Watch or Listen to the Following Media Clip 

Media 1.1 International trade [Video]. World 101.

Introduction

It is easy to think that trade is just about business interests of different countries. But in real, global trade is much more. There is a convergence and, at times, a conflict of the interests of different stakeholders — from businesses to governments to local citizens. In recent years, advancements in technology, a renewed enthusiasm for entrepreneurship, and a global sentiment that favors free trade have further connected people, businesses, and markets—all flatteners that are helping expand global trade and investment. An essential part of international business is understanding the history of international trade and what motivates countries to encourage or discourage trade within their borders. In this chapter, we will look at the concept of international trade, its process, stakeholders and documents. This chapter will also provide an introduction to the concept and role of global value chains and their relation with supply chain management.  

Media Attributions and References

Global Value Chain

Note. From Kennedy, 2020, Section 4.5. CC BY-NC-SA 4.0. [Image description].

The Value Chain includes both Primary and Secondary Activities. Primary activitiesare actions that are directly involved in creation and distribution of goods and services. There are five primary activities in Porter’s Value Chain namely Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales and Services. Secondary activitiesare not directly involved in the evolution of a product, but instead provide important underlying support for primary activities. Four activities are attributed as Secondary in Porter’s Value Chain namely Infrastructure, Human Resource Management, Technological Development and Procurement. These primary and secondary activities work together to produce a profit margin for the firm.  

Let’s try to understand these activities from a very simple example of doughnut shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into delectable treats. Value is added through this process because consumers are willing to pay much more for doughnuts than they would be willing to pay for the underlying ingredients. Figure 1.4 explains in detail how value is added while making donuts. 

Process of International Trade

From the Value Chain to Best Value Supply Chain

“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The belief that time is money has encouraged the modern emphasis on supply chain management. A supply chain is a system of people, activities, information, and resources involved in creating a product and moving it to the customer.

Supply chain is a broader concept than value chain; the latter refers to activities within one firm, while the former captures the entire process of creating and distributing a product, often across several firms. 

Supply-chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and logistics. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply-chain management integrates supply-and-demand management within and across companies.

Competition in the 21st century requires an approach that considers the supply chain concept in tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on the total value added to the customer.

The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic changes in supply and demand (Lee, 2004). Agility can be achieved using buffers. Excess capacity, inventory, and management information systems all provide buffers that better enable a best value supply chain to service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs across industries; therefore, no solution that works for one company can be directly applied to another in a different industry without adaptation.

Media Attributions and References

QStock Inventory. (n.d.). Comparing value chain and supply chain [Video]. YouTube. https://www.youtube.com/watch?v=MC_hByD8nBY

In this chapter, you were introduced to the terms Value Chain, Global Value Chain, International Trade Process, Stakeholders and Documentation. Relationship between Value Chain and Supply Chain was also discussed. The value chain provides a useful tool for managers to examine systematically where value may be added to their organizations. This tool is useful in that it examines key elements in the production of a good or service, as well as areas in which value may be added in support of those primary activities. The Primary participants in international trade are exporters and importers which take help of carriers, freight forwarders, banks, insurance companies etc. to function efficiently.  Essential documents for importing and exporting include the bill of lading, which is the contract between the exporter and the carrier; the export declaration, which the customs office uses to verify and control the export; and the letter of credit, which is the legal document in which the importer promises to pay a specified amount of money to the exporter when the bank receives proper documentation about the shipment. In regard to relationship between value chain and supply chain, supply chain is a broader concept than value chain; the latter refers to activities within one firm, while the former captures the entire process of creating and distributing a product, often across several firms. 

Key Terms

Adaptability: A willingness and capacity to reshape supply chains when necessary.

Agility: The supply chain’s relative capacity to act rapidly in response to dramatic changes in supply and demand.

Alignment: Creating consistency in the interests of all participants in a supply chain.

Best Value Supply Chains: Supply chains that focus on the total value added to the customer as opposed to individual outcomes, such as speed or cost.

Bill of Lading: The contract between the exporter and the carrier, authorizing the carrier to transport the goods to the buyer’s destination; acts as proof that the shipment was made and that the goods have been received.

Carrier/ Transportation Provider: The entity handling the physical transportation of the goods, such as UPS, FedEx, and DHL.

Certificate of Origin: Documentation that declares the country from which the product originates.

Commercial or Customs Invoice: The bill for the goods shipped from the exporter to the importer or buyer.

Competitive Advantage: Competitive Advantage defines how different and superior you are to your competitors. It is usually achieved in the form of Low Cost Leadership or Differentiation.

Competitors: Company’s rivals in the market

Cost: The price paid for supply chain inputs.

Customs Administration: A governmental agency that monitors imports and collects import duties on goods coming into the country.

Documentation: The official forms that must be presented to satisfy the import and export regulations of countries and for payment to be processed.

Economies: Countries

Entrepreneurs: Businessmen

Entrepreneurship: Activity of Setting up a business

Escrow: Documents in custody of bank and taking effect only when specified conditions are met.

Evolution: Development

Executives: Top Management of the Company

Export Declaration: Documentation that provides the contact information of both the exporter and the importer (i.e., buyer) as well as a full description, declared value, and destination of the products being shipped.

Exporter: A person or organization that sells products and services in foreign countries that are sourced from the home country.

Flexibility: A supply chain’s responsiveness to changes in customers’ needs.

Functional Specialization: Company’s expertise in different functions such as marketing and selling

Importer: A person or organization that sells products and services that are sourced from other countries.

Insurance Certificates: Documentation that shows the amount of insurance coverage on the goods and identifies the merchandise.

Internal Assessment Tool: Tools used to analyze company’s strengths

Letter of Credit: A legal document issued by a bank at the importer’s (or buyer’s) request in which the importer promises to pay a specified amount of money when the bank receives documents about the shipment.

License: Purchased permission to export goods from a country.

Merchandise: Products

Niche: Specialized segment of the market

Outsource: Purchasing from a foreign Supplier

Product Specialization: Company’s specialization in manufacturing a single product or a single product category

Quality: The relative reliability of supply chain activities.

Speed or Cycle Time: The time duration from initiation to completion of the production and distribution process.

Stakeholder: All the parties who participate in International Trade

Strategic Supply Chain Management: The use of supply chains as a means to create competitive advantages and enhance firm performance.

Supply Chain: A system of people, activities, information, and resources involved in creating a product and moving it to the customer.

Trade Secrets: A secret technique used by company to manufacture its products

Unique Capabilities: Core Competencies

Chapter References

A simple guide to value chain analysis: How to build more efficient sales processes [Blog]. (n.d.). Pipedrive. https://www.pipedrive.com/en/blog/value-chain-analysis

Alvarez, J. B., Baris, K. V., Crisostomo, Ma. C. R., de Vera, J. P., Gao, Y., Garay, K. V., Gonzales, P. B., Jabagat, C. J., Juani, A. S., Lumba, A. B., Mariasingham, M. J., Meng, B., Rahnema, L. C., Reyes, K. S., San Pedro, M. P., & Yang, C. (2021, November). Recent trends in global value chains. In Global Value Chain Development Report 2021: Beyond Production (pp. 1-42). World Trade Organization. https://www.wto.org/english/res_e/booksp_e/00_gvc_dev_report_2021_e.pdf. CC BY-NC 3.0 IGO.

Business Faculty from Ontario Colleges and eCampusOntario Program Managers. (2018, June 1). Fundamentals of Business: Canadian Edition. Open Library. https://ecampusontario.pressbooks.pub/businessfuncdn/chapter/opsmanagement/. CC BY-NC-SA 4.0.

Edwards, J. (2014). Mastering Strategic Management – 1st Canadian Edition: Evaluation and Execution. Victoria, B.C.: BC Campus. https://opentextbc.ca/strategicmanagement/chapter/value-chain/. CC BY 4.0.

Kennedy, R. (2020). Strategic Management. Blacksburg, VA: Virginia Tech Publishing. https://pressbooks.lib.vt.edu/strategicmanagement/chapter/4-5-value-chain/. CC BY-NC-SA 3.0.

Kessler, R.A. (2009, April 8). Q-Cells, China LDK Solar form joint venture for export push. Recharge. https://www.rechargenews.com/americas/q-cells-chinas-ldk-solar-form-joint-venture-for-export-push/1-1-861947

Nature and More. (n.d.). Farmers & growers. https://www.natureandmore.com/en/growers

Q Cells. (2019). Solar module manufacturing plant in Dalton, Georgia, USA [Photograph]. https://commons.wikimedia.org/wiki/File:Hanwha_Q_CELLS_Dalton_J_023.jpg

Voodoo Doughnut. (n.d.). Doughnuts. https://www.voodoodoughnut.com/doughnuts/

Walet, L. (2010, May 3). Sun shines through for clean tech outsourcing. Reuters. https://www.reuters.com/article/us-solar-contractors-analysis-idUSTRE6421KL20100503

World101. (2019, June 18). International trade explained | World101 [Video]. YouTube. https://www.youtube.com/watch?v=HfN8BnRJryQ

Image Descriptions

Figure 1.1: A photograph representing building of QCells.

Figure 1.2: The figure shows global value chain position of an economy. It begins with primary inputs on the left and ends with final consumers on the right. There is a reference economy point in between where final consumption happens. The area between primary inputs and final consumption is referred to as Backward GVC length and area between final consumption and final consumers is called forward GVC length. In the figure, forward GVC length is noticeably longer than the backward GVC length, such economy is said to be positioned relatively upstream in Global Value Chains. [Return to image].

Figure 1.3: The figure outlines primary activities in the bottom part and support activities on the top part. The primary activities are inbound logistics, operation outbound logistics, marketing and sales, and service. Secondary activities or the support activities are firm infrastructure, human resources management, and procurement. Both activities contribute towards profit margin on the right. [Return to image].

Figure 1.4: The figure illustrates how primary and support activities in the value chain can add value for doughnut shops. Primary activities are outlined on the left and secondary activities on the right explaining how doughnut shops buy commodity products (such as flour and grease) and transform them into delectable treats as Consumers are willing to pay much more for doughnuts than they would for flour and grease. [Return to image].

Alternative Text-Based Activities

Check Your Understanding: Global Value Chain Activity (Text-Based)

Question 1:

Global Value Chain is when an organization does the full range of activities including supply, production, marketing, sales, distribution, and support to the end consumer, across geographical locations to gain competitive advantage.

• True
• False

Feedback: True!

Question 2:

Drag and Drop the activities ( Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Services, Infrastructure, Human Resource Management, Technological Development and Procurement) into correct category: Primary Activities or Secondary Activities.

[Return to activity].

Check Your Understanding: International/Global Trade Activity (Text-Based)

Question 1:

Who is an exporter?

• the person or entity sending or transporting the goods out of the country
• the person or entity buying or transporting goods from another country into the importer’s home country
• the entity handling the physical transportation of the goods
• administration offices from both the home country and the foreign country

Feedback: The exporter, who is the person or entity sending or transporting the goods out of the country

Question 2:

Who is an importer?

• the person or entity sending or transporting the goods out of the country
• the person or entity buying or transporting goods from another country into the importer’s home country
• the entity handling the physical transportation of the goods
• administration offices from both the home country and the foreign country

Feedback: The importer, who is the person or entity buying or transporting goods from another country into the importer’s home country

Question 3:

Who is a carrier?

• the person or entity sending or transporting the goods out of the country
• the person or entity buying or transporting goods from another country into the importer’s home country
• the entity handling the physical transportation of the goods
• administration offices from both the home country and the foreign country

Feedback: The carrier, which is the entity handling the physical transportation of the goods

Question 4:

Custom Offices are:

• the person or entity sending or transporting the goods out of the country
• the person or entity buying or transporting goods from another country into the importer’s home country
• the entity handling the physical transportation of the goods
• administration offices from both the home country and the foreign country

Feedback: The customs-administration offices from both the home country and the foreign country

Question 5:

Intermediaries, such as freight forwarders and export management companies (EMC), provide companies with expert services so that the firms don’t have to build those capabilities in-house.

• True
• False

Feedback: True! Freight forwarders specialize in identifying the best shipping methods, understanding trade regulations, and arranging to have exported goods clear customs. EMCs handle the necessary documentation, find buyers for the export, and take title of the goods for direct export.

Question 6:

Drop the documents (Bill of Lading, Export Declaration, Letter of Credit, Insurance Certificates, Certificate of Origin and Commercial/Customs Invoice) and their purpose/definition:

1. The contract between the exporter and the carrier
2. The document used by customs office to verify and control the export
3. The legal document in which the importer promises to pay a specified amount of money to the exporter when the bank receives proper documentation about the shipment.
4. The document that shows amount of coverage on the goods and identify the merchandise.
5. The document that declares the country from which the product originates.
6. The bill for the goods shipped from the exporter to the importer or buyer.

Feedback: These are the correct combinations:

1. Bill of lading: the contract between the exporter and the carrier
2. Export Declaration: which the customs office uses to verify and control the export
3. Letter of credit: which is the legal document in which the importer promises to pay a specified amount of money to the exporter when the bank receives proper documentation about the shipment.
4. Insurance Certificates: show the amount of coverage on the goods and identify the merchandise.
5. Certificate of Origin: declares the country from which the product originates.
6. Commercial/ Custom invoice: the bill for the goods shipped from the exporter to the importer or buyer.

Overall Activity Feedback

Exporter is the seller whereas importer is the buyer. Carriers are the transportation parties which are responsible to carry goods from origin to destination. Whenever goods leave their originating country and reach destination country, they encounter custom officials which check and verify the goods and different documents and allow them entry into the country. [Return to activity].

Check Your Understanding: Supply Chain and Value Chain Activity (Text-based)

Question 1:

Value chain is broader concept than Supply Chain.

• True
• False

Feedback: A supply chain is a broader concept than a value chain; the latter refers to activities within one firm, while the former captures the entire process of creating and distributing a product, often across several firms.

Question 2:

From the following, which component is NOT required for creating best value supply chains.

• Strategic Supply Chain Management
• Agility
• Acceptability
• Alignment

Feedback: Creating best value supply chains requires four components: Strategic Supply Chain Management, Agility, Adaptability and Alignment.

Question 3:

The value chain provides a useful tool for managers to examine systematically where value may be added to their organizations.

• True
• False

Feedback: The value chain provides a useful tool for managers to examine systematically where value may be added to their organizations. This tool is useful in that it examines key elements in the production of a good or service, as well as areas in which value may be added in support of those primary activities.

Question 4:

Best value supply chains strive to excel along four measures. Which are those:

• Speed, Quality, Profit and Quantity
• Cost, Quality, Speed and Superiority
• Quality, Quantity, Customers and Profit
• Speed, Quality, Cost and Flexibility

Feedback: Best value supply chains strive to excel along four measures. These are: Speed, Quality, Cost and Flexibility. [Return to activity].

Figure 2.1

Distribution Chain 

Note. Distribution Chain. From EpicTop10.com, 2021. Flickr. CC BY 2.0. 

Introduction

Managing distribution is one of the integral parts of global value chain. Be it the distribution of raw material or finished goods, organizations try to effectively perform these activities as the former ensures company’s success in the market. Distribution further can be categorized as Inbound Logistics and Outbound Logistics. Inbound Logistics work closely to suppliers whereas Outbound Logistics work close to consumers.  These together form a logistic cycle that connects suppliers to customers. With this in mind, let’s try to look deeper into the concept of distribution logistics and understanding how different components of inbound and outbound logistics work. Also, we will try to build the logistic cycle and analyze the role of logistic service providers in it.

Media Attributions and References

EpicTop10.com. (2021, August 21). Distribution chain [Graphic]. Flickr. https://www.flickr.com/photos/182229932@N07/48592750752. CC BY 2.0.

With increase in international trade over the years, Consumer expectations have changed. Now, they want goods of high quality, service, responsiveness, and flexibility. Logistics has gained attention here by providing organizations with increased efficiency and flexibility. “Companies now seek to create synergies with other organizations and begin to create value chains through horizontal and/or vertical collaboration with logistics partners (Moutaoukil. et al., 2012, p. 477). ” It  helps businesses in satisfying the changing demand pattern of their consumers. Logistics can be thought as a company’s consumer-facing side that strives to add value to their consumers every day (Jejani et al., 2019).

The Council of Supply Chain Management Professionals (n.d.) define logistics as:

The part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements (para. 5).

Additionally, international selling require companies to focus more on their distribution strategies. For instance, a developing  country’s distribution strategies would require attention to loosely integrated networks, limited logistics and smaller retail markets to sell the product (Mariadoss, 2017). So, companies need to make their distribution plans different for different counties. Further, distribution becomes even more important because it makes sure that a company’s customers are highly satisfied by making it necessary for companies to provide the desired quality  and quantity of products to the value chain customers (Klumpp & Heragu, 2019).

One way to look at business logistics is “having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer.” To increase the visibility of value-added contribution  of logistics, these seven R’s were coined and announced (Swamidass, 2000).

Figure 2.2

The 7 R’s of Logistic

Note. 7 R’s in logistics. [Image description].

Achieving these R’s is essential to match the market’s demand and supply side. These elements can also help organizations in identifying different logistical aspects or key performance indicators to be considered to examine operational success or failure in international market (Rushton et al., 2014).

An operations manager who focuses on logistics will be concerned with issues such as inventory management, purchasing, transportation, warehousing, and the planning and organization of these activities. Logistics may have either an internal focus (inbound logistics) or an external focus (outbound logistics).

Media Attributions and References

Daily Logistics. (2021, June 27). What is logistics ? Logistics definition and 7 right of logistics explained! [Video]. YouTube. https://www.youtube.com/watch?v=FD2ShcUtLkE.

Inbound and Outbound Logistics – Introduction

Figure 2.3

Inbound Logistics

Note. Inbound Logistics. From Elevate, 2018. Used under the Unsplash License.

Inbound Logistics refers to anything that is coming inside a company. For a furniture manufacturer,  inbound logistics would mean managing the arrival of raw materials  or semi-finished products such as wood, paint, nuts, screws, bolts etc. For an Amazon Fulfillment centre, on the other hand, inbound logistics would mean managing receiving, quality check, storage etc. of finished goods.

“Inbound logistics is one of the primary processes of logistics concentrating on purchasing and arranging the inbound movement of materials, parts, or unfinished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores (Wikipedia, 2019)”.

According to Minner,

Inbound Logistics comprises all activities that secure the supply for manufacturing and assembly or sales. These activities range from order placement and order allocation between suppliers to a chosen delivery and transportation concept for the receipt and storage or immediate use of the materials.

A manager in charge of inbound logistics manages everything related to the incoming flow of resources that the company needs to produce its goods or services. These activities will include managing supplier relationships, accessing raw materials, negotiating materials pricing, and arranging quicker delivery.

Outbound Logistics

Figure 2.4

Outbound Logistics

Note. Forklift in Warehouse. From Nebov, J. 2021. Used under the Unsplash License.

Outbound Logistics refers to anything that is going outside of a company. Outbound processes are vital for companies as they connect them directly with their customers in value chain  (Klumpp and Heragu, 2019).” For instance, for a furniture manufacturer outbound  logistics would mean managing delivery of finished furniture such as sofa sets, beds, chairs etc., to furniture retailers. For Furniture retailers, on the other hand, outbound logistics would comprise managing the distribution  of finished goods to consumers on time and in good condition.

Council of Supply Chain Management Professionals defines  Outbound Logistics as “the process related to the movement and storage of products from the end of the production line to the end consumer”.

A manager working in outbound logistics will be focused on two issues: storage and transportation. They will use warehousing techniques to keep the finished goods safe and accessible. Since the products may need to be moved out to a customer at any moment, proper organization is crucial. Having as little product stored as possible can be advantageous since stored products are not making money, so the outbound logistics manager often has to balance company cost savings with consumer demand. The transportation function is by far the most complex part of outbound logistics. Without transport, there simply is no logistics. For that reason, it’s critical to be able to move the product from one location to another in the fastest, most cost-effective, and efficient way possible. Since transportation involves fluctuations, factors such as delays and changes in fuel costs need to be taken into account to cover  all possible scenarios that might jeopardize the efficient movement of goods.

Inbound and Outbound Logistics, taken together, links Suppliers in the upstream to consumers in the downstream. However, Inbound logistics focuses on the Supply-side whereas Outbound Logistics focuses on the demand side of the supply-demand equation. So, to ensure the operational success of any business, it is essential to focus equally on inbound and outbound operations. As per Jejani et al., 2019:

Outbound and Inbound logistics, both activities, play complementary roles to the success of the logistics function of the company while one guarantees that your management has all the supplies it needs to keep the production line upend running, the other connects your products to the final buyer. Therefore, both parts should be carefully planned and executed so that your supply chain and logistic can be as effective as possible and you are able to meet your customers’ expectations and requirements with ease.

Inbound and Outbound Logistics – Components

Before delving deeper into components of Inbound and Outbound Logistics, let’s look at the term logistics and it’s importance once again.

The Components of Inbound and Outbound Logistics vary from Industry to Industry. “How a company approaches inbound logistics varies depending on incoming goods, the industry and the buyer-seller relationship (Jenkins, 2020) .”

In this part of the chapter, we will focus on Inbound and Outbound Logistics activities. Figure 2.5 gives a quick view of these activities:

Figure 2.5

Components of Inbound and Outbound Logistics

Note. Components of Inbound and Outbound Logistics. [Image description].

Inbound Logistics Components:

As we know, Inbound Logistics works closely on the market’s supply side. Therefore, it would include activities related to suppliers and receiving of materials coming inside a company. Let’s discuss these activities in detail.

1. Sourcing and Procurement: This is the first activity a company does when it decides to trade globally. They start exploring suppliers in international markets who can provide them with required materials within desired time frame and agree to work on specified terms and conditions. In simple words, they decide to purchase the materials, which is called Sourcing or Procuring in Logistics terminology . “Procurement includes the activities involved in establishing fundamental requirements; sourcing activities, such as market research and vendor evaluation; and negotiation of contracts (Bhargove, 2018 ).”
2. Supplier Selection: This is another significant activity as it decides the quality of your outbound operations and success of your business in the long run. Suppliers are companies or individuals who provide you with the required material at the required time. In case a company ends up selecting a wrong supplier, it has financial implications and can impact the operational success of a business. Therefore, choosing suitable suppliers is crucial because it directly affects cost reduction, profitability, and company flexibility (Ting & Cho. 2008, p. 116-117). In some cases, it is also considered as a part of procurement.
3. Inbound Transportation: Inbound Transportation relates to material movement from suppliers to the manufacturing unit. It is one of a company’s significant decisions as it consumes much of its cost. The success of other activities depends upon whether the material has been received on time and in good condition. Therefore, a highly responsive and economical transportation system can be considered a strong pillar for any business to fulfill consumer demands at a reduced cost. Conversely, its absence can lead to increased costs of goods and services (Ogar, 2017).
4. Receiving and Quality Check: After inbound transportation comes receiving and quality check of the received material. During receiving, goods are unpacked, checked for any damages or quality and quantity issues, entered into the inventory system and staged for movement to the storage area. The aim here is ensure  that received products comply with ordering documentation and are not damaged during shipping (LINCS, 2017, p.38).
5. Material Handling: Once company receives goods, it’s vital to handle them properly. “Material Handling is the function of moving the right material to the right place, at the right time, in the right amount, in sequence, and in the right position or condition to minimize production cost (Stephens, 2019).” It includes other sub activities as well such as receiving, incoming quality check, warehousing and production scheduling.

Outbound Logistics Components

Outbound Logistics work closely on the demand side of the market. It would include order processing,  Storage Management, Packing, Distribution and Reverse Logistics. Let’s discuss these activities in detail.

1. Warehousing and Storage: Once a company receives goods, these are stored in the warehouses to fulfill consumer demand. A company needs to decide the number of goods to be stored as when goods stay in warehouses for a more extended period; additional costs are incurred. In warehouses, there is an overlap of inbound and outbound logistics. Where later specifically focus on sending goods directly to consumers or retail stores, the former works  towards product acquisition (Jenkins, 2020).
2. Picking and Packaging: When a consumer places order, warehouse associates pick the products ordered and forward them to the packaging department. The packaging associates make sure that goods are appropriately packaged within the transportation requirements of labelling and kitting, ensuring the safety of goods while in transit. For instance, fragile goods are packed using bubble wrapping so that these are not damaged during transportation and are labelled effectively for proper handling.
3. Outbound Transportation: The modes of transportation and other requirements remain the same for inbound and outbound transportation. The only difference is that in inbound transportation goods arrive at a facility and in outbound transportation goods move out of a facility. As Dao et. al., 2018  states, “Inbound Logistics includes all aspects of material sourcing, material purchasing, transporting to factories. Meanwhile, outbound logistics handles the rest of the process such as transportation of the finished goods to warehouses or distribution centers, then from warehouses or distribution centers to customers.”
4. Order Fulfillment: Delivering products at the right time and in proper condition to the consumer is all about order fulfillment. Companies can have their fleet of trucks and drivers or get services from courier companies like UPS and FedEx to fulfill consumer orders. In some instances, order  fulfillment is a process where inbound and outbound logistics intersect. A complete order fulfillment lifecycle starts with strategic sourcing and ends with shipping. Some businesses also consider inventory management, supply chain management, order processing, quality control and customer support as a part of order fulfillment (Schwarz, 2020).
5. Reverse Logistics: It often happens that the material you have received has some defects or problems. Such materials can be treated at the manufacturing unit, but sometimes it becomes essential to send them back to the suppliers. The process employed  to deliver goods back to the upstream point is known as ‘Reverse Logistics’. Many companies specifically operate in the area of Reverse  Logistics. For instance, GLS Logistics and International Shipping is a courier company that directly picks up the products from consumers and returns them to the seller of any other location (Tirelli, 2021).

   Check Your Understanding

   Answer the question(s) below to see how well you understand the topics covered above. You can retake it an unlimited number of times.

   Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

   Check Your Understanding: Components of Inbound and Outbound Logistics

    

   An interactive H5P element has been excluded from this version of the text. You can view it online here:
   https://ecampusontario.pressbooks.pub/globalvaluechain/?p=399#h5p-13

   Text-based alternative.

    

   Overall Activity Feedback

   It is important to understand the activities in Inbound and Outbound Logistics. Procurement or sourcing is also known as purchasing of goods or services from international suppliers. Material Handling is the function of moving the right material to the right place, at the right time, in the right amount, in sequence, and in the right position or condition to minimize production cost. In Warehousing and Transportation activities, Inbound and Outbound Logistics overlap. Reverse Logistics moves the goods or problem inventories from downstream to upstream.

    

Media Attributions and References

CognexTV. (2021, November 8). Inbound logistics solutions – machine vision & barcode reading for distribution & fulfillment [Video]. YouTube. https://youtu.be/Maz17CvqJa4

Elevate. (2018). [Inbound logistics] [Photograph]. Unsplash. https://unsplash.com/photos/dI-aXC7DWpQ

Nebov, J. (2021). Forklift in warehouse [Photograph]. Unsplash. https://unsplash.com/photos/seTS7bvcr0A

PLS Logistics Services. (2019, April 18). Why is logistics management important? [Video]. YouTube. https://youtu.be/eF1aYwDmppM

Tata Steel Jobs. (2018, June 15). Discover the world of outbound logistics within Tata Steel [Video]. YouTube. https://youtu.be/5RH9xMAANf8

Logistics Cycle

Inbound and Outbound Logistics ensure smooth material movement from upstream to downstream, efficient manufacturing process and satisfied consumers. That is why, collaborative planning of inbound and outbound logistics becomes so essential. The logistics cycle includes all the steps involved in inbound and outbound logistics. Figure 2.6 provide its overview:

Figure 2.6:

Logistics Cycle

Note. Logistics Cycle [Image description].

All the activities listed in this cycle are interrelated. The rest of the book  is based  on this cycle and will explain every step  in detail. For instance, Procurement is discussed in the next Chapter, different requirements and modes of transportation from origin to destination will be explained in Chapter 4, Warehousing, Order Processing and Inventory Management will be addressed in Chapter 5, Chapter 6 provides details on documentation, Incoterm Rules and other related concepts, and Reverse Logistics will be covered in Chapter 9. Other topics of relevance are also covered in the book like Value Chain Vulnerability, Sustainability, Circular Economy, Introduction to Value Stream Mapping, Humanitarian Logistics etc.

Logistics Service Providers

Logistics Service providers (LSPs) help organizations with the activities listed in the logistics cycle. To focus on their core businesses, companies take services from the logistics providers. Demands for different services have been continuously increasing in the current logistics market. For instance, FedEx responds to various consumer’s needs and provides services such as same day, first overnight, priority overnight, standard overnight, 2 day, and express saver. In the case of UPS and RPS, rather than overly diverse services, they are using a service strategy that accurately meets the scheduled time. This is also called a money-back guarantee (Kim, 2021).

Categories of Logistics Service Providers

The following categories of LSPs differ based on services provided by different companies. Figure 2.7 provides an overview of these categories:

Figure 2.7

Development of Outsourcing

Note. Development of Outsourcing. From Kim, J. 2021. CC BY-NC 4.0. [Image description].

1. 1PL: A logistics service with the concept of internally performing the logistics work generated by the company. Here, the company that manufactures the product handles the process from completion stage to final distribution.
2. 2PL: Companies chose the 2PL method to provide logistics services by independently creating subsidiaries with specialized functions. In this case, it was common for a department in charge of logistics to become independent and become a subsidiary.
3. 3PL: Third Party Logistics allows the shipper to designate all or part of the supply chain to improve customer service, reduce logistics-related costs, and improve operational efficiency for logistics activities. It refers to outsourcing logistics functions to a specialized company.
4. 4PL: Fourth-party logistics (4PL) is a connection with management resources, capabilities and technologies of other companies that can make up for the shortcomings of logistics service providers to provide a comprehensive supply chain solution to shippers. Thus, it can be defined as a supply chain integrator that provides a more complete supply chain solution. Fourth-party logistics are also described as LLP (Lead Logistics Providers) and general contractors. It is a single contract point that aims to effectively connect various organizations and functions to plan and manage all activities in the supply chain (Saglietto,2013).

Media Attributions and References

IIPMR. (2020). Difference between 1PL, 2PL, 3PL, 4PL and 5PL logistics providers [Video]. YouTube. https://youtu.be/2X6rD1nJx4M.

Kim, J. (2021, February 15). Studies on change of logistics concept and introduction to 4PL. East Asian Journal of Business Economics, 9(1), pp. 27-39. http://dx.doi.org/10.20498/eajbe.2021.9.1.27. CC BY-NC 4.0.

In this chapter, you were introduced to different aspects of Distribution Logistics. Logistics provides organizations with increased efficiency and flexibility to meet consumer demands by focusing on 7 R’s. Two categories of logistics were also explained – Inbound and Outbound Logistics. Where Inbound Logistics deals  with anything coming inside a company, outbound logistics focuses on everything going outside. This concept was explained using relevant examples. Various components of inbound and outbound logistics were also discussed in detail. In the end, clarity was provided towards the logistics cycle and role of Logistics Service Providers in this cycle.

Key Terms

Logistics: The part of supply chain management that plans, implements, and controls the efficient, effective forward and reverses flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements (CSCMP).

Inbound Logistics: Inbound logistics is one of the primary processes of logistics concentrating on purchasing and arranging the inbound movement of materials, parts, or unfinished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores (Wikipedia, 2019).

Outbound Logistics: Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user (Wikipedia, 2019).

Procurement: Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process (Wikipedia, 2022).

Reverse Logistics: Reverse logistics is a type of supply chain management that moves goods from customers back to the sellers or manufacturers (Jenkins, 2021).

Logistic Service Providers: Logistics Service Providers, or 3PL (third-party logistics) providers, are outsource entities shippers leverage to manage a company’s warehousing, distribution and transportation of freight (Young, 2019).

Chapter References

Bhargove, A. (2018). Project Procurement: A Real-World Guide for Procurement Skills (1st ed.). Project Management Institute.

Council of Supply Chain Management Professionals. (n.d.). Logistics. In CSCMP Supply Chain Management Definitions and Glossary. Retrieved May 4, 2022 from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921.

