Realities of Globalization for Companies

Transportation and Logistics Management

Tanya Combs

"Globalization is the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flow, and more rapid and widespread diffusion of technology" (International Monetary Fund -- quoted by Rushton, et al., 2007)

Globalization's impact on the world economy, in particular on the logistics and transportation management of the economies of the world, has been momentous. World trade has grown at "double the growth of GDP" over the past 15 years or so, and for developing nations, their share in world merchandise trade has skyrocketed by over 31% since 1950 (Rushton, 2007). More trade -- knocking down barriers to economic interaction -- means stronger economic growth, and globalization has stimulated trade; specifically it has helped the freight market enjoy healthy annual growth rates up to 10% annually on an international basis (Rushton, 22). The rapid development in information and communication technology allows must faster "…movement of data and transactions, as well as lower transport costs" for both air and sea freight (Rushton, 22).

Thesis: This paper reviews and critiques the literature that relates to the enormous impacts that globalization has had on the nations of the world. The advances in information technology, the increasing strategies used to remove trade barriers -- and the enormous impact those dynamics have had on the transportation and logistics industries -- will be brought into focus in this research. Aspects reflecting the downside of globalization will be presented in this paper as well.

What Are the Drivers that Propel Globalization?

Importantly, trade has driven the globalization movement, and the increase in trade has facilitated an exchange in "…cultures, politics, goods and services" between nations that previously had no interaction (Rushton, 21). Trade would not have been such a big player in the positive side of globalization without the enablers to trade -- international treaties.

The 1944 GATT treaty (General Agreement on Tariffs and Trade), for example, has been a key impetus to more trade and has resulted in the cost of ocean freight to drop by "over 70% since the 1980s" (Rushton, 22).

In 1995 the World Trade Organization (WTO) superseded GATT, and promoted vigorous trade activity between member nations. The WTO worked to resolve disputes between nations, remove harmful tariffs (taxes on goods being traded), and put together global free trade agreements (Rushton, 22).

The North American Free Trade Agreement (NAFTA) was established between Canada, Mexico, and the United States, and removed many tariffs and fees; this stimulated free trade between those North American neighbors.

And the European Union (EU) was established on November 1, 1993, which formed an economic association of European countries into a "…barrier-free market for products and services," as well as a common currency for transaction consistency (Rushton, 22).

Because of free trade, lower transport costs and faster communication, there have emerged more complex and "lengthy supply chains," Rushton points out on page 23-24. More supply chains bring along with them significantly more transportation in order to keep products moving from marketplace to marketplace. Along with the increased growth of the transportation industry, there is necessarily a growth in the management and logistics fields.

For example, the logistics people need to be able to have a handle on "all inventory," including raw materials, finished goods and "…goods in transit" (Rushton, 24). Are the products flowing to the right place according to the time table previously established between the manufacturer and recipient of goods? This question is a key issue for partners in the global supply chain, and when suppliers know exactly where their inventory is at every moment in the movement of materials, they have a solid grasp on how profitable their transaction will be.

Globalization and Information Technology

Bryant University "Senior Capstone Project" leader Benjamin Lawlor presents the research that shows there are six processes of globalization -- relating to doors globalization has opened up and how it works. Those six are: a) speeding up the movement of "capital, people, goods, images and ideas" worldwide; b) "intensification of the links, modes of interaction and flows" that make the world interconnected; c) the reaching out to -- and stretching out of -- cultural, political, and social economic practices; d) a sense of "interdependency of the global and the local landscape…" (what is done locally now has affects globally); e) values, goods and cultural trends now come from and are shared by many countries around the planet, not just from Europe and the United States; f) "Westernization" is not as powerful as before because people "customize their own ideas" and what's done in the U.S. Or UK isn't as meaningful because ideas and values move back and forth around the world, originating in Asia, South America, and Africa as well -- not just from Western countries (Lawlor, 2007).

The term "internationalization" is used as an alternative to globalization in the peer-reviewed Journal of Marketing Management. Companies that were launched in the age of the Internet are called "born-global," because they target markets from their very inception and they don't follow the more traditional "sequential process" of internationalism. For firms (small or medium) that are not born-global but are getting into the global marketplace after having been a traditional, local or regional company, they may benefit greatly from the Internet (Matthews, et al. 2012).

The pace of a firm's international growth, once it becomes skilled at using the Internet, is typically must faster. As a players in the global marketplace, a company now has "marketing intensity" in the form of "greater development of international knowledge, which in turn leads to… greater sales and market share" (Matthews, 737). Moreover, in addition to the process of internationalization, the authors point to greater "interactive communication with consumers" which plays an "essential role" in building relationships between buyers and sellers" in the global marketplace (Matthews, 737).

