International Logistics and Inventory Control: A Case of Healthcare International Company

Introduction

The competitive advantages that a company enjoys while pursuing their enterprise activities determines its success in national as well as international competition. Distribution logistics is one of the most instrumental activities in the value chain. Logistics is closely linked with customers thus able to generate competitive advantages directly. Broadly, distribution logistics is aimed at providing the right goods at the right time and place, in the right quality and amount, as well as the right price, consequently ensuring availability of goods and information. As a component of the general entrepreneurial goal, logistics gives top priority to profit maximization and is subject to the triple objectives of cost, quality and time. A company can enhance its profits through planning activities in a manner that boosts the cost-benefit ratio for the customers. It is vital to note that the planning of logistical structure is subject to the assumption that the customer is not necessarily interested in it as long as the logistics performance is warranted (Mae & Ohao, 2012).  Subsequently, there is only one way of optimizing profits, namely minimizing costs.

Issues and Procedures in International Logistics

As regards to international logistics, there is no substantial difference between the company’s goals and problems. However, certain framework conditions result into greater complexity as well as higher risks as pertains to country-specific logistical processes. In general, companies cannot influence a wide spectrum of underlying conditions and hence they have to conform appropriately. International distribution logistics is characteristic of a high degree of complexity due to the fact that companies normally accept national boundaries and organize their planning based on a specific country. International distribution processes involves the flow of products from different parts of the globe. It is vital to note that intra-company trade accounts for about one third of global trade (Behal et al., 2010).

Read also Inventory Control Models And The Driving Factor In Each Model

The new distribution processes of Healthcare International will call for the implementation of supply chain management techniques that will ensure the receipts of pharmaceuticals and cosmetics and delivery of this products to the regional distribution center in Jebel Ali. Just in time (JIT) production and distribution processes require that the supply and demand are well matched in near real-time in a bid to reduce inventory and storage costs besides freeing up working capital and equipment (OECD et al., 2014). Logistics costs which include transport, packaging, inventories, storage, administration and management, are a fundamental consideration for all stakeholders in the international logistics chain (Behal et al., 2010). Control of logistics cost allow companies to maintain a competitive advantage and trade growth, following the fact that logistics costs relate to competitive export and import prices. In international trade the component of transport is growing as that of inventory holding is declining.

Transportation is a cost and it is reported that logistic costs account for 10 to 15 percent of unit costs for finished products and about 60 percent of logistics costs arise from transportation activities. Managerial decisions regarding the mode of transportation directly impacts on the profitability as well as the competitiveness of a company. For the Healthcare International, transportation and logistics processes ought to be considered as strategic processes that create value to the customer. Healthcare International has to choose the appropriate transportation solution in a bid to remain competitive. For pharmaceuticals and cosmetics, replenishment time in the distribution center in Jebel Ali will be a critical success factor since customers are likely to pay more for timely delivery as well as a refreshed inventory. The company can deliver the products through ships, airplanes, trucks or trains. The major drivers to consider in choosing the transportation mode include customer requirements, product characteristics, and countries infrastructure.

Insight into Transportation Modes

The different modes of transport come with different aspects of costs, reliability, accessibility and speed. There are four main transport modalities namely; air shipping, sea shipping, road transportation, and railway. Each transport mode has specific freight requirements and companies should choose the most suitable transport mode. Healthcare International will have to rely on inter-modal transportation where the containers will be shipped by sea from  Sao Paulo, Brazil and Bangalore, India to the harbor  and then delivery to the Regional Distribution center in Jebel Ali by truck. The trans-oceanic shipping will involve either air shipping and sea shipping. Healthcare International transportation and distribution will require setting of freight management strategies. Logistic concerns all the activities required for the pharmaceutical and cosmetic goods to be made available in Jebel Ali distribution center including order processing, inventory management and transportation. The evident production expansion in the global domain has induced transport systems to conform to new environment in freight distribution where the timely and reliable deliveries are as vital as costs.

The development of global transportation and telecommunication networks, liberalization of trade, information technologies, and multinational corporations are factors that have considerably impacted the global commodity chains (GCC).  The three main factors to consider when it comes to transport are cost, reliability and speed. The cost is normally considered in the sense that faster transportation typically has higher costs and vice versa. Subsequently, it is important to consider that when aiming for lowest total logistical costs possible, the cheapest transportation option is not necessarily the best. It is crucial to balance out the cost and time of transportation. It should be noted that to aid in reducing the inventory, shorter delivery time makes the time interval shorter, when the inventory is in transit and consequently unavailable to be used.

