GSCM Week 1-7 Merged PPT

WEEK 1 MODULE OVERVIEW Prof. Jeong Hugh HAN Lecture Outline Professor Module aim Textbook Lecturing Exams & Grading Class activity - narrations Professor Prof. Jeong Hugh HAN at Department of Int’l Business & Trade Contact: [email protected] http://trade.khu.ac.kr/trade/index.php?mid=professor&documen...

WEEK 1 MODULE OVERVIEW Prof. Jeong Hugh HAN Lecture Outline Professor Module aim Textbook Lecturing Exams & Grading Class activity - narrations Professor Prof. Jeong Hugh HAN at Department of Int’l Business & Trade Contact: [email protected] http://trade.khu.ac.kr/trade/index.php?mid=professor&document_srl=204 https://scholar.google.com/citations?user=aPufguIAAAAJ&hl=ko has received PhD from Cardiff University(UK, full scholarship) has served Cardiff University (Research Associate) has served Inha university (Assistant professor, Asia Pacific School of Logistics) Associate editor of Journal of International logistics and trade Research interests – Global logistics and SCM, Innovation in SCM Objectives of this module This module consists of two parts: 1) Global logistics (app 40%); 2) global supply chain management theories (app 60%). The philosophy of international logistics and its important elements will be thought in light of supply chain management approaches. Topics will cover international logistics issues and practice, warehousing, inventory control, purchasing and location analysis, risk management, supply chain strategies, etc. Textbook International Logistics: The Management of International Trade Operations by Pierre David, 2021, Cicero Books Managing Operations Across the Supply Chain by Swink et al.. 2024, Mcgraw-hill A summarized version (the short version) of the text book in the form of PDF format will be provided via LMS in advance Handouts in short (PPT style) and an extended version (PDF) will be circulated in advance It will be helpful if you read the relevant chapters (PDF) that are summarized in PPT formats. Lecturing This module will be dedicated to the context of practices (International logistics) and theories (global supply chain management) Prof. HAN will use English Prof. HAN will try to use simple and straightforward explanations & expressions Key concepts and important notifications will be delivered in both English and Korean Lecturing Your language is both of the two. You can use both English and Korean No penalty in using Korean in any situations You can answer your exam questions in both English and Korean However the exam will be strcutured with English Will use e-campus for the supplementary cases and ideas I count attitude to your grade. Please respect every participants in this class Only beverages (coffee, water) are allowed during the lectures Food and others will invite you automatic penalties to your grade Exams & Grading Multiple choice questions / Short answer questions / (and / or) Essay style questions in English The outlines of the exam will be clarified before the exam dates (a week or two ahead) Exam questions will be limited to the context you learned from the lecture Broad and integrative view on the teaching materials will be helpful to your good grade Exams & Grading Attendance will be worth 5 credits out of 100. Midterm (8th week) and final exam (16th week) worth 45 credits and 50 credits, respectively. Absolute evaluation (grading method) will be used for your grade. Rules and thumbs Absence more than 25% of the semester = automatic F 1 absence means minus 1 credit out of 5 Being late to class (more than 5 mins) 3 times = 1 absence No mid term exam participation or No end term exam participation = automatic F (regardless of your performance in the exam) Any cheating attempt (or suspicious action) during the exams = automatic F (regardless of your performance in the exam) There will be no notice for the automatic F as it is an automatic one. Class activity - narration At any given moment, tens of thousands of giant cargo ships are moving around the world's oceans. These ships, some of which are more than a quarter of a mile long, are the heavy lifters of the global economy, shifting everything from metal ores and compressed gas to fresh fruit and plastic toys. This interactive map shows the movements of the world commercial shipping fleet in 2012, based on hundreds of millions of individually recorded positions. Plotting all the raw positions at once shows an extraordinary extent of shipping’s reach. Even without a background map, the world's coastlines are clearly defined – albeit with plenty of variation, from a buzz of activity in the East China sea to the relative quiet of the Somalia's piracy afflicted waters Class activity - narration While ships can move freely through the open ocean, routes are predetermined closer to land and especially in tight straits such as the dual carriageway of the English channel. The most crucial shipping thoroughfare of all, though, are the man-made canal linking different bodies of water – such as the Panama Canal, opened a century ago to connect the Atantic and Pacific ccean and the even older and busier Suez canal, which saw 17,000 transit in 2012 alone. In some places, ships penetrate deep into continents via rivers and lakes – such as the massive Paraguay and Amazon rivers in South america or the Great lakes in North america, whose ports include Chicago, Milwakee and Toronto. Coloring the ships by category shows the flows of the global economy in more detail. Class activity - narration The red dots are the tankers, which shut oil from massive terminals in the Middle East, or from off-shore rigs in West Africa and elsewhere. While the blue dots are called dry bulk ships moving aggregates, ores and coal from mines and quarries, many of which are found of Australia and Latin America. Many of these raw materials are shipped to manufacturing regions to make finished goods that are themselves then moved back across the oceans in containers ships shows here in yellow. China is the center of the container shipping world; Shanghai alone moved 33 million units in 2012. Class activity - narration While all this shipping makes modern life as we know it possible, there is a down side. Moving billions of tones of ships and cargo relies on burning massive quantities of bunker fuel. The result is a huge amount of carbon dioxide or CO2 – the main driver of global warming. Commercial ships produce more than a million tones of CO2 every day – more than whole of the UK, or Canada, or Brazil. WEEK 1 INTERNATIONAL TRADE International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories International Business Environment International Trade Growth Since World War II, global trade has skyrocketed, bringing economic prosperity to many nations. Countries that once struggled to feed their people have now become economic powerhouses, providing a modern standard of living for their citizens. The significant boost in international trade began when countries realized that trading with each other benefits their economies and improves the well-being of people worldwide. From 1953 to 2019, international trade has grown a staggering 2,858 percent. In 2019, it was 29.6 times larger than in 1953, showing an average annual growth rate of 4.96 percent. International Trade Growth International Trade Growth 1953-2019 (in 2019 constant dollars). Source: World Trade Organization International Trade Growth The increase in international trade over the last six and a half decades was triggered by a massive liberalization of international trade. It was also enabled by the creation of a number of international organizations designed to facilitate international commerce, and a significant decrease in transportation costs and transit times. During this period, a greater consumer acceptance of things “foreign,” from food to automobiles, allowed an increasing number of companies to expand sales beyond their domestic borders. Major Exporting Countries Major Exporting Countries (2019) Source: World Trade Organization Major Importing Countries Major Importing Countries (2019) Source: World Trade Organization International Trade Theories- historical mistakes The expansion of voluntary trade between nations has been a defining characteristic of the global economic system since the second World War. But peoples’ view on trade were not always so liberal. "government of the people, by the people, for the people, shall not perish from the earth“ The Gettysburg Address, 1863 Abraham Lincoln 1809-1865 International Trade Theories- historical mistakes President Lincoln once argued that… “To me that if we buy the rails from England, then we've got the rails and they've got the money. But if we build the rails here, we've got our rails and we've got our money.“ International Trade Milestones Treaty of Rome (1957) creates the European Union 1958: Belgium, France, Germany, Italy, Luxembourg, the Netherlands 1973: United Kingdom, Ireland, Denmark 1981: Greece 1986: Spain and Portugal 1995: Austria, Finland, Sweden 1999: Creation of the euro 2002: The euro becomes the currency of twelve countries 2004: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia 2007: Bulgaria, Romania 2013: Croatia 2020: United Kingdom “Brexit” 2021: The euro is the currency of 19 countries International Trade Milestones Progressive steps in the creation of trade blocs Free-Trade Agreement Elimination of tariffs between group members North American Free- Trade Area (NAFTA), Trans-Pacific Partnership (TPP) Customs Union Common tariff structure for all group members Central American Integration System (SICA), Central American Common Market Free circulation of goods and persons between group members Asian Nations (ASEAN), Eurasian Economic Union (EEU) Economic Union Common economic and monetary policies among group members European Union Political Union Common government European Union International Trade Drivers Cost Drivers Companies increase their sales worldwide to recover their high investment costs. Companies in industries with high fixed costs try to spread these costs over many units, and therefore seek sales outside of their home markets. Automobile companies were among the first to seek sales abroad: Automobile production was dominated by 20 companies in 2017 (87 percent of all automobiles worldwide) Automobile production was concentrated in 15 countries in 2019 (87 percent of worldwide production) Yet, automobiles are sold worldwide. International Trade Drivers International Trade Drivers Competition Drivers Companies enter foreign markets to keep up with their competitors, retaliate against them, or enter a market first Companies that see themselves as global players seek to counter their competitors’ international moves in order to retain global market share. Every move by one of the players is met with some retaliatory measure: When Benetton—an Italian company—, entered the U.S. market, The Gap—an American company—, retaliated by entering the Italian market. When Carrefour—a French retailer—enters a market, Walmart enters another. And when Walmart enters a market, Carrefour does as well. International Trade Drivers International Trade Drivers Market Drivers Companies enter foreign markets because their customers expect them to be present in those countries. Companies in industries where customers travel will follow these customers internationally: Hotel chains were first to offer a standardized experience worldwide. Fast-food restaurants followed their customers abroad (McDonald’s first foreign ventures followed U.S. military personnel in Germany and Japan). International Trade Drivers Technology Drivers Companies enter foreign markets because their customers use technology to make purchases from these markets. Buyers and sellers are increasingly technologically