Logistics and Supply Chain Operations of the Barossa Wine Company - Research Paper Example

TABLE OF CONTENTS 0 Introduction 2.0 Brief background on China and Australian trade 2 Main challenges of internationalization and their impact on logistics in China 2.1.1 Chinese customs, regulations, and procedures 2.1.2 Partnerships and supply chain relationships 2.1.3 Availability of materials and manufacturing 2.1.4 Skilled labor shortage and associated costs 2.1.5 Hard infrastructure, Transportation and third party logistics providers (3PL) 2.1.6 Soft infrastructure, Information technology, and communication 3.0 Recommendations 3.0.1 Focused factories strategy and Economies of scale 3.0.2 Effective use of warehousing 3.0.3 Strategic location choice and infrastructure and transportation 3.0.4 Supply chain relationships, skill development 3.0.5 Fourth party logistics providers (4pl) 3.0.6 The use of IT and supply chain visibility 4.0 Conclusion 5.0 References 1.0 Introduction: In recent decades, conducting business has changed dramatically as geographical borders are disappearing and the world is becoming one big market place. This is driven by many forces, such as cheaper raw materials, production and labor costs. For example, many companies like Nike moved their production from the USA to cheaper Asian countries (Donaghu & Barff, 1990). This is possible through the advancement of information technology and transportation systems that enable a global connection between customers and suppliers. Taking advantage of opportunities and capturing demand for products is another driver for global trade. For example, Air-Asia diversified their operations to Europe to take advantage of the growing European tourism market. Trade globalization could also be driven by political influences, such as free trade agreements and deregulation of trade between countries, for example the free trade agreement between the EU and China in 2009 (Panagariya, 2002). Trading globally would be impossible without logistics which is “a subset of and what occurs within the broader framework of a supply chain” (). Logistics is the process of moving, positioning, and storing inventory, materials, information and money across the supply chain, and it helps achieve competitive advantage through focusing one or more of the following logistics strategies: quality, time, cost, dependability and flexibility (Coyle et. al, 2002). This report will analyse the effects of internationalisation on the logistics and supply chain operations of the Barossa Wine Company (BWC). Recommendations will be produced to advise senior management of implications for expanding their operations into China. 2.0 Brief background on China and Australian trade China instituted an open door policy in 1978 that has been successful in attracting foreign direct investment (Hong & Chin, 2007), and today China is one of the biggest and rapidly-growing economies in the world. The Australian government is currently in negotiations with the China to establish a free trade agreement, which will result in mutual benefits such as future financial growth and relationship building. Currently, trade has been growing between China and Australia. Specifically for the state of South Australia, China is the fourth largest importer. 2.1 Main challenges of internationalization and their impact on logistics in China Even though the future of trade between Australia and China seems prosperous, there are many challenges that would affect Australian companies that seek to expand international operations into China such as: 2.1.1 Chinese customs, regulations, and procedures: This area could be divided into two sections and they are: Customs and importation regulations: All imported goods into China enter an intensive customs procedure, taking much time to clear customs, which causes lead time to increase dramatically. Goods may also be ceased by customs officials, which make it a major bottle neck for inbound logistics, creating a huge challenge for logistics managers as they must be flexible with the unpredictability of Chinese customs. The nature of the products imported into China: For wine or alcohol, special procedures and examinations occur in Chinese customs, which may require all packaging and bottles to be adjusted to meet specifications. This causes large logistical expenses with manufacturing and new-machine setup for bottles, issues with packaging and suitability of transportation for wine bottle damage, or total optimization of space (at warehouses and transport containers) and economies of scale. Inventory levels could rise to cope with uncertainty, causing costs of warehousing, damages, or opportunity cost to increase. This type of inventory is also known as safety stock (Chary, 2006). Heineken is an example where it had to go through expensive alteration of their packaging processes to produce limited-edition bottles that led to huge losses from high manufacturing and logistics costs (). 2.1.2 Partnerships and supply chain relationships For companies to operate legally in China, they must enter a joint venture or form partnerships with Chinese companies (Lo & Tian, 2005) creating a major challenge for BWC because it may be difficult to form joint ventures without ending prior relationships and trust as trade or manufacturing secrets and essential supply chain information could be exposed, especially China and Asian countries generally, where there is a lack of privacy laws and supply chain members are connected through relationship-based partnerships rather than rules-based partnerships. This raises concerns for BWC as Chinese partners may seek gains at BWC’s expense (Rajagopalan & Zhang, 2008). 