Logistics management and international logistics management

The literature overview relates to the problem area occur when the penetration to foreign market presented in chapter one. Firstly, I will describe definition of logistics management and international logistics management. Second, I will thrash out the reason of a logistics management start international operations. Further, I will talk about theories regarding the market selection. Next, I will present the different types of channels of distribution and the process for choose a representative in the foreign market. Lastly, I will end this chapter with environmental of logistics.

2.1 LITERATURE OF INTERNATIONAL LOGISTICS MANAGEMENT

Definition of logistics management and international logistics management

Generally logistics refers to the inbound and outbound flow and storage of goods , services, and information within and between organisations (Gundlach et al, 2006). The Council of Supply Chain Management Professionals (CSCMP), which is the pre-eminent professional organisation for academics and practitioners in the logistics field, formed in 1963, defined logistics management as ” that part of supply chain management that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods ,services, and related information between the point of origin and the the pont of consumption in order to meet customers requirements (see www.cscmp.org) This definition has resulted from numerous changes in the process to understand logistics (see Table 1).

Table 1: The Development of Logistics Management (source)

Period

Development

Prior to the 1980s

Logistics was primarily concerned with the outbound flow of finished goods and services, with an emphasis on physical distribution and warehouse management. As a managerial activity, logistics focused on its role to support an organisation’s business strategy and to provide time and place utility.

During the 1980s

The industry globalisation and transportation deregulation led to the expansion of logistics beyond outbound flows to include recognition of materials management and physical distribution as important elements. In 1986, CLM (now CSCMP) defined logistics as “the process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods, and related information flow from point of origin to point of consumption for the purpose of conforming to customer requirements” (see www.clm1.org).

During the 1990s

Logistics was defined as “the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory and related information flow through the organisation and its marketing channels”. The definition was changed as a result of accelerated market changes due to shrinking product lifecycles, demand for customisation, responsiveness to demand, and increased reliance on information” (Christopher, 1998).

During the 2000s

These years experienced further changes as to how logistics is defined. Development in international trade, supply chain management, technology and business process re-engineering generated a need to re-evaluate the logistics concept. As a result, in 2001, it was defined as “that part of supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customer requirements”.

* Adapted from Gundlach, G.T.; Bolumole, Y.A.; Eltantawy, R.A. and Frankel, R., (2006), The Changing Landscape of Supply Chain Management, Marketing Channels of Distribution, Logistics and Purchasing, Journal of Business and Industrial Marketing, Vol.21/7, pp 428-438.

The internationalization process of logistics is the best way that a supplier in one country are transferred procurement, transportation, storage, processing, collating, distribution, marketing and information are tied in and commodities to a demander in another country with the lowest cost and minimum risk, keeping goods quality, quantity and timely. The essence of Internationalization of logistics is the principle of collaboration with the international division of labors in accordance with international practice, the use of international logistics networks, logistics facilities and logistics technology and achieve global flows and exchange of goods and services to promote regional economic development and the optimal allocation of resources in the world (YANG 2003).

2.2 CHANGE AGENT

A change agent is an event, organization, material thing or, more usually, a person that acts as a catalyst for change. In business terms, a change agent is a person chosen to bring about organizational change. Corporations often hire senior managers or even chief executives because of their ability to effect change.

An internal change agent is usually a staff person who has expertise in the behavioral sciences and in the intervention technology of OD.

2.2.1Internal Change Agents

Internal change agents will affect the organization from within. These are individuals working for the organization who know something about its problems and has experience of improving situation in the same organization .The entry of new employee can view as the possibilities of prolonging the life cycle for a goods via internationalization.

2.2.2External Change Agents

External change agents are those that have influence on the organizational from the outside. These are outside consultants who are temporary employed in the organization to remain engaged only for the duration of the change process. External change agents usually do not implement plans or take responsibility for decision making. Supporting change leaders and programming and project teams in negotiating the transition between the current state and the desired future state is the preoccupation of external change agent. External change agents facilitating, through coaching, mentoring and knowledge transfer, the development of new skills and behaviour in others.