savvy and purchase goods from all over the world. The internet makes this process very simple: Paypal can be used to make and receive payments in 53 countries and can be used to make payments in 84 countries. eBay's “international shipping program” allows sellers to ship to 94 countries. Shutterstock has contributors in 150 countries. Apple’s “App Store” is present in 175 countries. Global logistics/SCM professionals Global logistics/SCM professionals have been the main facilitators of international- trade growth. How? They have been the managers responsible for the safe and timely deliveries of these billions of dollars of goods. Such as arranging the transportation of goods over thousands of miles understanding the trade-offs between the different modes of transportation choosing the right carrier determining through which ports and terminals the goods will transit making sure that the goods are packaged properly for their journey understanding the risks the goods face while in transit, and insuring against these risks appropriately These are the example of the contents we will explore on this semester. WEEK 2 INTERNATIONAL LOGISTICS AND SUPPLY CHAIN MANAGEMENT Logistics - Military Terminology Without Supplies no army is brave - King Frederick of Prussia (1712-1786) Victory is the beautiful, bright- coloured flower. Logistics is the stem without which it could never have blossomed. - Winston Churchill (1875-1965) Probably one of the most important and difficult phases of operations is actually getting the force to the line of departure. If this can be achieved satisfactorily, then the prospect of operational success is high. - Sir Mike Jackson (Commander, The Allied Rapid Reaction Corps, 1944~) Logistics § Definition The process that plans, implements, and controls the efficient and effective forward and reverse flow, as well as the storage of goods, services, and rela ted information between the point of origin and the point of consumption. § Scope Logistics is an internal function that ensures the efficient flow of goods with in a company or organization. § Primary activities Logistics primarily involves the physical aspects of transportation, warehou sing, order fulfillment, and packaging. § Goal To meet customer requirements Logistics § The 7 Rs of logistics The Chartered Institute of Logistics & Transport UK (2019) defines The 7 Rs of logistics “Getting the Right product, in the Right quantity, in the Right condition, at t he Right place, at the Right time, to the Right customer, at the Right price.” 7R explains the function of logistics, getting things moved in a synchronized fashion to meet a specific criteria such as timeliness, condition and the corr ect place Supply Chain Management § Definition Introduced by consultants in 1980s. The broader set of activities that involve planning and managing the entire network, from the procurement of raw materials to the delive ry of the final product to the end consumer. § Scope SCM encompasses logistics but goes beyond it. It involves the strateg ic coordination and integration of various functions within an organiz ation and with external partners to optimize the entire supply chain. § Primary activities Strategy and Coordination (SCM sets the strategy and directs daily lo gistical activities in factories, warehouses, and shipping centers). Supply Chain Management § Goal To ensure a smooth, efficient flow of goods, enhance customer expe rience, and drive business success. § Differentiating points from logistics Involves Partners: SCM coordinates activities across various entities involve d in the supply chain. So involves collaboration with external partners, such as suppliers and distributors, to achieve overall supply chain efficiency. Timeframe: Takes a long-term view, emphasizing strategic planning and opt imization of the entire supply chain. Customer: SCM focuses on enhancing the overall customer experience by managing the entire supply chain effectively while logistics aim at meeting i mmediate customer needs related to product movement and delivery Supply Chain Management § History Before the 1960s, business activities like purchasing, warehousing, and transportation were m anaged separately. Over time, they integrated into materials management, logistics in the 1990s, and eventually e volved into supply chain management in the 2000s with the inclusion of information technolog y, marketing, and sales. Supply Chain Management § A simple shape of a supply chain Upstream downstream A simple shape of a supply chain Distinguishing Logistics and SCM § Supply chain management involves integrating outside organizations and focuses on the end customer. § In many cases, supply chain management is somewhat larger than logistics. § We have four perspectives on the difference between logistics and SCM. § They are Traditionalist: regards SCM as a subset of logistics re-labeling view: logistics that has been re-labelled by the more recent term SCM Unionist view: logistics is seen as part of a wider entity Intersectional view: it suggest that there is overlap between parts of both logistics and SCM and also that each has parts that are separate and distinct. Distinguishing Logistics and SCM Key factors led logistics to SCM § Transport cost sensitivity of freight (compare to bulky material trade era) Traditional international trade was dominated by bulky raw materials (Iron ore, coals, rice etc.) Internatonal trade changed logistics that moves expensive in-process and finished goods - e.g Consumer electronic products. Ready to cook food. Higher value product can ‘absorb’ transport cost § Falling product prices (in contemporary age) Increased competition forced firms to reduce costs. This forces firms to focus on other areas where further savings can be made. Key factors led logistics to SCM § Deregulation of transport Transport markets in many countries have been deregulated by the governments. In theory the effect of deregulation is that markets become more contestable and prices come down and services improve. - Fedex has one of the world largest aircraft freight fleet. - In fact, the US market was deregulated in 1970s so Fedex was able to grow since 1980s. § Productivity improvements Containerized transport increased efficiency in transshipment, workforce uses. It reduced the cost of transporting freight and improved efficiency. Alliances were formed between combination of companies. Key factors led logistics to SCM § Inventory management There is a shift of management and financial attention into where an organization’s funds are tied up. Firms are now realizes that significant fund are tied up in unnecessary inventory. Integrated and focused inventory management can a source of cost savings and efficiency gains. § Changes in company structure Many firms have become integrated and more specialized. Functional and silo based thinking hinder the overall performance of the firm Competition based on time has become a key success factors in many markets so integration is much more important - Silo thinking: viewing the various departments within the firm as separate and non overlapping entities. Key factors led logistics to SCM § Globalization With the globalization of markets, supply chains expanded globally, necessi tating a more comprehensive and integrated approach. § Technology Advancements The advent of advanced technologies, like RFID, GPS, and sophisticated soft ware, enabled real-time tracking, end-to-end visibility, collaboration and op timization across the entire supply chain. § Customer Expectations SCM evolved to meet customer demands for faster, more reliable, and tran sparent supply chain processes, necessitating a holistic approach. § Market Dynamics Logistics addressed immediate needs in the movement of goods. SCM is required to changing market dynamics by integrating various functio ns, including procurement, production, and distribution, to adapt to market demands. Global supply chain management § In essence, supply chain is a system of connected networks between the original vendor and the ultimate final consumer. § This extended enterprise or boundary spanning perspective of supply chain management represents a logical extension of the logistics concept § It provides an opportunity to view the total system of interrelated companies and their impact on the final product in the marketplace in terms of its price-value relationship. International logistics The evolution of supply chain management has been characterized by an increasing degree of integration of separate tasks. This is a trend that was underlined in the 1960s as a key area for future productivity improvements since the system was highly fragmented. With the implementation of modern information and communication technologies a more complete integration became possible with the emergence of supply chain management. International logistics from SCM § The diagram shows that the activities that involve transportation and shipment of good s (and all related matters, such as paperwork, insurance, payments, and so on) betwee n domestic suppliers and customers are part of logistics. § When they involve foreign suppliers and customers, they are part of international logist ics. § Activities that involve deeper relationships with suppliers and customers (such as qualit y control, inventory management, and engineering exchanges) are regrouped under su pply chain management, especially when they involve these suppliers' suppliers (called second-tier suppliers), or customers' customers. Domestic Customers Domestic Suppliers Logistics Company International Logistics Foreign Suppliers Foreign Customers Supply Chain Management International logistics § The environment in which international logisticians operate is quite different from the domestic environment. The number of intermediaries involved in an international transaction is greater The inherent risks and hazards of international transportation are much greater. International insurance is much more complex. Terms of trade are more challenging. The crossing of borders represents specific challenges in documentation and requir ements. Warehousing decisions involve more variables. The transportation of time & temperature sensitive goods over long distances invol ves more careful planning. Globalization § What is globalization? a complex series of economic, social, technological, cultural and political changes. Geographically, it continues to take place throughout the world. The phenomenon that different cultures and economic systems around the world are becoming connected and similar to each other because of the influence of large multinational companies and of improved communication 19 Globalization Levitt suggested that companies must learn to operate as if the world were one large market. So firms need to ignore the regional and national differences. This is representing the “global market” which highlight the role of global consumers Falling trade barriers make it easier to sell globally Consumers’ tastes and preferences are converging on some global norm Firms promote the trend by offering the same basic products worldwide 20 Globalization § The three main flows in globalization process Trade Migration Flows of physical goods (mainly asymmetrical) Flows of people (mainly symmetrical) Flows of information (mainly asymmetrical) Raw materials, energy, food, parts and consumption goods Permanent, temporary (migrant workers), tourism, business transactions Communication, text and infomration exchanges Freight transport modes (maritime, rail, trucking) Passengers transport modes (vehicles, air, rail) Ports as main hubs Airports as main hubs Telecommunications Telecommunication systems (postal, internet, telephone, radio) Global cities as main hubs 21 