INTERNATIONAL BUSINESS MANAGEMENT

LESSON 37
INTERNATIONAL INVENTORY ISSUES,
PACKAGING ISSUES, STORAGE ISSUES & OTHERS.

International Inventory Issues EDI is the direct transfer of information technology between
Inventories tie up a major portion of corporate funds. Capital computers of trading partners. The usual paperwork the
used for inventory is not available for other corporate opportu- partners send each other, such as purchase or-ders and confir-
nities. Annual inventory carrying costs (the expense of mations, bills of lading, invoices, and shipment notices, are
maintaining inventories) though heavily influenced by the cost formatted into standard messages and transmitted via a direct
of capital and industry-specific conditions, can account for 15 link network or a third party net-work. EDI can save a large part
percent or more of the value of the inventories themselves. of the processing and administrative costs associated with
Therefore, proper inventory policies should be of major traditional ways of exchanging information.
concern to the international logistician. In addition, just-in-time The order-filling-time may also increase because lack of
inventory policies, which minimize the volume of inventory by familiarity with a foreign market makes the anticipation of new
making it available only when it is needed, are increasingly orders more difficult. Packing and shipment preparation require
required by multinational manufacturers and distributors more detailed attention. Finally, of course, transportation time
engaging in supply-chain management. They choose suppliers in-creases with the distances involved. Larger inventories may
on the basis of their delivery and inventory performance and have to be maintained both domestically and internationally to
their ability to integrate themselves into the supply chain. bridge the time gaps.
Proper inventory management may therefore become a
Consistency, the second dimension of order cycle time, is also
determining variable in ob-taining a sale.
more difficult to maintain in international business. Depending
The purpose of establishing inventory systems-to maintain on the choice of transportation mode, delivery times may vary
product movement in the delivery pipeline and to have a considerably from shipment to shipment: The variation
cushion to absorb demand fluctuations-is the same for requires the maintenance of large safety stocks to be able to fill
domestic and international operations. The international demand in periods when delays occur.
environment, how-ever, includes unique factors such as currency
exchange rates, greater distances, and duties. At the same time, Customer Service Levels
international operations provide the corporation with an The level of customer service denotes the responsiveness that
opportunity to explore alternatives not available in a domestic inventory policies per-mit for any given situation. A customer
setting, such as new sourcing or location alternatives. In service level of 100 percent would be defined as the ability to fill
international operations, the firm can make use of currency all orders within a set time-for example, three days. If, within
fluctuation by placing varying degrees of emphasis on inventory the ‘same three days, only 70 percent of the orders can be filled,
opera-tions, depending on the stability of the currency of a the customer service level is 70 percent. The choice of customer
specific country. Entire opera-tions can be shifted to different service level for the firm has a major impact on the inventories
nations to take advantage of new opportunities. In-ternational needed. In highly industrialized nations, firms frequently are
inventory management can therefore be much more flexible in expected to adhere to very high levels of customer service. For
its response to environmental changes. example, in the European Union, actual performance measures
for on-time delivery are 92 percent, for order accuracy 93 percent,
In deciding the level of inventory to be maintained, the
and for damage- free delivery 95 percent. Corporations are often
international manager must consider three factors: the order
tempted to design international customer service standards to
cycle time, desired customer service levels, and use of invento-
similar levels.
ries as a strategic tool.
Yet, service levels should not be oriented primarily around cost
Order Cycle Time or customary do-mestic standards. Rather, the level chosen for
The total time that passes between the placement of an order use internationally should be based on expectations encoun-
and the receipt of the merchandise is referred to as order cycle tered in each market. The expectations are dependent on past
time. Two dimensions are of major impor-tance to inventory per-formance, product desirability; customer sophistication, and
management: the length of the total order cycle and its consis- the competitive status of the firm.
tency. In international business, the order cycle is frequently
Because high customer service levels are costly, the goal should
longer than in domestic busi-ness. It comprises the time
not be the highest customer service leve1possible, but rather an
involved in order transmission, order filling, packing and
acceptable level. Different customers have different priorities.
preparation for shipment, and transportation. Order transmis-
Some will be prepared to pay a premium for speed, some may
sion time varies greatly internationally depending on the
put a higher value on flexibility, and another group may see low
method of communication. Supply-chain driven firms use
cost as the most impor-tant issue. Flexibility and speed are
electronic data interchange (EDI) rather than facsimile, telex,
expensive, so it is wasteful to supply them to cus-tomers who
telephone, or mail.
do not value them highly. If, for example, foreign customers

