17

Global Supply Chain

“The Dell theory of conflict prevention argues that the two countries that are both part of the same global supply chain will ever fight a war as long as they are each part of that supply chain”

 

—Thomas Friedman„

INTRODUCTION

Global operations of a business increase the complexity of the supply chain with an effect on cost of moving goods and servicing customers. With complexity, elements of uncertainty creeps in and that decreases the capability of control in movement of goods due to large distance, varied customer demand, diversity in working environment and multiple documentations. The global supply chain must accommodate all the uncertainties associated with the above factors which are possible by aligning the capabilities of all multiple agencies having expertise in facilitating cross-board movement of goods.

In the present situation when there is cut-throat competition, one has to find out ways to provide the best service at a minimum cost. To make this possible the company has to find partners at proper locations to get cost advantages. For example, China is a manufacturing hub while Dubai and Singapore are for trans-shipment at the free trade zones (FTZ). Today the components/raw materials are brought from various global locations, assembled/processed in other countries and sold in international markets. Hence, the aspects which are important in global supply chain are speed, flexibility and cost-effectiveness. This needs capabilities of material suppliers and service providers.

Differentiation is the only strategy for survival and growth in the global market. The way to develop competitive advantage is alliances with service providers to make customized service offerings to customers. This can be done by understanding customer's needs and expectations. Here, the company has to focus on its internal operations to be more responsive to accommodate customer's needs.

Another concept for global supply chain is distribution channel, which helps firms make their goods available to the customers spread across the globe. Distribution channels are not alike in all countries. For example, in India and France the channels of distribution are not the same for a similar category of products.

In the global supply chain, smooth movement of goods is critical and is dependent on the transportation. In addition, customs rules, logistics regulations, government policies and tariffs, very much impact the effectiveness and efficiency of international supply chain. The importance of 3PL and 4PL service providers cannot be ignored in successful global supply chain operations.

DOMESTIC VS. GLOBAL SUPPLY CHAIN

With globalization, the trade barriers have reduced and the competition has changed dramatically. In order to remain competitive in global market, firms have begun to implement two strategies by seeking supplies and productions on a global scale and reducing operations in-house via outsourcing and strategic alliances. With global sourcing, companies take advantage of the unique conditions existing in different countries, such as low wages, raw material availability and proximity to markets. In addition, outsourcing strategy gives firms more flexibility to react to the increased volatility in marketplace. Global supply chain management usually involves dealing with many countries with both opportunities and threats. There are four major differences between domestic and international supply chain (Exhibit 17.1).

 

Exhibit 17.1 Global Logistics Challenges

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

1. Performance cycle: In domestic markets, the transit times and total performance cycle varies in days. However, in global SC, the performance cycle varies in weeks or months. The reasons for a longer performance cycle are communication delays, financing requirement, special packaging requirement, ocean freight scheduling, long transportation times and custom clearance.
2. Documentation: International operations require multiple documents for goods clearance through customs.
3. Systems integration: This includes the ability coordinate various supply chain processes to fulfil the orders in agreed time frame.
4. Alliances: International alliances can provide market access and expertise and helps to reduce the risk in global operations.

STRATEGIC ISSUES

Today, sourcing components or products from ‘low-cost countries’ have almost become a common practice across every segment of the industry. The competitive pressures on pricing are so demanding that the procurement department seeks to the lowest possible raw material component cost without compromising on the standard of quality.

The major strategic issues in global supply chain are:

• Available infrastructure
• Alliances for outsourcing
• Safety and security
• Skilled human capital
• Responsiveness
• Technology

Time is another big issue that should be addressed when dealing with global supply chain management. The productivity of the employees and the extended shipping times at the sourcing country may positively or negatively affect the company's lead-time. However, lead-times need to be taken into consideration into the company's procurement plan. The weather conditions on one side of the world often vary greatly from those on the other and can impact production and shipping dramatically. The customs clearance time and other governmental red tape can add further delays that need to be taken into consideration during planning stage.