The development of globalization – product focused view § First phase International trade concerned a range of specific products which are not available in regional economies. Due to regulations and transportation costs, trade remained limited and delayed In this context, trade was an activity to deal with scarcity than to promote economic efficiency. Bulk point to point trade was common 22 The development of globalization – product focused view § Second phase From the 1970s to the 1990s Regional trade agreements emerged, and the global trade framework was strengthened with inter-governmetnal institutions such as WTO (World Trade Organisation) Containerization provided the capabilities to support long-distance trade flows 23 The development of globalization – product focused view § Third phase – global supply chain From the 1990s to the 2010s The priority is now shifting to the geographical and functional integration of production, distribution, and consumption Complex networks involving flows of information, commodities, parts and finished goods Powerful actors have emerged which are not directly involved in the function of production, but taking the responsibility of managing the web of flows such as Apple Global supply chains 24 Case study: APPLE GSCM § The iPhone supply chain involves Apple's product development t eam in the US, numerous suppliers, assembly operations in China , distribution channels, and retail outlets, all coordinated in real-ti me. Let’s have a look. 25 Case study: APPLE GSCM § New product involvement Apple follows a one-year produc t lifecycle, requiring coordination among internal and external stak eholders. The product development proce ss is centralized, with responsibil ity for design and engineering in California. Creative design and engineering responsibilities, including the de velopment of new technologies and acquisition of intellectual pr operty rights, market research, c ost analysis resided in California. Consumers have limited options for configuring their iPhones, all owing Apple to streamline its su pply chain. EXHIBIT 7: IPHONE MODELS AND INTRODUCTION DATES Case study: APPLE GSCM § Procurement Apple's global supply chain consists of 200 suppliers in 43 countries, with over 800 prod uction locations, accounting for 98% of expenditures for materials, manufacturing, and product assembly. Apple focused on minimizing costs and enforcing delivery deadlines by rotating staff me mbers and preventing personal relationships with suppliers. Apple had significant influence over suppliers due to its large iPhone volumes and relian ce on a few key components In September 2019, Apple gave $250 million to Corning to help create high-quality glass for iPhones, Apple Watches, and iPads through its Advanced Manufacturing Fund. EXHIBIT 10: IPHONE 11 PRO MAX KEY SUPPLIERS Case study: APPLE GSCM § Product Assembly More than 90% of Apple products, were assembled in China, with Foxconn handling the majority of the volume. From 2001 Foxconn became the largest private-sector employer in China, d epending on Apple for about 50% of its revenues. Zhengzhou, China, known as "iPhone City," employed over 300,000 people and produced 500,000 iPhones per day. The iPhone assembly process involved about 400 manual steps, including s oldering, drilling, and fitting tiny screws (not similar to SAMSUNG). Manufacturing processes are closely monitored by the engineers from HQs. Demand for workers surged before the introduction of new iPhone models, and the government helped funnel migrant workers to Foxconn plants thro ugh online postings Case study: APPLE GSCM § Logistics and distribution Apple allowed customers to pre-order iPhones prior to launch to forecast d emand. UPS is a major carrier involved in the launch, and is delivering new products to stores, distribution centers and customers in more than 20 countries. UPS has worked for weeks to ensure that pre- ordered devices on the launch day (October, 2020) for the Apple product (new iPhone and iPad). UPS Worldport ran a special delivery, dedicated solely to sorting iPhone and iPad Air shipments. Logistics for iPhone launches were carefully coordinated, with iPhones sent to sorting facilities for on-time delivery to Apple Stores and customers' hom es. Case study: APPLE GSCM § Retail network Apple had a global retail network with 510 stores in 25 countries, inc luding 271 stores in the US, offering a luxury shopping experience an d technical support. Apple Stores generated high sales per square foot, giving Apple lever age to negotiate favorable lease rates with mall owners. Apple also had authorized resellers and service providers like Walma rt, Target, and Best Buy, who sold and repaired Apple products, with access to Apple resources and training. In 2018, Apple partnered with Amazon to become an authorized res eller, leading to the removal of non-authorized third-party sellers fro m Amazon's platform Case study: APPLE GSCM § Challenges Apple's iPhone revenues saw a significant increase in the first quarte r of fiscal year 2020, driven by strong sales of the new iPhone 11. Despite focusing on other businesses like services and wearables, th e iPhone remains crucial for Apple's long-term success. Apple's centralized iPhone production in China poses risks due to tra de tensions and rising labor costs. The company aims to reduce its dependence on third-party technolo gies and suppliers to lower costs. Expanding into other regions is challenging due to the unique advant ages offered by China's business environment and skilled labor force Case study: APPLE GSCM § Review Apple’s supply chain for its iPhone product. Wha t differences set it apart from its competitors? WEEK 3 GLOBAL LOGISTICS INFRASTRUCTURE Overview of International Trade (physical goods) International trade encompasses a diverse range of goods. Two primary categories Natural resource-based goods: raw materials Agricultural products, while not falling under the natural-resource definition, are included under the category of primary materials. Manufactured products: industrial goods (machines) and consumer goods (clothes, furniture, etc). Trade Composition More than two-thirds of seaborne trade by volume consists of raw materials. More than two-thirds of seaborne trade by value is represented by manufactured goods, comprising the largest share in international trade. Natural resources Natural resources It refers to scarce and valuable natural materials used in production, either raw or minimally processed (WTO 2020) e.g., crude oil for petrochemicals, iron ore for steel, coal for power, logs for paper and furniture, rubber for automotive etc. Types of natural resources Liquid resources (liquid cargos) These are resources that are in a liquid state, like crude oil, gasoline, LNG, chemicals, or vegetable oils. They are often transported in tanks or (sometimes) special containers designed for liquids like tank container Dry resources (dry cargos) Goods and materials that are in a solid or dry state. Examples include coal, iron ore, bauxite, grains. Dry cargo is often transported in bulk carriers Natural resources - characteristics High cargo volume & homogeneous nature Cargo in significant volume, consisting of uniform natural resources. Large volume requires extensive transportation capacity with sizable ships. Homogeneous nature enables loose, bulk transportation, facilitated by specialized cargo handling equipment. Low unit value & transport cost Natural resources generally have a low market value. Abundant supply leads to low material value, and transport costs constitute a significant proportion of the cargo's total value. Low unit value justifies slower transport speeds to reduce costs, even at the expense of longer transit times. Natural resources - characteristics Concentrated & stable export sources Natural resource disposition is not directly linked to economic development levels and factors. Export sources remain relatively few and stable, determined by fixed factors such as natural distribution. For example, leading exporters are like Brazil, Australia for iron ore, Saudi Arabia, and Venezuela for oil. Volatile volume & price fluctuations Natural resource trade depends on the importing nations' economies and global economic conditions. Economic fluctuations can lead to variations in trade volume For instance, a slowdown in the Chinese economy in 2015 impacted iron ore imports and freight rates. Weather conditions also influence trade levels For instance, grain imports being affected by weather conditions, and the need for coal fluctuating based on winter temperatures. Natural resources characteristics - continued A dry-bulk carrier with hatches open, loading coal in Australia Carrier: A firm which transports goods or people via land, sea or air. Sometimes a ship. https://www.marineinsight.com/know-more/10-largest-container-shipping-companies-in- the-world/ Manufactured goods Manufacturing Process Involves the transformation of raw materials using man, machines, or chemical processing, typically on a large scale. This process distinguishes manufactures, also known as industrial goods producers. Types of Manufactured Goods: Consumer goods/home products: Items like electronic products, clothes, furniture, and other daily-life essentials purchased from shops. Capital goods: Designed for production rather than final consumption, such as machinery, office equipment, airplanes, ships, etc. Maritime Transport In maritime transport, manufactured products are commonly referred to as general cargo. Cargo General cargo General cargo consists of those products or commodities such as timber, structural steel, rolled newsprint, concrete forms, agricultural equipment that are not conducive to packaging or unitization. Break Bulk – Goods that are carried in unitized form. A cargo that is carried in drums, bags, pallets, or boxes. Neo Bulk - A cargo where each pre-packaged unit is accountable such as lumber (bundles), paper (rolls), steel, and vehicles. Containerized cargo - The growth of container shipping required creating a new general cargo category where the cargo is being carried in container load units. Unit load - Packages loaded on a pallet, in a crate or any other way that enables them to be handled as a unit. Bulk cargo vs. General cargo Roll On/Roll Off (RO/RO) Vessel Ships that are specially designed to carry wheeled containers trailers, or wheeled cargo. LO-LO (LIFT-ON LIFT-OFF) Loading/unloading by the vessel’s own or by-shore cranes Manufactured goods characteristics High value Manufactured goods represent the largest portion of international trade in value, with about 68% of world merchandise exports in 2018. High growth rate The trade volume of manufactured goods has grown 80-fold since 1950, with an average annual growth rate of 7%, outpacing that of fuel, mining products, and agricultural goods. Industrialized exporting countries Countries like Japan export mainly manufactured products due to limited natural resources Countries like Brazil and South Africa import more manufactured goods. New trend 1 – From product based to process based Historical Perspective Traditionally, countries specialized in producing entire products. International trade was based on exchanging finished goods. Transformation Global Supply Chain shifted toward a process-based approach. Countries now specialize in specific tasks within the production process. Trade involves the exchange of tasks (semi-finished goods) rather than complete products. New trend 1 – From product based to process based Distinct Features Concentration of production is observed Stages of design, development, manufacturing, sales, and distribution are now separate. Activities occur across national borders based on comparative advantage. Value-Added Each stage contributes varying value to the final product. Manufacturing and assembling often have the lowest value-added. Assembling iPhones, for instance, adds minimal value to the total product. New trend 1 – From product based to process based Value added and cargo volume generated by production stages along the supply chain New trend 2 – relocation of production facilities Relocation Manufacturing activities often relocate between countries or shift production centers due to evolving comparative advantages. Result: Changes in the most attractive location for production. Observation: Asia witnessed significant shifts of Japan → Korea → Malaysia → Thailand → China → Vietnam → Indonesia. China as the "Factory of the World" China earned the title due to its massive size, absorbing a substantial portion of the global manufacturing sector, catering to both international markets and domestic consumers. Anticipated Shifts China's role as the "factory of the world" is expected to change as its labor force becomes scarcer and more expensive. Container The usage of containers shows the complementarity between freight transportation modes by offering a higher liquidity to movements and a standardization of loads. Standard 20 Foot Containers The reference size is the 20-foot box of 20 feet long, 8’6″ feet high and 8 feet wide, or 1 Twenty-foot Equivalent Unit (TEU) Carry heavier goods. Running out on weight before run out of volume. 