Chapter 10 Supply Chain

Institutions Infrastructure Macroeconomic stability Health and primary education Higher education and training Goods market efficiency Labor market efficiency Financial market sophistication Technological readiness Market size Business sophistication Innovation

12 Pillars of Competitiveness

Right to work laws

28 states have laws protecting the right of employees to decide whether or not to join or support a union.

Offshore Factory

A factory set up for manufacturing or assembly in a country where labor and/or raw materials are less expensive, for eventual import back into the manufacturer's home country. Manufactures products at low cost with minimal technical and managerial resources Take advantage of low labor costs Import or acquire parts locally, then export to the manufacturer or directly to customers Local management serves in a supervisory roll not in making management decisions.

Server Factory

A factory set up to take advantage of government incentives, and/or reduced tax/tariff barriers, to meet regional or local market needs Firm uses government incentives Low exchange risk and tariff barriers to reduce taxes and logistics costs. Makes minor improvements to product and processes Set up to serve the local market

Accurately completing and filing about 35 documents. Compliance with over 600 laws and 500 trade agreements which are constantly changing. Interfacing with about 25 parties, including Customs, carriers, freight forwarders, other government agencies, etc.

A typical cross-border shipment involves:

Supplier proximity influences the delivery of materials and the effectiveness of the supply chain.

Access to Suppliers and Cost

40% of the value of the merchandise

Businesses violating trade regulations (ITC) face fines of up to __________________________ for "negligence," which can mean simply failing to keep certain necessary records.

industry partnerships and technology

CBP has a strong base of _________________________ to safeguard the American public and promote legitimate international commerce.

Correct valuation (price paid or payable) Correct classification Country of Origin (COO) Identification of the merchandise Identification of buyer and seller and whether they are related

CBP is also concerned with revenue collection (i.e. tariffs and duties). Revenue is determined by item such as:

active inspections

CBP protects U.S. through _________________ at ports of entry.

secure and facilitate

CBP works to ___________________ imports arriving in the U.S., accommodating the increasing volume and complexities of international trade.

Tariffs or duties (i.e., import taxes) Transporting goods across borders can be complex and involve new / different partners Customs, business practices, and regulations vary by country Foreign markets are not homogeneous even within the country

Challenges with global supply chain:

Substantial fines per occurrence Individual and/or company sanctions

Civil Penalties

globalization, technology, transportation, and open markets (GTTO)

Companies can locate anywhere in the world due to increased:

Weighted Factor Rating Model

Compares the attractiveness of several locations along a number of quantitative and qualitative dimensions.

discourage importing

Countries with high tariffs ____________ ___________ goods into the country and encourage multinational corps to produce locally

Substantial Fines (and/or) 10+ years imprisonment

Criminal Penalties

prevent the entry of terrorists and the instruments of terrorism, while simultaneously ensuring the efficient flow of lawful traffic and commerce.

Department of Homeland Security's first priority is to:

Prevent terrorist attacks within the United States Reduce America's vulnerability to terrorism Minimize the damage from potential attacks and natural disasters

Dept of Homeland Security (DHS) is a gvt agency who's mission is to:

Global warming, air pollution, and acid rain are debated as being the price of industrialization. Trade liberalization creates the need for environmental cooperation

Environmental Issues

1973 Sony built a Server factory in Wales and then 15 years later got involved in development, planning, etc. and now is a Contributor factory

Example of Contributor Factory

Intel factory in Penang, Malaysia opened in mid 1970's, now is a lead factory. This is your "Go-To" factory

Example of Lead Factory:

Clothing produced in Bangladesh/Indonesia

Example of Offshore Factories:

Raleigh, Durham, Chapel Hill NC. Research Triangle Center. UNC, Duke, IBM , Cisco, etc. Silicon Valley, Calif.

Example of Outpost Factory

Coca-Cola bottling. Mix the final ingredients to take advantage of exchange rates, tariff, & taxes.