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 expect to receive their merchandise within 30 days, for the The task becomes even more challenging when one considers
INTERNATIONAL BUSINESS MANAGEMENT

international corporation to promise delivery within 10 or 15 that, in the course of long-distance transportation, dramatic
days does not make sense. Indeed, such delivery may result in changes in climate can take place. Still famous is the case of a
storage problems. In addition, the higher prices associated with firm in Taiwan that shipped drinking glasses to the Middle
higher customer service levels may reduce the competitiveness East. The com-pany used wooden crates and padded the glasses
of a firm’s product. By contrast, in a business to business with hay. Most of the glasses, how-ever, were broken by the
setting, sometimes even a four-hour delay in the delivery of a time they reached their destination. As the crates traveled into
cru-cial component may be unacceptable, since the result may be the drier Middle East, the moisture content of the hay
a shutdown of the pro-duction process. dropped. By the time the crates were delivered, the thin straw
In such instances, strategically placed depots in, a region must offered almost no protection.
ensure that near in-stantaneous response becomes possible. For The weight of packaging must also be considered, particularly
example, Storage Technologies, a maker of storage devices for when airfreight is used, as the cost of shipping is often based
mainframe computers, keeps parts at seven of its European on weight. At the same time, packaging material must be
sub-sidiary offices so that in an emergency it can reach any sufficiently strong to permit stacking in international transporta-
continental customer within four hours. tion. Another consideration is that, in some countries, duties
are assessed according to the gross weight of shipments, which
Inventory as a Strategic Tool
includes the weight of packaging. Obviously, the heavier the
Inventories can be used by the international corporation as a
packaging, the higher the duty will be.
strategic tool in dealing with currency valuation changes or to
hedge against inflation. By increasing invento-ries before an The shipper must pay sufficient attention to instructions
imminent devaluation of a currency instead of holding cash, provided by the customer for packaging. For example, requests
the cor-poration may reduce its exposure to devaluation losses. by the customer that the weight of anyone pack-age should not
Similarly, in the case of high inflation, large inventories can exceed a certain limit or that specific package dimensions should
provide an important inflation hedge. In such circum-stances, be adhered to, usually are made for a reason. Often they reflect
the international -inventory manager must balance the cost of limitations in trans-portation or handling facilities at the point
maintaining high levels of inventories with the benefits accruing of destination.
from hedging against inflation or devaluation. Many countries, Figure 12.6 Stresses in Intermodal Movement
for example, charge a property tax on stored goods. If the
increase in tax payments outweighs the hedging benefits to the
corporation, it would be unwise to increase inventories before a
devaluation.
International Packaging issues
Packaging is instrumental in getting the merchandise to the
ultimate destination in a safe, maintainable, and presentable
condition. Packaging that is adequate for domes-tic shipping Although the packaging of a product is often used as a form of
may be inadequate for international transportation because the display abroad, international packaging can rarely serve the dual
shipment will be subject to the motions of the vessel on which purpose of protection and dis-play. Therefore double packaging
it is carried. Added stress in in-ternational shipping also arises may be necessary. The display package is for fu-ture use at the
from the transfer of goods among different modes of point of destination; another package surrounds it for protec-
transportation. Figure 12.6 provides examples of some sources tive purposes.
of stress in intermodal movement that are most frequently One solution to the packaging problem in-international
found in international transportation. logistics has been the de-velopment of intermodal containers-
The responsibility for appropriate packaging rests with the large metal boxes that fit on trucks, ships, railroad cars, and
shipper of goods. The U.S. Carriage of Goods by Sea Act of airplanes and ease the frequent transfer of goods in interna-
1936 states: “Neither the carrier nor the ship shall be responsible tional shipments. Developed in different forms for both sea
for loss or damage arising or resulting from insufficiency of and air transportation, con-tainers also offer better utilization
pack-ing.” The shipper must therefore ensure that the goods are of carrier space because of standardization of size. The shipper
prepared appropriately for international shipping. This is therefore may benefit from lower transportation rates. In
important because it has been found that “the losses that occur addition, con-tainers can offer greater safety from pilferage and
as a result of breakage, pilferage, and theft exceed the losses damage. Of course, at the same time, the use of containers
caused by ma-jor maritime casualties, which include fires, allows thieves to abscond with an entire shipment rather than
sinkings, and collision of vessels. Thus the largest of these just parts of it. On some routes in Russia, for example, theft
losses is a preventable loss. . and pilferage of cargo are so common that liability insurers will
Packaging decisions must also take into account differences in not insure container haulers in the region. Container technology
environmental conditions-for example, climate. When the has greatly improved over the years.
ultimate destination is very humid or particularly cold, special Container traffic is heavily dependent on the existence of
provisions must be made to prevent damage to the product. appropriate handling fa-cilities, both domestically and interna-
tionally. In addition, the quality of inland trans-portation must

