16

Global Logistics: A Pervasive Role in Wheeling International Trade

After reading the chapter, the students should be able to understand:

• Scope and scale of global logistics
• Operational factors and challenges in global logistics
• Strategic issues in cross-border goods movement
• Documentation involved
• TIR Carnet system by IRU

Global operation of business increases the complexity of logistics with obvious effects on the cost of moving the goods and servicing the customers. With the complexity, an element of uncertainty creeps in and that decreases the capability of control in the movement of goods due to large distances, varied customer demands, diversity in working environment and multiple documentations. Global logistics operations must accommodate all the uncertainties associated with the above factors, which is possible with aligning the capabilities of all the multiple agencies having expertise in facilitating cross-border goods movement.

“As the ‘world becomes flat’, logistics will rule.”

—Thomas Friedman

16.1 WHY GLOBAL LOGISTICS?

The globalization of the economies world over has created opportunities for doing business beyond the national boundaries of a country. Due to the rapid advancement in information and communication technologies during the last decade, the world has become a global village in the real sense. Today, Internet has made it easier to do business electronically in any part of the globe, from anywhere in the world. As business continues to globalize, attention has increasingly turned to logistics operation. Cargo movement needs to be done physically using the available means of transportation. The speed and efficiency of the movement of goods across national boundaries depends on the available modes of transportation, their capacity and capability, intermodal facility for movement, packaging and handling, and the logistical regulations in the countries where the buyers, sellers and carriers are located. For the physical movement of cargo, in the imports and exports business, the role of intermediaries—freight forwarders and customs-house brokers—is indispensable. Domain knowledge, connectivity with international cargo carriers and documentation are the three crucial areas that need focus in global logistics.

As a consequence of globalization, managing logistics at the global level poses a challenge of considerable complexity. The complexity of this challenge varies with the nature of business and the operational environment. To face the logistical challenges there is no single standard solution available. The individual companies will have to understand both strategic and management issues to clearly know the implications that globalization of their business will have on logistics (see Table 16.1) operation of their company.

 

Table 16.1 Global Logistics Challenges

Parameters	Domestic logistics	Global logistics
Performance Cycle	Shorter	Longer (due to grater distances, customs clearances, more intermediaries, more use of slow sea travel)
Documentation	Simple	Complex (for customs, banking and foreign exchange clearance requirements)
Alliances	Few (3PL firms)	Multiple (on global front with logistics service providers, distributors and manufacturers)
Information flow	Simple	Multiple channels, varied standards, alternative languages

 

16.2 OPERATIONAL FACTORS

The major areas of logistical expertise required in cross-border cargo movement are: mode of transportation, cargo insurance, packaging and shipping documentation for customs clearance.

Transportation

Transportation mode plays a vital role in the movement of cargo within or between countries. Normally, cargo is moved using three modes of transportation, e.g. road, sea and air, depending on the cost, urgency and the destination. However, for cross-border cargo movement mostly sea and air modes of transportation are preferred, as most of the countries are connected well by air and sea. The road option is preferred when countries are connected by land and other options are either costly or not feasible. In Indian subcontinent, the road is an important mode of cargo movement across India, Nepal, Pakistan, Bangladesh and Bhutan. The railway is the important mode in Europe because of the availability of a modern and efficient train system.

For selection of the transportation mode, logistical managers should have the following considerations:

• Location of market
• Cost of transportation
• Speed of cargo movement
• Reliability of mode

Location of a market is the most important factor in deciding the transportation mode. For shipping goods from India to the Middle East markets, the best and most convenient mode of transportation is sea for bulk cargo (steel, food grains, ores, minerals and chemicals, automobiles, and so on) and air for high-value cargo (jewellery, electronic goods, office equipment, and so forth).

