The Impact of Logistics Activities on Product Costs and Utility - Essay Example

THE IMPACT OF LOGISTICS ACTIVITIES ON PRODUCT COSTS AND UTILITY By: Author’s name MGMT 19103: Logistics Management Tage Andersson CQ University, Australia Term three, 2011 Introduction Logistics is concerned with the movement of commodities between two points: The originating point and that where the commodity is destined, so that customer and/or corporation requirements are wholly met. Logistics integrates information, inventory, transportation, warehousing, handling of materials, security and packaging. It forms part of Supply Chain Management (SCM); it has a supply chain channel that adds value to utilities of place and time. This is so, in that when there is the availability of a commodity at the required place, that is place utility- considered as value addition through logistics, whereas when delivery is made for commodities at the required time, time utility is realized, still value addition. Logistical activities, and in this respect the three that this essay will describe in Australia and China, generally entail features and categorization of services, that is advantages that a consumer enjoys like time utility, possession and place utilities are catered for by means of an enhanced offering of the product from logistical activities rather than out of a basic product/commodity’s attributes. Therefore, maximum utility, being a core aim of logistics, compels managers to decide on whether to make modifications to existing supply chain structure and the most efficient means of ensuring consistency in material flow via the same chain. In design modification, managers have a strategic viewpoint of the supply chain, which enables them to come up with the most suitable supply chain structure. In summary, Harrington (1996, p.53-58) has it that ‘logistics is both the glue that holds the materials/product pipeline together and the grease that speeds product flow along it.’ Functionally, logistics is broad in nature; it is comprised of an array of activities that have common elements. The commonest ones are procurement, transport, forecasting, warehousing, inventory and consumer service; according to a 2007 survey by LaLonde, et al. who do surveys regularly on logistical activities, 93% of respondents cited transport as the commonest, followed by warehousing (86%), inventory (75%), procurement (67%), forecasting (65%) then consumer service at 63%. These elements must work together to ensure efficiency. However, logistical costs are involved, and they call for control; besides, they must be related to service levels provided. This essay will focus on Transport, outsourcing and customs activities in Australia and China. 1. Global sourcing and procurement logistics in China Over the past decade, China has always been the best destination for procurement managers across the globe. Suppliers in China export commodities ranging from electronics and apparel to heavy machines to the United States and the European Union (EU); these have kept steadily growing, making China the top country in exports. Machinery and equipment exports to countries with modern economies have in particular grown at a fast pace over the past 10- year period. However, over the 2006-7 period, emerging issues, for instance inflation in currency and a hike in the cost of labor impacted both real competitiveness and perceived competitive advantage of the country as a producer of goods that are manufactured; this called for adaptive approaches and re-assessments by purchasers in the changing Chinese procurement environment. In terms of labor, a major problem in China was high costs of inputs and labor in its manufacturing industry during the period before the grand recession. Because of it, exports declined, and utilization at optimum capacity forced wages and prices upwards. But all that resumed since 2010, though, with costs of labor going up by 14.3% in 2010 and inflation in Producer Price Index at 5.5%. Thus, the cost of labor is not only increasing, but also a deficiency in white collar job workmen, managers and engineers is present, of whom their demand is high. China stands out as a prominent destination for sourcing due to its low costs; depending on the commodity and industry, average savings, in costs of 30%, are possible if corporations shift procurement operations to China. With regard to labor costs, the average wage in nations, for example, the United States is approximately 30 times higher than that in China. Comparatively, other developing economies can hardly compete with China; Brazil’s average wage is six times more than China’s, whereas Mexico’s is three times. Also, China has an excellent infrastructure, giving it distinctive competence over developing economies elsewhere. China is 27th on World Bank’s LPI (Logistical Performance Index), above Brazil, India and Russia; a number of new highways and a railway 78,000 kilometers long serve 6 of 10 ports in the world, which are busy. It also has 500 airports that link China’s products with end-users overseas. China has more options for transport available to the supply chains that it has; its location has advantages in transport. China has waterways that are navigable- inland waterways stand at 110,000 kilometers, further enabling more efficient commodity movement, besides the active ports around the globe. However, scarcity of providers of logistics providers in China implies a drawback for firms dealing in electronic commerce, in the form of late commodity delivery, parcels being either lost or damaged, negativity in attitude from people responsible for deliveries, slow COD (Cash on Delivery) problems, poor procedures for return and lack of special services, for example, installation. Besides, e-commerce majors in industries like consumer electronics are having a hard time with the inability of logistics suppliers in dealing with large shipments at costs that are lower. There are few companies for domestic express with the capability of handling freight, and companies dealing in freight are unable to provide door-to-door delivery. 2. Transportation logistics between China and Australia China ranks as number three in trading relations with Australia, number four in its export market and number three as the origin of imports. Australia is number eight as a trading partner with China. Trade relations between the two countries owe its rapid growth to complementarities in the economy in both countries; Australia has natural resources at its disposal, with iron ore, zirconium, bauxite, lead, limonite and aluminum accounting for 14.9%, 35%, 37%, 23%, 22% and 33% respectively. On the other hand, mainland China with its rapid economic growth and high demand for natural resources for its economic development offers an enormous market for Australian products. For instance, China is the top importer of iron ore worldwide, one major origin being Australia. Australia also exports bulk cargo such as natural gas, coal and lumber to China, making it a major destination. In 2002, China imported 42.78 million iron ore and 4.5 million coal tones from Australia, accounting for approximately 38% and 42% of total imports in China, respectively. Transportation, warehousing and storage logistics in Australia accounts for 5-6% of its Gross Domestic Product (GDP); at present, freight and logistics as an industry represents 9% of GDP in Australia. China is a latecomer in