Domestic and global logistics. Driving forces for the internationalization

Introduction to logistics, domestic and global logistics

The word logistics according to Sople (2007) originated from the Greek word logistikos and the Latin word logisticus, meaning the science of computing and calculating. In the ancient times it was used more in connection with the art of moving armies, and supplies of food and armaments to the war front. The usage of this word can be traced back to the 17th century, when it was probably used for the first time by the French army. During World War II logistics gained importance in army operations, covering the movement of supplies, men and equipment across the border. Today, logistics has acquired a wider meaning and is used in business for the movement of raw materials from suppliers to the manufacturer and finally the finished goods to the consumers. Logistics is also referred to as physical distribution. Philip Kotler defines logistics as ‘‘planning, implementing, and controlling the physical flows of materials and finished goods from point of origin to point of use to meet the customer needs at a profit’’. The American Council of Logistics Management defines 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 from point of origin to point of consumption for the purpose of conforming to customer requirement’ (Sople, 2007).

No other area of business operations involves the complexity or spans the geography of logistics. All around the world, 24 hours of every day, seven days a week, during 52 weeks a year, logistics is concerned with getting products and services where they are needed at the precise time desired. It is difficult to visualize any marketing, manufacturing or international commerce without logistics. To begin with, General Motors acquires parts from suppliers all over the world they assemble cars in factories all over the world. Imagine one single model of car and the thousands of parts that go into that one car. Now imagine all the places these parts come from and this is only one model of cars, trucks, vans, and other vehicles. Someone needs to manage the shipment of all the parts and vehicles so that they arrive where they are needed and when they are needed there.

Aswathappa (2008) discloses that nearly all business enterprises, large and small are inspired to carry on business across the globe. This may involve purchase of raw material from foreign suppliers, assembling products from components made in several countries, or selling goods or services to customers in other nations. One of the most important trends in the late 20th century has been the lowering of barriers to facilitate easy movement of goods and services across national boundaries. Globalization is synonymously used with international business. In fact, the term globalization is more popular in business, political, and academic circles. We use the terms globalization and international business interchangeably. What essentially happen in globalization is the economic integration among the countries across the globe. It is from this perception that we often use the term ‘global village’. Global village does not mean there is complete fusion among all the countries. Far from it. There tends to be mainly economic integration, but not political amalgamation (Aswathappa, 2008). Globalisation is a general term used to designate the growing process of international economic integration, covering the significant rise in trade of goods and services and increasing cross-border factor mobility. Globalisation is not a recent phenomenon but intensified as of the early 1990s (Manteu, 2008). Szymonik (2014) affirms that at the time when the company is transformed successively from the local (national) into an international one, and then a global one, it begins for instance, to import materials and components from around the world, manufactures its products in any country, and sells them on many markets, making certain amendments where necessary, to match the product to the local requirements. The period of globalization, which began to grow in strength in the second half of the twentieth century, characterized by the largest wave of mergers and takeovers, strategic alliances and the growth of partner business network that included international organizations. The synergy of joint companies led to improved business outcome, the example of which can be the combination of the reputation of the German group Volkswagen and the brand of Skoda in the Czech Republic, which had a positive impact on the latter. Similarly, the use of knowledge, skills and technology has enabled Volkswagen to raise productivity and improve product quality (Szymonik, 2014). In the markets of Europe (including Poland), China, India, the best-selling cars in the past few years are those produced in the Czech brand Skoda (Kisperska-Moroń, 2000 and Kompendium, 2001 as cited by Szymonik, 2014). Globalization of a given enterprise means the integration of operations that are internationally dispersed and the units that represent them; this becomes an implication for partnerships, including those regarding logistics activity in the global supply chain (Rutkowski, 2012 as cited by Szymonik, 2014).

Domestic logistics

Domestic logistics involves tracking and coordinating the flow of goods and services from their sources until the customer receives a final product within the same country. In managing domestic supply lines, all the production and transporting takes place within a single set of national borders (McDunnigan, 2017).

International logistics

“International” means that it will deal with transactions in more than one nation. “Logistics” means the organized movement of goods, services, and, sometimes, people (Wood, 1995 as cited by Wang & Yang, 2007). So “international logistics” refers to the flow of goods, services, or people between different countries (Wang & Yang, 2007). International logistics is the logistics beyond the frontier extension and expansion range, which is between different countries in the world and within the scope of logistics activities (Liu, 1984; Luo, 1994; Wan Hua, 2010 as cited by Wang, 2014). International logistics refers to the management of the firm’s supply chain involving the movement of resources across at least one international border (Reasonable assumption). When dealing with international supply lines, you have to make additional planning for border crossings and customs (McDunnigan, 2017).

