Freight Logistics & Transportation in International Business

Freight Logistics & Transportation in International Business

Gary Demasi

IB 8180

Topic Paper

4/1/99Introduction

Freight logistics are essentially the business processes that maximize the efficiency of inventory management through control of raw materials, production, and distribution. Over the last two decades, the basic nature of logistics has changed. Companies are increasingly changing from a “push” inventory management system to a “pull” system. The push system has traditionally based inventory production, storage, and distribution on predictions of market demand, and has effectively pushed product through the system. Over time, this system proved to be inefficient, as unexpected events often changed demand after a product was produced. Today, many companies produce product only as a reaction to proven market demand. This is the pull system.

Freight logistics is a necessary consideration throughout the life cycle of a product. Raw materials are sourced and transported to the production location. The finished products are often brought to a distribution center where they await delivery to the consumer.[1]

FREIGHT LOGISTICS

The most important component of freight logistics is transportation. From sourcing raw materials to the distribution of the final product, companies depend on air, truck, rail, water, and pipeline transportation. In the United States, the various modes of transportation used in the production and distribution of various products can be complicated, often taking weeks to accomplish, and utilizing several types of transportation vehicles. When an international component is added to the equation through the establishement of a foreign operation, the situation becomes even more complicated. Although the United States has a relatively sophisticated freight transportation system, many countries have complex import and export procedures, as well as infrastructure limitations. Furthermore, as globalization becomes more crucial to a company’s survival, efforts to produce seamless freight transportation in any given market will intensify.

This paper will investigate three types of freight transportation in the context of a hypothetical manufacturer looking to locate a proposed facility abroad which will serve internal and external markets. Six countries will be included in the analysis representing a cross section of continents and various levels of infrastructure development. This study assumes that the company has already concluded that based on labor quality, availability, and costs, these six countries are viable options for the project. However, an analysis is needed to evaluate the condition and appropriateness of the infrastructure in each of the countries. The countries will be evaluated in terms of ease of travel and likelihood that the freight logistics in each country will deliver product within a reasonable timeframe. For the sake of simplicity, only the distribution of product will be considered. In addition, the company produces a “low cost” item so they are unlikely to use air transportation. Instead, only highways, railroads, and ports will be discussed. The countries that will be investigated include Brazil, China, The Czech Republic, France, Mexico, and South Africa.

First, however, a brief overview of the various modes that will be investigated:

§  Highways: Typically, trucks transport moderate to high value products. In the US, trucking is the most common form of freight transport. Highways are generally used for shorter distances compared to rail for low cost items.[2] The condition and quality of major highways as well as travel costs determines the ease of travel between major cities and to other modes of transport such as air and ports. Each of the countries will be evaluated based on existing road infrastructure, and current construction forecasts when available.

§  Ports: The number of major ports and the efficiency of those ports determine the general quality of a country’s system. In addition, the quality and size of each nation’s merchant marine offers some insight into the ease of transport from these various ports. In general, international water transportation is used to transport low to moderate value goods long distances (2,300 miles, on average).[3]

§  Rail: Like highways, rail is a critical mode of transportation from manufacturers to trucks, pipelines, ports, or air terminals. Typically, rail is used to transport moderate to low cost goods, and the distance of an average haul (US) is 670 to 803 miles.[4] In this study, rail will be evaluated based on extent of infrastructure, quality of infrastructure, and trends in infrastructure development.

