Managing International Distribution Operations and Logistics

1. Managing International Distribution Operations and Logistics Dana-Nicoleta Lascu Chapter 11

2. Chapter Objectives • Describe the functions of home-country and host-country intermediaries involved in international distribution. • Identify the facilitators of international distribution and logistics and describe their involvement in the international distribution process. • Address the challenges encountered by distribution in countries of different development levels.

3. Issues Related to International Distribution • An important distribution decision for the company is whether to use established channels or to build its own channels. • Using Established Channels • Could charge high prices. • Could be blocked by competition. • Channel partnership is a long-term decision: company may be bound indefinitely to the channel choice. • Building Own Channels • Necessary if there are no channels at all and if the existing channels do not conform to company needs. • Expensive. • Time-consuming.

4. Home-Country Middlemen • Export Management Companies • Highly specialized in certain industries, they typically represent smaller companies in a region of the country. • Typically work as a company's export department.

5. Home-Country Middlemen (contd.) • Trading Companies • Large companies that provide intermediary services, risk reduction through extensive information channels, and significant financial assistance to manufacturing firms. • In Japan, trading companies (sogo shoshas) act as intermediaries, but are also involved in manufacturing and finance. • In the U.S., they are consortia of smaller suppliers, service-oriented firms, multinational corporations and public and quasi-public entities; they were created by the Export Trading Company Act to encourage and promote exports.

6. Home-Country Middlemen (contd.) • Home-Country Brokers and Agents • Middlemen who bring international buyers and sellers together in the company's home country. • Do not carry title to the product. • Manufacturer’s export agent: represents a manufacturer. • Buying offices: buyers located in the firm’s home country, representing different international firms.

7. Home-Country Middlemen (contd.) • Cooperative Export Arrangements • Also known as piggybacking and mother henning. • Involve exporters agreeing to handle export functions for unrelated companies on a contractual basis. • Complementary export agents export complementary products on a commission basis. • Complementary export merchants take title to the complementary products that they export.

8. Home-Country Middlemen (contd.) • Webb-Pomerene Associations of Exporters • Competing companies that join resources and efforts to export internationally. • Companies are exempt from antitrust scrutiny. • Companies are present especially where cartels are active.

9. Home-Country Middlemen (contd.) • Export merchants • Intermediaries who take title to and possession of the products they carry. • Responsible for shipping and marketing the products in the target market. • Carry competing brands. • Examples: • Export jobber, who carries commodity goods, but does not take physical possession of the goods. • Norazi agent, who deals in illegal and/or gray market products.

10. Other Tax Incentive-Based Structures for Internationalization • No longer viable options: • For years, setting up a Foreign Sales Corporation (FSC) has been a popular approach to allowing a portion of the firm's foreign-source income to be exempt from U.S. income tax. • It was followed by the Extra Territorial Income Act. • Both were repealed in 2004 by the U.S. Senate as a result of WTO complaints regarding what essentially were export subsidies.

11. Foreign-Country Middlemen • Merchant Middlemen: • Carry the manufacturer's product line in a particular country. • Usually carry title to and have physical possession of the products they distribute in the foreign target market.

12. Foreign-Country Middlemen (contd.) • Agents and Brokers: • There are many types of agents and brokers in international markets – for example, manufacturers’ representatives, managing agents, etc. • Could act as the manufacturer’s sales representatives and are paid on commission. • Could take on the role of managing agents (also known as compradors), with an exclusive arrangement with the company, representing it in the foreign market; they are paid as a percentage of sales.

13. Foreign-Country Middlemen (contd.) • Alternative Distribution Structures: Network Marketing • Using acquaintance networks for the purpose of both sales and distribution – have both a retailing and distribution function. • Have potential in emerging markets.

14. International Logistics • The international distribution function is supported by a number of service providers: • Transportation firms • Home country freight forwarders and customs brokers • Government agencies • Nongovernmental organizations • Logistics alliances • Other firms • Logistics costs account for a large percentage of GDP (more than 10 percent in the United States), making logistics the single highest operating cost.

15. International Transportation • Distribution Centers • Designed to speed up warehousing and delivery by channeling distribution to a hub. • Transportation Firms • Intermodal transportation firm. • Containerization. • Freight Forwarders and Customs Brokers • Government Agencies • Promote national security. • Promote international involvement of local firms. • Provide financing and insurance for high risk ventures.

16. International Transportation • The choice of transportation determines whether products arrive at the international destination on time and in good condition. • The cost of transportation is also essential because transportation costs can increase the product price in the target country. • Important is the transportation infrastructure of the country where the company is doing business: transportation networks are excellent in industrialized countries, with the countries easily accessible by rail, air, and water. Trucks offer flexibility on China’s crowded roadways.

17. U.S Merchandise Value by Mode of Transportation Sources: U.S. Department of Transportation, Bureau of Transportation Statistics,

18. Flexibility, Cost, and Speed Characteristics of Each Mode of Transportation

19. Logistics Facilitators • Critical: determining the number of warehouses and distribution centers needed to optimally implement the logistics function. • Distribution Centers and Warehousing: • In most industrialized countries, distribution centers are an option for the international firm; they perform the following functions: • receive goods from different producers. • take orders from buyers. • distribute goods promptly. • speed up warehousing and delivery by channeling distribution to a hub.

20. Logistics Facilitators (contd.) • Distribution Centers and Warehousing (contd.): • Warehouses are often located in free trade zones; the warehouses may be customs privileged facilities, as well as facilities where product assembly and packaging may be conducted. • Trend: worldwide, companies are attempting to address customer demand while reducing inventory costs, using just-in-time inventory systems, creating product flow rather than stock. • Transportation Firms • Freight Forwarders • Customs Brokers

21. Government Agencies as Logistics Facilitators • Government Agencies • Promote national security. • Promote international involvement of local firms. • Provide financing and insurance for high risk ventures. • International Trade Administration • Bureau of Export Administration • U.S. Commercial Service • Export/Import (Ex-Im) Bank • United States Trade and Development Agency

22. Other Service Providers Facilitating Logistics • Non-governmental • International Chamber of Commerce • Banks • Insurance agencies • Marketing research firms • Consultants

23. Steps Involved in Forming Logistics Alliances • Establish objectives • Identify providers • Express needs/wants • Evaluate and select bidder • Develop integration plan • Create win-win relationship • Measure and analyze performance • Redefine goals and objectives

24. Parallel Imports • Parallel imports (gray markets) • Defined as distribution systems that are not authorized by the manufacturer: products purchased in a low-price market are diverted to other markets. • Hurt company image and bottom line. • Combating Parallel Imports by: • Charging similar prices worldwide. • Creating product for low-price markets not as attractive to up-market. • Complicating the repair/servicing process for gray market goods. • Informing consumers. • Litigating.

25. Challenges to Distribution in Developing Countries • Unreliable transportation infrastructure. • Limited or nonexistent containerization capabilities. • Unreliable roads. High-quality roads are standard in high-income countries (see photo). However, in developing countries, many roads are not paved and are impassable during the rainy season.

26. Chapter Summary • Described functions of home-country and host-country middlemen involved in international distribution. • Identified different facilitators of international distribution and logistics. • Described their involvement in distribution process. • Addressed challenges encountered by distribution in countries of different development levels.