Global Logistics and Supply Chain Management in Business

Factors for Consideration for Using Air Freight in an International ‘Overseas’ Operation

Global logistics are dominated by seaborne trade because of the economies of scale involved. However, for certain products, items and other operational factors, Airfreight can become the medium of choice for transportation. The type of product, its sensitivity to environmental conditions and the speed of delivery often dictates the choice of transportation mode. An interesting graphic of US exports showing choice of transportation as reported by the US International Trade Commission (2005) is placed at Appendix (page 12). As can be seen from the graphic, Jewellery, electrical and non-electrical machinery, art and artefacts are preferred items for airfreight. Other factors that are crucial for utilisation of air freight in an overseas operations are weight and volume of products being transported. Export of high value-added perishable farm products are increasingly being air freighted. “Perishables are estimated to comprise between 14 percent and 18 percent of the world’s air cargo” (O Connell, Mason & Hagen, 2005. p.42). Transportation of semiconductors involves both modes of transportation as also road transportation. According to Monczka et.al (2002), “National semiconductors closed six warehouses around the globe and began air freighting microchips to customers worldwide from a distribution centre in Singapore. This reduced standard delivery time 47%, reduced distribution costs 25%, and increased sales 34 %”(p.606). Within the US, the company used road transportation also.

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International Logistics and its Characteristics

International logistics can be defined as designing and managing of a system that controls the flow of materials into, through, and out of the international corporation. International logistics are vastly more complex than domestic operations owing to its international nature. In an international system, the companies have to have cross-cultural expertise. In a domestic operation the employees are used to a particular culture and hence it is easier to conduct domestic operations. The personnel involved in International logistics not only have to know the laws of their own countries but also the laws of the countries to which the trade flows. It also requires in-depth knowledge of customer preferences and target markets which may differ significantly from the preferences of a domestic customer. Thus the numbers of uncertainties are more when compared to domestic operations. In an international logistical chain, because of the vagaries of geopolitics, at times a more ‘flexible’ view of various laws and procedures needs to be taken. For example, shipping crude oil from Nigeria may require the logistics managers to enter into an ‘understanding’ with the various ‘interest groups’ that provide ‘security’ for the crude to be transported from the oil fields to the seaport. This is a dilemma that faces all companies as Keegan (2002) puts it “When companies operate abroad in the absence of home-country legal constraints, they face a continuum of choices concerning ethics” (p.107).

Sustainable Global Logistics Chain

Global logistics chains with their resource intensive infrastructure have been blamed for environmental degradation. On time and in time delivery of products to consumer markets require resources in terms of air-conditioned and special climate control warehouses, heavy movers both at the factory sites as well as at the loading and unloading ports and at the consumer end. These heavy assets cannot be ‘green’ and deliver the same efficiency and also be cost effective. The enormous amounts of electricity required to sustain a 24-hour – 365 days operation, strains the electrical power generation of the states where they are located. Some types of packing material such as Styrofoam and plastics are non-bio degradable. Almost all supply chains have one built in redundancy which consumes precious resources. To make global logistics chains more sustainable, companies must strive to use renewable resources where possible. Companies must pledge to restore the environment or reduce the damage to the environment if their operations run the risk of doing so. In simple terms ‘You dirty it, you clean it’. While manufacturing, and packaging forms one part of the overall drive for sustainable global logistics, sustainable transportation is an important aspect. The present state of logistics involves tremendous wastages and losses on account of goods and product not reaching their destination in time. The way forward towards sustainable transportation is to have a network of multimodal transportation which can handle the logistics in a seamless, efficient manner. The bottom line in this case is that the entire operation must be cost effective, efficient, and ‘green’. The Trans-European Network for Transport (TEN-T) was formally established on 26 October 2006 to ensure efficient multimodal transport network which is both efficient and sustainable. The network envisages a road network of 98,000 km, railway network of 100,000 km, 400 Airports, 12,000 km of inland waterways, 400 seaports and 300 inland ports all over Europe integrated in all aspects of sustaining a global logistics chain so that products can move seamlessly(Schwarz, 2007, p.9). Especially in the field of the development of the TEN_T, inland waterways have been recognised as an important element for the promotion of clean and sustainable transport throughout Europe. The process is well underway and European countries have pledged to find the monies required for the infrastructure growth to meet the targets of 2008-2009. While in the United States there is no central federal legislation to tackle sustainable logistics on the European scale, some movement forward has been seen since 1991. In 1991, the United States Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) came into being. According to this legislation, metropolitan planning organizations (MPOs) were given the authority to plan their own sustainable programs and use and transfer federal funds for various sustainable transportation projects. During the Clinton administration, the President’s Council on Sustainable Development (PCSD) was established in 1993. Certain states like California and Oregon have advanced laws to cut green house gas emission and the enactments there closely follow the European model. S. In 2007 the U.S. National Infrastructure Improvement Act of 2007 was introduced to facilitate infrastructure development in the U.S., which will facilitate economic growth, public safety in a sustainable manner. On 29 January 2008, the House bill H.R. 5161 titled, Green Infrastructure Research and Technology Transfer Act was presented to the House of Representatives.” The objective of the bill is to provide for the establishment of green transportation infrastructure research and technology transfer centers”(Bryce, 2008, p.15).