Another issue that must be incorporated into a global supply chain management strategy is supplier selection. Comparing vendor bids from within the company's home-country may be difficult enough but comparing bids from global suppliers may be more complex. In addition, companies must make decisions about the number of suppliers to engage. Smaller supplier base may be easier to manage but could also lead to potential problems. If one vendor is unable to deliver as expected or if one vendor tries to leverage its supply power to obtain price increase then multiple suppliers may be a firm's choice. In general, the barriers to global supply chain are as follows:

• Marketing/competition: It includes entry restriction, information availability, pricing and competition. Entry restrictions limit market access by placing legal or physical barriers on importing. Pricing and the related topics of tariffs are other marketing-related barriers. International pricing is strongly influenced by exchange rates.
• Financial barriers: These mainly result from forecasting and institutional infrastructure. They result from major differences in facilitating intermediaries such as banks, insurance firms, legal counsellors and transportation carriers operations.
• Distribution channels: Infrastructure non-standardization at different parts refers to differences in transportation and material handling equipments, warehouse and port facilities, and communication systems. Trade restriction barriers can influence channel decisions such as the rules that restrict the volume of imports or increase duties once a specified volume has been reached.

To manage flow of inventory and information across the global supply chain is more complex than that of managing logistics operations within the country. It 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 to be 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 logistics network strategy will also depend on factors like unit value of the product, markets and competition. For example, when the 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 is concerned. Therefore, formulation of logistics strategy should take into consideration the location of production facilities, sourcing of raw materials and components, and the product–market characteristics. For a truly global operation, the following are options for firms for planning their logistical operations.

• The firms may concentrate their manufacturing and sourcing at few locations despite of selling their products across the global markets. The examples are BMW, Thomson. These companies have major focus on the outbound logistics for distribution of their finished products in global markets.
• The other categories of firms are those having manufacturing at one place and selling the 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.
• The third categories are companies manufacturing mass-consumed low-value products such as soft drinks. Firms like McDonalds, Coca Cola and Pepsi adopt the strategy of supplying finished products to the markets from the local manufacturing plants. The products are sold within 200 kilometres of distance from the plants. Beyond a particular distance, the logistical cost makes the finished products uncompetitive.
• The forth category is sourcing and distribution from and to many locations. They focus on both inbound and outbound logistics. The examples are Japanese car and consumer electronics manufacturing companies such as Honda, Toyota, Sony, etc.

Inventory: make-to-order or ‘make-to-stocks’ The major shift in inventory planning is ‘make-to-order’ to deliver products directly to the customers to reduce the inventory levels. The approach to this is to consolidate the global production in a single or few focused factories to cater to the needs of various markets. The variations in needs of local individual customer or local markets are fulfilled through the strategy based on rationalization of product design. The local needs are taken care of through 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 a pull system wherein the execution is carried out after the customer places an order. The internal system is so flexible so as to gear 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 for extending excellent 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 for such products. Configuration of the plants very much depends on the logistical reach of the product. However, in case of high-value products, the logistical reach is wider and the transportation cost as a percentage in total cost of product is insignificant and hence centralized manufacturing or distribution centre for better inventory control can be thought of. This 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 the dynamic market and demanding customers. The logistics system associated with the above 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 market, the emphasis is on responsiveness with lean supply chain. In such circumstances, the customers bank on shortest lead-time for the inputs going into his product manufacture to compress his performance cycle to extend superior customer service and simultaneously reduce 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 more, due to low freight charges. Moreover, this will pose constrains to the basic logistics principle of postponement. Documentation and customs clearance may further add to the cost of in-transit inventory shipped through slow-speed transportation modes.

ROLE OF IT SUPPLY CHAIN

IT-enabled supply chain management is a core strategy being adopted by leading business firms for developing sustainability. With the Internet, communication and information sharing amongst the partners is on time and seamless. High volumes of data can be transferred at low cost and with speed.

