SCM Chapter 10: Global Logistics & International Trade

Business Clusters

*Geographic concentrations of interconnected companies and institutions located in a single location* - Research parks and special economic/industrial zones serve as magnets for business Reasons for success: - 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

13 Global Location Factors

*These are factors used to compare and contrast one potential location against another when making global location decisions* 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

WTO Functions include:

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

Shippers must also:

- Complete and submit a *Shippers Export Declaration (SED)* - Submit a *Commercial Invoice* for the product

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

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

Penalties for Violations

- Criminal Penalties a. Substantial fines (and/or) b. 10+ years imprisonment - Civil Penalties a. Substantial fines per occurrence b. Individual and/or company sanctions - Statutory Sanctions a. Seizure and forfeiture or items in violation, including the vessels and aircraft carrying the item b. Loss of import and/or export privileges for a business unit, division, or for the entire company. c. Detailed inspections of every single shipment, and delayed release by US Customs and Boarder Protection

Environmental Issues

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

Trade Compliance Systems

- Have become a vital tool for every major importing and exporting company in the US. - Really the only way to *keep current* with all of the continuously changing laws, regulations and procedures. - Trade Compliance Systems can *automate the process* of checking every transaction a. For commercial and non-commercial products against every legal regulation before import or export.

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

Global Trade Opportunities

- Increase 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 - Nations forming trading groups (Ex. EU, NAFTA, MERCOSUR, ASEAN, COMESA)

Benefits of Trade Compliance Systems

- 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 Shipper Must:

- Know the product or technology being exported - Know where it is being produced - Know where and to who 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)

Labor Issues

- Labor availability, productivity, & skill. - Unemployment & underemployment rates. - Wage rates; turnover rates; labor force competitors.

Taxes and Incentives

- Several levels of government must be considered when evaluating potential locations. - Tariffs are federal taxes that are designed to protect local businesses. - Countries with high tariffs *discourage importing* goods into the country and encourage multinational corporations to produce locally.

Utility Availability and Cost

- Supply of electricity has not kept pace with the high speed of development. - 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.

Global Trade Challenges

- Tariffs or duties (i.e., import taxes) - Transporting goods across boarders 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

International Freight Security

- Transportation across national boundaries introduces added complexity, particularly security. - Since 9/11 there is more conflict between the U.S. government and industry regarding more security and restrictions for international shipments.

2 Location Evaluation Techniques

- Weighted-Factor Rating Model - Break Even Model

Global Logistics Intermediaries

-Customs Brokers -International Freight Forwarders -Trading Companies -Non-Vessel-Operating Common Carriers

12 Pillars of 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

6 Global Facility Types

1. Offshore Factory (Very Basic) 2. Source Factory 3. Server Factory 4. Contributor Factory 5. Outpost Factory 6. Lead Factory (More Complex and Comprehensive)

Mission of DHS (Department of Homeland Security) is to:

1. Prevent terrorist attacks within the U.S. 2. Reduce America's vulnerability to Terrorism 3. Minimize the damage from potential attacks and natural disasters

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 documentaries) 3. Estimated duties have been paid

Millions of shipments cross into the US annually, providing the US with goods and services:

11.2 Million Trucks 2.2 Million railcars 7,500 foreign-flag ships making 51,000 calls on US ports On a typical day, 70,334 truck, rail, and sea containers are arriving at 328 ports across the US.

Right to Work Laws

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

Business violating trade regulations face fines of up to _____________________________ for "negligence," *which can mean simply failing to keep certain necessary records*

40% of value of the merchandise

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 role, not in making management decisions. *Ex.* Clothing produced in Bangladesh, Indonesia

Server Factory

A factory set up to take advantage of *government incentives, and/or reduce taxes/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 *Ex.* Coca-Cola bottling. Mix the final ingredients to take advantage of exchange rates, tariffs, and taxes.

Land Availability and Cost

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

Foreign and domestic merchandise may be moved into FTZs for operations not otherwise prohibited by law, including these *Permitted Activities* (12):

Assembly Exhibition Inspection Salvage Destruction Reclassification Manufacturing Processing Storage Testing Relabeling Repackaging

Global Location Decisions

Companies can locate anywhere in the world due to increased *globalization, technology, transportation, and open markets.* - Facility location must be part of the firm's supply chain strategy - 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

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 the 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

Customs and Boarder Protection (CBP)

Est. 1789 - Controls the import process - It is a *"gateway agency"* for more than 20 other government agencies each of which has some control over various aspects of international trade. - It's mission is to *safeguard America's Boarders* 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 US, accommodating the increasing volume and complexities of international trade. - *"Pushing the boarders back"*

Shipments must conform to ___________________________.