Meanwhile, there is a "correlation" between the skyrocketing growth of the world's population and the "acceleration of technological progress" (Qureshi, 2013). Technological progress allows the world to "support more people' and because the population increases there is an increased "flow of new ideas" which in turn powers the "engine for further technological development," Qureshi explains on page 190.

An example of how information and communication technologies (ICT) impact the global community is found in the story of Mexico and healthcare for its citizens. Many technological advances in the offering of healthcare originated in the "first world" (the U.S., Europe and elsewhere in the "west"). However, countries that were or are in the third world (like Mexico) have taken that information -- through the use of ICT -- and today Mexico has "universal health care" (Qureshi, 190). Ironically, the United States still doesn't have universal healthcare even though through ICT a third world country like Mexico does have it. This is a perfect example of how information technology delivers important ideas and strategies for better living to globally remote countries.

Other examples of the tremendously positive impact that information technologies have had on commerce and transportation are presented in Rushton's book, International Logistics and Supply Chain Outsourcing: From Local to Global. First it should be noted that there are still developing countries that are not fully up to speed when it comes to ICT access, and several organizations have taken steps to remedy that lack of ICT access. The WTO and the International Telecommunications Union have employed strategies to being new and economically helpful technologies to developing countries in Africa, Asia, and elsewhere, Rushton explains.

The advent of e-commerce -- another feature of ICT -- has opened up new opportunities for marketing goods, and this allows "business-to-business" (B2B) transactions. These transactions have had a powerful impact on the buying and selling of goods globally (Rushton, 28).

Globalization Transportation and Logistics Management

Because of globalization, logistics providers face situations that are much different from what they face years ago, according to the peer-reviewed journal Economics and Management. The supply chains, for one thing, have become "longer and more complex"; and for another, the competition has become more intense because "barriers to trade have been gradually reduced" (Cepinskis, et al., 2010).

The important consequences resulting from the trends toward globalization within the global logistics systems include the following: a) global logistics is generally considered "one of the driving forces of economic growth and social development"; b) transportation is "central" to logistics, and it operates as "an enabling mechanism"; c) the services that freight transport offers have become "more critical"; d) accommodating new technologies, markets and organizational structures "requires change"; and e) because there has been a need for "greater efficiencies" this has made it more urgent for the development of "more seamless" markets to minimize delays in freight movements because routes are rarely hindered by "national or modal boundaries" (Cepinskis, 48).

Managers in the field of logistics must understand the "motivation of global logistics decisions," because global market logistics rely very heavily on the "performance of infrastructure owned and operated by the public sector" (Cepinskis, 48). Knowing those infrastructures helps logistics managers identify freight bottlenecks -- and those logistics managers in the global marketplace must be able to solve the bottlenecks and launch conditions that allow "free access" to their products (Cepinskis, 48). Moreover, supply-chain management must link the channels of distribution, the end client, "production processes and the procurement activity" in a way in which clients' expectations are not only met, but surpassed, Cepinskis explains on page 49.

The author asserts on page 53 that "Logistics has been called the last frontier," and the improvement of logistics is seen as "…the prime source of companies' [ability] to make new profits" and continue to have a competitive advantage. However, a "customer-driven supply chain" must be optimized in order for companies to experience global growth at a level that will continue to produce profits (Cepinskis, 53).

Global Production Networks and Supply Chain Management

Among the innovations that information and communication technologies (ICTs) have brought to "…the global economic and social integration" called globalization, is what essayist Jean Paul Rodrigue calls "global production networks" (Rodrigue, et al., 2007). The author notes that in the recent past manufacturing was largely done in developing countries and the research, product design and innovation activities were kept in "home countries and home markets of global corporations" (Rodrigue, 103).

However, because of the substantial impacts that ICTs have on the global processes, many "production-related services are fragmented and being shifted towards what was formerly… called the periphery" (Rodrigue, 103). In other words, there is software development, data processing centers, and call centers in places distant from the home office of the global corporation -- which Rodrigue says relates to the global production networks.

Recently, logistics has been "transformed" into the "more comprehensive mode of supply chain management" (SCM) Rodrigue continues. And SCM, because it is based on ITCs, and because of the changing habits of corporate management (including the elimination of inventories) there is a more integrated management of the supply chains.

Rodrigue explains that a "major requirement for the global expansion of production networks" is being built on logistics. In fact logistics is becoming what Rodrigue calls a "key unit" in the system of production. This is because it must offer agility and flexibility when there is interaction along the network; hence, a "major shift has occurred" in where and how products are being assembled, manufactured and distributed (Rodrigue, 105).

