CHAPTER 13 Global Logistics Becton Dickinson s Worldwide

CHAPTER 13 Global Logistics

Becton Dickinson’s Worldwide Sources

International Logistics • Changes to political landscape affect logistics – The end of Soviet rule in Eastern Europe – EU economic integration • Nontariff barriers-a rule that has the effect of reducing imports • Restrictions on truck traffic, forcing freight onto rail and water – NAFTA • Multinational firms

Comparison of Domestic and International Logistics Domestic About 10% of U. S. GDP today Cost Transport mode Mainly truck and rail Inventories Lower levels, reflecting short-order, leadtime requirements and improved transport capabilities Agents Modest usage, mostly in rail Financial risk Low Cargo risk Low Government agencies Primarily for hazardous materials, weight, safety laws, and some tariff requirements Administration Minimal documentation involved (e. g. , purchase order, bill of lading, invoice) Communication Voice, paper-based systems adequate, Cultural differences with growing usage of electronic data interchange and Internet Relative homogeneity requires little product modification International Estimated at 16% of world GDP today Mainly ocean and air, with significant intermodal activity Higher levels, reflecting longer lead times and greater demand transit uncertainty Heavy reliance on forwarders, consolidators, and customs brokers High, owing to differences in currencies, inflation, levels and little recourse for default High, owing to longer and more difficult transit, frequent cargo handling, and varying levels of infrastructure development Many agencies involved (e. g. , customs, commerce, agriculture, transportation Significant paperwork; the U. S. Department of Commerce estimates that paperwork cost for an average shipment is $250 Voice and paper costly and often ineffective; movement toward electronic interchange but variations in standards hinder widespread usage Cultural differences require significant market and product adaptation

International Market Entry Strategies • Exporting • Licensing • Joint ventures • Ownership • Importing • Countertrade

Major Participants in an International Logistics Transaction Domestic bank Domestic seller Domestic government agencies Export facilitators Inland transportation carrier Domestic port or terminal of exit International carrier (air, water) Foreign port or terminal of entry Product movement Information flow Foreign government agencies Foreign inland transportation carrier Foreign bank Foreign buyer

The Global Logistics Environment al cal Ec on om ic Customer service Other activities Inventory Logistics executive Warehousing and storage Packaging Transportation Ge og gy rap hy ch Te lo no Competition Social and cultural ti oli P an eg dl

Responding to Competition with Logistics • Increasing the number of cross-national partnerships, alliances, mergers, and/or acquisitions. • Expansion of many previously domestic-based organizations into international markets. • Development of global communications networks operating 24 hours a day. • Establishment of country and regional warehouses in major world markets. • Identifying and developing relationships with logistics service providers that offer transportation, storage, materials handling, and other services on a global basis.

Exporting Companies • • • Export distributor Customs house broker International freight forwarder Trading company Non-vessel-operating common carrier (NVOCC)

Documentation • • • Country of Origin Bills of Lading Packing Lists Customs Certified Shippers - C-T PAT

Free Trade Zones • > 225 in the US • postpone payment of customs or taxes until item is sold • avoid customs completely if consolidated and re-exported

Ocean Shipping • Types of Ocean Cargo – Petroleum – Dry-bulk cargoes-grain, ores, sulfur, sugar, scrap iron, coal, lumber, logs in vessel loads – Containers • Shipping conferences and alliances pool resources and extend market coverage

Ocean Shipping • Types of Vessels – Containerships – Lighter aboard ship (LASH) vessels – Roll On-Roll Off (RO-RO) vessels – Tankers – Specialized vessels

A RO-RO Vessel in Jacksonville Florida

International Trade Inventories • May vary in small ways from country to country—products may be tailored to fit • Less is needed (than in U. S. ) to serve any one country • Return items are impossible to accommodate • Import and export quotas affect value of inventories • Currency and language differences

CHAPTER 15 Organizing for Effective Logistics

Traditional Logistics Management Responsibilities • Sales service • Channels of distribution • Product returns and warranties • Manufacturing • Purchasing/ procurement • Traffic • Warehousing • Information systems • Budgeting • Inventory • Data processing Objectives Large inventories Small and frequent production runs Decentralized warehousing Large product assortment Low inventories Larger and infrequent production runs Plant warehousing Fewer products Centralized warehousing