Export Administration Regulations

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

Contributor Factory

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

Import / Export Process Flow

Foreign Country *EXPORTS* to USA ---> USA *IMPORTS* from Foreign Country Foreign Country *IMPORTS* from USA <-------- USA *EXPORTS* to Foreign Country

Regional Trade Agreements

Impact location decisions *European Union (EU)* [1950] 26 members countries of Europe [BREXIT] *North American Free Trade Agreement (NAFTA)* [1994] Removed most barriers to trade and investment among U.S., Canada, and Mexico. *Southern Common Market (MERCOSUR)* [1991] among Argentina, Brazil, Paraguay, and Uruguay *Association of Southeast Asian Nations (ASEAN)* [1967] among 10 member countries in SE Asia *Common Market of Easter and Southern Africa (COMESA)* [1993] among 19 members countries in Eastern and Southern Africa

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

Industry partnership and technology

International Trade Compliance (ITC)

Managing international trade activities is a *complex process* - A typical *cross-boarder* shipment involves: a. Accurately completing and filing about *35 documents.* b. Compliance with over *600 laws* and *500 Trade Agreements* which are constantly changing c. Interfacing with about *25 parties* including Customs, carriers, freight forwarders, other government agencies, etc.

Source Factory

Manufactures products at low cost but with *skilled workers and significant managerial input and control (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 cost *Ex.* Hewlett-Packard Singapore Factory produced calculators and keyboards

Customs Brokers

Move global shipments through customs and handle documentation

International Freight Forwarders

Move goods to and from foreign destination

Quality of Life Issues/Factors (9)

Need to consider the following Quality-of-Life issues in terms of maturity, sophistication, robustness, etc. in each location: Education Economy Natural Environment Social Environment Culture/recreation Healthcare Government/politics Mobility Public Safety

Non-Vessel-Operating Common Carriers (NVOCC)

Operate like freight forwarders but use only scheduled ocean liners.

Foreign Trade Zone (FTZ)

Physical areas *inside* the US supervised by US Customs and Boarder Protection that are considered to be *outside of the US territory*. Usually located at or near a port of entry. - Sites are subject to the laws and regulations of the US as well as 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*, similar areas are called *Free Trade Zones*

Trading Companies

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

On March 1st, 2003, DHS assumed responsibility for _______________________________________ which straddled 350+ official ports of entry and connects our homeland to the rest of the world.

Security over nations boarders and transportation systems

Lead Factory

Source of product and process *innovation* and advantage across the entire organization (world-class) - Competitive advantage of the organization - Source of innovation *Ex.* Intel Factory in Penang, Malaysia opened in mid 1970's, now is a lead factory. This is your "Go-To" Factory.

Access to Suppliers and Cost

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

Deemed Exports

The 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.

Technology is defined as

The specific information necessary for the development, production or use of a commodity - Usually technology is even more strictly controlled than a commodity. - The proper controls are needed to ensure that any such export occurs legally (i.e., with the proper licenses and approvals) and does not expose you or your company to penalties

Access and Proximity to Markets

The trend in manufacturing is to be within delivery proximity of your customers. - Logistics timelines and costs are the concerns, so that reinforces a clustering effect of suppliers and producers to place that offer lower cost labor and lower real estate prices. - In the service industry, proximity to customers is even more critical (You can't serve a washing machine if your technician is 3000 miles away...)

Break Even Model

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

The release can be ___________________________________________.

Visual, oral, on job training, via systems, access, etc.

Export Process

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

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.

The ___________________________________- 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.

World Trade Organization (WTO)

CBP protects the US through ___________________ at ports of entry.

active inspections

The DHS'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

An intentional or unintentional export of controlled technology can easily occur within the walls of your company, ______________________________________________.

even if located within the boarders of the US.

ITC is a *major concern* and dozens of laws, regulations and rules have to be checked and compiled with for __________________________________________.

every import and/or export transaction.

While in the FTZ, merchandise is ____________________________________.

not subject to US duty or excise tax. - US duty and excise tax, if applicable, are only payable when the material is moved outside the FTZ for consumption.

Trade regulations and related content are at the heart of ITC, but ______________________________________ because: - Information changes frequently - It's often made available only in a foreign language - It's not always produced in an electronic form

staying up to date is a major challenge