14 – International Logistics and Distribution Channels

Introduction

Following the first two Ps of worldwide marketing, you will now discover the third P of marketing: place (international distribution and logistics). Generally, the greater the distance between the product source and the target market, the longer the delivery time and the higher the transportation cost. However, new transportation technology and innovations are saving both time and money. Transportation businesses like CSX Corporation are creating alliances and becoming a key element of industrial value systems to facilitate worldwide delivery. Intermodal services, which allow containers to be transferred between train, boat, air, and truck carriers, are available to manufacturers.

14.1 International Transportation

After sketching a broad picture of worldwide marketing, we are ready to examine managerial approaches to international logistic planning. Companies that supply global markets aim to devise methods that are competitively practical and allow for the lowest cost of operation to maximise profit. This is one of the fundamental components of a multinational firm’s global unification strategy, on which its overall performance is dependent. Looking at the operations of US corporations, we can see that logistic systems are often made up of four major components.

Finished goods are exported from the United States. Almost all businesses begin their logistical planning with a strong preference for exporting from the United States. Manufacturing abroad always entails some risk and the complexities of managing operations from a distance. Furthermore, US exports increase domestic plants’ output volume, making them more efficient.

Produce in a foreign country for sale in that country. There are two types of scenarios that fit under this category. The plants of less developed countries come first. Companies selling goods in these nations are frequently forced to choose between manufacturing on a protected basis within the country or being excluded by limitations aimed at preserving those willing to manufacture. Companies have sometimes chosen the second option rather than making significant investments in money and labour in tiny markets. However, because of the long-term potential of emerging countries, most corporations hesitate to be locked out of them.

Foreign plants that produce for both domestic and export markets. This activity will likely rise as trade prohibitions under international agreements are reduced, mainly as common markets develop. The high cost of producing on a small scale for one-country markets has been a fundamental drawback of foreign manufacturing.

As trade restrictions have been reduced, firms have switched toward logistic systems centred on a few relatively extensive operations located in important locations worldwide.

Components from the United States and other countries are exported. Although many finished items cannot be exported from the United States, some parts or supplies can generally be shipped to foreign companies, particularly those producing complicated products such as medicines, vehicles, and electronic equipment.

14.2 International Distribution: What Is It and Why Is It Important?

The path that traverses between manufacturing and the eventual consumer is referred to as distribution. This course frequently varies by nation. MNCs will spend significant time evaluating the various systems in place, the criteria for selecting distributors and channels, and how distribution segments will be utilised.

14.2.1 Distribution’s Importance

The crucial process of ensuring that a firm’s products reach the correct area for sale at the proper time and amount is referred to as the marketing function of distribution. Interruptions in the distribution chain can result in disgruntled consumers, spoiled or damaged items, extra costs, and lost sales. As a result, the type of product being conveyed determines the optimal distribution mode and channel selection.

Distribution decisions are extremely important because they often have long-term implications, such as requiring contracts with carriers or equipment leasers or installing expensive capital equipment or infrastructure like rail lines, harbours, ports, docks, and loading facilities.

This process, which is challenging in local markets, becomes more problematic in international settings due to its two stages. The global exporter must first transfer items from the home production location to the foreign market and establish distribution systems within the country.

Distribution systems involve a large number of actors in getting items to markets. The distribution chains start with the makers of the goods and generally end with an intermediary, such as a wholesaler or distributor, who then provides the retailer with goods for sale. Other services offered in distributing commodities include storage facilities, transportation to market via rail, truck, barge, or plane, and insurance for items transported across nations.

With the addition of the international component, this very straightforward scenario becomes considerably more involved, at which time other parties enter the act to enable these trades. There are freight forwarders who oversee international transportation details and exporters and importers who handle international trade as agents or brokers. These persons may seek rights to the products and trade them on their behalf (merchant middlemen); alternatively, they may represent the interests of the firms and arrange for the distribution of commodities for a fee (agent middlemen). Other distribution players include resident buyers who operate in foreign markets to obtain goods and foreign sales agents who sell a product line in international markets. Newcomers supplement the classifications to the process, such as export management companies, which provide distribution services for firms under contract; buyers for exports, who actively seek merchandise for purchase by the principals they represent; and selling groups, such as those established in the United States to promote trade under the terms of the Webb-Pomerene Act. Some agents specialise in barter or counter-trade agreements with non-market economies. Key participants farther down the chain include individuals who deal directly with customers, such as salespeople, door-to-door salespeople, individual merchants, and customers.

