GLOBAL LOGISTICSDomestic and Global Logistics:What makes Global logistics different from logistics in general?Firstly, the fundamental concepts & functions are the same, however: Global logistics is fuelled by the process of globalisation world as the potential market sourcing, manufacturing, researching,raising capital, selling Global logistics gains significant attention mainly because of itscomplexityanduncertainty(associated with the geography of Global Logistics) Global logistics management is more complicated because of the differences in the Global trading environmentWe can see four similarities: Structural characteristics are the same (both involve managing the movement and storage of products) Similar Framework (linking supply sources, plants, warehouses and customers) Functional processes are the same (inventory management, warehousing, order processing, carrier selection, procurement and vendor payment) Information is crucial to both (customer service, inventory control, service quality monitoring and cost control)On the other hand, the differences are suggested as followed: Different operational domains Systems and user capabilities vary widely Distance Usually longer supply chains Global logistics is difficult to manage through one platform, because the users are large and spread around the worldIn addition, these differences must be viewed in two parts: Part of Global logistics systems where the flow of network ties one nation to another. The differences in this system can be classified as basic differences, Which includes:o Physical distanceo Currency variation and exchange rate differenceso Border-crossing regulations and documentationo Transportation modes The other part of an Global logistics system is that set of subsystems which exists within each nation, state, or market. The differences here are classified as country-specific differences (e.g. Cultural, Political, Governmental, Infrastructural), which includes:o Intermediaries varyo Reliability of carriers may be differento Computation of freight rates may be differento Packaging and labeling requirements differ

Furthermore, briefly here are the impacts of Global logistics: Logistical costs are 10% to 30% of the total landed cost of an Global order Logistics has become an instrument of competitive advantage in Global trade Factors necessary for the use of logistics as a competitive tool: Close collaboration with suppliers and customerso Technologically advanced information processing and communication exchange capabilitieso An integrated business infrastructureThe next section is showing the complexities of Global logistics: Nature of Global Marketso tastes, languages, cultures, traditions, political system Nature of Procurement or Sourcingo Different expectations from customer service, difficulty of control over deliveries and inventories, problem with quality control (cost, quality, environment, etc.) Global Tradeo divergent currencies & exchange rates, complex documentation and terms of sale, more intermediaries Divergent Nations and Trading Blocs (192)o tariffs and non-tariff barriers, preference for national carriers, requirement for joint ventures with national carriers Multinational or Global corporationso Intra-firm trading Differences in Infrastructure: (concord)o Size of ports, roads, railways, railcars, warehouses Different Customs and Legal Framework:o Environmental regulations, customs & labelling laws (recent trade security regulations from U.S. Customs; Security and Accountability for Every Port Act)

Additionally, there are five points illustrating the magnitude of Global logistics: The logistics systems have had the effect of shrinking the world, empowering competitive trade. Lower labour cost from Global outsourcing is a critical component of the supply chain. Focused manufacturing fits well into an Global logistics strategy To gain a competitive advantage, global sourcing is a given for companies engaging in global marketing strategies. The longer the supply chain, the more cooperation and coordination is required between production, marketing, purchasing and the logistics management.As we can see, with the global market developing, trade barriers continue to fall, which is accelerating global business activities. And this results from the general homogenisation of global needs and wants. Firstly, Local needs suborned to lower-priced, higher-quality products. Secondly, preferences for Global products can also be related to attempts to copy other more prosperous cultures (e.g. Coca cola, MTV, BBC, Sony, McDonalds, Burger King, and KFC)

To effectively serve global markets, firms should consider adopting integrated worldwide strategies. These firms are more likely to search for global sourcing for materials and components, depots, assembly, distribution centers, and logistics. Specifically, Global firms typically design synchronous strategies around technology, marketing, manufacturing, and logistics.

For global markets, customer service strategies contain four characteristics: Marketing becomes standardised yet customised (advertisements/commercials) Product life cycles shorten, sometimes to less than one year (cars 5, PCs 3, Clothing 1 season) Outsourcing and offshore manufacturing are becoming more prevalent. Marketing and manufacturing activities and strategies tend to converge and be better coordinated in firms operating globally.

As a result, Logistics networks tend to become more expansive and complex. Reasonably, lead times and inventory may rise and Logistics activities must be operated as a system to provide a countervailing force. Most importantly, the service needs of Globally-dispersed customers must drive the design and implementation of the logistics system.Conclusion Logistics has become an important area of business activity in recent times It is a critical part of supply chain management With the development of new technology and processes, logistics-related costs have been declining globally Logistics adds place and time value to products Logistics has an important relationship to manufacturing, marketing, finance, and other areas of companiesGlobal CorporationGlobal company is more than a multinational company. Global company operates as though the entire world were a single market, with close integration between various foreign subsidiaries.In the global business, materials and components are sourced world-wide, manufactured off-shore and sold in many different countries with local customisation. They are also the leading beneficiaries of globalisation. Here is a table to show you the example:

Global supply Chain StrategyGlobalisation and Logistics Global corporations are a driving force behind the developments in international logistics and shipping. Products are sourced, manufactured and marketed in many countries Complex and simultaneous decisions need to be made about many logistics factors such as inventory location, consignment size and transport times over vast distances. Important decisions about production and appropriate levels of customer service will also have a serious impact on logistics.Here is a conceptual map of supply chain:And then, this is the international supply chain:Moreover, we have three common features of global business, which are: Materials and components are sourced in more than one country Assembly and manufacturing take place in more than one country Products are marketed world-wideAs a result, here is the figure to show the business environment of Global Organisations and Production Location Decisions:The next is a case of TV manufacturing industry to show you the impact of globalisation on business: Prior to 1970, TV manufacturing (like most manufacturing 30 years ago) was vertically integrated (a single manufacturer designed, produced and assembled each part). TV production was concentrated in US, Japan and Germany three top industrialised nations. Today's supply-chain model is - virtual integration (companies rather than manufacturing every component depend on a virtual and dynamic co-ordination of external suppliers. This led to a large degree of standardisation in product design and hence manufacturing simplicity. By standardising TV sets, companies are able to easily replicate the manufacturing process around the world. Arguably, this is the single most important innovation that has set the wheels in motion for the globalisation. TV sets are no longer manufactured, but assembled. Over 40 countries from Ethiopia to the US have TV assembly lines. More than a dozen new factories open yearly in less developed countries. A handful of them close or shift to better locations. TV makers will keep moving to low-cost, high-skill labour locations that become available as less-developed countries engage on the road to development. A TV set does not travel a long way from its assembly point to the store, but its internal components travel a long way to get to the assembly point. It's cheaper to ship millions of small parts bought at competitive prices than to build millions of TVs at a single location and ship them around the world. This phenomenon is not exclusive to TV manufacturers but also to other sectors. Global corporations continuously switch part of their business operations to low-cost countries. A desirable low cost location has plenty of skilled workers, affordable labour rates, a large market at proximity and choice of component sourcing either in the same country or within local areas. Previously suppliers had to be located nearby assembly plants, today they don't have to. Advances in logistics allow the precise co-ordination of shipments according to a complex optimisation of JIT delivery schedules.On the other hand, here are three factors why globalise is needed: In search of raw materials Moving raw material from countries with surplus natural resources. In search of cheap labour Companies taking advantage of low regional labour costs to maximise profitability on labour-intensive manufacturing (South East Asia, China, India, and Bangladesh). In search of markets Companies taking advantage of the globalisation process and lowering of global trade barriers.

Global StrategiesI. Concentrating production at a few major sites The benefits of concentration are related to economies of scale, which allow longer production runs and hence overall cost reduction Concentration also permits more rapid introduction of new products into a wider market Prerequisites required for concentrationo Products must have a significant degree of commonality.o Transport costs must be low relative to other resource costs (raw materials and storage).o Transport must be reliable.o The company must have centralised marketing control. Concentration of production create problems for the manufacturero Ford Motor Company concentrated production of Fiesta at Saarlouis (Germany), Dagenham (England) and Valencia (Spain).o It would be cheaper to have a single mega production point.o But this might be a dangerous example of putting all one's eggs in one basket, should there be transport disruption such as a port strike or a lorry border blockade.