2.3 Motives for foreign expansion

There are many reasons for a company going expand to foreign country. Most of them are market related. The market related motivations to expand their business divided to proactive and reactive motivations. Proactive motives are motives that stimuli organizations to attempt strategy change, based on the firm’s interest in exploiting unique competences or market possibilities. Reactive motives are motives which the organization not influence over the threat or pressures and adjust passively to them by changing its activities over time. Czinkota &Ronkainen indicate that proactive organizational go international because they want to, however, reactive organizational because they have to. Several disadvantages will occur when an organization operation in a foreign market compared to the domestic competitors. As a result, an organization must build some advantages to get established in the new market compared to the domestic market.

2.3.1 PROACTIVE MOTIVATIONS FOR LOGISTIC MANAGEMENTS

Accordingly to Ross,1995, proactive motivations occurs when the enterprise make a decision to expand their operations into foreign markets. The proactive motivation are defined as

Profit advantage

Products

Exclusive information

Managerial urge

Tax benefits

Economies of scale

Usually, an enterprise perceive that internationalization will provides a great opportunity of increasing profits, which also the most well-known reason for internationalization . An enterprise will produce a product or service ,which is not readily existing in foreign markets. The product or service may be very attractive on foreign market, due to technological advantages of the production process, which gives the enterprise gain a competitive advantage over the domestic enterprises.(Czinkota &Ronkainen,1995) The next reason for export is that numerous enterprises realized the home market is too small and cannot afford to extend product at domestic market. Besides that, an enterprise may also acquired knowledge about the foreign market than other competitor which do not have. Thus, enterprise will initiate steps towards the internationalization process. Further, when an enterprise start to export, the domestic government may exploit the tax benefit to the enterprise. Lastly, an enterprise can obtain economies of scales as their advantage through export activities. The economies of scales means produce larger volumes then will diminish the cost per unit produced.

2.3.2 REACTIVE MOTIVATIONS FOR LOGISTICS MANAGEMENT

When the domestic industry outlook is not attractive, the enterprise will try to penetrate foreign market, to decreased their resource commitments at domestic country. The reactive motivation are defined as:

Competitive pressures

Overproduction

Declining domestic sales

Saturated domestic market

Excess capacity

Relationships

Unsolicited order

The high competition on the domestic industry or overproduction during the economic decline, might affect the enterprise’s profitability. Thus, the enterprise try to seek new markets abroad. Declining domestic sales occur when a product reaching the declining stage of the product life cycle and a saturated domestic market will lead an enterprise to export their product to foreign market, in order to prolong the lifetime of a certain product. Additional, if the enterprise has excess capacity ,internationalization may aid the enterprise in reaching the desired production level in order to reduce the fix cost per unit produced.(Czinkota&Ronkainen, 1995) .On top of that, some enterprise want to maintain or defend its position in a particular business network, therefore, they may be enforced to face internationalization process..Last but no least, the enterprise may fit into exporting sector because of the unsolicited order.

2.4 FOREIGN MARKET MODE OF ENTRY

A foreign market mode of entry is a channel which enables the enterprise’s product, human skills, management, technology or other resources, to enter into a foreign country. The choice of market entry mode is a vital strategic decision for firms intending to carry out business overseas. A number of definitions of different modes of entry exist. Hedman (1993) classifies the modes of entry as indirect , direct and alternatives to export. However, Hedman’s model does not assume joint venture as entry mode ,which other authors such as Jeannet &Hennessey,1988;Root 1994b;Ross,1995 identify as an entry mode.Joint ventures will be presented under heading 2.4.3.4.

Most models of foreign market mode of entry is due to limited resources , therefore ,enterprises initially penetrate a foreign market through indirect export methods. Indirect paths to internationalization are those “whereby small firms are involved in exporting, sourcing or distribution agreements with intermediary companies who manage, on their behalf, the transaction, sale or service with overseas companies” (Fletcher, 2004). Export intermediaries play an important “middleman” role in international trade, “linking individuals and organizations that would otherwise not have been connected” (Peng and York, 2001, 328). Small and new ventures use intermediaries toovercome knowledge gaps, find customers and reduce uncertainties and risks associated with operating in foreign markets (Terjesen et al., 2008)

The mode of entry will switches to direct export such as agents, distributors, and sales branches, when the enterprise becomes more dynamic in international business. Direct export known as the producer will conduct the distribution activities to a foreign agent or importer or to the end customer directly

