Chapter 10 Supply Chain -- Global Logistics & International Trade

Business Clusters

- A business cluster is a geographic concentrations of interconnected companies and institutions. - Research parks and special economic / industrial zones serve as magnets for business clusters. - Often naturally developed around the industry leader(s) - Reasons for Clustering: Innovation Close cooperation and coordination among clustered companies Companies recruit from local skilled workers Extended support systems are established Targeted education programs Government support Trade associations

Trade Compliance

- A major concern as dozens of laws, regulations and rules must be checked and complied with for every import / export transaction. - In the US alone, millions of shipments enter annually 11.2 million trucks & 2.2 million rail cars 7,500 foreign-flag ships making 51,000 calls on U.S. ports On a typical day, 70,334 truck, rail, and sea containers are arriving at 328 ports across the US. - Businesses violating trade regulations face fines of up to 40% of the value of the merchandise for "negligence," which can mean simply making a paperwork mistake or keeping necessary records. - Trade Compliance Software Systems automate the process, checking every transaction for compliance thereby avoiding fines and enabling the product to move quickly through customs

Taxes, Incentives & Regulatory fees

- All levels of government must be considered when evaluating the financial impact of potential locations. - Many types of taxes (tariffs, income, property, employment, welfare, environmental, etc) - Many regulatory fees (permits, licenses, regulatory approval...) **Tariffs are federal taxes that are designed to protect local businesses by balancing costs. **Countries with high tariffs discourage importing goods into the country and encourage multinational corporations to produce locally.

International Trade Legislation

- Global supply chains must comply with the ever changing laws and regulations in every country they do business. - Often countries impose conflicting regulations or different standards. Import and Export rules differ - US companies must also abide by regulations that impact their foreign operations - e.g. Foreign Corrupt Practices Act (FCPA), embargos, etc * 7 major Laws / Acts in the 70 years from 1930 - 2000; 10 major Laws / Initiatives in 2 years post 9/11

Labor Issues

- Labor availability, productivity, and skill. - Unemployment / underemployment rates - Wage rates; turnover rates; labor force competitors. - Unionization vs. Right-to-Work Laws * In the USA, 28 states have Right to Work laws which means employees are not forced to join or support a union as a requirement of employment.

Import / Export Customs Brokers

- Move global shipments through customs and handle all required documentation on behalf of the company. - Company handles the financial transaction directly based on the broker's instructions

Foreign (Free) Trade Zones (FTZ's)

- 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. - Foreign and domestic merchandise may be moved into FTZs for operations, not otherwise prohibited by law, such as storage, exhibition, assembly, manufacturing, and processing. - While in the FTZ, merchandise is not subject to U.S. duty or excise tax. U.S. duty and excise tax, if applicable, are only payable when the material is moved outside the FTZ for consumption. - Foreign-trade zone sites are subject to the laws and regulations of the United States and those of the states and communities in which they are located. - There is no limit on the time material may remain in the zone. - Internationally, they are called free trade zones.

Statutory Sanctions

- 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.

Import Process

- When a shipment reaches the US, the Importer of Record (i.e., the owner, or purchaser) must file entry documents at the port of entry. - CBP is also concerned with revenue collection (i.e. tariffs and duties). Revenue is determined by item such as: 1. Correct valuation (price paid or payable) 2. Correct classification 3. Country of Origin (COO) 4. Correct identification of merchandise 5. Correct identification of buyer and seller and whether or not they are related

Deemed Exports

- the release of technology or source code that is subject to the Export Administration Regulations, to a foreign national located in the United States. - An intentional or unintentional export of controlled technology can occur within the walls of a company, even if located within the borders of the United States. *The release can be physical, visual, oral, through training, systems access... *"Technology" is tightly regulated by the US and specific information relating to the development, production or use is restricted *Proper controls must be established to ensure that any such export occurs legally (i.e., with the proper licenses and approvals) and does not expose the company and employee to penalties.

Utility Availability and Cost

1. Consistent, dependable supply of utilities is not always available. Also, development of utility production and distribution systems has not kept pace with the high speed of business development. - Many developing nations do not have the required infrastructure in place. - Even in developed areas, a utility crisis has made several factories shut down in Japan and China 2. In heavy industries the availability and cost of energy is critical. 3. The internet has enabled Telecommunication costs to drop dramatically. Many organizations now have back office operations and call centers internationally to serve all markets.

