The Impacts of Globalization in the World Economy - Essay Example

Logistics Management in Ocean Shipping Introduction The evolution of globalization has led to many changes in the global environment related to human beings. The trend has resulted in mass movement of men and material from one place to another. Steve Agg, Chief Executive of Pulse Communications states that change is constant in our lives which are evident more in the world of logistics. The impacts of globalization require constant adjustment to the way in which business is done and always with an eye to the next change that is certain to come along. It is further mentioned that the fuel of future is just one of the many issues that logisticians have to contend with and putting this alongside the environmental pressures that pose significant challenges in securing the supply of goods and services. The issues like climate change dominate the future and result in headlong rush of western economies to offshore manufacturing to lower cost countries in the east. Further financial cost of delivering goods across the world has always been a fundamental element of trading and decisions of logistician is largely influenced by high environmental costs (www.pmcontent.com)1. Magee et al (1985:1) mentioned that high quality and high efficiencies have become the characteristics of the production and physical distribution operations of many foreign competitors concerned the companies in United States challenging some of their basic tenets. According to Frazelle (2001:10) global logistics is the flow of material, information and money between countries connecting suppliers' supplier with customers' customer internationally. Global logistics flows have increased dramatically during the last several years due to globalization in the world economy expanding use o trading blocs and global access to Web sites for buying and selling merchandise. It is much more complex than domestic logistics due to multiplicity of handoffs, players, languages, documents, currencies, times zones and cultures that are inherent to international business. According to Singh et al (1998:1) logistics management is unique and represents and paradox as it is concerned with one of the oldest and newest activities of business and government. It is further stated that logistics system consists of facility location, forecasting and order management, transportation, inventory, warehousing and packaging which were all being practiced since the start of commercial and industrial activity. Brewer et al (2001:12) states that logistic systems utilize a wide range of resources and services within and external to individual companies which is likely to happen because of wide range of functions that logistics encompass in procurement and distribution. It is further stated that achieving high level of performance in logistics is important for the profitability of companies and for the efficiency of national economies as well as global economy. The interactive effects of the productivity of national and international logistics increase because international trade increases as a percentage of the national domestic activity. Logistics is that part of supply chain process that plans, implements and controls the effective forward and reverse flow and storage of goods, services related information between the point of origin and the point of consumption in order to meet the customers' requirements. Logistics management is important in relation is issues like transportation costs, large distribution costs, deregulation, changing strategies, technology and globalization (Kritika and Madhu, 2008)2. Cavanagh et al (2002:163) mentions that there has been a massive increase in ocean shipping, highway transport, air cargo transport, rail with a tremendous corresponding increase in infrastructural development with export production as a central feature of free trade. Ocean shipping has expanded more than tenfold since 1950s mainly because of increased commodity export activity from economic globalization which accounts for more than 90% of commodity trade shipments with the industry consuming more than 140 million tons of fuel annually.3 Global industrial restructuring has led to changes in world trade patterns resulting in creation of strong shipping demands causing the driving force of shipping to shift from West to the East making China one of the main engines as part of this change. It is further stated that shipping industry contributes hugely in the implementation of international trades which is evident from the figures of IMO wherein it is revealed that 45,000 merchant ships were trading at that time with providing service in transporting every king of cargo all of which were registered in over 150 countries or regions. Further statistics reveal that 90% of the world trade is carried by sea and over 50% of the trade value is generated by seaborne trade (Jiafu, n.d.)4 and in this context, the present chapter is focused on critically reviewing the available information with regard to logistic management in ocean shipping with integrated logistics management, its functioning in the period of recession, shipping and logistic industry in UK and worldwide and next generation of logistics. Ocean Transportation Logistics in Integrated Logistics Management Transportation is a very important activity in the logistics system and is often the largest variable logistics cost. A major focus in logistics is on the physical movement or flow of goods and on the network that moves the product which is composed of transportation organizations that provide service for the shipping firm (Coyle et al 2009:39)5. Hesket, Glaskowsky and Ivie (quoted in Rushton et al, 2006:6) mentioned that "logistics is . the management of all activities which facilitate movement and the coordination of supply and demand in the creation of time and place utility". The concept of and need for integrated logistics system were recognized by forward looking companies that participated in distribution activities. In the 1990, process was developed to encompass not only the key functions within an organization's own boundaries but also those functions outside that also contribute to the provision of a product to a final customer which is known as supply chain management that recognizes several different organizations involved in getting a product to marketplace.6 The integrated logistics management process encompasses the support resources required to keep a system or item in an operational ready status throughout all of its operational life (www.dalmatech2.com)7 Gelinas and Bigras (2004) mentioned that