2.1.3 Availability of materials and manufacturing If BWC wishes to operate as a wine manufacturer in China, they will face major obstacles in the availability materials, especially for wine, because wine is differentiated from another by the type of grape it is made from, climate, location of grapes and where the wine is fermented. Therefore, BWC would need to import their grapes from Barossa in South Australia, using expensive cold chain logistics operations, which refers to the “equipments and processes used to keep perishable products in a conditioned environment” (). Furthermore, BWC must use airplanes to quickly transport the grapes before they deteriorate using a non-value added use of transportation could be classified as waste and raising total cost of logistics in the supply chain (Tseng et al., 2005). In addition BWC must deal with customs delays and strict importation regulations that could impact the freshness of grapes causing quality problems in the manufacturing of wine, all which they contribute to higher logistics costs. 2.1.4 Skilled labor shortage and associated costs Another area that could affect quality is the lack of skilled labor in the field of wine manufacturing causing high defects issues also resulting safety stock levels to rise to accommodate for the variation of quality and defected wine bottles (Ellison & Glaeser, 1999). In terms of the supply chain and logistics workforce, even though labor in China is relatively cheap to the rest of the world, labor in China could be potentially costly, due to the lack logistics and supply chain experience, leading to high insurance costs due to high damages in warehouses, injuries mix ups and delays also contributing to lengthening lead time. 2.1.5 Hard infrastructure, Transportation and third party logistics providers (3PL) Infrastructure is one of the main areas of concern in global logistics (Mangan et al., 2008). Over the last few decades China has been growing at a very fast rate; however the physical infrastructure has not been growing as fast, especially when it come to smaller cities where sometimes the only way to get there is by trucks only with no airports or ports, and poor roads. The wine industry in China is a new and booming industry, and Chinese 3PL may lack the skills and experience in areas, such as cold chain logistics, transport, or warehousing operations. They also developed a reputation of being unreliable, and items tend to get damaged during transportation or storage for example, damages due to exposure to sunlight, or damage to bottles, causing huge losses (Anderson, 2005). 2.1.6 Soft infrastructure, Information technology, and communication In China, logistics is a relatively new concept, and companies are unfamiliar and do not have the systems top support logistics processes, even simple communication tools such as the internet and websites, as many of the websites and communication means are controlled by the government, or even blocked. In addition, most Chinese logistics workforce are unfamiliar with logistics systems that are essential for supply chain integration such as electronic data interchange, materials requirement planning, radio frequency identification (RFID), also not to mention the language barrier, all of these issues lead to poor supply chain integration, visibility, and coordination (Waters, 2007; Mangan et al., 2008). Also contributing to high costs in terms of poor optimization of economies of scale in transportation, shipment delays or even loss. 3.0 Recommendations: Based on the issues mentioned above, these recommendations are produces supported by logistics theory and examples of companies best practice in logistics. 3.0.1 Focused factories strategy and Economies of scale BWC, should not go into China as a manufacturing firm, and should take advantage of economies of scale, and save on costs by adopt a focused factories strategy, where the wine for international markets including China will be produced in Barossa (Skinner, 1974). This also could eliminate the need for lengthy and complicated customs processes for importing grapes from Barossa, and excessive use of non value adding transportation, which raises total cost of logistics operations for BWC. In addition this will eliminate complicated legal procedures for manufacturing wine in China, and will also eliminate the need to go into a joint venture in manufacturing, where with the lack of privacy laws in China, trade and manufacturing secrets could have been exposed to Chinese business partners, who could use such information for their own interest and gains. 3.0.2 Effective use of warehousing Warehousing is referred to operations that involve storing, packaging or sporting goods (Coyle et. al, 2002), operating as warehouses or distributers is the most suitable option for BWC to operate in China, because this option will not expose any of BWC’s manufacturing techniques or ingredients to partners in China. In addition there will be fewer legal procedures involved, where BWC will only have to deal with the importation of manufactured wine bottles from Barossa, and the joint venture or outsourcing for the warehousing operations. Warehouses, like those used by Wal-Mart, add value to logistics systems and reduce costs, through taking advantage of economies of scale by break bulk procedures, where large shipments from Barossa, arrive in warehouses in China, where these shipments are broken down into smaller bulks, sorted, and repackaged, then they are delivered to retailers, or end consumers which could also give BWC some operational flexibility (Coyle et. al, 2002; Anderson, 2005). 