Council of Supply Chain Management Professionals. (n.d.). Outbound logistics. In CSCMP Supply Chain Management Definitions and Glossary. Retrieved May 4, 2022 from https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921

Dao, N. H. T., Daniel, J., Hutchinson, S. & Naderpour, M. (2018). Logistics and supply chain management investigation: A case study. In Beheshti, A. et al. (Eds.), Service Research and Innovation (pp. 216 – 230). Springer. https://doi.org/10.1007/978-3-319-76587-7_15.

Inbound logistics. (2019). In Wikipedia. Retrieved January 25, 2022, from https://en.wikipedia.org/wiki/Logistics

Jejani, G.R., S, A.T., & Jain, S. (2019). The impact of inbound and outbound logistics on the supplier-relationship management. International Journal of Innovative Research in Science, Engineering and Technology, 8(8). https://doi.org/10.15680/IJIRSET.2019.0808057

Jenkins, A. (2020, December 14). Guide to inbound and outbound logistics: Processes, differences and how to optimize. Oracle Netsuite. https://www.netsuite.com/portal/resource/articles/inventory-management/inbound-outbound-logistics.shtml

Jenkins, A. (2021, January 14). A guide to reverse logistics: How it works, types and strategies. Oracle Netsuite. https://www.netsuite.com/portal/resource/articles/inventory-management/reverse-logistics.shtml

Kim, J. (2021, February 15). Studies on change of logistics concept and introduction to 4PL. East Asian Journal of Business Economics, 9(1), pp. 27-39. http://dx.doi.org/10.20498/eajbe.2021.9.1.27. CC BY-NC 4.0.

Klumpp, M. & Heragu, S. (2019). Outbound logistics and distribution management. In Zijm, H., Klumpp, M., Regattieri, A. & Heragu, S. (Eds.), Operations, Logistics and Supply Chain Management (1st ed., pp. 305-330). Springer.

LINCS in Supply Chain Management Consortium. (2017, March 3). Warehousing operations certification track (Version v2.28). https://www.skillscommons.org/bitstream/handle/taaccct/14296/LINCS%20Warehousing%20Operations%20Content.pdf?sequence=1&isAllowed=y. CC BY 4.0.

Mariadoss, B. J. (2017). Core Principles of International Marketing. Mariadoss on Pressbooks. https://opentext.wsu.edu/mktg360/. CC BY-NC-SA 4.0.

Minner, S. (2019). Inbound logistics. In Zijm, H., Klumpp, M., Regattieri, A. & Heragu, S. (Eds.), Operations, Logistics and Supply Chain Management (1st ed., pp. 231-250). Springer.

Moutaoukil, A., Derrouiche, R., & Neubert, G. (2012). Pooling supply chain: Literature review of collaborative strategies. 13th Working Conference on Virtual Enterprise (PROVE), Oct 2012,
Bournemouth, United Kingdom, pp. 513-525. https://link.springer.com/chapter/10.1007/978-3-642-32775-9_52. CC BY 4.0.

Nokia Corporation. (2020). Company. Nokia. https://www.nokia.com/about-us/company/

Ogar, L. (2017, July 21). The role of transportation in a supply chain. Infoguide Nigeria. https://infoguidenigeria.com/role-transportation-supply-chain/

Outbound logistics. (2019). In Wikipedia. Retrieved January 25, 2022, from https://en.wikipedia.org/wiki/Logistics

Procurement. (2022). In Wikipedia. Retrieved January 25, 2022, from https://en.wikipedia.org/wiki/Procurement

Rushton, A., Croucher, P., & Baker, P. (2014). The Handbook of Logistics and Distribution Management (5th ed.). Kogan Page Limited.

Saglietto, L. (2013). Towards a classification of Fourth Party Logistics (4PL). Universal Journal of Industrial and Business Management, 1(3), pp. 104-116.

Schwarz, L. (2020, August 20). What is order fulfillment? 7 step process and key strategies. Oracle Netsuite. https://www.netsuite.com/portal/resource/articles/erp/order-fulfillment.shtml.

Stephens, M. P. (2019). Manufacturing Facilities Design & Material Handling (6th ed.). Purdue University Press, Indiana.

Swamidass, P.M. (2000). Seven “rights” of logistics. In Encyclopedia of Production and Manufacturing Management. Retrieved January 10, 2022, from https://doi.org/10.1007/1-4020-0612-8_871.

Ting, S. and Cho, D.I. (2008). An integrated approach for supplier selection and purchasing decisions. Supply Chain Management, 13(2) pp. 116-127. https://doi.org/10.1108/13598540810860958.

Tirelli, B. (2021, January 13). Reverse logistics examples | Importance of reverse logistics. Eurosender. https://www.eurosender.com/blog/en/reverse-logistics/.

Williams, L., Burokas, N. & Danielson, R. (n.d.). Introduction to Business. Lumen Learning. https://courses.lumenlearning.com/wmopen-introductiontobusiness/. CC BY-SA 0.0.

Young, A. (2019, June 19th). Logistics Service Provider (LSP) defined in 100 Words [About InTek]. InTek Freight and Logistics Inc. https://blog.intekfreight-logistics.com/logistics-service-provider-lsp-defined

Image Descriptions

Figure 2.2: The figure presents 7 R’s of logistic activities in circles, Each circle representing a each R such as right item, right quantity, right time, right place, right price, right condition and right customer. [Return to image].

Figure 2.3: The image shows a person using forklift to unload goods from a container, representing inbound logistics.

Figure 2.4: The image shows a person using forklift to move goods, representing outbound logistics.

Fig 2.5: The figure categorize inbound and outbound logistics in different columns each representing their own components. [Return to image].

Figure 2.6: This figure outlines the steps involved in logistics cycle starting with International Procurement to Reverse Logistics [Return to image].

Figure 2.7: The image presents different categories of Logistic Service Providers in four quadrants with 1PL on top left quadrant and 4PL on bottom right quadrant. [Return to image].

Alternative Text-Based Activities

Assessing What You Already Know Activity (Text-based)

Question 1

What raw materials furniture manufacturer receives and uses to manufacture finished goods? Check all that apply.

• Wood
• Paint
• Nuts and Bolts

Feedback: A furniture manufacturer uses all of these while manufacturing finished goods

Question 2

What goods a retail store like Walmart receives to sell to their consumers. Check all that apply.

• Finished goods
• Raw material
• Semi finished goods

Feedback: A retail store receives finished goods and in some cases semi finished goods to sell to their consumers.

Question 3

What finished goods does a furniture manufacturer sells? Check all that apply.

• Finished Sofa sets
• Finished Beds
• Nuts and Bolts

Feedback: A furniture store uses wood, paint and nuts and bolts that it received to manufacture finished goods such as sofa sets, beds, tables, chairs etc.

Question 4

What goods does a retail store like Walmart sells? Check all that apply.

• Books
• Grocery Items
• Fruits and Vegetables

Feedback: A retail store will basically sell whatever it will receive. It will not engage in manufacturing or producing goods like fruits and vegetables.

Question 5

On the basis of your previous experiences and knowledge, how would you define the term ‘distribution logistics’?

• Distribution logistics help company’s in managing whatever they receive and sell.
• Distribution logistics help company’s in hiring workforce.
• Distribution logistics help company’s in marketing and selling.

Feedback: Distribution Logistics is a process that help company’s in managing whatever they receive (inbound logistics) and whatever they sell (outbound logistics).

Overall Activity Feedback

While answering the above questions, you got a chance to analyze what a company receives and sells to their consumers. The products a company receives are a part of ‘Inbound Logistics’ and the goods that a company sells directly to consumers or retail stores is a part of ‘Outbound Logistics’. The process of managing Inbound and Outbound Logistics together is called ‘Distribution Logistics’. [Return to activity].

Check Your Understanding: Distribution Logistics (Text-based Activity)

Question 1

Logistics help companies to:

1. Increase efficiency and flexibility and satisfy consumer demands
2. Convert inputs (raw materials) into outputs (goods or services)
3. Reduce efficiency and flexibility

Feedback: Logistics help companies to Increase efficiency and flexibility and satisfy consumer demands whereas manufacturing converts inputs to outputs.

Question 2

It is important for companies to have different distribution plans for different countries because:

1. Different countries have different birth rate
2. Different countries have different dynamics of networks, logistics and market
3. Different countries have different political systems

Feedback: It is important for companies to have different distribution plans for different countries because different countries have different dynamics of networks, logistics and market.

Question 3

The 7 R’s in logistics help organizations by making ______________ visible to top management.

1. Costs in Logistics activities
2. Risks in Logistics activities
3. Value-added component of logistic activities

Feedback: The 7 R’s in logistics help organizations by making Value-added component of logistic activities visible to top management.

Question 4

Logistics may have either an internal focus (_____________) or an external focus (____________).

1. Outbound Logistics, Inbound Logistics
2. Inbound Logistics, Outbound Logistics
3. Downstream, Upstream

Feedback: Logistics may have either an internal focus (Inbound Logistics) or an external focus (Outbound Logistics).

Overall Activity Feedback

Logistics help companies in increasing efficiency and flexibility and satisfying consumer demands. It is important for companies to have different distribution plans for different countries as they may have different dynamics of networks, logistics and market. The 7 R’s in logistics are very important as they help organizations in making Value-added component visible to the top management. Logistics may have either an internal focus (Inbound Logistics) or an external focus (Outbound Logistics) which will be discussed in detail in next section. [Return to activity].

Check Your Understanding: Inbound Logistics (Text-based Activity)

Inbound Logistics focus on incoming goods in the company’s manufacturing unit , warehouse etc. Based on what has been explained above, Can you think of an example of Inbound Logistics ? If yes, write it in the box below. If not,  read through the text again and try again. [Return to activity].

Check Your Understanding: Outbound Logistics (Text-based Activity)

Outbound Logistics focuses  on goods moving out of the company’s  manufacturing unit, warehouse etc. Based on  what has been explained above, Can you think of an example of Outbound  Logistics?   If yes, write it in the box below. If not,  read through the text again and try again. [Return to activity].

Check Your Understanding: Components of Inbound and Outbound Logistics (Text-based Activity)

Question 1

Drag and Drop the components of Inbound and Outbound Logistics in correct Category. Students are given two columns titled Inbound and Outbound Logistics and six components to drop into the correct category.

Question 2

Purchasing of goods or services from international suppliers can be referred as:

1. Material Handling
2. Warehousing
3. Sourcing and Procurement

Feedback: Procurement is the first step a company does when it decides to trade globally. They start exploring suppliers in international markets who can provide them with required materials within desired time frame and agree to work on specified term and conditions. In simple words, they decide to purchase the materials which in Logistics terminology is called Sourcing or Procuring.

Question 3

Material Handling is the function of moving the right material to the right place, at the right time, in the right amount, in sequence, and in the right position or condition to minimize production cost.

1. True
2. False

Feedback: Material Handling is the function of moving the right material to the right place, at the right time, in the right amount, in sequence, and in the right position or condition to minimize production cost.

Question 4

These are the components where Inbound and Outbound Logistics overlap.

1. Warehousing and Transportation
2. Material Handling and Order Processing
3. Procurement and Reverse Logistics

Feedback:

Inbound and Outbound activities overlap during warehousing and transportation components.

Question 5

Reverse Logistics deals with problem inventories only.

1. True
2. False

Feedback:

The process that is employed to deliver goods back to the upstream point is known as ‘Reverse Logistics’. Many companies specifically operate in the area Reverse Logistics.  For instance, GLS Logistics and International Shipping is a courier company that pick up  the products from consumers directly and return them to the seller of any other location.  It not only focus on problem inventories but deals with products such as empty bear bottles being returned to the store for further processing.

Overall Activity Feedback

It is important to understand the activities in Inbound and Outbound Logistics. Procurement or sourcing is also known as purchasing of goods or services from international suppliers. Material Handling is the function of moving the right material to the right place, at the right time, in the right amount, in sequence, and in the right position or condition to minimize production cost. In Warehousing and Transportation activities, Inbound and Outbound Logistics overlap. Reverse Logistics moves the goods or problem inventories from downstream to upstream. [Return to activity].

Check your Understanding: Logistics Cycle and Logistic Service Providers (Text-based Activity)

Question 1

Arrange the logistic cycle activities in correct order:

• International Procurement – 1
• Transportation – 2
• Warehousing – 3
• Order Processing – 4
• Inventory Management – 5
• Shipping and Documentation – 6
• Managing Reverse Logistics – 7

Question 2

Each category of Logistic Service Provider differ on the basis of:

1. Policies
2. Services Provided
3. Owners

Feedback:

Every Logistic Service provider differs based on  services provided. For more details, watch the video describing different categories of LSPs. [Return to activity].

Watch or Listen to the Following Media Clip

Media 3.1 Introduction in Procurement – Module 1: What is Procurement? [Video]. Procurious HQ.

Introduction

All businesses have to be competitive and successful in markets. Companies’ procurement of goods and services plays a vital role in improving profit, customer needs, uniting suppliers, identifying and organizing sources, managing the value chain, renewing contracts, specifying requirements, and evaluating available options. A process of the procurement of goods or services can be done across continents or countries where specific international and national requirements and trade regulations have to be met.

Media Attributions and References

Procurious HQ. (2014, May 22). Introduction to procurement – module 1: What is procurement? (Part 1). [Video]. YouTube. https://www.youtube.com/watch?v=wPR_KoSSofA

What is Procurement?

Mangan and Lalwani (2016) describe procurement as:

• “Procurement includes sourcing and purchasing and covers all of the activities from identifying potential suppliers through top delivery from supplier to the customer” ( p. 379).
• “Procurement is about specifying requirements, identifying sources, evaluating options, and acquiring resources that are fit for purpose, cost effective and sustainable” ( p. 144).
• Managing risks and value on behalf of the company is the role of procurement ( p. 148).

Globalization gives tremendous opportunities for companies to increase competitive advantages by using international sourcing or acquiring cutting-edge technologies. The process of purchasing services or goods worldwide to bid on contracts is called international procurement. The process is increasingly essential for organizations globally. It helps organizations enhance their competitive position, meet customer expectations, improve profits, and add value by finding suppliers who meet the organization’s strategy.

According to authors from “Production and Inventory Management Journal“, international procurement helps improve worldwide logistics capabilities, the source for small companies, and extend international procurement activities (Scully & Fawcett, 1994). However, specific knowledge and special skills are required to succeed in international procurement.

Procurement Process and Steps

Before delving deeper into the procurement steps, let’s look at the types of the procurement process.

The procurement process helps companies obtain and manage costs such as freight forwarders, human resources, capital assets, fuel, IT equipment, sales, utilities, marketing, legal and professional services, raw materials, facility management.

According to the book FITT “Global Value Chain” (2021), there are seven major steps in the procurement process: “Conduct an Internal Needs Analysis, Conduct an Assessment of the Suppliers’ Market, Collect Supplier Information, Develop a Sourcing/Outsourcing Strategy, Implement the Sourcing/outsourcing Strategy, Negotiate with Suppliers and Select the Winning BID, Implement a Transition Plan or Contractual Supply Chain Improvements”. These seven steps are visualized in the figure below. (FITT, 2021, p. 8).

Figure 3.1
Procurement Flow Chart

Note. From FITT, 2021, p.8. Click to enlarge. [Image description].

Media Attributions and References

FITT. (2021). FITTskills: Global Value Chain (7th Edition). Forum for International Trade Training (FITT). https://bookshelf.vitalsource.com/books/9781988782126

Office of Government Procurement Ireland. (2018, January 11). Types of Procurement Process. [Video]. YouTube. https://www.youtube.com/watch?v=_490ZEaYdwA

Modern businesses evolve simply from domestic supply of products to global sourcing and outsourcing goods, manufacturing, and services. It is clear that companies cannot manufacture and do all products and services for running a business and hold a competitive position in the market. That is why many organizations use sourcing and outsourcing strategies and become globally competitive. Other benefits accrued include cost reduction, increasing efficiency by meeting customer demands on time, taking advantage of different time zones, accessing cutting-edge technology, cheap cost of labour, increase innovation and share expertise, improve quality of products/services, access to talents and experts, and so forth. Actual examples of big companies outsourcing include Google, Apple, Skype, Alibaba, etc. Let’s delve deeper into the definitions of sourcing and outsourcing of goods, manufacturing and services.

Sourcing

Figure 3.2
Sourcing

Outsourcing

Figure 3.3
Outsourcing

As defined by Cambridge Dictionary (2022):

Outsourcing is the process or a situation when the company employs a third-party provider or organization to do some work instead of using its staff or resources. Sourcing is a process of gaining goods or services from a particular place.

Simply, organizations select suppliers worldwide to provide goods for running business so-called sourcing. The difference between sourcing and outsourcing is that sourcing supplies goods/products for running a business; on the other hand, outsourcing transfers a firm’s function to the third-party provider or external service provider. A lot of Canadian companies, as well as the Canadian government, use outsourcing technology. For example, according to Forrester Research (2020), the Canadian government and businesses spent 15 billion dollars on technology outsourcing in 2021 (Forrester Research, 2020). View this graph, Technology Outsourcing Industry Spending by Business and Government in Canada from 2016 to 2021 for a further breakdown.

Table 3.1

Advantages and Disadvantages of Outsourcing

Outsourcing of Manufacturing

Globalization has significantly improved businesses by increasing the availability of labour globally and production flexibility. In addition, labour costs in many countries are cheap, which helps companies move their production process to third-party or external providers with whom the firm has a contract. As a result, the firm has gotten a lot of advantages, such as access to specialized resources and reduced fixed costs. For example, an airplane can be split into thousands of parts and produced in many geographic locations.

Consider This

A real example of outsourcing manufacturing is described in the following section from the Introduction to Business reading: “Outsourcing” by Linda Williams and Lumen Learning under a Creative Commons Attribution-NonCommercial-ShareAlike License 4.0 .

PowerSki’s Web site states that “PowerSki International has been founded to bring a new watercraft, the PowerSki Jetboard, and the engine technology behind it, to market.”[1] That goal was reached in May 2003, when the firm emerged from a lengthy design period. Having already garnered praise for its innovative product, PowerSki was ready to begin mass-producing Jetboards. At this juncture, the management team made a strategic decision that’s not uncommon in manufacturing today.

Rather than producing Jetboards in-house, they opted for outsourcing: having outside vendors manufacture the engines, fiberglass hulls, and associated parts. Assembly of the final product took place in a manufacturing facility owned by All American Power Sports in Moses Lake, Washington. This decision does not mean that the company relinquished control over quality; in fact, every component that goes into the PowerSki Jetboard is manufactured to exact specifications set by PowerSki.

One advantage of outsourcing its production function is that the management team can thereby devote its attention to refining its product design and designing future products. However, as processes or pieces of a process are outsourced companies have legitimate concerns about quality standards being met and maintained at the outsourced location. The decision whether or not to outsource often comes down to identifying organizations that can meet and maintain the standards set by the company and the customer.

Figure 3.4
Outsourcing in the Manufacturing Sector

Understandably, outsourcing is becoming an increasingly popular option among manufacturers. For one thing, few companies have either the expertise or the inclination to produce everything needed to make a product. Today, more firms, like PowerSki, want to specialize in the processes that they perform best—and outsource the rest. Like PowerSki, they also want to take advantage of outsourcing by linking up with suppliers located in regions with lower labor costs.(Williams, n.d.). CC-BY-NC-SA-4.0

Outsourcing of Services

Outsourcing services are essential for companies, governments, countries, and the world. Globalization allows organizations to be competitive and move data cost-effectively and very fast. In addition, technological advances help continue to grow to outsource services significantly. For example, according to Statista (2019), IT outsourcing services continue to grow steadily, and revenue of these services in Canada in 2021 accounted for approximately 500.97 million U.S. Dollars while the significant part is 7,439.02 million U.S. Dollars for IT-infrastructure outsourcing (Statista, January 22, 2019). View graph IT-outsourcing services market revenue in Canada from 2016 to 2021, by segment (in million U.S. Dollars) [chart description].

There are a few outsourcing services such as administration, infrastructure, and knowledge. Infrastructure services include communications services, information security, media and content, data processing, developing applications, and data storage. Administration services consist of the following: business processes, public administration, security, procurement, accounting, finance and so forth. Finally, the knowledge segment includes product and service developments, research, analytics, inventory management, insurance processing, software design.

Media Attributions and References

Gibson, J. (n.d.). [Outsource]. [Photograph]. Pixabay. https://pixabay.com/illustrations/outsource-freelance-contractor-1345109/

Minute MBA by OnlineMBA.com. (2013, May 28). Why outsourcing is bad for business [Video]. YouTube. https://www.youtube.com/watch?v=V7fsEIp2r_8

Suppliers are the central part of the company’s success. To select suppliers for the firm, the organization needs to know various strategies. According to the chosen strategy, the company needs to choose the right supplier. A firm has to select the appropriate strategy for its supply chain. According to the book “Operations Management: Sustainability and Supply Chain Management” (2020), six methods exist nowadays (Heizer, Render, Munson, & Griffin, 2020, p. 428).

Six strategies exist for obtaining suppliers:

1. The first strategy is to collaborate with many suppliers. It is common for companies worldwide and suitable for obtaining commodities. In this case, one supplier plays against another supplier and creates an aggressively competitive environment. This strategy is not ideal for long-term relationships. The provider is responsible for maintaining technology, expertise, cost, quality of goods and delivery (Heizer et al., 2020, p. 428).
2. The second is negotiating with a few suppliers, which helps build lifelong partnerships. Dedicated providers help companies get economies of scale and lower transaction and production costs (Heizer et al., 2020, p. 428). Collaboration between buyer and supplier can produce a willingness to participate in the Just-in-time method, increasing inventory turnover and reducing holding costs.
3. The third one is to buy the supplier. According to the Cambridge Dictionary (2022), vertical integration is “a process in a business where a company buys another company that supplies it with goods or that buys goods from it in order to control all the processes of production” (Cambridge University Press, 2022). It is suitable for large companies with a significant market share (Heizer et al., 2020, p. 428).
4. The fourth strategy is the so-called joint venture, when firms collaborate with a few companies to produce the finished product. The power of this collaboration is to enhance new development and technical skills as well as reduce costs and secure supply (Heizer et al., 2020, p. 428).
5. The fifth one is a coalition strategy called a keiretsu. The name came from Japanese manufacturers, often suppliers’ financial supporters. This strategy combines parts from vertical integration, collaboration, and purchase from a few suppliers. It’s for long-term relationships, which provide technical expertise with stable, high-quality production (Heizer et al., 2020, p. 428).
6. The sixth strategy is to use suppliers when needed and called virtual companies. The virtual company specializes in flexibility, efficiency, speed, management expertise and low capital investments. This type of company provides services on-demand by relying on various suppliers (Heizer et al., 2020, p. 430).

Selecting the right supplier consists of identifying, evaluating, and negotiating steps. Selection of suppliers is a process where the main objectives are reducing the risk of purchasing and costs, maximizing the value of the purchaser, as well as developing long-term relationships between supplier and buyer (Taherdoost & Brard, 2019). It isn’t elementary to choose the right supplier for the company because the decision can impact the performance and competitiveness of the company. For example, decrease customer satisfaction, increase the product’s lead time, suffer loss, and weaken the competitiveness. First, they identify suppliers often based on a quantitative and qualitative decision criterion such as delivery, quality performance, capability, costs, vendor competence. It depends no longer on the price but the purchasing situation (Taherdoost & Brard, 2019). The main goal of the first step for buyers is to identify the right supplier with the right product’ quality, who can provide the right price and the right quantities, at the right place and at the right time (Taherdoost & Brard, 2019). Second, evaluation vendors comprise major parts commonly used within many companies: price, quality, and delivery dimensions.

Vendors can be evaluated by the following key points: production flexibility, production capacity, financial situation, technical expertise, technical support, information systems, innovation capabilities, and communication systems (Taherdoost & Brard, 2019). External verification is the central part of the international quality certification of suppliers. Certifications for external verification are ISO 9000 and ISO 14000. The certificate means that the company follows standards and quality of management (Heizer et al., 2020, p. 436). Organizations can use these certificates to pre-qualify potential vendors (Heizer et al., 2020, p. 436). The third step appears after the supplier is selected and evaluated by the criteria and the weights. The next point is the negotiation process. The contract’s critical elements, such as schedules, delivery, cost, payment, or quality requirements, can be discussed during the negotiation process.

According to the authors of the book Operations Management: Sustainability and Supply Chain Management“(2020), three types of strategies where different components play a different role in supplier relationship models such as cost-based price, competitive bidding, as well as market-based price models (Heizer et al., 2020, p. 436). According to the book “Operations Management: Sustainability and Supply Chain Management” (2020), “cost-based price model requires that the supplier open its books to the purchaser. The contract price is then based on time and materials or fixed cost with an escalation clause to accommodate changes in the vendor’s labour and materials cost” (Heizer et al., 2020, p. 436). Market-based price model based on the product market prices. Companies consider competitors’ prices and competitive market position. For example, the company shortly adjusted their price according to competitors’ change. The last model is the competitive bidding model based on a bid to purchase products and the required bidding policy. Often, purchasing agents have many potential vendors (Heizer et al., 2020, p. 436).

Media Attributions and References

Skill Dynamics. (2012, September 14). Sourcing processes: Supplier selection-procurement training-purchasing skills.  [Video]. YouTube.https://www.youtube.com/watch?v=510AN2Tkuik

Suppliers’ relationships are vital for successful performing businesses. Supplier relationship management is increasingly essential for companies. Supplier relationship’ value created by reducing costs, improving efficiency, and getting quality products for the same price. These benefits impact the financial results of any organization. Advantages are beneficial if the relationship with suppliers is long-term developed. To create advantages for the organization, companies and suppliers have to invest money, time, patience, resources, and willingness to communicate to find the best solution for all parties. All stakeholders involved in the process include employees, suppliers, and buyers. Increasing the complexity of changing product lines, service delivery, value, and customer satisfaction all points to becoming a function of the global value chain. Relationships between business, suppliers, and customers are increasingly important and robust, improving overall business and the global value chain. Ongoing valuable relationships can increase the popularity of quality products and the organization’s efficiency and effectiveness, determined by a business model, supply chain, customers, and suppliers.

Quality products have to be delivered on time to provide excellent service and delivery goods. By having solid and long-term relationships with suppliers, vendors will prioritize my orders and provide quality goods ahead of time. In addition, suppliers will ensure that the company will get the best products quickly without returning poor-quality goods. The next value is excellent support from suppliers with whom you have a solid relationship. For example, if the company gets damaged products or delayed shipments, suppliers will help you solve this issue as soon as possible.

Moreover, if the company delivers quality products without defects, customer satisfaction indicators will increase because customers will continue to enjoy doing business. More vital brand awareness comes from excellent customer satisfaction factors. In addition, the production or manufacturing industry depends on suppliers. If the raw material is delivered late, the company will face risks and losses. Losses such as stopping production or rejecting finished products.

Media Attributions and References

Supply Chain Brain. (2020, January 23). What makes a great supplier relationship?  [Video]. YouTube. https://www.youtube.com/watch?v=dv5-J0HOeLE

Globalization gives tremendous opportunities for companies to increase competitive advantages by using international sourcing or acquiring cutting-edge technologies. Globalization has significantly improved businesses by increasing the availability of labour globally and production flexibility. In addition, labour costs in many countries are cheap, which helps companies move their production process to third-party or external providers with whom the firm has a contract. As a result, the firm has gotten a lot of advantages, such as access to specialized resources and reduced fixed costs. The process of purchasing services or goods worldwide to bid on contracts is called international procurement. The process is increasingly essential for organizations globally. It helps organizations enhance their competitive position, meet customer expectations, improve profits, and add value by finding suppliers who meet the organization’s strategy.

Key Terms

[KPIs] - Key Performance Indicators  – quantifiable metrics used for measuring the company’s performance and success in many different areas and situations. KPIs help the organization to focus on the primary key points.

[RFP]- Request for Proposal – “An RFP accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid” (Accettura, Bergsma, Boszak, Callaway, Cote, N. Doepker, Harbidge, Her, Hlushko,  Holmes, Knight, MacDowell, Marshall, McDougall, Prima & Story, 2021) CC-BY-NC-SA-4.0

[RFQ] - Request for Quote – “An RFQ focuses on price. The type of materials or service is well defined and can be obtained from several sources. The bidder that can meet the project quality and schedule requirements usually wins the contract by quoting the lowest price” (Accettura, et. al, 2021) CC-BY-NC-SA-4.0

Sourcing – is a process of gaining goods or services from a particular place (Cambridge University Press, 2022).

Outsourcing – is the process or a situation when the company employs a third-party provider or organization to do some work instead of using its staff or resources (Cambridge University Press, 2022).

Chapter References

Accettura, A., Bergsma, K., Boszak, T., Callaway, J.L., Cote, N. Doepker, C. Harbidge, M., Her, S., Hlushko, T., Holmes, J., Knight, M., MacDowell,  P., Marshall, C., McDougall, L., Prima, A., & Story, T. (2021). Project management for instructional designers, First Canadian edition. Pressbooks. http://pm4id.ca

Cambridge University Press. (2022). Cambridge Dictionary. https://dictionary.cambridge.org/dictionary/english/outsourcing

FITT. (2021). FITTskills: Global Value Chain (7th Edition). Forum for International Trade Training (FITT). https://bookshelf.vitalsource.com/books/9781988782126

Forrester Research. (July 20, 2020). Technology outsourcing industry spending by business and government in Canada from 2016 to 2021 (in billion Canadian dollars) [Graph]. In Statista. https://www.statista.com/statistics/821790/canada-spending-tech-outsourcing-industry/

Heizer, J., Render, B., Munson, C., Griffin, P. (2020).”Operations Management: Sustainability and Supply Chain Management“. (3rd ed.). Pearson.

Mangan, J., Lalwani, C. (2016). Global Logistics and Supply Chain Management (3rd ed.). Wiley

Mariadoss., B., J. (n.d.). 10.3 Global Sourcing and Distribution. Pressbook. https://opentext.wsu.edu/mktg360/chapter/10-3/

Office of Government Procurement Ireland. (2018, January 11). Types of Procurement Process. [Video]. YouTube. https://www.youtube.com/watch?v=_490ZEaYdwA

Scully, J. I., & Fawcett, S. E. (1994). International procurement strategies: Challenges and opportunities for the small firm. Production and Inventory Management Journal, 35(2), 39. https://www.proquest.com/openview/50eec3b24d2fa945a6a58507cef2735a/1?pq-origsite=gscholar&cbl=36911

Skill Dynamics. (2012, September 14). Sourcing processes: Supplier Selection-Procurement Training-Purchasing skills.  [Video]. YouTube.https://www.youtube.com/watch?v=510AN2Tkuik

Taherdoost, H., & Brard, A. (2019). Analyzing the Process of Supplier Selection Criteria and Methods. Procedia Manufacturing, 32, 1024–1034. https://doi.org/10.1016/j.promfg.2019.02.317

Watt, A. (n.d.). Procurement management. Pressbook. https://ecampusontario.pressbooks.pub/projectmanagement/chapter/chapter-13-procurement-management-project-management/

Williams, L. (Ed.), & Lumen Learning (Ed.). (n.d.). Introduction to business. Lumen Learning. https://courses.lumenlearning.com/baycollege-introbusiness/chapter/reading-outsourcing/#return-footnote-4444-1

Image Descriptions

Fig 3.1: 1. Conduct an internal needs analysis (identify the firm’s needs and targets benchmark the current company’s performance). [Return to image].

2. Conduct an assessment of the suppliers’ market (research and find the most cost-effective supply with the lowest risk).

3. Collect supplier information (determine supplier selection criteria, compare and evaluate suppliers).

4. Develop a sourcing/outsourcing strategy (strategy can be through acquisition or partnerships or purchase directly from suppliers).

5. implement the sourcing strategy (express interest. A firm can start preparing RFP (request for proposal) with explicit materials or RFQ (request for quote) and send it out to suppliers with a deadline for their response. Use e-procurement technology).

6. Negotiate with suppliers and select the winning bid (Evaluate suppliers’ responses by applying evaluation criteria. Choose suppliers by using the selection criteria).

7. Implement a transaction plan or contractual supply chain improvements. (invite winner suppliers in implementing improvements. The buyer should use KPIs (Key performance indicators)).