The Internet enhances the degree of coordination and communication between the partners. Internet-based technologies such as ERP, EDI, DRP, WMS, CRM, CPFR, etc., has improved the integration amongst the buyers and sellers many folds.

On the Internet platform, e-business has emerged enhancing supply chain efficiency and responsiveness by sharing real-time information regarding inventory, shipment movements, goods availability and demand between the partners. The speedier reach to relevant information in supply chain can help in reducing the costs both at the buyer and the seller ends.

Electronic Data Interchange

EDI is a method to automate the traditional paper-based, error-prone and time-consuming business transactions. EDI transfers the process and transaction documents. Just-in-time (JIT) implementation and its success depend on communication automation. The communication automation is possible with EDI. EDI also supports communication amongst the partners.

Intranet

Intranet is an organization's internal network for communication. It is done through LAN (local area network) or WAN (wide area network). Both the networks use Internet technology and communication protected through company's firewalls. Intranet helps employees to share documents regardless of their location. Employees can share various things such as internal policies and procedures, training programmes, product catalogues, design drawings and manuals.

Extranet

Extranets have global reach. It is used for communication with two or more organizations. Extranet also ensures privacy, security and coordination amongst partners, suppliers and customers

B2B Collaboration

In the B2B markets, the organizations establish long-term relationships with customers. However, with the internet it has become easier to collaborate with partners more quickly than the traditional way. The internet facilitates online ordering and tracking, managing their logistics, sharing the forecast, demand planning, etc.

Trading (Internet Based) Hubs/Exchanges

Trading hubs are independently owned organizations (market places) bringing the buyers and suppliers together on a real-time basis. It enables the buyers and sellers to initiate and conclude the transactions or contracts. The internet hubs connect a large number of buyers and sellers according to the requirements of both. The advantage of the internet hub is enhanced speed and reduction of transaction cost. The membership of trading exchanges is by registration or by invitation.

Collaborative Planning, Forecasting and Replenishment

Collaborative planning, forecasting and replenishment (CPFR) is one of the fastest growing technologies for business firms to collaborate with its partners. CPFR involves working with network members to plan for forecast, production, sales, shipments, etc. CPFR is based on IT. CPFR aims at accuracy of demand forecasts and replenishment plans resulting into lowering inventory levels. CPFR success depends on the trust between partners. For it to succeed, (point of sales) partners must be willing to share their promotion schedules, POS data and inventory data. CPFR is proving to be a win-win situation for the partners involved in meeting the customers’ demands, reducing inventory, lowering costs and improving the bottom line.

CROSS-BORDER LOGISTICS

As businesses continue to globalize, the attention has increasingly turned to logistics operation. The cargo movement needs to be done physically using the available means of transportation. The speed and efficiency of the movement of goods across the national boundaries of the nations depend on the available modes of transportation, their capacity and capability, inter-modal facility for movement, packaging and handling, and the logistical regulations in the countries where the buyers, sellers and carriers are located. In imports and exports business, for physical movement of cargo, the role of intermediaries (freight forwarders and customs-house brokers) are indispensable. The domain knowledge, connectivity with international cargo carriers and the documentations are the three crucial areas, which need focus in global logistics. As a consequence of globalization, managing logistics at a global level poses challenge of considerable complexity. The complexity of challenge varies with business and the environment it is operating in. To face logistical challenges, there is no single standard solution available. Individual companies will have to understand both the strategic and management issues to bring in more clarity in knowing the implications of globalization of their business on the logistics.

