Global Supply Chains
There is discussion surrounding globalization and its effects on business, and there is no doubt that supply chain competitors are increasingly going head to head on a worldwide playing field. Competing in supply networks that cross borders adds a set of problems when compared to doing business in one market where competitors play by the same rules, invoice and pay in the same currency, communicate in the same language, and pay roughly the same rates for labor, supplies, and raw materials. It is also possible to overplay the novelty of the situation.
Trade has been international roughly since the invention of the ocean going vessel, if not since the onset of the camel caravan or roaming of nomadic tribes. Moreover, there is more effort being made now to normalize cross-border trading than ever before, with international rule-making bodies and regional trade agreements. But the speed at which the game is played has increased exponentially in this age of the Internet, jets, and nearly instantaneous global connectivity. In the I700s, when the British shipped tea to their colonies, the product and its carrier were out of touch for weeks while global supply chain management back home waited for news. Now, with global positioning, bar coding, and satellite communications, every item on board every ship or plane can be tracked every minute of the day or night. Computer software coordinates transportation using multiple carriers and multiple modes. And computer optimization models crunch the numbers on all sorts of international variables to guide warehouse site selection. Automation, computerization, and electronic information technology all work together to keep tighter control on costs, reduce lead times, and make international supply chains an inevitable fact of competitive life.
It is now possible to place manufacturing outside one’s home country if local costs and conditions indicate that such a move will be profitable. Assembly, of course, can be done many thousands of miles/kilometers and several borders away from the manufacture of components to fit specifications of regional markets. Meanwhile, purchasing can compare the prices for source materials around the globe (taking into account all the costs involved in getting the materials and components from the source to the manufacturer). Goods can be shipped to warehouses anywhere using various combinations of vehicles owned and operated by transport specialists for whom the whole world is home. All these things are possible. But that means that all these things are rapidly – becoming necessary as well. What works for my competitor’s company becomes a necessity for mine. Next we’ll look at the intermediaries involved in global supply chains.
Managing the Global Supply Chains:
International commerce takes place between an exporter (the seller) and an importer (the buyer or customer). A number of intermediaries may perform one or more specialized services before the items sold in one country arrive at the customer’s dock in another. In the last module, we discussed the growing use of logistics specialists to carry out specific operations for a client firm (3PLs) or to coordinate the entire logistics function (4PLs). The use of specialized logistics intermediaries is even more common in the export-import business than in domestic supply chains. There are simply many more issues to contemplate when you send a product across borders into countries with different rules, different currency, and a different language. And so it may be cost-effective for a company sending, or receiving, an international shipment to pay out considerable sums in fees or commissions to acquire these services.
The following are some of the titles and job descriptions of the intermediaries who assist in getting cargo across borders and through customs in global supply chain management. All these are discusses in more details, in the SCM-521, which is one of the logistics and supply chain management courses designed for the supply chain and logistics diploma and online masters in supply chain management programs.
Next, you will explore the basic roles of the following:
- Freight forwarders.
- Non-vessel operating common carriers (NVOCCs).
- Customs house brokers.
- Export management companies (EMCs) and export trading companies (ETCs).
- Shipping associations.
- Ship brokers and ship agents.
- Export packing companies.
In the global supply chain management, the freight forwarder, foreign freight forwarder, or just plain forwarder is a firm that arranges transportation for commercial cargo. A freight forwarder is defined as “the ‘middle man’ between the carrier and the organization shipping the product, often combining] smaller shipments to take advantage of lower bulk costs.” A foreign freight forwarder is “an entity that picks up goods at the production site and coordinates transport to the foreign customer’s location.” Foreign freight forwarders are not themselves carriers, nor do they buy and resell space on carriers. They are, instead, independent agents, regulated in the United States by the Federal Maritime Commission.
A great majority of international shippers use forwarders. Small companies use them because they can’t afford to maintain a staff with the expertise required to handle foreign shipping and also because one of the forwarder’s functions is to consolidate smaller shipments into larger ones that qualify for discounts. But even large companies use forwarders, because they can benefit from the expertise of such specialists. Thousands of forwarders operate around the world, so there are plenty for logistics managers to select from.
Forwarders may perform quite a number of different functions in the course of shepherding goods across international borders, including the following:
- Quoting carrier rates.
