Exam 3: Chapter 10 - Global Logistics & International Trade

The Weighted-Factory Rating Model

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

Contributor Factory Characteristics

Includes: - Product development - Production planning - Procurement decisions - Supplier development

Global Supply Chain - 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

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 places that offer lower cost labor and lower real estate prices.

U.S. Customs and Border Protection

- "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 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.,

Permitted Activities in FTZs

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

Global Location Factors

- 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

CBP is also concered with revenue collection by item such as:

- Correct valuation - Correct classification - Country of Origin - Identification of the merchandise - Identification of buyer and seller and whether they are related.

Server Factory Characteristics

- 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.

Business Clusters

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

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 * For commercial and non-commercial products against every legal regulation before import or export.

Steps in Weighted Factory Rating

- 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.

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.

Labor Issues

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

Offshore Factory Characteristics

- 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.

Source Factory Characteristics

- Plant management involvement in supplier selection - Plant management involvement in production planning - More developed local infrastructure. - Access to skilled workforce - Low production costs.

Tax 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.

An intentional or unintentional export of controlled technology can easily occur within the walls of your company, even if located within the borders of the Untied States.

- The release can be visual, oral, through on the job training, or via systems access, etc. - "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.

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 materials is moved outside the FTZ for consumption.

Foreign trade zone sites

- are subject to the laws and regulations of the United States 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.

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

Global Facility Types

1. Offshore Factory 2. Source Factory 3. Server Factory 4. Contributor Factory 5. Outpost Factory 6. Lead Factory

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.

Steps in Break Even Model

1.) Identify the locations to be considered. 2.) Determine the fixed cost of land, property taxes, insurance, equipment, and buildings. 3.) Determine the unit variable cost, materials, utilities, and transportation costs. 4.) Construct the total cost lines. 5.) Determine the break-even points on the graph. 6.) Identify the range over which each location has the lower cost.

7 Major U.S. International Trade Legislation

1930 - Tariff Act of 1930 & Subsequent Regulations 1935 - Anti- Smuggling Act of 1935. 1978 - Public Law 95-410 1984 - Trade & Tariff Act of 1984 1993 - Title VI of the NAFTA - "Mod Act" & Subsequent Regulations. - CAT Audits - Compliance Assessment Team Audit. 1999 - FDA/USDA - Presidential initiatives for safety of imported goods.

Right-to-Work Laws

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

Businesses violating trade regulations face fines of up to

40% of the value of the merchandise for "negligence," which can mean simply failing to keep certain necessary records.

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.

Server Factory

A factory set up to take advantage of government incentives, reduce taxes/tariff barriers to meet regional needs.

WTO functions include:

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

Land Availability and Costs

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

FTZ Penalties for Violations

Criminal Penalties - Substantial Fines - 10+ years of imprisonment Civil Penalties - Substantial fines per occurrence - Individual and/or company sanctions Statutory Sanction - 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.

Global Logistics Intermediaries

Customer Brokers - Move global shipments through customs and handle documentation International Freight Forwarders - Move goods to and from foreign destination Trading Companies - Put buyers and sellers from different countries together and handle export/import arrangements, documentation and transportation. Non-Vessel-Operating Common Carriers (NVOOC) - Operate like freight forwarders but use only scheduled ocean liners.

Regional Trade Agreements impact location decisions:

European Union (EU): - [ 1950] following WWII, consists of 27 member countries in Europe {26 with BREXIT}.

Outpost Factory

Factory set up in an area with an abundance of advanced suppliers, competitors, research facilities, etc.

Contributor Factory

Focused on product development and engineering for products that they manufacturer.

Companies can locate anywhere in the world due to increased...

Globalization, technology, transportation, and open markets.

Global Logistics

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.

International Trade Compliance

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

Quality-of-Life Issues

Issues to consider: Education Economy Natural Environment Social Environment Culture/recreation Healthcare Government/politics Mobility Public Safety

Source Factory

Manufactures products at low cost but with skilled workers and significant managerial resources.

U.S. Department of Homeland Security

Mission: 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.

Foreign 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. Foreign and domestic merchandise maybe moved into FTZs for operations not otherwise prohibited by law, including these Permitted Activities:

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.

Access to Suppliers and Cost

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

Global Supply Chain - Challenges

Tariffs or duties (i.e., import taxes) Transporting goods across borders Customs, business practices, and regulations vary by country Foreign markets are not homogeneous even within the country

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.

Export Administration Regulations (EAR)

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

Break Even Model

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

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.

Southern Common Market (MERCOSUR)

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

North American Free Trade Agreement (NAFTA)

[1994] Removed most barriers to trade and investment among U.S., Canada, and Mexico.

Global Location Decisions

involve: 1.) Defining each facility's strategic role. 2.) Determining the location for each facility 3.) Identifying the market(s) that each facility serves.

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.

A major concern and dozens of laws, regulations and rules have to be checked and complied:

for every import and/or export transaction.

Currency Stability

impacts business costs and consequently location decisions.