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be considered. If transportations for containers is not available coding of products and the use of package dimensions accept-

INTERNATIONAL BUSINESS MANAGEMENT

and the merchandise must be removed, the expected cost able to the warehousing system are basic requirements. In
reductions may not materialize. contrast, in warehouses still stocked manually, weight limita-
In some countries, rules for the handling of containers may be tions will be of major concern. And, if no forklift trucks are
designed to main-tain employment. For example, U.S. union available, palletized delivery is of little use.
rules obligate shippers to withhold con-tainers from firms that To optimize the logistics system, the logistician should analyze
do not employ members of the International Longshoremen’s international prod-uct sales and then rank order products
Association for the loading or unloading of containers within a according to warehousing needs. Products that are most
fifty-mile radius of Atlantic or Gulf ports. Such restrictions can sensitive to delivery time might be classified as “A” products.
result in an onerous cost burden. “A” products would be stocked in all distribution centers, and
Overall, cost attention must be paid to international packaging. safety stock levels would be kept high. Alternatively, the storage
The customer who ordered and paid for the merchandise of products can be more selective, if quick delivery by air can be
expects it to arrive on time and in good condition. Even with guaranteed. Products for which immediate delivery is not urgent
replacements and insurance, the customer will not be satisfied if could be classi-fied as “B” products. They would be stored only
there are delays. Dissatisfaction will usually translate directly into at selected distribution centers around the world. Finally,
lost sales. products for which there is little demand would be stocked only
at headquarters. Should an urgent need for delivery arise,
International Storage Issues airfreight could again assure rapid shipment. Classifying
Although international logistics is discussed as a movement or products enables the international logistician to substan-tially
flow of goods, a sta-tionary period is involved when merchan- reduce total international warehousing requirements and still
dise becomes inventory stored in warehouses. Heated maintain accept-able service levels.
arguments can arise within a firm over the need for and utility
of warehous-ing internationally. On the one hand, customers Special Trade Zones
expect quick responses to orders and rapid delivery. Accommo- Areas where foreign goods may be held or processed and then
dating the customer’s expectations would require locating many reexported without in-curring duties are called foreign trade
distribution centers around the world. On the other hand, zones. The zones can be found at major ports of entry and also
warehouse space is expensive. In addition, the larger volume of at inland locations near major production facilities. For example,
inventory increases the inventory carry-ing cost. Fewer ware- Kansas City, Missouri, has one of the largest foreign trade
houses allow for consolidation of transportation and therefore zones in the United States.
