International Logistics Channels

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hree channels are discussed to help understand international marketing and distribution better.

International Logistics Channels Donald F. Wood

Introduction Channels are networks and are used to explain the functioning of marketing arrangements. The transaction channel handles contracting and trading; and the distribution channel deals with the physical movement of product. The channels are separatedfromeach other, i.e. a firm may locate sales offices in a different set of cities from where it locates distribution warehouses. However, the channels are linked to the extent that sales or payments "trigger" the release of goods to the buyer. This article adapts and expands this approach in an attempt to understand better international logistics operations. We will discuss three channels: the transaction channel, the distribution channel, and the documentation/ communications channel. We shall also mention the role of intermediaries who help the channels operate better. The International Transaction Channel Choosing the terms of sale within the international transaction channel involves looking at the distribution channel and determining when and/or where to transfer between buyer and seller: (1) The physical goods Received June 1990 Revised August and November 1990

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(2) Payment for goods (3) Legal title to the goods (4) Responsibility for: ● insuring the goods ● paying for transporting the goods ● controlling — or caring for — the goods (in the case, say, of livestock). Transfer of these can be expressed in terms of calendar time or geographic location or on completion of an event. One must: ● think in terms of both time and location; ● know when and where to assume or relinquish responsibility and control; ● mesh perfectly with the other party. A list of different locations or stages for quoting a price to an overseas buyer could include when: (1) at seller's dock (known as ex-works); (2) at seller's dock, packaged for export; (3) loaded aboard surface carrier that will take it to port or airport of export; (4) delivered alongside exporting ship (known as FAS); (5) crossed ocean and unloaded at port or airport of import (C & F means cost andfreightcharges to this point; CIF means cost,freight,and insurance changes to this point); (6) passed through customs and other inspections; (7) delivered to importer's receiving dock. The parties are sometimes not free to contract the terms to suit their needs. Often governments "pressure" their own firms to insist on terms which result in more of the services associated with moving the products being performed by firms of that nation. The reason is to conserve that nation's own currency and improve its balance of payments position. Many terms of payment are used. Since there is no universally accepted international equivalent of our uniform commercial code, the seller must take precautions to ensure that the payment is received. Sometimes, making payment is beyond the control of the buyer; the buyer's government may ban the outward flow of currency. The most common payment device used is the irrevocable letter of credit, an escrow-like agreement between the buyer's bank and the seller's bank to guarantee payment provided the seller meets specified terms. Letters of credit must be perfect; if not the bank may refuse to pay. In 1980 there was a story about a sunspot (a dark spot on the sun linked to disturbances in the earth's magnetic field) that may have caused an extra "L" to creep into a telexed message involving the letter of credit associated with a shipment of watches. The buyer's bank refused to pay

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because of the extra L. "Ordinarily,...the buyer authorizes payment despite such insignificant mistakes. (A spokesman for the importer said) the watches arrived too late (i.e. after the Christmas sales period) and were useless"[1], From a logistics standpoint, the letter of credit's wording controls the shipment's movement, specifying ports (and, sometimes, carriers), departure dates and labelling. If changes are to be made both the buyer and seller must agree and the letter of credit must be amended through the two banks. The risk is that the market value of the product may have changed since the orginal agreement, and one party may want to renegotiate the price. For international shipments, one needs insurance. The firm providing the insurance influences channel decisions since it will quote higher premiums for what it believes are less safe alternatives. There is one further difference between international and domestic transaction channels and that deals with relative fluctuations in currencies of both the buyer's and seller's nations. These fluctuations are also in the price of the goods and of most of the logistical services. Today, on shipments from the US to Japan there is a currency adjustment surcharge because it takes more US dollars to purchase the yen to pay port charges in Japan. Rates for transport are given in terms of currency of both the exporting and importing nations. In real terms they may differ and this might influence the terms of sale with respect to which party "pays" the carrier. Other factors result in more complicated international sales arrangements or routeings. "Grey" markets are for goods made in nation A and orginally shipped to contract distributors in nation B. However, the distributor in nation B may decide either to ship the goods back to nation A for sale or ship to a third nation, in either event cutting into the markets of regular distributors. The US and other nations have controls banning the export of specific products to certain nations, or quotas that limit imports from certain nations. These controls are circumvented by having the goods sold (and shipped) via circuitous channels. The International Distribution Channel Many of the steps in the international distribution channel steps are complicated and costly. "William C. Copacina (manager of Arthur D. Little's logistics and manufacturing group) estimates that international logistics costs range from 25-35 per cent of a product's sales value. This is opposed to 8-10 per cent for domestic shipment"[2, p. 101]. Protective packing is an early step. When goods move internationally, additional problems can be caused by