Logistics is an important element of any business venture. If we closely examine the elements of the cost of a product, the raw material cost forms a significant portion, nearly 40–70 per cent of the total cost. Hence, materials must be procured and provided for processing in an optimal manner. The decisions like economic order size, reorder level, etc., are generally considered to minimize the cost of holding inventories. In addition to these dimensions, there is the cost of transportation of raw materials which in turn depends on the location of vendors and intermediate warehouse(s), if any in the system. Again, within the plant, the logistics play a major role to minimize the in-plant movements which help in minimizing time and cost of transportation. They will be dispatched to the market points either directly or through some intermediate finished goods warehouses. In international logistics system, the movement of materials/products will be in the following five stages:

• Vendors
• Raw material warehouses
• Plants
• Finished goods warehouses
• Markets

In the individual firm, logistics activities absorb a substantial portion of its operating costs. It has been estimated that in the recent years, physical distribution costs in India have skyrocketed to 30–40 per cent of the consumer prices of the products. As such, physical distribution has become the most important area for cost control. And savings on this account means a great deal to the Indian business firms operating under competitive conditions.

Although the cost of market logistics is high, a well-planned market logistics programme can be a potential tool in competitive marketing. Companies can attract additional customers by offering better services, faster cycle time, or lower prices through improvement in market logistics. Experts call market logistics the lost frontier for cost economies. Lower market logistics costs will permit lower prices to yield higher profit margins or both.

Effective management of physical distribution can help a company gain advantage over competitors through better customer service and/or can be the basis by which a firm gains and sustains a strong differential advantage. Without effective physical distribution no firm can survive in the market.

RISK ASSOCIATED

An international supply chain is conceptualized as a complex and dynamic system in which disruptions happens due to long shipping and lead-times leading to costs implications. There are four disruptions in the supply chain, which are as follows:

1. Demand-related
2. Supply-related
3. Manufacturing-related
4. Distribution-related

Demand-related disruptions are the most important source of instability in the supply chain. Production-related disruptions do not have a severe effect in terms of production shortfalls and demand fulfilment, although they do seem to create a need for significant international communication. Production-related disruptions decline over time, although demand-related disruptions may last for a comparatively longer period.

Distribution-related disruptions cause due unavailability of products at the place of demand. Here, the costs take the form of expedited shipping, inventory shortages and lower demand fulfilment leading to customer dissatisfaction, etc.

The supply (sources)-related disruption raises the costs, due to emergency purchases and also due to loss of opportunities in markets.

To understand the disruptions, a firm needs a much deeper understanding of the difficulties of various types of value chain activities. The impact of demand, production and vendor-related disruptions in one company is on the cost of integrating an international supply chain which is product and market specific. If certain product attributes make international production difficult, then we need to investigate more thoroughly how these attributes can be changed over time.

Perhaps the most neglected in area is the potential role of management in improving the performance of international supply chains. More sophisticated simulations could help management understand the trade-offs entailed in international supply chains and make better decisions concerning facility location, shipping mode, choice of vendors and inventory levels. Moreover, there is a need to examine ways in which managers can reduce the level of disruptions to the supply chain, thereby decreasing the costs and difficulties of international sourcing.

OPERATIONAL FACTORS

The major areas of logistical expertise required in cross-border cargo movement are, mode of transportation, cargo insurance, packaging, 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: road, sea or air depending on the cost, urgency and the destination. However, for cross-border cargo movement mostly sea and air, as a mode of transportation, is 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 the Indian subcontinent, the road is an important mode of cargo movement across India, Nepal, Pakistan, Bangladesh and Bhutan. In Europe, the railways are the important mode because of the availability of modern and efficient train systems.

For selection of the transportation mode, logistical manager should take the following into consideration:

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

The location of the market is the most important factor in deciding the transportation mode. For shipping goods from India to Middle East countries market, the best and most convenient mode of transportation is sea for bulk cargo (steel, food grains, ores, minerals and chemicals, automobiles, etc.) and air for high-value cargo (jewellery, electronic goods, office equipments, etc.).

The second factor is speed, where the cargo is required in shortest delivery time or urgently. Obviously, the cost of the air transportation is very high which should be evaluated and justified by the criticality of the need in terms of time and the opportunity cost. The floricultural and horticultural products, which are perishable in nature, are directly sent by air to the destination or to the place of consumption. The roses produced at various farms near Pune in India are sent to the Mumbai airport through temperature controlled vans for further dispatch directly to Holland and Middle East countries by air to reduce spoilage.

