Global logistics strategies

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Globalization has been a trend for some time, but it only gained momentum
over the past two decades thanks to advancing technology, improving politi-
cal/economic environments, and the elimination of trade barriers.

These forces led to the creation of the virtual corporation, where a company
delegates a majority of its business functions, such as manufacturing and dis-
tribution, to partners are usually located in different parts of the world. For
example, semiconductor wafer fabrication is usually done
in the US, assembly is in Asia or Mexico, and final test 7KH UDSLG ULVH LQ JOREDO WUDGH LV
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poration essentially coordinates the activities of its
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partners to meet customer commitments, minimize costs,
and maximize profits.

Mergers and acquisitions are increasing as companies seek to gain market
share, expand their product footprint, and enter new markets. Often, the ac-
quired company is located in a different geographic region. The new entity,
therefore, becomes a global company instantaneously. The same is true for
companies that establish relationships with distribution partners overseas.

The World Trade Organization says the value of traded merchandise in-
creased from $124 billion in 1948 to $11.2 trillion in 1999 (or $13.8 trillion if
commercial services are included). The US was the leading exporter and im-
porter of merchandise with over 12 percent of total exports and 18 percent of
total imports. From 1998 to 2000, the total value of US imports and exports
increased from $2.03 trillion to $2.5 trillion (source: US Census Bureau).

The emergence of e-commerce, particularly business-to-business (B2B) activi-
ties, has spotlighted globalization. The Internet and related technologies
have enabled the creation of new business models such as marketplaces, ex-
changes, and application service providers (ASPs). These technologies are
facilitating collaboration between business partners, particularly small- and
mid-sized enterprises (SMEs) who have historically been left on the sidelines
due to the prohibitive cost of such technologies as EDI.

In March 2001, the US Census Bureau said manufacturing was the leading
industry sector for e-commerce in 1999, accounting for 12 percent ($485 bil-
lion out of over $4.0 trillion in total shipments. Unfortunately, the bureau

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did not distinguish between domestic and international shipments. But it is
very clear that in order for B2B e-commerce to reach the forecast of trillions
of dollars by 2005, a majority of the transactions will have to be international.

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Success on a global scale requires strong collaboration between business
partners, real-time visibility of information, tightly integrated business appli-
cations, and import/export tools and expertise. Moreover, companies now
buy and sell products worldwide via marketplaces, exchanges, portals, and
other channels that didn’t exist a few years ago. These new channels, along
with the need to collaborate with more partners, makes it harder to deliver
the right product, on time, in the right quantities, and billed correctly.

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Global Logistics is the transfer of information, documents, goods, and money
between various parties (such as suppliers, customers, freight forwarders,
carriers, and customs) to fulfill an order from one country to another.

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While fulfilling domestic orders can be challenging, as evidenced by the poor
performance of e-commerce providers during the holiday season, it is ele-
mentary compared to the challenges associated with global fulfillment.



First, Global fulfillment involves multiple modes of transportation, each with
unique contracting process, rating systems, schedules, semantics, packing
requirements, and documents. It’s difficult to manage these contracts, de-
termine the appropriate carrier for each segment, coordinate the transfer of
goods between carriers and modes, generate the necessary paperwork for
each carrier/mode, and manage the financial settlement process.

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Secondly, moving goods between countries involves many more parties than
shipping goods between states. Shippers must work with more carriers, col-
laborate with freight forwarders, export and import customs agents,
inspectors, insurance agencies, and banks. All these parties increase the
probability for delays, damaged shipments, and missed customer commit-
ments. No wonder many companies hold excess inventory (i.e. safety stock)
to account for the uncertainties associated with global shipments.

Third, shippers must follow government regulations, not only for their home
country, but also for every country they trade with. These regulations
change frequently, are difficult to interpret, and in some cases are poorly
documented. Taxes, duties, quotas, and restrictions all depend on the prod-
uct’s value, country of origin (for the finished product and all components),
and Harmonized Tariff Schedule (HTS) code.



It is against US trade laws to ship certain goods, such as chemicals and high-
tech electronics, to specific countries or entities, such as known terrorist or-
ganizations. Other countries have their own set of restrictions. For example,
some Middle East countries do not allow any products to be imported that
contain components manufactured or assembled in Israel.

In July 2000, the exporter and importer of record rules
were issued. They dictate that the exporter of record
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words, even though the shipment may be managed
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Since non-compliance can mean loss of export li-
censes, stiff penalties (up to 50 percent of invoice value), or jail, many com-
panies are looking to bring GLS capability in-house, particularly the ability to
perform restricted party screenings and the ability to generate/file all appro-
priate trade documents.

