Organizations are facing increased global competition, economic uncertainties, and changing markets. Technology is changing the way we conduct business and manage information. Outsourcing of goods and services enables companies to take advantage of lower costs in areas such as labor, energy, land and capital. By doing this, companies hope to lower their overall cost structure, improve profit margins, and enhance product quality, reliability and distribution, thus allowing them to compete more effectively. Suppliers and vendor partners may be located in the same city, region or country. But they are just as likely to be located halfway around the world, adding new challenges to business management.
The growth of international strategic partnerships has risen exponentially in the last twenty years. Competing in a global marketplace has made it increasingly important to align business strategies with a risk management strategy that includes strengthening global supply chains and vendor partnerships. In the near future, it is supply chains that will compete, not companies. Global supply chains must be carefully selected and monitored to ensure the competitive edge required to achieve success in the global market place. Typically, the first order of business has been logistics and operations.
1. Logistics moves the entire economy
Economic developments in recent years have led to the creation of complex company networks and systems of goods flow – in the process, the globalization of procurement, production and sales as well as the division of labor have increased. In addition, the complexity of international logistics systems in many sectors has grown as a result of increasing product variations and differentiation. Another factor is that many companies are concentrating on their core skills and are reducing their vertical integration. The efficient management of the resulting global flows of goods has boosted both the business and economic significance of logistics.
Structure of Global Trade
International trade, both in terms of value and tonnage, has been a growing trend in the global economy. It is important to underline when looking at the structure of global trade that it is not nations that are trading, but mostly corporations with the end products mostly consumed by individuals. Inter and intra corporate trade is taking place across national jurisdictions is accounted as international trade. The emergence of the current structure of global trade can mainly be articulated within three major phases: • First phase (immobile factors of production). Concerns a conventional perspective on international trade that prevailed until the 1970s where factors of production were much less mobile. Prior to the end of World War I, global trade was mainly structured by colonial relations. Particularly, there was a limited level of mobility of raw materials, parts and finished products. After World War I international trade became fairly regulated with impediments such tariffs, quotas and limitations to foreign ownership.
Trade mainly concerned a range of specific products, namely commodities, (and very few services) that were not readily available in regional economies. Due to regulations, protectionism and fairly high transportation costs, trade remained limited and delayed by inefficient freight distribution. In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency. • Second phase (mobility of factors of production). From the 1980s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place lead to a better realization of the comparative advantages of specific locations. Concomitantly, regional trade agreements emerged and the global trade framework was strengthened from a legal and transactional standpoint (GATT/WTO).
In addition, containerization provided the capabilities to support more complex and long distance trade flows, as did the growing air traffic. Due to high production (legacy) costs in old industrial regions, activities that were labor intensive were gradually relocated to lower costs locations. The process began as a national one, then went to nearby countries when possible and afterwards became a truly global phenomenon. Thus, foreign direct investments surged, particularly towards new manufacturing regions as multinational corporations became increasingly flexible in the global positioning of their assets. • Third phase (global production networks).
There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production. Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution and consumption with the emergence of global production networks. Complex networks involving flows of information, commodities, parts and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution. In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows.
The global economic system is thus characterized by a growing level of integrated services, finance, retail, manufacturing and nonetheless distribution, which in turn is mainly the outcome of improved transport and logistics, a more efficient exploitation of regional comparative advantages and a transactional environment supportive of the legal and financial complexities of global trade.
The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods. By 2007, international trade surpassed for the first time 50% of global GDP, a twofold increase in its share since 1950. The facilitation of trade involves how the procedures regulating the international movements of goods can be improved. It depends on the reduction of the general costs of trade, which considers transaction, tariff, transport and time costs, often labeled as the “Four Ts” of international trade. United nations estimates have underlined that for developing countries a 10% reduction in transportation cost could be accompanied with a growth of about 20% in international and domestic trade.
Thus, the ability to compete in a global economy is dependent on the transport system as well as a trade facilitation framework with activities including: • Distribution-based. A multimodal and intermodal freight transport system composed of modes, infrastructures and terminals that spans across the globe. It insures a physical capacity to support trade and its underlying supply chains. • Regulation-based. Customs procedures, tariffs, regulations and handling of documentation.
They insure that trade flows abide to the rules and regulations of the jurisdictions they cross. Cross-border clearance, particularly in developing countries, can be a notable trade impediment with border delays, bottlenecks and long customer clearance times. • Transaction-based. Banking, finance, legal and insurance activities where accounts can be settled and risk mitigated. They insure that the sellers of goods and services are receiving an agreed upon compensation and that the purchasers have a legal recourse if the outcome of the transaction is judged unsatisfactory or is insured if a partial or full loss incurs.
The quality, cost, and efficiency of these services influence the trading environment as well as the overall costs linked with the international trade of goods. Many factors have been conductive to trade facilitation in recent decades, including integration processes, standardization, production systems, transport efficiency and transactional efficiency: • Integration processes, such as the emergence of economic blocks and the decrease of tariffs at a global scale through agreements, promoted trade as regulatory regimes were harmonized. One straightforward measure of integration relates to custom delays, which can be a significant trade impediment since it adds uncertainty in supply chain management. The higher the level of economic integration, the more likely the concerned elements are to trade. International trade has consequently been facilitated by a set of factors linked with growing levels of economic integration, the outcome of processes such as the European Union or the North American Free Trade Agreement.