14.3 Channels, Direct and Indirect

When companies need to promote internationally, they use two main distribution channels:

(i) direct selling and

(ii) indirect selling.

When a manufacturer establishes an overseas channel, direct selling is used. This route necessitates that the manufacturer interacts directly with a foreign party rather than through an intermediary in the manufacturer’s home country. The most significant advantage of the direct selling channel is active market exploitation, as the manufacturer is more directly devoted to its overseas markets.

Direct selling also has many issues. If the manufacturer is unfamiliar with the international market, it is tough to manage the channel. Furthermore, the channel is time-consuming and costly. Without a high volume of business, the manufacturer may find it very expensive to sustain the channel.

When a manufacturer in the United States, for example, advertises its product through another US firm that functions as the producer’s sales intermediary, this is referred to as indirect selling (middleman). As a result, the sales intermediary is another local or domestic channel for the manufacturer, as there are no international transactions with a foreign firm. The manufacturer avoids establishing an international department by exporting through an independent local middleman.

There are several advantages to using an indirect domestic channel.

The channel, for example, is essential and affordable. The manufacturer incurs no channel start-up costs and is relieved of the duty of physically transporting items overseas. Because the intermediary almost certainly represents various clients who may help share distribution costs, the costs of moving the goods are cut even further.

14.3.1 Intermediary types: direct channel

The figure illustrates that many intermediaries are linked to direct and indirect channels. This graph compares two channels and lists the different types of domestic and foreign intermediaries.

 

1. Foreign Distributor: A foreign distributor has exclusive rights to distribute a manufacturer’s products in a foreign country or geographic area. Even if the distributor wishes to designate a sub-agent or sub-distributor, orders must be routed through the distributor. The distributor buys merchandise from the producer at a discount and then resells or distributes it to merchants and, in some cases, end users. In this regard, the distributor may be a hybrid of wholesalers and retailers in many nations. However, in most circumstances, the distributor is regarded as an importer or international wholesaler. The duration of the relationship between the manufacturer and its foreign distributor is determined by a renewable contract as long as the continuous arrangement is satisfactory to both parties. Using a foreign distributor has a lot of advantages. Unlike agents, the distributor is a merchant who purchases and maintains items in its name. This approach simplifies the manufacturer’s credit and payment activities. It is frequently necessary to warehouse appropriate products, parts, and accessories to distribute. Apple Computer currently handles its distribution in Japan because Toray Industry, its previous overseas distributor, proved insufficient.

2. Foreign Retailer: If a foreign retailer is used, the product must be a consumer rather than an industrial product. There are numerous routes through which a manufacturer can approach international retailers and gain their faith in their merchandise, ranging from a personal visit by the manufacturer to mailings of catalogues, brochures, and other literature to prospective shops.

3. State-Controlled Trading Company: A producer must contact and sell to state-controlled enterprises for certain products, particularly utility and telecommunications equipment. India has a State Trading Corporation (STC) that handles the import and export of automobiles and other SIL products. Most manufacturing prospects are restricted to raw materials, agricultural machinery, manufacturing equipment, and technical instruments rather than consumer or home goods. This could be due to a lack of foreign exchange and a focus on self-sufficiency, as in communist and socialist countries.

4. End User: A manufacturer may be allowed to sell straight to a foreign end-user without using an intermediary. This direct channel is a reasonable and natural alternative for expensive industrial products. The technique is practical for some products and, in some nations, for most consumer products. Duty and clearance issues might cause considerable difficulty for consumer purchasers. A consumer may place an order without comprehending the import rules of his or her country. The consumer may not be able to claim the product when it arrives. As a result, the product could be confiscated or returned to freight collection.