logistics integration is one of the most significant challenges of modern management for small and medium sized enterprises. It is further mentioned that logistics integration consists in implementing mechanisms to ensue fluidity of physical and information flows, accuracy of information and application of decisions within the supply chain. The phenomenon of logistics integration is growing in importance for using partial approaches to logistics problems as it enhances the potential for inconsistency in the decision making process, while it is not possible to exercise general control over performance by considering local solutions and more advanced competitive strategies cannot be applied unless the logistics chain is taken as a whole.8 Swamidass (2000:290) states that strategic integrated logistics are intended to support the firms competitive strategy and to deliver high levels of customer satisfaction and many diverse logistics activities such as inventory management, transportation, order processing, demand forecasting, documentation, packaging, parts support, warehouse management and reverse distribution must be managed in a cohesive and systematic manner to achieve the customer satisfaction. It is further stated that integrated logistics views all different logistics activities as interrelated components of a single value added system that is comprised of facilities, equipment, people, and operating policies covering the flow of goods and related information from the acquisition of raw materials through production and distribution to the customer. The integrated logistics concept provides a unified vision of what logistics must accomplish to help the firm succeed and provide the impetus for coordinating decisions across decision areas.9 Sum et al (2001) mentioned that logistics strategies should be integrated with production, marketing and corporate strategies whereas planning should be integrated with operations and purchasing. It is further stated that integrating logistics with other functional areas with bring about the full potential of the companies value added activities and enable them to gain significant competitive advantage over their competitors along with reduction in operational costs and an improvement in customer service.10 Lun et al (2010:135) mentioned that shippers increasingly expect their carriers and logistic service providers to supply more rapid and reliable delivery services so as to minimize their costs associated with warehousing, inventory holding, and other aspects of production and distribution. It is further stated that intermodalism combines the accessibility of inland transport modes with the economic line haul capabilities of ocean shipping.11 Ocean shipping is an industry characterized by great complexity and by a magnitude of interests which include the designers of the ship, the ship builder, the vessel owner or operator, the cargo owner, the holder of the mortgage on the ship, the creditor of the cargo owner, other creditors, agents and trustees and the consignee along with the crew and shore labor. The vital core of the shipping industry is the ship and the vital interest is the ship owner or operator which makes it seem expedient to concentrate on the ship and on ship operation and management primarily from the point of view of the ship operator. It is further stated that most of the expenses of shipping operation is estimated and budgeted by customary accounting procedures and therefore an adequate and fully integrated program of marine insurance is vital for financing ocean shipping and of efficient and successful ocean transportation (McDowell and Gibbs, 1999:1)12. Further McConville et al (2005:236) mentions that since large number of documents are produced and exchanged during an international shipment, it is expected that ocean transport operations will be increasingly driven by information technology. Therefore efficiency optimization is fragmented since it is constrained within the boundaries of independent companies. Further Frankel (cited in McConvile et al 2005) argued that in the trans - ocean supply chain there is an urgent need for effective integration with customers and central control of multimodal transport and intermodal transfer or storage operations. The increasing demand for global transport and logistics services by shippers and the developments in information and communication technology are changing role and relationships between ocean carriers and other participants and thus it is necessary that ocean transportation logistics is integrated so that poor cooperation between participants in ocean transport operations is ruled out.13 Logistics in the International Integration of Economies Logistics excellence has become powerful source of competitive differentiation with companies beginning to view it as more than simply a source of cost saving and recognize it as source of enhancing product or service offering as part of the broader supply chain process to create competitive advantage (Mentzer et al 2004)14. The need for a logistics consideration is a natural outcome from the trade related activities because a firm at micro level has to devise the most economic way in terms of both time and cost to handle goods and services between different locations of economic activities which have tremendous impact on the modes of transportation and logistics (Kim and Ruffini, 2007:161)15. Seuring and Goldbach (2002:312) mentioned that availability of resources increases companies interests in bridging high spatial and temporal distances and with regard to logistics it is stated that long distances result in longer lead times and growing uncertainties for planning and processing resulting the inventory level in the international supply chain to rise and simultaneously with a decline in flexibility and reliability of logistics services. Further it is stated that internationalization bears the opportunity to reap high economies of scale which allows a high degree of specialization on one hand and needs high level of integration on the other affecting logistics situation in terms of demand level and demand patterns as well as delivery times or delivery flexibility. Moreover distances and integration in global supply chains affect logistics costs which can be regarded as a traditional source of global logistics costs due to any kind of international trade.16 Wood (2002:83) mentioned that logistics systems and business practices are not uniform throughout the world because the world itself is not uniform and there are many cultural differences that must be bridged for effective business communication and