The transactional capacity is consequently facilitated with the development of transportation networks and the adjustment of trade flows that follows increased integration. Integration processes have also taken place at the local scale with the creation of free trade zones where an area is given a different governance structure in order to promote trade, particularly export oriented activities. In this case, the integration process is not uniform as only a portion of a territory is involved. China is a salient example of the far-reaching impacts of the setting of special economic zones operating under a different regulatory regime. • Standardization concerns the setting of a common and ubiquitous frame of reference over information and physical flows. Standards facilitate trade since those abiding by them benefit from reliable, interoperable and compatible goods and services which often results in lower production, distribution and maintenance costs.
Measurement units were among the first globally accepted standards (metric system) and the development of information technologies eventually led to common operating and telecommunication systems. It is however the container that is considered to be the most significant international standard for trade facilitation. By offering a load unit that can be handled by any mode and terminal with the proper equipment, access to international trade is improved. • Production systems are more flexible and embedded. It is effectively productive to maintain a network of geographically diversified inputs, which favors exchanges of commodities, parts and services. Information technologies have played a role by facilitating transactions and the management of complex business operations. Foreign direct investments are commonly linked with the globalization of production as corporations invest abroad in search of lower production costs and new markets.
China is a leading example of such a process, which went on par with a growing availability of goods and services that can be traded on the global market. • Transport efficiency has increased significantly because of innovations and improvements in the modes and infrastructures in terms of their capacity and throughput. Ports are particularly important in such a context since they are gateways to international trade through maritime shipping networks. As a result, the transferability of commodities, parts and finished goods has improved. Decreasing transport costs does more than increasing trade; it can also help change the location of economic activities. Yet, transborder transportation issues remain to be better addressed in terms of capacity, efficiency and security.
• Transactional efficiency. The financial sector also played a significant role in integrating global trade, namely by providing investment capital and credit for international commercial transactions. For instance, a letter of credit may be issued based upon an export contract. An exporter can thus receive a payment guarantee from a bank until its customer finalizes the transaction upon delivery. This is particularly important since the delivery of international trade transactions can take several weeks due to the long distances involved. During the transfer, it is also common that the cargo is insured in the event of damage, theft or delays, a function supported by insurance companies. Also, global financial systems permit to convert currencies according to exchange rates that are commonly set by market forces, while some currencies, such as the Chinese Yuan, are set by policy. Monetary policy can thus be a tool, albeit contentious, used to influence trade.
The close relationship between international economic growth and logistics
Mobility is a critical condition for gains to be achieved in productivity, growth and employment in a macroeconomic context. The connection between economic growth and demand for product-transporting services is the result of various effects. These effects can clearly show the growing significance of the economic sector of goods distribution:
1 The effect of goods volume
For a long time, it was assumed that in highly developed economies fewer and fewer quantities of goods were produced for the macrologistics system and that the transport volume rose at a slower pace than the economy. Today, it can be assumed that the development actually goes in the opposite direction as a result of the increasing inter-company division of labor created by intensified outsourcing in some highly developed countries. Transport intensity – that is, transport performance per production quantity unit – increases for many types of goods. Individual parts or components of a product are transported numerous times during various stages of the value chain, e.g., transports between plants.
2 The effect of goods structure
In highly developed economies, the number of high-quality consumer and production goods rises. The share of mass goods, on the other hand, stagnates or even falls. The distribution of goods then shifts to high-quality products that must be shipped quickly. Because of the relatively low costs, road transports Road transport generally benefit. Railroads and inland water transports generally suffer because of their low speed.
3 The effect of logistics
Logistics systems constantly undergo optimization. Supply chain management Supply chain management, production-synchronization deliveries that employ just-in-time Just-in-time concepts, the forgoing of storage and global outsourcing are just a few examples of this. But the application of modern logistics concepts affects the economic sector of goods distribution. This is because the new logistics focus of industrial and trade companies has altered the demands placed on the goods-distribution system. Road transports can react relatively flexibly and well to these demands. Railroads and inland water transports have a difficult time making this switch. At the same time, air-freight transports profit from time-critical shipments.
4 The effect of integration
The creation of large economic regions gives rise to international, cross-border logistics systems. For instance, the European Union and regulations from the World Trade Organization [World Trade Organization (WTO) have propelled globalization Globalization in the goods-distribution sector. As economic regions spread, cross-border trade expands and the distances that must be covered by logistics systems lengthen. The effect of integration describes the increasing demands placed on the economic sector of goods distribution that are arising from the creation of larger economic regions and cross-border logistics systems.
In all likelihood, globalization will continue and intensify. Trade is critical to economic growth and to global development. Trade facilitation has been pointed out as the lowest-hanging fruit in this respect. It has also been argued that logistics services play an important role in matching entrepreneurs in poor countries with foreign customers, whether these are retailers or downstream manufacturers. In particular, as the traditional wholesalers are increasingly being bypassed in modern supply chains, developing countries need to ensure that their entrepreneurs have access to modern intermediaries that can help match local suppliers with foreign buyers and with ensuring that products meet quality as well as time reliability requirements.
The future growth of world trade will not be evenly spread, any more than world trade has ever been evenly spread in any period in world history. Individual countries are in very different positions with respect to their ability to benefit from world trade. Part of that is luck – having a coast, and rich neighbors help. But part of it is skill. Countries that are open to world trade, that create the infrastructure, and above all the right attitude, will be best placed to weather the current hiatus more successfully, and to prosper in the years ahead.
Courtney from Study Moose
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