Fig 3.4: One bar for every year from 2016-2021 showing spending in billion Canadian dollars. 2016 = 13, 2017 & 2018 = 14. 2019-2021 = 15. [Return to image].

Fig 3.6: Bar graph showing IT-outsourcing services market revenue in Canada from 2016-2021 by segment in million US dollars. Each bar is divided to show: IT-infrastructure outsourcing, IT-application outsourcing, IT-administration outsourcing, and professional payment services. Totals increase over time with IT-infrastructure outsourcing growing the most (6625.08 in 2016 to 7439.02 in 2021). [Return to image].

Alternative Text-Based Activities

Assessing What You Already Know Activity (Text-based)

Question 1:

Procurement is about specifying requirements, identifying sources, evaluating options, and acquiring resources that are fit for purpose, cost effective and sustainable.

• False (Incorrect)
• True (Correct)

Feedback: “Procurement is about specifying requirements, identifying sources, evaluating options, and acquiring resources that are fit for purpose, cost effective and sustainable” ( p. 144).

Question 2:

Does the procurement process help organizations gain and manage costs such as professional services, IT equipment, capital assets and so forth?

• Yes (Correct)
• No (Incorrect)

Feedback:  The procurement process helps companies obtain and manage costs such as freight forwarders, human resources, capital assets, fuel, IT equipment, sales, utilities, marketing, legal and professional services, raw materials, facility management.

Question 3:

Globalization has significantly deteriorated businesses by decreasing the availability of labour globally and production flexibility. True/ False

• True- (Incorrect)
• False (Correct)

Feedback: Globalization has significantly improved businesses by increasing the availability of labour globally and production flexibility. In addition, labour costs in many countries are cheap, which helps companies move their production process to third-party or external providers with whom the firm has a contract. As a result, the firm has gotten a lot of advantages, such as access to specialized resources and reduced fixed costs. For example, an airplane can be split into thousands of parts and produced in many geographic locations.

Question 4:

What are the three main steps of choosing a supplier? Check all that apply.

• Identifying (Correct)
• Preparing (Incorrect)
• Evaluating  (Correct)
• Negotiating (Correct)

Feedback: Selecting the right supplier consists of identifying, evaluating, and negotiating steps. Selection of suppliers is a process where the main objectives are reducing the risk of purchasing and costs, maximizing the value of the purchaser, as well as developing long-term relationships between supplier and buyer (Taherdoost & Brard, 2019). [Return to activity].

Check Your Understanding: Concept of Procurement and its Value in the Global Value Chain

Question 1:

Feedback: Great Job! (Correct)

Try Again! (Incorrect)

Question 2:

What is the role of procurement?

• Hiring workforce on behalf of the company (Incorrect)
• Marketing and selling on behalf of the company (Incorrect)
• Managing risk and value on behalf of the company (Correct)

Feedback: Managing risks and value on behalf of the company is the role of procurement ( p. 148).

Question 3:

Contract planning is where you plan out each individual contract for the project work. True/False

• True (Correct)
• False (Incorrect)

Feedback: Contract planning is where you plan out each individual contract for the project work. You work out how you’ll manage the contract, what metrics it will need to meet to be considered successful, how you’ll pick a seller, and how you’ll administer the contract once the work is happening (Watt, n.d.)

Question 4:

International procurement is the process which is increasingly essential for organizations globally. It helps organizations enhance their  (_______), (_________), (_______), and (_______)  by finding suppliers who meet the organization’s strategy.

• competitive position, meet customer expectations, improve profits, add value (Correct)
• network, find new stream of revenue, connect them directly (Incorrect)
• Opportunities, improve profit, create freedom, buying an existing business (incorrect)

Feedback:  The process of purchasing services or goods worldwide to bid on contracts is called international procurement. The process is increasingly essential for organizations globally. It helps organizations enhance their competitive position, meet customer expectations, improve profits, and add value by finding suppliers who meet the organization’s strategy. [Return to activity].

Check Your Understanding: Sourcing and Outsourcing of Goods, Manufacturing and Services

Question 1:

Many organizations use (_____) and (_____) strategies and become globally competitive.

• Outsourcing and sourcing (Correct)
• Sourcing and procurement (Incorrect)
• Many suppliers and inbound transportation (Incorrect)

Feedback: Modern businesses evolve simply from  domestic supply of products  to global sourcing and outsourcing goods, manufacturing, and services. It is clear that companies cannot manufacture and do all products and services for running a business and hold a competitive position in the market. That is why many organizations use sourcing and outsourcing strategies and become globally competitive.

Question 2:

Benefits of outsourcing. Check all that apply.

• Lower costs; (Correct)
• differentiate products; (Correct)
• production capacity; (Correct)
• meet customer demands; (Correct)
• efficient replenishment; (Correct)
• focus on the core competencies; (Correct)
• build innovative products or services; (Correct)
• effective and efficient service; (Correct)
• increase value by bringing capabilities and expertise; (Correct)
• reduce operational and production costs; (Correct)
• being adaptable for changing market conditions and preferences; (Correct)
• increase human resources;  (Correct)
• low cost of labour;  (Correct)
• Value-added component of logistic activities (Incorrect)

Feedback:

Question 3:

Benefits of sole-sourcing. Check all that apply.

• Price discounts based on higher volume (Correct)
• Rewards for loyalty during tough times (Correct)
• Exclusivity brings differentiation (Correct)
• Greater influence with a supplier (Correct)
• More flexibility in times of disruption (Incorrect)
• Negotiating lower rates by pitting one supplier against another (Incorrect)

Feedback: Sole-Sourcing Advantages

• Price discounts based on higher volume
• Rewards for loyalty during tough times
• Exclusivity brings differentiation
• Greater influence with a supplier

Sole-Sourcing Disadvantages

• Higher risk of disruption
• Supplier has more negotiating power on price (Mariadoss, n.d.). CC-BY-NC-SA-4.0

Question 4:

Today, more firms, like PowerSki, want to specialize in the processes that they perform best—and outsource the rest.

• True (Correct)
• False (Incorrect)

Feedback: Understandably, outsourcing is becoming an increasingly popular option among manufacturers. For one thing, few companies have either the expertise or the inclination to produce everything needed to make a product. Today, more firms, like PowerSki, want to specialize in the processes that they perform best—and outsource the rest. Like PowerSki, they also want to take advantage of outsourcing by linking up with suppliers located in regions with lower labour costs (Williams & Lumen Learning (Ed.), n.d.). CC-BY-NC-SA-4.0

[Return to activity].

Check Your Understanding: Show how suppliers are selected and the role of different components in supplier relationship models

Question 1:

Suppliers are the central part of the company’s success.

• True (Correct)
• False (Incorrect)

Feedback: Suppliers are the central part of the company’s success. To select suppliers for the firm, the organization needs to know various strategies. According to the chosen strategy, the company needs to choose the right supplier.

Question 2:

A firm has to select the appropriate strategy for its supply chain. According to the book “Operations Management: Sustainability and Supply Chain Management” (2020), (_______) methods exist nowadays (Heizer, Render, Munson, & Griffin, 2020, p. 428).

• 5 (Incorrect)
• 7 (Incorrect)
• 8 (Incorrect)
• 6 (Correct)
• 9 (Incorrect)

Feedback: A firm has to select the appropriate strategy for its supply chain. According to the book “Operations Management: Sustainability and Supply Chain Management” (2020), six methods exist nowadays (Heizer, Render, Munson, & Griffin, 2020, p. 428).

Question 3:

Arrange the logistic cycle activities in correct order:
Collaborate with many suppliers -1
negotiating with a few suppliers- 2
buy the supplier -3
joint venture -4
a coalition strategy called a keiretsu -5
use suppliers when needed and called virtual companies -6

Question 4:

Drag and Drop the steps in correct category

Feedback: It is important for companies to select suppliers for the firm. That is why the organization needs to know various strategies. According to the chosen strategy, the company needs to choose the right supplier. A firm has to select the appropriate strategy for its supply chain. According to the book “Operations Management: Sustainability and Supply Chain Management” (2020), six methods exist nowadays (Heizer, Render, Munson, & Griffin, 2020, p. 428). [Return to activity].

Check Your Understanding: Explain How Supplier Relationships Adds Value in The Global Value Chain

Question 1:

Supplier relationship’ value created by (_____), (____) and getting quality products for the same price.

• reducing costs, improving efficiency (Correct)
• reducing order processing, deterioration in productivity (Incorrect)
• Improving management resources, reduce logistics-related costs (Incorrect)

Feedback:  Supplier relationship management is increasingly essential for companies. Supplier relationship’ value created by reducing costs, improving efficiency, and getting quality products for the same price. These benefits impact the financial results of any organization.

Question 2:

Advantages are beneficial if the relationship with suppliers is long-term developed.

• False (Incorrect)
• True (Correct)

Feedback: Advantages are beneficial if the relationship with suppliers is long-term developed. To create advantages for the organization, companies and suppliers have to invest money, time, patience, resources, and willingness to communicate to find the best solution for all parties. All stakeholders involved in the process include employees, suppliers, and buyers. Increasing the complexity of changing product lines, service delivery, value, and customer satisfaction all points to becoming a function of the global value chain.

Question 3:

Ongoing valuable relationships can increase the popularity of (_______)

• quality products (Correct)
• transportation (Incorrect)
• services (Incorrect)
• activities (Incorrect)

Feedback: Ongoing valuable relationships can increase the popularity of quality products and the organization’s efficiency and effectiveness, determined by a business model, supply chain, customers, and suppliers.

Question 4:

If the company delivers quality products without defects, customer satisfaction indicators will (____).

• Increase (Correct)
• Decrease (Incorrect)

Feedback: If the company delivers quality products without defects, customer satisfaction indicators will increase because customers will continue to enjoy doing business. More vital brand awareness comes from excellent customer satisfaction factors. In addition, the production or manufacturing industry depends on suppliers. If the raw material is delivered late, the company will face risks and losses. Losses such as stopping production or rejecting finished products.

[Return to activity].

Watch or Listen to the Following Media Clip

Media 4.1 Module 4: Move it: Transportation and Logistics – ASU’s W.P. Carey School [Video]. W.P. Carey School of Business.

Introduction

Transportation is an essential and integral part of the Global Value Chain. Transportation is beneficial for society and helps in globalization of the world economy. That is why it plays a vital role in human life, companies, suppliers and distributors. This service should be effective, efficient and appropriately managed by an enterprise. Demand for transportation depends on a party wishing to move goods or freight efficiently and effectively from one point to another. Five different modes of transportation exist  to help people move freight between cities or countries, or continents.

Transportation adds value in international supply chain management by reducing transportation time and as a result supply chain costs and frees up time on other areas of the supply chain. Also, suppose delays happened in some areas of the supply chain. In that case, transportation can help to speed up their performance and reduce time more efficiently by choosing the fastest way of delivering goods to the customer. In addition, transportation can help organizations to reduce cycle stock and increase customer satisfaction because of frequency deliveries. Supply chain cost minimized by dint of transportation’ benefits such as reducing inventory cost, safety stocks, cycle stocks, inventory velocity, minimum dwell-times, increase shelf life % for customers, operational planning. Transportation plays a vital role in supply chains which offer reliability and consistency; flexibility in terms of location, delivery, time, quantity, goods, cost; Just-in-Time delivery; customization by integration of supply chain; standardization by making activities predictable, reduction of total cost (Morash & Clinton, 1997).

Media Attributions and References

W. P. Carey School of Business. (2010, April 15). Module 4: Move it: Transportation and logistics – ASU’s W. P. Carey School. [Video]. YouTube. https://www.youtube.com/watch?v=-ZpHiMTwOdM

There are many criteria by which the mode of freight transportation will be chosen. It depends on the distance, value, availability of services, freight rates, characteristics of goods, budget, cost of transport, reliability, safety, urgency, carrier timing, etc. A critical decision for companies is to choose the suitable carrier to transport (Jung, Kim & Shin, 2019).

Modes of transportation are classified into the following types:

1. Road
2. Rail
3. Air
4. Water
5. Pipeline

Table 4.1

Characteristics of Mode of Transportation

This material is adapted from Faramarzi & Drane (n.d.) Introduction to Operations Management under a Creative Commons Attribution-NonCommercial-ShareAlike License 4.0.

Multimodal/Intermodal Shipping

This refers to the use of a combination of different types of transportation to move goods from origin to destination. A common example is a combination of truck/ship/train. The goal is to ship the goods as efficiently as possible. The goods are shipped under a single contract with a carrier, and can be easily tracked. It also uses several modes of transportation but also uses a container so that freight does not have to be handled each time it changes modes. Each mode will have a carrier responsible for the shipment. The use of containers increases the security, reduces loss and damage and increases the speed of shipment  (Faramarzi & Drane, n.d.).

Figure 4.1
Transportation Modes

Note. From Faramarzi & Drane, n.d. CC BY-NC-SA 4.0. [Image description].

Media Attributions and References

Drane, M. and Faramazi, H. (n.d.). Introduction to operations management. Pressbooks Seneca College. https://pressbooks.senecacollege.ca/operationsmanagement/ CC BY-NC-SA 4.0.

Often goods move intermodal by using several transport modes in a single container along the entire route. Intermodal transportation has excellent advantages, such as reducing the time and the chance of freight damage, flexibility, and secure goods flow. If the company needs to deliver cargo quickly to their destination and over a short distance, they prefer to choose intermodal transportation on the road. The freight will be delivered in the shortest time to their last destination. Regarding sea freight intermodal transport, it is the cheapest way to move cargo, allowing for the export and import of large-scale bulk, despite a long transportation time. The implementation time to organize shipment using rail transport will take several working days. On the other hand, the cost of transporting freight by rail will be decreasing significantly if the distance is increased; however, the short distance will be expensive (Mindur, 2021).  For organizing and managing intermodal transportation of cargo, operators should have skills, knowledge, experience and access to advanced technologies which help to understand and meet customer needs.

Importance of Containers in International Transportation

Figure 4.2
Container Ship

Container transport is the most important and often used for moving different types and sizes of goods globally. Containerisation system improves productivity, reduces time and increases delivery time which meet customer’s expectation and satisfaction. For instance, freight can be moved by sea-road-rail or rail-sea-road or road-sea. According to the Statista Research Department, the seaborne containerized cargo was significantly increased from 0.1 billion tons in 1980 and reached 1.85 billion tons in 2020 (Statista, November 23, 2021). View graph International seaborne trade carried by container ships from 1980 to 2020. [Chart description].

Also, as globalization continues growing, the largest shipping zone of cargo volume is the Trans-Pacific Ocean, which transported over 31.2 million twenty-foot equivalent units [TEUs] of freight in 2021 (UNCTAD, November 18, 2021). This mode of transport is environmentally friendly and the most cost-effective way to transfer freight internationally. View graph Estimated containerized cargo flows on major container trade routes in 2021, by trade route (in million TEUs). [Chart description].

There are many types and standardized sizes of intermodal transport unit (ITU)/containers; however, 90 % of all containers used worldwide are general-purpose containers.

Types of containers 20ft and 40ft:

Figure 4.3
Container

• Standard container- general purposes;
• Garmentainers containers – created specifically for garments on hanger shipments created with special system by using string or bar system; (OOCL, 2022).
• High Cube containers – suitable for voluminous or bulky cargo, and light; (OOCL, 2022).
• Open top – ideal particularly for machinery or bulky freight which loaded from the top; (OOCL, 2022).
• Super Rack- the most flexible container with adjustable height which is suitable for drilling machinery or helicopters; (OOCL, 2022).
• Refrigerated container created for products which should be moved with controlled temperature containers; (OOCL, 2022).
• Flat rack container is suitable for bulky machinery or pipes or heavy loads which should be loaded from the top or sides; (OOCL, 2022).
• Tank container for transferring heavy products with special attention which does not fit into the rest of containers;
• Dry ventilated containers are ideal for goods with high moisture components which should be naturally ventilated. These types of containers are so-called coffee containers. Suitable for organic goods or cocoa beans, coffee beans.

Table 4.2
Container Types

Media Attributions and References

[Container ship] [Photograph]. (n.d.). Pixabay. https://pixabay.com/photos/ship-container-ship-containers-sea-6560671/

McKenna, F. (2017). Containers. [Photograph]. Unsplash. https://unsplash.com/s/photos/containers

Now that you know the modes of transportation in detail, it would be beneficial to analyze international transport networks. The International Transport Networks consist of shipping routes worldwide and container ports connecting many countries and continents for moving  freight.

Routes include the Trans Mongolian and Trans-Siberian railways as well as Northern Sea and Commercial Maritime routes and Air Freight Hub (Mangan & Lalwani, 2016, p.114).

Figure 4.4
Northern Sea Route

• The Northern Sea Route (NSR): NSR opened new doors for international trades in containerized goods and connected Asia with Europe, Russia, with Korea. According to a journal about the Northern Sea Route (2020), this channel reduces distance by up to 40% between Europe and Asia (Khazheeva & Bondarchuk, 2021). The Northern Sea Route (NSR) gradually creates opportunities for shipping companies and moves freight faster by using short distances between destinations. Because of global climate change and melting icebergs in the Arctic. The research found (2020) that climate change impacts the ship schedules and sizes of vessels, which should have particular metal for moving through ice. In addition, the lack of modern deep-water ports and shipping small cargoes is sophisticated for this route (Keltto & Su-Han, 2020).
• Trans-Siberian railway is a part of international transport corridors (ITCs) and has the longest railway in Russia, which interconnects the Far East and the European Union ports. This channel generates economic cooperation between countries, world trade, the well-being of countries’ population, infrastructure, and opens huge sales markets for domestic companies within countries (Khazheeva & Bondarchuk, 2021).
• The least expensive cost and volatile region shipping through the Suez Canal and between Europe and Asia. The Suez Canal/ Panama is the most changeable region in the world and has vessel canal restrictions. At the same time, Northern Sea Routes and Trans-Siberian Railway are the second options of shipping cargo and are more expensive (Mangan & Lalwani, 2016, p.114).
• Trans-Mongolian Route starts from Moscow and finishes in Beijing. Trans-Siberian Route – Vladivostok and St. Petersburg. Destinations in both routes take approximately six days (Richmond, Bloom, Duca, Haywood, Kohn, Low, Masters, McCrohan, St. Lous., & Vorhees, 2015).

Figure 4.5
International Transport Network

Note. [Image description].

A consignor can choose any carrier organization because many global shipping companies move freight over broadly similar routes. The significant difference will be related to cost and time. The vital key role in deciding the freight shipment is the cost factor.

New routes are planned and emerge globally, such as the Nicaragua Canal and the Northern Sea Route (Mangan & Lalwani, 2016, p.114). Shipping channels can significantly impact global economic integration, export service, and world seaborne trade and help less economically developed regions stimulate foreign trade (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019). The Nicaragua Canal will connect the Caribbean Sea with the Pacific Ocean to compete with the Panama Canal (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019). Also, the Nicaragua Canal can accommodate much more enormous vessels than the Panama Canal because of the superior water depth, which is a minimum of 26.9-29.0 m (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019). According to the article “The Nicaragua Canal: potential impact on international shipping and its attendant challenges” (2019), the potential of the Nicaragua Canal is significant because it can impact developing port’ systems in the Pacific and the Atlantic Oceans and create a cargo channel to Cuba, Venezuela, Colombia and other regions (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019).

Media Attributions and References

Aurecon. (2018, March 5). Marine traffic – A visualisation of global shipping data. [Video]. YouTube. https://www.youtube.com/watch?v=JLg1_dnWXR8

Harder, S. (2009). Arctic marine shipping assessment [Image]. Arctic Council. https://commons.wikimedia.org/w/index.php?curid=36253405. Public Domain.

Transportation adds value to the global value chain for many aspects such as reducing time delivery, efficiency, reliability, flexibility, increasing visibility, transparency, and enhancing customer satisfaction and service. Moreover, transport logistics can use data for analyzing costs and expenses for optimizing future transport planning for being more effective and adding value to the global value chain. In addition, various transportation networks can significantly impact global economic integration, export service, the connection between countries and continents, and help less economically developed regions stimulate foreign trade (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019).

The global chain relies on efficiency and flexibility of transport; that is why many companies use intermodal modes. Internodal transportations and containers increase security, reduce loss and damage, and increase shipment speed and efficiency. Different organizations choose different transportation methods suitable for the firm’s objectives. Companies need to select the proper transport for moving their goods. Without transportation, businesses cannot exist. For example, raw materials should be moved to production and manufacturing destinations to create finished goods that should be delivered on time to customers. The global value chain adds a competitive advantage to businesses, organizations, and industries. Maximizing inbound and outbound logistics and operations are keys to success for the competitive world’s business field (Tarver, 2021). It’s self-evident that technical improvements help intermodal transportation be more efficient for connecting between modes of transport and the value chain.

The Role of Transportation Networks in Moving Canadian Trade

The following is from The Role of Transportation Networks in Moving Canadian Trade by Stephen Tapp (2016) under the Creative Commons/No Derivatives Licence 4.0:

The efficiency and reliability of a country’s transportation networks are key drivers of international competitiveness, and can help expand global trade and attract foreign investment. This is particularly true with the emergence of a “supply chain mindset” as production processes become more international. Jacques Roy (HEC Montréal, Professor of Logistics and Operations Management), examines the role of Canada’s transportation infrastructure in moving goods in and out of the country by four key transportation modes: road, rail, sea and air.

Overall, he finds that Canada’s transportation and logistics networks perform reasonably well compared with other countries. But he identifies several areas for improvement, namely for:

• roads: domestic congestion;
• rail: capacity constraints;
• sea: container port competitiveness; and
• air: cargo capacity, competitiveness and airport landing fees.

Roy points out that the countries that lead the global logistics performance rankings have all invested heavily in major hubs to connect various transportation modes efficiently. As the new federal government looks to increase infrastructure spending, he urges them to take advantage of the opportunity to enhance Canada’s trade-related infrastructure to support our trade, and thus our longer-term prosperity.

Over the past decade, Canada’s goods trade has become far more reliant on marine transportation and less reliant on roads — although roads remain the most common mode by a wide margin:

Figure 4.6
Canada’s trade shares, by transportation mode

The author suggests two key drivers of these trends.

Note. Driver 1: Canadian trade has stagnated with US, but grew with rest of world over the past decade. [Chart description].

Figure 4.7
Canada’s merchandise trade growth

Note. Canada’s merchandise trade growth comparing total growth, trade with US, and other countries. [Chart description].

As a result of this differential performance, the share of Canada’s overall merchandise trade conducted with the US shrank from 76% in 2002 to 63% in 2012. These regional shifts matter for transportation because Canadian trade with the US relies heavily on roads (and, to a lesser extent, rail and pipelines), whereas Canadian trade with the rest of the world relies much more — and increasingly — on marine and air modes (figure below). Air is the dominant mode used for trade with Western Europe, while sea is primarily used for trade with Asia.

Figure 4.8
Canada’s trade shares by transportation mode

Note. Driver 2: Increased use containerized freight in recent decades. [Chart description].

The value of Canada’s trade moved by sea nearly doubled between 2002 and 2012. This is largely due to increased containerized freight, which has been a major development in marine (and other) transportation modes in recent decades. Containerization allows for standardized sizes and easier intermodal transportation changes, including the ability to transfer containers seamlessly from ships to rail or trucks. This opens up more possible routes between the origin and final destination.

Canada’s biggest increases in marine traffic were on the country’s West Coast at the ports of Vancouver and Prince Rupert (the latter only started handling containers in 2007), which likely relates to increased trade with Asia, particularly China.

The chapter describes some considerations and trade-offs that firms face when shipping goods in and out of Canada. Roy provides an overview of each transportation mode and some of the emerging issues — this table gives a quick summary:

Table 4.2

Overview the key features of various transportation modes

Mode	Road	Marine	Rail	Air
Attributes	Most flexible delivery option; generally fast and reliable	Cheapest option; large capacity	Cheaper than road and air; large capacity	Most expensive, fastest, but less capacity
Examples of goods shipped	Manufactured goods: machinery and equipment, vehicles	Petroleum products, grains, potash, vehicles	Raw materials, agriculture, chemicals, forest products	Pharmaceuticals, aerospace, high-tech, fresh food, newsprint, fashion
Key challenges for Canada	Weak exports to United States; higher energy use and emissions; traffic congestion in major cities	Potential impacts of climate change on river depth; labour disputes	Adjusting capacity; new safety regulations	Limited connections to Asia; competitiveness

The competitiveness of Canada’s global supply chains and the reliability and efficiency of its transportation infrastructure go hand in hand. Over the past decade, a greater share of Canada’s merchandise trade has been transported by sea and air, and relatively less by roads and rail. This is due, in part, to changing regional patterns of Canada’s trade away from the US to other countries, as well as increased use of containers to ship goods.

Nonetheless, although roads have lost significant trade share over this period, they remain the most commonly used transportation mode for Canadian trade by a wide margin. Here, international border crossings no long seem to be a major concern for Canadian businesses. Instead, the bigger outstanding issues are Canada’s weak trade performance with the US, and domestic road congestion in major cities (such as Toronto, Montreal and Vancouver), which causes delays and additional costs for Canadian traders.

For its part, Canada’s rail system has faced capacity constraints and service issues, as well as safety concerns and regulatory reviews after the tragic accident in Lac-Mégantic in 2013.

Canadian ports and airports have become bigger conduits of international trade over the past decade, and recently concluded trade deals (CETA with the European Union and the TPP with 11 other Pacific Rim countries), if implemented, could reinforce these trends.

Canadian ports are generally well-equipped to handle bulk products, but the competitiveness of container ports is more fragile. Recent challenges include labour disputes, in both Canada and the US, reduced rail capacity in the winter to transport containers further inland to their final destinations, and the longer-term concern over climate change, which could reduce river depth and handling capacity along the Saint Lawrence Seaway.

A perennial challenge for Canada’s air cargo is its limited market size. This limits freighter capacity and makes it hard to compete on costs relative to US alternatives, which increasingly have been used to transport Canada’s aerospace exports (a phenomenon called “international leakage”). Canada’s competitive disadvantage is exacerbated by relatively high taxes and landing fees.

Compared with other countries, Canada generally has a competitive transportation infrastructure and overall good logistics performance.

As the new federal government looks to increase infrastructure spending, it should adopt a long-term view and take advantage of the opportunity to enhance Canada’s trade-related infrastructure to support the country’s international trade and longer-term prosperity.

(Tapp, 2016). CC-ND-4.0

Transportation is an essential and integral part of the Global Value Chain. Transportation is beneficial for society and helps in the globalization of the world economy. That is why it plays a vital role in human life, companies, suppliers and distributors. Demand for transport depends on a party wishing to move goods or freight efficiently and effectively from one point to another. Modes of transportation are classified into the following types: road, rail, air, water, pipeline. Moreover, intermodal or multimodal shipping refers to a combination of different types of transportation to move goods from origin to destination (Faramarzi & Drane, n.d.).

A typical example is a combination of truck/ship/train (Faramarzi & Drane, n.d.). Intermodal transportation has excellent advantages, such as reducing the time and the chance of freight damage, flexibility, and secure goods flow. In addition, the containerization system improves productivity, reduces time, and increases delivery time to meet customer expectations and satisfaction. The goal is to ship the goods as efficiently as possible (Faramarzi & Drane, n.d.). A greater share of Canada’s merchandise trade has been transported by sea and air, and relatively less by roads and rail (Tapp, 2016).

Transports add value in international supply chain management by reducing transportation time, and as a result, supply chain costs and frees up time on other areas of the supply chain. The vital key role in deciding the freight shipment is the cost factor. Transportation adds value to the global value chain for many aspects such as reducing time delivery, efficiency, reliability, flexibility, increasing visibility, transparency, and enhancing customer satisfaction and service. The international Transport Networks consist of shipping routes worldwide and container ports connecting many countries and continents for moving goods and freights. Routes include Trans Mongolian and Trans-Siberian railways as well as Northern Sea and Commercial Maritime routes and Air Freight Hub (Mangan & Lalwani, 2016, p.114). Companies need to select the proper transport and route for moving their goods. Without transportation, businesses cannot exist.

Key Terms

Full Truckload (FTL) – A categorization of trucking transport when the entire truck is hired and delivered directly (Faramarzi & Drane, n.d.).

Less-than-truckload (LTL) – A categorization of trucking transport which generally includes using several orders to increase the utilization of the truck (Faramarzi & Drane, n.d.).

Garmentainers Container – A container which was made specifically for garments on hanger shipments created with a special system by using string or bar system (OOCL, 2022).

Intermodal Transport Unit (ITU) – A container for various transports that ship or move freight or good or products via intermodal transportation travel internationally or domestically.

International Transport Corridor (ITC) – A linear area such as highways, railways, roads determined by transportation modes and crossing countries or territories.

Chapter References

Chen, J., Notteboom, T., Liu, X., Yu, H., Nikitakos, N., & Chen, Y. (2019). The Nicaragua canal: Potential impact on international shipping and its attendant challenges. Maritime Economics & Logistics, 21(1), 79-98. http://dx.doi.org/10.1057/s41278-017-0095-3

Faramarzi, H., & Drane, M. (n.d.). Introduction to operations management. Seneca College Pressbooks Network. https://pressbooks.senecacollege.ca/operationsmanagementintro/chapter/supply-chain/

Jung, H., Kim, J., & Shin, K. (2019). Importance analysis of decision-making factors for selecting international freight transportation mode. The Asian Journal of Shipping and Logistics, 35(1), 55–62. https://www.sciencedirect.com/science/article/pii/S2092521219300082

Keltto, T., & Su-Han, W. (2020). Profitability of the northern sea route for liquid bulk shipping under post 2020 sulphur regulations. International Journal of Logistics Management, 31(2), 313-332. http://dx.doi.org/10.1108/IJLM-12-2018-0314

Khazheeva, M. A., & Bondarchuk, E. A. (2021). Economic connectivity of international transport corridor projects and the Trans-Siberian railway. Les Ulis: EDP Sciences. http://dx.doi.org/10.1051/shsconf/202111200031

Laake, J., & Zhang, A. (2016). Joint optimization of strategic fleet planning and contract analysis in tramp shipping. Applied Economics, 48(3), 203–211. https://doi.org/10.1080/00036846.2015.1076151

Leszek MINDUR. (2021). Combined/intermodal transport – the global trends. Transport Problems, 16(3), 65–75. https://doi.org/10.21307/tp-2021-042

Lun, V., & Marlow, P. (2011). The impact of capacity on firm performance: a study of the liner shipping industry. https://www.inderscienceonline.com/doi/pdf/10.1504/IJSTL.2011.037819

Mangan, J., & Lalwani, C. (2016). Global logistics and supply chain management (3rd ed.). Wiley.

Morash, E. A., & Clinton, S. R. (1997). The role of transportation capabilities in international supply chain management. Transportation Journal (American Society of Transportation & Logistics Inc), 36(3), 5–17.

OOCL (2022). Orient overseas container line. Container types. https://www.oocl.com/eng/ourservices/containers/containerspecifications/Pages/flatracks.aspx

Richmond, S., Bloom, G., Duca, M.D., Haywood, A., Kohn, M., Low, S., Masters, T., McCrohan, d., St. Lous.,R., & Vorhees, M. (2015). Trans-Siberian railway. Lonely Planet Publications Pty Ld. 5th ed., http://media.lonelyplanet.com/shop/pdfs/trans-siberian-railway-5-contents.pdf

Statista. (November 23, 2021). International seaborne trade carried by container ships from 1980 to 2020 (in billion tons loaded) [Graph]. In Statista. https://www.google.com/url?q=https://www.statista.com/statistics/253987/international-seaborne-trade-carried-by-containers/&sa=D&source=docs&ust=1643059680207677&usg=AOvVaw3cFnBq9OHQRDl088SkvnN-

Tapp, S. (2016). The role of transportation networks in moving Canadian trade. Policy Options. https://policyoptions.irpp.org/2016/02/29/the-role-of-transportation-networks-in-moving-canadian-trade/

Tarver, E. (2021). Value chain vs. supply chain: What’s the difference? Investopedia.
https://www.investopedia.com/ask/answers/043015/what-difference-between-value-chain-and-supply-chain.asp

UNCTAD. (November 18, 2021). Estimated containerized cargo flows on major container trade routes in 2021, by trade route (in million TEUs) [Graph]. In Statista. https://www.statista.com/statistics/253988/estimated-containerized-cargo-flows-on-major-container-trade-routes/

Image Descriptions

Fig 4.1: Trucking: Flexible (truck load vs less-than-truckload), drivers in demand, creates highway congestion.
Railroads: Ideal for bulkier products or containers, cost effective over distances, energy efficient.
Airfreight: Ideal for small & light products, prioritizes speed over cost, reliable, air pollutant.
Waterway: Ideal for low cost, heavy products, very common, inexpensive.
Pipeline: Used for crude oil, gas, petroleum, once built, very cost effective, land and water pollutant.
Multimodal: Uses a combination of modes through a carrier, products secured in containers, contractual with a single carrier. [Return to image].