40 Foot Containers Majority of containers are now forty feet long, the term Forty-foot Equivalent Unit (FEU) Carry more volume then weight 40 Foot High Cube “Hi cube” containers are also common, and they are one foot higher (9’6″) than the standard. Containers used in global fleet, 2019 The Emma Mærsk officially carries 11,000 TEU 40 foot vs. 40 foot HI CUBE Advantages of Containerization Standardization Standard transport unit that can be handled anywhere in the world Each container has a unique identification number and a size type code https://www.bic-code.org/ Length Height Type 2 20 feet 2 8 feet 6 inches G1 General purpose container 4 40 feet 5 9 feet 6 inches R1 Refrigerated container L 45 feet “High cube” U1 Open top container P1 Platform container T1 Tank container M 48 feet Advantages of Containerization Owner code Consisting of three capital letters that identify the owner of the container. An international agency (Bureau International des Containers et du Transport Intermodal) issues owner codes on behalf of ISO In the previous case, the container belongs to the American company Textainer, the world’s largest container leasing company. Product group code Appears right after the owner code and consists of one capital letter J refers to equipment can be attached to a container, such as a power unit. Z refers to a trailer used to carry a container. U refers to a general use container. Registration Number (or Serial Number) A sequence of 6 digits where each container belonging to an owner has a unique value. Therefore, each owner code can have up to 1 million containers. Advantages of Containerization Check digit This single digit is used to cross-verify if the identification sequence is accurate. A numerical operation is performed on the container identification sequence (owner code, product group code, and registration number) which results in a single-digit number, which is the check digit. https://www.gs1.org/services/check-digit-calculator Size and type code The first character is related to the length of the container while the second character is relative to its height. The first two numbers 45 indicate that the container is a 40 footer (4; commonly the length of the container) of 9 feet 6 inches in height (5; high cube). G1 indicate that it is a general-purpose container Advantages of Containerization Velocity Transshipment operations are minimal and rapid and port turnaround times have been reduced from 3 weeks to about 24 hours. Warehousing The container is its own warehouse, protecting the cargo it contains. Simpler and less expensive packaging for containerized cargoes, particularly consumption goods. The stacking capacity on ships, trains (double-stacking), and on the ground (container yards, cy) is a net advantage Security and safety The contents of the container are unknown to carriers since it can only be opened at the origin (seller/shipper), at customs and at the destination (buyer). Disadvantages of Containerization Site constraints Containers are a large consumer of terminal space Many intermodal terminals have been relocated to the urban periphery Capital intensiveness Container handling infrastructures and equipment requires capital investments The push towards automation is increasing the capital intensiveness of intermodal terminals. Repositioning There are 2.2 times as many containers moving from Asia to the United States (17.9 million TEUs in 2017) than vice-versa 9.7 million TEUs had to be repositioned across the Pacific More than half the slots of containerships leaving the United States are for empties, particularly for major container ports such as Los Angeles. This is a challenge for carriers as they have to match inbound freight capacity with outbound freight capacity as possible. Disadvantages of Containerization Theft and losses High-value goods can forcefully be opened or carried away (on a truck) About 1,500 containers are lost at sea each year mainly because of bad weather. Illicit trade The container is an instrument used in the illicit trade of goods, drugs, and weapons, as well as for illegal immigration (rare). Vessels Volume (in millions of tons) of ocean transport, by type of cargo. Vessels Multiple categories of vessels Panamax A ship of the maximum size that can enter the locks of the Panama Canal. The locks are 110 feet wide, 1000 feet long. Neo-Panamax A ship of the maximum size that can enter the newer locks of the Panama Canal. The locks are 180 feet wide, 1,400 feet long. Post-Panamax A ship that is too large to enter the locks of the Panama Canal. Handy Size term commonly used in the dry-bulk trade that refers to ships in the 10,000 to 50,000 deadweight ton range. Such ships tend to be used for tramp service Vessels Suez-Max A ship roughly 150,000 dead-weight tons, the maximum size that can fit through the Suez Canal. The size changes as the canal is expanded regularly (In 1996, the Suez Canal was deepened and widened) Cape-Size A large dry-bulk carriers of a capacity greater than 80,000 dead-weight tons. The term relates to the ships that originally could not fit through the Suez Canal and had to go around Africa by way of the Cape of Good Hope. Vessels A Post-Panamax containership with 24 containers abreast, the HMM Algeciras A critical point – Economies of scale Try to interpret this figure. Is a large ship better for your company? What are the considerations in this decision making process? Operating Costs of Panamax and Post-panamax Containerships (in USD) A critical point – Economies of scale A standard Panamax containership has operational costs of about $9million per year. The most significant expenses are related to fuel (46%) and port charges (21%), which are variable costs. This is transcribed in annual operating costs of about $2,314 per TEU. The incentive to use larger containerships is quite clear from the perspective of maritime shippers, which led to a new generation of 10,000 TEU containerships being introduced in 2007. In this case, fuel and port charges account respectively for 50% and 21% of their annual operating costs, while manning costs remain constant. However, annual operating costs per TEU drop by more than one half to $1,449. The principle of economies of scale is thus a strong factor in containerized maritime shipping. Containerships in Operation 2019 * Panamax and Neo-Panamax in bold § Containerships on order 2019 * Panamax and Neo-Panamax in bold Types of services Liner Service A service provided by a ship that operates on a regular schedule, traveling from a group of ports to another group of ports. Liner ships travel on a regular voyage, following a pre-established schedule, and with determined ports of call. A scheduled voyage may include only two ports. Commonly, a series of ports in one region of the world (e.g., Rotterdam, Netherlands; Felixstowe, UK) to another (e.g., Boston, USA; Baltimore). Types of services Example https://www.hmm21.com/cms/company/korn/index.jsp https://www.hpnt.co.kr/homepage/webpage/ https://www.vesselfinder.com/ Tramp Service An oceangoing vessel that does not operate along a definite route or on a fixed schedule, but rather calls at any port where cargo is available - Charter services A maritime company rents a ship to move cargos between a specific port of origin and destination. For the case of bulk cargo, such as petroleum, iron ore, grain or coal The whole contents of the ship are usually traded Maritime logistics process This part introduces the key processes and documents used in the shipping process, at origin (at time of export) and at destination (at time of import) in liner shipping service 1. Processes and Documents – Sailing Schedule 1) One of the first parts of the shipping process is to identify when goods must be shipped from origin for them to arrive at destination at the desired time. 2) Carriers publish their vessel sailing schedules on the internet, making it easy for customers to access the information. 3) Sailing schedules show ETD (Estimated Time of Departure) and ETA (Estimated Time of Arrival). * Given the nature of shipping, exact departure and arrival times are not guaranteed but punctuality is a key service element for shipping lines. Maritime logistics process 4) Voyage - A liner vessel will sail according to a fixed schedule in a rotation between a number of fixed ports. - Each round trip is called a voyage and is given a voyage number to avoid any confusion regarding which exact vessel sailing the carrier, customers and other parties in the shipping process are referring to, e.g. during the booking process. 5) Cut-off - To make sure that vessels depart on time, carriers will stipulate a Cut-off time to the customers. - The Cut-off or Closing time is the deadline before which a shipper must deliver his cargo to the carrier’s terminal or depot prior to departure Maritime logistics process 2. Processes and Documents – Origin Flow (1) Booking: Customer needs transport and contacts the shipping line, advising details of the shipment to be moved. (2) Booking Confirmation: The shipping line checks equipment and vessel space availability and advises if the shipping line accepts the shipment. (3) Empty Dispatch: The shipping line allocates an empty container. Shipper loads the container and it is taken to the port or carrier yard. (4) Receipt: The shipping line confirms that the container has been received at the port terminal Maritime logistics process (5) Shipping Instructions: Shipper advises details to the shipping line of cargo loaded in the container and confirms shipping information. (6) Invoice preparation: Shipping line prepares documentation for the shipper and advises prepaid charges. (7) Vessel Manifest: shipping line prepares documentation and submits details to Customs about the containers planned for loading. (8) Vessel Departure: Container is loaded and the vessel departs. The shipper pays prepaid charges to the shipping line and the B/L is released. Maritime logistics process 3. Processes and Documents – Origin Documents 1) Booking Confirmation - The booking confirmation is a message sent by email or fax by the carrier to the customer, advising that his booking has been accepted. - The booking confirmation restates the booking details such as ETD, vessel sailing, origin, destination, equipment size, etc. 2) Dock Receipt 수취증 - A Dock Receipt is a document, stamp or message issued by the carrier or terminal operator to confirm that the container has arrived at the terminal or container yard. - The dock receipt states the time of arrival to the terminal and confirms that the container was received in good order and condition (if not, carrier must make sure to make notation on the receipt). Maritime logistics process 3) Shipping Instructions 선적지시서 - Shipping Instructions (S/I) is information provided by the customer to the carrier about the shipment, in particular a description of the goods (type, volume, etc.) and a confirmation of the container and seal number as well as the final sender/receiver name and address. Maritime logistics process 4) Vessel Manifest 화물적하목록 - The Vessel Manifest is an official document submitted by the carrier to Customs authorities before vessel departure, advising what will be or has been loaded onboard the vessel. - The manifest provides details of e.g. cargo types and shipper/consignee details and is prepared by the agent in the port of loading. Maritime logistics process 5) Commercial Invoice – Prepaid Charges 상업송장 - 선불 - At origin, the carrier will prepare an invoice to the shipper covering the relevant prepaid charges. - An invoice is a formal demand for payment and includes payment terms, description of cargo and breakdown of charges. Maritime logistics process 6) Bill of Lading (B/L, 선하증권) - A legal document that establishes evidence and the terms of a contract between a shipper, a transportation company, and the agents providing and receiving the cargo. - It serves as a document of title, a contract of carriage, and a receipt for goods. 