- Arranging charters or booking vessel space.
- Preparing and presenting documents.
- Obtaining insurance.
- Handling payments.
- Tracing and expediting shipments.
- Arranging inland transportation.
Although in the global supply chain management, forwarders must be licensed by the government (for example, USA), they are not subject to certification requirements. However, certification is available for ocean forwarders from the U.S. National Customs Brokers and Forwarders Association, which will designate someone as a “Certified Ocean Forwarder” based upon a combination of experience and passing a certification exam.
Airfreight forwarders may be either independent contractors or affiliated with a single air carrier. They require neither licensing nor certification. However, they may obtain certification from the U.S. Federal Aviation Administration (FAA). Clients generally prefer to work only with FAA-certified airfreight forwarders.
The primary job of the airfreight forwarder is consolidation of small shipments for presentation to an air carrier. They also offer the following services:
- Preparing and presenting documents.
- Coordinating ground transport and warehousing.
- Tracing and expediting shipments.
- Publishing tariffs and issuing air bills.
- Assuming liability for damage to shipments.
A major source of competition for airfreight forwarders comes from the carriers themselves, who can work directly with shippers. Firms like FedEx and UPS Air also compete with forwarders for small shipments. Forwarders derive income from a combination of fees, markups, and commissions from carriers.
A common carrier is “transportation available to the public [that] does not provide special treatment to any one party and is regulated as to the rates charged, the liability assumed, and the service provided. [The common carrier] must have a certificate of public convenience and necessity from the (U.S.) Federal Trade Commission for interstate traffic.” In global supply chain management non-vessel operating common carrier (NVOCC) buys space on inland carriers and resells it to shippers at a marked-up price. NVOCCs handle only the part of the shipment travelling from a port to the importer’s dock or from an exporter’s dock to a port.
NVOCCs originated in the United States in the 1970s as a cost-effective alternative to the carriers. At the time, trains and trucks often returned to port empty after unloading cargo at inland destinations and charged the shipper for both halves of the round trip—even though the shipper made no money on the turnaround. The NVOCCs were able to solve the problem by finding cargo for the return trips to port. Using their own containers for the inland journey, NVOCCs scout around for port-bound shipments to consolidate into those same containers for the trip back to port. They also provide container service for trips to and from foreign ports. Both shippers and carriers benefit from the intermediary work of the NVOCCs. The shippers receive reduced rates; the carriers gain access to a wider market.
NVOCCs can be distinguished from forwarders in three ways:
- NVOCCs actually buy and resell space on carriers while forwarders do not.
- NVOCCs perform the physical work of consolidating, loading, and unloading cargo (using non-union labor to undercut the rates charged by carriers). Forwarders do not provide labor.
- NVOCCs can handle the freight in many cases, such as shipping by a motor freight carrier from Charlotte to Hawaii.
A freight forwarder in a global supply chain management could perform those inland functions for the NVOCC and could very well be a division of the freight line or their contractor. The NVOCC can arrange for transport. These are common carriers that do not operate the vessels by which the ocean transportation is provided and are shippers in their relationship with an ocean common carrier. Some NVOCCs are affiliated with freight forwarders; some are independent and are therefore able to work with a variety of forwarders. The independent NVOCCs can offer lower rates than those affiliated with a forwarder, but the affiliated NVOCC and forwarder can offer door-to-door service.
Though they neither own nor operate vessels, NVOCCs are regulated in the U.S. by the Federal Maritime Commission, which requires them to publish rates and not discriminate in hiring. However, they are also subject to different global supply chain management regulations from carriers, and this may put them at a disadvantage. Under the Ocean Shipping and Reform Act (OSRA) of 1998, for instance, NVOCCs are forbidden to enter into service agreements with shippers, while carriers are allowed to do so.
The consolidator, when dealing in global supply chain management, combines small shipments into larger ones to qualify for full vehicle discounts. Generally this service is provided to fill containers for intermodal shipment, such as turnarounds carrying cargo between an inland warehouse and a port. Consolidators are distinct from NVOCCs, but they may work under them. A consolidator that is not affiliated with an NVOCC contracts with a forwarder or a carrier to arrange the transportation.