II. Limited range of production (focused production at a single site) Focused Factory - a company produces a few products to achieve very high volumes economies of scale. Companies are able to switch production from one factory to another depending on changing local circumstances and exchange rates.o VWs future is pessimistic. In US, its cars are sold at a loss, because of the strength of the euro and the relative inefficiency of VWs German factories. VW is unable to downsize its labour force.o VWs bizarre decision to axe low-cost production in Belgium, Spain and Portugal and to repatriate production to more costly German plants is to make better use of its capacity. Focussed production create problems for the manufacturero Transport costs and delivery lead times are likely to increaseo Special local market features (e.g. other language labelling) may be requiredo A single customer order may require a range of products manufactured at different plantso The company may be slow to respond to changing market circumstances

III. Centralized Inventories and Information The concentration of inventory can reduce the overall level of inventory in the system or supply chain. Gillette wanted a two-day order-to-delivery time across Western Europe, which could be achieved by eight warehouses instead of thirteen. Energizer (European wing of Eveready Battery) reduced its distribution centres from 60 to 6 in Western Europe, with the aim of focusing on two European heartland warehouses with satellite distribution centres outsourced to third parties.

IV. Low-cost sources of supply Outsourcing to low-cost countries has become very common in recent years Outsourcing continues despite the obvious difficulties in purchasing from another countryo Language difficultieso Currency problemso Differences in legal systemso Contract arrangements for transporto Contract arrangements for insurance in transito Customs clearance and documentationo Methods of payment Apart from these difficulties, there are issues associated with remote suppliers that are more closely related to modern logisticso Longer, less predictable delivery timeso Small, frequent JIT deliveries difficulto Quality difficulties (especially returns and replacements) lead to higher inventorieso Difficult communicationso Suppliers have many customers, leading to poor customer serviceo Low productivity of suppliers

V. Acquisitions and mergers Alliances (e.g. joint ventures, licensing arrangements) are aimed at minimising the risk undertaken by a single firm. Such developments can have far reaching implications for logistics companies. For example, if two merged manufacturers have been using different logistics providers, they may decide to consolidate their business with only one provider.

Global Supply Chains and LogisticsClashes between the demands of globalisation and time-based competitiono Improvements in manufacturing can be made through global concentration or focusing of productiono However, the goods will have to be taken to market often on the other side of the world Modern logistics and Global Distributiono Minimal inventory levels, with small shipments being delivered close to the time of customer demando Given the large distances from production to market, there are particular problems for inventory managemento On the one hand, there is scope for effectiveinventory management with fewer inventory locations. However, where exactly inventory is located requires careful consideration Five factors critical to global supply chains:o Extended supply lead timeso Lengthy and unreliable transit timeso Complex consolidation optionso Complex freight options; ando Shipping of intermediate components Given the large distances in global transport, a company with a few manufacturing sites worldwide would have problems of supply to a global market One solution is to provide intermediate inventory points between manufacturing and the market. However, an increase in the inventory points increases the overall level of inventory in the supply chain

Principle of Postponement in Global Distributiono Requires the delay of specific product decisions until the last moment, enabling a flexible response to marketso Due to uncertainty, local managers in the market over-order and raise inventory safety stock levels. This leads to an increase in transport costo The principle of postponement advocates the maintenance of a generic stock until the last possible moment, when the goods are then customised to suit the needs of a particular marketo Zinn and Bowersox - five different types of postponement (labeling, packaging, assembly, manufacturing, and time)

Global Supply Chains and Low Transport Costs Beginning of 20th century - International trade was dominated by raw materials (wheat and iron ore carried as bulk cargo). With their low prices, the cost of transporting them was relatively high Since then the world economy has evolved and manufactured products have grown in importance Many modern products (those with advanced technology) have a high value that transport costs form a negligible proportion of total costs and are of limited importance in decisions about production location Transport costs continue to be significant for many other products. For example, steel produced in Asian countries cannot be exported if transport costs exceed around 50% of steel production costs Scale economies in bulk shipping have been gained through specialisation and the use of larger ships, thus generating cheap transport Specialised ships such as chemical carriers, LPG and LNG carriers can carry large amounts of cargo and can load and discharge efficiently Global supply chains are facilitated by low transport costs Freight transport costs have diminished relative to costs of many other products, so that it is cheaper to transport goods around the world than before Between 1980~1999, the value of world trade grew at 12% per year, whilst total freight costs during this period increased by only 7%, demonstrating the falling unit costs of marine transportation. Here are two figures to show the typical ocean freight costs:

The transport cost element in the shelf price of consumer goods continues to be marginal For example, transport costs account for only 2% of a television shelf price and only 1.2% of a kilo of coffee The cost of shipping continues to fall sharply, which has accentuated the global manufacturing process In the past, all the production processes for manufactured goods were completed within the boundaries of a single nation At present, with relatively low transport costs, outsourcing of components from any part of the world is possible Fragmentation of production mostly takes place between areas with low trade barriers and/or transport costs