Fig 4.3: Trade in billion tons loaded:
1980 = 0.1 billion; 1985 = 0.15 billion; 1990 = 0.2 billion; 1995 = 0.4 billion; 2000 = 0.6 billion; 2005 = 0.95 billion; 2010 = 1.2 billion; 2015 = 1.6 billion; 2016 = 1.7 billion; 2017 = 1.75 billion; 2018, 2019, & 2020 = 1.85 billion. [Return to image].

Fig 4.4: Trans-Pacific is 32.2 million TEUs.
Europe-Asia-Europe is 26.3 million TEUs.
Transatlantic is 8 million TEUs. [Return to image].

Fig 4.5: World map illustrating various trade routes. Air freight hubs are indicated with a blue airplane icon. Northern sea route is indicated with a purple dashed line which goes north of all continents through the arctic. Trans-Mongolian and Trans-Siberian rails are indicated with yellow and red dashed lines respectively and are located through Russia into China. Commercial maritime routes are indicated with a green solid line and are located throughout the globe except for the arctic which is where the Northern Sea Route is located. Major ports are indicated with red target icons with various TEU levels: >20 million, 10-20 million, and < 20 million TEUs. [Return to image].

Table 4.2: Types of containers: general purpose (2 sizes 20ft and 40ft); flatracks (3 sizes 20ft, 40ft, and 40×9’6″); garmentainers (2 sizes 20ft and 40ft); high cube (40ft and 45ft); open top (3 sizes 20ft, 40×8’6″, and 40×9’6″); refrigerated (2 sizes 20ft and 40ft); super rack (1 size 40ft) [Return to table].

Fig 4.6: Road: 66.8% with US, 21.5% non-US.
Marine: 6.5% US, 51.5% non-US.
Rail: 21.0% with US, 3.1% non-US.
Air: 5.8% with US, 23.9% non-US. [Return to image].

Fig 4.7: 2.1 average annual change in total trade growth. 0.2 average annual change in trade with US. 6.6 average annual change in trade with all other countries. [Return to image].

Fig 4:8: Road: 59.7% in 2002, 48.3% in 2012.
Marine: 14.8% in 2002, 24.9% in 2012.
Rail: 14.79% in 2002, 13.79% in 2012.
Air: 10.89% in 2002, 13.29% in 2012. [Return to image].

Alternative Text-Based Activities

Assessing What You Already Know (Text-Based)

Question 1:

Transportation is an essential and integral part of the Global Value Chain. Transportation is beneficial for society and helps in globalization of the world economy.

• True (Correct)
• False (Incorrect)

Feedback: Transportation is an essential and integral part of the Global Value Chain. Transportation is beneficial for society and helps in globalization of the world economy. That is why it plays a vital role in human life, companies, suppliers and distributors. This service should be effective, efficient and appropriately managed by an enterprise. Demand for transportation depends on a party wishing to move goods or freight efficiently and effectively from one point to another.

Question 2:

Does transportation add value in international supply chain management?

• Yes (Correct)
• No (Incorrect)

Feedback: Transportation adds value in international supply chain management by reducing transportation time and as a result supply chain costs and frees up time on other areas of the supply chain. Also, suppose delays happened in some areas of the supply chain. In that case, transportation can help to speed up their performance and reduce time more efficiently by choosing the fastest way of delivering goods to the customer.

Question 3:

Supply chain cost minimized by dint of transportation’ benefits such as ….. Check all that apply.

• reducing inventory cost (Correct)
• safety stocks (Correct)
• cycle stocks (Correct)
• inventory velocity (Correct)
• extend activities (Incorrect)
• minimum dwell-times (Correct)
• increase shelf life % for customers (Correct)
• operational planning (Correct)
• flexible time (Incorrect)

Feedback: Transportation can help organizations to reduce cycle stock and increase customer satisfaction because of frequency deliveries. Supply chain cost minimized by dint of transportation’ benefits such as reducing inventory cost, safety stocks, cycle stocks, inventory velocity, minimum dwell-times, increase shelf life % for customers, operational planning.

Question 4:

Transportation plays a vital role in supply chains which offer (_____) and (_____).

• Reliability and consistency (Correct)
• Freedom and fast (Incorrect)

Feedback: Transportation plays a vital role in supply chains which offer reliability and consistency; flexibility in terms of location, delivery, time, quantity, goods, cost; Just-in-Time delivery; customization by integration of supply chain; standardization by making activities predictable, reduction of total cost (Morash & Clinton, 1997) [Return to activity].

Check Your Understanding: Identify different modes of transportation and their characteristics (Text-based)

Question 1:

Choose criteria by which the mode of freight transportation will be chosen. Check all that apply.

• the distance (Correct)
• Value (Correct)
• availability of services (Correct)
• freight rates (Correct)
• characteristics of goods (Correct)
• Budget (Correct)
• Appearance (Incorrect)
• cost of transport (Correct)
• Reliability (Correct)
• safety (Correct)
• Urgency (Correct)
• carrier timing (Correct)
• none of the above (Incorrect)

Feedback: There are many criteria by which the mode of freight transportation will be chosen. It depends on the distance, value, availability of services, freight rates, characteristics of goods, budget, cost of transport, reliability, safety, urgency, carrier timing, etc. A critical decision for companies is to choose the suitable carrier to transport.

Question 2:

What are the five (5) modes of transportation? Write your response in the box below.

Feedback: Modes of transportation are classified into the following types – Road, Rail, Air, Water, Pipeline.

Question 3:

Drag and Drop the modes in correct Category

Feedback: It is important for companies to select the right mode of transportation. Transportation plays a vital role in supply chains which offer reliability and consistency; flexibility in terms of location, delivery, time, quantity, goods, cost; Just-in-Time delivery; customization by integration of supply chain; standardization by making activities predictable, reduction of total cost (Morash & Clinton, 1997)

Question 4:

Which mode of transportation is generally used when speed is more important than cost?

• Rail (Incorrect)
• Water (Incorrect)
• Air (Correct)
• Road (Incorrect)
• Pipeline (Incorrect)

Feedback: Urgent air shipping may be reasonable for expensive, small, and light goods. Air carriers charge by a combination of the weight and size of the shipment. This mode of transport is generally used when speed is more important than cost. In addition, shipping by air is very reliable. [Return to activity].

Check Your Understanding: Assess infrastructure and equipment types used in different modes of transportation

Question 1:

Why is intermodal transportation used? Write your response in the box below.

Feedback: Because intermodal transportation uses only one container along the entire route, often goods move intermodal by using several transport modes in a single container along the whole route. As a result, intermodal transportation has excellent advantages, such as reducing the time and the chance of freight damage, flexibility, and secure goods flow.

Question 2:

If the company needs to deliver cargo quickly to their destination and over a short distance, they prefer to choose intermodal transportation on the road.

• True (Correct)
• False (Incorrect)

Feedback: If the company needs to deliver cargo quickly to their destination and over a short distance, they prefer to choose intermodal transportation on the road. The freight will be delivered in the shortest time to their last destination.

Question 3:

How many types of containers exist?

• 8
• 7 (correct)
• 9
• 3
• 6
• 5

Feedback: 7. General purpose, flatracks, garmentainers, high cube, open top, refrigerated, super rack. There are many types and standardized sizes of intermodal transport unit (ITU)/containers; however, 90 % of all containers used worldwide are general-purpose containers.

Question 4:

What is the largest shipping zone of cargo volume, which has transported over 31.2 million of freight in 2021?

• Trans-Pacific Ocean (Correct)
• Europe-Asia -Europe
• Transatlantic

Feedback: Also, as globalization continues growing, the largest shipping zone of cargo volume is the Trans-Pacific Ocean, which transported over 31.2 million twenty-foot equivalent units [TEUs] of freight in 2021 (UNCTAD, November 18, 2021). This mode of transport is environmentally friendly and the most cost-effective way to transfer freight internationally. [Return to activity].

Check Your Understanding: Describe International Transport Network

Question 1:

The international Transport Networks consist of shipping routes worldwide and container ports connecting many countries and continents for moving freight.

• True (Correct)
• False(Incorrect)

Feedback: Now that you know the modes of transportation in detail, it would be beneficial to analyze international transport networks. The international Transport Networks consist of shipping routes worldwide and container ports connecting many countries and continents for moving freight.

Question 2:

Choose routes that exist now below? Check all that apply

• The Northern Sea Route (NSR)
• Trans-Siberian railway
• The Suez Canal/ Panama
• Trans-Mongolian Route
• Commercial Maritime Route
• All of the above (Correct)

Feedback: The Northern Sea Route (NSR), Trans-Siberian railway, The Suez Canal/ Panama, Trans-Mongolian Route, Commercial Maritime Route.

Question 3:

Which of the new two routes are planned and emerge globally? Check all that apply

• Nicaragua Canal (Correct)
• South Africa Canal
• Northern Sea Route (Correct)
• Ethiopia Sea Route
• Nairobi Sea Route

Feedback: New routes are planned and emerge globally, such as the Nicaragua Canal and the Northern Sea Route. Shipping channels can significantly impact global economic integration, export service, and world seaborne trade and help less economically developed regions stimulate foreign trade (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019) [16]. The Nicaragua Canal will connect the Caribbean Sea with the Pacific Ocean to compete with the Panama Canal

Question 4:

What is the significant difference between routes? Check all that apply.

• Cost (Correct)
• Time (Correct)
• Flexibility
• Delivery speed
• Distance
• Risks
• Customer satisfaction

Feedback: The significant difference will be related to cost and time. The vital key role in deciding the freight shipment is the cost factor. [Return to activity].

Check Your Understanding: Explain how transportation adds value to the global value chain

Question 1:

Transportation adds value to the global value chain for many aspects such as reducing time delivery, efficiency, reliability, flexibility, increasing visibility, transparency, and enhancing customer satisfaction and service.

• True (Correct)
• False(Incorrect)

Feedback: Transportation adds value to the global value chain for many aspects such as reducing time delivery, efficiency, reliability, flexibility, increasing visibility, transparency, and enhancing customer satisfaction and service. In addition, various transportation networks can significantly impact global economic integration, export service, the connection between countries and continents, and help less economically developed regions stimulate foreign trade (Chen, Notteboom, Liu, Yu, Nikitakos, & Chen, 2019)

Question 2:

Global chain relies on (_____) and (_______) of transport; that is why many companies use intermodal modes. Choose two options.

• Efficiency (Correct)
• Reliance(Incorrect)
• Flexibility (Correct)
• Delivery time(Incorrect)

Feedback: The global chain relies on efficiency and flexibility of transport; that is why many companies use intermodal modes.

Question 3:

Which areas for improvement Jacques Roy (HEC Montréal, Professor of Logistics and Operations Management) identified? Check all that apply.

• roads: domestic congestion (Correct)
• rail: capacity constraints (Correct)
• road: cheap price (Incorrect)
• sea: container port competitiveness (Correct)
• air: the impact of weather conditions and conveyance (Incorrect)
• air: cargo capacity, competitiveness and airport landing fees (Correct)

Feedback: Jacques Roy (HEC Montréal, Professor of Logistics and Operations Management), examines the role of Canada’s transportation infrastructure in moving goods in and out of the country by four key transportation modes: road, rail, sea and air. Overall, he finds that Canada’s transportation and logistics networks perform reasonably well compared with other countries. But he identifies several areas for improvement, namely for:

• roads: domestic congestion;
• rail: capacity constraints;
• sea: container port competitiveness; and
• air: cargo capacity, competitiveness and airport landing fees.

(Tapp, 2016) [CC-BY-ND]

Question 4:

Minimizing inbound and outbound logistics and operations are keys to success for the competitive world’s business field.

• True (Incorrect)
• False (Correct)

Feedback: Maximizing inbound and outbound logistics and operations are keys to success for the competitive world’s business field. It’s self-evident that technical improvements help intermodal transportation be more efficient for connecting between modes of transport and the value chain. [Return to activity].

Figure 5.1

Inbound and Outbound Storage

Note. Modern Warehouse with pallet rack storage system. From Wikimedia Commons, 2007. CC BY SA 3.0.

Introduction

In this chapter, you will be explained about the importance of Inbound and Outbound storage in the global value chain. Storage of goods received by a firm is known as Inbound Storage, and storage of goods which are scheduled to move out of a firm is known as Outbound Storage. The concept of Material handling will also be explained with special reference to its importance in storage. Inbound and Outbound goods are stored in warehouses and distribution centers where they are managed using different concepts of Stock Keeping Unit, Electronic Data Interchange and cross-docking. For optimal space utilization in warehouses, an accurate demand forecast is essential. Techniques such as demand planning, Collaborative Planning, Forecasting and Replenishment, Value Chain Visibility and Value Stream Mapping could help avoid be helpful in avoiding shortages or excess inventories. Various Inventory Management Techniques were also discussed, such as Economic Order Quantity, Vendor Managed Inventory, Just In Time and Activity- Based Cost Analysis.

Media Attributions and References

Axisadman. (2007, Dec 11). Modern Warehouse with pallet rack storage system [Photograph]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:Modern_warehouse_with_pallet_rack_storage_system.jpg. CC BY-SA 3.0.

Importance of Storage in Warehousing

The Logistics Cycle (discussed in chapter 2) is a complex process involving a series of stages that must run smoothly to ensure that goods reach their destination on time and in good condition. One of those stages is Storage, which plays a vital role in distribution logistics. In the logistics cycle, Storage includes both Warehousing and Inventory Management.

Let’s look at the main flows in value chain to understand importance of storage. There are three types of main flows that happen in any value chain (outlined in Figure 5.2):

• The flow of materials/goods,
• The flow of money/cash, and
• The flow of information.

There is a regular forward flow of materials/goods that happens all the way from higher-tier suppliers (upstream) to the end-consumer (downstream). In addition, if there are returns for any reason, there will be a reverse flow of materials/goods in the opposite direction to the forward flow.

The flow of money (cash flow) happens from downstream to upstream. For example, the retailer needs to pay the distributor for the goods they have received. from them.

The flow of information happens both ways in the supply chain since organizations will need to share a different type of information so that the whole supply chain can make better decisions to improve overall performance.

Figure 5.2

Main Flows in Value Chain

Note. From Faramarzi & Drane, n.d. CC BY-NC-SA 4.0. [Image description].

When materials move from upstream to downstream or vice versa, there arises a need to store goods either at specific destinations or while in-transit. Efficient storage helps to:

• guarantee consumer satisfaction by maintaining good delivery times
• Reduce warehouse losses by keeping a track of goods coming in and going out of the storage facility
• Offer better services which ultimately increases profit

Storage of goods received by a firm is known as ‘Inbound Storage’, and storage of goods which are scheduled to move out of a firm is known as ‘Outbound Storage’. In some cases, companies have different storage facilities to manage inbound and outbound storage. As per Jenkins, 2020:

Inbound Storage includes managing the materials before they go to manufacturing or customer fulfillment. This department is responsible for making sure items are placed in logical locations for fulfillment and the right storage conditions are met. A company keeps a certain quantity of goods on hand to meet demand. Outbound Storage Facilities help store these goods securely in the right conditions and organize them.

Material handling is an integral part of Inbound and Outbound Storage. Therefore, it is important to discuss it here before moving on to the subsequent sections on Warehousing and Inventory Management.

Material handling relates to transporting raw materials, finished goods and other kinds of inventories within the manufacturing unit, and out of the unit to warehouses, distribution centers or directly to consumers (Rosenblatt, 2001, p-492).  It is estimated that 20% to 50% of the total operating expenses within manufacturing are attributed to material handling (Tompkins et al., 1996). Material handling activities may account for 80% to 95% of total overall time spent between receiving a customer order and shipping the requested items (Rosaler and Rice, 1994).

The Ministry of Labour, Training and Skills Development, Canada  recognizes the importance of material handling and specifies that:

The efficient handling and storing of materials are vital to industry. Activities involving material handling enable the supply of raw materials as well as a continuous flow of parts and assemblies through workplaces and ensure materials are available when needed.

Many manufacturing companies have adopted computerized systems to control the flow of resources and inventory. Materials requirement planning (MRP) is one such system. MRP uses a master schedule to ensure that the materials, labor, and equipment needed for production are at the right places in the right amounts at the right times. The schedule is based on forecasts of demand for the company’s products. It says exactly what will be manufactured during the next few weeks or months and when the work will occur. MRP also helps to ensure the smooth flow of finished products.

Some manufacturing firms have moved beyond MRP systems and are now using Enterprise Resource Planning (ERP) systems. ERP systems provide an integrated and continuously updated view of core business processes using shared databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments—orders, purchase orders, and payroll. The applications that make up the system share data from and between various departments (e.g., manufacturing, purchasing, sales, accounting, etc.). ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

Media Attributions and References

Faramarzi, H. & Drane, M. (n.d.).Introduction to operations management. Seneca College Pressbooks System. https://pressbooks.senecacollege.ca/operationsmanagementintro/. CC BY-NC-SA 4.0.

MHI. (n.d.). Introducing the material handling and logistics industry [Video]. YouTube. https://www.youtube.com/watch?v=dEtn3P2kFFI.

Tech Vision. (n.d.). Inside Amazon’s smart warehouse [Video]. YouTube. https://www.youtube.com/watch?v=IMPbKVb8y8s.

Warehouse

Figure 5.3

Warehouse

Note. Shallow focus photo of gray steel muscle rack photo. From Unsplash. Reused under Unsplash Licence.

A warehouse is one of the most important parts of a company with distribution functions, on which the entire company’s sustainability largely depends. It has a significant impact on economic and social sustainability as a part of the company that most absorbs the consequences of changes in demand. This has been best demonstrated nowadays, where there are large differences in demand (Popovic et . al., 2021 ). Though warehousing requires additional expenses in terms of labor, capital (land and storage-and-handling equipment) and information systems, we need them because they provide valuable services essential for businesses to operate in the current economic situation.

To learn more about the importance of warehouses with examples, please read Section 1.1: Why Have a Warehouse  in Warehouse and Distribution Science by John J. Bartholdi and Steven T. Hackman.

Figure 5.4

More Oil Storage

Note. More Oil Storage. From Flickr. CC BY 2.0.

You might not know where the tiny town of Cushing, Oklahoma, is, but oil producers and traders around the world do. Cushing is one of the largest oil storage areas in the United States. Storage tanks like these cover more than nine square miles on the outskirts of the town (Davis, 2009).

In some cases, warehouses are also called Distribution Centers (DC). The major difference between these two is that former store products to be used by manufacturers, importers, exporters, wholesalers, transport businesses etc., later is a warehouse or storage facility where the emphasis is on processing and moving goods on to wholesalers, retailers, or consumers. A few years ago, companies moved towards large, centralized warehouses to keep costs down. For example, in 2005, Walmart opened a four-million-square-foot distribution center in Texas. (Four million square feet is about the size of eighteen football fields.) (University of Minnesota, 2015).

Today, however, the trend has shifted back to smaller warehouses. Using smaller warehouses is a change driven by customer considerations rather than costs. Warehousing products regionally, closer to consumers, can also help a company tailor its product selection better to match customers’ needs in different regions. Ultimately, a company selects their warehousing needs depending upon its consumers.

Functioning of Warehouses and Distribution Centers

A question may arise – How do warehouse associates find a product or pallet of products in a warehouse or distribution center the size of eighteen football fields? To begin with, each product is given its identification number, SKU (stock-keeping unit). Then, when the product enters the warehouse, it is scanned and given an “address,” or location, in the warehouse where it is stored until it is plucked from its shelf and shipped.

Figure 5.5

An Example of a SKU

Note. Scanning. From  Flickr. CC BY-NC-SA 2.0

Warehouses and distribution centres are also becoming increasingly automated and wired. For example, some warehouses use robots to pick products from shelves. At other warehouses, employees use voice-enabled headsets to select products. Via the headsets, the workers communicate with a computer that tells them where to go and what to grab off shelves. As a result, the employees can pick products more accurately than at a sheet of paper or computer screen.

It is amazing when you think about how the thousands of products that come in and out of Amazon’s distribution centres every day ultimately end up in the right customer’s hands. After all, how many times have you had to look hard to find something you put in your closet or garage? The concept of Order Fulfillment helps here. Processing orders — order fulfillment — is a crucial part of the job in supply chains. Why? Because delivering what was promised, when it was promised, and how it was pledged are key drivers of customer satisfaction (Thirumalai & Sinha, 2005 ).

One of the ways companies are improving their order fulfillment and other supply chain processes is by getting rid of paper systems and snail – mail. So, for instance, instead of companies receiving paper orders and sending paper invoices to one another, they send and receive the documents via electronic data interchange (EDI). Electronic data interchange (EDI) is a particular electronic format that companies use to exchange business documents from computer to computer. It also makes for greater visibility among supply chain partners because they can all check the status of orders electronically rather than having to fax or e-mail documents back and forth.

Companies also use Warehouse Management System (WMS) to manage their warehouse operations. A warehouse management system is an application that helps to monitor and handle the day-to-day tasks of a warehouse. WMS systems allow companies to control and oversee third-party logistics processes (Patel, 2021).

To know more about how WMS works, benefits, types and features of WMS, read through What is Warehouse Management System? (Process, Benefits, Features, & Types).

Another new trend is cross-docking. A broad definition of crossdocking is the transfer of goods and materials from an inbound carrier to an outbound carrier without the products entering the warehouse or being put away into storage (Faramarzi and Drane, n.d.) . Thus, the products “cross the docks” from the receiving dock area to the shipping dock area. It can provide significant inventory savings, the cost of holding inventory and the costs of handling the inventory are reduced (Kulwiec, 2004 ). Crossdocking helps to provide excellent customer service by speeding up customer deliveries. In other words, cross-docking is the logistics process of transshipping inventory in a flow-centre by unloading the shipments from the inbound trucks directly to the outbound trucks to reduce shipment time and cost (Belle et al., 2012). It also helps by eliminating storage and order picking activities, thus accelerating the flow of the shipping cycle (Ladier & Alpan, 2016).

According to Belle et al. (2012), The Material Handling Industry of America defines cross-docking as “the process of moving merchandise from the receiving dock to shipping dock for shipping without placing it first into storage locations”.

Industries implement a cross-docking strategy to improve the “just-in-time” deliveries within their supply chain in order to minimize the number of inbound and outbound trucks and enhance sustainability (Dulebenets, 2018). Under a cross-docking strategy, the inventory is stored only for a short time before being reloaded onto outgoing trucks; the inventory does not stay beyond 24 hours within the cross-dock station (Moghadam et al., 2014 and Mavi et al., 2020).

Media Attributions and References

Chuttersnap. (2019, Feb 3). Shallow focus photo of gray steel muscle rack photo [Photo]. Unsplash Licence. https://unsplash.com/photos/sxhVoUrItmQ.

Easton, A. (2010, April 30). More oil storage [Photo]. Flickr. CC BY 2.0. https://www.flickr.com/photos/pinkmoose/4598192764/.

Herzog, B. (2011, Feb 7). Scanning [Photo]. Flickr. https://www.flickr.com/photos/herzogbr/5428372392/. CC BY-NC-SA 2.0.

Demand Planning and Inventory Management

Imagine you are a manager who has done everything in their power to help develop and promote a product—and it’s selling well. But now the company is running short of product because the demand forecasts  were too low. This  is the scenario Nintendo faced when the Wii first came out. The same happened with IBM when it launched the popular ThinkPad laptop in 1992. Not only is the product shortage that adversely affects profitably of a company, but it affects all the stakeholders.

Thus, demand planning is essential for a company to manage their inventories well. Demand planning is the process of estimating how much good customers will buy from you. If you’re a producer, demand planning will affect not only the amount of finished goods you have to produce but also the raw materials you must purchase to make them. It will also affect the production scheduling or the resources, events, and processes needed to create an offering. For example, if demand is heavy, you might need your staff members to work overtime. Closely related to demand forecasting are lead times. A product’s lead time is the amount of time it takes for a customer to receive a good or service once it’s been ordered. Therefore, lead times also have to be considered when a company is forecasting demand.

Forecasting decisions must be made more frequently — sometimes daily. Nowadays, companies are also moving to demand forecasts for multiple work shifts during a day. One way for you to predict the demand for your product is to look at your company’s past sales. This is what most companies do. But they don’t stop here. Why? Because changes in many factors — the availability of materials to produce a product and their prices, global competition, oil prices (which affect shipping costs), the economy, and even the weather — can change the picture.

In addition to looking at the sales histories of their firms, value chain managers also consult with other managers when they are generating demand forecasts. Firms also look to their value chain partners to help with their demand planning. Collaborative planning, forecasting, and replenishment (CPFR) is a technique value chain partners use to share information and coordinate their operations (University of Minnesota, 2015).

The trend is clearly toward more shared information, or what businesspeople refer to as value chain visibility. After all, it makes sense that a supplier will be more reliable and in a better position to add value to your products if they know what your sales, operations, and marketing plans are — and what your customers want. By sharing more than just basic transaction information, companies can see how well operations are proceeding, how products are flowing through the chain, how well the partners are performing and cooperating the extent to which value is being built into the product. Demand-planning software can also be used to create more accurate demand forecasts.

Litehouse Foods, a salad dressing manufacturer, improved its forecasts dramatically by using demand-planning software. Initially the company  used a traditional sales database and spreadsheets to do the work. “It was all pretty much manual calculations. We had no engine to do the heavy lifting for us,” says John Shaw, the company’s Information Technology director. Yet, in a short time, the company \ reduced its inventory by about one-third while still meeting its customers’ needs (Casper, 2008).

Companies are also moving towards Lean Manufacturing techniques to enhance visibility through out the value chain network. One such technique is Value Stream Mapping or Material and Information Flow Mapping (Manos, 2006) . “It is a lean -management method for analyzing the current state and designing a future state for the series of events that take a product or service from the beginning of the specific process until it reaches the customer (Wikipedia, 2021).”

To gain more information about the concept of ‘Value Stream Mapping’, read the article What is Value Stream Mapping?

Inventory Management and Control

Inventory management is one of the essential business processes related to purchases, sales and logistic activities. It is concerned with the control of stocks throughout the value chain. The essence of inventory management is to augment business operations to ensure the adequate flow of goods, products, and services is in place (Chalotra, 2015). In this context, ‘inventory’ is the aggregate list of items, several goods in stock or stock of the product an organization produces for sale and the components that make the sale. ‘Stock’ consists of a wide range of goods or materials – stationery, office equipment, plant, machinery, consumables, etc., available for use or sale.

Inventory control sits at the data level, where the day-to-day business is organized. Activities here are data-driven and primarily concerned  with  short-term  planning and  recording  events.  Inventory  control  is  concerned  with maintaining the correct stock level and recording its movement.   

To help avoid stock outs, most companies keep a certain amount of safety stock on hand. Safety stock is backup inventory that serves as a buffer in case the demand for a product surges or its supply  drops off for some reason. However, maintaining too much inventory ties up money that could be spent in other ways — perhaps on marketing promotions. Inventory also has to be insured, and in some cases, taxes must be paid on it. Products in inventory can also become obsolete, deteriorate, spoil, or “shrink.” Shrinkage is a term used to describe a reduction or loss in inventory due to shoplifting, employee theft, paperwork errors, or supplier fraud (Hudson, 2020).

Inventory Management Techniques

Inventory management techniques are extremely important as they result in success and cost reduction of a company. In this section, different techniques of inventory management are discussed.

Economic Order Quantity

Media Attributions and References

erwinofm. (n.d.). The Basic of RFID and EPC [Video]. YouTube. https://youtu.be/k-w6ZYIo37E.

Inventory Planner. (2018, June 11). Inventory planner overview | Demand planning | Sales forecasting | Replenish stock and inventory [Video]. YouTube. https://youtu.be/iGUsEtQwIkU.

LeanVlog. (n.d.). Types of Inventory : The 4 different buckets to know [Video]. YouTube. https://www.youtube.com/watch?v=TU2OniIvVmw.

Mars Electric, (2019, November 19). Vendor managed inventory from Mars Electric [Video]. YouTube. https://youtu.be/gmvH4boZX5c.

University of Minnesota. (2015, October 17). Principles of marketing. University of Minnesota Libraries Publishing Edition. https://doi.org/10.24926/8668.1901. CC BY-NC-SA 4.0.

This chapter focused on explaining the importance of storage in the global value chain. Storage of goods received by a firm is known as Inbound Storage, and storage of goods scheduled to move out of a firm is known as Outbound Storage. Material handling was also explained with special reference to its importance in storage. Inbound and Outbound goods are stored in warehouses and distribution centers where they are managed using different concepts of SKUs, EDIs and cross-docking. For optimal utilization of space in warehouses, accurate demand forecasts are essential. Techniques such as demand planning, CPFR, Value Chain Visibility and Value Stream Mapping could help avoid shortage or excess inventories. Various Inventory Management Techniques were also discussed, such as EOQ, VMI, JIT and ABC Analysis.

Key Terms

Cross-docking: The process of moving merchandise from the receiving dock to shipping dock for shipping without placing it first into storage locations.

Demand Planning: The process to forecast consumer’s demand in future.

Downstream: Consumer side

Electronic Data Interchange: Exchange of business documents from computer to computer.

Enterprise Resource Planning: ERP systems provide an integrated and continuously updated view of core business processes using shared databases maintained by a database management system.

Inventory Management: Managing the stock of goods in warehouse

Inventory: Aggregate list of items, several goods in stock or stock of the product an organization produces for sale and the components that make the sale.

Lead Time: The time gap between placing an ordering and receiving it.

Materials Requirement Planning: A system that ensures that the materials, labor, and equipment needed for production are at the right places in the right amounts at the right times.

Order Fulfillment: The process of delivering what was promised, when it was promised, and how it was pledged are key drivers of customer satisfaction

Safety Stock: back up inventory

Semi-finished materials: work in progress

SKU (Stock-keeping unit): A unique number given to products when they arrive in warehouses.

Stock outs: Shortages or availability of less than required Inventory.

Stock: The goods or materials such as stationery, office equipment, plant, machinery, consumables, etc., available for use or sale.

Storage: The act of storing something in a warehouse.

Sustainability: Environment friendliness

Upstream: Supplier side

Value Chain Visibility: Making a company’s operations visible to all stakeholders.

Warehouse Associates: Persons working in Warehouses

Warehouse Management System: An application that helps to monitor and handle the day-to-day tasks of a warehouse.

Chapter References

Bartholdi III, J.J. & Hackman, S.T. (2014, August 19). Warehouse and distribution science (Release 0.96). The Supply Chain and Logistics Institute School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205 USA. https://www2.isye.gatech.edu/~jjb/wh/book/editions/wh-sci-0.96.pdf.

Belle, J.V., Valckenaers, P. & Cattrysse, D. (2012). Cross-docking: State of the art. Omega, 40(6): 827–846. https://doi.org/10.1016/j.omega.2012.01.005.

Casper, C. (2008). Demand planning comes of age. Food Logistics. https://www.foodlogistics.com/software-technology/article/10315689/demand-planning-comes-of-age?msclkid=5e0929b5cebf11eca68a5d38d81a26e2.

Chalotra, V. (2013). Inventory management and small firms growth: An analytical study in supply chain. Vision: The Journal of Vision Perspective, 17(3): 213-222. https://doi.org/10.1177/0972262913496726.

Chambers, D. & Lacey, N. (2011). Modern corporate finance (6th ed.). Michigan: Hayden McNeil Publishing.

De Lollis, B. (2008, March 25). CEO Profile: At Goya, it’s all in la familia. ABC News. https://abcnews.go.com/Business/story?id=4507435&page=1.

