Logistics is a business process that ensures consistency in the supply chain. This involves the planning of how to acquire, store and transport inventory and goods to ensure that they are delivered to the right place at the right time and in the right condition. Logistics have become increasingly important in today’s business world because customer loyalty no longer depends upon excellent product quality. Rather, it is more important to deliver the product to the customer’s desired destination at a reasonable price.
Inventory
Inventory management involves managers coming up with a trade-off with handling the costs of maintaining inventory and the cost of losing a customer or the halt of the production process. Firms prefer to keep the inventory levels low but this requires that the other parts of the logistic system are very swift as to meet any unexpected demand. However, it is important to maintain a certain level of inventory to meet customer needs in different markets. Managers in globalize logistics need to ensure that inventory and finished goods should be ample enough to maintain the supply chain and the production process (Frazzle, 2001).In the local logistics system, low inventory levels are maintained and around 2 weeks of inventory is kept at the warehouse as the lead time is small. This reduces the cost of maintaining inventory so lower inventory levels eventually translate into cost savings. In a local system, managers have to worry about their area of concern only. However, in a global setting, it has to be ensured that every location of sale or production has ample inventory, this involves managing multiple locations. In a global logistics system, buffer inventory has to be maintained because the transit time and the lead times are longer. This increased inventory level at the warehouse increases the cost of maintaining inventory. Also, in a global setting, the element of uncertainty in terms of unexpected demand or unexpected supply delay must be accounted for so it is necessary that backup inventory has to be maintained at nearby locations.
Transportation
Many companies opt for global operations to take advantage of cheap labor and materials. However, they are losing out on this advantage due to the rising costs of shipping- an essential transport medium in global transportation. Transportation is the critical element in supply chain management. This is because of two main reasons ( Gourdin 2001) Globalization has increased the mediums of transport so now managers have more choice and it is up to them to decide the most economical yet efficient mean. Secondly, there is now a changing trend to maintain Just in Time inventory to save inventory costs so transportation has to be swift to overcome any potential shortages. Many companies lack the required skills and infrastructure to plan transportation in such a way that the rising shipping costs are offset by the savings from maintaining JIT inventory and operating in low labor and material cost countries. The transportation schedule planning for global operations is much more complicated than that of local operations. In the case of global logistics, the transportation cost rises sharply if there is air transport involved and air transport becomes necessary if urgent delivery is required. Then, there is a danger of the goods being damaged especially if they are being transported by the sea so there is an additional hassle of packaging as strong as strong packing is required on each pellet to prevent any damage. As opposed to this, the transportation costs in local transport are lower and there is no special packaging required, simple carton packing works.
Warehouse Facilities
Warehouses are places where the inventory is stored and distributed to the respective sale or production points. Warehouses are needed in both local and global logistics but the capacity needs differ. In the case of a local logistics system, the lead time and transportation time are smaller so smaller consignments are sent and hence the distribution center has to be small. This is because each warehouse caters to a small area only. However, in the case of a global logistics system, there is a need for a bigger area to store the goods as the lead time and the transportation time, and the lead time is greater- for instance, it takes 4 weeks for a shipment to come from Europe.
Information Management
The management of everyday activities becomes very complicated in the case of a globalized logistics system. This is because there are various working locations, different time zones, different working hours, different holidays, etc. If the information is not managed properly, there may be disruptions in the supply chain. For instance, if managers do not keep into account the national holiday of another country, there will be supply shortages (of raw materials or finished goods) as in that country no transportation will take place. Understanding the rules and regulations of different countries is also a challenge for managers, they need to understand the rules concerning logistics, exports, and imports and comprehend how these affect the supply chain to develop a relationship with their partners and optimize any opportunities.
Politics and Government Regulations
The rules of every country differ so understanding the rules and maximizing business growth and maintenance while complying with them is a challenge for the managers. Many managers do not have foreign trade experience and are unable to manage a global supply chain network. When it comes to a local logistics system, managers have to deal with one government and they are well acquainted with the laws so the job is much simpler than a global network where multiple governments and alien laws are involved. Global logistics has become increasingly difficult since September 11 terrorist attacks for now the customs clearance has become very cumbersome. All imports and exports have strict security checks, custom clearance takes greater time, increased and thorough documentation are needed and all this may cause a delay in the delivery. Moreover, due to the strict laws, heavy penalties may be imposed if incorrect documents are submitted even if this is due to human error.