3 original documents are issued. - When signed, the carrier acknowledges that it has received the cargo in good condition in the right quantity when the carrier took custody of it. - So it is a receipt of goods (화물수취증)issued by the carrier to the shipper. - The B/L also evidences a contract (운송계약서) of carriage between the shipper and the carrier. Maritime logistics process - It also acts as the “key to the cargo”. - At destination the carrier will release the container to the party who submits an original B/L document (a person who presents an original B/L document at destination obtains the goods from the carrier) - The B/L is a so-called Document of Title (권리증권) which means that goods can be sold during transit and as long as the new owner obtains an endorsed original B/L (this is also called negotiable B/L), he/she can receive the goods from the carrier at destination. Maritime logistics process Sea Waybill (SWB) - If the shipper requests it, the carrier may issue a so-called Sea Waybill (SWB) instead of a Bill of Lading. - The Sea Waybill works much the same way as the B/L but it is not a document of title. - In practical terms this means that goods shipped on a Sea Waybill can only be released to the consignee that is listed on the document. Maritime logistics process - That means as long as a person can present proper identification that he/she represents the consignee named in the Sea Waybill, the goods will be released to that person at destination (whereas on a B/L, goods are released to the person who presents an endorsed original B/L document to the carrier at destination). - Sea Waybills are often used where no sale of goods is expected during transit and where the shipper and consignee trust that payment can take place and legal ownership for the goods can change without the use of an original B/L document. Maritime logistics process 4. Processes and Documents – Free Time - After arrival at the port of discharge, the customer must collect his container from the terminal within an agreed number of days, referred to as ―Free time. - Typical free time is 2-5 days but carriers may agree with some customers to extend this period. * Demurrage 체화료 - If the container is still at the terminal after expiry of the free time, the customer will be liable to pay so-called ―Demurrage‖ charges to compensate the carrier for the cost of storing the container at the terminal. - It is important to remember that the container cannot leave the carrier’s terminal or container yard at destination for delivery to the consignee until the consignee has submitted an original Bill of Lading. Maritime logistics process Although all containers have the same physical construction and appearance, multiple types of container services can be identified. The differences between such loads are not of a physical nature but are identified by ascertaining who the consignor(s) and consignee(s) of such container is/are: FCL /FCL Container Load - the goods stuffed in this container are from one supplier and are consigned to one importer. This container will be delivered to the consignee directly once cleared by customs. FCL/LCL Container Load – the goods stuffed in this container originate from a single supplier, but is consigned to different importers. The container will be delivered to a depot/warehouse for unpacking. Maritime logistics process LCL/FCL Container Load – The goods stuffed in this container are from more than one supplier and are consigned to one importer. The container will be delivered directly to the consignee once cleared by customs. LCL/LCL Container Load the goods stuffed in this container are from more than one supplier and are consigned to more than one importer. Separate Bills of Lading are issued for each individual consignment. The container will be delivered to a depot/warehouse for unpacking. * FCL – Full Container Load * LCL – Less than Container Load Service Components of Logistics The logistics service characteristics that are usually most important and discussed include Transit time Reliability Accessibility Capability Security Service Components of Logistics TRANSIT TIME It is the planned travelling time of a product to the final destination. It can impact the inventory levels held by sellers and buyers. Usually, the longer the transit time the higher the inventory levels required and the higher the related inventory carrying costs and potential stock out costs. Shorter transit times reduce the potential losses from stock outs. * Stock out cost is the cost of not meeting customer demand which can be the profit on the sale of the product or the longer run cost associated with losing the customer Service Components of Logistics e.g., the supply of clothing produced in the Pacific Rim might require 45 days transit time from manufacturer’s shipping point to a specific retail store. While the clothes are in transit for 45 days, either a buyer or a seller incurs the cost of financing the inventory for the 45 days. If the transit time is reduced to 15 days by use of air transportation, the in-transit inventory financing costs will be reduced by two-thirds. longer the transit time increases the potential cost for stock outs. a stock out of clothing at the retail store could mean a maximum of 45 days without inventory with sales and the related profits lost during this period. Service Components of Logistics RELIABILITY It refers to the consistency of the expected transit time of carriers. Meeting pickup and delivery schedules enables shippers and receivers to optimize service levels and minimize stock out costs. Unreliable transit time requires the freight receiver to either increase inventory levels to guard against stock out conditions or incur stock out related costs. Service Components of Logistics ACCESSIBILTY It refers to the ability of a carrier to move freight between a specific origin and destination. If the carrier cannot provide that direct service it will affect inventory cost with longer transit times and higher total transportation costs usually associated with additional transportation services (pick up and/or delivery charges). The motor carrier usually has the advantage in providing direct point-to-point service and is frequently the complementary service required by other carriers for complete point to point service Service Components of Logistics CAPABILITY This refers to the ability of the carrier to provide effective service for specific products and/or to meet the special service characteristics of the freight and market needs. Typically, this is the first step in evaluating the potential for using a particular mode of transportation for a movement. Based on the physical and marketing characteristics of the freight, shippers might have unique demands for the transportation, facilities, and communication For example, products requiring controlled temperature and necessitate the use of a refrigerated vehicle; time sensitive shipments that need state-of-the-art communications systems to monitor their exact location and arrival times Service Components of Logistics SECURITY It is concerned with the safety of the freight while it is in-transit or what is commonly referred to as loss and damage. Shipments that are damaged or lost in transit can cause increased cost in the areas of inventory and/or stock outs. A damaged shipment will usually not be accepted and the buyer faces the possibility of losing a sale or stopping the production process. Increasing inventory levels to protect against stock out costs relating from a damaged shipment causes increased inventory carrying costs WEEK 5 LPI AND MAERSK CASE STUDY International logistics performance § The global logistics performance index (LPI) It ranks 160 countries’ logistics performance against six key dimensions: The aim of this index is to benchmark countries overall performance on these dimensions and to assess the quality of a country's connection to the global market. - Customs: The efficiency of the clearance process (i.e; speed, simplicity and predictability of formalities) by border control agencies, including customs. - Infrastructure: Quality of trade and transport-related infrastructure (e.g., ports, railroads, roads, information technology) International logistics performance - International shipments: Ease of arranging competitively priced shipments. - Logistics competence: Competence and quality of logistics services (e.g., transport operators, customs brokers) - Tracking & tracing: Ability to track and trace consignments; - Timeliness :Timeliness of shipments in reaching the destination within the scheduled or expected delivery time. International logistics performance § By averaging scores in 6 dimensions, the LPI ranges from 1 to 5 points ( 5 points indicates the best performance) § The LPI scores are divided into five groups, which correspond to the sco ring quintiles as follows Logistics unfriendly—includes countries with severe logistics constraints, su ch as the least developed countries (bottom LPI quintile) Partial performers—includes countries with a level of logistics constraints most often seen in low- and middle income countries (fourth and third LPI quintiles). Consistent performers—includes countries rated for logistics performance more highly than most others in their income group (second LPI quintile). Logistics friendly—includes high performers, mostly high-income countries (top LPI quintile). https://lpi.worldbank.org/ § Top LPI economies? § Bottom LPI economies? § Top-performing lower-middle-income economies? § Top-performing lower-middle-income economies? § Top-performing lower-middle-income economies, 2018 § Top-performing low-income economies, 2018 Measuring Logistics Performance § What is required for LPI improvement? Public Border management Trade infrastructure Private Logistics services Regional trade faciliation Key performance index Public private partnerships Action plans Government leadership Integration of supply chains Including government International logistics performance § The Logistics Performance Index summarizes a country’s ability to handle logis