Optimal Distribution Logistics Strategy

Service level is critically instrumental in evaluating the distribution system. Service level shows the proportion or value of orders delivered within a planned or an agreed time-frame. The service level acts as a performance indicator for assessing the completed transactions and benchmarking for developing new distribution systems. It follows therefore that delivery times that do not conform to the apposite customer prerequisites will result into extra costs by way of opportunity costs occasioned by shortages in deliveries. In a bid to provide and maintain optimal delivery times while considering the usual market-related fluctuations in demand, the distribution system requires to have either a certain stock level or a very high flexibility.

Sea-freight is considered the cheapest mode of transportation. It is considered that ships have cargo capacity that is substantially larger than the other transport modes. To illustrate, a containerized vessel freight carries between 7000 to 50000 tons while an aircraft do not exceed 50 tons. This would allow Healthcare International to exploit the economies of scale, and this mode of transport is suitable for very bulky cargoes due to its high volume capacity. Nonetheless, sea-freight is the slowest alternative mode of transportation given that a vessel from Brazil may take 4 to 5 weeks to reach Jebel Ali while an aircraft, considering all inbound and outbound logistics, will require a few days. There are five different types of vessels namely; Container ship, General cargo, tankers, RO-RO ship, and Bulk and Multipurpose ship. Container ship is an evolution of the General Cargo where cargos are not loaded with different packages but rather goods are distributed within containers (Mae & Ohao, 2012). The dimensions of the containers are standardized and they normally come in lengths of 40 and 20 feet.

20 Foot Container $0 Foot Container
Capacity (m3) 30 60
Internal Dimensions (LxWxH)m 5.89×2.32×2.23 12×2.32×2.43
Door WxH (m) 2.30×2.14 2.30×2.23
Maximum Load (tons) 18 30

Source: OECD

Air shipping is the fastest mode of transport. It is reported that an Express service will only take two working days to deliver a consignment from Brazil to Jebel Ali. However, Air freight is the most expensive alternative and it can only be selected to match specific requirements as well as constraints such as rapid delivery times for urgent dispatch. Freight aircrafts come with different characteristics from conventional passenger aircrafts. They come with high wings providing low fuselage with easy entry, wider body, and large number of wheels. The popular cargo airplanes are the Boeing 747 and the Airbus A330.

Length (m) Maximum Takeoff Weight (kg) Maximum Cargo Volume (m3) Maximum Speed (km/hr)
Airbus A330-200 59,69 233 000 475 611
Boeing 747-400 70,6 396 890 780 901

Source: OECD

Below is a tabulation showing the ranking of the different transport modes considering cost, speed, accessibility and punctuality.

MODE Cost per ton and per kilometer Line Haul Transit Time Delivery Time Variability Accessibility
Absolute %
Road 3 2 2 1 1
Rail 2 3 3 2 2
Water 1 4 4 3 4
Air 4 1 1 4 3

Ports Suitability for Products Exports

There are over 30 sea ports in India. This paper considers three ports that will offer the least transit time from Bangalore to Jebel Ali in Dubai. Ports of Mengalore, Mumbai and Kendla have beeen considered. It should be noted that the distance between Bangalore and Mengalore, Mumbai and Kendla ports is 352km, 1,020 km, and 1836 km respectively. These distances between Bangalore Plant and the three ports can be covered by use of the road or rail. However, road is considered as the main form of freight cargo transportation mode in India representing about 60.2%, with rail trailing at 32.1%. Nonetheless, Indian roads are in poor condition which increases the challenges experienced. Although railway is considered to be more convenient, it is less preferred since it is highly saturated and thus, it hardly creates room for new freights. Other challenges with railway transportation include uncertain and long transit time, poor quality of rail terminals, and less flexibility in transporting different forms of products. Furthermore, it is not easy to secure a railway carriage especially when the industry cannot offer loads to fill the train.

Indian sea ports are said to have a high turnaround time due to on berths congestion and slow at berth evacuation of unloaded cargoes. The lack of enough port depth in most ports makes it hard for them to attract very big vessels. The land side infrastructure is inadequate and thus, limiting coastal shipping in the country. India also experiences poor storage infrastructure.  Most of them are wrongly positioned, limiting movement due to congestion and poor packing. Warehouses are in poor states and normally in small size. Others lack the necessary security system to enhance surety of the product safety.