According to the US Department of Transportation, ocean shipments ac-
counted for 41 percent of international shipments in 1997 based on value
(almost 63 percent based on tonnage), the largest share among all modes.
Over the past 15 years, ocean trade has almost doubled to 1.13 billion metric
tons, and it is expected to double again over the next twenty years.

While air cargo accounts for less than 1 percent of international tonnage, it is
28 percent of these shipments’ value, due to the fact that nearly 20 percent of
air shipments are electronics and computers. In addition, international ton-
miles have increased fivefold over the past twenty years. Air transportation
will undoubtedly play a more important role in the near future as companies
adopt make-to-order models and inventory reduction policies.

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Global Logistics also involves the transfer of documents between different
parties. The amount of paperwork required to ship goods across borders is
simply astounding (see table below). Many of these documents are produced
in multiple copies, and if there are changes to the original itinerary or details,
they have to be regenerated. Considering that freight forwarders can charge



as much as $75 per trade document, many companies are looking to bring the
document-creation process in-house.

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Fortunately, there is a move towards electronic filing of these documents.
For example, as of November 1, 2000, the US Census Bureau and US Cus-
toms stopped accepting Shipper’s Export Declarations (SEDs) via fax. The
preferred method is via an Internet system called AES Direct (Automated
Export System). A similar system exists for importers called ABI (Automated
Broker Interface). The benefits of automating document creation are primar-
ily threefold: cheaper, faster, and fewer errors. The latter has ancillary
benefits, including fewer delays at customs and faster payment cycles.

In summary, many documents are required to import or export a single
shipment. These documents flow between the shipper, its carriers, freight
forwarders, government agencies, banks, and other parties. A single clerical
error can result in delays, fines, or withheld payments. Therefore, automa-
tion of this laborious process is a necessity.



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It has been said that information is the most valuable thing to possess. The
more accurate and current the information, the greater its value. This dictum
certainly holds true in global logistics.

Traditionally, once an international shipment left the dock, it entered a black
hole where information about its status was virtually impossible to obtain.
Today, thanks to the Internet, satellite technology, messaging tools, bar-
coding, and improved software, the black hole is quickly disappearing.

Shippers and other parties can now access real-time or
6LQFH JOREDO ORJLVWLFV LV D FROODERUDWLYH near real-time information about shipments. Depending
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on the sophistication of the systems involved, they can
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identify the exact location of a vessel, along with very spe-
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cific details about its cargo, down to the stock-keeping-
unit (SKU) level.

Having this information reduces the uncertainty of global shipments, thereby
eliminating the need for high-levels of safety stock. It also enables inventory
to be dynamically routed to areas of high demand, thereby maximizing sales,
minimizing inventory carrying costs, and avoiding unnecessary manufactur-
ing costs. Third, information enables faster response to problems via event
management tools that proactively alert authorized parties to exceptions.
Fourth, information translates into higher customer satisfaction by having
the answer to their most common questions, namely: Where is my ship-
ment? and Do you have the product available?

There is another dictum, however, that has been used to describe informa-
tion: garbage in equals garbage out. Gathering information is definitely not a
trivial task. Since global logistics is a collaborative process, involving many
different parties, integration of disparate business systems is a big challenge,
along with rationalizing different standards and nomenclature. Therefore,
monitoring the quality of incoming and outgoing messages is critical. Oth-
erwise, there will be constant false alarms due to missing data, lost messages,
poor message mappings, or other correctable factors.

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While information may indeed be valuable, money still makes the world go
round. The complexity of the financial settlement process depends on the
trust level between the buyer and seller. If the two parties have a long his-
tory of working together without any issues, the process is relatively simple.



However, if there is no prior relationship (as is common in public on-line
marketplaces), the transaction size is relatively large, and there is a desire for
higher levels of payment guarantee, then the process becomes complicated.

There are numerous payment terms used for transactions, but the most
common method of settling large international trade transactions is by ob-
taining a Letter of Credit (L/C).

Simply stated, the process of issuing a Letter of Credit and finalizing pay-
ment generally takes a long time (sometimes months), requires many
documents, is easily delayed by any clerical errors, is relatively expensive,
and involves many parties. Banks play the role of neutral third-party in the
transaction. Due to the labor-intensive nature of the process, they charge
both the buyer and the seller between 0.5% and 3.0% of the payment amount,
plus as much as $100 each time the L/C is amended. For a $5 million dollar
transaction, an L/C can cost over $150,000.