Traditional Logistics Management cont. Responsibilities Objectives • Sales service • Channels of distribution • Product returns and warranties Rapid order processing Generous returned goods policies Fast transportation Expedited shipments • Manufacturing • Purchasing/ procurement • Traffic • Warehousing • Information systems • Budgeting • Inventory • Data processing Inexpensive order processing More rigid returned goods policies Low cost transportation

Control Exercised By Logistics Executives Over Selected Logistics Functions Percent of Reporting Companies Activities 1966 1976 1985 1990 1999 Transportation 89% 94% 97% 98% 90% Warehousing 70 93 95 97 88 Inventory control 55 83 81 79 74 Order processing 43 76 67 61 55 8 70 37 48 39 15 58 44 51 41 Packaging Purchasing and procurement

Organization Design for Logistics as a Function Human Resources Logistics

Organization Design for Logistics as a Program President Logistics Engineering Manufacturing Human Resources Marketing/ Sales Finance/ Accounting

Components of Corporate and Logistics Mission Statements • • Targeted customers and markets Principal products/services Geographic domain Core technologies

Components of Corporate and Logistics Mission Statements (cont. ) • • Survival, growth, and profitability Company philosophy Company self-concept Firm’s desired public image

Ways of Improving Logistics Organizational Effectiveness • • • Strategic goal setting Resource acquisition and utilization Performance environment Communication process Leadership and decision making Organizational adaptation and innovation

Logistics/Supply Chain Organization A good organization structure does not by itself produce good performance--just as a good constitution does not guarantee great presidents, or good laws, or a moral society. But a poor organization structure makes good performance impossible, no matter how good the individual managers may be. To improve organization structure…will therefore always improve performance. Peter F. Drucker

Activity Fragmentation in the Supply Chain Responsibilities President Marketing • Distribution channels • Customer service • Field inventories • Revenue CR (2004) Prentice Hall, Inc. Finance • Cost of capital • ROI • Inventory carrying costs Operations • Supply alternatives and supply costs • Warehousing • Purchasing • Transportation 15 -4

Activity Fragmentation in the Supply Chain (Cont’d) Objectives President Marketing • More inventory • Frequent & short production runs • Fast order processing • Fast delivery • Field warehousing CR (2004) Prentice Hall, Inc. Finance • Less inventory Operations • Long production runs • Cheap order processing • Less warehousing • Lowest cost routing • Plant warehousing 15 -5

Activity Fragmentation in the Supply Chain (Cont’d) Reasons for fragmentation • Lack of understanding of key cost tradeoffs • Traditions and conventions • Other areas considered to be more important to the firm than logistics • Organization structure can be in an evolutionary state Benefits of fragmentation elimination • Encourages important cost tradeoffs to be effected • Focuses on an important, defined area by top management • Sets the structure within which control can take place

Organizational Choices • Informal structure -Persuasion of top management -Coordinating committees -Incentive arrangements -Profit sharing -Cross charges • Semi-formal structure -Matrix organization • Formal structure -Line--creates value in products, therefore it has operating status -Staff--provides assistance to the line organization

Logistics Matrix Organization CR (2004) Prentice Hall, Inc. 15 -8

What is Systems Analysis? • Systems analysis refers to the orderly and planned observation of one or more segments in the logistics network or supply chain to determine how well each segment functions.

General Questions • Why do we perform each task? • What value is added by it? • Why are the tasks performed in the order they are? • Can we alter the sequence of the processing steps to increase efficiency? • Why are the tasks performed by a particular group or individual? • Could others perform this task? • Is there a better way for the system to operate?

Problems in Systems Analysis • Multiple business functions are impacted. • There are trade-offs among conflicting objectives. • Logistics system impacts are difficult to precisely evaluate. • There are business issues unique to each logistics system.

Systems Integration: Logistics Activities Outside the Firm • Third-party, or contract, logistics • Integrated service providers • Monitoring third-party performance

Reverse Logistics

What Drives Reverse Logistics and Returns? Wal-Mart Costs = up to 7 -8% of costs of goods!

Impacts

SCOR and Returns Plan Deliver Return Plan Source Make Return Plan Deliver Return Source Make Deliver Suppliers’ suppliers Return Deliver Return Source Return Customer Supplier Internal or External Make Plan Return Your Company Internal or External Customers’ customers Processes associated with receiving returned products for any reason. These processes extend into post-delivery customer support. The process includes communication between the customer and last known holder or known return center and the generation of associated documentation.