Distribution Center. (2021, August 15). In Wikipedia. https://en.wikipedia.org/wiki/Distribution_center.

Dulebenets, M. (2018). A diploid evolutionary algorithm for sustainable truck scheduling at a cross-docking facility. Sustainability, 10(5): 1333. https://doi.org/10.3390/su10051333.

Faramarzi, H. & Drane, M. (n.d.). Introduction to operations management. Seneca College Pressbooks System. https://pressbooks.senecacollege.ca/operationsmanagementintro/. CC BY-NC-SA 4.0.

Fellows, P. & Rottger, A. (n.d.). Business management for small-scale agro-processors [Working Document]. Food and Agriculture Organization of the United Nations, Rome. https://www.fao.org/3/j7790e/j7790e.pdf?msclkid=07d8911bcee611ecbad3109427dc6047.

Hertini, E., Anggriani, N., Mianna, W. & Supriatna, A.K. (2018). Economic order quantity (EOQ) optimal control considering selling price and salesman initiative cost. IOP Conference Series Materials Science and Engineering, 332(012013). https://doi.org/10.1088/1757-899X/332/1/012013.

Hudson, M. (2020, February 02). The top resources of retail shrinkage. The Balance Small Business. https://www.thebalancesmb.com/top-sources-of-retail-shrinkage-2890265.

Jenkins, A. (2020, December 14). Guide to inbound and outbound logistics: processes, differences and how to optimize. Oracle Netsuite. https://www.netsuite.com/portal/resource/articles/inventory-management/inbound-outbound-logistics.shtml.

Kotler, P., Roberto, N., & Lee, N. (2002). Social marketing: Improving the quality of life. (2nd ed.) Sage Publications.

Kulwiec, R. (2004). Crossdocking as a supply chain strategy. Target Magazine. https://www.ame.org/sites/default/files/target_articles/04-20-3-Crossdocking.pdf.

Kumar, S. and Craig, S. (2007). Dell, Inc.’s closed loop supply chain for computer assembly plants. Information Knowledge Systems Management, 6(3): 197–214. https://dl.acm.org/doi/10.5555/1369880.1369882.

Ladier, A.L. & Alpan, G. (2016). Cross-docking operations: Current research versus industry practice. Omega, 62, 145–162. https://doi.org/10.1016/j.omega.2015.09.006.

Luenendonk, M. (2021, July 7). Economic order quantity (EOQ): Definition, formula and guide. Founderjar. https://www.founderjar.com/economic-order-quantity/?msclkid=93119f86ced111ec89d89547f76336ee.

Manos, T. (2006). Value stream mapping – An introduction. American Society for Quality, 64-69. http://faculty.washington.edu/apurva/502/Readings/Lean/value-stream-mapping–an-introduction%20lean.pdf.

Mavi, R. K., Goh, M., Mavi, N.K., Jie, F., Brown, K., Biermann, S. and Khanfar, A.A. (2020). Cross-docking: A systematic literature review. Sustainability, 12(11): 4789. https://doi.org/10.3390/su12114789.

Ministry of Labor, Training and Skills Development. (2022, March 31). Workplace health and safety. https://www.ontario.ca/page/workplace-health-and-safety.

Moghadam, S.S., Ghomi, S.M.T.F., & Karimi, B. (2014). Vehicle routing scheduling problem with cross docking and split deliveries. Computers & Chemical Engineering, 69, 98–107. https://doi.org/10.1016/j.compchemeng.2014.06.015.

Oluwaseyi, J.A., Onifade, M.K., and Odeyinka, O.F. (2017). Evaluation of the role of inventory management in logistics chain of an organisation. LOGI – Scientific Journal on Transport and Logistics, 8(2): 1-11. https://doi.org/10.1515/logi-2017-0011. CC BY-NC-ND 3.0.

Patel, R. (2022, April 20). What is warehouse management system? (Process, benefits, features, & types). Space-O Technologies. https://www.spaceo.ca/blog/warehouse-management-system-wms/.

Popovic, V.,Kilibarda, M., Andrejic, M., Jereb, B., & Dragan, D. (2021, Feb. 13). A new sustainable warehouse management approach for workforce and activities scheduling. Sustainability, 13(4). https://doi.org/10.3390/su13042021.

Purdue University. (2021, May 30). What is value steam mapping? https://www.purdue.edu/leansixsigmaonline/blog/value-stream-mapping/.

Rosenblatt, M.J. (2001). Material handling. In Encyclopedia of Operations Research & Management Science. pp. 492 – 495. Springer.

Saylor Academy. (2019, April 9). Inventory management. https://learn.saylor.org/mod/page/view.php?id=9328%23%3a%7e%3atext%3dBasic+economic+order+quantity+model+(EOQ)+Used+to%2ccosts+of+holding+inventory+and+ordering+inventory+Assumptions%3a&msclkid=93111cd4ced111ecbc6e755f8192bbbd. CC BY 3.0.

Thirumalai, S. & Sinha, K.K. (2005, April). Customer satisfaction with order fulfillment in retail supply chains: Implications of product type in electronic B2C transactions. Journal of Operations Management, 23(3-4): 291-303. https://doi.org/10.1016/j.jom.2004.10.015.

Tompkins, J.A., White, J.A., Bozer, Y.A., FrazeUe, E.H., Tanchoco, J.M.A., and Trevino, J. (1996). Facilities planning (2nd ed.). John Wiley: NY.

University of Minnesota. (2015, Oct 17). Principles of marketing. University of Minnesota Libraries Publishing Edition. https://doi.org/10.24926/8668.1901. CC BY-NC-SA 4.0.

Value-stream mapping. (2022, April 5). In Wikipedia. https://en.wikipedia.org/wiki/Value-stream_mapping#:~:text=Value-stream%20mapping%2C%20also%20known%20as%20%22material-%20and%20information-flow,the%20specific%20process%20until%20it%20reaches%20the%20customer.?msclkid=a8934dd9cec011ec99c04dead3225f54.

Image Descriptions

Figure 5.2: The figure shows upstream and downstream flow of material and information. Upstream, the supplier end is at the top left corner and moves through downstream, the consumer end at the top right corner. The flow from upstream to downstream starts with Tier 2 Suppliers and moves to Tier 1 Suppliers to Manufacturer to Distributor to Retailer to finally end-consumer. The image also shows that forward flow of information is from left to right i.e. from upstream to downstream. Reverse flow of information is from right to left same as flow of money and flow of information. [Return to image].

Figure 5.6: The figure presents Tags used by readers and then stored into local servers representing ‘How RFID tags work’. [Return to image].

Alternative Text-Based Activities

Check Your Understanding: Inbound and Outbound Storage

Question 1:

From Logistics Cycle perspective, which activities are a part of Storage?

1. Order Processing (Incorrect)
2. Transportation (Incorrect)
3. Warehousing and Inventory Management (Correct)

Feedback: In the logistics cycle, Storage includes both Warehousing and Inventory Management.

Question 2:

Forward flow of materials/ goods happens ________ to ________. Conversely, Reverse flow of materials/goods happen _________ to _________.

1. Upstream to Downstream; Downstream to Upstream (Correct)
2. Downstream to Upstream; Upstream to Downstream (Incorrect)
3. Both happens through out the supply chain (Incorrect)

Feedback: There is a forward flow of materials/goods for the regular flow that happens all the way from higher- tier suppliers (upstream) to the end-consumer (downstream). In addition, if there are returns for any reason, there will be a reverse flow of materials/goods in the opposite direction to the forward flow.

Question 3:

Storage of goods received by a firm is known as ___________, and storage of goods which are scheduled to move out of a firm is known as __________.

1. Inbound Storage; Outbound Storage (Correct)
2. Outbound Storage; Inbound Storage (Incorrect)
3. Inbound Logistics; Outbound Logistics (Incorrect)

Feedback: Storage of goods received by a firm is known as ‘Inbound Storage’, and storage of goods which are scheduled to move out of a firm is known as ‘Outbound Storage’.

Question 4:

____________ is a computerized system to control the flow of resources and inventory.

1. Inbound Storage System (Incorrect)
2. Outbound Storage System (Incorrect)
3. Material Requirement Planning (Correct)

Feedback: Many manufacturing companies have adopted computerized systems to control the flow of resources and inventory. Materials requirement planning (MRP) is one such system.

Overall Activity Feedback

The Logistics Cycle is a complex process involving a series of stages that must run smoothly to ensure that goods reach their destination on time and in good condition. In the logistics cycle, Storage includes both Warehousing and Inventory Management. There is a forward flow of materials/goods for the regular flow that happens all the way from higher- tier suppliers (upstream) to the end-consumer (downstream). In addition, if there are returns for any reason, there will be a reverse flow of materials/goods in the opposite direction to the forward flow. Material Handling is an integral part of Inbound and Outbound Storage. Many manufacturing companies have adopted computerized systems such as Materials requirement planning (MRP) to control the flow of resources and inventory. [Return to activity].

Check Your Understanding: Warehousing

Question 1:

What are benefits of having a Warehouse? Check all that apply.

• It helps in matching Supply with Consumer Demand. (Correct)
• It helps in reducing transportation cost and providing customer satisfaction. (Correct)
• It enables postponing product differentiation and product configuration close to customers. (Correct)
• It helps proper storage and arrangement of goods within the storage space. (Correct)

Question 2:

What is an SKU (Stock Keeping Unit)?

• Product’s identification number given by manufacturer. (Correct)
• Products number defined by Supplier. (Incorrect)
• Products number that generates when consumer orders a product. (Incorrect)

Question 3:

All activities are the part of Warehouse Management System Except:

• Inventory Management (Incorrect)
• Order Management (Incorrect)
• Reporting & Analytics (Incorrect)
• Role Play (Correct)

Question 4:

What is the difference between Warehouse Management & Inventory Management?

Feedback: Warehouse management solutions provide a more holistic framework that covers all facets of operating and developing business warehouse systems, while inventory management takes a simple approach to manage stock volumes.

Question 5:

Crossdocking is the process of moving merchandise from the receiving dock to shipping dock for shipping without placing it first into storage locations.

• True (Correct)
• False

[Return to activity].

Check Your Understanding: Demand Planning, Inventory Management & Control

Question 1:

Demand Planning is important because it helps in forecasting demand and taking supply decisions accordingly.

• True (Correct)
• False

Question 2:

Value Chain Visibility makes value chain transparent and helps suppliers to know what your customers want.

• True (Correct)
• False

Question 3:

What is the difference between Inventory and Stock? Fill in the blank to show your understanding.

________ is the aggregate list of items, several goods in stock or stock of the product an organization produces for sale and the components that make the sale.

_________ consists of a wide range of goods or materials – stationery, office equipment, plant, machinery, consumables, etc., available for use or sale.

Feedback: Inventory is the aggregate list of items, several goods in stock or stock of the product an organization produces for sale and the components that make the sale.

Stock consists of a wide range of goods or materials – stationery, office equipment, plant, machinery, consumables, etc., available for use or sale.

Question 4:

Inventory Stock outs happen when inventories are more than required and Surplus when inventories are less than required.

• True
• False (Correct)

Question 5:

All are Inventory Control techniques except:

• Vendor Managed Inventory
• Just-In-Time
• ABC Analysis
• Simulation (Correct)

[Return to activity].

Watch or Listen to the Following Media Clip 

Media 6.1 Why Do Countries Trade? [Video]. Mindlever Education Centre.

Introduction

This chapter will provide different ways to facilitate international freight flows. As you have seen in the previous chapters, complex international trade is important, and countries gain by participating in trade activities. Here, we will look into various approaches that can be used to simplify trade. The chapter starts with an introduction to Incoterms rules that manage trade complexity by guiding importers and exporters on cost and risk decisions. Then, realizing that international trade is beneficial, it should be facilitated and promoted through economic integration and trade security programs. Finally, we will look into the product classification system of Harmonized System Coding and how it helps simplify international trade.

Media Attributions and References

Mindlever Education Centre. (n.d.). Why do countries trade? [Video]. YouTube. https://youtu.be/-IW8ZzY3xt8.

Incoterms Rules

Import and export are the critical components of all industries, particularly manufacturing, where imports act as inputs to the production process to export finished goods to their final destinations. International trade is complex because of the many parties involved taking diverse decisions related to transportation, delivery, risks and costs associated, storage, loading, unloading etc. Incoterms (International Commercial Terms) rules try to manage this complexity by guiding importers and exporters on two significant decisions:

• Costs: Who is responsible for expenses associated with the shipment?
• Risks: Who bears the risk of loss or damage to the load?

Figure 6.1

Incoterms Chart

Note. Incoterms Chart. From Wikimedia Commons, 2021. CC BY-SA 4.0. [Image description].

Incoterms rules are developed and published by International Chamber of Commerce (ICC) to facilitate the global trading system. The ICC codified their first study of most generally used trade terms as a pre-incoterms edition in 1923 and published their first set of Incoterm Rules in 1936 (Thompson, 2020). Since then, this organization reviews and updates Incoterms rules every ten years, the previous edition was published in 2010 (Lowe, 2020). ICC has announced the latest edition Incoterms 2020 Rules containing 11 terms, which have been effective since 1 January 2020 (See Figure 6.1 for details). The Incoterms 2020 Rules is the ninth edition of Incoterms, which has the aim of being more inclusive and uses simple language for the current international trade decisions (Suraraksa, Amchang, Sawatwong, 2020).

Media Attributions and References

Inco Docs. (n.d.). Incoterms 2020 explained for import export global trade [Video]. YouTube. https://youtu.be/7g7IC4IzjDM.

Naveen7829. (2021). Incoterms chart [Chart]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:%E0%A4%87%E0%A4%A8%E0%A4%95%E0%A5%8B%E0%A4%9F%E0%A4%B0%E0%A5%8D%E0%A4%AE%E0%A5%8D%E0%A4%B8_%E0%A4%9A%E0%A4%BE%E0%A4%B0%E0%A5%8D%E0%A4%9F.jpg.

Trade Facilitation and Promotion

The American statesman Benjamin Franklin (1706–1790) once wrote: “No nation was ever ruined by trade.” Many economists would express their attitudes toward international trade in an even more positive manner (Greenlaw & Shapiro, 2017). The evidence that international trade confers overall benefits on economies is pretty strong. Trade has accompanied economic growth in the United States and around the world. Many of the national economies that have shown the most rapid growth in the last several decades — for example, Japan, South Korea, China, and India — have done so by dramatically orienting their economies toward international trade. There is no modern example of a country that has shut itself off from world trade and yet prospered.

“Trade facilitation looks at how procedures and controls governing the movement of goods across national borders can be improved to reduce associated cost burdens and maximize efficiency while safeguarding legitimate regulatory objectives” (Wikipedia, 2021) .

As per OECD Trade Facilitation and the Global Economy Report, 2018 :

Trade facilitation benefits exporters and importers alike by allowing better access to inputs for production and enhancing participation in Global Value Chains. On the supply side, trade facilitation helps reduce business losses resulting from delays of goods at the border. Delays in delivery increase firms’ costs for managing inventory and undermine their ability to respond rapidly to changes in consumer preferences. On the demand side, faster and more predictable delivery of intermediate goods through the supply chain can reduce firms costs (p. 16, para 5).

Economic Integration

For a variety of reasons, it often makes sense for nations to coordinate their economic policies. Coordination can generate benefits that are not possible otherwise. If countries cooperate and set zero tariffs against each other, then both countries are likely to benefit relative to the case when both countries attempt to secure short-term advantages by setting optimal tariffs. Benefits may also accrue to countries that liberalize labour and capital movements across borders, that coordinate fiscal policies and resource allocation toward agriculture and other sectors, and that coordinate their monetary policies (Saylor Academy, 2012).

Any type of arrangement in which countries agree to coordinate their trade, fiscal, or monetary policies is referred to as economic integration. There are different degrees of integration:

• Preferential Trade Agreement (PTA)
• Free Trade Area (FTA)
• Customs Union
• Common Market
• Economic Union
• Monetary Union

Let’s discuss these in detail.

Preferential Trade Agreement

A preferential trade agreement (PTA) is perhaps the weakest form of economic integration (Saylor Academy, 2012). In a PTA, countries would offer tariff reductions and not eliminations, to a set of partner countries in some product categories. Higher tariffs would remain in all other product categories. This type of trade agreement is not allowed among World Trade Organization (WTO) members, who are obligated to grant most-favored nation (MFN) status to all other WTO members. Under the MFN rule, countries agree not to discriminate against other WTO member countries. Thus, if a country’s low tariff on bicycle imports, for example, is 5 percent, then it must charge 5 percent on imports from all other WTO members. Discrimination or preferential treatment for some countries is not allowed. The country is free to charge a higher tariff on imports from non-WTO members, however. In 1998, the United States proposed legislation to eliminate tariffs on imports from the nations in sub-Saharan Africa. This action represents a unilateral preferential trade agreement since tariffs would be reduced in one direction but not the other.

Free Trade Area

A free trade area (FTA) occurs when a group of countries agrees to eliminate tariffs among themselves but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Agreement (NAFTA), now USMCA is an example of an FTA. When NAFTA/USMCA is fully implemented, tariffs of automobile imports between the United States and Mexico will be zero. However, Mexico may continue to set a different tariff than the United States on automobile imports from non-NAFTA countries. Because of the different external tariffs, FTAs generally develop elaborate “rules of origin.” These rules are designed to prevent goods from being imported into the FTA member country with the lowest tariff and then transshipped to the country with higher tariffs.

Customs Union

A customs union occurs when a group of countries agrees to eliminate tariffs among themselves and set a common external tariff on imports from the rest of the world. The European Union (EU) represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin but introduces the problem of policy coordination. With a customs union, all member countries must agree on tariff rates across many different import industries.

Common Market

A common market establishes free trade in goods and services, sets common external tariffs among members, and also allows for the free mobility of capital and labour across countries. The EU was established as a common market by the Treaty of Rome in 1957, although it took a long time for the transition to take place. Today, EU citizens have a common passport, can work in any EU member country, and can invest throughout the union without restriction.

Economic Union

An economic union typically will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labor, and also relegate some fiscal spending responsibilities to a supranational agency. The EU’s Common Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic union.

Monetary Union

A monetary union establishes a common currency among a group of countries. This involves the formation of a central monetary authority that will determine monetary policy for the entire group. The Maastricht treaty, signed by EU members in 1992, proposed the implementation of a single European currency (the Euro) by 1999.

Perhaps the best example of an economic and monetary union is the United States. Each U.S. state has its own government that sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor, and capital can all move freely, without restrictions among the U.S. states, and the nation sets a common external trade policy.

Canada’s Trade Agreements

The trade agreements of Canada represents Canada’s cooperation in multinational trade pacts and plays a large role in the development of Canadian economy. Canada is regularly described as a trading nation, considering its total trade is worth more than two-thirds of its GDP (Hart, 2003). Of that total trade, roughly 75% is done with countries that are part of free-trade agreements with Canada—primarily the United States through the Canada–United States–Mexico Agreement (CUSMA), and its predecessor the North American Free Trade Agreement (NAFTA) (Coyne, 2012) . According to Global Affairs Canada, one in every five Canadian jobs is directly linked to exports (Kingston, 2017) .

By 2030, two-thirds of middle – class consumers will be in Asia, which can create new trade opportunities for Canadian companies (Kingston, 2017). In 2020, merchandise trade between Canada and ASEAN reached $26.7 billion, making it evident that a free trade agreement would boost GDP and exports to ASEAN countries, create new market opportunities for Canadian goods and services, and support a more predictable environment for trade and investment. As a result, in November 2021, Canada and ASEAN nations agreed to proceed with Free Trade Agreement negotiations (Government of Canada, 2022).

Trade Programs

There is another way to facilitate and promote trade: Trade Security Programs. Participation in these programs helps make the customs clearance process easier and quicker. Each country has its own international trade security program; this section will discuss trade security programs in Canada and the US.

• PIP (Partners in Protection)
• Customs Self Assessment (CSA)
• FAST (Free and Secure Trade)
• Single Window Initiative
• Custom Trade – Partnership Against Terrorism (CT-PAT)

Let’s discuss each of these in detail.

Partners in Protection (PIP)

According to the Government of Canada (2014), “Partners in Protection (PIP) is a cooperative program between private industry and the CBSA (Canada Border Services Agency) aimed at enhancing border and trade chain security” (para. 1). Partners in Protection program:

• does not cost anything if an organization decides to participate in the program as a member
• is designed for business that have been identified as “trusted traders”
• outlines responsibility for these traders in PIP Terms and Conditions of Use.
• improves the efficiency of trading across the border
• allows your organization’s trading processes to be evaluated by the CBSA (Government of Canada, 2014)

To learn more, visit Partners in Protection by the Canadian Border Services Agency.

Customs Self Assessment (CSA)

According to Government of Canada (2008), “The Customs Self Assessment (CSA) program is designed for low-risk, pre-approved importers, carriers and registered drivers. To take advantage of the program, CSA-approved importers and carriers must use a registered driver to carry CSA-eligible goods into Canada in the highway mode.” The CSA program:

• makes imports of low-risk products, quick and easy, and
• helping CBSA to focus only on high-risk shipments.

To learn more, visit Customs Self Assessment Program by the Canadian Border Services Agency.

Free and Secure Trade (FAST)

The Free and Secure Trade (FAST) program is a joint United States – Canadian program between the Canada Border Services Agency and the U.S. Customs and Border Protection. The FAST initiative offers pre-authorized importers, carriers and drivers expedited clearance for eligible goods, building on what Canada previously implemented under their Customs Self Assessment (CSA) program (Government of Canada, 2021).

The program aims to clear shipments faster and more cheaply by:

• Reducing the information needed for border/customs clearance
• Eliminating the need for importers to transmit data for each transaction
• Dedicating lanes for FAST clearances at border crossings (Wikipedia, 2021).
• Reducing the rate of border examinations
• Verifying trade compliance away from the border
• Streamlining accounting and payment for all goods imported by approved importers (Canada only)

The FAST Card is available to drivers who Canada and the United States have jointly approved. Each country must approve carriers and importers separately. As a result, a FAST importer and/or carrier can choose to be approved only in Canada or only in the United States (Office of Press Secretary, 2002).

Single Window Initiative

The single-window system is a trade facilitation concept that allows an international (cross-border) trader to submit information to a single agency, rather than dealing with multiple agencies in multiple locations to obtain the necessary papers, permits, and clearances to complete their import or export processes.

“A single window is defined as a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfill all import, export, and transit related-related regulatory requirements” (World Custom Organization, n.d.).

In Canada, the Single Window Initiative is managed by Canada Border Services Agency (CBSA) and simplifies sharing of commercial data between importing countries and the government of Canada (Government of Canada, 2020).

Custom Trade – Partnership Against Terrorism (CT-PAT)

The Customs-Trade Partnership Against Terrorism (C-TPAT) is a voluntary supply-chain security program led by U.S. Customs and Border Protection (CBP) focused on improving the security of private companies’ supply chains concerning terrorism. The program was launched in November 2001 with seven initial participants, all large U.S. companies. As of December 1, 2014, the program had 10,854 members. The 4,315 importers in the program account for approximately 54% of the value of all merchandise imported into the U.S (Wikipedia, 2022) .

Media Attributions and References

Brad Cartwright. (n.d.). 3 Why do countries trade? | Introduction & overview | IB international economics | The global economy [Video]. YouTube. https://youtu.be/Jyw5p1EEZNM.

Canada Border Services Agency. (2015, July 20). Trusted traders [Video]. YouTube. https://youtu.be/SVxRtifbQuY.

Jieholee. (2016). [Trade processes pre-single window initiative] [Flowchart]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:BeforeSW.jpg#/media/File:BeforeSW.jpg.

Jieholee. (2016). [Trade processes post single window initiative] [Flowchart]. Wikimedia Commons. https://upload.wikimedia.org/wikipedia/commons/5/54/AfterSW.jpg.

Trade Harmonization

According to United Nations Trade Facilitation Implementation Guide, harmonization is

“the alignment of national procedures, operations and documents with international conventions, standards and practices. It can come from adopting and implementing the same standards as partner countries, either as part of a regional integration process or as a result of business decisions.”

Trade harmonization becomes even more important in international trade where multiple countries, languages and systems are involved. In simple words, Harmonization of trade implies standardized processes and procedures to facilitate and simplify trade. This section will cover the standardization of product classifications and documentation.

Standardization of Product Classification

Correct product classification is crucial as it helps prepare accurate documentation, calculate tariffs and taxes and completion of customs formalities. World Customs Organization (WCO) established a standardized product classification system in 1983 known worldwide as ‘Harmonized System (HS) Coding. HS Coding categorizes goods into approximately 5,000 commodity groups, used in by more than 200 countries worldwide. It is also known as the HS code or HTS — the Harmonized Tariff Schedule code (Zurkow, 2016).

The HS is organized logically by economic activity or component material. The HS is organized into 21 sections subdivided into 99 chapters. The 99 HS chapters are further subdivided into 1,244 headings and 5224 subheadings (Wikipedia, 2022). Section and Chapter titles describe broad  categories of goods, while headings and subheadings describe products in more detail. Generally, HS sections and chapters are arranged according to a product’s degree of manufacture or technological complexity. Natural commodities, such as live animals and vegetables are described in the early sections of the HS. In contrast, more evolved goods such as machinery and precision instruments are described in later sections.

Generally, the HS code consists of 6-digits. The first two digits designate the HS Chapter. The second two digits represent the HS heading. The third two digits designate the HS subheading. HS code 1006.30, for example, indicates Chapter 10 (Cereals), Heading 06 (Rice), and Subheading 30 (Semi-milled or wholly milled rice, whether or not polished or glazed).

Figure 6.4

Hierarchy of Harmonized Code: Example

Note. Example of hierarchical structure of the Harmonized System for rice. From Wikimedia Commons, 2016. CC-BY-SA-4.0. [Image description].

Use this online database to search list of products and commodities with their 6-digit, 4-digit and 2-digit HS codes: Foreign Trade Online.

The contracting parties (such as countries participating in international trade) to the Convention on the Harmonized Commodity Description and Coding System must agree to base their national tariff schedules on the HS nomenclature and legal notes. They can subdivide the HS nomenclature beyond 6-digits and add their legal notes according to their tariff and statistical requirements. Parties often set their customs duties at the 8-digit “tariff code” level. Statistical suffixes are often added to the 8-digit tariff code and make it 10 digits. If the number of digits is more than 8, additional digits are called the national subheading.

For example, a leather sofa can be classified as 9401.61.10.90.

Figure 6.5

HS Code Breakdown

Media Attributions and References

Canada Border Services Agency. (2016, March 4). Classifying imported goods [Video]. YouTube. https://www.youtube.com/watch?v=K4KML-rENVM.

Hsmind. (2016, February 17). Hierarchy of harmonized code: Example [Hierarchy Chart]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:HS_Hierarchy_Structure_Rice.jpg.

Different ways to facilitate international freight flows were discussed in the chapter. Realizing that countries gain from trade, it is important to simplify, facilitate, promote and harmonize it, various approaches that can help were discussed. First, the importance of Incoterms rules were highlighted, and 11 terms were discussed. Further, economic integration and trade security programs were explained wherein trade agreements, Canada’s Partners in protection, Free and Secure Trade, Customs Self – assessment, single – window initiative and US’s CT-PAT program were discussed. At last, Harmonized Coding System was introduced, highlighting its importance in the product classification world wide.

Key Terms

Economies – countries

Export – Sending the goods from originating country.

Exporters – A person or organization that sells products and services in foreign countries that are sourced from the home country.

GDP – Gross Domestic Product

Import – Receiving the goods in destination country.

Importers – A person or organization that sells products and services that are sourced from other countries.

International Trade – Bi-lateral or Multi-lateral exchange of goods and services.

Merchandise Trade – Trade in goods only

Multinational Trade Pacts – Trade policies between multiple nations

Storage – The act of storing something in a warehouse.

Tariffs – Tax or duty paid on exports/ imports.

Transportation – The entity handling the physical transportation of the goods, such as UPS, FedEx, and DHL.

World Trade Organization – WTO is a global organization that outlines rules to trade and all the member nations are bound to follow these rules.

References

Coyne, A. (2012, Mar 16). Andrew Coyne: Canada at the crossroad of trade. National Post. http://webarchive.loc.gov/all/20120324082649/http:/fullcomment.nationalpost.com/2012/03/16/andrew-coyne-canada-is-poised-to-win-front-door-access-to-a-billion-person-market/.

Customs-Trade Partnership Against Terrorism. (2022, May 10). In Wikipedia. Retrieved on May 10, 2022, from https://en.wikipedia.org/wiki/Customs-Trade_Partnership_Against_Terrorism#cite_note-C-TPAT_Achievements-1.

Export Development Canada (EDC). (2018, Jan 03). What are the benefits of Canada’s Trade Agreement?. https://www.edc.ca/en/article/benefits-of-canadas-trade-agreements.html.

Foreign Trade Online. (n.d.). HS Codes. https://www.foreign-trade.com/reference/hscode.htm.

Free and Secure Trade. (2021, Oct 17). In Wikipedia. Retrieved on May 10, 2022, from https://en.wikipedia.org/wiki/Free_and_Secure_Trade#cite_note-3.

Free Trade Agreements of Canada. (2022, Apr 8). In Wikipedia, Retrieved on May 10, 2022, from https://en.wikipedia.org/wiki/Free_trade_agreements_of_Canada.

Government of Canada. (2008). Customs self assessment program. https://cbsa-asfc.gc.ca/prog/csa-pad/menu-eng.html.

Government of Canada. (2020). Single Window Initiative. https://cbsa-asfc.gc.ca/prog/sw-gu/menu-eng.html.

Government of Canada. (2021). Free and Secure Trade. https://www.cbsa-asfc.gc.ca/prog/fast-expres/menu-eng.html.

Government of Canada. (2022). Partners in Protection. https://cbsa-asfc.gc.ca/security-securite/pip-pep/menu-eng.html.

Government of Canada. (n.d.). Canada-ASEAN Free Trade Agreement. https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/asean-anase/fta-ale/negotiations-negociations.aspx?lang=eng.

Government of Canada. (n.d.). Canadian customs tariff. https://cbsa-asfc.gc.ca/trade-commerce/tariff-tarif/menu-eng.html.

Greenlaw, S. A. & Shapiro, D. (2017). Principles of economics (2^nd ed.). OpenStax. https://opentextbc.ca/principlesofeconomics2eopenstax/chapter/absolute-and-comparative-advantage/. CC BY 4.0.

Harmonized System. (2022). In Wikipedia. Retrieved on May 10, 2022, from https://en.wikipedia.org/wiki/Harmonized_System#:~:text=From%20Wikipedia%2C%20the%20free%20encyclopedia%20The%20Harmonized%20Commodity,of%20names%20and%20numbers%20to%20classify%20traded%20products.

Hart, M. (2002). A trading nation: Canadian Trade Policy from colonialism to globalization. University of British Columbia Press.

IncotermsExplained.com. (n.d.). The Incoterms rules. https://www.incotermsexplained.com/the-incoterms-rules/incoterms-2010-rules/.

Kingston, B. (2017, Dec 19). Canadian Free Trade Agreements and why they are important. Export Development Canada (EDC). https://www.edc.ca/en/blog/importance-of-canadian-free-trade-agreements.html.

Lowe, D. (n.d.). Incoterms® 2020 vs 2010: What’s changed?. ICC Academy. https://icc.academy/incoterms-2020-vs-2010-whats-changed/.

OECD. (2018). Trade facilitation and the global economy [Report]. https://read.oecd-ilibrary.org/trade/trade-facilitation-and-the-global-economy_9789264277571-en#page1.

Office of the Press Secretary. (2002, September 9). United States – Canada Free and Secure Trade Program the FAST Program [Press Release]. The White House.  https://georgewbush-whitehouse.archives.gov/news/releases/2002/09/text/20020909-3.html.

Saylor Academy. (2012). International economics: Theory and policy (v.1.0). Saylor Academy. https://saylordotorg.github.io/text_international-economics-theory-and-policy/s12-10-economic-integration-free-trad.html. CC BY-NC-SA 3.0.