The second important factor is speed, when the cargo is required urgently or in the shortest delivery time. Obviously, the cost of air transportation is very high and should be evaluated and justified considering the criticality of the need in terms of time and opportunity cost. Floricultural and horticultural products, which are perishable in nature, are directly sent by air to the destination. Roses produced at various farms near Pune, in India, are sent to the Mumbai airport in temperature-controlled vans to be airlifted directly to Holland and the Middle East countries in order to reduce spoilage.

The third important factor is the cost of transportation in international travel. The cost of travel is directly proportional to the speed of travel. Air transportation is the costliest. However, air cargo needs less packaging due to less handling and practically no exposure to hazardous storage, transit and travel conditions because of the short journey period. On the other hand, good packaging is required for sea cargo to withstand the hostile storage, travel and handling conditions during the long journey. Therefore, the packaging cost for sea cargo is very high. With the speed factor in play, the inventory in transit is less and has to be held for only a short period of time. This reduces the inventory level-related costs, resulting in faster inventory turnover.

In India, among all the transportation modes, air accounts for less than one per cent of the total cargo movement, while rail contributes to 35 per cent, road 39 per cent and sea 24 per cent. Each of the modes is associated with some hazards and so there is no ideal mode of transportation (see Table 16.2). The choice depends on the urgency at the customer end and affordability of the costs involved.

 

Table 16.2 Comparative Hazards of Transportation Modes

Air	Sea	Road/Rail
Variations in changes in temperature and pressure	Water damage Corrosive atmosphere Wave impacts Hostile storage condition	Shocks Vibrations Careless Handling Impacts due to breaking Transshipments

 

The other advantage of air transportation is responsiveness. It can quickly respond to the urgent and unpredictable demand of parts or components. This transportation mode inflicts minimum transit damages to the cargo. In addition, the insurance cost is less than the other modes. Due to the speed of air transportation, the marketer can avoid the risk of opportunity cost.

Air transportation is traditionally confined to high-value density items (i.e. items that have a high selling price), so that the transportation cost as a percentage of the price of the product becomes insignificant. Secondly, the value of the cargo being high, the capital tied up in inventory in transit is released fast.

Airfare is charged on the basis of weight, whereas sea freight rates are based on both weight and volume, whichever is higher. Freight forwarding agents quote the ocean freight rates. The rates quoted are on both weight and volume basis. The shipping company will charge the rate that gives it more revenue.

Three types of shipping companies undertake the transportation of sea cargo:

• Independent lines
• Tramp vessels
• Conference lines

The independent lines operate and quote freight rates individually and independently. They accept cargo from all shippers through the freight forwarding agents. Their services are limited to the route they operate on. However, they have fixed schedules on the fixed routes.

The second category is that of the tramp vessels. These transporters do not have any fixed route or schedules. They operate on a charter basis and are mainly involved in bulk cargo transportation.

The third type of company is the conference line, which is an association of shipping companies across the world. They join hands to have common codes/rules for cargo movement, freight rates, shipping conditions, and so on. Freight rates among conference members are identical. These companies have a dual ocean freight rate system. They charge lower rates for contract shippers as fixed by the conference line. With the permission of conference, a member shipping company can operate its own vessel if schedules are not available for a particular route during a certain span of time.

Sometimes, it may so happen that under a regulatory condition of certain countries, the shipper may not have any access to shipping vessels other than stipulated by the authority. The mandatory use of a particular vessel is due to the laws enacted to protect the interests of that particular country. In Japan, it is mandatory that all Japanese automobiles for export to other countries should be shipped in vessels flying the Japanese flag.

Insurance

Shippers insure goods to protect against loss or damage to cargo during transit via air or sea. The carriers take responsibility for transit loss or damage during domestic cargo movement. However, in sea transportation, the carriers do not take such responsibility because of the high degree of risk involved due to unavoidable perils during sea journey. The purpose of marine insurance is to protect sea cargo against loss or damage in transit. The coverage in marine insurance is much broader as compared to domestic cargo insurance. Marine insurance is of two types:

• Open blanket coverage
• Special coverage (one-time)

Open policy insurance coverage is for a specified period for the estimated total value of the cargo that the shipper may dispatch. No record is kept or reports are required for individual shipment made during that period. The premium is charged on the basis of the total estimated cargo that the shipper intends to move during the contract period of the insurance policy. However, the shipper declares all the shipments to the underwriter, who insures the shipments at an agreed insurance rate within the limitations of the insurance policy.