Chapter IIIntroduction to International Logistics : Logistics in global economy, Logistics is also important on the global scale. Efficient logistics systems throughout the world economy are a basis for trade and a high standard of living for all of us. Lands, as well as the people who occupy them, are not equally productive. That is, one region often has an advantage over all others in some production specialty. An efficient logistics system allows a geographical region to exploit its inherent advantage by specializing its productive efforts in those products in which it has been an advantage by specializing its productive to other regions. The system allows the products landed cost (production plus logistics cost) and quality to be competitive with those form any other region. Common examples of this specialization have been Japans electronics industry, the agricultural, computer and aircrafts industries of United States and various countries dominance in supplying raw materials such as oil, gold, bauxite, and chromium. Furthermore Logistics has gained importance in the international marketing with the following reasons: 1. Transform in the customers attitude towards the total cost approach rather than direct cost approach . 2. Technological advancement in the fields of information processing and communication. 3. Technological development in transportation and material handling. 4. Companies are centralizing production to gain economies of scale. 5. Most of the MNC organizations are restructuring their production facilities on a global basis. 6. In many industries, the value added by manufacturing is declining as the cost of materials and distribution climbs. 7. High volume data processing and transmission is revolutionizing logistics control systems.8. With the advancement of new technologies, managers can now update sales and inventory planning faster and more frequently, and factories can respond with more flexibility to volatile market conditions. 9. Product life cycles are contracting. Companies that have gone all out to slash costs by turning to large scale batch production regularly find themselves saddled with obsolete stocks and are unable to keep pace with competitors new-product introductions. 10. Product lines are proliferating. More and more product line variety is needed to satisfy the growing range of customer tastes and requirements, and stock levels in both field and factory inevitably rise. 11. The balance of power in distribution chain is shifting from the manufacturers to the trader. Stages of international development, managing theEmployees of a major international third-party logistics provider refused to work in a distribution facility in Mexicowhich they thought was haunteduntil the 3PL arranged for exorcism rites to be performed.A majorelectronicsfirm with high quality standards discovered that factory personnel in some countries were modifyingquality testingscores to make it appear that those factories were making perfect product.At an employee-of-the-month ceremony, the American manager of a facility in China recognized a worker's superior performance by giving him a clock. "You could hear a gasp throughout the audience. In China, giving a clock as a present signifies oncoming death," says Frank W. Lange, director of international development for MenloWorldwide Logistics, Redwood City, Calif.These examples illustrate how cultural complexities can add layers of challenges toglobal logisticsandsupply chain management. Whendoing business internationally, "people with the best intentions can create huge problems for themselves," Lange says. "It's very easy to take a misstep.""If you throw very good U.S.-based logistics experts into another country, no matter how smart they are, they will make all sorts of mistakes unless they're sensitized tocultural differences," says Paul S. Bender, a consultant with Supply Chain Executive Advisors LLC, Miami, Fla.With the United States' percentage of the world economy half what it was 50 years ago, "there's increasing pressure to dobusinessglobally," Bender says. "Companies have to be prepared to do international and global logistics, not just domestic."THE THREE STAGES OF GLOBALThe first step to preparing forinternational logisticsis understanding what stage of global business your company is in currently.Companies that simplyexport and importproduct are in the first stage of globalization, explains Gene Tyndall, associate director of the Center for Advanced Supply Chain Management at the University of Miami, Florida. This includes companies that export products to countries where they are sold, as well as companies in the United States (or elsewhere) that import everything they sell within their domestic market.Companies in Stage Two are doing business internationally. They often work through distributors or subsidiaries, and may have some regional production and sourcing. They tend to have decentralized management and operations, Tyndall says, and different processes and IT in place.Companies in Stage Three are considered global, have global brands, and do business around the world. "Global companies have global sourcing and distribution, and more centralized planning," Tyndall says. "They think globally, operate regionally, act locally." A global company will have common processes, so that, except for local differences, a distribution center in China will operate similarly to a DC inOhio.Operating globally creates different requirements than operating internationally. "If you move to a global proposition, you have to think in terms of the entire organization, which can no longer be headquarters-driven. Instead, it should be network-driven," saysNicholasJ. LaHowchic, president and CEO of LimitedLogistics ServicesInc., Columbus, Ohio.Having a global mindset requires a new way of looking at how the company does business, internally as well as externally. "For example, a global company would ask, 'are our accounting, business, andsalespractices prepared to take us into the areas our customers demand that we go? Do we have a diversified workforce with many cultures?'" says Frank Lange.INCREASED COMPLEXITYWhether you work internationally or globally, the challenges are far different than those of working domestically. "The complexity is much higher. Risks are much higher. The uncertainty is much greater," Bender says.For example, logisticians working internationally "have to understand currency implications from a logisticspoint of view," he says. "Financial matters such as exchange rates can change the selection of suppliers, transportation modes, inventory levelsthey can have a direct impact on very important logistics variables."Distance is also a critical factor in international business. "Distance always provides a challenge logistically," says Robert Gifford, vice president of global logistics for Hewlett-Packard Company,Palo Alto, Calif. "When you buy your chips from Korea to go to China to be assembled for a product launch in Indianapolis, that's much more challenging than having the chips come in from Chicago." HP serves customers in more than 160 countries on five continents.Other factors such as differences in inflation and political risk can come into play in international and global logistics.In addition, "you're putting together a supply chain that has all the nuances of each region. TheChinese New Year, theCherry Blossom Festival, Oktoberfest, and theFourth of Julythose all play into operations," Gifford says. The hard part is that you don't have the familiarity around the world that you have with occurrences in your home country."I know when the Fourth of July is coming, but I'm not as familiar with the Australian holiday forindependence. If that interrupts my supply chain, particularly in a just-in-time environment, the ramifications could be big," he says.Add cultural differences to the mix, which "are probably the greatest area of complexity," Bender says, "and it becomes even more of a challenge. That's where most mistakes tend to be made."While most large companies have or can get the expertise required to cope with internationalfinance, exchange rates, and inflation, "they may not have the smarts to find out the differences among people, including cultural, historical, language, and laws," he says.Despite what Bender calls "a tendency to assume that the rest of the world must be very similar to our part of the world, that what works here will work everywhere," cultural differences can be tremendously important."Cultural differences exist whether you operate domestically, internationally, or globally," Tyndall says. The relevance of culture increases sharply as companies go global.Logistics professionals who don't pay attention to such cultural differences "could make significant mistakes that would create a veiled resistance to others doing business with them," Bender warns. Breaking taboos in another culture may cause others not to want to do business with you, or introduce barriers to achieving optimum results.Resolving cultural differences will never happen by itself. Doing so requires sensitivity, awareness, and savvy. But becoming globally competent means more than knowing "how to usechopsticks in Asia or drink wine in France," notes Frank Lange, who has been involved in international business for 20 years.Some areas where cultural differences may come into play in the logistics/supply chain arena are:Establishing relationships."Cultural differences can have a huge impact when setting up an initial relationship," says Gene Tyndall. "In the United States, you may be able to do it over the phone. In Asia, it takes face-to-face time, contact, and trust."In the United States, business is business. As long as there's a profit, we'll tend to do business with someone. That's not the case everywhere," he notes. "In Asia, for example, people won't do business with you unless they feel very comfortable with you. Selling yourself and establishing a cordial relationship, is a prerequisite to doing business."Establishing such relationships doesn't happen overnight, Bender warns. "You have to be very patient. If you push, you may drive people away."Use of third parties."In some parts of Asia, inviting a third party to design and implement a supplychain managementmodel for your business can imply you have not done your job properly," says Rick Moradian, APL Logistics president for Asia/Middle East. "This type of scenario must be treated with sensitivity and highlights the need to have team membersregardless of their nationalitywho are familiar with the cultural and linguistic sensibilities of client companies."Contracts."In the United States, we believe firmly that a commitment, a contract, has to be honored. If you sign the contract, you either live by it or you're taken to court," Paul Bender says. But in other parts of the world, "a commitment is a statement of intent, and if the situation changes significantly, you're not expected to fulfill your part of the commitment."For example, a major devaluation in your currency or your supplier's currency may cause your trading partner to feel that it's no longer in their interest to honor the commitment. "While that's unacceptable in the United States, it's perfectly acceptable in their culture," says Bender.Differences in working style."When you deal in an international situation, you have to be aware of people chemistry," says Robert E. Murray, president, REM Associates, a management and supply chain consulting firm based in Princeton, N.J. Murray and colleagues helped a global consumer products company implement a new production planning and scheduling system in 10 countries in the Far East, Middle East, Africa, and Central and South America.