Suraraska, J., Amchang, C. & Sawatwong, N. (2020). Decision Making on Incoterms 2020 of Automotive Parts Manufacturers in Thailand. Journal of Asian Finance, Economics and Business, 7(10), 461 – 470. https://doi.org/10.13106/jafeb.2020.vol7.no10.461. CC BY-NC 4.0.

Thompson, B. (2020, Jan 20). Incoterms® 2020 explained – The complete guide. IncoDocs. https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/.

Trade Facilitation Implementation Guide. (n.d.). The Single Window Concept. https://tfig.unece.org/contents/single-window-for-trade.htm.

Trade Facilitation Implementation Guide. (n.d.). Trade facilitation – principles and benefits. https://tfig.unece.org/details.html.

Trade Facilitation. (2021). In Wikipedia, Retrieved on May 10, 2022, from https://en.wikipedia.org/wiki/Trade_facilitation.

Wood, G. & Aversa, F. (2019, June 27). Procurement contracts and INCOTERMS; How to ensure your supply contracts are not INCO-mpatible with INCOTERMS [Newsletter]. Baker McKenzie. https://bakerxchange.com/rv/ff004dd8f77a5993d00ea4f3f74ea2724a0b192d/p=6104317.

Zurkow, M. (2016). A Guide to the Harmonized System. Punctum Books. https://library.oapen.org/viewer/web/viewer.html?file=/bitstream/handle/20.500.12657/25497/1004598.pdf?sequence=1&isAllowed=y. CC BY-NC-SA 4.0.

Image Descriptions

Figure 6.1: The chart shows different Incoterm Rules and provides information about responsibility, cost and risk involved. The entire breakdown is explained in Media 6.1 video below this chart. [Return to image].

Figure 6.2: The image shows trade process where documents journey starts with port authorities and ends with regulatory agencies. Departure and arrival documents pass through the same process in two different countries to finally reach regulatory agencies making the process slow, costly, complicated, unpredictable and inefficient. [Return to image].

Figure 6.3: The image shows the functioning of single window system where documents are submitted once to the single window and are used whenever required by different authorities and government offices in importing and exporting countries. [Return to image].

Figure 6.4: The image shows 6-digit HS code classification for product Rice. As you go deep into the classification, products can be defined more specifically. In the figure there is an example for product rice. Its classification starts with the section, moving down to Chapter (2-digit), headings (4-digit) and subheadings (6-digit). For rice, it is a part of Section II (vegetable products), Chapter 10 (Cereals), Heading 10.06 (Rice) and subheading 1006.30 (Semi-milled or wholly milled rice, whether or not polished or glazed. [Return to image].

Alternative Text-Based Activities

Check Your Understanding: Incoterms Rules

Question 1:

What does Incoterms stand for:

• International Commerce Terms
• International Commercial Terms (Correct)
• Interactive Common Terms
• Innovative Commercial Terms

Feedback: Incoterms stand for International Commercial Terms.

Question 2:

Incoterm Rules 2020 are divided into four groups (____________) which consist of _____ terms.

• (A, B, C, D); 14
• (P,X,S,U); 7
• (C, F, A, W); 10
• (C,D,E,F); 11 (Correct)

Feedback: Incoterm Rules 2020 are divided into four groups (C, D, E, F), which consist of 11 terms.

Question 3:

In which two Incoterms Rules, seller must pay for insurance?

• EXW and DAP
• FOB and DDP
• FAS and DAP
• CIF and CIP (Correct)

Feedback: There are only two incoterms rules out of 11 for which seller must pay for insurance and they are CIF and CIP where ‘I’ stands for insurance.

Question 4:

Out of the following options, which incoterms rules is NOT multimodal?

• FCA
• CPT
• DDP
• CIF (Correct)

Feedback: CIF (Cost, Insurance and Freight) is single modal which applies only to sea and inland waterways.

Question 5:

Out of the following options, which incoterms rules is NOT single modal?

• FAS
• CFR
• DAP (Correct)
• CIF

Feedback: DAP (Delivered at Place) is multimodal which applies for land, air and waterway transportation. [Return to activity].

Check Your Understanding: Trade Facilitation and Promotion

Question 1:

Countries benefit from trade by (Check all that apply):

• Opening their economies to foreign goods, services, and finance (correct)
• Making their domestic markets more competitive (correct)
• Protecting domestic industry by reducing competition (Incorrect)

Question 2:

Economic Integration can be in the form of Preferential Trade Agreements, Free Trade Areas, Customs Union, Common Market, Economic Union and Monetary Union.

• True (Correct)
• False

Question 3:

USMCA (previously NAFTA is an example of a free trade area and include these three countries:

1. *US*
2. *Canada*
3. *Mexico*

Question 4:

What is the difference between Customs Union and Common Market. Fill in the blank to show your understanding:

A *customs union* occurs when a group of countries agrees to eliminate tariffs among themselves and set a common external tariff on imports from the rest of the world whereas A *common market* establishes free trade in goods and services, sets common external tariffs among members, and also allows for the free mobility of capital and labor across countries.

Question 5:

By 2030, two-thirds of middle- class consumers will be in Asia, which can create new trade opportunities for Canadian companies.

• True (Correct)
• False

Question 6:

Partners in Protection is a program led by the U.S. whereas Customs Trade-Partnership against terrorism is a trade program led by Canada.

• True
• False (Correct)

[Return to activity].

Check Your Understanding: Trade Harmonization

Essay-Based Question

Select a product importing to Canada. Using examples above, use Canada’s Customs Tariff Schedule to find it’s HS Code at 2-digit, 4-digit, 6-digit, 8-digit and 10 digit levels. Also, specify the tariff arrangement for that product.

Solution:

Let’s consider a product: Umbrellas

When looked into Customs Tariff Schedule, It was in Chapter 66 – Umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof.

When researched further, we were able to find it’s HS Code:

2-digit: 66 (Chapter 66 – Umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof)

4-digit: 66.01 (Umbrellas and sun umbrellas (including walking-stick umbrellas, garden umbrellas and similar umbrellas)

Let’s say now we are looking for Umbrellas that can be used in garden. HS Code will be:

6-digit: 66.01.10 (Umbrellas and sun umbrellas (including walking-stick umbrellas, garden umbrellas and similar umbrellas) – Garden or similar umbrellas

8-digit: 66.01.10.00

10-digit: 66.01.10.00.00

To find Tariff, we need to look into custom’s tariff schedule again.

So, the tariff on our selected product is: 7% MFN Tariff; For CCCT, LDCT, UST, MXT, CIAT, CT, CRT, IT, NT, SLT, PT, COLT, JT, PAT, HNT, KRT, CEUT, UAT, CPTPT, UKT: Free and For GPT: 5%.

[Return to activity].

Watch or Listen the Following Media Clip

Media 7.1  Global Value Chains: The Production Revolution of the 21st Century. [Video]. OCED.

Introduction

Globalization transformed international business significantly by enhancing cutting-edge technology as well as increasing shipping trade worldwide. As a result, the connection between countries and continents became shorter and faster, impacting economic performance and gaining economic benefits. On the other hand, due to globalization and trade openness, companies faced challenges that amplified the vulnerability in Supply Chain Management and increased the risks. Supply Chain Management can promote competitiveness in the business field, and risk mitigation strategies can help organizations reduce risks such as human-made or natural disasters (Gurtu & Johny, 2021). CC BY-4.0

Media Attributions and References

OECD. (2013, May 27). Global value chains: The production revolution of the 21st century [Video]. YouTube. https://youtu.be/ktx2_Dzy3tM

What is vulnerability? According to the Cambridge University Press (2022),

“Vulnerability is the quality of being vulnerable (able to be easily hurt, influenced, or attacked), or something that is vulnerable” (Cambridge University Press, 2022).

Risks have always existed everywhere; however, globalization has increased the risk significantly internally and externally. Challenges within the global value chain could be lack of visibility within companies, chaos, inaccurate research or forecast, human mistakes, mother nature, political situation and so forth. The global value chain is a complex model with simultaneous flow of information and products . The right quantity of products must be effectively delivered to the right place and the right customer. Globalization has made the global value chain model more sophisticated and more vulnerable for all parties, with many interruptions and disruptions on the supply chain network. Nataliya Smorodinskaya, Daniel Katukov & Viacheslav Malygin (2021) presented a typical global value chain organizational model that can help you understand various value chain activities, which each of them can be at risk and have challenges.

Consider This: Global Value Chain Vulnerability

The following material is adapted from Global Value Chains in the Age of Uncertainty: Advantages, Vulnerabilities, and Ways for Enhancing Resilience by Smorodinskaya, Katukov & Malygin (2021) under Creative Commons Attribution License 4.0.

The concept of Global Value Chain relies on the value chain organizational model used for mapping particular firms, activities, and geographic locations involved in the co-creation of a final product, be it a physical good, a service or an enabling technology. This model is multi-structural, containing four key elements.

Figure 7.1
A typical Global Value Chain organizational model (industry-neutral)

Note. From Smorodinskaya, Katukov & Malygin, 2021. CC BY-4.0

They are:

1. six main value-adding activities representing basic operational functions that Global Value Chains firms are engaged in to bring a product from an idea to the end use.
2. four main supply chain stages (often termed in literature as ‘supply chains’ or ‘global supply chains’) illustrating the input–output structure of a product or the downstream flow of inter-firm interactions for its creation. Each stage represents supplier firms from a certain sector that can be further disaggregated into subsectors or intermediates delivered by second- or third-tier suppliers.
3. end markets for final goods (basically, an extension of the supply chain), classified into several categories within a given industry, such as producer specific markets (e.g., for consumer electronics or automotive electronics in the electronics chains), buyer-specific markets (e.g., for retail consumers or industrial buyers in the apparel industry chains), and geographic markets.
4. supporting environment uniting multiple local or global actors who do not directly produce and trade products but provide various supporting and regulative facilities enabling the chain’s smooth functioning (from utility providers and financial institutions to governments and international organisations)

For 30 years of evolution, the distributed production system has fundamentally enhanced functional interdependences among suppliers, their industry domains and their countries of origin, thus making the world economy much more interconnected through transnational flows of trade, foreign direct investment [FDI] and labour force. This interconnectedness not only brings mutual benefits but also risks to Value Chain Partners.

In economic and business literature, uncertainty is viewed as the probability of risk occurrence, when unexpected events cause certain kinds of damage to systems’ economic performance, with the scale of this damage being neither predicted nor insured against. Indeed, participation in Global Value Chain’s [GVC] allow companies and economies to co-create increasingly complex products that they would never manufacture on their own. But at the same time, the involvement in value-added production and trade puts interdependent Global Value Chain partners at risk of rolling disruptions in their performance in case of a sudden idiosyncratic shock happening at the level of a certain supplier firm (Smorodinskaya, Katukov & Malygin, 2021).

GVCs Under the Pandemic Shock

Since the start of the digital age, GVCs and their supplier ecosystems have been facing increasingly frequent and severe systemic shocks of various origins, causing supply disruptions and imposing damage on international business and national economies. So, the propagation of shocks through supply chains and its macroeconomic implications have been widely studied even before the COVID-19 pandemic, both in economic and management literature, both theoretically and empirically. According to McKinsey Global Institute, over the past decade, at least one-month-long disruptions in supplier networks occurred on average every 3.7 years, with one major disruption capable to stop production in a GVC for 100 days, thus depriving firms in a number of industries of annual revenues. In the year of 2019 alone, the supply disruptions caused only by natural disasters had imposed damage on the world economy up to USD 40 billion. However, the 2020 pandemic crisis has brought the worst shock to the distributed production system for its entire 30-years evolvement. The crisis has demonstrated that increased interconnectedness of economies as GVCs’ partners can put them at enormous destabilizing risks in case of a sudden fall in deliveries from just a single country, particularly from China. It has become clear that with all its advantages the modern system of production and trade is yet not tailored to safely meet powerful unpredictable shocks and should be seen fundamentally vulnerable to impacts of rising uncertainty. Among the biggest disruption risks that had fully realized at the start of the crisis was a combination of two factors — the involvement of GVCs’ country partners in the just-in-time delivery practices that had critically increased their interdependences and the revealed dependence of a significant share of these countries on intermediary imports from China, that had been steadily growing through over the past decade.

(Smorodinskaya et al., 2021) CC-BY-4.0

This is an excellent example of a current challenge that our world and global value chain have now faced and are dealing with it.

Media Attributions and References

Smorodinskaya, N., Katukov, D., & Malygin, V. (2021). Global value chains in the age of uncertainty: advantages, vulnerabilities, and ways for enhancing resilience. Baltic Region (13), 78-107. https://journals.kantiana.ru/eng/baltic_region/4953/31214/

Figure 7.2
Dice

Note. Dice with letters arranged to form words: profit, loss, risk. From AbsolutVision, 2017. Pixabay Licence

Risk is a possibility of an event that can occur and affect the global value chain. There are different types of risks: external and internal, and distribution channel risks. These risks can be predictable, unpredictable, controllable, uncontrollable, technical, non-technical. Some of them combine a few criteria, such as predictable and uncontrollable or unpredictable and uncontrollable. External risks are risks that the firm cannot control and often are difficult to influence. Therefore, they require a complex approach and try to identify and mitigate them.

According to the FITT (2013), external risks can be predictable and uncontrollable such as cost fluctuations, market risks, inflation, environmental, operational, taxation. In addition, external risks can be unpredictable, such as natural hazards and sabotage, which are uncontrollable (FITT, 2013). Internal risks are risks that the company can control, and they are technical and non-technical. These risks are controllable because the organization can eliminate or avoid them. For example, non-technical internal risks are human error, management, delays, inappropriate procurement, or loss of profits (FITT, 2013). Non-technical risks are related to the interactions between stakeholders such as the public, government, regulatory, partners, contractors, communities. Technical internal risks consist of risks associated with technology and design issues. These risks impact the following parts of the organizational model of the global value chain: value-adding activities, supply chain stages, supporting environment, and end markets such as buyer, producer, or geographic market (Smorodinskaya et al., 2021).

Risks in the global value chain significantly influence domestic and international companies and the environmental organizations overall.

The most identified risks in the global value chain are political, accidents, natural disasters, product integrity, physical supply security (theft), cybersecurity, financial supply chain, performance risks (Supply Chain Risk, 2020, February 18). CC-BY-SA-4.0

Figure 7.3
Supply Chain Risks

Additionally, a stable political environment helps businesses flourish and maintain long-term plans because of a business-friendly political environment. A great source of checking a country’s political stability is Global Economy.com (2022). For example, the strongest indicator of the politically stable countries is Liechtenstein, Andorra, New Zealand, and Singapore, while the weakest are Syria, Afghanistan, Yemen, and Iraq. The lowest countries are often developing countries with more extreme instability caused by civil wars, corruption, turmoil, or protectionism. Firms have no control over politically unstable countries and their problems that can cause disruptions within the global value chain. Moreover, companies often cannot operate within the country during a difficult time, and they often lose permission or lose business.

Please explore the Global Economy website.

A lack of foresight risks in the organization can cause disruptions. Disruptions can ripple through the global value chain, which causes vulnerability, uncertainty, and colossal loss of money. For example, during economic hardship, disturbances in the global value chain cost a lot for organizations. According to Statista (2021), an average 184 million US dollars per year costs organizations worldwide supply chain disruptions. The highest annual average cost in the United States accounted for 228 million US dollars. View graph Estimated average annual cost to respondents’ organizations as a result of global supply chain disruptions in 2021, by region or country. [Chart description].

Media Attributions and References

AbsolutVision. (2017). Dice over newspaper. [Photograph]. Pixabay. https://pixabay.com/illustrations/dices-over-newspaper-profit-2656028/

Global News. (2020, April 9). Coronavirus outbreak: The impact COVID-19 is having on the global economy. [Video]. YouTube. https://www.youtube.com/watch?v=0cGLrSpaf4o

Heavy Lift Specialist. (2018, March 20). Container vessel collision in Karachi Port. [Video]. YouTube. https://www.youtube.com/watch?v=Y0OY9XrOLcs

Los Angeles Times. (2020, August 14). Aftermath of explosion at Beirut port. [Video]. YouTube. https://www.youtube.com/watch?v=BuTVd_jwRuw

Practical Engineering. (n.d.). What really happened at the Suez Canal? [Video]. YouTube. https://www.youtube.com/watch?v=Ty-m4pm8oog

Quest TV. (2021, April 1). Explosion In China which could be seen from space | Disasters engineered. [Video]. YouTube. https://www.youtube.com/watch?v=z39sNRK614U

Effective Risk Management Processes

Companies need to use an effective risk management process that consists of the following steps: identifying, assessing, responding, communicating, and monitoring risks in the global value chain. The process is the so-called risk management cycle. The risk management cycle is a helpful tool for helping companies in a variety of industries to recognize potential risks at all levels and then manage risks at all levels. The most comprehensive risk management cycle was created by the Government of Canada (2016). The risk management cycle helps organizations to choose “the best course of action under uncertainty” (Government of Canada, 2016). The cycle includes the following steps: identity, assess, respond, communicate, and monitor risks (Government of Canada (2016). It is a systematic, proactive, and ongoing process that equips organizations to be more effective, high-performance, and build confidence when companies face uncertainty (Government of Canada, 2016).

Identifying Risk

Identifying risk in the global value chain is the initial step in the risk management process. In this step, the organization has to identify as many risks as possible and share them with every stakeholder and third party. Next, identify warning signs of risks by creating questions, for example, is our new technology proven and mature for the global value chain? Why does the organization have significant gaps between partners and information? Why does the organization not have a mitigation or contingency plan? (FITT, 2021)

The organization should spread the mitigation plan, expectations, and valuable tools with stakeholders, partners, and staff. According to the Government of Canada (2016), there are several techniques and tools available for identifying risks, such as checklists, workshops, and risk assessment forms (Government of Canada (2016). In addition, identification activities have to be provided by the staff, such as identifying people who should be involved in identifying risk roles, how to document identified risk and what type of information should be collected and recorded (Government of Canada, 2016).

Assessing Risk

Assessing risk includes analyzing and prioritizing steps (Government of Canada, 2016). The scope of the risk has to be determined by the assigned person. Also, determine the factors about the severity of this risk and how this risk impacted businesses in the past. The likelihood and the impact of an event are the significant parts of this step. The organization should take into account two terms together impact and probability. Probability is how often the event occurs in the past. For assessing risks, companies should characterize, evaluate, and prioritize risks for supporting the chosen decision. This action will help the organization to manage risk in the future. There are a variety of assessments: qualitative, quantitative, and semi-quantitative. Quantitative assessment consists of numerical risk criteria such as numbers which can be counted or measured. Qualitative assessment based on the qualitative descriptions of risks, for example characteristics or information that cannot be counted. Semi-quantitative which combines quantitative and qualitative data. After getting information, risks have to be measured and ranked. The top priority risks have the highest probability and greatest impacts (FITT, 2021). There are a few specially designed tables for this purpose.

Responding to Risk

According to the Government of Canada (2016), this step includes selecting and implementing measures to the risk. Responding to the threat has several mitigation strategies: accepting, reducing, avoiding, monitoring, and transferring risks (Government of Canada, 2016). Accepting risk is the same as retention risk, and an organization accepts particular risk because it is not enough to spend money to mitigate it. For example, it can cost a small amount of money. Accepting is the most common approach for small risks in the global value chain. Reducing risks can be through control or prevention. Installing security systems, burglar alarms, protective equipment, and insurance companies are common approaches to minimizing risks. Avoidance strategy is applicable for organizations that want to eliminate as many challenges as possible and potential risk sources. This strategy is not acceptable for all hazards and can be mitigated by creating policies, procedures, training and so forth. For example, if a country has the weakest political stability, the company can avoid the political risk and avoid expansion to that country. Monitoring risks have to be an ongoing process within the global value chain. Companies can transfer risks to the insurance company by purchasing an insurance policy. Also, transfer risk to the third party who will be responsible for consequences and loss, meaning transferring risks.

Communicating Risk

The government of Canada (2016) describes this step as the risk management process of making decisions according to the communication and reporting information about risks to the particular department. The communication process must be internally between employees and externally between clients, stakeholders, and third parties. An integral part of communications is providing enough information to make the right decision (Government of Canada, 2016).

Monitoring Risk

Regular review of risks’ information and mitigation plan is an ongoing process for the global value chain. Review risk responses to ensure that the plan is implemented effectively and efficiently. It is an essential part of the whole cycle because new improvements or opportunities can be effectively identified and executed (Government of Canada, 2016).

Figure 7.4
Risk Management Cycle

Note. Adapted from Government of Canada, 2016.

Media Attributions and References

AIMS Education, UK. (2022, January 14). Supply chain risk management (SCRM) | AIMS UK. [Video]. YouTube. https://www.youtube.com/watch?v=7-jpmngs6aw

Government of Canada. (2016, May 12). Guide to integrated risk management. https://www.canada.ca/en/treasury-board-secretariat/corporate/risk-management/guide-integrated-risk-management.html#toc4_6

Globalization transformed international business significantly by enhancing cutting-edge technology as well as decreasing shipping trade worldwide. As a result, the connection between countries and continents became shorter and faster, impacting economic performance and gaining economic benefits. On the other hand, due to globalization and trade openness, companies faced challenges that amplified the vulnerability in Supply Chain Management and increased the risks. Supply Chain Management can promote competitiveness in the business field, and risk mitigation strategies can help organizations reduce risks such as human-made or natural disasters (Gurtu & Johny, 2021).

Risk is a possibility of an event that can occur and affect the global value chain. There are different types of risks: external and internal, and distribution channel risks. Risks in the global value chain significantly influence domestic and international companies and the environmental organizations overall. A lack of foresight risks in the organization can cause disruptions. Disruptions can ripple through the global value chain, which causes vulnerability, uncertainty, and colossal loss of money. The risk management cycle is a helpful tool for helping companies in a variety of industries to recognize potential risks at all levels and then manage risks at all levels.

Key Terms

Force majeure disruption – “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement.” (Cambridge Dictionary, 2022)

Chapter References

Cambridge University Press. (2020). Force majeure. In Cambridge dictionary. https://dictionary.cambridge.org/dictionary/english/force-majeure

Cambridge University Press. (2022). Vulnerability. In Cambridge dictionary. https://dictionary.cambridge.org/dictionary/english/vulnerability

FITT. (2021). FITTskills: Global value chain (7th ed.). Forum for International Trade Training.

FITT. (2013). FITTskills: International trade management (6th ed.). Forum for International Trade Training.

Government of Canada. (2016). Guide to integrated risk management. https://www.canada.ca/en/treasury-board-secretariat/corporate/risk-management/guide-integrated-risk-management.html#toc4_6

Gurtu, A., & Johny, J. (2021). Supply chain risk management: Literature review. Risks, 9(1), 16. https://doi.org/10.3390/risks9010016. CC BY-4.0

Interos. (June 30, 2021). Estimated average annual cost to respondents’ organizations as a result of global supply chain disruptions in 2021, by region or country (in million U.S. dollars) [Graph]. Statista. https://www.statista.com/statistics/1259125/cost-supply-chain-disruption-country/

Open Risk Manual. (2021). Supply chain risk. https://www.openriskmanual.org/wiki/IT_Risk

Sheffi, Y., & Rice, J.B. Jr. 2005. A supply chain view of the resilient enterprise. MIT Sloan Management Review (47), 41. https://www.proquest.com/docview/224969684?pq-origsite=gscholar&fromopenview=true

Smorodinskaya, N., Katukov, D., & Malygin, V. (2021). Global value chains in the age of uncertainty: advantages, vulnerabilities, and ways for enhancing resilience. Baltic Region (13), 78-107. https://journals.kantiana.ru/eng/baltic_region/4953/31214/

Supply Chain Risk. (2020, February 18). In Open Risk Manual. https://www.openriskmanual.org/wiki/index.php?title=Supply_Chain_Risk&oldid=13807.

Image Descriptions

Fig 7.1: Value adding activities (across top): Research and development, design and development, manufacturing, distribution and logistics, sales and marketing, services.
Supply chain stages (centre left): Initial inputs (materials/commodities sector, supporting inputs from sector), intermediate goods (components sector (sub-sector)), final goods (final goods sector), distribution and sales (distribution and sales sector (sub-sector)).
End markets (centre right): producer-specific, buyer specific, geographic markets.
Supporting environment (across bottom): infrastructure and finances, government agencies, business, information &amp; technology services, education, testing and training, trade and professional associations, NGOs and standards. [Return to image].

Fig 7.3: 3 categories of risks.
External risks are risks that cannot be controlled by the firm (natural factors, geopolitical, government, consumer preferences, economic, competitors, cyber attacks, changes in environment, technological, market failures, social, commercial, regulatory climate, ecological, legislation).
Distribution channel risks are risks that combine of controllable and uncontrollable risks (loss of merchandise, labour unavailability, information accuracy, cargo damage, disasters, infrastructure unavailability, quality of insurance risks, outsourcing risks, partnering risks, supplier performance risk). Internal risks are risk that can be controlled by the company (privacy, security, supply network, forecasting accuracy, reputation, corporate controls, employees, operation &amp; producing, legal, non-performance, management &amp; procurement, human error, technical, non-technical, deficient knowledge). Below the columns of risks are arrows pointing cumulatively to value adding activities, supply chain stages, supporting environment, end market. [Return to image].

Fig 7.4: United States 228 million, Nordic countries 196 million, Global 184 million, United Kingdom 146 million, DACH 145 million [Return to image].

Fig 7.5: Risk management cycle: Identifying, Assessing, Responding, Communicating, Monitoring

Alternative Text-Based Activities

Assessing What You Already Know

Question 1:

Globalization transformed international business significantly by enhancing cutting-edge technology as well as increasing shipping trade worldwide.

• True (Correct)
• False

Feedback: It is true that globalization transformed international business significantly by enhancing cutting-edge technology as well as increasing shipping trade worldwide. As a result, the connection between countries and continents became shorter and faster, impacting economic performance and gaining economic benefits.

Question 2:

Supply Chain Management can promote (______) in the business field, and risk mitigation strategies can help organizations reduce (_____) such as human-made or natural disasters.

• competitiveness, risks (Correct)
• ways, opportunities
• relationships, problems
• networking, issues

Feedback: Supply Chain Management can promote competitiveness in the business field, and risk mitigation strategies can help organizations reduce risks such as human-made or natural disasters.

Question 3:

Globalization has increased the risk significantly (______) and (______).

• internally, externally (Correct)
• globally, internally

Feedback: Risks have always existed everywhere; however, globalization has increased the risk significantly internally and externally. Challenges within the global value chain could be lack of visibility within companies, chaos, inaccurate research or forecast, human mistakes, mother nature, political situation and so forth.

Question 4:

What is vulnerability? Write your answer in the box below.

Feedback: According to the Cambridge University Press (2022),
“Vulnerability is the quality of being vulnerable (able to be easily hurt, influenced, or attacked), or something that is vulnerable” (Cambridge University Press, 2022).

[Return to activity].

Check Your Understanding: Explain the concept of value chain vulnerability by reviewing current challenges

Question 1:

Globalization has made the global value chain model more sophisticated and more vulnerable for all parties, with many interruptions and disruptions on the supply chain network.

• True (Correct)
• False

Feedback: Globalization has made the global value chain model more sophisticated and more vulnerable for all parties, with many interruptions and disruptions on the supply chain network. The global value chain is a complex model with simultaneous flow of information and products .

Question 2:

How many value-adding activities representing basic operational functions exist?

• 4
• 6 (Correct)
• 7
• 8
• 5

Feedback: 6 (six) main value-adding activities representing basic operational functions that Global Value Chains firms are engaged in to bring a product from an idea to the end use.

Question 3:

Choose the right value-adding activities below. Check all that apply.

• Research and development (Correct)
• Design and development(Correct)
• Manufacturing(Correct)
• Education, tasting, and training (Incorrect)
• Distribution and logistics(Correct)
• Sales and marketing(Correct)
• Service(Correct)

Feedback: Research and development, Design and development, Manufacturing, Distribution and logistics, Sales and marketing, Service

Question 4:

Drag and Drop activities in correct Category

[Return to activity].

Check Your Understanding: Identify types of risks and disruptions

Question 1:

Drag and drop risks into correct category

Question 2:

Drag and Drop definitions in correct Category

Question 3:

According to the FITT (2013), external risks can be (__________) such as cost fluctuations, market risks, inflation, environmental, operational, taxation.

• predictable and uncontrollable (Correct)
• unpredictable and uncontrollable
• unpredictable and controllable

Feedback: According to the FITT (2013), external risks can be predictable and uncontrollable such as cost fluctuations, market risks, inflation, environmental, operational, taxation. In addition, external risks can be unpredictable, such as natural hazards and sabotage, which are uncontrollable (FITT, 2013).

Question 4:

According to Silva and Reddy (2011), (______) % of the U.S. organizations suffered more than USD 1 billion in sales in the previous five years due to volatile disruption in the business cycle, with the most recurrent disruption caused by unmanageable natural disasters.

• 83
• 94
• 63
• 73 (Correct)
• 67

Feedback: According to Silva and Reddy (2011), 73% of the U.S. organizations suffered more than USD 1 billion in sales in the previous five years due to volatile disruption in the business cycle, with the most recurrent disruption caused by unmanageable natural disasters.

[Return to activity]

Check Your Understanding: Examine risk management strategies to mitigate the supply chain vulnerability

Question 1:

Risk management refers to implementing strategies and plans to manage supply chain networks through inconstant risk assessment and increasing vulnerabilities to ensure resilience in supply chains.

• True
• False (Correct)

Feedback: Risk management refers to the implementation of strategies and plans to manage supply chain networks through constant risk assessment and reduce vulnerabilities to ensure resilience in supply chains. All supply chains do not have the same risks, but some risks are common. The risks are also specific to an area of business or the field of study.

Question 2:

According to the Government of Canada, how many steps does an effective risk management process consist of?

• 4
• 5 (Correct)
• 7
• 3
• 9
• 6

Feedback: Companies need to use an effective risk management process that consists of the following steps: identifying, assessing, responding, communicating, and monitoring risks in the global value chain. The process is the so-called risk management cycle.

Question 3:

Drag and Drop explanations in correct Category

Question 4:

Choose strategies to control risk. Check all that apply.

• Prevention(Correct)
• Rescheduling(Correct)
• Conjecture(Correct)
• numerical and economic(Correct)
• vertical integration(Correct)
• Risk-sharing(Correct)
• technology and security (Correct)
• Scheduling (Incorrect)
• Support(Incorrect)
• Horizontal integration(Incorrect)

Feedback: Strategies to control risk may be divided into seven categories: prevention, rescheduling, conjecture, numerical and economic, vertical integration, risk-sharing, and technology and security. [Return to activity].

Watch or Listen to the Following Media Clip

Media 8.1  What is Sustainability. [Video]. UCLA.

Introduction

Global climate change, intense competition, social and environmental responsibility forces the global value chain to vigorously act and use the world’s resources more efficiently, commit to sustainable practices and be competitive nowadays. Three aspects should be included in the sustainable value chain to gain beneficial economic, social, and environmental results. First, many businesses put a lot of effort into demonstrating environmental and social responsibilities. The global value chain uses many global resources, money, human resources, and unnecessary sources. The total environmental impact shown in figure 1 below, where only greenhouse gas emissions from the most significant companies worldwide accounted for 31 percent out of 100 percent (Trucost & GreenBiz, 2018). All companies should start measuring social, environmental and economic impact from the beginning to the end of the product’s life cycle of their services and good; otherwise, the planet will deplete. View graph Distribution of natural capital impacts among companies worldwide in 2016, by issue. [Chart description].