14.3.2 Intermediary Types: Channel Indirect

For most items, a producer may find it difficult, if not impossible, to sell directly to various foreign parties (foreign distributors, foreign retailers, state-controlled trading organisations, and end users). Other middlemen have stepped in between these overseas buyers and manufacturers.

1. Agents representing manufacturers’ interests: The Export Broker’s job is to connect a buyer and a seller, for which he is compensated. The Broker may be tasked to search for potential buyers in some or all overseas markets. It negotiates the best conditions for the seller (maker), but the deal cannot be completed without the principal’s consent. As a manufacturer’s representative, the export broker may operate under its or the manufacturer’s name. A fee/commission is paid to the broker for any action taken. An export broker does not acquire ownership of the products. He is quite valuable because he is well-versed in the market, including supply, demand, and overseas clients. As a result, he can negotiate the best possible terms for the company.

2. Manufacturer’s export agent or sales representative: A manufacturer’s export agent is not an employee. In truth, he is a self-employed business owner who typically keeps his or her identity hidden by not using the manufacturer’s name. A sales representative with greater discretion than the manufacturer’s salesperson can choose when, where, and how to work within the allotted region. Presenting product literature and samples to potential buyers is one way to do this. A self-employed export agent may represent manufacturers of related and non-competing products. He can work on an exclusive or non-exclusive basis. Unlike the broker, the relationship with the manufacturer is ongoing and long-term. The agreement is valid for a predetermined period and is renewable with mutual consent. However, the manufacturer retains some control because the contract specifies the territory, terms of sale, method of combination, etc.

3. Export Management Company: An Export Management Company (EMC) administers a manufacturer’s complete export programme under contract. An EMC is a combination export manager (CEM) since it can serve as an export department or a group of related but non-competing enterprises. In this context, EMC refers to export brokers and manufacturers’ export agents representing various clients. The EMC has more independence and authority than export brokers and manufacturers’ export agents. EMC offers multiple services, from promotion to shipment arrangements and documentation.

4. Cooperative exporter: A cooperative exporter is a manufacturer with its export organization and works with other manufacturers to sell in some or all international markets. This intermediary is, in fact, a manufacturer, yet it acts similarly to any other export agent. The typical arrangement is to work as an export distributor for different providers, occasionally operating as a commission representative or broker. Because the cooperative exporter organises shipping, it has possession but not title to the commodities.

5. Webb-Pomerene Association: A Webb-Pomerene Association is created when two or more companies, usually from the same industry, band together to sell their products internationally. The alliance is a non-profit organisation co-owned by rival US manufacturers solely for export. The Webb-Pomerene Association is essentially an export cartel. Although cartels are banned in some countries, such as the United States, this type of cartel is permitted to function as long as it has no anti-competitive impact on domestic marketing in the United States.

6. Purchasing agent: An export agent works on behalf of a seller or manufacturer. The purchasing/buying agent represents the foreign buyer. Because the purchasing agent lives and conducts business in the exporter’s nation, he or she is in a better position to find a product that meets the preferences and criteria of the foreign principal. The purchasing agent acts in the buyer’s best interests by negotiating the best possible price for the buyer’s overseas clients. As a result, the customer of the purchasing agent pays a charge or commission for the services given. The purchasing agent is sometimes called a Commission Agent, Buyer for Export, Export Commission House, or Export Buying Agent. When confirming payment and paying the seller after obtaining the invoice and title document for the customer, this agent may also become an export-confirming house.

7. Country-controlled buying agent: A country-controlled buying agent is simply a variation on the purchasing agent because this type of agent performs the same function as the purchasing agent. The only difference is that a country-controlled buying agent is a foreign government agency or quasi-government firm. The country-controlled purchasing agent has the authority to locate and acquire commodities on behalf of the country. When a purchase need arises, this agent may have a representative who formally visits the supplier country.

8. Resident buyer: The resident buyer is another variation on the purchasing agent. As the name implies, a resident agent is an independent agent frequently stationed near the highly centralised producing business. Although acting similarly to a standard buying agency, the resident buyer differs in that maintaining a continual search for new items that may be suitable preserves it. Because of the long-term relationship, the resident buyer might be compensated with a retainer and commission for business performed.