On the other hand, special insurance is a one-time policy and commands relatively high premium charges. It is specific to one shipment and cannot be spread over a number of shipments of the same order. This cover is taken for infrequent export shipments.

While taking out a marine insurance policy, the shipper has to specify the kind of coverage required. The policies are normally differentiated as “particular average” and “general average.”

The risk, under general average, is shared by all the parties involved, e.g. cargo owner, shipper and carrier. This applies to any loss to goods or cargo during sea transportation to reduce the impact of an impending peril so as to save the ship or the lives of the persons on board. Under this scheme, all concerned share the risk through voluntary sacrifice.

Under particular average, the insurance coverage has to be specified against the particular peril. The shipper alone shares the risk of peril and gets the benefits of the policy. The various types of coverage under this policy are:

Fire and Sea Peril. This includes the losses caused by the unusual forces of nature while operating in and navigating waters. For example, the perils are: heavy leakages of seawater in the vessel due to opening of seams, thus resulting in damage to cargo; impact of water waves on the cargo; collusion with sea objects, iceberg, or other vessels; and so on. If the insurance covers fire and sea perils, the claims are paid only when a vessel is stranded, sunk, burned, or has collided and damages are caused by fire and sea perils.

Free of Damage Insurance. This insurance covers the total actual loss of cargo. It does not cover partial loss of cargo.

Named Perils. The coverage includes fire and sea perils with averages, plus additional perils that are to be named such as hook damage, fresh water damages, non-delivery, breakages and theft etc.

Fire and Sea Peril with Averages. This covers fire and sea peril, though neither the stranding, sinking, burning or collision of the vessel is a necessary condition.

All Risk Insurance. This is the most comprehensive insurance coverage and is applicable to loss or damage of cargo from external causes during transit. The causes may be war, strikes, delays and the inherent nature of the goods.

Similarly, insurance is required for air cargo to cover the various risks associated with air transportation. However, the degree, variety and frequency of risk involved in air transportation is less and the insurance normally is not so comprehensive as in marine insurance.

Packaging

For overseas shipment, packaging is more critical than for domestic shipment, because of the nature and number of hazards the packaging has to face or undergo during its journey to the destination. The logistical packaging needs to withstand the varying storage, transit and handling conditions during transit and protect the packed material. In addition, logistical packaging has to comply with the shipping regulations of the country of origin and destination. Hence, the packaging for overseas consignment is a cost-spinner. In many cases, seaworthy packing costs more than 5–6 per cent of the price of the engineering goods. Some of the problems in overseas shipments that need to be taken care of by shippers are given below:

Weight. The weight of the packaging will add to the gross weight of the consignment and freight will be charged on the gross weight. Hence, the over-designed and/or over-protected packaging will add to the transportation cost of the consignment more than its worth.

Transit Damage/Breakage. Due to varying degrees of handling at multiple points of transshipments during the journey, the product and its packaging is susceptible to breakages and damages. In developed countries, advanced automated material-handling equipment is normally used at ports, nodal points and even at the customer end, while in some countries very primitive methods of material handling may be in use. Hence, the packaging should be designed to take care of such material-handling conditions. To guard against this, it is recommended to use the unitizing or palletizing methods with shrink-wrapping for securing material in place during transit. Proper marking for safe handling is required to be printed at appropriate places on the packaging. Shrink- wrapping may provide additional protection to cargo from heat, rain and dust, if same is stored in uncovered places. For all these problems containerization is the best solution.