lower transportation rates to the warehouse. However, if the The existence of trade zones can be quite useful to the interna-
warehouses are located far from customers, the cost of outgo- tional firm. For ex-ample, in some countries, the benefits
ing transportation increases. The international logistician must derived from lower labor costs may be offset by high duties and
consider the tradeoffs between service and cost to the supply tariffs. As a result, location of manufacturing and storage
chain in order to determine the appropriate levels of warehous- facilities in these countries may prove uneconomical. Foreign
ing. trade zones are designed to exclude the impact of duties from
Storage Facilities the location decision. This is done by exempting merchan-dise
The location decision addresses how many distribution centers in the foreign trade zone from duty payment. The international
to have and where to locate them. The availability of facilities firm can there-fore import merchandise; store it in the foreign
abroad will differ from the domestic situa-tion. For example, trade zone; and process, alter, test, or demonstrate it -all
while public storage is widely available in some countries, such without paying duties. If the merchandise is subsequently
fa-cilities may be scarce or entirely lacking in others. Also, ‘the shipped abroad (that is, reexported), no duty payments are ever
standards and quality of facilities can vary widely. As a result, the due. Duty payments become due only if the merchandise is
storage decision of the firm is often accom-panied by the need shipped into the country from the foreign trade zone.
for large-scale, long-term investments. Despite the high cost, in- Trade zones can also be useful as transshipment points to
ternational storage facilities should be established if they reduce logistics cost and redesign marketing approaches. For
support the overall logistics effort. In many markets, adequate example, Audiovox was shipping small quantities of car alarms
storage facilities are imperative to satisfy customer demands and from a Taiwanese contract manufacturer directly to distributors
to compete successfully. For example, since the establishment in Chile. The shipments were costly and the marketing strategy
of a ware-house connotes a visible presence, in doing so a firm of requiring high minimum or-ders stopped distributors from
can convince local distributors and customers of its commit- buying. The firm resolved the dilemma by using a Miami trade
ment to remain in the market for the long term. zone to ship the alarms from Taiwan and consolidate the goods
Once the decision is made to use storage facilities abroad, the with other shipments to Chile. The savings in freight costs
warehouse condi-tions must be carefully analyzed. As an allowed the Chilean distributors to order whatever quantity they
example, in some countries warehouses have low ceilings. wanted and allowed the company to quote lower prices. As a
Packaging developed for the high stacking of products is result, sales improved markedly.
therefore un-necessary or even counterproductive. In other All parties to the arrangement benefit from foreign trade zones.
countries, automated warehousing is available. Proper bar