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

In India, amongst all the transportation modes air accounts for less than 1 per cent of the total cargo movement (domestic), while rail contributes to 30 per cent, road 60 per cent and water 10 per cent. Each of the modes has its own disadvantages and there is no ideal mode of transportation. The choice depends on the urgency at the customer end and affordability for the costs involved.

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

Air transportation is traditionally confined to high-value density items, that is, the items having 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.

The air freight rates are charged on the basis of the weight and the sea freight rates are based on both weight and volume, whichever gives higher charges. The freight forwarding agents quote ocean freight rates. The rates quoted are based on both weight and volume. The sea freight rates are based such that higher revenue is generated.

The three types of shipping companies that undertake sea cargo transportation are as follows:

• Independent lines
• Tramp vessels
• Conference lines

The individual lines operate and quote 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 the tramp vessels which do not have any fixed route or schedules. They operate on charter basis. They are mainly involved in bulk cargo transportation.

The third one is the conference line, which is an association of shipping companies across the world. They join hands and have the common codes/rules for cargo movements, freight rates, shipping conditions, etc. The freight rates amongst the conference members are identical. They have a dual ocean freight rate system. They charge lower rates for contract shippers as allowed by the conference line. With the conference's permission, the member shipping company can operate its own vessel if the schedules are not available on the particular route for a longer time.

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

Insurance

Transit insurance covers property against loss or damage during its movement from one place to another. Insurance can be done for the goods transported in own vehicle or public transporter. The transport insurance policy indicates the type of transport being used for goods movement. For example, goods movement by sea transport is covered under marine insurance.

Cover    Goods-in-transit policy will protect the insurer from:

• Theft during transit
• Loss of goods (physical) during transit
• Damage caused due to vehicle accidents

Insurance policies protect the insurer if goods are new but inferior, below standard, or damaged through inappropriate packaging or sub-quality goods are not covered under this policy. The insurance coverage are of two types: old-for-new items replaced at their current market value and indemnity cover-to-cover general depreciation.

Special features   Insurance policies cover some special features. These special policies covers legal expenses, possessions in vehicle, food spoilage in freezers, garage cover and outbuildings cover. The special features incorporated in insurance coverage will increase the value of the premium. To reduce the insurance premium to a minimum, the insurer should leave off special features.

Level of risk   The risk in insurance depends on the cost of goods-in-transit. If risk is very high the premium becomes expensive. If the past record shows a high level of risk then the consigner should take measures to increase the level of the security of goods.

Types of risks (INCOTERMS)   These are the trade codes used in cross-border trade. These codes define the risk and cost obligations on the part of importers and exporters. It also explains about the transit insurance in international movement of goods. However, the obligation for insurance is at a minimum cover. The party can go for increased cover also depending on the needs.

In domestic cargo movements, the carriers take responsibility for transit loss or damage. However, in sea transportation the carriers do not take this responsibility because of the high degree of risk involved due to unavoidable perils during sea journey. The purpose of marine insurance is to protect the sea cargo against loss or damage in transit. The coverage of marine insurance is much broader as compared to domestic cargo insurance. The marine insurances are of two types:

• Open blanket coverage
• Special coverage (one time)

Open policy insurance coverage is for a specified period for estimated total value of the cargo that the shipper may dispatch. No record is kept nor are reports required for individual shipments 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 insurance policy. However, the shipper declares all the shipments to the underwriter, who insures the shipments at 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 to number of shipments of the same order. It is adopted for infrequent export shipments.

The shipper while taking out the marine insurance policy has to specify the kind of protection required for providing the coverage. The policies are normally differentiated as ‘particular average’ and ‘general average’.