§  Intermodal Transportation: Although this transportation structure will not be investigated as a separate freight transport mechanism, the complexity of international logistics invariably involves several modes of transportation. In the textile example of this study it would not be uncommon for the export of the finished product to require rail and truck, truck and ship, rail and ship, or even all three modes. Intermodal transportation is common around the world. The major costs include the physical transition of product from one mode to the other, interim transportation during a mode transition, if necessary, and the actual time value of the transition period.[5]

Highways

Brazil

/ §  Of 1,670,148 km total, only 10% are paved.[6]
§  The Brazilian highway system is generally not adequate by US standards. However, in the highly industrialized state of Sao Paulo and in other pockets within the south, the highways are sophisticated and efficient. In the interior, the infrastructure is largely undeveloped. However, truck transport remains the most common method of freight movement. Fuel costs are particularly expensive and often prohibitive.[7]
§  Summary: In order to take advantage of the highway system it would be necessary to locate a manufacturing facility near a major metropolitan area such as Sao Paulo or Rio de Janeiro, or near an inland or coastal port. The highway system is relatively inadequate for long distance trucking from the interior.
China / §  China has a total of 1,180,000km of roads, 20% of which are paved.[8]
§  Major infrastructure improvements are planned as part of China’s Ninth Five-Year plan. An estimated $30 to $40 billion has been allocated for road construction and improvements.[9]
§  Summary: Major road systems between Chinese cities are improving. As the Chinese economy continues to grow at an accelerated rate, the government intends to invest heavily in infrastructure improvements.
Czech Republic / §  The Czech Republic has 55,489km of paved roadways, including 423 km of expressways (less than 1%).
§  Compared to Western Europe, the countries of the former Soviet block have poor infrastructure in place. In addition, small hauling companies predominate, often consisting of only one or two vehicles. However, costs are reasonable since imports significantly outweigh exports and many freight companies find it difficult to fill outbound trucks.[10]
§  Summary: Until the highway system becomes more extensive and the road freight industry more sophisticated, the principal method of transporting goods will be via rail.
France / §  France boasts nearly 892,500 of paved roads including 9,500km of expressways (1%).[11]
§  France offers advantages unique to the European Union. Each year, hundreds of miles of new highways are constructed, adding to the already sophisticated infrastructure. In addition, France offers the only direct routes into Spain, Portugal, and the UK. France also offers entry into Italy without the freight restrictions of moving trucks from Switzerland or Austria.[12]
§  Summary: France offers many infrastructure advantages in terms of highway travel. For instance, France offers the most extensive road network of all European countries. In fact, like the US, more freight moves via truck than any other transportation mode.[13] However, the low percentage of expressways could present difficulties in product transport time and congestion.
Mexico / §  Mexico has a total of 245,433 km of roadways, 36% of which are paved roads. Of the paved roads, almost 5% are classified as expressways.[14] Another 6,000 km of expressway construction is planned before 2001.[15]
§  One of the biggest concerns operating in this market is the threat of theft of the trucks, cargo, or both. The sophistication of tracking and protecting shipments is increasing, but the hijacking of shipments is still a regular occurrence. Coca-Cola de Mexico and Kimberly Clark de Mexico founded the National Private Transportation Association (ANTP) to lobby the Mexican government to increase security. It is estimated that 88% of goods shipped by ANTP members involve some truck transport.[16] Border inspections also present problems. On average 44% of Mexican vehicles that are inspected at the US-Mexico border are taken out of service for safety violations. In fact, a 1995 Clinton administration mandate bars Mexican truckers from traveling outside commercial zones along the border.[17]
§  Summary: Barriers to seamless travel make intermodal transportation necessary. In addition, most highways are between major cities, making transport of goods from or to rural locations difficult. Theft will continue to plague truck traffic until sufficient safety measures are in place.
South Africa / §  Of 331,265km of roads, almost 42% are paved. However, less than 1% are classified as expressways.[18]
§  Lack of adequate monitoring has resulted in a high degree of overloading of trucks traveling on South Africa’s highway system. It is estimated that overloaded trucks cause 60% of all damage to South Africa’s road system. This is a concern because it interferes with truck travel in general, causing damage to trucks and slowing the transport time. In addition, transport deregulation has resulted in a general shift of rail transport to trucking.[19]
§  Summary: Although the quality of roads is questionable, it appears that federal monies will be available to maintain and build the infrastructure. Efforts to create multinational highways through southern Africa will also increase the quality and expanse of the road network.