INTERNATIONAL LOGISTICS SYSTEM ELEMENTS The following are the system elements of logistics: 1. Order processing 2. Warehousing 3. Inventory control 4. Transportation 5. Information monitoring 6. Facilities Let us discuss the above said Elements in detail.1. Order processing: The starting point of physical distribution activities is the processing of customers orders. In order to provide quicker customer service, the orders received from customers should be processed within the least possible time. Order processing includes receiving the order, recording the order, filling the order, and assembling all such orders for Transportation, etc. the company and the customers benefit when these steps are carried out quickly and accurately. The error committed at this stage at times can prove to be very costly. For example, if a wrong product or the same product with different specifications is supplied to the customer, it may lead to cancellation of the original order (apart from loss in the credibility of the firm). Similarly, if the order is not executed within a reasonable time, it may lead to serious consequences. High speed data processing techniques are now available which allow for rapid processing of the orders. 2. Warehousing: Warehousing refers to the storing and assorting products in order to create time utility. The basic purpose of the warehousing activity is to arrange placement of goods, provide storage facility to store them, consolidate them with other similar products, divide them into smaller quantities and build up assortment of products. Generally, larger the number of warehouses a firm has the lesser would be the time taken in serving customers at different locations, but greater would be the cost of warehousing. Thus, the firm has to strike a balance between the cost of warehousing and the level of customer service. 4. Inventory Control and Management: Linked to warehousing decisions are the inventory decisions which hold the key to success of physical distribution especially where the inventory costs may be as high as 30-40 per cent (e.g., steel and automobiles). No wonder, therefore, that the new concept of Just-in-Time-Inventory decision is increasingly becoming popular with a number of companies. The decision regarding level of inventory involves estimate of demand for the product. A correct estimate of the demand helps to hold proper inventory level and control the inventory costs. This is not only helps the firm in terms of the cost of inventory and supply to customers in time but also to maintain production at a consistent level. The major factors determining the inventory levels are: The firms policy regarding the customer service level, Degree of accuracy of the sales forecasts, Responsiveness of the distribution system i.e., ability of the system to transmit inventory needs to the factory and get the producs in the Market. The cost inventory consists of holding cost (such as cost of warehousing, tied up capital and obsolescence) and replenishment cost (including the manufacturing cost). 4. Transportation: Transportation seeks to move goods from points of production and sale to points of consumption in the quantities required at times needed and at a reasonable cost. The transportation system adds time and place utilities to the goods handled and thus, increases their economic value. To achieve these goals, transportation facilities must be adequate, regular, dependable and equitable in terms of costs and benefits of the facilities and service provided. 5. Information monitoring: The physical distribution managers continuously need up-to-date information about inventory, transportation and warehousing. For example, in respect on inventory, information about present stock position at each location, future commitment and replenishment capabilities are constantly required. Similarly, before choosing a carrier, information about the availability of various modes of transport, their costs, services and suitability for a particular product is needed. About warehousing, information with respect to space utilization, work schedules, unit load performance, etc., is required. In order to receive all the information stated above, an efficient management information system would be of immense use in controlling costs, improving services and determining the overall effectiveness of distribution. Of course, it is difficult to correctly assess the cost of physical distribution operations. But if correct information is available it can be analyzed systematically and a great deal of saving can be ensured. 6. Facilities: The Facilities logistics element is composed of a variety of planning activities, all of which are directed toward ensuring that all required permanent or semipermanent operating and support facilities (for instance, training, field and depot maintenance, storage, operational, and testing) are available concurrently with system fielding. Planning must be comprehensive and include the need for new construction as well as modifications to existing facilities. Facility construction can take from 5 to 7 years from concept formulation to user occupancy. It also includes studies to define and establish impacts on life cycle cost, funding requirements, facility locations and improvements, space requirements, environmental impacts, duration or frequency of use, safety and health standards requirements, and security restrictions. Also included are any utility requirements, for both fixed and mobile facilities, with emphasis on limiting requirements of scarce or unique resources. CHAPTER IIIINTERNATIONAL SOURCING Global SourcingOne of todays major business challenges specificly impacting logistical management is the dramatic increase in international sourcing, particularly from low-cost countries such as China. Firms in virtually all durable goods industries are investigating Asia, Eastern Europe, Latin America, and Africa as potential sources for finished goods or, at least, component parts. This section reviews the rationale for international sourcing from low-cost countries, identifies some of the specific challenges, and offers some guidelines regarding sourcing strategy.Rationale for Low-Cost-Country SourcingIncreased need for global competitiveness is driving many firms, particularly those in durable and fashion industries, to identify and establish relationships with suppliers in low-cost countries. There are a number of justifications for such sourcing initiatives. First, sourcing from countries with low wage rates typically reduces manufacturing cost. While such strategies may reduce manufacturing cost, some firms do not consider the total cost impact of international sourcing particularly with respect to the logistics cost components of transportation and inventory. Second, seeking out suppliers in low-cost countries can also increase the number of possible sources and thus increase the competitive pressure on domestic suppliers. Third, low-cost-country sourcing can increase the firms exposure to state-of-the-art product and process technologies. Without pressure from global suppliers, there may be reluctance on the part of domestic suppliers to investigate or invest in new technologies because they have significant assets tied up in older technologies. Conversely, global suppliers may place significant focus on new technologies to establish a competitive position in foreign markets regardless of the issues discussed earlier regarding extended supply chains. A final rationale for low-cost-country sourcing is to establish a local presence to facilitate sales in the international country. For example, while the U.S. automobile industry is significantly increasing sourcing from low-cost countries to reduce component cost, it is also seeking to facilitate automobile sales in the local country. Due to political or legal constraints, it is often necessary for a firm to have local relationships and production operations to be allowed to sell their product in the local country. The combination of these makes a strong case for sourcing from a low-cost country, but it is necessary to also consider the challenges.Challenges for Low-Cost-Country SourcingWhile the rationale for low-cost-import sourcing is substantial, there is also a long list of issues and challenges related to such sourcing strategies. These issues and challenges are further complicated by the fact that the benefits and costs related to low-cost-country sourcing accrue to different organizational units. Procurement or manufacturing may receive the benefits through lower-cost materials or components. Many of the costs and the challenges to ship and guarantee delivery of the materials are the responsibility of logistics. Benefits and costs must be integrated across the full supply chain process in order to make the correct sourcing decision.The first challenge is the identification of sources capable of producing the materials in the quality and quantity required. While it is becoming easier to achieve the quality objective, ensuring that the potential supplier has the ability to meet volume and seasonal fluctuation demands in a suitable time frame often remains a challenge.The second challenge considers the protection of a firms intellectual property as products or components are produced and transported. The suppliers and countries involved need to have legal constraints in place to protect product designs and related trade secrets.The third challenge relates to understanding import/export compliance issues. There may be government regulations regarding the volume of a commodity that can be imported before duties or other restrictions are enforced. The percentage of materials that are foreign-sourced may also restrict a firms ability to sell to select customers. Government contracts may require a specific level of domestically made components. For example, if the contract requires that the product is Made in the U.S.A., 95 percent of the material must be of domestic origin.The fourth challenge relates to communication with suppliers and transportation companies. While the procurement negotiation with low-cost countries is not easy, there is often a greater difficulty in dealing with carriers, freight forwarders, and government customs as a result of time zone, language, and technology differences.The fifth challenge is the need to guarantee the security of the product while in transit. Not only does supply chain security require that the product is secure, the process must also secure containers and vehicles involved that are both full and empty.The sixth challenge concerns the inventory and obsolescence risk associated with extended transit times. With the longer transit times associated with low-cost-country sourcing, it is not uncommon for the firm to have one or two months supply of product in transit, which must be counted as an asset and incur related inventory carrying cost. Extended leadtimes also increase the potential for obsolescence, as orders have longer leadtimes and there is generally little flexibility for change. Such extended leadtimes also can impact recovery when a quality issue develops. It is not unusual for firms to fly components from offshore suppliers to recover from unexpected quality problems or delayed shipments.The final challenge, which synthesizes the previous ones, focuses on the need to understand the difference between piece price and total cost. While the piece price may include the material as well as direct and indirect labor, the total cost perspective needs to consider other cost elements, including freight, inventory, obsolescence, duties, taxes, recovery, and other risk considerations.Guidelines for SourcingThe decision to source material and components domestically or from a low-cost country is a complex one. While direct and indirect product costs represent one major factor, there are many other factors that must be considered and weighed appropriately. Products and components that have extended times between manufacturing changeovers are ideal for low-cost-country sourcing. A counterexample would be the life cycle for an electronics component, which is typically quite short and therefore would generally trend toward domestic sourcing. Products and components that have numerous variations should also generally be domestically sourced because the extended leadtimes associated with low-cost-country sourcing make it difficult to forecast the precise mix of product that will be demanded. Products or components with high labor content should take advantage of the typically low labor rates in low-cost counties. Products or components with high intellectual property content should be sourced domestically, as the legal systems in many of the low-cost countries do not provide adequate trade secret protection. Domestic sourcing is generally appropriate for products and components with relatively high transport cost such as those that are bulky or damage easy. Due to increasing energy prices, many firms are beginning to reconsider more localized sourcing. Products or components with relatively low value are ideal for low-cost-country sourcing, as the inventory carrying cost while it is in transit is not significant. Products and components that are constrained for security or other types of import restrictions by a domestic government should tend toward domestic sourcing. For example, there may be customs delays in importing electronic goods when the supplier does not have the trust of the importing government because of the potential for importing contraband. Finally, products or components that have a high degree of transport uncertainty because of relatively low volumes or location on trade lanes with limited service would suggest domestic sourcing.There is no simple answer regarding which products or components should be domestically sourced, as a number of the criteria are somewhat qualitative. lists the general sourcing criteria.The final determination depends on the specific item and the firms expertise. As firms increase their global operations and marketing efforts, logistics managers should be increasingly involved to provide a realistic assessment of the total cost and performance implications.Sourcing GuidelinesAs a supply chain strategy becomes more global, increased complexities are encountered. These complexities result from longer distances, demand differentials, cultural diversity, and complex documentation. Nevertheless, firms will increasingly confront the need to expand operations into the global arena. Strategies to achieve a share of the rapidly expanding world market range from export/import to local presence to true globalization. Regardless of the strategic focus, success will, to a large extent, be dependent upon a firms logistical capabilities.Supply chain securitySupply chain securityrefers to efforts to enhance thesecurityof thesupply chain, the transport andlogisticssystem for the world'scargo. It combines traditional practices ofsupply chain managementwith the security requirements driven by threats such asterrorism,piracy, and theft.Typical supply chain security activities include: Credentialing of participants in the supply chain Screening and validating of the contents of cargo being shipped Advance notification of the contents to the destination country Ensuring the security of cargo while in-transit via the use of locks and tamper-proof seals Inspecting cargo on entryThere are a number of supply chain security initiatives in the United States and abroad, including:1. The Customs Trade Partnership against Terrorism (C-TPAT), a voluntary compliance program for companies to improve the security of their corporate supply chains.2. The World Customs Organization (WCO) adopted the Framework of Standards to Secure and Facilitate Global Trade in 2005, which consists of supply chain security standards for Customs administrations including Authorized Economic Operator(AEO) programs.3. The Container Security Initiative(CSI), a program led by U.S. Customs and Border Protection in the Department of Homeland Security focused on screening containers at foreign ports.4. The Global Trade Exchange, a DHS data-mining program designed to collect financial information about shipments, with the objective of determining safety of cargo shipments are safe.5. Efforts for countries around the world to implement and enforce the International Ship and Port Facility Security Code (ISPS Code), an agreement of 148 countries that are members of the International Maritime Organization (IMO).6. Pilot initiatives by companies in the private sector to track and monitor the integrity of cargo containers moving around the world using technologies such as RFID and GPS.7. The International Organization for Standardization have released a series of Standards for the establishment and management of supply chain security. ISO/PAS 28000 Specification for Security Management Systems for the Supply Chain, offers public and private enterprise an international high-level management standard that enables organisations to utilise a globally consistent management approach to applying supply chain security initiatives.