9. Export trader: An export merchant is a domestic merchant. An export merchant identifies gaps in international markets and purchases from domestic producers to fill those gaps. Typically, the merchant deals with staple commodities, undifferentiated products, or things where the brand is unimportant. Once the merchandise has been packed and tagged to specifications, the export merchant resells the goods in his name through contacts in foreign markets. The merchant completes all legalities and arrangements and accepts all ownership risks.

10. Export drop shipper: An export drop shipper is a type of export merchant known as a desk jobber or cable merchant. As this implies, the drop shipper must request that the producer “drop ship” a product straight to the overseas clients. Physically handling or possessing the product is neither practical nor desirable for the carrier. According to this operational strategy, the shipper’s ownership of the items may be limited to a few hours. On receipt of an order from overseas, the export drop shipper sets an order with a manufacturer, instructing the producer to send the product directly to the foreign buyer. The manufacturer receives payment from the drop shipper, who receives payment from the foreign buyer.

11. Export distributor: This distributor is authorised and awarded exclusive marketing rights to represent the company in particular or in all foreign markets. It pays for items in domestic transactions with manufacturers and manages all financial risks in international trade. The only difference between an export distributor and a foreign distributor is location. The overseas distributor is based in a particular foreign country and has the authority to distribute and sell the goods there.

12. Trading firms: Buyers and sellers in international markets are unfamiliar with each other and have no idea how to contact one another. To fill this need, trading companies have sprung up. In terms of volume of business and influence, this sort of intermediary may dominate many countries’ international marketing activities. Many significant trade companies have branches in every city where they do business.

14.4 Factors Affecting Distribution Systems

Several factors influence distribution decisions. One of them is the product’s nature. Is it perishable, fragile, or a product that will necessitate after-sales support? Could an authorised company dealer do a better job of distributing it? Another factor to examine is the degree of distribution control. Greater control over the distribution process necessitates a firm’s time, money, and energy commitment.

Another consideration is the expense. The availability of middlemen or distribution channels, political restrictions imposed by the country’s characteristics, or insufficient infrastructure may all limit the types and methods of usable distribution modes that a firm wishes to employ.

A country’s level of development impacts its distribution of resources and networks. A shortage of chilled transportation techniques will impede the marketing of frozen items or fresh vegetables. Similarly, income levels in rich countries may support airfreight delivery of live lobsters, while impoverished countries rely on sluggish delivery by boat of less exotic items.

Chinese ethnic groups control the wholesale commerce of vanilla and cloves in Madagascar, rice distribution and milling in Vietnam, retail trade in the Philippines and Kampuchea, and poultry and pineapple trade in Malaysia as examples of ethnic domination.

14.5 Value Chain Theory

Value chain analysis highlights the actions that occur in a business and links them to examining the business’s competitive power. Michael Porter’s influential work proposed that a company’s activities may be divided into two categories:

1. Primary Activities, those immediately connected with the creation and delivery of a product (e.g., component assembly); and
2. Support Activities may boost effectiveness or efficiency while not directly involved in production (e.g., human resource management). It is unusual for a company to perform all primary and secondary functions.

Value Chain Analysis is one method for determining which operations a company performs best and which are better offered by others (outsourced).

14.5.1 Valuation Chain Analysis and Competitive Advantage

What activities does a company engage in that are directly related to gaining a competitive edge?

For example, if a company wants to surpass its competitors by differentiating itself through higher quality, it must conduct its value chain operations better than the competition. On the other hand, a strategy focused on cost leadership will necessitate reducing the expenses connected with value chain operations or the overall quantity of resources consumed.