Example of Server Factory

HP Singapore produced calculators and keyboard

Example of Source Factory:

EU, NAFTA, ASEAN, MERCOSUR, COMESA

Examples of Regional Trade Agreements:

Shipment is ready to be exported, the shipper will file export documents for the goods' at the port of departure. Shipments must conform to Export Administration Regulations The shipper must: Know the product or technology being exported Know where it is being produced Know where and to whom it is being sent Know who will use the product Know whether there are any illegal restrictions in the order, L/C or other document (e.g. Boycott clauses). Complete and submit a Shippers Export Declaration (SED) Submit a Commercial Invoice for the product.

Export Process:

Outpost Factory

Factory set up in an area with an abundance of advance suppliers, competitors, research facilities, etc. Setup in a location within proximity to: Advance suppliers. Competitors. Research facilities & universities for materials, components and products.

Contributor Factory

Focused on product development and engineering for products that they manufacture Basically, a Server Factory which also includes: Product development. Production planning. Procurement decisions. Supplier development.

those of the states and communities in which they are located.

Foreign-trade zone sites are subject to the laws and regulations of the United States as well as

Business Clusters

Geographic concentrations of interconnected companies and institutions. Research parks and special economic / industrial zones serve as magnets for business.

Offshore Factory Source Factory Server Factory Contributor Factory Outpost Factory Lead Factory OSSCOL

Global Facility Types:

Defining each facility's strategic role (i.e., what type of facility) Determining the location for each facility (i.e., where in the world) Identifying the market(s) that each facility serves

Global Location Decisions Involve:

compare and contrast one potential location against another when making global location decisions

Global Location Factors are used to

Competitiveness Taxes and Incentives Currency Stability Access and Proximity to Markets Labor Issues Right to Work Laws Access to Suppliers and Cost Utility Availability and Cost Environmental Issues Land Availability and Cost Quality of Life Issues Business Clusters Trade Agreements

Global Location Factors:

The shipment has arrived within the port of entry Delivery to the shipping destination has been authorized by CBP (following submission and review of required documentation) Estimated duties have been paid.

Goods are not legally entered into US commerce until:

Trade Compliance Systems

Have become a vital tool for every major importing and exporting company in the US.

Currency Stability

Impacts business costs and consequently location decisions. A few years back, Brazil had 1000% annual inflation rate. Not so easy to set prices in that currency environment

the material is moved outside the FTZ for consumption

In regards to FTZs, U.S. duty and excise tax, if applicable, are only payable when

Free Trade Zones.

Internationally, similar areas to Foreign Trade Zones are called

U.S. Customs and Border Protection (CBP)

It is the "gateway agency" for more than 20 other government agencies each of which has some control over various aspects of international trade.

U.S. Customs and Border Protection (CBP)

Its' mission is to safeguard America's borders thereby protecting the public from dangerous people and materials while enhancing the Nation's global economic competitiveness by enabling legitimate trade and travel.

Labor Issues Labor availability, productivity, and skill. Unemployment / underemployment rates Wage rates; turnover rates; labor force competitors.

Labor Issues

As land and construction costs in big cities continue to escalate, the trend is to locate in the suburbs and rural areas

Land Availability and Costs

Source Factory

Manufactures products at low cost but with skilled workers and significant managerial resources Basically, an offshore factory that includes: Plant management involvement in supplier selection Plant management involvement in production planning More developed local infrastructure Access to skilled workforce Low production costs

Customs Broker

Move global shipments through customs and handle documentation.

Non-Vessel-Operating Common Carriers (NVOCC)

Operate like freight forwarders but use only scheduled ocean liners.

Increased Revenue though global business and economic opportunities Increased sourcing options with more potential sources of supply to choose from including potential economic opportunities

Operating supply chain globally can present opportunities like:

U.S. Customs and Border Protection (CBP)

Originally established in 1789, controls the import process

International Freight Forwarders

People who Move goods to and from foreign destination

Assembly, exhibition, inspection, salvage, destruction, reclassification, manufacturing, processing, storage, testing, relabeling, repackaging

Permitted Activities in FTZs: ON EXAM

Foreign Trade Zone - FTZ

Physical areas inside the US supervised by U.S. Customs and Border Protection that are considered to be outside of the U.S. territory. Usually located at or near a port of entry.