tics functions. The higher the LPI, the more efficiently goods can move in that country. § The coefficient of determination (R-squared) of a regression model between L PI and the GDP per capita of a country is 60 percent. International logistics performance § UNCTAD Liner Shipping Connectivity Index (LSCI) This measures 159 countries’ access to container shipping services. Generated from five components: - Maximum vessel size in a country’s ports: Lager vessels require deeper ports and investments - The number of companies providing services to a country’s ports: A higher number of competing companies implies more choices and fore lower freight cots for shippers. - The number of services offered by the liner companies: A higher number of services gives more options to shippers to connect to overseas markets. - The number of ships deployed on services to a country’s ports: More ships are correlated with higher frequencies. - The twenty foot equivalent TEU capacity on the deployed ships: This is correlated with economies of scales and lower freight cots. 10 International logistics performance § UNCTAD Liner Shipping Connectivity Index (LSCI) This measures 159 countries’ access to container shipping services with 5 components - Maximum vessel size in a country’s ports: Lager vessels require deeper ports and investments - The number of companies providing services to a country’s ports: A higher number of competing companies implies more choices and fore lower freight cots for shippers. - The number of services offered by the liner companies: A higher number of services gives more options to shippers to connect to overseas markets. - The number of ships deployed on services to a country’s ports: More ships are correlated with higher frequencies. - The twenty foot equivalent TEU capacity on the deployed ships: This is correlated with economies of scales and lower freight cots. 11 International logistics performance The country with the highest LSCI in 2015 was China, Hongkong, Republic of Korea, Malaysia. This remained unchanged through the year 2023. Eleven of the twelve countries with the lowest LSCI are island states, mirroring their low trade volumes and remoteness. https://unctad.org/news/unctad-maritime-connectivityindicators-review-critique-and-proposal International logistics performance The key underlying trend is consolidation with fewer companies (merges and alliances) offering fewer services and using large vessels. One of the goals of logistics is to facilitate the process of trade, and this in turn can aid the economic well being of all countries Ensuring good logistics systems are in places is a key components in efforts to help developing countries in particular. § Note: google ‘trade facilitation internship’ 13 Key characteristics of maritime logistics § Cost Efficiency For some products, the most economical means of transportation remains conven tional sea freight. This particularly applies to bulk goods and large packaged consignments traveling long distances. When speed of service is not a priority, the affordability of sea freight makes it hig hly competitive. § Slow Speed Sea freight tends to be relatively slow. While recent ships can achieve speeds between 25 to 30 knots (approxim ately 45 to 55 kilometers per hour), it is uncommon for commercial ships to travel faster than 25 knots due to energy requirements. This slower speed results in longer shipping times. Key characteristics § Delay Three main factors: pre-shipment delays, discharge port delays, and unexpected delays (adverse weather or missed tides). Asia/Europe trade routes and trans-pacific experience around 33% of shi ps arriving 1 to 3 days late, indicating low ETA reliability. Transatlantic routes have higher schedule reliability due to shorter dista nces and fewer port calls. Low schedule reliability invites challenges for supply chain managers, lea ding to increased inventory and last-minute adjustments for terminal pic kups and deliveries. Terminal operators must allocate more space to buffer the lack of reliabil ity, while inland transport providers face fluctuations and uncertainty in servicing port terminals. Key characteristics § Difference from ETA in days Key characteristics § Accessibility The limited accessibility of the water carrier usually necessitates pickup or delivery by another mode of transportation. Service can also be disrupted by weather. Rivers and lakes freeze during the winter months in the northern states, which can interrupt service for sever al months. Drought conditions can lower water levels and restrict traffic flow. Conversely, heavy rains can cause flooding, which is also disruptive to servic e. § Overall, water carriers are an attractive alternative for low-value traffic, where transportation rates are a significant part of the total delivered c ost and price of the good. A case of Maersk – Boom and burst years § Late 1990s to 2000s: Strong growth fueled by buoyant export-import activities, open trade p olicies, and emerging markets. China became a main driver with large ports and import activ ities § China’s Role: China emerged as a major seaborne trade driver due to exports and commodit y imports. § Optimism and New Vessels: Shipping companies ordered vessels to meet demand, encoura ged by bullish market conditions. § Oil Prices and Bigger Vessels: Rising oil prices led to larger vessel orders to offset bunker fuel costs. § Delivery Timing Challenges: Market conditions sometimes weakened by the time ships were delivered. § Post-2008 Crisis: Market demand dropped. Ship liners didn’t reduce orders. Ships arrived aft er the crisis hit. Overcapacity made. Freight rates down. Oil prices remained around USD95 p er barrel. § CRUDE OIL PRICES (PER BARREL) FROM 1986 TO 2016 Source: US Energy Information Administration, https://www.eia.gov § SUPPLY AND DEMAND GROWTH IN CONTAINER SHIPPING Source: Data from United Nations Conference on Trade and Development, “Review of Maritime Transport 2021 A case of Maersk – Maersk A case of Maersk – Maersk § Maersk Group Origins Founded in 1904 by Danish magnate AP Møller as a shipbuilding company. Initially focused on core shipping businesses. Diversified into logistics, oil, and gas services over time. § Key Milestones Flourished during the 1920s oil boom with a successful oil tanker business. Maersk Line launched trans-Pacific operations. Navigated economic cycles, including World War II and global trade surges. By 2016, Maersk Group was the world’s largest shipping conglomerate. § Subsidiaries Maersk Line: Leading container shipping division covering major trade routes. Maersk Oil: Significant player in the oil industry. APM Terminals: Provider of port and terminal services worldwide. A case of Maersk – market turbulences § Impact of Low Oil Prices on Maersk Falling oil prices since 2014 severely impacted profitability of Maersk Oil Heavy losses reported as oil prices dropped by half in 2015, affecting project cost r ecovery. Pressure on oil field owners to cut production, raising uncertainty in securing futur e contracts. § Overcapacity Challenges in Shipping Industry Container shipping industry revenue down over 16% from peak in 2008. Measures like slow steaming and laying up ships adopted to cope with oversupply. Industry faced additional challenges as shipping companies ordered larger vessels, worsening oversupply. Alliances (conferences) formed to utilize each other’s route coverage. § Market Response: Mergers, Acquisitions, and Bankruptcies Tough operating environment led to mergers and acquisitions for survival. Notable mergers include COSCO Container Line with China Shipping Group and Hap ag-Lloyd with United Arab Shipping Company. Hanjin Shipping's bankruptcy highlighted industry challenges, prompting further co nsolidation efforts. A case of Maersk – China factor § Impact of State-Owned Enterprises in China Chinese state-owned enterprises (SOEs) play a significant role in strategic ind ustries like shipping. Chinese government directed a merger between COSCO and China Shipping to create the fourth-largest global ship liner, showcasing state-driven econo mic policies. § Chinese Government's Influence on Shipbuilding China's government-directed initiatives aimed to boost shipbuilding capacity , making it the world's largest. State-supported consolidation led to closure of less competitive shipyards, el iminating about 19% of capacity by 2015. Class activity § Maersk has a good option: alliances. § Considering mixed signals in global trade and the econo my, let's identify the pros and cons (advantages and disa dvantages) of joining an alliance. § Please see the next two slides for further critical inform ation. Alliance in maritime logistics § Alliance An alliance refers to a cooperative agreement among ocean carriers. It’s a strategic partnership that allows these carriers to cover different trade routes globally through collaboration. Carriers in an alliance can share vessels, networks, and port calls, which hel ps them to optimize their operations and reduce costs. Alliances are essential for maintaining competitiveness and managing the c apacity in the liner shipping market. They’ve become increasingly common, with major alliances like 2M, THE All iance, and Ocean Alliance dominating significant portions of global trade2. Alliance in maritime logistics Major shipping alliances 2024/2025 Alliance Members Details of alliance Gemini Cooperation Maersk & Hapag Lloyd This new alliance will begin in January 2025, where Maersk will step away from the 2M alliance, and Hapag Lloyd will leave THE Alliance. 2M MSC & Maersk % Ocean Alliance CMA-CGM, Cosco Group, OOCL and Evergreen THE Alliance Hapag Lloyd, NYK, Yang Ming, MOL, K-Line, HMM Formed in 2015 to ensure competitive and cost-efficient operations. This alliance comes to an end in 2025. Formed in 2017 and renewed for 10 years ending in 2027. Recently extended again until 2032. The alliance has 330 ships, out of which 111 ships are operated by CMA CGM. The alliance has a capacity of 3.8 million TEUs. Launched in 2017, THE Alliance has 241 ships calling more than 1,150 ports and coverin g 3.3 million TEUs. With the new Gemini Cooperation forming in January 2025, Hapag Lloyd will be leaving THE Alliance next year. WEEK 6 THE SHIPPING INDUSTRY – A CASE STUDY Shipping industry – a case study Shipping industry – overview The liner shipping industry, which transported a significant portion of global manufactured goods, faced challenges of poor profitability and overcapacity. The COVID-19 pandemic initially caused a decline in global trade and shipments, but there was a quick recovery in the second half of 2020, leading to increased cargo volumes and higher rates. While there was optimism that the industry was on a path to sustained profitability, observers were uncertain about its future, questioning whether overcapacity and poor profitability would persist. LINER SHIPPING: Operations § Fixed intercontinental services 2021 About 50% involved ports in Asia. Example: "Daily Maersk" service by Maersk Line. - Sailed between major ports in East Asia and Northern Europe. - Guaranteed delivery times in exchange for higher rates. § Hub-and-spoke system Smaller shipping firms focused on transshipments, transferring cargo between l arge and regional ports § Overcapacity The liner shipping industry's growth rate in container volume slowed to about 3 % after 2020, despite industry capacity consistently exceeding demand since th e 1990s (exhibit 1, 2, 3). § Changing trade patterns Reshoring and local sourcing (with long supply chains), posed threats Governments aimed to bring manufacturing back and reduce reliance on trade for future global growth. LINER SHIPPING: Industry structure § Market Concentration The top five and ten firms