condensation, the rigours of an ocean voyage or having to lie outside, exposed for long periods of time while awaiting inspections. Large exporters employ experienced personnel for packing their export shipments, or private packers travel to the exporter's loading dock or to a cargo consolidation point. Or there may be an additional node or loop in the channel since the cargo may move to their shops for packaging. Some export packers have rail tracks through their building and the exporter sends them the cargo using a switch engine; the packer packs and labels the cargo and ships it to the port terminal for export.

Goods must be labelled so that they can be handled in the distribution channel Goods, or their packing, must be labelled so that they can be handled in the distribution channel and also be presented for retail sale in the country of import. This involves use of other languages and metric measurements. Sometimes there are labelling requirements in addition to those imposed by the importing nation. Goods sold in Quebec must be labelled in French, and this is a Provincial requirement; it has nothing to do with having goods imported into Canada. Sometimes goods are labelled as "for export" products, to discourage their grey market sales, as mentioned above. Once goods are labelled, they are less interchangeable in the inventory. Pre-shipment inspections are imposed by about 25 Third World nations which are short of hard currency, and have problems with illegal flights of currency. In 1965, the African republic of Zaire felt that some importers: ...eager to get money out of a country with a treacherous currency exchange, would over-invoice and end up collecting more than the value of what was being sold. Or, to avoid heavy import duties, an importer might under-invoice the cost of the goods. (The seller would then transfer excess funds to the buyer's account in another country.)[3, p. 12]. A number of nations now use the pre-inspection service and US exporters complain: "You'd better add $500 to your quote and five weeks more lead time if you're shipping to a country that employs a pre-inspection service"[3, p. 11]. Choice of Transport Mode and Route When shipping to Canada or Mexico, one has as wide a choice of modes as exist for domestic movements. To reach other markets, one uses sea or air. Aside from physical considerations, such as perishability or time sensitivity, value per unit of weight is the usual determinant for use of air freight. For example, of the US

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exports to Japan in 1985, 55 per cent of those worth more than $16 per kilogram moved by air compared with only 3 per cent of those worth between $1 and $2 per kilogram[4]. Air freight reduces the length of time one's money is invested in inventory. There are various levels of air service, ocean service, or combined air/ocean service that provide a range of delivery times. Once the transport type is selected, this influences the route, carrier and type of packaging. Because of the long length of time that products are moving in the international distribution channel it is conceivable that priorities change while the goods are en route. This can be accommodated. Burroughs receives materials from the Far East. As containers are loaded in Asia, information is sent electronically to the US regarding the contents of each. Comparison is then made of forthcoming needs and a priority list is established. Incoming containers are pre-cleared with Customs and containers sorted and shipped according to the new priority Burroughs has assigned. Four-day truck, two-day air, or overnight Federal Express are assigned to move goods across the US. Choice also depends on the importance of the shipper and the size of shipment. If one deals in shipload lots, the ship will come to the port of one's choice. Or, one could charter a cargo plane. For most transactions, however, one goes to the port or airport that the carrier serves. Some ocean vessel services will call at a port "on inducement", meaning that they will stop at a nonscheduled port to take on or discharge a shipment above a certain size. There are many other concerns in selecting the port of export. For example, in 1986 Union Carbide anticipated a longshoremen's strike. So the company routed cargo through non-ILA (a longshoremen's union) ports "to establish a pattern of use and acceptability with the intention of precluding carrier's consideration of Union Carbide's business as strike diverted". Also they signed a service contract with a carrier which stated if there was a strike the ship would call at specific non-ILA ports[5]. In 1990 there was an issue of overweight containers and shippers preferred ports where adjoining highway weight limits were not rigorously enforced. Sometimes the choice of port is influenced by the desire to consolidate cargo from several ports. At Seven Islands, Quebec, near the mouth of the St Lawrence River, Great Lakes self-unloaders can load coal directly into ocean vessels. In one instance a Japanese customer loaded the base of his ship with coal at Hampton Roads. At the same time, Great Lakes self-unloaders loaded with Devco coal at Sydney, Nova Scotia and at Lake Erie ports with Appalachian coal. The two self-unloaders then rendezvous with the partially loaded ocean vessel at Seven Islands. Using the self-