Trading Companies

Put buyers and sellers from different countries together and handle export/import arrangements, documentation and transportation.

You will need people to work at these locations - so consider the following Quality-of-Life issues in terms of maturity, sophistication, robustness, etc., in each location, and do a comparison/evaluation: Education Economy Natural Environment Social Environment Culture Healthcare Government / Politics Mobility Public Safety Recreation

Quality of Life issues

Trade Compliance Systems

Really the only way to keep current with all of the continuously changing laws, regulations and procedures.

Innovation and competition can be geographically concentrated. Close cooperation, coordination, and trust among clustered companies Fierce competition among rival companies Companies recruit from local skilled workers

Reasons for success of business clusters:

Lead Factory

Source of product and process innovation and competitive advantage across the entire organization (world-class) Competitive advantage of the organization. Source of innovation.

Seizure and forfeiture of items in violation, including the vessels and aircraft carrying the items. Loss of import and/or export privileges for a business unit, division, or for the entire company. Detailed inspections of every single shipment, and delayed release by US Customs & Border Protection.

Statutory Sanctions

Identify the locations to be considered. Determine the fixed cost of land, property taxes, insurance, equipment, and buildings. Determine the unit variable cost, materials, utilities, and transportation costs. Construct the total cost lines. Determine the break-even points on the graph. Identify the range over which each location has the lower cost.

Steps of Break Even Model

Identify the factors Assign weights to each factor. The weights sum to 1. Determine a score for each factor. Multiply the factor score by the weight, then sum the weighted scores The location with the highest total weighted score is the recommended location.

Steps of Weighted-Factor Rating Model

Increased level of compliance compared to a manual process. Decreased number of physical inspections by US Customs & Border Protection Faster release of shipments by US Customs & Border Protection. Avoidance of fines and penalties. Opportunity to interface with other systems

The benefits of implementing a Trade Compliance System include:

PROXIMITY Access and Proximity to Markets

The trend in manufacturing is to be within delivery _________ of your customers. In the service industry, __________ to customers is even more critical.

automate the process

Trade Compliance Systems can _________________ of checking every transaction For commercial and non-commercial products against every legal regulation before import or export.

The information changes frequently It's often made available only in a foreign language It's not always produced in an electronic form

Trade regulations and related content are at the heart of the International Trade Compliance, but staying up to date is a challenge because:

Security International Freight Security

Transportation across national boundaries introduces added complexity, particularly with __________. Since 9/11 there is more conflict between the U.S. government and industry regarding more ___________ and restrictions for international shipments. (same word)

Break Even Model

Useful location analysis technique when fixed and variable costs can be determined

In heavy industries the availability and cost of energy are critical considerations. - Telecommunication costs have dropped dramatically. Many organizations now have back office operations and call centers internationally to serve the U.S. market.

Utility Availability and Cost

Administering agreements Forum for trade negotiations Trade disputes Monitor trade policies Aid for Developing countries International organizations

WTO Functions:

export documents

When a shipment is ready to be exported, the shipper will file _______________ for the goods' at the port of departure.

the Importer of Record

When a shipment reaches the US, ___________________ (i.e., the owner, or purchaser) must file entry documents at the port of entry.

not subject to U.S. duty or excise tax.

While in the FTZ, merchandise is

DHS (Dept of Homeland Security)

assumed responsibility for securing our nation's borders and transportation systems which straddle 350+ official ports of entry and connects our homeland to the rest of the world

World Trade Organization (WTO)

deals with the global rules of trade between nations. Its main goal is to ensure that trade flows as smoothly, predictably and as freely as possible.

"Technology"

defined as the specific information necessary for the development, production or use of a commodity

Tariffs

federal taxes that are designed to protect local businesses

Deemed Export

release of technology or source code that is subject to the Export Administration Regulations, to a foreign national (i.e., non-US citizen) located in the United States.