in India is in a nascent
stage. However, the industry is growing at a fast pace and if India can bring down its
logistics cost from 14% to 9% of the GDP (level in the US), savings to the tune of
USD 50 billion will be realized at the current GDP level, making Indian goods more
competitive in the global market. Moreover, growth in the logistics sector would
imply improved service delivery and customer satisfaction leading to growth of export
of Indian goods and potential for creation of job opportunities.

Several problems existing in the Indian logistics industry make it unattractive for
investments and also create entry barriers. Some problems are mentioned here.
Logistics is a high-cost, low-margin business. The problem of organized players is
compounded by unfair competition with unorganized players, who can get away
without paying taxes and following operating norms stipulated in the Motor Vehicles
Act such as quality of drivers and vehicles, volume and weight restrictions, etc.
Economies of scale are absent in the Indian logistics industry. Even the organized
sector that contributes slightly more than 1% of the logistics cost, is highly
fragmented. Existence of the differential sales tax structure also brought in
diseconomies of scale. There is lack of trust and awareness among Indian shippers
with regard to outsourcing logistics.

The volume of outsourcing by Indian shippers is presently very low (~ 10%)

compared to the same for the developed countries (> 50%, sometimes as high as 80%).
Indian freight forwarders face stiff competition from multi-national freight forwarders
for international freight movement. MNCs, because of their size and operations in
many countries, are able to offer low freight rates and extend credit for long periods.
Indian freight forwarders, on the other hand, because of their smaller size and lack of
access to cheap capital, are not able to match the same. Service tax levied on logistics
service fees (currently 12.36% with educational cess) may make outsourcing costly
and outweigh the possible benefits. There is lack of skilled and knowledgeable
manpower in the logistics sector. Management graduates do not consider logistics as a
prime job.

2.4 Changing Logistics Landscape in India

India’s container trade has been growing at around 15 per cent over the past five years.
That means the logistics services business will be growing at a multiple of the box
trade, probably around 20 per cent and more per year. The growth in demand presents
significant opportunities for the logistics industry, as also challenges. India’s current
trade profile provides important clues about the development of logistics industry. In
some areas, notably, apparel exports, there is vital emphasis on logistics and speed to
market for the delivery of time-dependent ‘perishable’ goods. For the bulk of trade
into and out of India, it is not the case; relatively inefficient, individual transport
services can be cobbled together to get goods to the market. This will change. As the
trade profile changes, so will the need for more reliable, seamless supply chain
solutions that offer real-time visibility along the pipeline.

The key driver of demand for world-class logistics services is a critical mass of MNCs
whose bottomline success requires low-cost manufacturing locations, connected to
highly efficient supply lines. Secondly, some pieces of hardware are either missing or
not up to the global standards. Ports, for example, are for the most part choked up or
not set up for increased container transportation. Road and rail connectivity is patchy
and waterways, while exciting, are not yet big on the radar screen as far as volumes
are concerned. Add to that a lack of capabilities or competition in some segments of
the supply chain, absence of common standards for equipment and technology, and
intra-provincial barriers. These are the key factors playing on the minds of MNCs
looking for alternative lower-cost sourcing locations or wanting to reduce their
dependence on China and other Asian countries.

Broadly the elements of integrated supply chain include:

• Supply chain management design

• International ocean/air transportation
• Consolidation/Distribution
• Document Delivery
• Deconsolidation distribution
• Multimodal transportation
• Warehousing
• Delivery to point-of-sale

An effective logistics provider should have the expertise and global connectivity to
manage cargo through an integrated network from the time it leaves the warehouse to
delivery at destination to customer locations and distribution centers. Expertise in
freight analysis, audit and payment, plus service-level reporting is the customer’s
weapon in the everyday battle to move freight more efficiently.

2.5 Need for Integration

There is a vital need for integration so that customers can achieve their transportation
requirements while maximizing the value of money spent in getting their goods to
market. This requires better use of existing assets and industry cooperation, and
greater competition. Companies aiming to be an integrated solutions provider have to
tackle this by extending their supply chain capabilities.

Every point of service along the chain must have the capacity for cargoes to flow
through efficiently—at the lowest cost and greatest velocity—or it will become a
bottleneck and has a cost or time impact on customers. Having bigger ships may ease
the shortage of space at sea, but shift the pressure on to the next point in the chain.

The global transportation companies of tomorrow must be able to offer highly

integrated and flexible solutions that take into account the increasing cyclicality and
volatility in operations across industries. This is making companies vulnerable to
interruptions in their supply lines. A weak or weakening US dollar, lack of consumer
confidence in the West, surge in world oil prices, terrorism or geopolitical concerns—
these are all very real factors influencing the design of supply chain solutions in
today’s economically connected world. New technologies such as RFID, standardized
data processing formats and new supply chain tools and e-commerce capabilities will,
undoubtedly, open up new ways to mange movement and storage of goods.