held 64.8% and 82.9% market shares, respectivel y, with a 25% increase in concentration ratios over a decade (exhibit 4). Growing concentration resulted from mergers and acquisitions, offering ma rket power and economies of scale. § Customer Base and Loyalty Majority of customers were small, with even large corporations like Walmar t accounting for minimal shares of global shipments (900,000 TEUs but 1 per cent o f the total volume of global trade) Customers, including multinational corporations, exhibited little loyalty, shif ting business based on price and schedule considerations. Limited product and service differentiation is the root cause § Price Sensitivity and Shipping Costs Customers exhibit high sensitivity to prices, particularly concerning shippin g costs, especially for bulky, low-value items. LINER SHIPPING: Industry structure § Shipbuilding Industry Dynamics Shipbuilding, a major investment for liner shipping firms, experienced overc apacity since 2000, leading to pricing pressures. Governments provided substantial support to the shipbuilding industry, wit h firms from South Korea, China, and Japan dominating construction (over 90 % of container ships) § Disconnection between Demand and Capacity The lengthy shipbuilding process, typically taking about a year, results in a di sconnect between demand fluctuations and vessel capacity availability (sev eral years to deliver the vessel) (exhibit 5) § Container Investment and Usage Containers represented a significant investment, with prices doubling from 2019 to 2021. Container usage faced challenges, including empty shipments due to region al demand imbalances LINER SHIPPING: Industry structure § Logistics Services and Technology Gap Liner shipping firms struggled to provide value-added logistics services due to a lack of sophisticated information systems. Attempts to expand into logistics services generally failed by the mid-2010s, highligh ting technological limitations. § Government Support and Infrastructure Challenges Governments supported national shipping lines to boost trade, offering ease of entr y and operational support. The Chinese government's endeavor to substitute Europe-Asia shipping routes with a land bridge encountered infrastructure development challenges (1,1000 TEU ship requir es 77km rail) § Economies of Scale and Port Infrastructure Investment Ultra-large container ships with capacities up to 23,000 TEUs are favored for their po tential economies of scale. However, the realization of these benefits is contingent upon substantial investment s in port infrastructure to accommodate larger vessels. LINER SHIPPING: Cost structure § Operating Costs and Ship Operations Most industry costs were linked to ship operations, driven by competition and pricin g pressures. Firms invested in new, larger ships, with the average size growing to nearly 10,000 T EUs by 2020, resulting in economies of scale. § Advancements in Ship Technology/Building Ultra-large container ships, with capacities up to 23,000 TEUs, became popular, offer ing improved efficiency and reliability. Investments in design, engine technology, and automation reduced crew requireme nts and fuel consumption, enhancing operational efficiency. § Economies of Scale New ships operated with significantly reduced fuel consumption, up to 30% less tha n older vessels, contributing to cost savings. Investments in port infrastructure further optimized efficiency, reducing time spent i n ports and increasing sailing time. LINER SHIPPING: Cost structure § Port Fees and Security Costs Port fees and handling charges constituted significant costs, with limited competitio n among ports leading to fee imposition. Security concerns, including terrorism and piracy, necessitated costly screening proc edures and increased insurance charges. § Environmental Pressures and Initiatives The industry faced growing pressure to address environmental concerns, including g reenhouse gas emissions and pollution. Initiatives aimed at reducing emissions and improving energy efficiency required hea vy investments, likely increasing operational costs. § Rate Resistance and Capacity Management Freight rates displayed resistance to increases (discounting), often remaining small d espite liner’s efforts. Excess capacity was managed through idling ships, slow steaming, and price adjustm ents, constraining rate increases. LINER SHIPPING: Cost structure § Challenges Faced by the Liner Shipping Industry Rates declined by about 2 per cent annually over the two deca des from the late-1990s Margins were low because most liners could not pass increase d costs to customers Heavy capital requirements resulted in liners’ average return o n capital being consistently below their cost of capital. Estimates were that the liner shipping industry destroyed $84 billion of shareholder value between 2012 and 2016 However, there was a recent surge (exhibit THE CURRENT STATE : optimism § Surge in Shipping Rates and Profits In late-2021, shipping rates on major routes experienced a sign ificant surge, reaching unprecedented highs. Total profits for the top 10 liners notably increased in 2020, sur passing their weighted average cost of capital for the first time in years. § Port Delays and Supply Chain Disruptions Increased demand coupled with pandemic-related labor shorta ges led to delays at ports, exacerbating rate hikes and custome r complaints. The Suez Canal blockage in March 2021 further disrupted supp ly chains, causing production delays and rising shipping rates. THE CURRENT STATE § Demand for New Ships and Market Prospects The industry witnessed a surge in demand for new ships in 202 1, with orders reaching the highest levels in a decade. Majority of orders were for ultra-large ships, reflecting anticipa tion for future capacity expansion and market growth. § Optimism Amid Challenges Industry experts express optimism about the sector's resilience and ability to adapt to challenges. Structural changes, including capacity management, offer pros pects for sustained profitability despite ongoing financial, tech nological, and regulatory challenges. Case study questions Q1. What factors influence profitability of this industry? Explain with industry structure based on Porter’s five forces model https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-fiveforces.aspx Case study questions Q1. What factors influence profitability of this industry? Force 1. Degree of Rivalry Explanations Concentration – Briand identity – Product differences – Switching cost – Inter-alliance competition – Impact on Profitability Case study questions Q1. What factors influence profitability of this industry? Force 2. Supplier power Explanations Number of Ships - Ports’ power – Labour cost - Impact on Profitability Case study questions Q1. What factors influence profitability of this industry? Force 3. Buyer Power Explanations Buyer concentration and buyer volume – Buyer bargaining power – Threat of integration – Impact on Profitability Case study questions Q1. What factors influence profitability of this industry? Force Explanations Access to input by new entrants– Proprietary inputs required – 4. Threat of New entran ts Government policy for entrants – Capital requirements – Expected retaliation – Impact on profitability Case study questions Q1. What factors influence profitability of this industry? Force 5. Threat of Substitutes Explanations Buyer propensity to substitute - Switching costs to substitutes - Reshoring and local sourcing- Impact on profitability Case study questions Q2. Then do we need to dismiss this industry? If not, what are the reasons of optimism? WEEK 7 GLOBAL SOURCING/PROCUREMENT Purchasing terms e-procurement Single sourcing versus multiple sourcing Case study of HongKong e-commerce platform for COVID Purchasing - overview Purchasing is a key business function that is responsible for acquisition of required materials, services, and equipment As global competition intensified, executives realized the impact of large quantities of purchased material and work-in-process inventories on manufacturing cost, quality, new product development, and delivery lead time. Managers adopted new supply chain management concepts that emphasized purchasing as a key strategic business process rather than a narrow specialized supporting function to overall business strategy. Purchasing - overview The increased strategic role of purchasing in today’s business setting has brought a need for higher levels of skill and responsibility on the part of purchasing professionals Manufacturers spend more than 50 percent of each sales dollar on raw materials. Purchases of raw materials actually exceeded value added through manufacturing Strategies are required to meet the organization’s strategic objectives Purchasing - Supply Management Supply Management is A newer term to describe the expanded set of responsibilities of purchasing professionals Institute of Supply Management defined supply management as the Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives. The Role of Supply Management The primary goals of supply management 1) Ensure uninterrupted flows of raw materials at the lowest total cost 2) Improve quality of the finished goods produced 3) Maximize customer satisfaction 4) Purchasing contributes to these objectives by: Actively seeking better materials and reliable suppliers, Working closely with and exploiting the expertise of strategic suppliers to improve quality and materials Involving suppliers and purchasing personnel in new product design and development efforts. The Purchasing Process – e Procurement The e-procurement system allows users to submit their purchase requisitions to the purchasing department electronically and enables buyers to transmit purchase orders to suppliers over electronic intermediary (Intranet, internet, email). Step 1- Material user enters a purchase request Relevant information such as quantity and date needed. The material user may recommend suppliers or potential sources for the requisition. Step 2- Purchase requisition approved and transmitted electronically to buyer This is done by the purchasing department. The Purchasing Process – e Procurement Step 3- Buyer reviews The buyer reviews the purchase requisition for accuracy and appropriate approval level If the amount is below $25,000 (for example), The buyer extracts details of the purchase requisition stored in the database to prepare an electronic purchase order The buyer assigns a preferred supplier from the e-procurement database If the amount of the purchase requisition is between $25,000 and $50,000 (for example), Two formal requests for quotation (quotes from at least two suppliers) are needed before a purchase order can be released If the amount exceeds $50,000 (for example), A supplier must be chosen by means of a formal bidding process. At the specified time and place, bids are opened publicly. The purchase is awarded to the lowest responsible bidder whose bid conforms to all requirements of the solicitation. Then an electronic purchase order is prepared and transmitted (or mailed) to the selected supplier Step 4- Buyer reviews closed bids & selects a supplier The Purchasing Process – e Procurement The Purchasing Process – e Procurement Advantages of the e-Procurement System Time savings: E-procurement is more efficient when (a) selecting and maintaining a list of potential suppliers, (b) processing requests for quotation and purchase orders, and (c) making repeat purchases Cost savings: Buyers can handle more purchases, and the manual task of matching bids to purchase requisitions is reduced Accuracy: More up-to-date information on suppliers, with goods and services readily available online, allows users to assess their options before preparing a