CHAPTER IVOutsourcing and Logistics Service Providers: IntermediariesWhat is Third Party Logistics?Third-party Logistics (abbreviated 3PL): The use of an outside company to perform all or part of the firms materials management and product distribution function (Prof. Simchi-Levi, 2000).

3PL Services Provider: A firm which provides multiple logistics services for use by customers. Preferably, these services are integrated together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers and finished products from manufacturers to distributors and retailers.This is a conceptual modal of Global Logistics (Long, Complex, Supply Chains Often with Disparate Systems):

Notes: TMS - Transportation Management System;

ERP - Enterprise Resource Planning;

WMS - Warehouse Management System;

DMS - Distribution Management System

CRM - Customer Relationship Management

Generally, we can list out three functions of 3PL:

The functions performed by the third party can encompass the entire logistics process or selected activities within that process. 3PL involves logistics functions such as transportation, warehousing, cross-docking, inventory management, packaging and freight forwarding that have traditionally been performed within the organisations. 3PL providers specialise in integrated warehousing and transportation services that can be scaled and customised to customers needs based on market conditions and the demands and delivery service requirements for their products and materials.

Here is a figure to show these functions:

Additionally, we have four points of Characteristics of 3PL: Perform outsourced logistics activities.

Process management / multiple activities.

Mutually beneficial and risk-sharing relationship.

Long-term commitments (1~ 3 years).

And also, here are the five elements of 3PL:

Transportation: Shipping, forwarding, Contract delivery, Household goodsrelocation, load tendering, Brokering

Warehousing: Storage, receiving, assembly, return goods, labelling

Inventory: Forecasting, location management analysis, network consulting, layout designing

Information systems: EDI, scheduling

Packaging: Design, recycling

Why Do Firms Undertake 3PL

There are numerous reasons why using 3PL can help to run a business more efficiently. By outsourcing to a 3PL, products will be stored, distributed and fulfilled more efficiently, costs will be decreased, resources will be maximised and customer satisfaction rates will be improved.

To compete in this fast-paced, international marketplace, more and more manufacturers are relying on third-party logistics providers to supply their customers with a higher level of service, as well as a measurable cost savings to their bottom line.

Outsourcing logistics helps businesses preserve valuable time. By freeing up resources in the organisation, more time can be allocated to focusing on core competencies

It is also important to note that having the required resources available does not guarantee success. 3PL providers exist because they have an expertise in providing logistics support and therefore can potentially add value to the business supply chain

Outsourcing to a 3PL provider creates shared responsibility for the business. The 3PL share responsibility for a variety of services, such as supply chain management and locating economies of scale. Utilising a 3PL provider can also help to re-engineer distribution networks by plugging the business into new markets.

All of the benefits of outsourcing logistics to a 3PL provider contribute to gaining a competitive advantage in the market.

This is the figure of Evolution of Logistics Outsourcing:

Logistics Decision MakingAn important channel decision is whether to use 3PL or run an own-account (in-house) distribution system. As a result, channel decision making is a very crucial process and it must be handled very carefully, and looking for a perfect partner in logistics can be an indomitable challenge.

Here are the crucial steps to make this decision:

1. Whether logistics is part of core competency? If logistics and distribution are the core areas for the success of the business, then the service should be provided by in-house logistics providers, since the company can control the entire logistics activity (Royal Mail - Delivery)

If, it is not so, then it is better to outsource a major part or the entire process2. Mapping the Supply Chain Map the entire process in the supply chain. Study the cost involved in every link of the supply chain (i.e.) from inbound logistics to warehousing to distribution centre to the final delivery. The process map of cost and others should be formulated after due consultation with the channel partners and suppliers as they are also form a part of the entire supply chain. Once the cost analysis of the supply chain is undertaken, the logistics manager can decide as to which part of the distribution channel should be handled in-house and which part or parts can be outsourced.

3. Reading the Signal to Outsource Logistics Functions: Regular delivery mishaps Increase in vehicle maintenance cost Investment in new technologies Underutilisation of warehouse Above than average inventory

4. Selection criteria for 3PL Cost On-time deliver Level of customer service Flexibility demand fluctuation Past experience and client reference Infrastructure capabilitiesHere are the categories of 3PL Service Providers: Asset based logistics companies Service firms owned by or affiliated with truck, rail, air, shipping, warehouse, or forwarding companies that use their own fixed assets in providing services. Non-asset based logistics companies - Independent firms that rely on information systems (an interconnected set of information resources hardware, software, information, data, applications, people and communications) or management skills to service their customer needs instead of owning hard assets.

Information systems based logistics companies - Rely almost entirely on information systems, offering data management and pipeline product flow visibility options to customers with little or no physical product handling. Hybrid based logistics companies They combine an asset and non-asset philosophy. They operate assets on behalf of specific customers and providing them with information systems to leverage information support capabilities to their fullest extent.Here are the types of 3P Distribution System:

Dedicated (exclusive) distribution system: Complete distribution provided by a third party company. The 3P addresses customer distribution requirements on a national or regional basis. The resources used are: warehouses, distribution centres, transport fleets, managers, etc. These 3PL providers are confined to large companies common in UK and adopted in other EU and North American countries.

Multi-User Distribution System: Similar to the above but here the 3PL providers address the needs of small group of client companies. The clients are manufacturers of goods and their products are all delivered to the same or similar customers. E.g. groceries to grocery stories, supermarkets, catering establishments. Also known as shared-user operation as expensive distribution costs are shared between the clients, so all parties enjoy the benefits.

Specialist Distribution System: Used for storage and movement of products those require special facilities or services. E.g. Frozen food and hanging garment distribution, distribution of leisure equipment. Regional Multi-Client Distribution Operation: Service provided for any number of clients and for most products. National Multi-Client Distribution Operation: National-wide operation. Joint Venture: Client and Operator form a distribution operation. This occurs where an operator has underutilised resources.

Satellite or Cross Docking Operation: Operator is not involved in storage, but only provides a collect, break-bulk and delivery service. No stocks are held although minor stock-holding occur occasionally. International Distribution Operation: Dedicated service provider enables the client achieve international movements. Difficult to find a single 3P operator that could provide such a service. Occasional Use: Service providers are used on an occasional basis (seasonal fluctuations; non-standard products; non-coverage areas; non-standard operations such as returns, etc.).