3.0 INTERNATIONAL LOGISTICS AND SCM

International logistics is the design and management of a system that controls the
forward and reverse flow of materials, services and information into, through and out
of the international corporation. When shipping a product overseas, the exporter must
be aware of packing, labeling, documentation, and insurance requirements. Most
exporters rely on an international freight forwarder to perform these services because
of the multitude of considerations involved in physically exporting goods.

Freight Forwarder
An international freight forwarder is an agent for the exporter in moving cargo to an
overseas destination. Whether an exporter is large or small, the weight of the cargo
light or heavy, a freight forwarder can take care of cargo from “dock to door,” thus
freeing the exporter from dealing with many logistics-related details.

Schedule B and HS Numbers

The Harmonized System (HS) assigns a 6 digit number to each product that is traded
internationally. Each country can assign, on its own, four additional numbers, making
the entire number 10 digits. The United States does this with its Schedule B system.
Tariffs and Import Fees
Tariffs or duties are a tax levied by governments on the value of products imported
from one country into another. Before you export to any country, you need to
determine what the tariff rate is on your product(s) as well as any import fees for that
country.

Common Export Documents

There are many common export documents that have to accompany export shipments
including the Shipper’s Export Declaration, invoices, packing lists, certificates of
origin and the list goes on.

Through the implementation of international logistics, the firm can implement cost-
saving programs such as just-in-time (JIT), electronic data interchange (EDI), and
early supplier involvement (ESI).
The two phases of the movement of materials include: Materials management or the
timely movement of materials, parts, and supplies; Physical distribution or the
movement of the firm’s physical product to its customers.

3.1 Important Logistics Issues Surrounding Corporate Management

Recently Japanese companies have actively deployed manufacturing bases overseas.

Such globalization of corporate activities has been supported by IT represented by the
Internet and logistics. The establishment of systems and structures quickly responding
to changes by visualizing worldwide production and inventory through the utilization
of IT is crucial in realizing efficient global supply chains.
The international distribution connecting each function and player of globally
conducted procurement, production, and sales also plays an extremely important role.

There has been a great expectation for the advancement of 3PL (3rd Party Logistics)
businesses as a counterpart of global SCM (Supply Chain Management). In the
globalization of corporate activities, efficient and seamless logistics is necessary and
when it is realized, it would make a huge contribution to corporate competitiveness.

Since logistics is a foundation which supports not only economic activities, but also
people’s lives, the viewpoint of providing safety and ease of mind to consumers is
essential. Therefore, the important issues include: securing of safety by eliminating
accidents during transportation and by strictly complying with proper product
handling procedures throughout distribution processes, and pursuing ease of mind
such as with the development of the product traceability system and/or others. It is
necessary to implement a safe and efficient international distribution mechanism in
response to the enhancement of international security.
4.0 COMPARISON BETWEEN DOMESTIC AND INTERNATIONAL
LOGISTICS

The national logistics operator serving the indigenous market usually has the
advantage of being aware of the structure of the market, its infrastructure and all its
elements, in particular, regulations, all the costing elements from
manufacturer/production to the distributor/consumer, the supply chain under the
national government,, a common language, a range of economic/industrial indices
indicating the changing market trends, taxation levels, employment law, consumer
protection and competitive law. Hence the logistics operator remains focused on one
country, but must be equally conscious of inwards investment whereby overseas
companies penetrate the market with their goods and services.

The international logistics operator in designing the supply chain permeates several
countries and may extend to several thousand miles from
Australia/China/India/Malaysia to Europe and North America and vice versa. It is a
distant market and embraces numerous conventions and complex regulations
especially in the area of trade law, international finance, market entry regulations,
customs, taxation, language, transport regulations etc.

The international logistics operator must be competent in all areas of the global supply
chain. A synergy must be developed with the supplier and distributer together with all
elements of the supply chain, carrier, handling, customs, finance, security, warehouse
etc. Transparency is essential throughout the supply chain together with advanced
software.

4.1 Management of International Logistics

Centralized Logistics Management

In international logistics, the existence of a headquarters staff that retains decision-
making power over logistics is important. To avoid internal problems, both
headquarters staff and local management should report to one person. This individual
can contribute an objective view when inevitable conflicts arise in international
logistics coordination.

Decentralized Logistics Management

When a firm serves many diverse international markets, total centralization might
leave the firm unresponsive to local adaptation needs. If each subsidiary is made a
profit center in itself, each one carries the full responsibility for its performance. Once
products are within a specific market, increased
input from local logistics operations should be expected and encouraged.

Outsourcing Logistics Services

The systematic outsourcing of logistics capabilities is a third option. By collaborating
with transportation firms, private warehouses, or other specialists, corporate resources
can be
concentrated on the firm’s core product. One-stop logistics allows shippers to buy all
the
transportation modes and functional services from a single carrier.

4.2 Transportation Infrastructure

A firm’s logistics platform is determined by a location’s ease and convenience of

market reach under favorable cost circumstances.

The public sector’s investment priorities, safety regulations, tax incentives, and
transport policies can have major effects on the logistics decisions of firms.