Selecting the channel of distribution is a long-term strategic decision and need to build long-term relationships and the necessity of stimulating cooperation among distribution alliance partnersMehta et al., 2001 R. Mehta, T. Larsen, B. Rosenbloom, J. Mazur and P. Polsa, Leadership and cooperation in marketing channels: a comparative empirical analysis of the United States, Finland, and Poland, Int Mark Rev 18 (2001), pp. 633-666. View Record in Scopus | Cited By in S. Distribution channels defined as the external contractual groups that firms cooperation to accomplish their distribution objectives (Rosenbloom, 2004 B. Rosenbloom, Marketing channels: a management view, South-Western, Mason (OH) (2004).Rosenbloom 2004). The chosen channel will affect the enterprise’s effectiveness and efficiency for as long as it is operating (Doyle, 1994). As a result, the enterprise should plan a long-term strategy and evaluate the own enterprises’s future economical abilities, before select distribution channel.

2.4.1 INDIRECT EXPORT

Indirect export is a chain that connect with the exporting enterprise with a domestic middleman in the target foreign country and link to the end customer as a final point(Akhter,1996). Export intermediaries often help their clients to identify customers, financing and distribution infrastructure providers (Balabanis, 2000). Intermediaries also help firms in overcoming knowledge gaps of the local market , reduce uncertainties and risks associated with operating in foreign markets. Firms may hire export intermediaries because they perform certain functions related to exporting without large investments, with low start up costs and few risks better than the firm itself could. Firms may hire export intermediaries because they perform certain functions related to exporting better or at lower costs than the firm itself could, for example because they possess country-specific knowledge that the firm lacks (Li, 2004) . For this reason Peng and Ilinitch (1998) argue that manufacturers may be more likely to use intermediaries when entering foreign markets. Export intermediaries can also help firms to save costs associated with searching new customers and monitoring the enforcement of contracts (Peng and York, 2001) as well as to help access intermediaries’ contacts, experience and knowledge of foreign markets (Terjesen et al., 2008).

According to Hedman (1993), indirect export may work in three ways: through a trading firm ,an export merchant and an export agent.

2.4.1.1 Trading firm

An export trading firm is an alliance among a few local small and medium enterprise (SME) to export their product to a target country. They will do export as teamwork to developing and penetrating a target country rather than do it single-handedly. Those firms cooperate to reduce export costs and risks while can develop market research to find new export business opportunities Firms that team-up for exporting can negotiate favorable rates on transportation, insurance and other export services .However ,a trading firm is independent when it operate in a foreign market(Hoagland,1996)

2.4.1.2 Export through an export agent

Export agent is buyers in foreign countries who will buy products from enterprise and sell it abroad in their country. The agent usually awards the lowest bidder with the order and sell it with receives commission as compensation for their effort. Normally, the payment for export agent is received almost immediately plus there is very little effort required to complete the sale. Therefore, the manufacturer can get access to a larger market with minimum cost and risk . The manufacturer’s reputation is the largest risk when the manufacturer choosing export agent in foreign market. The manufacturer absolutely looses their control of the export activities after they select an export agent to help them sell their product in foreign market.

2.4.1.3 Export through an export merchant

An export merchant acts as a kind of international wholesaler (Ross,1995). An export merchant seeks out needs in foreign markets and negotiates with a manufacturer. After makes purchases from manufacturers, the goods are exported to the waiting buyer. After having the merchandise packed and marked to specifications, the export merchant resells the goods in its own name. The export merchant normally specializes in a particular line of products or in a particular geographical market area where they have been operating during a longer a longer period. Sometime it sells the goods with the original supplier’s labels or puts its own label.

2.4.2 Direct export

Direct export may be conducted in three ways: (1) directly to the final customer,(2) with the help of a representative or (3) through the exporting enterprise’s own establishment (Hedman, 1993). The enterprise will confront with higher investment risks when they conduct export their product through direct link to foreign country. On the other hand, the enterprise may gain potential profit margin and the cost for transaction between home country n host country will drop.

2.4.2.1 Export directly to the final customer

When conduct direct export without going through an intermediary in the home country to develops an overseas channel so that it deals directly with a foreign party, the exporting enterprise takes hold of all exporting activities. Therefore, they have to conduct their marketing research, investigations, transportation and documentation (Young et al .,1989 ). The advantages of directly to final customers is active market exploitation and greater control to the transaction in the host country. On top of that, the channel also improves communication and consistency. However, it is a difficult channel to handle if the manufacturer is unfamiliar with the foreign market and causing time consuming and expensive.