unloaders' conveyor belt systems, the Canadian and American coal is blended as it is being discharged into the ocean vessel so as to meet the specifications of the Japanese steel mills[6, p. 68]. Blending of products is sometimes used to work around an importing nations's tariff specifications. There are influences on the choice of port or airport of import. There must be Customs inspections services available. Several years ago, during a trade disagreement with Japan, France insisted that all Japanese electronics products be funnelled through an obscure French customs post, which delayed the movement until after the Christmas market had passed. In late 1989, Customs inspectors in Southern California were overloaded with work, and some cargoes diverted to other ports in order to avoid the bottlenecks. If one is moving hazardous cargo there are many additional restrictions of routeing (as well as other international requirements for labelling, documentation and placarding). An initial consideration when using ocean liners is whether the shipper has signed a "conference" agreement. In market areas where shipping conferences (combination of vessel lines) are active, shippers sign "loyalty" contracts with the conference, agreeing to give them all of their business and, in return, receiving a 10-15 per cent discount off published rates. For US exporters, loyalty contracts were once more significant; today, "service" contracts between shippers and ocean conferences relate discounts to volume. In either event, existence of a conference contract influences choice of carrier.

All international carriers fly the flag of the nation in which they are registered However, there are options that make it possible for the shipper to escape from the obligation to use the conference in situations where non-conference vessel operators are offering much lower rates. Both of these involve the transactions channel. The first would be that, if either the exporter or the importer (but not both) had a contract with the conference, an option would be to select terms of sales so that the party responsible for ocean transport was the one without the contractual obligation to use the conference. The second option is to work through a "dummy" firm that does not have an obligation to use the conference. All international carriersflytheflagof the nation in which they are registered. In the case of international aviation, nations — through the use of bilateral agreements —

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control the number of carriers, routes and operations between each other. Ocean commerce is freer as a vessel flying any flag can call at almost any port in the world. (A current exception is the Arab boycott of Israel: a vessel cannot call both at ports of Israel and some Arab nations.) The term "cargo preference" is used to describe those rules and treaties that limit the choices shippers have in choosing the flag of the carrier they use. When major grain sales are negotiated with the Soviet Union, a common clause is that one-third is to move on US-flag vessels, onethird on Russian-flag vessels and one-third on any vessel. In the US, cargo preference is usually interpreted to mean that 50 per cent of shipments of products supported in one way or another by federal funds have to move on US ships. Starting in 1989, 75 per cent of "Food for Peace" crops and grain sold under the Agriculture Department's export promotion programme were to be shipped on USflag vessels. In 1988, Korea tried to enforce regulations calling for carriage of 100 per cent of its steel exports on Korean-flag vessels. The US objected, and Korea lowered the limit to 70 per cent[7].

The geographic location of nodes can be explained in terms of low labour costs Early in the 1980s, a worldwide code for sharing liner traffic was adopted, known as the "40/40/20 rule". It states that, as a principle, ocean liner traffic between nations A and B shall be carried in the following proportions: 40 per cent on vessels flying nation A's flag, 40 per cent on vessels flying nation B's flag and 20 per cent on vessels flying any nation's flag. In the early days of the rule, nations using it found their rates went up since they did not have the tonnage to carry that much traffic, and little was done to implement the code. However, in late 1988, it was reported that: Nigerian officials want to use their right to carry 40 per cent not actually tofillNigerian ships but to sell thatrightto other carriers. They would, in effect, put their Liner Code share on the open market for bidding by shipping companies[8]. Here is an example of flag preference being enforced through airport user fees: Air carrier monopoly is the greatest problem flower importers face, according to Christine Martindale, EspritMiami's president. For a long time, the Columbians wouldn't grant landingrightsto US airlines unless they paid a landing fee of $10,000. Avianca Airlines, the national air carrier of Columbia, had a monopoly on carryingflowers.Anytime it got upset with theflowergrowers, its planes would suddenly