3.0.3 Strategic location choice and infrastructure and transportation BWC should strategically base their hubs or warehouses and operations in major cities, as they have well developed infrastructure, such as ports and roads. In addition, major cities do not require great geographical knowledge, as all roads are well labeled and well known, and this means that these warehouses will be closer to their markets and end consumers, all contributing to higher shipment safety, and reliability (Chary, 2006). In addition, BWC could use cheaper cold chain transportation modes, such as sea as transporting wine bottles have less transportation urgency that fresh grapes. 3.0.4 Supply chain relationships, skill development Supply chain relationships are vital in any industry, however BWC need to establish close collaborative relationships and trust between their distributers in China, and their partners such as warehouse partners as well as making sure that contracts are signed for privacy and confidentiality protection. This will help take advantage of Chinese companies geographical knowledge While developing these relationships BWC need to train their warehousing staff and other supply chain personnel in various logistics processes such as materials handling, packaging, timeliness, safety, and warehousing operations, and using logistics it systems such as RFID and EDI, and by this way, BWC will help their partners gain better logistical knowledge for better logistics and supply chain management, all of which will improve reliability, safety, and reduce errors which will result in shorter lead time. 3.0.5 Fourth party logistics providers (4pl) Due to the vast complexity, of logistics operations in China, and the unreliability of Chinese 3PL BWC need to use fourth party logistics providers, like Deloitte and Accenture, which are companies that organize and manage the whole supply chain for a client company (Chary, 2006; Mangan et al. 2008). In this case BWC could use a 4pl firm such as UPS, to take care of their China operations such as warehousing, customs, downstream supply chain integration. This way BWC could become more efficient, organized, and reliable and would have higher focus on their core activities and the production of quality wine, all resulting in a more efficient, higher quality, reliable supply chain (Coyle et al., 2002). 3.0.6 The use of IT and supply chain visibility Information is one of the major parts of logistics as mentioned in the definition of logistics above. So BWC must use IT systems internally and with supply chain partners, to link the supply chain, such as electronic data interchange EDI system which is a system that “allows supply chain partners to transfer data electronically between their IT systems” (). Wal-Mart requires suppliers to use its EDI for ensured success. Creating collaboration internally and externally with supply chain members, and creating a virtual supply chain and real time data transfer, allowing better communication with supply chain members. Other execution systems could also be used such as RFID which uses electronic tags to track shipments of wine across the supply chain, creating greater supply chain visibility. Helping the reliability and safety of shipments, all contributing to shorter lead times, fewer damaged and lost shipments, and reducing logistics total cost (Waters, 2007). 4.0 Conclusion In conclusion, by adopting the recommendations above, BWC would be able overcome global logistics obstacles with China, such as uncertainty, underdeveloped infrastructure, and unskilled workforce, and develop an effective logistics strategy to enter and achieve order winners in the Chinese wine industry. BWC would be able to compete through high reliability and dependability, high quality manufactured wine, and low cost achieved through a well integrated supply chain, and effective use of hubs and warehouses. 2181 words. 5.0 References Anderson, K. (2004). The Worlds wine markets: globalization at work. Edward Elgar Pub. Chary, S.N. (2004). Production and operations management. Tata McGraw-Hill. Coyle, J., Bardi, E. & Langley, C. (2005). Business and economics cat 2005/06. Arden Shakespeare. Donaghu, M., & Barff, R. (1990). Nike just did it: international subcontracting and flexibility in athletic footwear production. Regional Studies, 24(6), 537-552. Ellison, G., & Glaeser, E.L. (1999). The Geographic concentration of industry: does natural advantage explain agglomeration?. The American Economic Review, 89(2), 311-316. Hong, J., & Chin, A.T.H. (2007). Modeling the location choices of foreign investments in chinese logistics industry. China Economic Review, 18(4), 425-437. Lo, V.I., & Tian, X. (2005). Law and investment in china. Routledge Curzon. Mangan, J., Lalwani, C. & Butcher, T. (2008). Global logistics and supply chain management. Wiley. Panagariya, A. (2002). Eu preferential trade arrangements and developing countries. The World Economy, 25, 1415-1432. Skinner, H. (1974). The Focused factory. Harvard Business Review, 113-121. Tseng, Y., Yue, W.L., & Taylor, M.A.P. (2005). The Role of transportation in logistics chain. Proceedings of the Eastern Asia Society for Transportation Studies, 5, 1657-1672. Waters, D. (2007). Global logistics: new directions in supply chain management. Gower Publishing Company. Read More