Figure 1: Illustrates the process of international logistics process, and table 1 gives the differences between the domestic logistics and international logistics.

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Figure 1: International logistics process (Wang & Yang, 2007).

Example of International Logistics

Just pretend for a moment that you work as a logistics manager for a large American jewelry company based out of New York. Your company has an extensive international supply chain. We will walk through a simplified logistical process for a diamond ring. Your diamond supplier is in South Africa. You get your gold from a supplier in China. The jewelry itself is assembled in Switzerland. Your job is to manage the supply chain from acquisition of a resource through its transformation into a finished product and until it is sold to a customer (Srinivas, 2015). Your responsibilities according to Srinivas (2015) may include the following:

- Oversight of the purchase of diamonds in South Africa and gold necessary from China to fulfill the company's production demands.
- Arranging for the temporary warehousing of the purchased diamonds and gold at local storage facilities.
- Arranging for the international shipping of the gold stored in China to a subsidiary in a small Eastern European country, where the gold will be refined and prepared for the jewelers in Geneva.
- Arranging for the international shipping of the diamonds stored in South Africa to the company's facilities in Geneva for cutting and polishing.
- Arranging for the international shipping of the refined gold to the company's Geneva facility to create rings and settings.
- Once the rings are finished, arranging for their warehousing at the company's central warehouse until they are needed to fill orders, keeping meticulous computerized inventory records, and ensuring the facility is adequately secured.
- Arranging for the shipment of an order of diamond rings to the company's flagship Manhattan retail store.
- Continued monitoring of the inventory at the retail store until the product is sold to a customer.

Global logistics

Global logistics is the design and management of a system that directs and controls the flows of materials into, through and out of the firm across national boundaries to achieve its corporate objectives at a minimum total cost. Global logistics, like domestic logistics, encompasses materials management, sourcing, and physical distribution (Helsen & Kotabe, 2014). Klassen and Whybark (1994) define a global logistics (global supply chain) as a network of factories and material sourcing on a worldwide basis. As a group, we agreed to define global logistics as a business practice where firms source for materials from one or more than one country, manufacture products in another country and sale finished products in many countries (Reasonable assumption).

Global logistics also known as global supply chains are complicated network, as various members from several countries are involved. Hence, global supply chains involve cross-border, inter-organizational relationships among suppliers, government, intermediaries, local traders, and customers (Marasco, 2008). Indeed, Pontrandolfo, Gosavi, Okogbaa & Das (2002) note that multinational firms are good examples of global logistics systems that combine their production systems with the added complexity of a global supply chain to connect several nations with different currencies, import tariffs and fiscal systems. One of the most important activities of global logistics is global sourcing. Global sourcing occurs when buyers purchase goods and services from sellers located anywhere in the world.

Distinction between domestic and global logistics

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Adopted from Sople (2007)

Distance. In global logistics, the distances to be managed are most often much longer than those found in domestic logistics systems. As a result, managing distance often becomes the primary factor to consider when designing international logistics systems. When managing distance issues domestically, the manager usually has the capacity to optimize distance variables by manipulating transportation, inventory, warehousing, and customer services variables. In the international arena, transportation considerations tend to dominate the thinking and problem solving of logistics managers. These transportation issues also bring to the fore the critical importance of full service, flexible, and reliable transportation system to global logistics excellence (Wood et al., 2012).

Global logistics frequently require the transportation of parts, supplies, and finished goods over much longer distances than is the norm domestically. A longer distance generally suggests higher direct costs of transportation and insurance for damages, deterioration, and pilferage in transit and higher indirect costs of warehousing and inventory.

Transportation. Domestic logistics can utilize a variety of transportation options for moving goods, out of which road transport is the most common preference. Road transport in itself also provides a variety of options. With international logistics, you have limited transportation options some would require only rail while others would require only flight or sea transport (Jayem Logistics, nd). International logistics may also involve using multiple transportation alternatives for a single transaction. Wood et al (2012) reiterates that multimodal transportation coupled with improved information management has helped logistics professionals cope with the demands of global sourcing and manufacturing. Seyoum (2000) confirms that most goods are transported by truck or rail in domestic logistics while in international logistics most goods are transported by air or sea.