With an increase in outsourcing, the need for collaboration and integration also increases:Integration and Commitment in 3PL:

Without collaboration, integration and control, major risks would arise in the supply chain: Coordination costs. Loss of internal logistics management capabilities. Biased choices of service providers. Leakage of sensitive data and information. Service degradation.o Less reliable?o Longer order cycle time?o Emergency response? Loss of control and representation. Reduced contact with final customer.

Advantages of 3PL are shown as below: Decreased time to market. Higher productivity; increased sales. Reduced staffing and operating costs. Cost reduction; Focus on core competency. Improved efficiency and customer service. Quick entry in markets. Build-to-order systems. Improved customer service and retention. Access to best-of-breed expertise. Ability to invest more time and money on core competency.

It deserves to be mentioned that even with advantages the supply chain could break as these reasons: Failure to reach an understanding. Promises that cannot be fulfilled (intolerable service failure). A money losing contract.

Moreover, using 3PL also offers some disadvantages: Loss of control over supply chain. Loss of in-house logistics expertise. Impact on in-house workforce. Increase in cost. Impaired credibility with customers. Increased supplier dependence.

As a result, here are some Essential Observations in 3PL, which involves the main point of Continuous Monitoring: Observe Customer Satisfaction complaints, marketing dept. interaction. Logistics cost compare the present costs to earlier costs with capital investment. On-time shipment Number of delays in deliveries. Desired market reach. Forecasting accuracy. Inventory accuracy.

Additionally, here are some introductions of 4PL: Fourth-party logistics (4PL) is a term coined by Accenture. A 4PL is an integrator that assembles the resources, capabilities and technology of its own organisation and other organisations to design, build and run comprehensive supply chain solutions. 4PL is a refinement on the idea of 3PL, a firm that provides third party logistics services to companies for part or sometimes all of their supply chain management function. A 4PL uses a 3PL to supply service to customers, owning only computer systems and intellectual capital.Outsourcing, once a mere option, has today become a competitive imperative. The growth of theInternet, customer revolution, rise ofmass customization, severe competition etc. has forced the companies to focus on core competencies instead of vertical integration. This means that original equipment manufacturers (OEMs) must ideally contract out part or all of manufacturing, assembly, distribution, and support operations. What to outsource has historically been decided by the question, Is it strategic to my business? If the answer is yes, you would keep it. If no, farm it out. Today, companies are asking a different question : Is it my core competency? If no, then it is ripe for outsourcing, whether it is strategic or not.

The trendsetter barometer conducted by Coopers and Lybrand LLP, contraction shows that 83 per cent of Americasfastest growing companieshave turned to out-sourcing for one or more functions.WHAT IS OUTSOURCING?

Outsourcing is defined as the contracting of one or more of a companysbusiness processesto an outside service provider to help increase shareholder value, by primarily reducing operating cost and focusing on core competencies.

CIO defines outsourcing as an arrangement in which one company provides services for another company that could also be or usually have been provided in- house.

Automatic data processingInc. (ADP) defines . outsourcing as the contracting out of a companys non- core, non-revenue-producing activities to specialists. It differs from contracting in that outsourcing is a strategic management tool that involves the restructuring of an organization around what it does best its core competencies.

WHY DO COMPANIES OUTSOURCE?

There are several reasons why outsourcing is becoming a habit. The simplest reason to outsource is to alleviate administrative burdens and focus on strategic areas.As the companies move from non-outsourcing environment to an outsourcing environment the profile of the time spent by the executives on various activities change dramatically. According to Figure 1 in a non outsourcing environment, executives spend 60 per cent of their time on administration matters, while 30 per cent on tactical issues and this leaves only 10 per cent of their time to focus on strategic matters. On the contrary when they switch to an outsourcing environment and outsource some of the activities they need to spend only 10 per cent of their time on handling administration issues, 30 per cent time they focus on tactical matters while 60 per cent of their time they can devote to thinking, strategizing and planning.

Some other reasons behind outsourcing are:1.Reduce costs:A company may emphasize costsavings for a variety of reasons, such as being in apoorfinancial position, or because of a goal to increase profits. Reducing costs by using a supplier is possible, but not in all situations. A supplier has clearly lower costs, if it can centralize the work of several companies at one location, such as centraltruck maintenancefacilities or a data processing centre. It can also lower costs if materials or supplies can be bought at lower costs by using volume purchasing. It can also purchase assets from a company and then lease the assets back as a part of an outsourcing deal, thereby giving the companies an upfront cash infusion.Power of Outsourcing in SupplyChain ManagementIts not what you dont known that hurts you. Its what you know that aint so. Otherwise, its costs will be higher than those of the company, for it must include a profit as well assales and marketingcosts in its budget an internal department does not have to earn a profit, nor does it have a sales force. Thus, there are a few situations in which a company can reduce its costs by outsourcing, but there are many more cases where this is not a realistic reason for outsourcing.2. Focus oncorefunctions :A company typically has a small number of functions that are key to its survival while other functions or activities are required to be done but are non-core. It may want to focus all of its energies on those functions and distribute all other functions among a group of suppliers who are capable of performing them well enough that the company management will not have to be bothered with any of the details associated with running them. The company may even what to outsource those functions that are core functions at the moment, but which are expected to become less important in the near future due to changes in the nature of the business. In addition, a company could even outsource a function that is considered key to the companys survival if it can find a supplier that can perform the function betterin short, only keep those functions that are core functions and which the company can do better than any supplier. For example, a company may be thelow costmanufacturer in its industry, which allows it to maintain a large enough, pricing advantage over its competitors, that it is guaranteed a large share of the market.3. Acquire new skills :A company may find that its in-house skill set is inadequate for a given function. This is the most common reason and is used for outsourcing those functions that require high skill levels, such as engineering and computer services.4. Acquirebetter management:A company may find that an in-house function is not performing as expected not because of any problem with the staff but because of inadequate management support or capability.Symptoms ofthis are high turnover, absenteeism, poor work products and missed deadlines. It can be very hard to obtain quality management, so outsourcing a function to a supplier just to gain access to the suppliers better management can be a viable option. It may also be possible to rent management from the supplier. This can be a good option in all functional areas, though it is more common in areas requiring high levels of expertise such as engineering.5. Assist a fast growth situation:If a company is rapidly acquiring market share, themanagement teamwill be stretched to its limit, building the company up so that it can handle the vastly increased volume of business. In such situations, the management team will desperately need additional help in running the company. A supplier can step in and take over the function so that the management team can focus its attention on a smaller number of core activities. For example, a company in a high growth situation may outsource its customer support function to a supplier, who already has the phone line capacity and trained staff available to handle the deluge of incoming calls.6. Avoid labour problems:If a company is constantly bogged down by labour problems which start affecting its productivity and performance, outsourcing becomes a viable option. Companies can in such cases use suppliers infrastructure, manpower and facilities for production and concentrate onmarketingor getting business.7. Focus on strategy:A companys managers typically spend the bulk of each day handling the detailed operations of their functional areasthe tactical aspects of the job. By outsourcing a function while retaining the core management team, a company can give the tactical part of each managers job to a supplier, which allows the management team to spend far more time in such strategy related issues as market positioning, new product development, acquisitions, and long-term financing issues.8. Avoid major investments:A company may find that it has a function that is not as efficient as it could be, due to lack of investment in the function. If the company keeps the function in-house, it will eventually have to make a major investment in the function in order to modernize it. Outsourcing this function can avoid any major investments. For example, by outsourcing transportation. activity, the company that owns an ageing transportation fleet can sell the fleet to a supplier, who then can provide an upgraded fleet to the company as part of its service.

