Chapter 10 Global logistics and international trade

Location Evaluation Techniques The Weighted-Factor Rating Model

Compares the attractiveness of several locations along a number of quantitative and qualitative dimensions. slide 24

The benefits of implementing a Trade Compliance System include:

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.

Major U.S. International Trade Legislation

7 major Laws / Acts in the 70 years from 1930 - 2000 10 major Laws / Initiatives in 2 immediate years post 9/11 slide 33/34

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

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.

Right-to-Work Laws

25 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.

Facility Types: 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. slide 5

Facility Types: Server Factory

A factory set up to take advantage of government incentives, reduce taxes/tariff barriers to meet regional needs slide 7

A typical cross-border shipment involves:

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.

Land Availability and Costs

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

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.

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

Correct valuation (price paid or payable) Correct classification Country of Origin (COO) Correct identification of merchandise Correct identification of buyer and seller and whether or not they are related

Penalties For Violations Can Be Substantial

Criminal Penalties Civil Penalties Statutory Sanctions slide 48

Global Logistics Intermediaries

Customs Brokers International Freight Forwarders Trading Companies Non-Vessel-Operating Common Carriers (NVOCC) slide 49

Decisions involve:

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

Quality-of-Life Issues

Education Economy Natural Environment Social Environment Culture Healthcare Government / Politics Mobility Public Safety Recreation

Regional Trade Agreements impact location decisions

European Union (EU): [1950] following WWII, consists of 26 members countries in Europe 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 in SE Asia Common Market of Eastern and Southern Africa (COMESA) [1993] among 19 member countries in Eastern and Southern Africa

Facility Types: Outpost Factory

Factory set up in an area with an abundance of advance supplier, competitors, research facilities, etc. slide 9

Facility Types: Contributor Factory

Focused on product development and engineering for products that they manufacturer slide 8

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.

Business Clusters

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

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 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

Business Cluster 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

12 Pillars of Competitiveness

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

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. 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. secure and facilitate imports arriving in the U.S., accommodating the increasing volume and complexities of international trade.

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).

Labor Issues

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

Facility Types: Source Factory

Manufactures products at low cost but with skilled workers and significant managerial resources slide 6

Global Facility Types

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

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. slide 45

DHS is the government agency who's mission is to:

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

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.

Facility Types: Lead Factory

Source of product and process innovation and competitive advantage across the entire organization (world-class) slide 10

Access to Suppliers and Cost

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

Utility Availability and Cost

Supply of electricity has not always kept pace with the high speed of development. China (2006) made several factories shut down for 1 day/week 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 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

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

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

Goods are not legally entered into US commerce until:

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.

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. In the service industry, proximity to customers is even more critical. You can't service a washing machine if your technician is 3000 miles away.

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.

Location Evaluation Techniques Break Even Model

Useful location analysis technique when fixed and variable costs can be determined slide 25

Export Process

When a shipment is ready to be exported, the shipper will file export documents for the goods' at the port of departure. must conform to Export Administration Regulations Complete and submit a Shippers Export Declaration (SED) Submit a Commercial Invoice for the product.

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 protects U.S. through and has a strong base of

active inspections at ports of entry. of industry partnerships and technology to safeguard the American public and promote legitimate international commerce. "Pushing the borders back"

U.S. Department of Homeland Security (DHS)

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

Managing international trade activities is

complex process.

The 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. slide 22

Is a major concern and dozens of laws, regulations and rules have to be checked and complied with for

every import and/or export transaction.

"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.

Nations forming trading groups

slide 30

Import / Export Process Flow

slide 43

Deemed Export

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 easily occur within the walls of your company, even if located within the borders of the United States. The release can be visual, oral, through on the job training, systems access, etc.

Trade Compliance Systems (or Global Trade Management systems)

vital tool for every major importing and exporting company in the US. only way to keep current with all of the continuously changing laws, regulations and procedures.