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 Clearly, ill will may arise if local managers are appraised and
INTERNATIONAL BUSINESS MANAGEMENT

The government maintaining the trade zone achieves increased

employment and investment. The firm using the trade zone rewarded on the basis of a performance they do not con-trol.
obtains a spearhead in the foreign market without incurring all This may be particularly problematic if headquarters staff
of the costs customarily associated with such an activity. As a suffers from a lack of information or expertise.
result, goods can be reassembled, and large shipments can be To avoid internal problems, both headquarters staff and local
broken down into smaller units. Also, goods can be repackaged management should report to one person. This person,
when packaging weight becomes part of the duty assessment. whether the vice president for international logis-tics or the
Fi-nally, goods can be given domestic “made-in” status if president of the firm, can then become the final arbiter to
assembled in the foreign trade zone. Thus, duties may be decide the firm’s priorities. Of course, the individual should
payable only on the imported materials and component parts also be in charge of determining appro-priate rewards for
rather than on the labor that is used to finish the product. managers, both at headquarters and abroad, so that corporate
In addition to foreign hade zones, governments also have de-cisions that alter a manager’s performance level will not affect
established export pro-cessing zones and special economic areas. the manager’s appraisal and evaluation. Further, the individual
The common dimensions for all the zones are that special rules can contribute an objective view when in-evitable conflicts arise
apply to them when compared with other regions of the coun- in international logistics coordination. The internationally cen-
try, and that the purpose of these special rules lies in the tralized decision-making process leads to an overall supply-chain
government’s desire to stim-ulate the economy, particularly the management per-spective that can dramatically improve
export side of international trade. profitability.
Export processing zones usually provide tax- and duty-free Decentralized Logistics Management
treatment for produc-tion facilities whose output is destined An alternative to the centralized international logistics system is
abroad. The maquiladoras of Mexico are one example of a decentralization. The main rationale for such decentralization is
program that permits firms to take advantage of sharp the fact that dealing with markets on a global scale can quickly
differentials in labor costs. Firms can carry out the labor- lead to problems of coordination. Particularly when the firm
intensive part of their operations in Mexico, while sourcing raw serves many international markets that are diverse in nature,
materials or component parts from other nations. total centralization might leave the firm unresponsive to local
One country that has used trade zones very successfully for its adaptation needs.
own economic development is China. Through the creation of If each subsidiary is made a profit center in itself, each one
special economic zones, in which there are no tariffs, substantial carries the full respon-sibility for its performance, which can lead
tax incentives, and low prices for land and labor, the govern- to greater local management satisfaction and to better adapta-
ment has attracted many foreign investors bringing in billions tion to local market conditions. Yet often such decentralization
of dollars. The investors have brought new equipment, deprives the logistics function of the benefits of coordination.
technology, and managerial know-how and have in-creased local For example, while headquarters, referring to its large volume
economic prosperity substantially. The job generation effect has of overall international shipments, may be able to extract
been so strong that the central Chinese government has bottom rates from transportation firms, individual subsidiaries
expressed concern about the overheating of the economy and by them-selves may not have similar bargaining power. The
the inequities between regions with and without trade zones. same argument applies also to the sourcing situation, where the
For the logistician, the decision whether to use such zones coordination of shipments by the purchasing firm may be
mainly is framed by the overall benefit for the supply-chain much more cost-effective than individual shipments from many
system. Clearly, additional transport and retrans-port are small suppliers around the world.
required, warehousing facilities need to be constructed, and Once products are within a specific market, however, increased
material handling frequency will increase. However, the costs input from local lo-gistics operations should be expected and
may well be balanced by the preferential government treatment encouraged. At the very least, local man-agers should be able to
or by lower labor costs. provide input into the logistics decisions generated by head-
Management of International Logistic quarters. Ideally, within a frequent planning cycle, local managers
The very purpose of a multinational firm is to benefit from can identify the logistics benefits and constraints existing in their
system synergism and a persuasive argument can be made for particular market and communicate them to headquarters.
the coordination of international logistics at cor-porate Headquarters can then either adjust its international logistics
headquarters. Without coordination, subsidiaries will tend to strategy accordingly or explain to the manager why system
optimize their in-dividual efficiency but jeopardize the efficiency optimization requires actions different from the ones recom-
of the overall performance of the sup-ply chain. mended. Such a justification process will help greatly in reducing
the potential for animosity between local and headquarters
Centralized Logistics Management operations.
A significant characteristic of the centralized approach to
international logistics is the existence of headquarters staff that Outsourcing Logistics Services
retains decision-making power over logistics activities affecting A third option, used by some corporations, is the systematic
international subsidiaries. If headquarters exerts control, it outsourcing of logistics capabilities. By collaborating with
must also take the primary responsibility for its decisions. transportation firms, private warehouses, or other specialists,

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corporate resources can be concentrated on the firm’s core disposal. To a growing degree the ability to develop such reverse