To summarize, global logistics involves more than just the physical move-
ment of goods across borders, which in itself is a complicated process. It also
involves the movement of documents, information, and (of course) money
between the numerous parties in the logistics ecosystem. All four compo-
nents are interrelated and critical for success.

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Global Logistics information, particularly trade content, obviously impacts
fulfillment. Its value, however, extends to other business processes, such as
product development, network design, vendor selection, and customer rela-
tionship management.

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As highlighted earlier, many trade regulations are based on the characteris-
tics of the product, which form the basis of its HTS code. The code
determines the duty rate applied, the trade documents required, and the ap-
propriate government agency to oversee the import. Since a product’s HTS
classification is essentially defined during its development, it is critical for
developers to understand the impact of their design choices as they relate to
trade regulations in each target market.



For example, an adhesive is comprised of several chemical components. The
choice of components and their overall amount plays a role in how the fin-
ished product is classified. Too much of Component A and the adhesive
becomes flammable or unstable, thereby resulting in a
more regulated classification and perhaps illegal to im-
port into certain countries. If Component Z is chosen
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resulting in a more favorable classification in terms of
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The bottom line: the decisions product developers make
when designing a product impacts the cost and viability
of importing/exporting.
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As with product development, the decisions made during network design
have a large and somewhat lasting impact on global fulfillment. Companies
evaluate their network design every one to two years, or more frequently if
they acquire another entity or significant changes occur within their supply
chains. The process entails determining the location, size, and number of
plants, distribution centers, suppliers, and third-party partners.

Obviously, local tax rates, labor costs, and currency valuations play an im-
portant role in the decision-making process. But as indicated earlier, country
of origin is also factor, along with preferential trade agreements such as
NAFTA and MERCOSUR (a trade alliance between Argentina, Brazil, Para-
guay and Uruguay, with Chile and Bolivia as associate members). Free
Trade Zones (FTZ) are also important. These are ports designated by a
government for duty-free entry of non-prohibited goods. Merchandise may
be stored and used for manufacturing within the zone and re-exported
without duties being paid. Duties are imposed only when the original goods
or items manufactured from those goods pass from the FTZ into an area of
the country subject to customs authority.

Therefore, companies should take into account global trade information
when evaluating their network design. In particular, they should consider
the following questions:

• Which is the better option: exporting merchandise directly to its des-
tination or exporting it to a nearby country that has more favorable



import regulations (perhaps due to a trade alliance) and then re-
exporting the merchandise to its final destination?

• Can I establish/utilize FTZs to eliminate duties?
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• If I establish a manufacturing site in country A, are
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there import restrictions into the country that will
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impact my manufacturing costs or limit my ability PDWHULDOV
to use certain raw materials?

• Which countries do I plan to serve from a new manufacturing plant
or distribution center? How does my choice of locating the plant or
DC in country A affect my ability to export to these other countries,
in terms of costs, quotas, and other trade restrictions?

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Many factors are involved in selecting a vendor, including ability to produce
the desired product, quality metrics and certifications (such as ISO 9000),
credit rating, capacity constraints, and geographic location. The latter obvi-
ously presents global logistics considerations, especially with regards to
determining the total landed cost (TLC) of the goods.

TLC is the true cost of procuring an item. It entails not only the cost of the
item, but also freight charges, duties, taxes, insurance, inspection fees, broker
fees, banking charges, and many other cost components. Some GLS software
vendors claim that their applications can consider over 100 components to
determine a landed cost.

Therefore, basing a procurement decision simply on unit price is a highly-
flawed policy. For example, a supplier in China may quote a lower per unit
price than a supplier in Mexico. However, when all other factors are consid-
ered (such as duty rates, freight charges, and NAFTA privileges), the final
cost of procuring the goods from China may be significantly higher than ob-
taining them from Mexico (assuming labor charges and other factors being
equal).

Procurement managers can also benefit by understanding Incoterms, which
are standard sales terms developed by the International Chamber of Com-
merce. The Incoterm specifies where along the supply chain the title for the
goods is exchanged between the buyer and seller. Unfortunately, due to the
complexity of global logistics, many procurement managers ask vendors to



quote “landed cost” prices, thereby forfeiting control of many cost compo-
nents such as freight charges and insurance. In short, better collaboration
between logistics and procurement with an enterprise can result in cost
avoidance.

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