logistics but has made major leaps recently, with improvements in logistics infrastructure. Travel and transport are the major exports to Australia from China; China was the number eight source of imports in services in 2004, unlike number twelve in 1995. China made service exports of over 1 billion Australian dollars to Australia in 2004, a 3% fraction of the total imports of services in Australia. Exporting commodities from China to Australia faces major drawbacks; according to Ross Gluer, TNT Express’ General Manager, delays in transportation brought about due to improper documentation of customs and licensing, especially in China after custom regulation changes were effected in July, 2010 are costing transport operations. The declaration forms for customs in China now require codes for both harmonized systems (HS Code) and customs registration of an importer/exporter indicated, failure to which shipments are delayed by seven days, approximately. Still, companies in China face challenges when trading with Australia in exports, with a major problem being strict Australian customs. TNT Express’ Warwick Prestwood mentioned that customs in Australia have too much rigidity concerning knowledge on what a product has. Prestwood also observed that companies in China sometimes do not have knowledge on establishing appropriate exporting procedures for commodities to Australia. 3. Australian customs, quarantine and Inspection clearance A report by the United States International Trade Commission (USITC) concerning the market for global logistics found out that customs procedures at the border and inspections are the major and most significant barriers to the provision of particular logistics services aimed at expeditious and reliable movement of freight at the lowest cost. Indeed, tighter controls at national borders over the movement, storage and handling of freight all over the world are being put into effect due to increasing concerns over security. International trade in Australia has to undergo some procedures relating to quarantine and customs, which are important to supply chain logistics. Administrators of these procedures in Australia are the ACS (Australian Customs Service) & AQIS (The Australian Quarantine and Inspection Service). It is compulsory for importers and exporters of commodities to furnish the AQIS and ACS with information on product movement between Australia and destinations overseas so as to facilitate customs duty collection, export quality certification and for reasons of national security. Under the custom law in Australia, goods do not qualify for export via sea or air unless listed for export on EXIT (Customs Export Integration System). For long, AQIS has been resorting to solutions based on technology for the purpose of cost reduction and efficiency in using resources of its own and those of its clients. The development of an electronic system for documentation of domestic exports, or EXDOC by AQIS since 1992 significantly reduces processing time and cost for documents exchanged between exporters in Australia and agencies, in the government. EXDOC, a system that works on a business-to-government platform, is already a major advantage to AQIS and exporters with respect to savings in cost and quicker turnaround time for documents meant for export. Another system, the E-cert that is based on the Internet and meant for inter-governmental use, aids in certification of exports. Being a system based on a government-to-government platform, E-cert’s advantage lies in providing importing countries’ authorities with access in real-time to certification information of AQIS for imports that are pending. For exporters in Australia, if they deal particularly in perishables such as seafood, the systems quicken clearance time at ports of destination and result in cycles of payment that are efficient. The same benefits also apply to importers. Conclusion Logistics is essential as a function in any corporation or organization. Always, it has been an essential and central feature of economic activities anywhere. It is what is responsible for aspects relating to materials’ movement and warehousing/ storage. Logistics moves materials from suppliers, onto operations and finally end-users into organizations. Logistics mainly aims at satisfaction of customers. At best, it is viewed functionally as single, but it comprises of various activities that are related, like procurement, material supplies and distribution to consumers. Global sourcing is now less of an advantage in strategy and more of a competitive necessity. Cut- throat competition is making many corporations resort to sourcing in countries of low costs. Expectations of greater investment returns coupled with a surge in competition drive executive managers to search for expenditure reductions, having a direct and immediate impact. They are still challenged to keep service levels at optimum and avoid control losses. Many companies in the West have shown interest in sourcing products and parts from China so as to realize these goals. More industrial players are also having success in sourcing basic chemicals, small machines, packaging, molds and commodities in China owing to a continuous squeeze in margin. Also, search for Chinese suppliers has been further facilitated by portals for sourcing and specialized fairs on sourcing. On the other hand, trade relations between China and Australia are fast growing. China is the third largest partner in merchandise trade with Australia; it was eighth only a decade ago and the fifth in the past five years. Cost has been the main driver behind organizational shift to countries of low costs; global manufacturing and sourcing has been driven by differences in costs across countries. Slack & Lewis (2002) make reference to the cost of inputs like labor, energy and transportation as causes for the shift. Finally, the use of Information Technology aids in streamlining of export and import processes in a country; in a global market that is competitive, electronic paperless solutions have the potential of giving exporters in Australia an advantage over their competitors in access to new markets, as well as maintenance of the ones in existence. In this case, Australia, whose government agencies dealing in quarantine, customs and inspection like AQIS, resorted to technological solutions in order to maximize on client resources, as well as a reduction of costs. EXDOC and E-cert are proof of effectiveness and speed in both government-to-government and business-to-government platforms. References Harrington, L., 1996. Untapped savings abound. Industry Week, 245(14), 53-58. LaLonde, B.J., Ginter, J.L. and Stock, J.R., 2007. The Ohio State University 2007 survey of career patterns in logistics [pdf] Available at: [Accessed 10 December 2011]. Slack, N. and Lewis, M., 2002. Operations strategy. London: FT Prentice Hall. Eui Hong and Matthias Howleg, 2008. Evaluating the effectiveness and efficiency of global sourcingstrategies:Aconceptualnote.[pdf] Available at: < http://www innovation.jbs.cam.ac.uk/publications/downloads/hong_evaluating.pdf> [Accessed 9 December 2011]. Luca, 2011. A new approach to China procurement. The China Sourcing Blog, [Blog] 17 November. Available at: < http://www.chinasourcingblog.org/supply-chain/> [Accessed 8 December 2011]. Donald Waters, 2010. Global logistics: New directions in Supply Chain Management. London: Kogan Page Publishers. Read More