2.4.2.2 Export through a representative

Export through a representative have played a crucial role in the development of the internationalization process. A representative is an intermediaries in the foreign market which have their own market organization that separated from the exporting enterprise . The company can determine to adapt the quantity of the home-based sales representative travel abroad at certain times to take orders or find business. Those enterprise want to penetrate the foreign market but afraid of the risk can find an experienced intermediaries to help them start their operation in foreign country. This is because those intermediaries obtain the knowledge about the country and may efficiently locate the product to the final customer.

Agent

An export agent, is an intermediary or trading company that acts on behalf of a company to open up or develop a market in a foreign country. However, the agent does not take title to the products and gives the exporter to take part in the planning and monitoring of the marketing activities. Export agents usually paid a commission on all sales and may have exclusive rights in a particular geographic area. A good agent will know or get to know local market conditions, which the exporting enterprises lack. An agent just carrying out part of the operations on behalf of the exporter, the exporter owns the product until it is sold to the final customer. The exporter has responsible for the customers risks because of the agent does not do not handle the products .The role of the export agent is to evaluate the export potential of the local manufacturer’s products, advertise them abroad, look for foreign buyers, place orders with the manufacturer, or arrange for, the documentation, take care of shipments and insurance once a sale has been made.

Distributor

Distributor is a firm located in the foreign market that purchase goods, re-label them with their own name, brand or trademark and then sell them as their own products. Foreign distributors are the backbone for many export manufacturerBello, D.C. and Lohtia, R., 1995. Export channel design: the use of foreign distributors and agents. Journal of the Academy of Marketing Science 23 2, pp. 83-93 Full Text via CrossRef | View Record in Scopus | Cited By in Scopus. These export intermediaries possess crucial contacts with foreign buyers, strong local-market knowledge, and the ability to provide sophisticated marketing services. Distributors usually has a close relationship with the exporter and given the exclusive right to sell the product. They typically provide complementary services to their buyers, such as maintenance, parts sales, and technical assistance. On top of that, the distributor will assist the export enterprise by running processing orders, stock foreign inventories, grant buyer credit n delivery. Entering foreign market with using distributors is less risky and payment will get directly after transaction. This methods allow SMEs with limited resources to operate in major markets and companies with significant resources to offer their products and services in smaller markets.

2.4.2.3 Export through an own establishment

Export through an own establishment usually is a company-owned export department for a enterprise sells their product directly to companies or final customers in the foreign market.The enterprise has full control over export activities such as the marketing and distribution of its goods and services, and coordinates research, distribution, sales, marketing, pricing, and legal. This department usually consists of an export sales manager with some clerical assistants. Export through an own establishment is an expensive way but very effective for enterprise to conduct their business in foreign market.

Sales office

An enterprise starting a sales office in a foreign market have to be establish new relationships in the foreign business network .Enter a foreign market with sales office is very costly n time consuming. This is because establish a sales office in foreign market required a high level of resources n effort into the market. , however, it is the best way to enterprise to obtain the knowledge of the local market.

Branch

A branch office established facilitate sales in the foreign market . They is an intermediary who selling products and providing support services to the manufacturer’s sales force .A sales branch allows the manufacturer to achieve greater presence and programme control in the foreign market. The role of sales branch handle sales is distribute product and managing warehouse and promotion. It often serves as a display centre and customer service centre in the foreign market. However, there are no manufacturing is done at this location.

Subsidiary

An export sales subsidiary basically removes the export function from the parent company and places the function in a separate wholly owned subsidiary. The export subsidiary purchases goods from the parent company, then resells it on their country. Export subsidiaries is able to add products from outside the parent company in order to round out its product line, and is able to separate out costs and expenses more efficiently than an internal department. On top of that, export subsidiaries can also develop into centre of excellence, controlling critical resources that other parts of the MNE depend upon Holm and Pedersen, 2000 U. Holm and T. Pedersen, The emergence and impact of MNC centres of excellence, A subsidiary perspective, Macmillan Press Ltd, Houndsmills (2000)..

2.4.3 Alternatives to export

A lot enterprise realized the importance of expanding their business internationally. However, there are several obstacles to internationalization for firms in the developing world. One of these is a lack of information and knowledge about foreign markets. In such case, licensing or franchising might be the right choice (Czinkota&Ronkainen, 1995).