Resolution of JIT Logistics Problems

“The essence of JIT is that the exact number of components will arrive at a workstation exactly at the time required and, in JIT, the supply of materials will exactly match the demand of materials both in terms of quantity and time”(Brown et.al, 2005, p.209). Since time is the critical factor in this supply chain model, JIT logisticians are increasingly resorting to ‘fail-safe’ alternatives like more frequent deliveries in smaller consignments and using air freight/express freight services which are expensive and thus reduce the profitability. One suggested method at the macro level is to move the producer closer to the consumer so as to reduce the logistics lines of communication and the cost of transportation. Decentralized, independent hubs with close satellite product companies located in the same region with a high level of computerized monitoring through devices such as RFID tracking would help in reducing transportation costs. For example, apparel especially high end fashion apparel are extremely time sensitive. For such an industry a model based on regional distribution centres located at the target consumer markets can help reduce overdependence on air freight.

How to Achieve Full Loads and Efficient Consignment Sizes

Achieving full load in an air freighted JIT consignment requires careful examination of various factors. Firstly, the cost of designing a full load palette for air freight means reserving cargo space on a cargo carrier which is expensive. So proper forecasting of the actual demand and the redundancies is required. Full load capacities on both outbound and inbound legs may require careful analysis of the target countries and tie-ups with other firms if own company is not diversified enough to cater for the range of goods being air freighted. For example, Boeing Corporation’s World Air Cargo Forecast 2008-2009 reports that “Air cargo between Latin America and Europe was quite balanced…The westbound traffic included automotive parts, electrical machinery and industrial and specialized machinery. The East bound goods were largely perishables, electrical and industrial machinery, leather goods and automobile parts” (p.41). Thus, the trick lies in collaboration and proper pairing of destinations to ensure full loads on both legs and efficient use of facilities. According to Bloch, “Freight’s handled multiple times in airline facilities rather than just once” (p.4). Thus, efficiency of consignment sizes is very much a function of efficient system integration at the loading and unloading points.

How to Improve Fleet Management in Reducing Empty Return Trips

In airfreight business, partially empty ‘backhaul’ flights are a reality, which cannot be wished away due to the nature of the Industry. However, empty returns flight can be reduced by adopting multiple pickups at multiple destinations. For example, plan the supply management so as to transport goods from destination A to B with another destination involved. A t Destination B, pick up goods for Destination C along with the goods destined for Destination A. Once the aircraft flies to Destination C, arrange to pick up goods for Destination A from Destination C. In this way, the quantum of empty backhaul will reduce but never become zero. Other way is to carefully choose the target countries where the difference in cargo carriage on the outbound and inbound flights is not substantial to hurt the bottom line. A careful selection of cargo carriers is also mandated as some cargo carriers are cheaper than the others on some specific routes.

ISO 14000 and Sustainable Business Practices

The primary purpose ISO 14000 standards is to ensure that businesses comply with applicable environmental law. Though the standards are voluntary in nature, more and more companies are opting for it because of the good image that a company gets. ISO 14000 provides an alternative to “command and control” regulation by governments and fosters greater cooperative environmental controls. Such voluntary control measures have resulted in success stories wherein companies have managed to effect savings in electricity by adhering to the tenets of ISO 14000. Since the standard provides a comprehensive procedure for adopting ‘green’ practices, they produce better results than government driven initiatives where, companies try and fulfil only those parts of the stipulation that is required and not the complete process. Over a period of time, having an ISO 14000 certification becomes a sort of brand value which has its own market driven imperatives. Efforts such as ‘Energy Star’ also encourage production of ‘green’ electronic equipment.

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Rethinking of the Supply Chain

According to Monczka, Trent and Handfield (2002), “The supply chain encompasses all activities associated with the flows and transformation of goods from the raw materials stage (extraction), through to end users, as well as the associated information flows and material and information flow both up and down the supply chain” (p.4). The authors further amplify that the chain “includes systems management, operations and assembly, purchasing, production scheduling, order processing, inventory management, transportation, warehousing, and the customer is in turn a supplier to the next downstream organization until a finished product reaches the ultimate user”(p.4).