INTERNATIONAL BUSINESS MANAGEMENT

product. logistics is a key determinant for market acceptance and profit-
Many firms whose core competency does not include logistics ability.
find it more efficient to use the services of companies specializ- Society also recognizes that retrieval should not be restricted to
ing in international shipping. This is usually true for smaller short-term consumer goods, such as bottles. Rather, it may be
shipping volumes, for example in cases when smaller import- even more important to devise systems that enable the retrieval
export firms or smaller shipments are involved. Such firms and disposal of long-term capital goods, such as cars, refrigera-
prefer to outsource at least some of the international logistics tors, air conditioners, and industrial goods, with the least
functions, rather than detracting from staff resources and time. possible burden on the environment. In Germany, for example,
Some logistical services providers carve specific niches in the car manufacturers are required to take back their used vehicles for
transnational ship-ping market, specializing for example in dismantling and recycling purposes.
consumer goods forwarding. The resulting lower costs and Managers are often faced with the trade-offs between environ-
better service make such third parties the preferred choice for mental concerns and logistical efficiency. Companies increasingly
many firms. On the other hand, when hazardous or other need to learn how to simultaneously achieve environmental and
strictly regulated materials are in-volved, some firms may choose economic goals. Esprit, the apparel maker, and The Body Shop,
to retain control over handling and storing activities, in view of the well-known British cosmetics producer, screen their
possible liability issues. suppliers for environ-mental and social responsibility practices.
Going even further, one-stop logistics allows shippers to buy all The significance of this trend is reaffirmed in the new set of
the transporta-tion modes and functional services from a single rules issued by the International Organization of Standardiza-
carrier, instead of going through the pain of choosing different tion. ISO-14000 specifically targets international environmental
third parties for each service. One-stop logistics en-sures a more practices by evaluating companies both at the organization level
efficient global movement of goods via different transportation (management systems, environmental per-formance, and
modes. Specialized companies provide EDI tracking services environmental auditing) and product level (life-cycle assessment,
and take care of cumbersome customs procedures; they also la-beling, and product standards).
offer distribution services, such as warehousing and inventory From the perspective of materials management and physical
management. Finally, third parties may even take some of the distribution, environ-mental practices are those that bring about
international shipper’s logistical functions. This rapidly growing fewer shipments, less handling, and more direct movement.
trend provides benefits to both carriers and shippers. The latter Such practices are to be weighted against optimal efficiency rou-
enjoy better service and simplified control proce-dures, and tines, including just-in-time inventory and quantity discount
claims settlement. On the other hand, one-stop logistics can purchasing.
help carriers achieve economies of scale and remain competitive
On the transportation side, logistics managers will need to
in a very dynamic market. The proliferation of one-stop
expand their involvement in carrier and routing selection. For
logistics practices is facilitated by the wider acceptance of EDI
example, shippers of oil or other potentially hazardous
and the growing importance of quality criteria versus cost criteria
materials increasingly will need to ensure that the carriers used
in shipping decisions.
have excel-lent safety records and use only double-hulled ships.
While the cost savings and specialization benefits of such a Society may even expect corpo-rate involvement in choosing the
strategy seem clear, one must also consider the loss of control route that the shipment will travel, preferring routes that are far
for the firm, its suppliers, and its customers that may result from ecologically important and sensitive zones. Firms will
from such outsourcing. Yet, contract logistics does not and need to assert leadership in such consideration of the environ-
should not re-quire the handing over of control. Rather, it ment to provide society with a better quality of life.
offers concentration on one’s specializa-tion-a division of labor.
The control and responsibility toward the supply chain re-main Questions for Discussion
with the firm, even though operations may move to a highly 1. Explain the key aspects of supply-chain management.
trained outside organization. 2. Contrast the use of ocean shipping and airfreight.
Logistic and the Environment 3. Explain the meaning and impact if transit time in
The logistician plays an increasingly important role in allowing international logistics.
the firm to operate in an environmentally conscious way. 4. How and why do governments interfere in “rational” freight
Environmental laws, expectations, and self- imposed goals set carrier selection?
by firms are difficult to adhere to without a logistics orientation
5. How can an international firm reduce its order cycle time?
that systematically takes such concerns into account. Since laws
and regulations differ across the world, the firm’s efforts need 6. Why should customer service levels customer service levels
to be responsive to a wide variety of requirements. One new differ internationally? Is it, for example, ethical to offer a
logistics orientation that has grown in importance due to lower customer service level in developing countries than in
environmental concerns is the development of reverse distribu- industrialize countries?
tion systems. Such systems are in-strumental in ensuring that 7. What role can the international logistic play in improving the
the firm not only delivers the product to the market, but also environmental friendliness of the firm?
can retrieve it from the market for subsequent use, recycling, or

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