Supply Chain and Logistics -- Potentially Negative Global Issues

Illustration courtesy of Industry Week

magazineIn the magazine Industry Week, the author, Dave Blanchard, writes that as more and more businesses adopt a globalization business model with a network of suppliers, there is a "higher risk of fraud" (Blanchard, 2013). As manufacturers tap into third party logistics partners and other outsourcers they are increasing their chances of fraud, Blanchard explains. It is important for businesses with an eye to global markets to expand their supply chains, and realize the potential of "high-growth emerging markets," but in the process they can "unknowingly invite unwelcome participants along for the ride" (Blanchard, p. 1).

This article was written in 2013, in December, so it is just over a year old, but Blanchard points out that the incidence of companies "falling victim to fraud" is up 9% over 2012. Seven out of ten companies have been "victimized," the writer asserts, and that statistic comes from a global fraud study by Kroll, a company that provides risk management services. This is a red flag warning for companies that have plans to launch global business models, because apparently relying on a network of partners and suppliers may want to take steps to try and avoid fraud.

In addition, Kroll's research revealed that "Nearly one in five companies surveyed (19%) say they were a victim of vendor, supplier, or procurement fraud last year" (Blanchard, p. 1). The writer goes on to explain that particularly in India, Africa, and Latin America, businesses cannot always count on honest, dependable supply chain facilities and partnerships; of the companies surveyed by Kroll, almost half of them said they chose to avoid those venues due to fears of corruption.

Who commits the fraudulent act when partnering with foreign entity? Kroll's CEO, Tom Hartley, said fraud is often "perpetrated by an insider," and that insider might be a "senior or middle manager" (Blanchard, p. 2). In Kroll's research it turned out that thirty-two percent of company respondents to his survey said they have been victims of fraud "committed by a manager"; 42% were victimized by a "junior employee" and 23% were victimized by an agent or third party (Blanchard, p. 2).

If a company involved in globalization is counting on the honesty of a vendor or other partner in the supply chain, from the report provided in this Industry Week publication it isn't so much "…whether or not you've suffered a fraud," Hartley, it is "how your prepare for it, how you deal with it and how you move on afterwards" (Blanchard, p. 2). In the first place global-themed companies should definitely do their homework and carefully screen vendors, and use whistleblowers that can be trusted -- according to Hartley.

One of the problems is that manufacturers are not spending enough time and energy investigating their potential partners or others in the supply chain. There should be a "risk assessment compliance strategy, which includes "written policies and procedures, internal controls, training, internal audits, and, significantly, management commitment," according to Greg Chalkley, director of global trade services for Maxim Integrated, a manufacturer of semiconductor products (Blanchard, p. 2).

Moreover, companies should be certain to determine the risks out in front of any arrangement with a supply chain or logistics entity; a company should know what "could go wrong," and follow-through with pre-determined corrective action should be a top priority. What stands in the way for many companies is that they don't have timely access to the information they need vis-a-vis their global supply partners, and one of the "culprits for this lack of visibility is a continued reliance on stand-alone spreadsheets and manual data sourcing" (Blanchard, p. 2).

Managing the Risks of a Globalized Supply Chain

Guest journalist Milosz Majta writes in Forbes that while there are certainly huge benefits that come from globalization, there are also costs; and when it comes to global supply chain management, there are definitely "pros and cons" as well (Majta, 2012). Managing supply chains has become "more complex and business critical" than ever before in the manufacturing and marketing milieu. Hence, effective risk management, as mentioned earlier in this paper, is vitally important.

When a company has total control of its operations, Majta notes that there are "fewer moving parts"; and this allows the company to have far greater control of information that is vital to its functioning. For example a company in control of its operations has a far easier time identifying, quantifying, prioritizing and mitigating potential risks to its supply chain. But of course in the era of globalization, when there are more parties involved in the process, pinpointing information relative to its risks is far more difficult and challenging (Majta, p. 2). The three factors that contribute to the supply chain risks, according to Majta, are: a) the increasing complexity of the supply chain; b) the lessening of company access to information regarding its supplies and logistics; and c) "greater need for higher quality, faster, all for a lower cost" (Majta, p. 2).

Added to the complexity of the supply chain milieu is the fact that more and more work is being outsourced, which makes it very difficult to track, trace and monitor any potential problems, according to Majta. Not only do manufacturers need to manage and try and control their supplier networks -- and Majta is referring to "multiple product lines" -- they also must carefully manage the logistics of everything that is going on with their products.

And along with the growth of a huge number of markets -- spread out geographically in different corners of the world -- comes "an increasing volume of regulations that must now also be complied with," in particular, Majta continues, if the manufacturer is producing aerospace products or products related to the life sciences (p. 2).