"break down" ten days before Valentine's Day, for example. At the same time, it would fly a charter plane with half the capacity of a jumbo aircraft. And that cost...twice as much per kilo weight... To counter the Avianca monopoly, Martindale imported flowers on smaller airlines owned or leased by Columbians living in Miami; they could avoid the landing fee because they were Columbians[9]. Manufacturing Site Location This is a complicated topic when thinking of movements through international channels. While the same principles apply as do domestically, the problem has more dimensions. Note it is also related to routeing; sites for distribution channel activities are selected because they are on trade routes. Sometimes an issue is boundaries of labour union jurisdiction. Most readers are familiar with foreign trade zones, often known as "free ports" which are sites where materials are stored that have not yet cleared Customs. We think of them as usually located next to a seaport or airport. They are used for storage, to delay paying Customs duties, light assembly, and labelling. To the smallfirmusing them, they definitely are an additional stop along the distribution channel. However, for larger firms, it is possible to have a foreign trade zone established at an inland site, so the location should not be considered as unique. A large number of facilities can be found just south of the US-Mexican border. These are maquiladora plants owned by US, Japanese, West German and other interests but employing Mexicans at about one dollar per hour. The Japanese firm Hitachi "employs 500 workers in Tijuana to make wooden cabinets for the televisions assembled by its 300 workers in Anaheim... Nineteen per cent of the 42,235 maquiladora employees in Tijuana work at Japanese-owned factories"[10]. There are now container trains running between Mexico and the US, and "between 600 and 700 trucks a day cross the bridges for maquiladora operations in El Paso alone"[11]. What is described here is not unique to the US-Mexican border. The geographic location of nodes in many channels can be explained in terms of low labour costs.

Documentation flows are as much a part of the main logistical flow as flows of product There are other reasons for choosing sites or nodes: Marco Polo Associates of San Francisco, which has built a million-dollar scarf business buying raw silk in China, weaving it in Korea, pattern-printing it in Italy, stitching

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it in France and marketing it in the United States, Eastern Europe and elsewhere. A key to (the firm's) suc­ cess...was setting up a complicated import-export plan that routed a scarf through as many as four countries before it was marketed — as opposed to the more traditional route of directly from a single producer country to a single consumer country[12]. The manufacturer felt that there were marketing advantages from being able to state that these were French scarves made from Chinese silk. The Documentation/Communications Channel Gray and Davies used the expression "international logistics" to mean "a system in which documentation flows are as much a part of the main logistical flow as flows of product"[13]. Usually about ten documents are required for an export shipment; the number can run to over 100. Assembling all the documents is a major logistical exercise in itself. Nearly all of the documents must be ready at the port of export; all are required at the point of import. One could develop documentation channels for any product and this channel would have linkages with both the transactions and distribution channels.

Some ocean carriers allow cargo to be booked by computer In US foreign trade the average cost of processing a single set of documents for a shipment of goods in 1982 was $395[14]. The direct cost per consignment, due to documentation for an exporter not employing one or more of the various systems available to aid the management of export administration, can be estimated by using the formula: current retail price index x 0.23[15]. From these examples, we can see that documentation is a major cost item. Interestingly, some of the overnight express services handling international shipments now advertise that they will assume many of the shipper's documentation burdens. Communications are obviously more complex, although EDI is being used for buyer-seller, and shipper-forwardercarrier linkages. Some ocean carriers allow cargo to be booked by computer. Sea-Land allows shippers direct access to its computer network. The customer can bypass a Sea-Land customer service representative and, by using a telephone hook-up, personal computer and Sea-Landprovided software, can: ● perform cargo tracking; ● learn shipment status;