Pilferage and Theft. Packaging alone is not the solution to prevent thefts and pilferage. The effective way to reduce these is prompt pickup and delivery. The packaging should not be used for advertising the contents, particularly when high-value items are packed. The use of codes or marking should be encouraged, so that pilferage and thefts may be reduced.

Containerization. Today, the majority of exporters are resorting to container shipment in international trade. It is increasingly becoming the popular method of shipment of domestic and exports cargo. Due to a variety of advantages of container shipment (see Chapter 8, Section 8.7) its share in the total cargo movement in the world is increasing every year. Container traffic in India has grown at a rate of 18–20 per cent during the past few years. The most common container sizes in use in international trade are 20 ft and 40 ft. However, the growth of containerization depends a lot on container handling facilities at the major ports in the country, and the regulatory environment for facilitating multimode transportation within the country. The containers can take care of all the problems associated with traditional logistical packaging. The extra costs associated with container packaging can more than offset the losses incurred due to the traditional methods of l ogistical packaging. However, the job of the logistical manager will be to choose the right container for the right products, as containers are available in varying sizes and type. In many cases, the containers are provided with fixtures to accommodate or pack particular products. For example, high-value fashion garments are shipped in a hung position in the box container, using special types of hanging fixtures. Even cars are exported in containers using special fixtures.

Shipments by air do not require heavy packaging. However, high-value, delicate, perishable or fragile products are containerized and sent by air, using light, closed containers of a smaller size.

Intermediaries

The role of intermediaries is crucial and pervasive in cross-border trade. Intermediaries are basically logistical service providers having expertise in customs clearance, export/import documentation and cargo movement from the place of shipment to the destination. Cargo movement in the country of destination is coordinated by their business associates in that country. There are two types of intermediaries in international trade:

Freight Forwarder. The role of the freight forwarder is to forward freight locally or internationally. They have expertise in the following areas of global logistics operations:

• Traffic operations, that is, choosing the right mode and carrier for a given destination
• Initiating or organizing documentation (from shipper) required for cross-border shipments
• Customs clearance of cargo as per the regulations at the port of shipment
• Customs clearance and documentation at the port of destination
• Cargo movement and handling at the port of entry and destination

Freight forwarders represent shippers, both in ocean and air shipment, as the procedure and documentation required are the same. Freight forwarders are business houses licensed (by government) for doing the above-mentioned tasks. They are compensated for the work they do for the shippers by way of commission or brokerage. As and when the exporter receives an enquiry from an overseas client, he contacts the freight forwarders for advice on the following:

• Freight cost
• Port charges
• Cost of documentation
• Insurance cost
• Forwarding charges
• Packaging requirements
• Documents required

The freight forwarder also assists shippers in other areas such as reserving space on the shipping vessel, preparing the ocean bill of lading, forwarding documents to the customer’s bank, and so forth.

Custom-House Broker. The counterpart of the freight forwarder in the import of shipment is called custom-house broker. He is licensed to do similar task of freight forwarder, but for the importers. His main responsibility is clearing of the importer’s shipment through customs. He is compensated for this by way of brokerage. This broker assists the importer in the processing of imports documentation, movement of cargo from the shipping vessel to the customs bonded warehouse, inspection of imported cargo, clearance of the cargo from there and moving it to the importer’s place.

Documentation

To move cargo, documentation is necessary either in paper or digital form. The traditional way is to pursue the documentation in paper form. However, the system at customs is gearing up for digital movement of shipping documents in the near future, using EDI. Several types of documents are required for facilitating cross-border movement of goods. These documents are necessary for exercising controls on cross-border movement of goods and currency flow, in and out of the country.

Export Licence. An export licence is a permit allowing goods to be exported. There are two types of export licences, e.g. general and validated. The general licence permits the exporter to export all the commodities listed. However, a validated licence is required for the export of certain restricted commodities.