A typical shipping scenario begins with the shipper contacting a freight forwarder when the shipment is ready for delivery to the consignee. The freight forwarder then evaluates the best bargain flight connections and then books space for the cargo. After the air carrier confirms the booking, the freight forwarder usually arranges for the cargo pick up from the shipper and brings it to the airport. After the required documentation is completed, the cargo is checked-in at the airport terminal. At the destination airport, the cargo is unloaded, sorted and delivered to the consignee(s) by the freight forwarder. The process does not end there as the concept of integrated reverse logistics has taken root. According to this concept, the supply chain has the responsibility of taking back a defective item together with its financial and environmental ramifications. The advantages of this concept are; environmental factor of disposal are addressed centrally by the company, allows product defect analysis, and leads to customer retention or loyalty which is very important factor in any business growth.

European Logistics Infrastructure: Challenges and Responses

The European Logistics Infrastructure poses many challenges due to the stages of transition the various countries comprising the European Union are in. The problems of nationalism impinge on deciding EU wide logistics arrangements as each country tries to protect its own national interests. Europe’s high per capita income translates into higher wages and greater costs when compared to the cheap services available in the East. European operators also have to factor national propensities such as “the French 35-hour week introduced by a socialist government in 2000-02” (The Economist, January 2008, p.41) to manage their European workforce. The EU has various supply chain systems in place which compete with each other and there are a number of operators resulting in overcapacity in some fields and under-representation in others. In this Babel of supply chain structures, are country specific environmental laws which require to be taken cognizance of. According to Mead (1994) , the EU has a range of bureaucracy styles ranging from ‘Marketplace’ bureaucracy as found in UK, Scandinavian counties and Ireland to ‘Full’ bureaucracies such as those found in Belgium, France and Portugal (p.181, 182). These bureaucratic models have been responsible for delayed execution and excessive documentation. Intel’s Head of Financial service, Nigel Woodward (2007), states that “Now, the goods arrive before the physical documentation can be produced because the supply chain was designed for the days of ships…Today, a lot of that documentation is redundant” (p.2). Adding to the woes of a supply chain manager, are the new stipulations for added security. According to UNCTAD report on Maritime Transport (2007), “At the European Union level… By way of amendments to the Community Customs Code, it introduces a number of measures aimed at increasing the security of shipments entering or leaving the EU” (p.104). Rising oil prices have a knock on effect on consumer spending and a cascading effect on transportation charges. The EU, North Sea resources notwithstanding, depend heavily on the Middle East and Russia for their oil supplies. Disruption of either can have serious deleterious effects on the entire supply chain. Congestion at the Seaports and Airports are causing logistics bottlenecks. The EU member countries have realized the deficiencies of their system and corrective measures have been envisaged. The move has been towards ‘Source-Make-Plan-Deliver’ as a common entity. Countries now consult each other for devising a customer service strategy. The EU is moving towards full implementation of a centralised European Distribution structure. In a centralized setup, the company keeps its inventory for the European markets in a centrally located European distribution centre and serves the entire Europe based customers from that centre. As customs interference has reduced, intra-EU trade goods are moving speedily. This helps save transportation costs and efficient management and control of stocks through economies of scale. An effort is on the way to upgrade airport facilities as has been done at the Charles De Gaulle Airport in Paris. A move to incorporate all EU countries into the EU common taxation laws is in progress.

References

Boeing Corporation. World Air Cargo Forecast 2008-2009. Web.

Bloch, P. Building Customer Value and Trust. Web.

Brown, S, Lamming, R, Bessant, J & Jones, P. 2005. Strategic Operations Management. Web.

Bryce, J.M. 2009. Developing Sustainable Transportation Infrastructure. Web.

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Keegan, W.J. 2002. Global Marketing Management.7th edition. Singapore: Pearsons education Inc.

Mead, R. 1994. International Management. 3rd edition. Malden: Blackwell Publishing. 2005.

Monczka, R, Trent, R & Handfield, R. 2002. Purchasing and Supply Chain Management. KY: South-Western Thompson.

O’ Connell, J, Mason, B & Hagen, J. 2005. The Role of Air Cargo in California’s Export Trade. Web.

Schwarz, M. 2007. Developing the Trans-European Transport Networks (TEN-T) And the Role of the Corridors. Web.

The Economist. Sarkozy’s Testing Year Ahead. New York: The Economist 2008 Vol.386 No.8561, 41-41.

US International Trade Commission Report. May 2005. Logistics Service: An Overview of the Global Market and Potential Effects of Removing Trade Impediments. Investigation no,332-463 USITC Publication 3770. Web.

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UNCTAD report. Review of Maritime Transport 2007. Web.

Woodward, Nigel. 2007. White Paper Supply Chain Innovation: Trends, Issues and Future Opportunities. Intel Corporation Roundtable Report. Web.

Appendix

Refers to Page 1:

Figure one

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