● ask vessel schedules; ● book space; ● make queries about information on specific bills of lading; ● "telex" queries to other Sea-Land offices; and ● learn cargo availability (imports)[16]. EDI interchanges between Customs and its clients are also being developed. One recent study, performed for the US Customs Service, indicated that: "concern over inventory costs dictated the extent to which importers themselves depend upon electronic interaction" with Customs[17]. Logistics Intermediaries Intermediaries, or middlemen, are well-known in channel literature. They arise "in the process of exchange because they can improve the efficiency of the process" [18, p. 5]. They abound in foreign trade, with the most widely known intermediary being the freight forwarder. In a study of US firms engaged in international sourcing: Respondents reported that logistics management for well over half of all foreign-sourced materials and products was handled outside the corporate logistics function, primarily because corporate logistics managers were believed to lack expertise about international logistics operations[19]. Listing and discussing all the international logistics intermediaries would form another article. Banks and export packers have already been mentioned. Freight forwarders and non-vessel-operating common carriers (NVOCCs) handle many of the exporter's traffic management and movement practices. Other intermediaries deal with activities such as currency hedging, market intelligence and overseas advertising. The functions of only one form will be described to give an idea as to the degree of specialisation: the services for distributing periodicals in other nations. KLM, the Dutch airline, has a publications distribution service that includes wrapping, destination sorting, addressing and database management for magazines. Also handled are the business reply mail and collections of subscription payments in local currency. The magazines move across the ocean by air and are then given to post offices for local delivery[20]. Virgin Atlantic Airways provides a similar service. "Virgin International Print Distribution is the airline's service for globally distributing trade and technical magazines, publications and journals, books, corporate mail and direct promotional mailings"[21]. Sometimes the wrapping and labelling is done in the country of destination to save the weight of wrapping materials going by air. Friction and Fraud in the Distribution Channel To this point, the discussion has dealt with the positive forces and activities which co-ordinate to move products forward to the buyers. Within channels — whether

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domestic or international — there are points of friction. These are often addressed by some combination of adding inventory as a cushion, lengthening lead times, or improving communication.

charts were constructed for the export process in the early 1970s[24]. Over the years, commercial software has been developed to assist those managing international transactions and shipments; so, in a sense, computers are integrating the various international logistics channels.

In addition to friction, there is fraud and theft. Outside parties examine the long links of others' overseas distribution channels, searching for vulnerable spots where they might be attacked or robbed. While it is not unknown in domestic channels, it is worth mentioning for anyone interested in how international channels function, or malfunction. Anyone designing a channel must be aware of these hazards and make certain that the channel is sufficiently strong.

By way of example, at the Council of Logistics Management's 1988 meeting, Clayton et al. presented an example of applying an integrated systems approach to international transactions[25]. The system described was for Unisys Corporation, and is probably typical of sophisticated programmes in use. Once an order is received it is validated and a decision is made whether applicable export licenses allow the product to be shipped. The order is then transmitted either to a factory for production or to a warehouse for shipment. Commercial invoices, and duty drawback requests are prepared as are the documents needed to transfer title to the goods at the appropriate site or time. Transport routeing is determined as carrier and customs documents are also prepared.

Terrorism aimed at airlines is an ongoing problem of great concern Terrorism aimed at airlines is an ongoing problem of great concern. Without belittling the tragedy of losing lives, there are also disruptions in movement of cargo and mail. Sometimes terrorists sabotage products, with a 1989 example being cyanide placed into Chilean grapes[22]. Most common hazards are to vessels. Best-known are the attacks in the Persian Gulf which occurred during the hostilities between Iran and Iraq. There is still piracy, both actual and "paper work". In 1985, approximately 20 attacks on merchant vessels occurred in West Africa. Targets were usually European roll-on/roll-off and container vessels. The ships were attacked "by gangs of up to 30 men armed with knives, and many with guns" [6, p. 74]. In 1990 there were reported attacks on ships calling at Ethiopia. "Paper work" piracy involves the use of phoney cargoes or phoney vessels which "disappear" at sea. Cargo theft is common. The Octonia Sun was fitted with a special pipe — known on board as "the thief" — that connected one of the ship's cargo lines to a fuel line[23, p. 1]. Some companies...maintain blacklists of tanker operators they consider disreputable... The blacklisted operators stay in business by submitting low bids for their services, attracting clients who factor anticipated theft into their costs[23, p. 26]. This is a form of designed shrinkage in a logistics system.