2.4.3.1 License manufacturing

Licensing is another easy way to for a manufacturer to involve in international marketing with a limited degree of risk. Licensing occurs when an enterprise within the foreign market, the licensee, make an agreement with the licensor who offering the right to use a manufacturing process, trademark rights, patent rights, or trade secret of value for a fee or royalty. The licensee will produce the licensor’s products and market these products in his assigned territory. After that, the licensee will pay the licensor royalties related to the sales volume of the products. The producing enterprise hereby escapes expensive toll and other trade barriers, exchange fluctuations, high transportation costs and political risks(Root,1987). The disadvantage of licensing is the firm has less control over the licensee than if it had set up its own production facilities. After few years, once the know-how is transferred, the foreign firm may begin to act on its own and the international firm may therefore lose that market. Therefore, the licensor must establish a mutual advantage in working together, and a key to doing this is to remain innovative so that the licensee continues to depend on the licensor.

2.4.3.2 Franchising

Franchising is an entrepreneurial activity that plays a crucial role in the creation of new jobs and economic developmentFalbe et al., 1998 C. Falbe, T. Dandridge and A. Kumar, The effect of organizational context on entrepreneurial strategies in franchising, Journal of Business Venturing 14 (1998), pp. 125-140.. In franchising, an exporting enterprise collaborates with a franchisee-entrepreneur to create economic value in a prescribed manner. The franchisee obtains the right to use franchisers, brand name, and marketing techniques to market goods or services. In return, the franchisee pays an up-front fee and ongoing royalties to the franchiser. Franchisees usually operate in local markets and communities, therefore, they can provide local knowledge to penetrate the foreign market. Thus, franchisees bring to the franchise system not just financial capital, but also a knowledge of geographic locations and labour markets, and their own managerial labour; that is they represent an efficient bundled source of financial, managerial and information capital Dant, R.P. and Kaufmann, P.J., 2003. Structural and strategic dynamics in franchising. Journal of Retailing 79, pp. 63-75. Article | PDF (157 K) | View Record in Scopus | Cited By in Scopus (24) ( Dant, R.P. and Kaufmann, P.J., 2003. Structural and strategic dynamics in franchising. Journal of Retailing 79, pp. 63-75. Article | PDF (157 K) | View Record in Scopus | Cited By in Scopus (24)Dant and Kaufmann, 2003). The franchising tends to be more directly involved in the development and control of the marketing program. The main disadvantage of franchising is the level of the standardization of the product and service. Without a standardization there might be a risk of losing transferred know-how. (Hackett,1979)

2.4.3.3 Foreign direct investment(manufacture)

Foreign market investment is the direct ownership of facilities in the foreign market. There are two ways for enterprise to enter foreign market through investment. The first option is make a direct acquisition or merger in the host market. The second option is develop its own facilities from the ground up. The reason that the firm invest in the foreign market may be the production in the foreign market is much cheaper . On top of that, the firm develops a deeper relationship with government , customers and local suppliers, so that make a better adaptation of its products to the local marketing environment.Glass and Saggi, 2002b A. Glass and K. Saggi, Licensing versus direct investment: implications for economic growth, Journal of International Economics 56 (2002), pp. 131-153.

2.4.3.4 Joint venture

Joint venture is a contractual agreement between an international enterprise and foreign enterprise to execute a particular business. According to Fletcher and Brown (2004), joint venture is a second broad method of entering a foreign market to set up production and marketing facilities. in common with licensing. In joint ventures, the international firm has an equity position and a management voice in the foreign firm. Therefore, international firm better control over operations and also access to local market knowledge. The international firm has access to the network of relationships of the franchisee and is less exposed to the risk expropriation thanks to the partnership with the local firm. Previous studies (e.g., Blodgett (1992) L.L. Blodgett,Factors in the instability of international joint ventures: An event history analysis, Strategic Management Journal 13 (1992) (6), pp. 475-481. Full Text via CrossRefBlodgett, 1992; Geringer &Hebert,1989; Merchant & Schendel, 2000) have shown that equity ownership in a joint venture is an important determinant of its performance. This is because if the partner has different strategy than the international enterprise, it may lead to conflicting interests.