transactions to take place. Nations of the world were placed into three categories with respect to the development of their logistics system and it was found that sophistication of nation's logistics infrastructure was closely correlated to its overall level of economic development.17 Farahani et al (2009:101) mentioned that impacts of logistics on local or regional economies vary greatly depending on the type of industrial production, the type of trade of a particular region and on the basic logistics position on the region. It is further revealed through various case studies that logistics can have various positive effects on the logistic sector economy and on the other businesses established in the target areas. Measures of improving logistics competitiveness of a region are justified by the increase of investment attractiveness, new businesses and new jobs.18 Logistics have certain direct or indirect impact on the regional and national economies and international integration will further make it more stronger in taking decisions pertaining to the national economy and the development of the businesses in the sector. Ocean Shipping in the period of recession/credit crisis The global shipping industry constitutes of transportation of both goods and passengers with international freight transport being the largest segment occupying 69.1% of industry revenue (deliotte, 2010)19. The recent credit crisis has left tragic impact in most parts of the world and has not left a single sector unaffected. The banks collapsed, software firms announcing layoffs, national GDP declining at much faster speed than space shuttle would come down after performing its operations in the space Shipping industry was also not left unaffected during the credit crisis as shipping companies around the world were gearing up for gloomy days as freight rates had collapsed as movement of goods across oceans had dwindled following the economic slowdown. (www.careratings.com)20 Elsayeh and Elkolla (n.d) stated that world container traffic has tripled in volume in the last two decades growing at an average of about 8% that resulted in liner shipping investing billions in horizontal and vertical integration in order to increase their market share as well as get advantage of the economy of scale. It is further stated that the recent financial crisis in 2008 and its rapid conversion to economical crisis have deeply affected all economies worldwide and deterioration in almost all worlds' growth rates and volumes of exports and imports was having a significant impact on container transportation. Further the collapse of credit based demand growth, credit supply and financial asset prices pushed the industry into severe recession since Second World War. The crisis fueled up a global economical crisis leading to decline in all economical indicators mainly due the presence of globalization. It is further stated that globalization widened the distance between production and consumption and markets as well as it globalizes the supply chains that previously spurred the growth rate in shipping industry. The impact of global credit crisis on shipping industry could be seen in the decline of growth rate in global container which increased by 12.7% in 2007 and then came down drastically to 7.4% in 2008 with further slowdown to 3.1% in 2009.21 According to research published by French company Alphaliner, the world's 24 largest container liner has declined by 4% during the financial crisis. It is further stated that since September 2008, the tonnage decline from 10.86 million TEU to 10.43 million TEU (www.deliverjournal.com).22 According to Lloyd's Register, the global industry booked 86.4% million gross tons (mgt) in 2009 which was 50% lower than the previous year's 170 mgt. The shipbuilding industry outlook for 2009 is uncertain but bleak given the current global economic downturn, credit crunch and stagnant ocean shipping market (www.hhiir.com).23 The credit crisis had significant impact on economies of most of the nations with downfall of major companies, employees being laid off, etc. the shipping industry was also effected due to the crisis due to the absence of credit facilities. Supply Chain Management According to Johnson and Pyke (1999) supply chain management is the term used to describe the management of flow of materials, information and funds across the entire supply chain, from suppliers to component producers to final assemblers to distribution and ultimately to the consumer24. Mentzer et al (2001:1) mentioned that supply chain is a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances and information from a source to customer whereas supply chain management is the implementation of a supply chain orientation across suppliers and customers and is the systemic, strategic coordinator of the traditional business functions within a particular company and across businesses within the supply chain for the purposes of improving the long term performance of the individual companies and the supply chain as a whole. The term supply chain management has gained prominence over the past few years based on the emphasis on time and quality based competition and respective contributions to greater environmental uncertainty. It is further stated that corporations have turned increasingly to global sources for their supplies that has forced companies to look for more effective ways to coordinate the flow of materials into and out of the company25. Jespersen and Larsen (2005:16) mentioned that supply chain management can be divided into three components which are interconnected that include network structure, business processes and management. Network structure comprises the most important collaboration partners in supply chain as well as the relationship between these players. Business processes encompasses the activities and flows of information that are connected with conducting materials, products and services that are connected with conducting materials, products and services through the supply chain and on to customers. Management principles encompass the company's philosophy and the management methods and philosophies that dominate the businesses in focus.26 Frazelle (2001:3) mentions that logistics and supply chain management are popular and at the same time misunderstood topics as they are new concept in private industry. Logistics and supply chain management cut across and draw from personnel in a multiplicity of disciplines. It is further stated that paralleling advances in management theory and information systems, logistics has evolved in scope and influence in the private sector.27 Read More