Media Attributions and References

OCED. (2013, May 27). Global value chains: The production revolution of the 21st century [Video]. YouTube. https://www.youtube.com/watch?v=ktx2_Dzy3tM

TED. (2020, February 14). How supply chain transparency can help the planet | Markus Mutz [Video]. YouTube. https://www.youtube.com/watch?v=ygxh6KR4BPk

TEDx Talks. (2015, May 5). Sustainability of supply chains in the age of information | Tom Pathuis | TEDxYouth@Maastricht [Video]. YouTube. https://www.youtube.com/watch?v=zKOkEEmtlIo

UCLA. (2021, April 13). What is sustainability [Video]. YouTube. https://www.youtube.com/watch?v=zx04Kl8y4dE

When companies aim at minimizing the impact on the environment while benefiting the communities and the people, they address global issues and focus on Sustainable Value Chain. Sustainable value chain is a concept that focuses on global issues such as human rights, global warming and melting ice caps, fair labour practices, marine pollution, decreases of forest cover, plastic pollution, air pollution, etc. For example, many global values chain companies focus on the speed, delivery, cost, reliability, and quality of goods and operations. Still, only a few companies add strategic goals to consider global issues’ environmental and human impact. These strategic goals can be decreasing carbon emissions and improving labour conditions. There are many ways of reducing the impact on the environment: changing the liner business model towards sustainable, inclusive, and resilient value chains is vital nowadays. In addition, companies have to look at the source of materials and their impact on the earth. Sustainability is an opportunity for businesses, but it is hard to understand the global goals, trade, policies, and improving three main parts simultaneously: social, environmental, and economical. Moreover, the sustainable value chain is related to the core of the whole business, from the strategy to developing products and relationships.

Figure 8.1
Untitled Photo

Note. From LeBoutillier, 2021. Unsplash License.

Media Attributions and References

Amin Khorsand. (2019, August 27). Iran tractor factory [Photograph]. Unsplash. https://unsplash.com/photos/tAnzPbVXjQo

LeBoutiller, C. (2021, January 21). Untitled photo [Photograph]. Unsplash. https://unsplash.com/photos/TUJud0AWAPI

TED Institute. (2018, February 15). The complex path to sustainability | Olivia Tyler. [Video]. YouTube. https://www.youtube.com/watch?v=5lgxdOTIrCo

The European Union, the national government of many countries and businesses worldwide, promoted the concept of the so-called Circular Economy (CE) (Korhonen, Honkasalo & Seppälä, 2018). According to the European Commission, 600 billion euros can gain the manufacturing sector alone for the EU after the transition to the circular economy-type economy. Only the national Finland economy can earn 2.5 billion euros through a circular economy, and the global economy estimated benefits by 1000 billion US dollars annually (Korhonen, Honkasalo & Seppälä, 2018). It’s interesting to say that the first country was China, which adopted the circular economy in 2008 because it was recommended for economic growth and part of the country’s sustainable environmental and economic development (Korhonen, Honkasalo & Seppälä, 2018).

With the dawn of industrialization, the circular economy is a great practice to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities (Korhonen, Honkasalo & Seppälä, 2018). A circular economy implies the following solutions to reduce adverse environmental effects: remanufacturing, repair, reuse, refurbishment, disposal, cascading, upgrading, and recycling. Please see figure 8.3 below. Authors of the academic journal “Circular Economy: The Concept and its Limitations” (2018) have given the current concept of circular economy with inner circles of product reuse, recycling, disposal, remanufacturing. Those inner circles demand less energy, fewer resources, and it is more economical than the standard recycling of goods. It is essential to know that the time within circles must be maximized (Korhonen, Honkasalo & Seppälä, 2018). According to the CE, the latest material should be landfill disposal, and the last option has been combustion for energy (Korhonen, Honkasalo & Seppälä, 2018). Authors have mentioned that the product’s life cycle and its value should retain the highest possible quality/value as long as possible (Korhonen, Honkasalo & Seppälä, 2018). The Circular Economy concept is popular nowadays because it extends the utilization of typical waste of materials by utilizing the value embedded in products.

Figure 8.3
The Current Concept of Circular Economy

Note. Adapted from Korhonen, Honkasalo, & Seppälä, 2018. [Image description].

The circular economy is the win-win-win potential for sustainable development because the CE contributes to sustainable development’s economic, social, and environmental dimensions (Korhonen, Honkasalo & Seppälä, 2018). Read more about the Circular Economy.

Let’s look into the statistics below and interesting diagrams that clearly explain the Circular Economic system diagram concept, European countries with a circular economy strategy, job breakdown by pillar and sector in 2017 in terms of the number of people employed.

Consider This: Circular Economic (CE) Systems Statistics and Visuals

The following material is adapted from Field Actions Science Reports, 23, 4-7 by Circular Economy: Strategies and Policies (2021) under a Creative Commons Attribution License 4.0.

Figure 8.4

Circular Economy System Diagram

The diagram illustrates different strategies for looping material and energy flows to reduce resource extraction (top half) and avoid waste creation (bottom half). Two types of circularity strategies are depicted: for technical inputs from non-renewable resources (right-hand side) and for biochemical inputs from renewable resources (left-hand side). In principle, the shorter the loop (e.g.: maintenance, reuse), the greater the likelihood of maintaining economic value and minimizing environmental impacts (Circular economy: strategies and policies, 2021).

Figure 8.5

European Countries with a Circular Economy Strategy

This map, taken from a European Environment Agency study, shows countries which had adopted a national resource efficiency or circular economy strategy or action plan as of 2019. The colour legend indicates the state of progress with these measures. The map does not show countries that have simply indicated an intention to take action in the future. In total, 21 of the 32 countries in the study stated they had begun work on drafting national policies relating to the circular economy (Circular economy: strategies and policies, 2021).

Figure 8.6

Job Breakdown by Pillar and Sector in 2017 in Terms of the Number of People Employed
 

This is one of eleven indicators used to track circularity in the French economy. It seeks to quantify the number of jobs associated with economic activities within the circular economy. Only activities relating to “extended life” and “recycling” are studied here, i.e. reuse and repair of goods, waste collection and materials recovery. These activities create more jobs per unit managed than activities relating to waste disposal (landfill and incineration).(Circular economy: strategies and policies, 2021) CC-BY-4.0

Media Attributions and References

Circular Economy: Strategies and Policies. (2021, December 9). Field action science reports (23), 4-7. Institut Veolia. https://journals.openedition.org/factsreports/pdf/6515

Korhonen, J., Honkasalo, A., & Seppälä, J. (2018). Circular economy: The concept and its limitations. Ecological Economics (143), 37–46. https://doi.org/10.1016/j.ecolecon.2017.06.041

Harvard Business Review (2020) has mentioned the rising number of corporations that pledged to work with companies that adhere to environmental and social standards. Standards are related to suppliers, and those suppliers have to comply with those commitments; otherwise, multinational corporations cease working with them. This action creates sustainable practice, smoothly spread worldwide within the global value chain. However, according to the article, realizing this practice is hard for corporations to comply with social and environmental standards simultaneously. In addition, multinational corporations faced scandals that arose from their standards because suppliers were aware that these standards violated them.

Villena and Gioia (2020), authors of the article from Harvard Business Review, have posted best practices for multinational corporations for promoting environmental and social responsibility:

• They have to establish long-term sustainable goals;
• First-tier suppliers must establish their own long-term sustainability goals;
• Lower-tier suppliers should be included in the global corporate sustainability strategy;
• An employee responsible for promoting sustainability programs to lower and first-tier suppliers;
• First-tier suppliers have to be annually assessed by asking about their safety, health, labour, and environmental practices in their workplace;
• Conduct a survey about the sustainability of the supply chain to comply with multinational corporations’ requirements within the company. There are many indicators and critical performance within the company to monitor supplier sustainability annually;
• Training first-tier suppliers to comply with their standards as well as providing incentives for using sustainability practices. The training and incentives led suppliers to increase awareness and make significant changes within the industry; (Villena & Gioia, 2020).
• Invite suppliers to the workplace and spread best practices related to the sustainability of the supply chain;
• Collaborating and cooperating with competitors to comply with these sustainable practices because fighting alone with this problem is impossible;
• Collaborative initiatives can increase awareness about sustainable practices and standards, increasing efficiency for suppliers and simultaneously satisfying customer needs. That is why suppliers will be willing to follow these requirements and be members of an association. Industry associations have a lot of benefits for parties and members because all of them are prominent actors in that scene;
• Collaborate with NGOs and international associations for adopting and spreading sustainable practices and strategies within all industries. Spread information about the importance of complying with economic, social, and environmental standards.

These best practices are recommended for companies to adopt, use and spread through the supply network.

Managers can potentially improve indicators and simultaneously make their supply chains more sustainable. Gargalo, Pons, Barbosa-Povoa, & Carvalho (2021) created a table of recommendations for each indicator (Gargalo, Pons, Barbosa-Povoa, & Carvalho, 2021).

The main dimensions of sustainability in the global value chain are environmental, economic, and social dimensions. Integration of three dimensions, economic, social, and environmental, can help companies achieve a long-term goal, and the sustainable supply chain is a crucial success factor for the future. This concept is not only theoretical but enduring. Interesting that only proactive organizations can build sustainable supply chains and products (Sureka, Shiva, Palkar, Jarwal & Bhavsar, 2021). Organizations consciously find ways to be sustainable, which will help the world create a more sustainable ecosystem for the global value chain.

For achieving a sustainable value chain and development, companies have to integrate and balance economic, social and environmental dimensions within their companies (Neumüller, Kellner, Gupta, & Lasch, 2015). Decision-makers within organizations have to focus simultaneously on economic effects and consider the impact on the social and environmental aspects. Companies can compromise customer satisfaction but gain a tremendous impact on society and the environment. Therefore, a lot of corporate organizations consider and incorporate sustainability considerations in supply chain management as well as in operations. Because rising issues negatively impact the whole world and attract debates such as labour practices, emission generation, resource consumption and so forth (Neumüller, Kellner, Gupta, & Lasch, 2015). According to the authors of the academic journal (2015), organizations are aware of a clear positive correlation between social responsibility and customer satisfaction, and on the other hand, the negative link between a poor social reputation and customers’ reactions to the product (Neumüller, Kellner, Gupta, & Lasch, 2015).

There are many benefits to being a sustainable organization. For example, reduced packaging can lead to cost savings and reduce waste of materials. In addition, the company can reduce turnover of employees and labour turnover costs by promoting good working conditions and safety in transportation and warehousing. As a result, employees will be motivated, productive and promote a great working environment (Neumüller, Kellner, Gupta, & Lasch, 2015). These can lead to support the positive development of the society and environment and prevent negative consequences by balancing three dimensions: economic, environmental, and social performance (Neumüller, Kellner, Gupta, & Lasch, 2015).

Global climate change, intense competition, social and environmental conscious responsibility force the global value chain to vigorously act and use the world’s resources more efficiently, commit to sustainable practices and be competitive nowadays. Three aspects should be included in the sustainable value chain to gain beneficial economic, social, and environmental results. When companies consider goals related to minimizing the impact on the environment while benefiting the communities and the people, this means that this company addresses global issues and focuses on a Sustainable Value Chain. The sustainable value chain focuses on global issues such as human rights, global warming and melting ice caps and so forth.

With the dawn of industrialization, the circular economy is a great practice to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities (Korhonen, Honkasalo & Seppälä, 2018). A circular economy implies the following solutions to reduce adverse environmental effects: remanufacturing, repair, reuse, refurbishment, disposal, cascading, upgrading, and recycling.

There are a bunch of benefits to being a sustainable organization. For example, reduced packaging can lead to cost savings and reduce waste of materials. In addition, the company can reduce turnover of employees and labour turnover costs by promoting good working conditions and safety in transportation and warehousing. As a result, employees will be motivated, productive and promote a great working environment (Neumüller, Kellner, Gupta, & Lasch, 2015). These can lead to support the positive development of the society and environment and prevent negative consequences by balancing three dimensions: economic, environmental, and social performance (Neumüller, Kellner, Gupta, & Lasch, 2015).

Key Terms

Sustainable – “causing, or made in a way that causes, little or no damage to the environment and therefore able to continue for a long time” (Cambridge dictionary, 2022)

Chapter References

Circular Economy: Strategies and Policies. (2021). Field Actions Science Reports, 23, 4–7. https://journals.openedition.org/factsreports/6515

Dwivedi, A., Agrawal, D., Jha, A., Gastaldi, M., Paul, S. K., & D’Adamo, I. (2021). Addressing the challenges to sustainable initiatives in value chain flexibility: Implications for sustainable development goals. Global Journal of Flexible Systems Management, 22, 179–197. https://link.springer.com/article/10.1007/s40171-021-00288-4 

FITT. (2013). FITTskills: International trade management (6th ed.). Forum for International Trade Training

Gargalo, C. L., Pons, E. P., Barbosa-Povoa, A. P., & Carvalho, A. (2021). A lean approach to developing sustainable supply chains. Sustainability, 3(7), 3714. https://www.mdpi.com/2071-1050/13/7/3714/htm

Korhonen, J., Honkasalo, A., & Seppälä, J. (2018). Circular economy: The concept and its limitations. Ecological Economics, 143, 37–46. https://doi.org/10.1016/j.ecolecon.2017.06.041

Neumüller, C., Kellner, F., Gupta, J. N. D., & Lasch, R. (2015). Integrating three-dimensional sustainability in distribution centre selection: the process analysis method-based analytic network process. International Journal of Production Research, 53(2), 409–434. https://www.tandfonline.com/doi/abs/10.1080/00207543.2014.939241

Deqiang, S., Zhijun, C., Hajduk-Stelmachowicz, M., Razaque Larik, A., & Zahid Rafique, M. (2021, November). The role of the global value chain in improving trade and the sustainable competitive advantage: Evidence from China’s manufacturing industry. Frontiers in Environmental Science, 9. https://www.frontiersin.org/articles/10.3389/fenvs.2021.779295/full.

Sureka, S., Shiva, S., Palkar, S., Jarwal, V., & Bhavsar, V. (2021, June). Sustainable supply chain management. SAMVAD: SIBM Pune Research Journal, 22, 36-40. http://samvad.sibmpune.edu.in/index.php/samvad/article/view/164045/113948 CC BY-3.0

Trucost, & GreenBiz. (January 31, 2018). Distribution of natural capital impacts among companies worldwide in 2016, by issue [Graph]. Statista.  https://www.statista.com/statistics/597033/distribution-of-environmental-impacts-among-companies-worldwide-by-issue/

Villena,V. H., & Gioia, D.A.(2020). A More Sustainable Supply Chain. Harvard Business Review. https://hbr.org/2020/03/a-more-sustainable-supply-chain

Image Descriptions

Fig 8.1: Nutrients &amp; Organic pollutants 33%; Greenhouse gases 31%; Water abstraction 18%; Heavy metal pollution 7%; Other 11% [Return to image].

Fig 8.4: Series of circles all moving clockwise. Inner circles (From smallest to largest) reuse, re-manufacturing, recycling, disposal. Outer circle (clockwise from top) product usage, product end-of-life, treatment, material end-of-life, nature, material/energy acquisition, material refinement, product manufacture. Around the outside at top and bottom: cost, time, energy [Return to image].

Fig 8.5: Four clockwise circles. Input with a an arrow pointing to the circles on the left and Output with an arrow pointing away from the circles on the right.
Input wins: Environmental (reduced virgin material and energy input, virgin inputs are predominantly (to the extent possible) renewable from productive ecosystems) and Economic (reduced ram material and energy costs, the value in resourced is used many times, not only once, the use of costly scarce resources is minimized, reduced costs that arise from environmental legislation, taxes and insurance, image, responsible and green market potential).
Output wins: Environmental (reduced wastes and emissions, resources in production-consumption systems are used many times, not only once, renewables are CO2 neutral fuels and their wastes are nutrients that can be used by nature) and Economic (value leaks and loses are reduced, reduced waste management costs, reduced emissions control costs, reduced costs from environmental legislation, taxes and insurance, new markets are found for the value in resources, new responsible business image attracts investment).
Social wins: new employment opportunities through new uses of the value embedded in resources, increased sense of community, cooperation and participation through the sharing economy, user groups share the function and service of a physical product instead of individuals owning and consuming the physical product [Return to image].

Fig 8.6: 3 sections to the diagram.
Centre: Renewables and Finite Materials arrows to parts manufacturer (renewable has up and down arrows), arrows to product manufacturer, service provider, consumer & user, collection, minimize systematic leakage and negative externalizes.
Left Side: Renewables flow management. Arrows from collection of middle diagram to Extraction of biochemical feedstock (post-harvest and post-consumer waste) arrows go back to consumer and then forward to anaerobic digestion, biogas, regeneration, farming/hunting/fishing/collection.
Right side: Stock management. Arrows from collection of middle diagram to maintain/prolong, resuse/redistribute, refurbish/remanufacture, recycle. [Return to image].

Fig 8.7: Examples of countries which adopted a national resource efficiency or circular economy strategy or action plan (non comprehensive list).
Already adopted a national circular economy strategy or action plan (A): France, Italy, Netherlands, Denmark, Portugal, Slovenia.
Currently finalizing a national circular economy strategy or action plan (B): Spain, Poland.
Already Adopted a national resource efficiency strategy or action plan (C): Germany, Austria, Ireland.
Adopted both resource efficiency and circular economy strategy or action plan (A) + (C): Scotland, Finland.
EEA-39 remaining countries: Bosnia & Herzegovina, Serbia, Albania, Turkey, Montenegro.
Outside EEA-39: Switzerland, Czech Republic, Slovakia, Croatia, Bulgaria, Hungary, Ukraine, England, Norway, Sweden, Baltic States, Russia [Return to image].

Fig 8.8: Wholesale waste and scrap: 3,023
Resuse of good 14,625
Domestic repairs 254,512
Industrial repairs 98,320
Waste collection 29,705
Materials recovery 55,454 [Return to image].

Fig 8.9: Various connections and relationships between a wide variety of factors such as lack of knowledge towards sustainability, supplier commitments, consumer orientations, lack of distribution and IT integration, financial constraints, insufficient government rules, lack of trust in the chain, lack of top management commitment to flexibility, lack of manufacturing flexibility, and inadequate communication. [Return to image].

Alternative Text-Based Activities

Assessing What You Already Know

Question 1:

Is the sustainable value chain focused on global issues? Check all that apply.

• human rights (Correct)
• global warming and melting ice caps (Correct)
• fair labour practices (Correct)
• Raw material (Incorrect)
• marine pollution (Correct)
• decreases of forest cover (Correct)
• plastic pollution (Correct)
• air pollution (Correct)

Feedback: The sustainable value chain focuses on global issues such as human rights, global warming and melting ice caps, fair labour practices, marine pollution, decreases of forest cover, plastic pollution, air pollution, etc. When companies consider goals related to minimizing the impact on the environment while benefiting the communities and the people, this means that this company addresses global issues and focuses on a Sustainable Value Chain.

Question 2:

What are the three dimensions of sustainability? Check all that apply.

• Social (Correct)
• Humanity (Incorrect)
• Ecological (Incorrect)
• Environmental (Correct)
• Economic (Correct)

Feedback: The main dimensions of suitability in the global value chain are environmental, economic, and social dimensions. Integration of three dimensions, economic, social, and environmental, can help companies achieve a long-term goal, and the sustainable supply chain is a crucial success factor for the future.

Question 3:

Sustainability is an opportunity for businesses?

• True (Correct)
• False (Incorrect)

Feedback: Sustainability is an opportunity for businesses, but it is hard to understand the global goals, trade, policies, and improving three main parts simultaneously: social, environmental, and economical. Moreover, the sustainable value chain is related to the core of the whole business, from the strategy to developing products and relationships.

Question 4:

On the basis of your previous experiences and knowledge, how would you define the term ‘circular economy’? Check all that apply.

• circular economy is a great practice to minimize the negative impact on the environment (Correct)
• circular economy helps company’s in inbound logistics (Incorrect)
• circular economy helps company’s in procurement (Incorrect)

Feedback: the circular economy is a great practice to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities. [Return to activity].

Check Your Understanding: Define the term Sustainable Value Chain and how it adds value in the global value chain

Question 1:

When a company addresses global issues and focuses on a Sustainable Value Chain, this means that

• companies consider expanding to the new market (Incorrect)
• companies consider goals related to minimizing the impact on the environment while benefiting
• the communities and the people – (Correct)
• companies would like to be socially responsible – (Incorrect)

Feedback: When companies consider goals related to minimizing the impact on the environment while benefiting the communities and the people, this means that this company addresses global issues and focuses on a Sustainable Value Chain. The sustainable value chain focuses on global issues.

Question 2:

Is the sustainable value chain focused on global issues? Check all that apply.

• human rights (Correct)
• global warming and melting ice caps (Correct)
• fair labour practices (Correct)
• Raw material (Incorrect)
• marine pollution (Correct)
• decreases of forest cover (Correct)
• Exploding data (Incorrect)
• plastic pollution (Correct)
• air pollution (Correct)

Feedback: The sustainable value chain focuses on global issues such as human rights, global warming and melting ice caps, fair labour practices, marine pollution, decreases of forest cover, plastic pollution, air pollution, etc. When companies consider goals related to minimizing the impact on the environment while benefiting the communities and the people, this means that this company addresses global issues and focuses on a Sustainable Value Chain.

Question 3:

What are the three dimensions of sustainability? Check all that apply.

• Social (Correct)
• Humanity (Incorrect)
• Ecological (Incorrect)
• Environmental (Correct)
• Economic (Correct)

Feedback: The main dimensions of suitability in the global value chain are environmental, economic, and social dimensions. Integration of three dimensions, economic, social, and environmental, can help companies achieve a long-term goal, and the sustainable supply chain is a crucial success factor for the future.

Question 4:

Companies should continuously identify …. Check all that apply.

• high-quality resources from the GVC (Correct)
• cost s in logistics activities – (Incorrect)
• discover ways of integrating internal and external carbon innovation resources – (Correct)

Feedback: The manufacturing subsidiaries’ capability to achieve a sustainable competitive advantage represents a significant asset when developing innovations. The findings reveal that a thorough evaluation of the company’s innovation resources to identify potential positions for the GVC is highly advisable. Therefore, companies should continuously identify high-quality resources from the GVC and discover ways of integrating internal and external carbon innovation resources to form innovation capability. Besides, companies should also analyze the cost issues of transforming the low-carbon innovation capability into a competitive advantage and evaluate the consistency of their low-carbon innovation strategy with the parent company.

[Return to activity].

Check Your Understanding: Explain the Concept of Circular Economy

Question 1:

According to the European Commission, how many euros can the manufacturing sector gain alone for the EU after the transition to the circular economy-type economy?

• 500 million euros (Incorrect)
• 600 billion euros – (Correct)
• 300 billion euros – (Incorrect)

Feedback: According to the European Commission, 600 billion euros can be gained in the manufacturing sector alone for the EU after the transition to the circular economy-type economy. Only the national Finland economy can earn 2.5 billion euros through a circular economy, and the global economy estimated benefits by 1000 billion US dollars annually (Korhonen, Honkasalo & Seppälä, 2018).

Question 2:

What is a Circular economy?

• It is fair labour practices (Incorrect)
• It is a great practice to minimize the positive impact on the environment and simultaneously stimulate businesses to find great opportunities (Incorrect)
• It is a great practice to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities (Correct)

Feedback: With the dawn of industrialization, the circular economy is a great practice to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities.

Question 3:

How can the circular economy be implied to reduce environmental effects? Check all that apply.

• remanufacturing, upgrading, and recycling (Correct)
• Repair and reuse (Correct)
• Constructing and using (Incorrect)
• upgrading, and recycling (Correct)
• refurbishment and disposal, (Correct)
• Destroying (Incorrect)
• cascading (Correct)

Feedback: A circular economy implies the following solutions to reduce adverse environmental effects: remanufacturing, repair, reuse, refurbishment, disposal, cascading, upgrading, and recycling.

Question 4:

The circular economy is the ………. potential for sustainable development because the CE contributes to sustainable development’s economic, social, and environmental dimensions

• win-win-won (Incorrect)
• win-won-win – (Incorrect)
• win-win-win – (Correct)

Feedback: The circular economy is the win-win-win potential for sustainable development because the CE contributes to sustainable development’s economic, social, and environmental dimensions.

[Return to activity].

Check Your Understanding: Describe various initiatives taken by organizations to make their supply chains sustainable

Question 1:

Drag and Drop recommendations in correct Category

Question 2:

Can managers potentially improve indicators and simultaneously make their supply chains more sustainable?

• True (Correct)
• False (Incorrect)

Feedback: Managers can potentially improve indicators and simultaneously make their supply chains more sustainable.

Question 3:

Is it easy to adapt to include sustainability aspects in lean management?

• Yes (Correct)
• No – (Incorrect)

Feedback: Lean management has proven to be a handy and innovative tool to promote continuous improvement and is easily adaptable to include sustainability aspects. Due to the ongoing interest and need to implement corporate environmental and social policies, combining lean management and sustainability has become more popular. An increasing number of studies have proven clear positive impacts (economic, environmental and social) on the supply chain performance when lean is linked to sustainability.

Question 4:

Check all best practices for multinational corporations for promoting environmental and social responsibility. Check all that apply.

• Establish long-term sustainable goals (Correct)
• First-tier suppliers must establish their own long-term sustainability goals (Correct)
• Lower-tier suppliers should not be included in the global corporate sustainability strategy – (Incorrect)
• An employee irresponsible for promoting sustainability programs to lower and first-tier suppliers – (Incorrect)
• First-tier suppliers have to be monthly assessed by asking about their safety, health, labour, and environmental practices in their workplace – (Incorrect)
• Conduct a survey about the sustainability of the supply chain to comply with multinational corporations’ requirements within the company- (Correct)
• Training first-tier suppliers to comply with their standards as well as providing incentives for using sustainability practices (Correct)

Feedback: They have to establish long-term sustainable goals (Villena & Gioia, 2020).
First-tier suppliers must establish their own long-term sustainability goals. Lower-tier suppliers should be included in the global corporate sustainability strategy An employee responsible for promoting sustainability programs to lower and first-tier suppliers. First-tier suppliers have to be annually assessed by asking about their safety, health, labour, and environmental practices in their workplace. Conduct a survey about the sustainability of the supply chain to comply with multinational corporations’ requirements within the company. There are many indicators and critical performance within the company to monitor supplier sustainability annually. Training first-tier suppliers to comply with their standards as well as providing incentives for using sustainability practices. The training and incentives led suppliers to increase awareness and make significant changes within the industry (Villena & Gioia, 2020).

[Return to activity].

Check Your Understanding: Learn the main dimensions of sustainability in the global value chain

Question 1:

What are the three dimensions of sustainability? Check all that apply.

• Social (Correct)
• Humanity (Incorrect)
• Ecological (Incorrect)
• Environmental (Correct)
• Economic (Correct)

Feedback: The main dimensions of suitability in the global value chain are environmental, economic, and social dimensions. Integration of three dimensions, economic, social, and environmental, can help companies achieve a long-term goal, and the sustainable supply chain is a crucial success factor for the future.

Question 2:

For achieving a sustainable value chain and development, companies have to integrate and balance economic, social and environmental dimensions within their companies.

• True – (Correct)
• False – (Incorrect)

Feedback: For achieving a sustainable value chain and development, companies have to integrate and balance economic, social and environmental dimensions within their companies (Neumüller, Kellner, Gupta, & Lasch, 2015). Decision-makers within organizations have to focus simultaneously on economic effects and consider the impact on the social and environmental aspects. Companies can compromise customer satisfaction but gain a tremendous impact on society and the environment. [Return to activity].

Check Your Understanding: Identify key sustainability challenges in value chains and recommend solutions

Question 1:

Drag and Drop the components in correct Category

Question 2:

Key sustainable challenges in the value chain. Check all that apply.

• Lack of consumer orientation toward sustainability in value chain (Correct)
• Lack of distribution flexibility in the value chain (Correct)
• Lack of supplier commitment towards sustainable products (Correct)
• Lack of knowledge towards sustainability in value chain (Correct)
• Sufficient government rules towards sustainable initiatives – (Incorrect)
• Financial constraints towards sustainable initiatives (Correct)
• Adequate Information sharing in value chain- (Incorrect)
• Capacity opportunities in value chain flexibility – (Incorrect)
• Lack of top management commitment towards flexibility in value chain (Correct)
• Lack of manufacturing flexibility in the value chain (Correct)
• Adequate communication among the suppliers in the value chain- (Incorrect)

Feedback:

Question 3:

Is it unnecessary to communicate the advantages associated with the use of natural resources, of working in conditions of minimum risk to the health of citizens, of no exploitation of people?

• True- (Incorrect)
• False – (Correct)

Feedback: It is difficult to change this principle, which is the basis of doing business. However, it is necessary to communicate the advantages associated with the use of natural resources, of working in conditions of minimum risk to the health of citizens, of no exploitation of people. In fact, where the organization and the worker have the same objective, the benefits translate directly into the well-being of the company and the ability to generate income for the entire community. Inadequate communication among the suppliers in the value chain deriving by information asymmetries would lead to a loss of value for all the shareholders.

Question 4:

Businesses that incorporate sustainability principles into their strategies and practices can be competitive in the local market by fostering the development of a local supply chain.

• True- (Correct)
• False – (Incorrect)

Feedback: Businesses that incorporate sustainability principles into their strategies and practices can be competitive in the local market by fostering the development of a local supply chain. This process includes the creation of smart networks in which companies share their resources in order to be competitive in a global market. The results show that inadequate communication among the suppliers in the value chain has among the lowest driving power. [Return to activity].

Watch or Listen to the Following Media Clip

Media 9.1  What is Reverse Logistics. [Video]. Daily Logistics.

Introduction

Globalization has given a lot of opportunities for the economy, businesses, and international competition. Trades spread production, manufacturing and networks across many countries and continents. New technologies are coming, and enterprises have to be more flexible and adaptable nowadays. Businesses build export capabilities, leverage services, and move to high-value niches in the Global Value Chain by incorporating Artificial Intelligence, Reverse Logistics,  Information Technology (IT), Value Stream Mapping and Humanitarian Supply Chain Management. Global demand for a skilled workforce and IT adds value in every industry, such as global value chain, manufacturing, tourism, automobile, agriculture, move industry, education, etc. Multinational organizations are increasingly trying to be socially responsible via Humanitarian Supply Chain Logistics.

Media Attributions and References

Daily Logistics (2021, October 21). What is reverse logistics? [Video]. YouTube. https://www.youtube.com/watch?v=r8u-vPd6igg

Figure 9.1

Reverse Logistics

Until this chapter, the major focus was on activities related to forward logistics where raw material moves from suppliers and reaches consumers in the finished form. In this section, activities concerning reverse logistics will be explained.

According to Cambridge Dictionary, “reverse logistics is the process of dealing with goods that have been returned to the company by customers” (Cambridge Dictionary, 2022).

For example, the customer would like to return or recycle products or goods, and this process requires reverse logistics. Therefore, activities such as recovery, return, reuse or disposal of discarded products are part of reverse logistics activities. In short, when products return from the final destination or user to another location for final disposal or recapturing value, the process is called reverse logistics.

A great example is Amazon which has no-fuss return policies and innovative reverse logistics. In addition, it provides excellent reverse logistics training programs. Amazon’s reverse logistics focus on managing and running warehouses in a sustainable way. It also helps organizations build trust between logistics service providers, manufacturers, and customers. Moreover, a company has full control over a product’s life from start to the end involving decisions relating to recycling, refurbishment, repair, warranty, disposal of discarded products, etc.

Let’s take the example of E-commerce which is a fast-paced industry, and businesses use fast, free and easy return policies. Though it attracts customers, but also increases the volume of returned products. . For consumers, returns could be a motivator to shop with a particular online retailer but for retailers, it is adding to huge costs.

It is exciting that reverse logistics has existed for the last 100 years, and it is a part of the retail industry. The size of reverse logistics market worldwide has been significantly increasing. Let’s watch this video that explains retail reverse logistics.

For more details on how e-returns could be costly, E-commerce return rates by industry, reasons of returns, strategies of handling e-commerce returns and impact of COVID-19, read though the first two sections of article: The Plague of Ecommerce Return Rates and How to maintain Profitability.

According to Statista (2021), the size of the reverse logistics market globally will be continuously expanded and projected to reach 958.3 billion U.S. dollars by 2028 (Statista, August 4, 2021). As evident from the graph, a significant part of reverse logistics, electronic waste (e-waste), has become one of the fastest-growing fields. View graph Size of the reverse logistics market worldwide from 2020 to 2028 (in billion U.S. dollars) [Chart description].