purchase requisition Real time use: Buyers have real-time access to the purchase requisition once it is prepared. The system enables buyers to initiate bids and suppliers to respond in real time on a 24/7 basis Mobility: The buyer can submit, process, and check the status of bids, as well as communicate with suppliers regardless of the buyer’s geographical location and time of day. The Purchasing Process – e Procurement Advantages of the e-Procurement System Trackability: The e-procurement system allows submitters and buyers to track each purchase requisition electronically through the process—from submission, to approval, and finally conversion to a purchase order. Summary statistics and supplier performance reports can be generated Management benefits: The system can be designed to store important supplier information. Supplier benefits: Benefits include lower barriers to entry and transaction costs, access to more buyers, and the ability to instantly adjust to market conditions Sourcing Decisions – The Make or Buy Decision Outsourcing (not logistics outsourcing) Buying materials and components from suppliers instead of making them in-house. The trend has been moving toward outsourcing combined with the creation of supply chain relationships to replace the practice of backward or forward vertical integration (collaboration). Backward vertical integration refers to acquiring upstream suppliers Forward vertical integration refers to acquiring downstream customers The Make or Buy decision is a strategic decision Sourcing Decisions – The Make or Buy Decision Reasons for Buying or Outsourcing Cost advantage – Especially for components that are non-vital to the organization’s operations, suppliers may have economies of scale Insufficient capacity – A firm may be at or near capacity and subcontracting from a supplier may make better sense Lack of expertise – Firm may not have the necessary technology and expertise Quality – Suppliers have better technology, process, skilled labor, and the advantage of economy of scale Sourcing Decisions – The Make or Buy Decision Reasons for Making Protect proprietary technology - A firm may have developed an equipment, product, or process that needs to be protected for the sake of competitive advantage No competent supplier - If existing suppliers do not have the technology or capability to produce a component, the firm may be forced to make an item in-house Better quality control - If the firm is capable, the make option allows for the most direct control over the design, manufacturing process, labor, and other inputs to ensure that high-quality components are built Sourcing Decisions – The Make or Buy Decision Reasons for Making Use existing idle capacity - a firm with excess idle capacity is to use the excess capacity to make some of its components. Control of lead-time, transportation, and warehousing costs - The make option provides better control of lead time and logistical costs since management controls all phases of the design, manufacturing, and delivery processes Lower cost: If technology, capacity, and managerial and labor skills are available, the make option may be more economical if large quantities of the component are needed on a continuing basis. Sourcing Decisions – The Make or Buy Decision The Make-or-Buy Break-Even Analysis Find break-even point Q by setting total cost of both options equal and solving for Q: Sourcing Decisions – The Make or Buy Decision How Many Suppliers to Use The issue of how many suppliers to use for each purchased item is complex one. The current trends in sourcing favor using fewer sources, although not necessarily a single source. Theoretically, firms should use single or a few sources, whenever possible, to enable the development of close relationships with the best suppliers. However, by increasing reliance on one supplier, the firm increases its risk that poor supplier performance will result in plant shutdowns or poor-quality finished products. Sole sourcing vs. single sourcing Sole sourcing typically refers to the situation when the supplier is the only available source Single sourcing refers to the deliberate practice of concentrating purchases of an item with one source from a pool of viable suppliers. How Many Suppliers to Use Reasons Favoring a Single Supplier To establish a good relationship: a mutually beneficial strategic alliance relationship is considered Less quality variability: The same technologies and processes are used, so variability in the quality levels is less Lower cost: A single source concentrates purchase volume with the supplier, typically lowering the purchase cost per unit Transportation economies: The firm can take advantage of truckload (TL) shipments, which are cheaper per unit than the less-than-truckload (LTL) rate Proprietary product or process purchases: If the procured goods are a proprietary product or process, or if the supplier holds the patents to the product or process, this is the only option Volume too small to split: If it is a proprietary product or process, or if the supplier holds the patents to the product or process How Many Suppliers to Use Reasons Favoring Two or More Suppliers Required capacity: When demand exceeds the capacity of a single supplier Spread risk of supply interruption: Multiple sources allow the firm to spread the risk of supply interruptions due to a strike, quality problem, political instability, and other supplier problems Create competition: Using multiple sources encourages competition among suppliers in terms of price and quality Abundant Information: Multiple suppliers usually have more information about market conditions, new product developments, and new process technologies Dealing with special kinds of business: The firms, particularly government contractors, may need to give portions of their purchases to small, local, or women- or minority-owned businesses, either voluntarily or as required by law. Supply Category Management Develop Strategies Using Portfolio Analysis – Kraljic matrix A portfolio analysis uses information from the spend analysis and assessment of future needs to categorize purchases. A classic framework developed by Kraljic in 1983 is still relevant today. The framework categorizes strategies based on supply risk and the value of the total amount spent by the firm and recommends supply management strategies Supply Category Management Develop Strategies Using Portfolio Analysis Supply Category Management Supply management strategies and tactics vary by category Strategic purchase It represents a high spend level and are high risk. Typically these purchases are unique and core to the firm’s performance. Tactics—Use one or two suppliers and build partnerships with them to foster collaboration and innovation Bottleneck It represent purchases are high risk and low spend and typically are not core to the firm’s performance, but lack of availability can cause delays. Tactics—Use at least two suppliers to assure supply, develop new suppliers, and explore using different materials. Supply Category Management Leverage It represents purchases are low risk but represent a high level of spend. Tactics - Standardize purchases across the company, use competition to select suppliers, and consolidate purchases with one or a few suppliers to get discounts. Noncritical items It represents typically a low percentage of overall spend and have little impact on performance. Tactics—Use vendor-managed inventory and allow users to make their own purchases using online catalogs or corporate credit cards (called purchasing cards) to lower the transaction costs of purchasing. * Vendor managed inventory (VMI) – Suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer HKTVmall with a COVID – a case study In early stages of COVID-19 pandemic, demand for online shopping surged, causing supply chain issues. Hong Kong faced shortage of PPE (Personal Protective Equipment) like masks and disinfectant, leading to soaring prices and long queues. HKTVmall, a leading e-commerce platform, worked to stabilize PPE supply by contacting local sellers and exploring new suppliers in Southeast Asia. Efforts faced challenges as many countries restricted PPE exports, exacerbating shortage. HKTVmall needs to address shortage Options include letting market equilibrium restore supply-demand balance or; having new suppliers or; Producing its own masks What are the pros and cons of these three options? HKTVmall with a COVID – a case study HKTV (Hong Kong Technology Venture) It started as a phone service, then became internet provider, TV producer, and now an online shopping platform. E-commerce growth in Hong Kong lagged due to quality control issues, proximity of physical stores, high shipping fees, and long shipping times. Ricky Wong, CEO of HKTVmall, believed e-commerce could thrive in Hong Kong with proper quality supply. Wong implemented an offline-to-online (O2O) store strategy to encourage online shopping and enable self-pickup. HKTVmall invested in advanced warehousing, logistics, and delivery systems to reduce shipping fees and times. HKTV eventually became the dominant player in the market by offering a highquality e-commerce experience for both consumers and sellers. HKTVmall with a COVID – a case study COVID-19 COVID-19 outbreak hit Hong Kong soon after emerging in mainland China in late 2019. Border entries closed from January 27, 2020; complete closure to non-local residents by mid-March. In the initial wave, Hong Kong fared better due to pre-existing mask-wearing and disinfection practices from past epidemics like SARS. Despite WHO initially advising against mask use, mask-wearing became common in Hong Kong. Surge in demand for masks and PPE early in pandemic; estimated need for 5 million disposable masks daily. Long queues and price hikes observed; for instance, price for a box of 50 masks surged from HK$100 to HK$500 in January. Hong Kong Consumer Council urged firms not to exploit shortage, citing previous prices of masks around HK$2 in 2017. HKTVmall with a COVID – a case study SHORTAGE: WAIT, BUY, OR MAKE? Global shortage of masks and medical supplies highlighted by WHO in 2020. HKTVmall sold a record 4.5 million masks in January 2020 alone. Immediate steps taken by HKTVmall investigating current supplier inventories lowering commission fees on masks and medical supplies from 25% to 5%, exploring new suppliers in Southeast Asia. Efforts limited due to rising global demand and export restrictions imposed by many countries. Foreign markets unable to provide significant support for Hong Kong's PPE needs. HKTVmall faced three decision point 1) adopt wait-and-see approach 2) develop new local supply 3) produce masks HKTVmall with a COVID – a case study Option 1: Wait-and-See Approach Wong views HKTVmall as a landlord, not retailer, but current situation demands action. Easy option: Adopt wait-and-see approach. Shortage expected to resolve naturally; e-commerce platform not expected to intervene. HKTVmall with a COVID – a case study Option 2: Develop Own Supply Contract directly with new local producers. HK government considering subsidies for local production. HKTVmall can provide established distribution channel and logistic support to new sellers. However, this are concerns about credibility of new suppliers so quality inspection by HKTVmall staff is necessary. HKTVmall with a COVID – a case study Option 3: Producing Own Masks HKTVmall produces own masks instead of sourcing from vendors. Small-scale production manageable Provides flexibility in production and distribution. Ensures quality control essential for combating COVID-19. Opportunity to brand products with HKTVmall logo, enhancing local support awareness. Class activity What are the pros and cons of these three options?