Exchange Rate Fluctuation. Domestic logistics uses one currency and is not affected by currency variations as in the case of global logistics. With global logistics, the firm must adjust its planning to incorporate the existence of currencies and changes in exchange rates from time to time (Seyoum, 2000).

Currency used. In domestic logistics, the domestic currency is used. In international logistics, different currency and exchange rates are used (Seyoum, 2000).

Regulations. In domestic logistics, one national regulation on customs procedures, documentation, packaging, and labelling requirements are followed. However, in international logistics, there are different national regulations and many intermediaries participating in the distribution channel (custom brokers, forwarders, banks, etc) (Seyoum, 2000). Farahani, Asgari, & Davarzani (2009) reckon that laws applied in global logistics contracts between buyers and suppliers can be chosen from the law of the buyer’s country, the law of supplier’s country, or one applicable under an agreement accepted by both countries. Therefore, it should be clearly defined which one of these three category of laws are going to be used through buyer supplier transactions.

However, in domestic logistics the laws used are for that specific country where all logistics activities are executed.

Management. Domestic logistics companies have a single logistics manager to supervise and manage all sides of planning and execution related to the movement of goods. On the other hand, international logistics will have a corporate logistics manager who will coordinate logistics activities with other managers. This will require clear plans on execution and distribution processes, and may lead to challenges in decision making (Jayem Logistics, nd).

Costs involved. In both domestic and international logistics, you have to consider the costs involved with store facilities, transportation, workers and technology. But, in international logistics, there are some additional costs to be considered too which include tariffs, government taxes, fees and currency exchange fluctuations (Jayem Logistics, nd).

Supply chain relationships. In order to build relationships between businesses or between a business and the customers, trust is the most important factor, which decides on the nature of the relationship. It gets easier to build trustworthy relationships domestically but, in international cases, different country regulations, geography and economic roadblocks present more challenges in building reliable relationships (Jayem Logistics, nd).

Culture. In global logistics, being unfamiliar with the supplier’s language and culture, you increase the risk of communication challenge, misunderstandings, and uncomfortable encounters. Sourcing processes such as supplier selection, supplier assessment, supplier involvement, and so on in global supply chains need to consider more sophisticated factors such as culture which may be insignificant in domestic logistics (Farahani, Asgari, & Davarzani, 2009).

Driving forces for the internationalization of logistics

Globalization

The globalization of the economies of countries has created opportunities for doing business beyond the national boundaries of each country (Sople, 2007). As businesses continue to globalize, their attention has increasingly turned to logistics operations. Cargo movement needs to be done physically, using the available means of transportation. Speed and efficiency in the movement of goods across national boundaries depends on the available modes of transportation, their capacity and capability, inter-modal facility for movement, packaging, and handling, and where the buyer, sellers, and carriers are located (Sople, 2007). The two most notable drivers of changes in the international logistics service market according to (Branch, 2009) are globalization and technology. Broadly, globalization has resulted in increased trade, which has necessitated the need for efficient and cost-effective logistics services network. This in turn has given rise to changes in the structure of the global logistics industry, including third-and fourth-party logistics (3PL and 4PL) as well as the outsourcing of logistics services (Branch, 2009).

Information and Communication Technologies

Sople (2007) avers that due to rapid advancement in information and communication technologies during the last decade, the world has become a global village in a rear sense. Sople argues that today, the internet has made it easier to do business electronically in any part of the globe, from anywhere in the world. Branch (2009) observes that technology as a driver has resulted in a twofold impact. On the other hand, technology has resulted in the provision of fast and accurate logistics services, while on the other hand, technology has resulted in changes to transport services, which is a key input into the logistics sector. Two significant results of these changes are the containerization of cargo shipping and the use of wide-bodied aircraft by the logistics service provider. These changes in particular have on the whole enabled large turnovers in terms of volume of goods, time and cost efficiency (Branch, 2009). Sople (2007) professes that to move the cargo, documentation is necessary, either in paper form or in digital form. Sople adds that the traditional way is to move documents in paper form. However, the system at customs in gearing up for digital movement of shipping documents in the near future using Electronic Data Exchange (EDI). There are several types of documents required for facilitating the cross border movement of goods. Those documents are necessary for exercising controls on the cross border movement of goods and currency flow in and of the country (Sople, 2007). Mass communication and information technology expose international consumers to foreign products, thus stimulating convergence of global needs and preferences. This promotes global marketing and global logistics (Srinivas, 2015).

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