Forward and Reverse Supply Chain

Forward logistics is the same as traditional logistics, starting from the suppliers through the factory and then moving to the distributor/wholesaler. Finally, the product moves to retailers and final customers. Forward or traditional flow is a green arrow in figure 9.2. On the other hand, reverse logistics starts from the opposite side- customers and moves to the first point of the supply chain according to a return policy of the product. Reverse logistics is a brown line in figure 9.2.

Figure 9.2

Forward and Reverse Logistics Processes

 Recalls

Recalls products mean officially retrieving products from manufacturers or users to the place of origin because discovered defects can harm consumers, hinder performance or realize more cost-effective product production. The request to recall products can be by the government or company in the form of a letter shown below. This official act helps prevent and reduce risks related to injuries or safety concerns. In this scenario, companies provide consumers with compensation. Recalls can be mandated by Safety Commissions or voluntary. Please follow the link for more examples of recalls in Canada.

On the other hand, activities such as recovery, return, reuse or disposal of discarded products are part of reverse logistics activities. In short, when products return from the final destination or user to another location for final disposal or recapturing value. This process is so-called reverse logistics.

Figure 9.3

Rattlesnake Bicycles

Note. Rattlesnake Bicycles recall notice. [Image description].

Media Attributions and References

Cranfield School of Management. (2012, June 14). Retail reverse logistics [Video]. YouTube. https://www.youtube.com/watch?v=x6NiqMEnvos

A few examples of Information and Communication Technology (ICT) or Information Technology (IT) include Big Data, Blockchain Technology (BT), Internet of Things (IoT), robots, cloud computing, transactions, hardware, internet access, communications technology and so forth.

The difference between ICT and IT is that ICT is a broader and more comprehensive term than IT. There is no general definition of Information and Communication Technology (ICT). Information and Communication Technology (ICT) is the infrastructure for modern operation of computers which includes all devices, components, applications, systems that allow people and organizations to be connected and interact in the digital world (Pratt, 2019). ICT can connect through the internet and is mobile powered by wireless networks. ICT is vital nowadays for people and organizations because it allows businesses and the economy to grow. Other advantages of using ICT includes getting insights, building customer bases, creating new products and services, internet shopping, transactions, digitalization of businesses, finding fast solutions, speeding up order tracking and processes, enhancing the exchange of information, increasing collaboration, and transparency in the global value chain.

Figure 9.4

A Mind Map on the Use of Information and Communication Technology (ICT) in Educational Assessment

Note. A mind map on the use of ICT in education. From Paily, 2017. CC BY-SA 4.0 [Image description].

The intervention of information and communication technologies (ICT) helps supply chains be more efficient. In addition, by integrating ICT, businesses gain more sustainable benefits, which makes them competitive in the field. Scientists are constantly studying the advantages of the correlation between SC and ICT and SSCP for helping businesses succeed. Therefore, the central part of improving partnership as well as collaboration between supply chain participants is supply chain integration (SCI). In addition, blockchain technologies are essential for enhancing supply chain integration, which contributes to business sustainability and excellence (Kamble, Gunasekaran, Subramanian, Ghadge, Belhadi & Venkatesh, 2021).

Media Attributions and References

Eye on Tech. (2020, March 9). What is ICT (Information and Communications Technology)?. [Video]. YouTube. https://www.youtube.com/watch?v=5PDQKu2-bAc

Paily, M. U. (2017, April 8). Technology assessment: Mind map on the use of ICT in education [image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:A_Mind_Map_on_the_Use_of_Information_and_Communication_Technology_(ICT)_in_Educational_Assessment.jpg

Value Stream Mapping

The emergence of waste in supply chain activities directly impact availability of goods to the final consumers. One of the best ways to manage waste is to apply lean approach with Value Stream Mapping technique.

As cited by Adrianto & Kholil (2015) in the article by Amrina & Fitrahaj (2020), Lean is an approach in identifying and eliminating waste or non-value-added activities through continuous improvement. There are 8 things that cause waste (Helleno, Moraes & Simon, 2017):

• Overproduction (excessive production),
• Unnecessary Inventory (inventory that is not needed),
• Defect (defective product),
• Unnecessary Motion (movements that do not add value),
• Excessive Transportation (excessive material or product movement),
• Inappropriate Processing (inappropriate process),
• Waiting (waiting time), and
• Unutilized Talent (ability that is not utilized) (Amrina & Fitrahaj, 2020).

In the Lean concept, waste can be removed through 12 techniques, and one of them is Value Stream Mapping (Amrina & Zagloel, 2019). As cited by Firdaus (2018) in the article by Amrina & Fitrahaj (2020), Value Stream Mapping (VSM) is a method used to visualize waste in a complete process. VSM maps the process flow, information flow and material flow. VSM helps decision makers identify activities that do not add value by mapping current conditions.

Mapping the value-added processes within the supply chain is useful for management because it aligns stakeholders, from multiple departments, on the needs of the customer and the demands of the supplier. It’s also an effective tool for illustrating the overall supply chain for a product to a variety of audiences (Justin, 2017).

Five Lean Thinking Fundamentals:

Lean Approach is based on five principles:

1. Specify Value: It is hard to identify what adds value to your business. Value is defined by customers in terms of specific products and services they are willing to pay for.
2. Identify the Value Stream: The Value Stream itself is the series of individual processes that connect together to create the valuable goods or service that an organization produces for its customer. The process of mapping the Value Stream is designed to view the big, macro picture in order for executives to make strategic decisions as part of an extended organizational transformation effort.
3. Make Value Flow Continuous: The best way of having a continuous flow of material and information is to eliminate the wastes involved in supply chain process. Having eliminated waste, makes remaining value creating steps flow.
4. Let Customers Pull Value: There are two ways organizations work – Push and Pull. Traditional organizations used to work on Push System wherein what ever they produce were make available for consumers to consume. This no longer works in today’s market, rather customer’s pull cascades all the way back to the lowest level supplier, enabling just in time production.
5. Pursue Perfection: Adding value and eliminating non-value added steps is a never ending process. With changing needs and demands of consumers, companies need to look into the processes time and again to ensure perfection.

Building a Value Stream Map

Value Stream Map in Supply chain is a visual way to identify steps involved in the supply chain process and their relationship. It makes decision makers to see value added and non-value added activities clearly by drawing the whole process from upstream to downstream on a paper. “To Create flow you need a vision. Mapping helps you see and focus on flow with a vision of an ideal or improved state (Rother and Shook, 2018) . Figure 9.5 shows an example of how Value Stream Map looks.

Figure 9.5

Value Stream Map: Example

Note. Components of a Value Stream Map. From Wikimedia Commons, 2013. CC-BY-SA 3.0. [Image description].

As shown in Figure 9.5, Value Stream Maps are divided into three sections – Information Flows, Material Flows and Lead Time Ladder. Let’s look into these sections:

1. Information Flows: Information flow is located at the top half of the map and is drawn from right to left, starting with customers indicating the pull value principle. To present the flow of information between customer and company and then company and supplier, narrow line is used.
2. Material Flow: Material Flow is located in the center of the map and is drawn from left to right. It provides valuable information to decision makers and includes the activities such as identifying different processes along with a few statistics such as cycle time, changeover time, uptime, batch sizes, working time and scrap rate. The icons used at this stage are very important as they represent clear flow of material. This is the section that highlights wastage a company is making in terms of holding over or under inventory. It is important to note that material movement is pushed by producer and not pulled by consumer.
3. Lead Time Ladder: The bottom part is the simplest and extremely important. It indicates the length each process takes in value chain.

Once the current information and material flow along with lead time calculation is complete, companies tend to reach at a current state map which is analyzed by all the stakeholder and company representatives to highlight wastes and its sources. These wastes are eliminated by implementing a future-state map which is the final stage of value stream mapping process.

Media Attributions and References

DanielPenfield. (2013). [Value stream map: Example] [Image]. Wikimedia Commons. https://commons.wikimedia.org/wiki/File:ValueStreamMapParts.png. CC BY SA 3.0.

Humanitarian Supply Chain Management

Disasters occurring across the world pose a severe threat to human society. Disasters may be natural (heavy rainfall, avalanches, earthquakes) or human made (industrial accidents, chemical leakages, building collapses) in nature (Maqbool & Khan, 2020). During and after the disaster, the provision of relief and recovery materials lowers victims’ suffering. In such a situation, the supply chain network plays a crucial role.

Providing the “right materials” in the “right quantity” to the “right people” at the “right time” is the intention of typical supply chain management (SCM) (Sharma & Luthra, 2020). It is applicable for both commercial and humanitarian SCM (HSCM). In comparison with commercial supply chain management, the number of challenges in HSCM is greater (Barcik, Beamon, Krejci, Muramatsu & Ramirez, 2010). This is because HSCM is carried out under damaged infrastructure, such as limited energy resources and limited transport connectivity, working in coalition with multiple stakeholders (shown in Figure 9.6) involved in the relief activities, governmental interventions, and the final beneficiaries. From this, it may be well understood that HSCM operates in a more complex and challenging environment (Behl & Dutta, 2018). Furthermore, it is important that HSCM activities meet the triple bottom line (TBL) concept which is related to sustainability, i.e., addressing economic, environmental, and social concerns.

Figure 9.6

Actors in Humanitarian Logistics

Note.From Paciarotti, et al., 2021, p. 556. CC BY 4.0.. [Image description].

These humanitarian actors have distinct characteristics. They could have different geographical coverage. Furthermore, these actors can also be broadly different in nature, size, approach, mission, specialization, rules and regulations and scope of operations. Moreover, a humanitarian system is composed of a number of individualistic actors with self-sufficient perspectives which have a potential to become competitors (Maon, Lindgreen & Vanhamme, 2009). The presence of such a high number of differentiated and individualistic stakeholders raises the issue of better coordination of the relief chains and highlights the need for standards able to provide a shared language and shared understanding of procedures and processes.

The need for coordination will grow in the coming years also as a consequence of the increasing attention to localization in the humanitarian sector since the 2016 Global Humanitarian Summit (WHS, 2016). Localizing humanitarian response is “a process of recognizing, respecting and strengthening the leadership by local authorities and the capacity of local civil society in humanitarian action, in order to better address the needs of affected populations and to prepare national actors for future humanitarian responses.” (OECD, 2017). In practical terms this implies a greater and greater involvement of a plethora of different actors such as national authorities in aid recipient countries, national Societies of the Red Cross /Crescent, national/subnational/local non-governmental organizations (NGOs)/civil society organizations (CSOs), local and national private sector organizations (OECD, 2017). The resulting increasing complexity and necessity to cooperate adopting a shared “language” increasingly emphasizes the importance of widespread and shared standards. Usage of standardized processes, procedures, common templates, etc. increases interoperability between organizations, allowing coordination of the efforts between international and local partners.

The importance of coordination of humanitarian actors strongly emerged after the response to the Rwanda humanitarian crisis that began in 1994. In 1996, the problems and inefficiencies faced during this crisis determined the decision to launch the Sphere project, with the first set of minimum standards published and applied in 1998 (O’Donnell, Bacos & Bennish, 2002). In January 2000, the Sphere project published the first handbook identifying a set of a minimum standard in key lifesaving sectors to be achieved by emergency relief programs in order to improve the quality and accountability of NGOs for their actions in humanitarian responses.

Minimum standards are set in four key response sectors:

(1) water supply;

(2) sanitation and hygiene promotion (WASH);

(3) food security and nutrition;

(4) shelter, settlement and health.

In the following years, other standards have been developed adopting a similar approach, that is, via inclusive consultation processes with a wide group of practitioners. Currently, the Sphere, in coalition with other six standards initiatives:

(1) minimum standards for child protection in humanitarian action,

(2) livestock emergency guidelines and standards,

(3) minimum economic recovery standards,

(4) minimum standards for education,

(5) minimum standard for market analysis and

(6) humanitarian inclusion standards for older people and people with disabilities, constitutes the humanitarian standards partnership.

Despite that many areas of humanitarian operations are covered by this group of approved and widespread initiatives, the humanitarian logistics and supply chain are not yet deeply involved in this standardization process.

Sustainable Humanitarian Supply Chain Management and Response to COVID-19

It is important that Humanitarian SCM activities meet the triple bottom line (TBL) concept, i.e., addressing economic, environmental, and social concerns. The TBL concept is aligned with the sustainability. Hence, it is necessary to carry out sustainable HSCM (SHSCM) activities. The organizations involved in relief activities are predominantly classified under three sections, namely bodies working under the United Nations (World Health Organization, Geneva, Switzerland), international organizations (International Committee of Red Cross, Geneva, Switzerland), and nongovernmental organizations (NGOs) (Doctors Without Borders, Geneva, Switzerland).

Disaster management is a set of operational activities and administrative decisions related to various disasters at all levels (Lu, Gao & Zhao, 2020). HSCM plays an integral role in disaster management. HSCM needs to be sustainable economically, environmentally, and socially; only then will HSCM meet the intended purpose of delivering medical essentials on time. Hence, SHSCM is critical in disaster management. Furthermore, SHSCM helps in meeting several sustainable development goals (SDGs), such as SDG 3 (good health and wellbeing) and SDG 17 (partnerships for the goals). SDGs are a set of goals proposed by the UN for the prosperity of people and the planet by the inclusive actions of global nations.

Media Attributions and References

Freedom House. (2014, February 6). [Syria Crisis] [Image]. Flickr. https://www.flickr.com/photos/syriafreedom/12340805415. CC BY 2.0.

HELP Logistics. (n.d.). Supply Chain in the humanitarian context [Video]. YouTube. https://youtu.be/CKNeGGmNuCE.

Paciarotti, C., Piotrowicz, W.D. & Fenton, G. (2021). Humanitarian logistics and supply chain standards. Literature review and view from practice. Journal of Humanitarian Logistics and Supply Chain Management, 11(3), 550-573. 10.1108/JHLSCM-11-2020-0101. CC BY 4.0.

In the chapter, emerging concepts of Reverse Logistics, Information and Communication Technology, Value Stream Mapping and Humanitarian Reverse Logistics were discussed. Reverse Logistics works to manage problem inventories. Activities such as recovery, return, reuse or disposal of discarded products are part of reverse logistics. Information and Communication Technology helps in every facet of Value Chain. Be it Manufacturing, Transportation, Warehousing, Storage, Inventory Management or Distribution, ICT allows people and organizations to be connected and interact in the digital world. When organizations work, they tend to deal with a lot of wastes. Value Stream Mapping helps in eliminating these wastes, making the whole process, from upstream to downstream, transparent and increasing organization’s efficiency. Humanitarian Logistics is a concept that integrates supply chain activities to help societies during disasters and natural calamities.

Key Terms

Batch Sizes – The number of products manufactured in one batch

Big Data – as extremely large sets of data or fast growing amounts of data from different sources that present industrial organizations with a variety of storage and analysis issues (Agarwal, Shiralkar, Aaher, & Jawade, 2021)

Blockchain – is mostly referred to as a cryptocurrency or digital money such as Bitcoin, Dogecoin, ripple etc. Blockchain is a decentralized digital ledger. Ledgers are used to keep a record of important things, financial or something else  (Agarwal, Shiralkar, Aaher, & Jawade, 2021)

Changeover Time – Time elapsed during converting a line or machine from running one product to another

Cycle Time – Time taken from start of product to its completion

Geographical Coverage – Some actors act at regional and local levels, others operate at national and some at a global level.

Information and Communication Technology (ICT) – means all devices, components, applications, systems that allow people and organizations to be connected and interact in the digital world (Pratt, 2019).

Internet of things (IoT) – is used to connect various devices through a network in order to sense and collect data around the world on the internet to process various intelligent applications with the aid of embedded systems, artificial intelligence (AI), various software and sensors (Agarwal, Shiralkar, Aaher, & Jawade, 2021)

Lead Time – The time gap between placing an ordering and receiving it

Pull Value – The process that starts with customer demand.

Recalls products – mean officially retrieving products from manufacturers or users to the place of origin because discovered defects can harm consumers or hinder performance or realize more cost-effective product production.

Reverse logistics – “Reverse logistics is the process of dealing with goods that have been returned to the company by customers” (Cambridge Dictionary, 2022).

Scrap Rate – The rate that measures quality of output

Stakeholders – Participants

Uptime – Time during which a piece of equipment (such as a computer) is functioning or able to function (Mariam Webster, n.d.)

Working Time – The time spend on job for which a worker is paid salary

Chapter References

Agarwal, V., Shiralkar, S., Aaher, S., & Jawade, S. (2021) The supply chain management revolution. International Journal of Engineering Research and Technology, 10(10), 51-58. CC BY-4.0.

Amrina, U. & Fitrahaj, M.U.R. (2020). An Application of Value Stream Mapping to Reduce Waste in Livestock Vitamin Raw Material Warehouse. International Journal of Science and Research, 9(3), 1541 – 1546. https://www.researchgate.net/publication/340443479_Licensed_Under_Creative_Commons_Attribution_CC_BY_An_Application_of_Value_Stream_Mapping_to_Reduce_Waste_in_Livestock_Vitamin_Raw_Material_Warehouse. CC BY.

Amrina, U. & Zagloel, T. Y. M. (2019). The Harmonious Strategy of Lean and Green Production: Future Opportunities to Achieve Sustainable Productivity and Quality. 2019 IEEE 6th International Conference on Industrial Engineering and Applications (ICIEA), 187-192, 10.1109/IEA.2019.8714768.

Balcik, B., Beamon, B.M., Krejci, C.C., Muramatsu, K.M. & Ramirez, M. (2010). Coordination in humanitarian relief chains: Practices, Challenges and Opportunities. International Journal of Production Economics, 126(1). https://doi.org/10.1016/j.ijpe.2009.09.008.

Behl, A. & Dutta, P. (2018). Humanitarian supply chain management: a thematic literature review and future directions of research. Annals of Operations Research, 283, 1001-1044. https://doi.org/10.1007/s10479-018-2806-2.

Boers, J. (n.d.). Global Business. Pressbooks. https://oer.gsu.edu/globalbusiness/chapter/supply-chain-shifts-the-knowns-and-the-unkowns/ CC BY-4.0.

Cambridge Dictionary. (2022). Reverse Logistics. https://dictionary.cambridge.org/dictionary/english/reverse-logistics.

Dubey et al. (2019). Big data analytics and organizational culture as complements to swift trust and collaborative performance in the humanitarian supply chain. International Journal of Production Economics, 210, 120-136. https://doi.org/10.1016/j.ijpe.2019.01.023.

Fabre, C. (2017). Localising the response. Organisation for Economic Co-operation and Development. https://www.oecd.org/development/humanitarian-donors/docs/Localisingtheresponse.pdf

Helleno, A.L., Moraes, A. & Simon, A. T. (2017). Integrating Sustainability Indicators and Lean Manufacturing to assess manufacturing processes: Application case studies in Brazilian Industry. Journal of Cleaner Production, 153, 405-416. https://doi.org/10.1016/j.jclepro.2016.12.072.

Humanitarian Insight. (2022). Syria Humanitarian Response Plan 2022 – 2023. https://hum-insight.info/plan/1088. CC BY 4.0.

IndustryStar. (2017, Nov. 9). Value Stream Mapping to Eliminate Waste in the Supply Chain. https://www.industrystar.com/blog/2017/11/value-stream-mapping-eliminate-waste/.

Kamble, S. S., Gunasekaran, A., Subramanian, N., Ghadge, A., Belhadi, A., & Venkatesh, M. (2021). Blockchain technology’s impact on supply chain integration and sustainable supply chain performance: evidence from the automotive industry. Annals of Operations Research; ISSN 0254-5330 1572-9338. https://link.springer.com/article/10.1007/s10479-021-04129-6#citeas. CC BY-4.0.

Karuppiah, K., Sankarnarayanan, B., Ali, S.M. & Paul, S.K. (2021). Key Challenges to Sustainable Humanitarian Supply Chains: Lessons from the COVID-19 Pandemic. Sustainability, 13, 5850. https://doi.org/10.3390/su13115850.

Larsen, A. (2020, November 23). Sustainability, innovation and entrepreneurship. LibreTexts. https://biz.libretexts.org/Bookshelves/Business/Advanced_Business/Book%3A_Sustainability_Innovation_and_Entrepreneurship/02%3A_Sustainability_Innovation_in_Business/2.02%3A_Defining_Sustainability_Innovation  CC BY-NC-SA-3.0

Linh Thi Truc Doan, Yousef Amer, Sang-Heon Lee, Phan Nguyen Ky Phuc, & Luu Quoc Dat. (2019). E-Waste Reverse Supply Chain: A Review and Future Perspectives. Applied Sciences; Volume 9; Issue 23. https://www.mdpi.com/2076-3417/9/23/5195. CC BY.

Lu, Z., Gao, Y. & Zhao, W. (2020). A TODIM-based approach for environmental impact assessment of pumped hydro energy storage plant. Journal of Cleaner Production, 248, 119265. https://doi.org/10.1016/j.jclepro.2019.119265.

Maon, F., Lindgreen, A. and Vanhamme, J. (2009). Developing supply chains in disaster relief operations through cross-sector socially oriented collaborations: a theoretical model. Supply Chain Management: International Journal, 14(2), 149-164. https://www.emerald.com/insight/content/doi/10.1108/13598540910942019/full/html.

Maqbool, A. & Khan, N. Z. (2020). Analyzing barriers for implementation of public health and social measures to prevent the transmission of COVID-19 disease using DEMATEL method. Diabetes & Metabolism Syndrome: Clinical Research & Reviews, 14(5). https://doi.org/10.1016/j.dsx.2020.06.024.

O’Donnell, M.R., Bacos, D. and Bennish, M.L. (2002). Nutritional response to the 1998 Bangladesh flood disaster: sphere minimum standards in disaster response. Disasters, 26 (3), 229-241. https://doi.org/10.1111/1467-7717.00202.

Ozdemir et al. (2020). The role of blockchain in reducing the impact of barriers to humanitarian supply chain management. The International Journal of Logistics Management, 32(2). https://www.emerald.com/insight/content/doi/10.1108/IJLM-01-2020-0058/full/html.

Paciarotti, C., Piotrowicz, W.D. & Fenton, G. (2021). Humanitarian logistics and supply chain standards. Literature review and view from practice. Journal of Humanitarian Logistics and Supply Chain Management, 11(3), 550-573. https://doi.org/10.1108/JHLSCM-11-2020-0101. CC BY 4.0.

Prasad, S., Zakaria, R. & Altay, N. (2018). Big data in humanitarian supply chain networks: a resource dependence perspective. Annals of Operations Research, 270, 383-413. https://link.springer.com/article/10.1007/s10479-016-2280-7.

Pratt, M. K. (2019). ICT (Information and communications technology, or technologies). https://www.techtarget.com/searchcio/definition/ICT-information-and-communications-technology-or-technologies.

Queiroz, M.M., Wamba, S.F., Bourmont, M.D. & Telles, R. (2020). Blockchain adoption in operations and supply chain management: empirical evidence from an emerging economy. International Journal of Production Research, 59(20), 6087-6103. https://doi.org/10.1080/00207543.2020.1803511.

Rother, M. & Shook, J. (2018). Learning to see: Value stream mapping to create value and eliminate muda. Lean Enterprise Institute.

Sabri, Y., Zarei, M.H. & Harland, C. (2019). Using collaborative research methodologies in humanitarian supply chains. Journal of Humanitarian Logistics and Supply Chain Management, 9(3). https://www.emerald.com/insight/content/doi/10.1108/JHLSCM-06-2018-0041/full/html.

Salvatore Cannella, Roberto Dominguez, Jose M. Framinan, & Borja Ponte. (2018). Evolving Trends in Supply Chain Management: Complexity, New Technologies, and Innovative Methodological Approaches. Complexity, 2018. https://www.hindawi.com/journals/complexity/2018/7916849/. CC BY.

Sharma, M. & Luthra, S. (2020). Developing a framework for enhancing survivability of sustainable supply chains during and post-COVID-19 pandemic. International Journal of Logistics Research and Applications. https://doi.org/10.1080/13675567.2020.1810213.

Statista. (August 4, 2021). Size of the reverse logistics market worldwide from 2020 to 2028 (in billion U.S. dollars)* [Graph]. In Statista. Retrieved April 01, 2022, from https://www.statista.com/statistics/1090465/reverse-logistics-market-size-worldwide/#:~:text=In%202020%2C%20the%20global%20reverse,exceed%20958%20billion%20U.S.%20dollars.

Vega, D. (2018). Case studies in humanitarian logistics research. Journal of Humanitarian Logistics and Supply Chain Management, 8(2). https://www.emerald.com/insight/content/doi/10.1108/JHLSCM-01-2018-0005/full/html.

World Humanitarian Summit. (2016, August 16). Commitments to action [Summary Report]. Agenda for Humanity. https://agendaforhumanity.org/sites/default/files/resources/2017/Jul/WHS_Commitment_to_Action_8September2016.pdf

Zhang, Y. (2017). Global Supply Chain Management with Advanced Information and Production Technologies. https://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/14393/Zhang_duke_0066D_13840.pdf?sequence=1.  CC BY-NC-ND.

Image Descriptions

Chart 9.2: Bar graph showing size of reverse logistics market world wide from 2020 to 2028 in billion US dollars. The chart gradually increases starting at 635.60 in 2020 to 958.3 in 2028.
2020 = 635.60
2021 = 669.07
2022 = 704.31
2023 = 741.40
2024 = 780.45
2025 = 821.50
2026 = 864.81
2027 = 910.36
2028 = 958.3

[Return to image].

Fig 9.2: Depictions of 2 product flows, forward and reverse.
Forward: Suppliers, factory, distributor/wholesaler, stores/consumers.
Reverse: Stores/consumers, defective returns/excess product returns, seasonal returns, fix/refurbish (can return to forward here through discount or regular channels), remove item, dispose of product/good will/waste, recycling/re-manufacturing [Return to image].

Fig 9.3: Letter reads:
April 6, 2022
Important Recall Notice Rattlesnake Bicycles spirit road bike Model #10445 – Spirit
Dear Davis &amp; Daughters Bicycle shop customer,
Our records show that you purchased a spirit road bike (Model #10445) built by rattlesnake bicycles between June 1, 2020 and August 2021.
Rattlesnake Bicycles is recalling this bicycle for a potential hazard regarding the frame. The weld where the Top Tube joins with the Head Tube can fracture. If a fracture occurs, the bike may become unstable and potentially lead to a crash.
[Image of the bicycle with area indicated]
Stop using it immediately if you have a Rattlesnake Spirit (Model #10445). Return the bike to Davis &amp; Daughters Bicycle for repairs. We will replace the frame without cost.
If you are not sure if your bicycles is involved in the recall or if you have questions, please contact Davis &amp; Daughters at: 555-555-0101 or visit the shop located at 25 Avenue B. Please bring your bicycle.
You may also contact Rattlesnake Bicycles: phone 1-800-555-0112, website https://rattleshankebikes.ca
We apologize for any inconveniences this recall may cause.
Respectfully,
Rattlesnake Bicycles

[Return to image].

Figure 9.5: The image shows parts of value stream map – Information flow, Material Flow and Lead Time Ladder. Information flows are at the top indicating flow of information from customs to company to suppliers. Material flow is in the middle indicating flow of material from upstream to downstream. Finally, lead time ladder is at the bottom indicating calculation of lead time between different processes.

[Return to image].

Figure 9.6: The circular chart shows stakeholders in Humanitarian Logistics. Clockwise from top: government, donors, inter-governmental organizations, non-governmental organizations, national police and armed forces, media, commercial/private sector organizations, and local populations.

[Return to image].

Figure 9.7: The image indicates the severity of Syria Crisis. It shows a person standing looking at demolished buildings around them.

[Return to image].

Alternative Text-Based Activities

Assessing What You Already Know

Question 1:

What does IT stand for?

• International Technology
• Information Technology – Correct
• Interactive Television
• Intercommunication technology

Feedback: IT stands for Information Technology.

Question 2:

What is Blockchain Technology?

• cryptocurrency
• digital money such as Bitcoin
• decentralized digital ledger
• All of the above – Correct

Feedback: All are blockchain technologies. 

Question 3:

Value Stream Mapping is a Lean Concept that increases efficiency by reducing Muda (Waste).

• True (Correct)
• False

Feedback: Yes, Value Stream Mapping is a Lean Concept that increases efficiency by reducing Muda (Waste).

Question 4:

Supply Chain Logistics works around 7 R’s. Which of the following is NOT one of them?

• Right time
• Right Condition
• Right Place
• Right Loading (Correct)

Feedback: Logistics aims at having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer.

[Return to activity].

Check Your Understanding: Explain the concept of Reverse Logistics and Recalls

Question 1:

Drag and Drop definitions in correct category:

Feedback: Recall products mean officially retrieving products from manufacturers or users to the place of origin because discovered defects can harm consumers, hinder performance, or realize more cost-effective product production. The request to recall products can be by the government or company. This official act helps prevent and reduce risks related to injuries or safety concerns. In this scenario, companies provide consumers with compensation. Recalls can be mandated by Safety Commissions or voluntary. “Reverse logistics is the process of dealing with goods that have been returned to the company by customers” (Cambridge Dictionary, 2022).

Question 2:

To mitigate the amount of product disposal, industries have been carrying out 6R concepts to improve recovery implementation and minimize non-value-added activities within end-of-life (EoL) management. Check all 6R concepts that apply.

• Reduce (Correct)
• Reuse (Correct)
• Recycle (Correct)
• Recover (Correct)
• Redesign (Correct)
• Remanufacture (Correct)
• Recreate (Incorrect)
• Reupdate (Incorrect)

Feedback: To mitigate the amount of product disposal, industries have been carrying out 6R concepts (namely, Reduce, Reuse, Recycle, Recover, Redesign, and Remanufacture) to improve recovery implementation and minimize non-value added activities within end-of-life (EoL) management.

Question 3:

According to Statista (2021), the size of the reverse logistics market globally will be
continuously expanded and projected to reach (_____) billion U.S. dollars by 2028

• 958.3 (Correct)
• 900.3 (Incorrect)
• 938.3 (Incorrect)
• 853.6 (Incorrect)

Feedback: The size of the reverse logistics market worldwide has been
significantly increasing. According to Statista (2021), the size of the reverse
logistics market globally will be continuously expanded and projected to reach
958.3 billion U.S. dollars by 2028 (Statista, August 4, 2021).

Question 4:

Drag and Drop differences between forward and reverse supply chains in correct Category

Table 9.1

Differences between forward and reverse supply chains

[Return to activity].

Check Your Understanding: Define how ICT is supporting the global value chain

Question 1:

Companies are lucky to have advanced ICT because it provides a (_______).

• slew of cost savings – (Correct)
• lack of visibility (Incorrect)
• raw materials (Incorrect)

Feedback: Companies are lucky to have advanced ICT because it provides a slew of cost savings. Advantages include insights, building customer bases, creating new products and services, internet shopping, transactions, digitalization of businesses, finding fast solutions, speeding up order tracking and processes, enhancing the exchange of information, increasing collaboration, and transparency in the global value chain.

Question 2:

Today’s organizations are constantly searching for innovative ways to integrate ICT into their business process to acquire sustainable benefits.

• True (Correct)
• False (Incorrect)

Feedback: Today’s organizations are constantly searching for innovative ways to integrate ICT into their business process to acquire sustainable benefits.

Question 3:

What does blockchain mean? Write your response in the box below.

Feedback: Blockchain is mostly referred to as a cryptocurrency or digital
money such as Bitcoin, Dogecoin, ripple etc. Blockchain is a decentralized
digital ledger. Ledgers are used to keep a record of important things,
financial or something else.

Question 4:

Drag and Drop definitions in correct category

[Return to activity].

Check Your Understanding: Value Stream Mapping

Question 1:

Which of the following is not among the eight wastes discussed in the section:

• Unnecessary Inventory
• Waiting
• Unutilized Talent
• Water (Correct)

Question 2:

Drag the words. Value Stream Maps include:

*Process Flow*

*Information Flow*

*Material Flow*

Question 3:

Information flow indicates Push Value Principle.

• True
• False (Correct)

Question 4:

Is it True: The shorter your production lead time, the shorter the time between paying for raw material and getting paid for product made from those materials. A shorter production lead time will lead to an increasing in the number of inventory turns, a measure with which you may be more familiar.

• Yes (Correct)
• No

[Return to activity].