The logistics manager must learn about existing and planned infrastructures abroad
and at home and factor them into the firm’s structure. Some of the international
transportation issues are:

• Availability of transportation modes- Overland shipping, ocean shipping, air

shipping
• Transportation infrastructure- roads, rail lines, airports, seaports, pipelines
• Choice of modes- transit time, predictability, cost
• Non economic factors- Government involvement, UNCTAD

4.3 Export Documentation

A bill of landing is a contract between the exporter and the carrier indicating that the
carrier has accepted responsibility for the goods and will provide transportation in
return for payment.

A commercial invoice is a bill for the goods stating basic information about the
transaction, including a description of the merchandise, total cost of the goods sold,
addresses of the shipper and seller, and delivery and payment terms.

A freight forwarder specializes in handling export documentation.

5.0 FUTURE PROSPECTS OF LOGISTICS

Facing the worldwide competition, the improvement of logistics system should be

advanced by both private companies and government. There will be three revolutions
in business that have substantial impacts on the purchasing and supply strategies of the
manufacturing sectors. These three revolutions are:

(1) The globalisation of trade

(2) The coming of the information era
(3) More demanding consumers and continuously changing consumer preferences.

The main characteristics of future logistics development are:

Government role: To keep competitiveness of industries, the government has to lead
the way to assist the logistics industries. For instance, the idea of freight village of city
logistics provides the environment to promote logistics efficiency and to reduce
operation costs. However it involves large of investments and some problems relating
laws and national policies. Without the lead and support of government, achieving the
plan is difficult.

Growth of international goods transport: The up-growth of international freight

transport is contributed by several factors. Firstly, the blossoming of E-commerce
pushes ahead the international business activities. Secondly, the change of production
strategy needs international cooperation, e.g. importing the semi-finished products
from countries with cheaper human resources to those with higher technology to
assemble the final goods. Thirdly, the pressure of globalised market, such as World
Trade Organization (WTO), pushes local industries to promote themselves to reach an
international standard and face the worldwide competition.

Improvement of services: Providing a good customer service becomes a necessary

requirement of business operation with the intense competition of global market. The
quality of services is the main factor to affect consuming behaviour among the
enterprises with high similarity. The service systems involve several developed
techniques now, such as Efficient Consumer Response (ECR) and Quick Response
(QR). In the near future, more new techniques would be applied in providing better
services for customers.

Revolution of logistics operation: IT techniques and its products bring efficiency and
fluency to the logistics systems. Radio Frequency ID (RFID) is one of these
techniques. The main difference between the bar-code system and RFID is that RFID
does not need the action of scanning the barcode on goods. RFID could save manual
operation time dramatically. RFID systems could sense the amount of goods input in
the tags automatically and immediately when the costumers push their trolley through
the exit

Shorter product life cycle: With the current trend, the merchandise design is changing
day by day, and therefore, the product life cycle is shorter and shorter, especially in
computer science. To confront the impacts, logistics system must improve its
efficiency and reliability of goods delivery. Otherwise an inappropriate logistics
system would hinder the competitiveness of new products and the business profits.

Improvement of logistics facilities: The advancement and development of logistics are

based on several techniques and complete theories. High-tech facilities and systems,
e.g. ITS, could bring more possibilities and advantages to logistics. For example, the
improvement of related facilities, e.g. Forklift Trucks, is necessary for transport
efficiency. In the future, factory automation is the main target for the whole supply-
chain procedures. It could help to improve efficiency and also reduce the operation
costs.
Channel cooperation between companies: In order to save the logistics costs, a key
concept is t maximize the usage of available transport capacity. Integrating the
logistics demands between numerous departments helps achieve this purpose. In
practice, a conglomerate could develop its own logistics service for the branches. For
some medium size companies, they could cooperate transport channels with others.

Specialized logistics delivery: One of the notable trends of logistics industries is

specialized delivery service. For instance, delivering fresh food from the place of
origin needs low-temperature containers. Compute chips, gases and petroleum need
particular conveyances to carry. These demands are rising since the products became
more and more delicate.

Logistics centres: The development of logistics centres is good for industry promotion
and the development of national economic system. Logistics centres could
successfully shorten the distance between production and marketing vertically and
also integrate various industries horizontally, and thus decrease the costs.
Governments can propose special areas for storehouses and logistics to reduce land
acquisition. The future logistics will cooperate e-commerce, the Internet and the newly
door-to-door service to create new business prospects.

Freight transport: The alliance between middle-small size delivery companies is an

important trend in the future. The strategy could help to expand service areas and
increase service quality, and meanwhile raise the loads of single trips to reduce
delivery costs.

Logistics service providers should recognize that business will change. The reduced
financial value of companies can create an incentive to buy competitors to fill niches
in geography or industries served. This excludes issues as to funding availability and
the ability to debt leverage being down significantly at present. But if their customers
transform their businesses, then any acquisitions may miss the shifts in geographies or
industries. The future that evolves from the present economic and financial problems
can be significantly different that what has been going on. Businesses will change.
Supply chain management will change. This challenge will create opportunities for
visionaries and risk takers.