Customs House Brokers:
Customs house brokers assist importers by shepherding shipments through customs. In term of global supply chain management, their job is to ensure that all documentation required to pass customs is complete and accurate. These days, the information required to clear customs passes through computer interfaces, such as the Automated Broker Interface System in the United States and the Pre-Arrival Review System (PARS) in Canada. Replacing paper shuffling with electronic data transfer has shaved considerable time off the process of getting cargo through customs. The customs house broker pays all import duties under a power of attorney from the importer. Liability for any unpaid duties lies with the importer, not the broker.
Export Management Companies (EMCs) and Export Trading Companies (ETCs):
When companies want to expand from domestic to foreign markets, they may turn for assistance to foreign trade specialists in either export management companies (EMCs) or export trading companies (ETCs) rather than adding internal expertise. While there may be some overlap in the types of services offered by EMCs and ETCs, there is a distinct line between their approaches. The EMC is generally not an exporter itself but rather a consultant to the exporters that hire it. The ETC, on the other hand, is itself an exporter rather than a consultant to an exporter.
A common reason to hire an EMC is to acquire representation in a particular market where the EMC has special knowledge and connections. By working with an EMC, the exporter gains access to current information about the preferences of consumers in that market and about local customs and government regulations. Knowledge of local conditions enables an EMC to help the exporter avoid offending consumers or officials by inadvertent misinterpretations of the culture or the politics of the importer’s country. Finally, EMCs often cultivate friendly relationships with host governments, and this can help ease the exporter’s goods through customs. EMCs may also buy the exporter’s goods and resell them in the foreign market (in the manner of an ETC), but generally they act as a firm’s long-term consulting partner, not as a buyer of its products.
An ETC in global supply chain management, by contrast, looks for companies making goods that it wants to buy and resell in a foreign market. Its functions, therefore, may include any or all of the following:
- Locating importers to buy the goods.
- Overseeing export arrangements.
- Preparing and presenting documentation.
- Arranging transportation overseas and inland.
- Complying with regulations.
More expansively structured ETCs are known as general trading companies. These entities may comprise banks, steamship lines, warehouses, insurance services, a communications network, and a sales force. Japan’s success in international trade has been facilitated by such general trading companies, known in Japan as “sogo shosha.” These enormous conglomerates are some of the world’s highest revenue generators, including familiar names such as Mitsui and Mitsubishi. With offices in over 100 countries, the sogo shosha handle more than three-fifths of Japan’s imports and over one-third of its exports. Other countries with very large general trading companies include Germany, South Korea, China, and the Netherlands.
Smaller exporters band together in shipping associations in an effort to qualify for the rate discounts that carriers offer to larger shippers. Before deregulation ocean liners were required to publish their rates. Smaller shippers, seeing the rate schedules, could ask for similar deals. Since deregulation, carriers and the larger shippers have been able to sign confidential rate agreements. In response smaller shippers have formed shipping associations—usually nonprofit organizations—to negotiate with carriers on the same terms as larger shipping firms.
Ship Brokers and Ship Agents:
Ship brokers and ship agents assist exporters with the details of arranging ocean transport.
A ship broker in global supply chain management is an independent operator that brings exporters together with ship operators that have appropriate vessels available to carry the shipper’s freight. With detailed knowledge of carrier schedules, the broker can help the exporter find a ship that will be in port when its cargo is ready to travel.
A ship agent works for the carrier rather than being an independent contractor. When a ship is headed for port, the ship agent arranges for its arrival, berthing, and clearance; while the ship is in port, the agent coordinates unloading, loading, and fee payment. Shippers contact ship agents for information about the arrival and availability of ships.
Export Packing Companies:
Export packing companies provide the specialized packaging services required for cargo that may have to undergo long journeys and pass customs inspections in another country. Hiring a specialist in export packaging provides three advantages for a shipper:
- By choosing the most appropriate materials, the packager in global supply chain management can expedite the movement of cargo through customs.
- Specialized packaging can help exports survive the rough handling and adverse changes in climate that can occur when cargo travels long distances. The packing company can choose packaging materials that provide adequate protection with the least bulk and weight.
- In some countries, import duties are based on the weight of the cargo including the packaging, not just the weight of the goods.