Logistics Chapter 4

• Global Sourcing/ foreign sourcing


  Buying outside the firm's country
• International sourcing vs domestic sourcing

  • International sourcing is more complex than domestic sourcing
  • International sourcing carries a higher risk than domestic sourcing
  • Sourcing internationally requires exceptional skills in communication and legal requirements, and an understanding of markets and transportation systems
  • International sourcing personnel should understand the exchange rate and the risks of foreign currency
  • An information system for information sharing across organisations and national borders is necessary for global purchasing
• Reasons for global sourcing

  • Quality issues
  • Lower cost
  • Technological advancement
  • Larger product range
  • Creation of strategic alliances
• Risks in global supply chain

  • Delays
  • Procurement risks
  • Quality risks
  • System risk
  • Higher cost of doing business
  • Culture and communication
• Micro Environment


  Controllable environment
• Macro-environment


  Uncontrollable environment is characterised by uncertainty
• Factors of macro environment

  • Economical
  • Legal
  • Political
  • Ethical
  • Environmental
  • Technological
• Foreign market entry modes

  • Exporting
  • Licensing
  • Joint venture
  • Wholly owned subsidiaries
  • Importing
  • Countertrade
• Exporting


  Firm maintains its production facilities in its home and sells its products
• Advantages of exporting


  • Greater flexibility
  • No additional production facilities or logistics assets investments are needed
  • Assists a firm to realise experience curve economies as well as location economies
• Disadvantages of exporting


  • High transportation cost
  • Trade barriers to import in the foreign country
  • Problems with foreign market agencies
• Licensing


  Agreements that allow a firm in one country to use the manufacturing, processing, trademark, know-how, technical assistance, merchandising knowledge, or some other skill provided by a licensor located in another country
• Advantages of licensing


  • Allows the domestic firm more control over how the product is distributed
  • Specific logistics functions are carried out by the licensee using the established distribution systems of the foreign market
  • Licensor does not have to carry the risk and cost associated with setting up a foreign operation
• Disadvantages of licensing


  • Licensor has no control over the licensee to promote and market its product
  • Risk of losing technological know-how to licensee, hence creating a potential future rival
  • Limits a firm's ability to implement a coordinated strategy to facilitate entry into multiple foreign marketing
• Joint venture


  Company joining with foreign companies to sell or market a product or service
• Advantages of joint venture

  • Domestic firms can provide significant management input into the supply chain and logistics strategies of foreign enterprises because of its financial partnership
  • Firms benefits from the partner's knowledge of the host country's market
• Disadvantages of joint venture

  • There are greater risks of giving control of the firm's technology to the partner
  • Shared ownership arrangement could result in conflict in battles for control
• Wholly owned subsidiaries


  Investment firm owning one hundred percent of the new entity in the host country
• Advantages of wholly owned subsidiaries

  • Ability to engage in strategic global coordination
  • Customs duties and other import taxes are also eliminated
  • Realisation of experience curve economies
• Disadvantages of wholly owned subsidiaries

  • Most costly method of entering into and serving a foreign market
  • Last of flexibility because the firm has a long-term commitment to the foreign market
  • Another drawback, especially in politically unstable countries
• Importing


  Purchase of goods from foreign sources
• Advantages of importing


  • Quality management
  • Creation of global strategic alliances
  • International trade stimulation local economic activity
• Disadvantages of importing


  • May cause unemployment in developing countries
  • High logistics risks
  • May squeeze small domestic supplier
• Countertrade


  Exchanging of goods or services, which are paid for in whole or part with other goods or services rather with money
• Types of countertrade


  • Barter/swaps
  • Counter purchase
  • Buyback agreements
  • Offset
• Advantages of countertrade


  • Facilities ease of entry into challenging markets
  • Facilities the conservation of foreign currency
  • Enables participants to make fuller use of plant capacity
• Disadvantages of countertrade


  • Commodity prices can vary widely during the lengthy periods of countertrade
  • Transactions involved complex financial procedures, increased costs, and a risk of exchange rate fluctuations, duties and tax increases
  • Countertrade product may be of poor quality and difficult to market
• International logistics intermediaries


  • Customs brokers
  • Foreign freight forwarders
  • Trading companies
  • Non-vessel operating common carries
• International procurement office (IPO)


  An office in a foreign country that is owned and/or operated by the parent company to facilitate business interactions in the foreign country and surrounding region
• Documentation for international purchasing procedures

  • Sales contract
  • Certification of origin
  • Import licence
  • Bill of lading
  • Commercial invoice
• Global methods of payment

  • Letter of credit
  • Open account
  • Use of drafts
• Letter of credit


  • Irrevocable vs revocable
  • Confirmed vs unconfirmed
  • Revolving vs non-revolving