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Global Logistics: The Benefits and Challenges

Centralizing global production to a limited number of plants can lower per-unit cost of goods and simultaneously reduce a company’s asset base by having fewer plants. Here is a look at how to make this strategy pay off and avoid the pitfalls many have faced in the process.

By David J. Closs

While many U.S. and Canadian firms have demonstrated their ability to operate international logistics pipe- lines for decades, particularly across our common border, extending such sourcing and delivery pipelines across oceans substantially increases both the opportunities and challenges. There are many firms that are taking up these challenges as they recognize the benefits of lower cost sourcing or increased market size. While the benefits are obvious to comprehend, the issues and challenges are not as well defined. This article reviews some of the opportunities and discusses some of the related logistics challenges.

Benefits Achievable Through Global Logistics
Effective operationalization of global logistics opens up many opportunities to North American firms including low cost sourcing, increased markets, and increased economies of scale. Firms having effective global logistics operations can take advantage of low cost sourcing for components, labor, or expertise. While low cost sourcing is an objective of many firms, they want to go global to increase revenue opportunities. Since the growth rates for many products have slowed in North American markets, the only means to achieve organic growth is to extend to other markets. Effective selling in international markets requires either the creation of an international sales organization or extended relationships with international supply chain partners. In the first case, the firm experiences substantial risk while in the second, there is a loss of control. The final opportunity, which is being sought out by many firms today, is the ability to achieve increased economies of scale particularly in production by spreading the substantial capital costs related to production across a global marketplace. By centralizing global production in a limited number of plants, the firm can significantly lower per unit cost and simultaneously lower the asset base by having fewer plants. While the opportunities to enhance firm value are significant and an increasing number of firms are seeking them out, some of the challenges are not being adequately considered. The following section describes some of these challenges.

Challenges to Global Logistics
Adapting the Council of Logistics Management definition of logistics, “Global logistics plan, controls, and manages the movement and storage of goods, services, and related information as it moves across international boundaries from raw material provider to consumer also considering the handling of return goods and containers. While there are some that would argue that there is not much difference between domestic and international logistics, there are some substantial differences which are often characterized as the “four Ds” –demand, distance, documentation, and diversity. The demand is greater, the distances are longer, the documentation is more extensive, and there is substantial diversity in requirements and cultures.

Given these differences, there are some specific challenges that global logistics managers must consider. Figure 1, adapted from Helferich and Cook, illustrates some of the generic global and domestic institutions critical in supply chain logistics. These institutions are the organizations that must collaborate and coordinate to move product and information from the raw material stage to the ultimate consumer. To effectively achieve this objective, global logistics managers must manage the “Five V’s” across the top of the figure. The first challenge is to provide the consumer with better value in return for their dollar. While the firm may see global sourcing as a means to reduce material or component costs, the only value that is relevant for consumers is a reduction in total landed cost while also considering such elements as quality and post sales support. Manufacturers need to make sure that their decisions to reduce sourcing costs also continue to provide the best overall value to consumers.

Maintaining supply chain velocity is the second challenge faced by the linked partners of the typical supply chain today. While firms and supply chains are trying to increase product velocity in the supply chain to lower cost by reducing product storage time and damage, the transit times and border delays characteristic of global logistics constrain product velocity. extended transit times and exposures in-transit increases the product risk for intentional or unintentional damage as well as reducing velocity and ultimate flexibility.

The third challenge is increased supply chain variability. Domestic and global supply chains experience variability in production and transit times. However, global operations dramatically increase the magnitude of the variations in production and transit time often resulting in substantially larger inventory buffers or safety stocks.

The fourth challenge is to maintain adequate supply chain visibility. In a domestic operation, most shipments are handled by a single carrier, which facilitates the shipment tracking and ultimate visibility. In addition, domestic transit times are relatively fast so extended visibility is typically a major issue. Many supply chain participants can leverage visibility to resolve problems caused by supply chain variation. Visibility regarding where a product is in the supply chain and positive tracking to determine arrival gives manufacturers, wholesalers, or retailers a chance to expedite the product or obtain it from an alternative source. The extended transit times characteristics of global operations and the involvement of multiple carriers increase the need for proactive shipment tracking and the challenge of actually doing it.

The final challenge is to manage supply chain vulnerability. Supply chain vulnerability exists in a variety of forms particularly in a global operation where product or transportation equipment can be inadvertently or purposefully damaged or infected by a bio-chemical or nuclear agents or its contents changed. An obvious form in the food supply, for example, is product infection or infestation with a bio-chemical agent at any point within the supply chain. Less obvious forms include damage or destruction of the supply chain infrastructure or processes used to move and store the product from the supplier to the customer. Extended and less controlled global logistics flows increase the opportunity for damage or inappropriate intervention. Examples include systematic damage or destruction to critical material suppliers, transportation equipment, transport infrastructure, storage facilities, or information processing systems. These problems were experienced by firms, suppliers, customers, and carriers in the aftermath of September 11 when borders were closed, air transport shut down, and inventories rapidly depleted. While this situation resulting from these vulnerabilities were faced by domestic operators as well, the magnitude of the challenges increased significantly for global logistics organization when borders were shut or tightly restricted.

Effective and efficient global supply chain logistics require consideration of the five “V” elements to provide consumer value while minimizing the cost and threat vulnerability related to reduced visibility, variability, and velocity. This balancing must incorporate the multiple perspectives of consumers, firms, government, and the public. From an institutional perspective, these include producers, material suppliers, manufacturers, wholesalers, distributors, retailers, and carriers. From a capability perspective, this includes individuals with skills in sourcing, manufacturing, inventory management, packaging, warehousing, transportation, and security as well support sciences (e.g., bio-chemical sciences). The combination of these V’s and the institutional breadth increasingly highlight two major concerns facing global logistics managers. These include the information and physical infrastructure necessary to move, track, and monitor global shipments. While the information infrastructure may be easier to grow and expand, the current need is to establish standards, consistency, and integrity. The larger concern is the physical infrastructure and the need to meet the necessary capacity demands within the physical and organizational capabilities of existing relationships and capabilities. While increased physical infrastructure capacity is receiving increased focus, the difficulty in coordinating multiple public-private partnerships and relationships still results in many challenges.

While the principles of supply chain logistics still apply in a global environment, the challenges are significantly magnified and the risks are increased. As many firms attempt to take advantage of global sourcing and marketing, there is a growing need for awareness regarding the challenges and infrastructure changes.