Under ‘general average’ are risks shared by all the parties involved, that is, cargo owner, shipper and carrier, any loss to goods or cargo in sea transportation to reduce the impact of impeding peril to save the lives of the persons on board, or to the save the ship, etc. Under this scheme, the risk is shared through voluntary sacrifice by all the concerned parties.

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

• Fire and sea peril: This includes the losses caused by the unusual forces of nature while operating in and about navigating waters. For example, the perils are heavy leakages of seawater in the vessel due to opening of seams and causing damage to cargo, impact of water waves on the cargo, collusion with sea objects, iceberg, or other vessels, etc. If the insurance covers fire and sea perils, the claims are paid only when vessel is stranded, sunk, burnt or collided and damage is caused by fire and sea perils.
• Free of damage insurance: This insurance covers the total actual loss of cargo. It does not cover the partial loss of the cargo.
• Named perils: The coverage includes fire and sea perils with average and additional perils which are to be named, such as hook damage, fresh water damages, non-delivery, breakages, thefts, etc.
• Fire and sea peril with averages: This covers fire and sea peril but it is not necessary that the vessel is stranded, sunk, burned or collided.
• All risk insurance: This is the most comprehensive insurance coverage but applicable to loss or damage of cargo from external causes during transit. The causes may be war, strikes, delays and inherent natures of the goods.

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

Packaging¹

For overseas shipment, packaging (Figure 17.2) is more critical as compared to 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. Over and above this, the logistical packaging has to comply with the shipping regulations of the country of origin and destination. Hence, packaging for overseas consignment is a cost spinner. In many cases, the sea-worthy packing cost over 5–6 per cent of the price of engineering goods. In overseas shipments, following are the problems associated, which are to be taken care of by the shippers.

 

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/protected packaging will add to the transportation cost of the consignment more than it worth.

Transit damage/breakage   Due to multiple handling and varying handling condition at multiple points of trans-shipments during journey the product and its packaging is susceptible to breakages and damages. In developed countries, advanced automated material handling equipment is used at all places like 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. A proper marking for safe handling is required to be printed at the appropriate places on the packaging. The shrink-wrapping may provide additional protection to cargo from heat, rain, dust, if the same is stored in uncovered places. For all these problems, containerization is the best solution.

Pilferage and theft   Packaging alone is not the solution for avoiding thefts and pilferages. The effective way to reduce the same is a 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 the pilferage and thefts may be reduced.

Containerization   Today the majority of exporters are resorting to container shipments in international trade. It is increasingly becoming the popular method of shipment for domestic and exports cargo. Due to a variety of advantages of container shipment (Chapter 11), the share of container shipment in total cargo movement all over the world is increasing every year. In India, the container traffic has grown at a rate of 18–20 per cent during the last few years. The most common popular sizes of containers in use in international trade are 20 ft and 40 ft. However, the growth of containerization very much depends on the container handling facilities on 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 offset more than the losses due to traditional methods of logistical packaging. However, the job of a logistical manager will be to choose the right container for the right products because containers are available in varying sizes and types. In many cases, the containers may be provided with fixtures to accommodate or pack the particular products. For example, the high-value fashion garments are shipped in hung position in box containers using special types of hanging fixtures. Even cars are exported in containers using special fixtures.

The regulations issued by the government are implemented by the export inspection agency. These regulations are covered under Heavy Packages Act, 1951. The regulations include the guidelines for quality standards, protecting testing and packaging. The export consignment needs to have identification marks on the package. The information should include the name of the manufacturer, name of the consignor, name and address of the consignee, port of destination, country of origin, product type, quantity, shipping weight and handling instructions. The above information is required to be put in the languages of the country of origin and the country of destination (if required). The package should be duly inspected and stamped by the Export Inspection Agency for clearance through customs. For high-value cargo susceptible to pilferage or theft, blind or coded marking are recommended.

The instructions, markings, their contents and their positioning on the package should be as per the guidelines covered under the regulations. These are more specifically mentioned by the regulations issued by International Maritime Organization (IMO) and International Air Transport Association (IATA) for dangerous and general goods cargo.