The only sea port that can be used to transport containers from Brazil to Jabel Ali port in Middle East is the Port of Santos which is located 77.2 KMs away from the company’s plant in Sao Paulo. This distance can be covered by use of the road for 1 hour 22 minutes. Rail can also be used to travel form Sao Paulo to Port of Santos. Railway covers a distance of 78.5 KMs which takes less than two hours to be covered. In this regard, there would be no a lot of logistics challenges as compared to India which involves a longer distance from the plant to the port.

Similar to India, road transportation is the major form of freight transportation in Brazil. However, about 69% of the roads in the country are in poor condition, particularly those in the northeast and north. The country’s railways are concentrated mostly in southeast which contain 47% of the total rail in the country. Railway experiences competition from the road form of transportation. Other challenges include being inflexible, low speed, unavailability of wagon and high cost. The country also does not have a well-integrated multi-modal system and thus, shifting from one mode of transport to another is not easy. However, the country has embraced logistic technology effectively and thus, their warehouses are well managed and tracking systems are very effective in the country.

Transit Times and Inventory Levels

Product Company Location Export Port to Jabel Ali Distance to Jebel Ali Port

(Nautical Miles)

Transit Time (days) Time at Sea in days (at 14 knots)
Pharmaceuticals Rotterdam , Netherlands Port of Rotterdam 6231.22 16-33 19
Sao Paulo, Brazil Port of Santos 8194 29-48 24
Cosmetics New York, USA Port of New York 8058.99 9 – 53 days 24
Bangalore, India Mengalore Port

Mumbai Port

Kendla Port

1455.62

1138.18

935.34

13-38

9-17

8-26

4

3

3

Source: SeaRates.com

Inventory seeks to provide sufficient products aimed at meeting the demand levels of the customer. Additionally, inventory is usually aimed at achieving maximum inventory turn. It is important to maintain the service commitments at the desired level while meeting these objectives of inventory. Inventory management should attempt to increase the financial return on inventory while at the same time enhancing the levels of customer service. Inventory availability is the most crucial element of customer service. When and how much to order are the primary considerations when planning inventory. There are different fundamental strategies in managing inventory. One way is to ensure that the level of customer service is as high as possible. Another way is the use of more reliable transportation aimed at reducing the transportation time as well as uncertainity (Harrison & Fichtinger, 2013). There is need to find the right relation of transportation and inventory costs in a bid to minimize costs. The most evident primary factor that is relevant to inventory management when putting into account the transportation time is the average level of inventory. Subsequently, the factors for average inventory that should be considered are safety stock, average order quantities, and in transit inventory (Multaen, 2011).

Looking at the pharmaceutical products, exporting from Sao Paulo, Brazil will take longer with a transit time range of between 29 to 48 days as compared to 16 to 33 days if the products are sourced from Rotterdam. The transit time in weeks would range between 4 and 7 weeks. It implies therefore that there is need to increase the average inventory level from the current 4 weeks cover to 8 weeks cover to cater for the longer transit time from Sao Paulo, Brazil to Jebel Ali, Dubai. On the hand, for cosmetics, Sourcing from India will reduce the transit time spent currently when getting the products from New York. Taking the transit time incurred from Mumbai, which is 9 to 17 days as compared to the 9 to 53 days spent from New York. It is important to note that the transit time from the three ports in India that have been considered, the range of between 1 to 4 weeks is less than the time required to deplete the inventory at the Regional distribution center in Jebel Ali. Subsequently, there is no cause to adjust the average inventory levels for cosmetics.

Based on this analysis, it is evident that cosmetics will be highly accessible even with a shorter notice. The duration the cosmetics products take in the sea means that the company can minimize their storage area by ordering small quantities as frequent as they are needed. Pharmaceutical products on the other hand takes longer meaning that there will be more waiting time before a loaded ship arrive at the Jabel Ali harbor compared to the usual time. This means, the company may need a higher level of inventory to cater for the challenges presented by the delay. This will ensure that the product is always in the market and no shortage is experienced. In this regard, the company can reduce the amount of cosmetic inventory and increase that of pharmaceutical products to create a balance. The recommended pharmaceutics inventories will be 9 weeks, while cosmetic inventories will be 6 weeks.

Transit time performance is a crucial point as pertains to selecting the ocean freights. Schedule variability, which is the difference between the planned arrival date and the actual arrival date is a driving factor in sea-freight (Multaen, 2011). Schedule variability will lead to Healthcare International incurring logistics costs relative to holding incremental inventory in the form of safety stock. The ideal logistical arrangement is for the company that seeks to reduce the schedule variability should be to load goods on at the last port in the chain relative to the originating location and consequently unload them at the first port relative to the destination (Harrison & Fichtinger, 2013).

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