Integrating the Channels We have treated the transaction, distribution and documentation channels as separate while acknowledging that they need co-ordination. Computer modelling has been used to arrange all the flows in some order. PERT

The complexities of international logistics channels can be viewed as both a problem and an opportunity Despite the advances of computer modelling, it must be recognised that the distribution channels are still very complex. Our discussion confirmed the Stern and ElAnsary statement that: Explanations of channel structure in terms of economic variables alone are obviously insufficient, even though such economic models provide an appropriate starting point for understanding why specific structures emerge. The necessity for going beyond economic variables is made especially clear when one attempts to answer the question of why uneconomic channel structures persist over time[18, p. 26].

Conclusions Three channels have been discussed. The decisions agreed to in the transaction channel influence, if not control, the movement of product in the distribution channel. Documenting international movements is so complex that it deserves to be considered as a separate channel. In some instances, the complexities and costs associated with documentation are greater than those associated with movement of the physical product. Because of the complexities of many international transactions, numerous middlemen or third parties exist, making their living by helping the users find short-cuts in time or savings in money. Goods moving through

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cumbersome international channels are often targets for theft and terrorism and special precautions are often needed. The complexities of international logistics channels can be viewed as both a problem and an opportunity. They add to the cost of any transaction, thereby discouraging sales or even interest in developing export sales activity. They offer opportunities to third-party providers to find and fill niches in the world of trade.

Channels theory could be applied to describe the functioning of international movements of products a This article was written in response to a challenge given in 1985 that: "International logistics lacks a theory... Thirty years after the landmark logistics texts were written, there is still no textbook available to university instructors on the "Principles of International Logistics"... The academic process begins with a theory. The theory is then refined, refuted or improved by the subsequent efforts of others[2, p. 55]. The purpose of this article was to demonstrate that channels theory, long-practised in marketing study, could be applied to describe and understand the functioning of international movements of products. References

1. "How a Glitch Can Ensnarl Foreign Trade", The Wall Street Journal, 4 November 1980. 2. Stevens, C. (Ed.), Logistics: International Issues, Leaseway Transportation, Cleveland, 1985. 3. Distribution, March 1987.

4. International Commodity-Flow Analysis, Boeing, Seattle, 1986, p. 21. 5. American Shipper, July 1986, p. 14. 6. American Shipper, December, 1986, p. 68. 7. American Shipper, September 1988, p. 32. 8. American Shipper, November 1988, p. 20. 9. "The Risky Business of Transporting Perishable Commodities", Inbound Logistics, January 1987, p. 29. 10. San Francisco Chronicle, 1 March 1988, p. A8. 11. Distribution, October 1987, p. 58. 12. San Francisco Chronicle, 1 February 1990, pp. C1, C6. 13. Cited in Davies, G.J., "The International Logistics Concept", International Journal of Physical Distribution & Materials Management, Vol. 17 No. 2, 1987, p. 20. 14. American Shipper, August 1984, p. 16. 15. Danes, G. and Freebury, C., "The Management of Documentation by British Exporters", International Journal of Physical Distribution & Materials Managemen Vol. 17 No. 6, 1987, p. 15. 16. American Shipper, January 1987, p. 20. 17. American Shipper, May 1988, p. 36. 18. Stern, L.W. and El-Ansary, A.I., Marketing Channels, 3rd ed., Prentice-Hall, Englewood Cliffs, 1988. 19. Anderson, D.L., "International Outsourcing: Radical Changes Ahead for Logistics Management", Proceedings of the Annual Conference of the Council of Logistics Management, Vol. II, 1986, p. 116. 20. "From Press to Public", KLM Cargovision, November/December 1988, pp. 14-5. 21. "Virgin does Everything in International Print Distribution", Global Trade, January 1988, p. 26. 22. Lowe, D., "Crisis Management Marketing for Tampering: Strategies for International and Domestic Marketplace Terrorism", San Francisco State University School of Business Journal, Vol. 1, 1990, p. 81. 23. The Wall Street Journal, 13 October 1987. 24. Tatterson, J.W. and Wood, D.F., "PERT, CPM and the Export Process", OMEGA, The International Journal of Management Science, Vol. 2 No. 3, 1974, pp. 421-6. 25. Clayton, B.R. et al., "International Transactions, An Integrated Systems Approach", Proceedings of the Annual Council ofLogistics Management, Vol. I, 1988, pp. 133-60.

Donald F. Wood is Professor of Transportation at San Francisco State University, California, USA.