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

Intermediaries

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

The shipping line appoints agents at every destination (the port where the ship calls upon). The agents handle the commercial and operational matter and documentation on behalf of the shipping company in that particular location. On the commercial parts, these agents book cargo on behalf of the shipping companies. They do it themselves through freight forwarders. On the operational part, they file the IGM with the customs, get the port clearance, pay the port dues and pay taxes on behalf of the shipping line. For this they get a total commission of 5 per cent of the total export cargo and 2.5 per cent of the import cargo handled. They also arrange stevedores to handle the port operations like loading and unloading the cargo and moving it between the ship and specified area of the port.

Freight forwarder is basically a broker who books space on the ship for his customer—the shipper (exporter). The next person in the chain is the custom house agent (CHA). This person arranges for customs clearance of import and export cargo. But over the time, CHAs have extended their operations and have diversified into freight forwarding business. This is to provide their customers all the services under one roof.

After the people who directly deal with the importers and exporters, come the people who handle the activities at ports called stevedores. They handle the cargo coming in and out of the port and the loading and unloading of cargo. They hire people and equipments needed for the work.

There are two types of intermediaries in international trade:

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

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

Freight forwarders represent shippers in both ocean and air shipments, as the procedure and documentation required are the same. Freight forwarders are business houses licensed (by government) for doing the above task. They are compensated for the work they do for the shippers by way of commission or brokerage. As an exporter gets 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

Freight forwarders also assist the shippers in other areas such as reserving space on the shipping vessel, preparing ocean bill of lading, forwarding documents to customer's bank, etc.

Customhouse broker   The counterpart of freight forwarder in import of shipment is called a customhouse broker. He is licensed to do a similar task of freight forwarders but for importers. His main responsibility includes clearing of importer's shipment through customs. He is compensated for this by way of brokerage. He assists the importer in processing of imports documentation, movement of cargo from shipping vessel to customs bonded warehouse, inspection of imported cargo, clearance of the cargo therefrom and moving the cargo to importer's place.

DOCUMENTATION

Most international trade transactions require transport, administrative, commercial and insurance documents (Exhibit 17.2). There are many documents that may need to be produced to complete an export/import transaction. Some estimates indicate over 100 different documents are used in international trade. However, in most export transactions, only a few documents are used (invoice, packing list and transport document). These documents serve the following functions:

 

 

• Proof of contract: Evidence of contract of sale and conditions stipulated therein.
• Title to the goods: Transport documents giving the right to the consignee to collect the goods from the carrier (just as a bank draft gives you the right to collect funds against the drawer).
• Information: Documents provide information on the price for the goods (invoice), the contents of package units (packing list), etc.

• Customs: The customs authorities of the destination country require documents from the consignee to clear goods. These documents are required for charging appropriate taxes and duties.
• Proof of compliance: Certain documents serve as proof that the conditions stipulated in the contract of sale are complied with, such as date of shipment (transport documents), the origin of the goods (certificate of origin), etc.
• Documents of origin: The purpose of these documents is to show wherefrom the goods originated.

The type of documentation required often depends on the INCOTERM (international code for delivery) used for the contract. A freight forwarder will usually assume responsibility for export documentation, although it is still a good idea to understand the different types and procedures.

Commercial Documents

Commercial invoice   It is a bill for the goods shipped. It includes product description, shipping marks, unit price, quantity, etc. The invoice helps the customs authority to assess the import duty.

Pro-forma invoice   This is an invoice sent to the customer in advance of dispatch of goods to organize foreign exchange, an import license or letter of credit (LC).

Export cargo shipping instruction (ECSI)   This document is issued by the exporter to the forwarding agent or carrier with a set of terms and conditions for the movement of goods and assigning responsibility.

Official Documents

Export license   To be obtained by the exporter from the local government authorities. It is required for certain goods to be exported legally (e.g., dangerous goods, explosives, drugs, chemicals, etc.).