Impacts of Reverse Logistics • • Forecasting Carrying costs Processing costs Warehousing Distribution Transportation Personnel Marketing

Reverse Logistics - What is it? The Commercial Perspective Reverse Logistics is the process of moving products from their typical final destination to another point, for the purpose of capturing value otherwise unavailable, or for the proper disposal of the products.

Typical Reverse Logistics Activities • Processing returned merchandise damaged, seasonal, restock, salvage, recall, or excess inventory • Recycling packaging materials/containers • Reconditioning, refurbishing, remanufacturing • Disposition of obsolete stuff • Hazmat recovery

Reverse Logistics - New Problem? • • Sherman Montgomery Ward’s - 1894 Recycling/remanufacturing in 1940 s World War II - 77, 000 square feet of storage across Europe with over $6. 3 billion in excess stuff • Salvage and reuse of clothing and shoes in the Pacific Theater World War II

Costs - above the cost of the item – Merchandise credits to the customers. – The transportation costs of moving the items from the retail stores to the central returns distribution center. – The repackaging of the serviceable items for resale. – The cost of warehousing the items awaiting disposition. – The cost of disposing of items that are unserviceable, damaged, or obsolete.

Costs • Process inbound shipment at a major distribution center = 1. 1 days • Process inbound return shipment = 8. 5 days • Cost of lost sales • Wal-Mart: Christmas 2003 - returns = 4 Days of Supply for all of Wal. Mart = 2000 Containers • Palm. One - 25% return rate on PDAs

Is it a problem? • Estimate of 2004 holiday returns: $13. 2 billion • % of estimated 2004/2005 holiday returns: 25% • Wal-Mart: $6 Billion in annual returns = 17, 000 truck loads (>46 trucks a day) • Electronics: $10 Billion annually in returns • Personal Computers: $1. 5 Billion annually = approximately $95 per PC sold • 79% of returned PCs have no defects

Returns: an Operations Perspective – – – – Emerging industry in infancy stage Many skill sets involved, deep knowledge of some skills Person on Warehouse floor –needs tools No Schooling for Reverse Logistics No rules or standards No methods Few Best Practices Few comparisons • How do we know WHAT we should be doing? • How do we know HOW WELL we are doing? • Where are the opportunities to improve PROFITS?

Some Key Operational Challenges Operations people face: 1. So many people, from so many departments, at so many locations, from different companies, needed to process one return 2. For the group managers, returns is a small, annoying part of their group – Most of a Return is someone else’s problem /fault 3. Turn Around Time is often very slow and difficulties often arise that add days to the processing of a Return

Key Operational Challenges - 2 4. Difficulties arise with process Hand-offs between groups, Outsourced providers and multiple data systems – staff is continually reconciling 5. Collect little data about a Returned unit; it often has errors, so it may get handled incorrectly or we have to believe what the customer tells us 6. Often time consuming or difficult to track down the status of a unit 7. Stressful work environment due to frequent issues that need to be resolved ASAP 8. Senior staff spend considerable time solving processing problems or escalated issues

Best Practices • All Returns under control of ONE GROUP • Very Defined Business Processes • Process Mapping – author of text found that companies that develop process maps saved up to 40% • Map all processes and add timelines • Automate processes where possible

Why are the number of returns increasing?

Cell Phone Returns • Nearly 75% of returned phones are determined to have “No Trouble Found” • 63% of returned phones are resold “as is” • More than 16 hours of use and phone is no longer “new” • High returns rate impacts Original Equipment Manufacturers for products under warranty • Resold phones are used as scrap or warranty replacements • California legislation – requires retailers to establish system for collection, for reuse, recycling or disposal at no cost to the consumer

Source: DHL Presentation to Reverse Logistics Association, Feb 2007

NASA Reverse Logistics

Returns Impact All Operational Facets Marketing Product Logistics Development Production Purchasing Finance Product Returns Processes – all different Groups Authorize, Receive, Ship, Credit, Inventory, Inspect, Test, Repair, Disposition Multiple Locations Outsourced Parties Each with - their own processes - their own priority

Supply Chain Integrity • What is it? • Why is it important?

Supply Chain Integrity • • Perfect Order Fulfillment Information Security Parts integrity – Boeing 787 Product integrity – Mattel Shipping Integrity Inventory Integrity Cornerstone of supply chain leadership

Questions? ?

Summary • Global Logistics – controllable and uncontrollable factors • Impacts on global inventories • Traditional vs. Non-traditional organizations • Functional vs. Program design • Reverse Logistics – impacts, causes, best practices • Supply Chain Integrity

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