Commercial Invoice. Commercial invoice is required for collecting payments from purchasers. This document incorporates the details of goods to be exported, their prices, duties, taxes and so on. There are two kinds of invoices. One is the “proforma invoice” that is provided by the shipper prior to shipment. This invoice informs the buyer about the shipping quantities and the value of the goods for making payments. The buyer may need a proforma for opening a letter of credit. The “commercial invoice” is a regular invoice prepared after the goods are shipped.

Certificate of Origin. It is a document prepared by the exporter to identify or declare that the goods originated in a certain country.

Inspection Certificate. This is a document certifying that the merchandise was in good condition prior to shipment. It may be issued by an inspection agency assigned for the job by the government.

Insurance Certificate. It is a negotiable document issued to provide insurance coverage for a specific shipment.

Packing List. This document lists the number of pieces, contents, weight and measurement of each item in the consignment.

Dock Receipt. It is a proof of delivery of goods received at the dock or warehouse of a shipping company.

Air Waybill. It is basically a receipt of goods issued to the shipper by the air carrier company. The original may be produced by the consignee for collecting the goods from the airport of destination.

Bill of Lading. A bill of lading is prepared by the ocean carrier for receipt of goods meant for sea transportation. This document allows the holder to claim the goods.

Free Trade Zone

Free trade zones facilitate transactions and smooth physical flow of goods. These zones are earmarked by the various countries that do not require customs formalities for inward and outward movement of goods. Invariably, these zones are the warehousing hubs for MNCs with global operations for distribution across world markets. Jubel Ali in Saudi Arabia and Hong Kong on the southeast coast of the People’s Republic of China are the two main free trade zones in Asia for international companies to route their trade.

16.3 STRATEGIC ISSUES

The process of managing the flow of inventory and information across the global supply chain is more complex than managing logistics operations within the country. This is because of the diversity in markets in terms of the following:

• Customer needs
• Economic and regulatory environment
• Logistical infrastructure

The dominant factors need to be identified during the planning stage and proper strategies evolved to overcome the barriers.

Internal Issues

Logistics Planning. For companies with global operations, logistics network planning is crucial for gaining competitiveness. The formulation of a logistics network strategy will also depend on factors such as unit value of the product, markets and competition. For example, when a firm decides on developing new markets and relocating facilities, the sourcing of raw materials becomes important as far as the delivery time frame, logistics cost and reliability are concerned. Therefore, the formulation of logistics strategy should take into consideration the location of production facilities, sourcing of raw materials and components, and the product-market characteristics. The following are some options for firms to plan their logistics for truly global operations:

• The firms may concentrate their manufacturing and sourcing at a few locations, despite selling their products across global markets, for example, BMW and Thomson. The major focus of these companies is on outbound logistics for distribution of finished products in global markets.
• The next category of firms includes those that manufacture at one place and sell their products in the global markets. These are the companies manufacturing very high value products such as aircrafts and defence products. They source their raw material and components from all over the world. The major focus of these companies is on inbound logistics.
• Companies in the third category manufacture mass-consumed low-value products such as soft drinks. Firms like McDonalds, Coca Cola and Pepsi adopt the strategy of supplying the finished products to the markets from local manufacturing plants. The products are sold within 200 kilometres of the plants. Beyond a particular distance the logistical cost makes the finished products uncompetitive.
• The fourth category includes companies that source from and distribute to many locations. They focus on both inbound and outbound logistics. Some examples are the Japanese car and consumer electronics manufacturing companies such as Honda, Toyota and Sony, and so on.

Inventory: “Make-to-Order” or “Make-to-Stocks.” A major shift in inventory planning is “make-to-order” to deliver the products directly to the customer to reduce inventory levels. The approach followed here is to consolidate the global production in a single or a few focused factories to cater to the needs of various markets. The variations in the needs of the individual customer or local markets are fulfilled through a strategy based on rationalization of product design. The local needs are taken care of through the modular approach to product design, wherein the product can be configured to its final shape at the distribution centre catering to the local markets. This is the “pull” system wherein the execution is after the customer places an order. The internal system is flexible so as to gear itself for execution of orders for product volumes and variety.