Certificate of origin (C/O)   It is a certification indicating the place (manufacturing/shipping) of the goods.

Movement certificate   This certificate ensures preferential tariff treatment for the goods exported from the EU to a country covered by the EU trade.

Import license   Import licenses are required for certain countries for all goods or certain categories of goods. The customer should comply with the import procedures.

Inspection certificate   It is required by the customs authority in the importer's country to confirm that the shipped goods meet their specifications.

Transport Documents

Export packing list   This document specifies the weight, volume and type of cargo. This list is attached to the outside of the package to be shipped.

Bill of lading   This document mentions the condition of the goods when transferred to the shipper. It is also a document of title transfer. It is a contract between the owner of the goods and the carrier.

Sea waybill   It is a document issued by sea freight liner for receipt of goods from the consigner. It states about the possession of goods during transit. It serves the same purpose as the ‘consignment note’ issued by a road carrier.

Air waybill   It is a document issued by airline cargo companies for receipt of goods from the consigner. It states the possession of goods during transit. It serves the same purpose as the ‘consignment note’ issued by a road carrier.

Insurance Documents

Insurance policy   This document is issued by the insurance company covering for the full value of goods, during transit against damages.

Certificate of insurance   This document details the degree of protection, and list the policy number and all relevant details (e.g., dates, destinations, transport method, route, description of the cargo and value for which it is insured).

FREE TRADE ZONE

Free trade zone, also called foreign-trade zone², formerly free port, an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located, they are subjected to the prevailing customs duties applicable on normal imports.

Free trade zones (FTZ) facilitate the transactions and smooth physical flow of goods. These zones are earmarked by various countries, where no customs formalities are required for inward and outward movement of the goods. Invariably, these zones are the warehousing hubs for MNCs with global operation for distribution across world markets. To name a few, Jebel Ali in Saudi Arabia and Hong Kong in the east are two main free trade zones in Asia for international companies to route their trade.

FTZ is a special area earmarked wherein trade barriers like quotas and tariffs are not applicable. FTZs are developed in places which are in proximity to international airports and seaports. In the free trade zone, the components are imported, assembled and re-exported as finished products to different countries. No duties or taxes are applicable in these zones. These are manufacturing zones that provide employment and foreign exchange to the country. FTZ provides opportunities, business options and manufacturing options to businessmen. The aims of FTZs are to develop export-oriented units, increase the foreign exchange earnings and generate employment opportunities. It facilitates cross-border trade by removing obstacles imposed by customs regulations.

India was one of the first in Asia to recognize the effectiveness of the export processing zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandala in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances, absence of world-class infrastructure, and an unstable fiscal regime with a view to attract larger foreign investments in India, the special economic zones (SEZs) policy was announced in April 2000.

REVIEW QUESTIONS

1. Discuss the various issues in global supply chain.
2. How do global supply chain operations differ from their domestic counterparts?
3. What are the barriers in the global supply chain?
4. Discuss the role of IT in global supply chain.
5. Explain how ‘free trade zones’ and the ‘trading blocks’ influence global logistics.
6. What are the critical operational factors in global supply chain?

INTERNET EXERCISES

1. Visit http://www.transworldeducation.com/articles/nlogistics.htm, for free subscription and access to articles on global logistics and supply chain
2. To study the terms and conditions of the overseas shipping cargo visit http://www.customgl. com/about.php. Custom Global Logistics are full service transportation provider in international trade.

VIDEO LINKS

1. Global supply chain management http://www.youtube.com/watch?v=ZuQ200JAViA
2. Keeping the global supply chain moving http://vodpod.com/watch/5356631-keeping-the-global-supply-chain-moving

PROJECT ASSIGNMENT

1. Catalogue marketers like Lands End have global reach in garment markets in 105 countries. They have their main manufacturing facility in the United States. Find out the problem they are facing in managing their global supply in catering to the requirements of their customers spread wider in different geographical areas.