9.Handleoverflow situations:A company may find that there are times of the day or year when a function is overloaded for reasons that are beyond its control. In these situations it may be cost effective to retain a supplier to whom the excess work will be shunted when the in-house staff is unable to keep up with demand. This is a reasonable alternative to the less palatable option of overstaffing the in-house function in order todealwith overflow situations that may only occur a small percentage of time. This is a popular option for help desk services as well as customer support, where excessincoming callsare sent to the supplier instead of having customers wait on line for an excessively long time.10. Improve flexibility:This is similar to using outsourcing to handle overflow situations, except that the supplier gets the entire function, not just the overflow business. When a function experiences extremely large swings in the volume of work it handles, it may be easier to eliminate the fixed cost of an internal staff and move the function to a supplier who will only be paid for the actual work done. This converts a fixed cost into variable costthe price of the suppliers services will fluctuate directly with the transaction volume it handles.11. Improve ratios:Some companies are so driven by their performance ratios that they will outsource functions solely to improve them. For example, outsourcing a function that involves transferring assets to the supplier will increase the companys return on assets (which is one of the most important measurements for many companies). The functions most likely to improve this ratio are those heavy in assets, such as maintenance, manufacturing andcomputer services. Another ratio that can be improved is profitability per person. To enhance this, a company should outsource all functions involving large numbers of employees, such as manufacturing or sales.12. Jump on the bandwagon:A company may decide to outsource a function simply because everyone else is doing it, too. Also, a large amount of coverage of outsourcing in various national or industry specific publications will give company management the impression that outsourcing is the trend, and they must use it or fail. For example, due to the large amount of publicity surrounding some of the very large computer services outsourcing deals, the bandwagon effect has probably led to additional outsourcing deals for the computer services function.13. Enhance credibility:A small company can use outsourcing as a marketing tool. It can tell potential customers the names of its suppliers, implying that since its functions are being maintained by such well-known suppliers, the companys customers can be assured of a high degree of quality service. In these instances, the company will want to hire the best known suppliers, since it wants to draw off of their prestige. Also, for key functions, the company may even want to team up with a supplier to make joint presentations to company customers, since having the suppliers staff present gives the company additional credibility.14. Maintain old functions:A company may find that its in-house staff is unable to maintain its existing functions, while transitioning to new technology or to a new location. Outsourcing is a good solution here, for it allows the company to focus its efforts on implementing new initiatives while the supplier maintains existing day-to-day functions. This reason is most common in computer services, where suppliers are hired to maintain old legacy systems while the in-house staff works on transitions to an entirely new computer system.15. Improve performance:A company may find that it has a function that has bloated costs or inadequate performance. To shake up the function, company management can put the function out to bid and include the internal functions staff in the bidding process. The internal staff can then submit a bid alongside outside suppliers that commits it to specific service levels and costs. If the bid proves to be competitive, management can keep the function in-house, but hold the functions staff to the specific cost and performance levels noted in its bid. As long as suppliers are told upfront that the internal staff will be bidding and that the selection will be a fair process, they should not have a problem with this type of competition. This approach can be used for any functional area.16. Begin a strategic initiative : A companys management may declare complete company reorganization and outsourcing can be used to put an exclamation point on its determination to really change the current situation. By making such a significant move at the start of the reorganization, employees will know that management is serious about the changes and will be more likely to assist in making the transition to the new company structure.Usually one of the above reasons dictates an outsourcing decision. But before finally taking the plunge, company should exhaustively evaluate the working and functioning of the department/function concerned. Many a time there is a deeper problem where the function in question is not doing a good job of presenting its benefits to management. In such a case, the function manager may not be able to showcase its accomplishments, or showing management that the cost of keeping the function in- house is more favourable.If the management suspects that this may be the reason why outsourcing is being considered, it is useful to bring in a consultant who can review the performance of the in-house employees and see if they are, in fact doing a better job than they are saying. Sometimes investigating the ability of in-house staff prior to outsourcing functions will keep the outsourcing from occurring.

The manager who is making the outsourcing decision should also consider that it is not necessary to outsource an entire functional areainstead the manager can cherry pick only .those tasks within the function that are clearly worthy of being outsourced and keep all other tasks inhouse. This reduces the risk to the company of having the chosen supplier do a bad job of handling its assigned tasks, since fewer tasks are at risk, and it allows the company to hand over the remaining functional tasks to the supplier as it becomes more comfortable with the suppliers performance. For example, a company can outsource just the maintenance of its computer services function, or it may add network services, telephone services, application development, or data centre operations task to one or more suppliers.

These options are all available to the manager who is edging into a decision to outsource.

The typical path that a company follows starts with a function that has minimum strategic value and will not present a problem even if the suppliers does a poor job of providing the service. If the companys experience with these low-end functions prove successful, then company management will be more likely to advance to outsourcing those functions with more strategic value or with more company threatening consequences, if the provided service is inadequate. These functions include accounting, HR and materials management. Finally, if the company continues to perform well with all or part of these functions; typically these are manufacturing, computer services and engineering (though this may vary by industry). Only by considering the reasons in favour of outsourcing alongside the associated risks can a manager arrive at a considered decision to outsource a function.OUTSOURCING RISKSThese can range from pricing issues to non- performance by a supplier of a key function. The person making the outsourcing decision must be aware of these risks before making the decision to hand over a function to a supplier. Broadly, these risks can be classified into short-term risks and long-term risks. Companies indulging in outsourcing have to guard against both of these risks. Short-term risks can include among others operational issues at suppliers end, while long-term risks can be nonalignment of companys goals with suppliers goals in the long term.

Suppliers situation may change in the future, causing problems in the outsourcing relationship. For example, the supplier may havefinancialdifficulties, be bought out by a company that does not want to be in the outsourcing business, or undergo a shift in strategy that forces it to provide different services. Also, the technology needed to service the companys needs may change over time and the supplier may no longer be able to service that new technology. These risks can be lowered by ensuring that there is a termination clause in the outsourcing contract that allows the company to back out of the contract if any of the above circumstances occur. Also, these risks are less important if there is a large number of competing suppliers to whom the business can be shifted. Alternatively, the risk is greater if there are few competing suppliers to whom the companys business can be shifted. Suppliers inability to grow in the same proportion as the company, can be another big risk. But this is a long-term risk and can be gauged and understood beforehand.

OUTSOURCING PROCESS

1.Understanding company goals and objectivesOutsourcing decisions have to be taken within the framework of a companys goals and objectives. Both the short-term goals and long-term strategies have to be considered, understood and acted upon. Outsourcing suppliers also have to appreciate these goals and functions accordingly.2. A strategic vision and planDrafting an outsourcing vision and plan is the next important step. Once again, this plan has to be both long-term and short-term. Long-term plan can contain the overall companys policy towards outsourcing in general, clarity on the functions, activities to be outsourced, etc. while the short-term plan contains an immediate plan of action.3. Selecting the right vendorThis is one of the most vital and important activities. It is also a long-drawn out activity which should involve activities such as collecting supplier intelligence, collecting supplier background information, evaluation of this information, etc. Vendors attitude, his growth potential, past performance, etc. need to be evaluated.4. Management of the relationshipsRelationship management is an extremely important task in outsourcing. The more one indulges in outsourcing, the more relationships one has to manage. Hence it is essential to have a structured method of managing the relationships.5. A properly structured contractStructuring an outsourcing contract is both an art and a science. This contract needs to have all the necessary clauses, scope for growth, scope for incentives and all other clauses built into it. This contract will be the main document that will govern the relationship.6. Open communicationWhen the company takes outsourcing-related decisions for the first time, it is always one of the activity/function initially done internally. This either causes closure of aninternal function/activity or pruning it substantially. Hence this action displaces an internal group and can cause a lot of unrest within the company. Therefore, handling this situation effectively is also a part of an outsourcing process. This is applicable even for situations where the company decides to increase outsourcing or outsource some other activity/function.

7. Section executive support

This is essential initially to garner support for outsourcing. Also inputs from these senior executives can be helpful for drafting the contract.

8. Use of outside expertise

It is sometimes essential to involve an outside consultant to help the company through the process, especially when the company is doing it for the first time. This person should be an expert in outsourcing and should have adequate experience in drafting the outsourcing contract.