Ports

Brazil / §  Brazil has 11 major ports, 50,000 km of navigable waterways, and a total of 220 ships.[20]
§  In the past two decades, strong economic growth throughout Latin America has encouraged the proliferation of shipping companies in the region. Since the Asian crisis began, however, increased competition has pushed rates down as the multitude of shipping companies pursue a limited amount of cargo. As the crisis continues it is probable that mergers will occur among companies, but that rates will remain competitive.[21]
§  Like the rail system, Brazilian ports are being privatized. In addition, the Tiete/Parana project involves the construction of a locks/rail/port facility deep in the interior along the border of Brazil and Paraguay.[22]
§  Summary: Brazil’s port system is extensive. The low rates add to the short-term advantage of using shipping companies to transport goods. In addition, shipping companies have increased speed of service to capture the market. One company, Columbus Line, has introduced weekly service between the western coast of South America and the US eastern seaboard (three days faster than its nearest competitor).[23] However, with the devaluation of the real, exports to North America are expected to increase, which will tighten space availability and will likely lead to higher rates in the future.[24]
China / §  China has 18 major ports, 110,600km of navigable waterways, and a 1,966-ship merchant marine.[25]
§  Like its road system, China has integrated port improvements into its Ninth Five-Year Plan. Between 1996 and 2000, China will spend approximately $10 billion improving both its inland and coastal port system.[26]
§  Summary: China continues to improve every sector of its freight movement infrastructure, including its ports. With the acquisition of Hong Kong, China’s ability to move freight through its ports has been enhanced considerably.
Czech Republic / §  Although the Czech Republic is landlocked, there are three ports located at Decin, Prague, and Usti nad Labem. The Czech Republic’s principal waterway is the Elbe river, and the merchant marine consists of 5 ships.[27]
§  Summary: Because the Czech Republic is landlocked, the most cost common methods of shipping freight include highway and rail travel.
France / §  France boasts 16 major ports, 14,932km navigable waterways (47% of which are classified as “heavily traveled).[28]
§  By world standards, the ports of France are considered state-of-the-art. Not just ocean shipping facilities, these ports are intermodal centers offering rail and truck service as well. For instance, Europort Vatry is located inland 90 miles east of Paris. When it opens later this year it will offer an integrated port, highway, and rail infrastructure, served by a complex information and internal transportation system. The facility will run 24 hours, seven days per week.[29]
§  Summary: France’s geographic position and established infrastructure make its ports particularly strategic. France’s port system offers several advantages including the shortest transit times from Europe to North America and the Far East, deep water ports, direct rail links and direct access to highways.[30]
Mexico / §  Mexico has 15 major ports, 2,900 km of navigable rivers and coastal canals, and 48 non-passenger ships.[31]
§  Like most of Latin America, Mexico is in the process of privatizing its ports which should lead to quicker turnarounds and lower fees.[32]
§  Summary: Although the perception exists that most freight coming into the US from Mexico arrives by truck, a great deal of freight leaves through Mexico’s ports. The time-consuming process of truck inspections and related regulations can make shipping more cost effective for some products.
South Africa / §  South Africa has 7 major ports, and a 9-ship merchant marine.[33]
§  Traditionally the mineral industry has been very strong in South Africa, necessitating the development of several world class ports. Currently, there is a major port development near the city of Port Elizabeth. If completed, the port would be the deepest in the African nation.[34]
§  Summary: The port system of South Africa is sophisticated. However, it’s connectivity to other modes of travel is questionable. It is likely that transition costs and time costs would be considerable.

Rail System

Brazil / §  Brazil has 30,133 km tracks, 24,690 of which is 1.000-meter gauge.[35]
§  Under its “Brazil in Action” plan, much of Brazil’s rail system will be privatized in an attempt to increase operating efficiencies. The plan also calls for additional lines, bridges, and related infrastructure.[36] Already, the privatization has lead to a resurgence in the Brazilian rail industry. This year it is predicted that sales among railroad equipment suppliers will increase 30% as this mode of transport becomes more economical for the public and private sectors.[37]