Geographic Environment
As the companies increase their area of operations, many challenges related to logistics and supply chain arise. In many developing countries the physical infrastructure is not developed so the free flow of inventory and finished goods is hindered. The lead times and variability in shipment cycle times increase due to infrastructure limitations and this, in turn, affects the inventory levels and cash to cash cycle time so eventually, the company has to keep more working capital for the supply chain. Moreover, due to the geographic limitations, the total transportation costs increase and at times company even has to hire premium freight service to overcome halt in production and this lowers profits.
Hidden Costs
When entering foreign markets, companies often encounter ‘hidden’ costs they were not aware of. (Waters, 2006) Global logistics managers often have to deal with tariffs, taxes, duties, customs duties they were not aware of. Moreover, the managers comprehending the information about these costs is difficult for all the documents, and communication with the government agencies is in a foreign language.
Social Culture
In the case of a globalized logistics system, understanding the culture of foreign places and adapting to them is a big challenge for the management. The culture plays a significant role in the daily operations and the management style and this will, in turn, affect the implementation and management of a logistics system. Mangers have to be adept at negotiations with the suppliers and in this regard the negotiating style is very important. In developing countries, rules are often hazy so business mostly depends on personal contacts and maintaining relationships so the managers need to be well aware of the cultural norms to get business done. In a global system, different languages will be used and there will be different time zones so it will be difficult to analyze the status of shipment and update information regularly.
Intermodal Transport
International transport that involves the use of multiple mediums of transport is called intermodal transport. This is a hybrid transportation system that involves several players in the process. In this type of transport, the freight is packed into containers which are then transported via rail, ship, or road. (Leinbach,2007) This method reduces the direct handling of the cargo so there is less damage while changes in the mode for the containers are just shifted.
Benefits of Intermodal Transport
This method enables the transport of large volumes of cargo. This is because it uses containers that are easier to transport than individual items so large volumes can be accommodated within the containers. (Frankel, 1987) Then intermodal uses multiple mediums including ships so the capacities of volume to be transported increases over other media like roads etc. Intermodal transportation is swifter and reduces cargo handling so the chances of damages, the loss is reduced. If items are handles individually, there are chances that they may be damaged but since they are in containers this risk is reduced. Intermodal transport reduces the overall cost of transportation as it has economies of scale. Moreover, this method covers as much distance as air shipment but this is cheaper and more economical. Intermodal transport is faster as it combines the best of various options, the use of roads or ships alone would be slow but intermodal uses all of the options at the appropriate places i.e. ships for inter-country transportation and roads for intra country transportation. In intermodal transport, the journey time is reduced cost-effectively. This is because the transport is faster than road transport alone would be, it may not be as fast as air transport but it is much cheaper. So with the combination of air and sea transport faster transport is possible and at cost-effective rates. Finally, global logistics require the use of intermodal for this gives greater access to both the input and the output markets-the supplier and buyer can be reached at the right time.
Drawbacks of Intermodal Transport
One of the major drawbacks of intermodal transport is that involves multiple media so multiple actors are involved. (OECD, 2005)This complicates coordination and there is no single person responsible for the supply chain management. The task of coordination amongst all these players is very difficult and so is negotiation with them for every party has separate interests. All these parties have diverse requirements and interests so meeting them and coming up with an integrated system are a big challenge. For instance, the manager has to coordinate with the person handling the road transport, the rail transport, and the sea transport. Any halt in one of the processes will stop the entire supply chain process. Managing the supply chain has become very challenging with the use of intermodal transport. Moreover, intermodal transport is expensive and involves the payment of multiple duties due to the use of multiple mediums. Therefore, the cost reduction that companies aim for through globalized logistics may not possible due to this. The packaging of freight intermodal transport is difficult because the chances of damage due to sea delivery are greater. Therefore, special packing needs to be done, Moreover, in intermodal transport, the clearance process is very cumbersome because the clearance has to be taken at multiple points. This process has become even more difficult after the September 11 attacks because the security checks are even greater.
Bibliography
- Frankel, E, (1987) The World Shipping Industry: Policy Analysis and Development: an Industry at the Crossroads. Routledge,
- Frazelle, E. (2001) Supply Chain Strategy. McGraw- Hill Professional.
- Gourdin, K. (2001). Global Logistics Management. Blackwell Publishing
- Kaminsky, P. (2004) Managing the Supply Chain. McGraw- Hill Professional.
- Leinbach. T and Capineri. C. (2007) Globalized Freight Transport. Edward Elgar
- Long, D. (2003). International Logistics: Global Supply Chain Management. Springer.
- Organisation for Economic Co-operation and Development. (2005). Container Transport Security Across Modes. OECD Publishing.
- The International Journal of Logistics Management. (1998). Supply Chain Management: Implementation Issues and Research Opportunities. Emerald Group Publishing Limited
- Waters, D.(2006). Global Logistics. Kogan Page Ltd