OUTSOURCING IN SCM

Outsourcing logistics has been a favourite with companies since several years. It is only recently that companies have started thinking about outsourcing other aspects of SCM.Despite the wide acceptance of outsourcing logistics functions, a variety of organizational concerns inhibit the outsourcing of logistics processes, including:1. Fear of losing control.Companies are hesitant to hand over important logistics processes to a third party. As the third party might also be managing the logistics processes of competitors, companies are afraid that trade secrets might be misused, mismanaged, or lostor in the worst case, pass through the third-party provider into the hands of competitors.2. Lack of confidence.Compounding the fear of loss of control is the lack of confidence compan feel about the ability of third-party providers to meet their needs.3. Lack of outsourcing education.Many companies are familiar with outsourcing, in terms of the IT and bnsiness-process enhancements that logistics service providers can offer. However, they lack a through understanding of the experience of managing the outsourcing service provider throughout the life of the relationship.4. Management philosophy and tradition.Many companies simply resist change. They may reject the concept of outsourcing logistics activities due to a perceived potential negative effect on their business model and operations. In addition, these companies may have had poor outsourcing relationships in the past and may be less inclined to initiate new outsourcing contracts. Furthermore, they may believe that the geographical separation between them and their outsourcer could cause service management issues.For example, some companies feel that an outsourcer may not be sensitized to the unique logistics needs of their product lines. Others feel that outsourcers are not equipped to deal with dynamic or mission-critical operations. Due to this lack of confidence, companies are cautious about getting locked into a long-term contract with an outsourcer and are concerned about the associated legal fees and penalties that would be incurred if disputes arose.CHAPTER V Planning Global Logistics: Planning the global logistics,Globalization has created staggering opportunities for companies around the world in growing markets like Brazil, Russia,India and China. It has also ushered in a more competitive business environment. Today, whether or not a company produces or sources outside its home country, it is often competing against global organizations.To survive and thrive under these conditions, organizations must develop efficient and effectiveglobal supply chains that can ensure a smooth supply of goods anywhere in the world. Many enterprises expecttransportation and logistics executives to determine how to move products freely and efficiently across oceans and borders. While it is valuable to develop a knowledge resource regarding the population, infrastructure, languages, politics, economy, customs, currencies, tax laws, and tariffs for each country that shipping routes touch, it is not enough. The variables of global transportation change faster than the knowledge can be compiled.Taking advantage of global opportunities requires a strategy that transcends continually changing markets. This white paper offers key considerations to enterprises of any size that are looking to initiate or expand their international logistics capabilities while developing global businesses.Understanding Globalization and the Changing WorldTo succeed in global markets, enterprises and logistics professionals must be mindful of the factors that drive change in the international movement of goods:Infrastructure development.While some market and transportation infrastructures are currently insufficient tohandlefast growth, its anticipated that government agencies will shift greater resources toward that development.From a logistics perspective, this includes the creation and/or expansion of intermodal terminals, roads, airports, railways and ports. Monitoringgovernment investmentin these initiatives is critical to the development of an effective global transportation plan.The global grid.A highly connected digital and physical network is emerging that is expected to transcend physical, social, cultural, and technological borders. While such a network should helpstreamlineinternational logistics, it could be hindered by periodic instability and volatility. Global logistics plans should prepare alternate strategies to cope with these conditions.Government attitudes toward economic growth and social stability.Views regarding the balance of strong economic growth, environmental policy, community and social responsibility, productsafety, and social services vary by country and culture. These considerations often dictate the development of tariffs, duties, taxes, customs declaration processes, and general import/export compliance.Regulatory materials and energy pricing.Fuel costs will be a determining factor in the decision to approach global markets, source raw materials from abroad, oroutsource manufacturingto low-cost jurisdictions. Companies also need to consider the costs associated with sourcing scarce materials.Logistics must be part of any globalbusiness strategyto source products and grow market share. Whether a company handles global logistics internally or outsources some or all of its transportation management, they must understand the crucial role logistics will play in their ultimate success.Global Transportation EssentialsBy definition, global opportunities bringlogistics and transportationto the forefront of the discussion. To capitalize on sourcing and sales in global marketsand to successfully price goods and servicesan enterprise needs information and analysis unique to logistics, as well as several essential areas of expertise.1. Supply Chain Finance.Organizations can maintain a free and timely flow of goods across borders by understandinginternational tradeagreements and requirementsletters of credit, tariffs, terms of sale, and other financial considerations.All financial documentation must be in order to avoid profit-killing delays in buying, selling, and sourcing.2. Integrated Workflow.Reaching global profitability goals will likely require an integrated workflow approach. While some transportationmanagement systems(TMS) offer software platforms to integrate global inbound and outbound transportation, strategic silos still remain in many enterprises. Theinformation and technologyare available to bridge the gaps, but the strategic intent is missing.Logistics and transportation groups should lead this unification process to create a truly global infrastructure.3. Real-Time, Dynamic Routing.Global instability and rapidly changing infrastructures in countries around the world call for dynamic routing approaches.The most efficient route in December may not be in January, since bad weather, political instability, fuel prices, capacity, or any number of other factors can influence that determination. To account for all the variables, effective global transportation strategies will likely employ TMS technology, processes, and expertise, which allow for real-time agility and risk mitigation.4. Control Tower Visibility.Global logistics will greatly magnify the inefficiencies of spending too much time on tactical or low-value tasks. Granted, international transportation can be far more complex thandomestic shipping.Its not uncommon for global shipments to touch many intermediaries, each of whom has a distinct set of regulations, cultural beliefs, and IT capabilities.Nor is technology alone the answer; too many shippers have deployed TMS software, only to have it fail and drive users back to their old, laborious duties.The most successful global companies use strategies that allow for acceptable tolerances in their transportation networks. They rely onevent managementfeatures of technology to alert operators when attention is needed for out-of-the- ordinary situations. In addition, effective TMS solutions and services should allow users to generate a real time, global control tower view of their networks, and to drill down into the specifics of each shipment, such as P.O.s, freight bills,SKUs, etc.5. International Portals.While IT savvy and bandwidth vary from country to country, the global IT infrastructure is generally sound enough to allow for visibility into offshore supplier organizations. The ability to communicate with offshore customers or providers is a critical part of the global control tower.Global supply chains demand access to current information, from advance ship notices andinventory planningto purchase orders and production status updates. While there are often significant hurdles to overcome in terms of language, customs processes, time zones, and currencies, an effective TMS platform supported by a strong strategic plan can greatly reduce delays and other costly problems posed by international borders.6. Security Compliance.Border controls and customs procedures in many countries pose significant and costly barriers for shipments of all kinds.Automation can overcome manual data entry errors that are often the cause of significant delays and fines. Organizations must also develop processes around security, safety, and compliance in various jurisdictions to prevent unnecessary difficulties and delays, and ensure that suppliers understand and follow those procedures.7. Total Landed Costs Analysis.Analyzing the total landed cost seems straight-forward, but some shippers have found it can be much higher than expected. Accurately calculating total landed cost especially as it fluctuates due to a variety of global forces moves transportation to the center of the pricing and profitability discussion, since it is crucial to helping senior leaders avoid surprises.8. Managing Risk.Even the most perfectly planned global shipment can be ruined by theft, counterfeiting, hurricanes, floods, political unrest, labor disputes, documentation errors, and mechanical problems. The best practice course of action requires a strategic view ofsupply chainrisks.Although preventing and managing risk associated with disruptions is clearly more difficult on a global level than it would be regionally or locally, the risk management role is essential for global supply chains. Even in organizations with dedicated risk management staff, questions can arise about who is responsible headquarters, regional offices, or third-party transportation providers for predicting, tracking, and resolving disruptions, and for understanding Incoterms (InternationalCommercial Terms)1and associated risks around contracts, liability, and insurance.Companies must decide how much time, money, and effort should be allocated to prevention vs. response. While strategic responsibility should reside at the top of the supply chain, ensuring that suppliers understand the risk priorities, prevention strategies, and response plans is imperative. A plan should include: Awareness.Many providers in the supply chain may have little or no risk management capabilities, so identifying the relative strength of core suppliers is important. Keep senior management aware of potential risks, since these vulnerabilities can have an impact on decisions regarding where to source, manufacture, and market products. Awareness and understanding of Incoterm2can help minimize confusion and misunderstanding of trade contract responsibilities and avoid the associated, costly risks. Accountability.Developing a risk management plan that clearly spells out the responsibilities of regional offices and third party providers establishes accountability. Developing and promoting a plan will contribute to vendor selection cr