Penalties For Violations Can Be Substantial

1. Criminal Penalties 2. Civil Penalties 3. Statutory Sanctions

Global Location Decisions involve:

1. Defining each facility's strategic role (i.e., what type of facility) 2. Determining the location for each facility (i.e., where in the world) 3. Identifying the market(s) that each facility serves

Access to Markets

1. Establishing manufacturing to develop access to new markets or to be within delivery proximity of your customers. - Logistics timelines and costs can be reduced. 2. In the service industry, proximity to customers is critical.

International Trade Management

1. Opportunities and Challenges 2. Trade Legislation 3. Regulatory Authorities 4. Trade Compliance 5. Trade Intermediaries 6. Imports Process 7. Export Process 8. Penalties for Violations

Location Evaluation Techniques

1. The Weighted-Factor Rating Model 2. Total Cost Model

Goods are not legally entered into US commerce until:

1. The shipment has arrived within the port of entry 2. Delivery to the shipping destination has been authorized by CBP (following submission and review of required documentation) 3. Estimated duties have been paid.

Competitiveness of the location

12 Pillars of Country Competitiveness 1. Institutions 2. Infrastructure 3. Macroeconomic stability 4. Health and primary education 5. Higher education and training 6. Goods market efficiency 7. Labor market efficiency 8. Financial market sophistication 9. Technological readiness 10. Market size 11. Business sophistication 12. Innovation

Offshore Factory

A factory set up for manufacturing or assembly in a country where production is less expensive (lower labor & facility costs) for eventual shipment to the manufacturer's home country. - Produces products at low cost with minimal technical and managerial resources - Take advantage of low labor costs (labor arbitrage) - Produces for export to key selling markets - Local management executes and supervises, not in making management decisions.

Source Factory

A factory set up for manufacturing or assembly where production is less expensive (lower labor & facility costs). Similar to an off shore factory but with higher skilled labor and local production management. - Factory is responsible for end to end production planning of certain products including supplier selection - Often supply worldwide demand for the company of certain existing products - Production transitions to the Source factory after the product has been established in the market.

Server Factory

A factory set up to take advantage of government incentives, reduce taxes/tariff barriers to meet regional needs - Set up to serve the local market and avoid exchange risk and tariffs which reduces taxes and logistics costs. - Often gets government incentives to build the factory - Some product and package customization for the local market - Factory is responsible for end to end production planning

Outpost Factory

An outpost factory is established primarily to gain access to the knowledge or skills that the company needs in an area with the skilled resources and knowledge creation. Setup in a location within proximity to: - Research facilities & universities for materials, components and products. - Advanced industry suppliers. - Industry associations & competitors

Land Availability and Costs

Available and cost of land and construction continue to escalate in population centers. The trend is to locate production in more rural areas. This has to be balanced with resource availability and infrastructure

Global Location Decisions

Companies can locate anywhere in the world as technology, transportation, and communication has enabled globalization. - Facility location is a part of the firm's Business and supply chain strategy but must also consider legal & political environments. - Location still matters - industry clusters show that innovation & competition are geographically concentrated. - Global location decisions involve location of the facility, defining its strategic role, & identifying the markets it serves

Global Logistics Specialists

Companies can outsource custom clearance activities: 1. Import / Export Customs Brokers 2. Trading Companies / Import Merchants

The Weighted-Factor Rating Model

Compares the attractiveness of several locations along a number of quantitative and qualitative dimensions. - Identify the factors, Assign weights to each factor. The weights sum to 1, Determine a weighted score for each factor. - The location with the highest total weighted score is the recommended location.

Currency Stability

Currency exchange rates impact business costs and are included in location decisions. A stable currency is crucial for the business case to remain valid.

U.S. Department of Homeland Security (DHS)

DHS is the government agency who's mission is to: 1. Prevent terrorist attacks within the United States 2. Reduce America's vulnerability to terrorism 3. Minimize the damage from potential attacks and natural disasters - On March 1st 2003, DHS assumed responsibility for securing our nation's borders and transportation systems at 328 official ports of entry. - The Department's first priority is to prevent the entry of terrorists and the instruments of terrorism, while simultaneously ensuring the efficient flow of lawful traffic and commerce.