Product Variables. The unit value of the product decides the reach of the logistical system. In the globalized marketing environment, the firms with low unit value products invariably resort to a local manufacturing system to extend better customer service. For products like soft drinks, the distribution is mostly restricted within 200 kilometres of the bottling plant. The cost of serving the customer becomes uneconomical beyond a certain distance. The configuration of plants for such products depends, to a great extent, on the logistical reach of the product. However, in the case of high-value products, the logistical reach is wider and the transportation cost as a percentage of the total cost of the product is insignificant and, therefore, a centralized manufacturing or distribution centre for better inventory control is thinkable. It is an important consideration for consumer products sourcing and distribution network in the global markets.

Flexibility. Invariably, the global players focus on the strategy of economies of scale for cost advantage. But this strategy has an element of inflexibility to respond to a dynamic market and demanding customers. The logistics system associated with the aforesaid strategy also becomes inflexible in responding to the changing distribution needs. For example, the emphasis on freight consolidation with few dispatch schedules has shifted to frequent and small consignments to reduce the inventory-related costs.

External Issues

Short Lead Time. In the global markets, the emphasis is on responsiveness with a lean supply chain. In such circumstances, the customers bank on the shortest lead time for the inputs going into the product manufacture to compress the performance cycle resulting in superior customer service and simultaneously reduced overall inventory levels. However, in case of inflexibility in manufacturing system, the supplier needs to keep some buffer stocks to maintain the desired level of customer service, sacrificing the benefits of lean inventory.

Transit Time Extensions and Delays. The freight cost is directly proportional to the speed of transportation mode. Air transportation may be obviously costlier than sea transportation, but inventory carrying cost over a longer period of sea journey will offset its benefits due to low freight charges. Moreover, this will pose constrains to the basis logistics principle of postponement. The documentation and customs clearance may further add to the cost of in-transit inventory shipped through slow speed transportation modes.

SUMMARY

The movement of cargo between different countries is much more complicated as compared to transportation within the country. The major considerations in cross-border cargo movements are selection of transportation mode, insurance, and packaging and documentation as per laws of the land. The two most widely used transportation modes in international trade are air and sea. The sea route is chosen for bulk cargo with relatively low unit price, while the air route is preferred for high-value cargo. The major considerations for choosing the modes are cost, speed, urgency and reliability. To cover the risk of cargo breakage, loss or damage, the goods are insured under open or special insurance coverage. Because of varying conditions of storage, transportation and material handling during the journey of the goods, the packaging needs special design consideration, as far as cost and robustness are concerned. In the export and import of goods, the role of the freight forwarding agent and the custom house broker is crucial. They facilitate a smooth goods movement, taking care of documentation as per the regulations. Documentation is the most important part of cross-border trade. The important documents in foreign trade are export licence, commercial invoice, bill of lading, air waybill, and certificate of origin, and so on.

REVIEW QUESTIONS

1. How do logistics operations differ for material movement within and between the countries?
2. Explain the role of intermediaries in global logistics.
3. What are the barriers you foresee in the crossborder logistics?
4. “Containerization has eliminated many barriers in cross-border movement of goods.” Explain.
5. Explain how “free trade zones” and “trading blocks” influence global logistics.

INTERNET EXERCISES

1. Multimodal International Hub Airport, Nagpur (MIHAN) is being established at Nagpur in central India. Find out how changes in the logistics demographics of India will take place with regard to import-export trade after the project is completed. Visit http://www.en.wikipedia.org/wiki/MIHAN
2. Custom Global Logistics is a full service transportation provider in international trade. Study the terms and conditions for shipping cargo overseas. Go to http://www.customgl.com/about.php.

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