Primary Activities

Among the primary value chain activities are:

Primary Activity	Description
Inbound logistics	All those activities concerned with receiving and storing externally sourced materials
Operations	The manufacture of products and services – how resource inputs (e.g., materials) are converted to outputs (e.g., products)
Outbound logistics	All those activities associated with getting finished goods and services to buyers
Marketing and sales	It is an information activity that informs buyers and consumers about products and services (benefits, use, price, etc.).
Service	All those activities associated with maintaining product performance after the product has been sold

 

Support Activities

Support activities include:

Secondary Activity	Description
Procurement	This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)
Human Resource Management	Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business
Technology Development	Activities concerned with managing information processing and the development and protection of “knowledge” in a business
Infrastructure	Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

 

Value Chain Analysis Procedures

The value chain analysis process can be divided into three steps:

1. Divide a market/organization into its core activities under each of the model’s significant areas;
2. Evaluate the possibility of adding value through cost advantage or differentiation or identify present operations where a company looks to be at a competitive disadvantage;
3. Develop strategies focused on activities where a competitive advantage may be sustained.

14.6 Transportation Modes

When establishing a new business, the transportation function should be considered before deciding on a location. There are three basic modes of transportation for supplying a product between countries and inside a country: air, water (ocean and inland), and land (rail and truck).

The best form of transportation is determined by

(i)  market location,

(ii) speed, and

(iii) cost.

A company’s initial consideration should be market location. Contiguous markets can be served by rail or truck, depending on the circumstances. Sea or air transportation is required to convey products between continents.

Another factor to consider while deciding on a form of transportation is speed. When time is of the essence, air transportation is the primary form of distribution.

Another element to consider while choosing a mode of transportation is the cost. The cost of a swift delivery is directly related to its speed—a quick delivery costs more.

The three forms of transportation are explored in detail in the following subsections.

14.6.1 Land

Land transportation is the most prevalent means of transit for domestic or international shipments. Moving products to and from an airport or seaport necessitates using some form of ground transport. Rail or truck transportation is used when commodities in significant quantities must be moved over land for a long distance. However, rail may prove to be more cost-effective than trucks. Europe and Japan have advanced train systems capable of efficiently transporting goods. Developing countries like India have yet to provide businesses with an efficient and speedy rail transportation system.

Trucks, on the other hand, can travel to more destinations. Trucks may also be required to transport cargo to and from the railway station. Moving merchandise by truck or train is typically a realistic alternative when countries’ borders have been connected.

14.6.2 The atmosphere

Air transport accounts for only 1% of total international freight transit among all modes of transportation. It is the fastest-growing mode and is becoming less restricted to high-priced items. Although air transport has the highest absolute rates, exporters have realised numerous benefits to using this mode. First, air transport expedites delivery, reduces transit time, and allows for greater flexibility in delivery schedules. Second, it ensures that perishables arrive in perfect condition. Perishable items such as cut flowers, mushrooms, and fruit are delivered by air in India to facilitate successful export. Third, it can respond quickly to unanticipated and urgent needs.

Air, for example, can be used to replace broken machinery, equipment, or parts quickly.

Fourth, it lowers the expense of little damage, packaging, and insurance. Finally, it can aid in the control of costly inventory and other hidden costs such as warehousing, transportation time, inventory carrying costs, inventory losses, and the paperwork required to file claims for lost or damaged items. These costs will rise as the amount of time spent on transportation grows.

14.6.3 Water

Bulk shipping is significant in international trade because it is one of the most feasible and efficient methods of delivering petroleum, industrial raw materials, and agricultural commodities over great distances. Oil tankers account for around 51 percent of the worldwide bulk fleet, while dry bulk carriers account for 43 percent. The rest of the fleet comprises combination carriers that can transport wet (crude oil and refined petroleum products) and dry (coal, iron, iron ore, and grain) bulk cargo. The bulk shipping business is highly fragmented, with no organisation owning more than 2% of the fleet.

There are three kinds of shipping companies:

(a) An ocean freight conference line is an association of ocean carriers that have joined together to establish standard rules regarding freight charges and shipping conditions;

(b) an independent line is a line that operates and quotes freight rates individually and independently without the use of a dual-rate contract and

(c) a tramp vessel is a ship that does not operate on a regular route or schedule. Tramp steamers do not operate on the exact schedules as the other two categories of carriers.