Global Facility Types

Different facility types play different roles in the supply chain. They progress from basic production to a critical role from 1 through 6 1. Offshore Factory 2. Source Factory 3. Server Factory 4. Contributor Factory 5. Outpost Factory 6. Lead Factory

Total Cost Model

Financial analysis when fixed and variable costs can be determined - Determine the fixed costs (land, taxes, insurance, equipment, buildings...) - Determine the unit variable cost (labor, materials, utilities, transportation...) - Construct the total expected cost formula for each location. - Determine the Total cost of each location based on planned production levels - Identify the range over which each location has the lower cost.

Contributor Factory

Focused on product development and engineering for products that the factory manufactures. A Server Factory which also includes engineering and product development. Server factory responsibilities plus: - Engineering research - Product development. - Supplier development.

Global Supply Chain

Global supply chains can present opportunities: - Increased revenue through global business (i.e., more customers) and economic opportunities - Increased sourcing options with more potential sources of supply to choose from including potential economic opportunities Global supply chains can present challenges: - Tariffs or duties (i.e., import taxes) - Transporting goods across borders - Customs, business practices, laws and regulations vary by country - Foreign markets are not homogeneous even within the country

Environmental Issues

Local environmental regulations need to be considered vs. the type of activity the company is looking to establish. Companies must stay true to CSR mission and objectives when evaluating environmental impacts.

Lead Factory

Main production facility of the organization. Source of product development, process innovation and competitive advantage. - Often connected to company HQ - Initial development and production of new products which move to other factories once established. - Core facility to company's success

Global Location Determination

Many factors are used to compare and contrast one potential location against another when making global location decisions. These factors can be at the country, region and / or local levels. 1. Competitiveness of the location 2. Taxes and Incentives 3. Currency Stability 4. Access / Proximity to Markets 5. Access to Suppliers 6. Labor Cost & Availability 7. Utility Cost & Availability 8. Land Cost & Availability 9. Environmental Issues 10. Quality of Life Issues 11. Business Clusters 12. Trade Agreements

U.S. Customs and Border Protection (CBP)

Originally established in 1789, U.S. Customs and Border Protection (CBP) controls the import process - It is the gateway agency for more than 20 other government agencies each of which has some control over various aspects of international trade. - 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. - CBP works to secure and facilitate imports arriving in the U.S., accommodating the increasing volume and complexities of international trade. - CBP protects U.S. through active inspections at ports of entry. - CBP has a strong base of industry partnerships and technology to safeguard the American public and promote legitimate international commerce.

Quality-of-Life Issues

People will work at these locations, often relocated from existing facilities to start up and operate the facility. Consideration must be given to the following Quality-of-Life issues to retain key employees: 1. Education 2. Economy 3. Natural Environment 4. Social Environment 5. Culture 6. Healthcare 7. Government / Politics 8. Mobility 9. Public Safety 10. Recreation

Trading Companies / Import Merchants

Put buyers and sellers from different countries together and handle export/import arrangements, documentation and transportation buy purchasing in the sellers market, handling the export and import, and selling in the buyers market.

Complete and submit a ___________________________________

Shippers Export Declaration (SED)

Criminal Penalties

Substantial Fines (and/or) 10+ years imprisonment

Civil Penalties

Substantial fines per occurrence Individual and/or company sanctions

Suppliers

Supplier proximity influences the delivery of materials and the effectiveness of the supply chain. Often encourage suppliers to set up operations close to the production facility

Trade Agreements - Global

The World Trade Organization (WTO) was established in 1995 and 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. - WTO functions include: Administering agreements Forum for trade negotiations Trade disputes Monitor trade policies Aid for Developing countries **164 member countries

Export Process

When a 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 restrictions to the export. Complete and submit a Shippers Export Declaration (SED) Submit a Commercial Invoice for the product value.

European Union (EU):

[1950] following WWII, consists of 26 members countries in Europe

Association of Southeast Asian Nations (ASEAN):

[1967] among 10 member countries in in SE Asia

Southern Common Market (MERCOSUR):

[1991] among Argentina, Brazil, Paraguay, and Uruguay

Common Market of Eastern and Southern Africa (COMESA)

[1993] among 19 member countries in Eastern and Southern Africa

North American Free Trade Agreement (NAFTA):

[1994] among U.S., Canada and Mexico.

Trans Pacific Partnership (TPP)

[2016] among 11 member countries located on the Pacific Rim (the United States withdrew January 23, 2017).