One very serious potential problem that manufacturers face as they expand globally is that whether all the right data and other information is available or not, operational decisions have to be made. This is another area where information technology comes into play; good communication and "collaboration systems" absolutely need to be implemented because a lack of pertinent, updated information "…relates directly to an increased risk" (Majta, p. 2).

The world of course is not a consistently stable place when it comes to weather, natural disasters and more. Majta reflects on the possibilities that a manufacturer going global -- at any moment in time -- could have his supply chain disrupted by "…political and economic instability, supply disruptions, economic volatility…" or other adverse events (p. 3). A case in point was the recent floods in Thailand; companies that manufacture disk-drive technologies were "hit hard" when those key suppliers were shut down because flooding had intruded in their workplace. Quickly the manufacturers that were counting on the Thailand disk-drive company had to "reroute work to other suppliers not affected by the floods" (Majta, p. 3).

Moreover, since globalized companies cannot predict what might happen at any moment -- terrorism, for example, could suddenly cause explosions, death and other carnage near to a supplier of a pivotal component for Apple, or Samsung, or other technology companies -- the ability of a company to quickly switch to another vendor is not an easy task.

Because of unexpected eventualities -- or because a company uncovers fraud and corruption occurring along the supply chain -- the value of "supply chain visibility has increased significantly," Majta explains (p. 3). When he says "visibility" he doesn't mean it literally; rather, he means that manufacturers must take a "wider, more holistic perspective across operations," and that can be enhanced when technologies are implemented that allow a clearly, more real-time view of what is going on in the supply chain (Majta, p. 3).

When a company puts out bids to vendors for the manufacture of key components, that company must be very careful not to just automatically accept the lowest bidder. "This situation occurs regularly," Majta explains, hence, it is a big challenge for a globalized company to be sure that "low cost bidder" actually has the capability to deliver the goods on time, up to specification, and without undue delay. How well with that low cost vendor perform if "multiple design changes or other modifications" are needed? Will that low cost vendor also be able to provide "…the necessary traceability and operational intelligence" so the company's budget won't be busted and the trust that was placed in the vendor be justified?

Majta, who is quality control manager for the Apriso Corporation in Long Beach, California, concludes his narrative by reminding readers that the global marketplace has been "both a blessing and a curse"; even though many new markets have opened up, that actually brings with it "greater risk," which could very well impact the "survivability" of any company (p. 3).

Risk Assessment and the Management of Logistics Chains

Vladimir Vikulov and Andrey Butrin write in the Scientific Journal of Logistics that there are many weaknesses in the present stage of risk management. They first describe the "modern integration processes" as offering businesses new opportunities that also present new challenges, including the important objectives of risk management. By "integration" the authors are alluding to the process of integration between the supplier and the customers, and how (through good use of available information technologies) weak links in the logistics chain can be identified (Vikulov, 2014). The ability to "optimize" the level of risks associated with logistics is vitally important in the world of globalization, they emphasize.

When a company participates in a process of integration that company then becomes a participant with these features: higher access to resources (labor, materials, financial); the opportunity to create greater efficiencies; and the opportunity to create what the authors call "privileged conditions for integrating subjects" -- and the ability to "protect them from competition" (Vikulov, 44).

Meanwhile, an important part of this scholarly piece is the identification of the main weaknesses in the current use of risk management strategies: a) companies lack a "theoretical and methodological framework" for actually identifying what risks are out there; b) companies lack a "methodology of risk management"; c) on a local level company management does not include risk management as a principal component of its global operations; and d) when a company prices its products based on the "classical approach" it is failing to take into consideration the possibility of risk losses in the logistics chain (Vikulov, 44).

Hence, companies expanding into global markets should become fully conversant with the economic nature of the risks -- in the context of "integration with suppliers and customers" (Vikulov, 44). Also a risk optimization strategy should be developed, along with an "economic and mathematical model for determining the optimal level of risk" in the logistics chain a company has developed.

Supply-Chain Survival in the Age of Globalization

There is a great need for material requirements planning (MRP) and enterprise resource planning (ERP), when developing a solid, workable plan to manage a supply chain in a globalized organization (Pope, 2011). When external customers and vendors were integrated into the supply chain -- as Vikulov and colleague discussed in the previous reference -- that in fact meant that supply chains began function as "virtual companies" (Pope). However, virtual companies are not legally part of each other, but they were operating as though they were. This is a key issue in a company's need to keep a close hand on its supply chain, as much as possible.

An example of the complexity of supply chains is seen in AT&T's supply chain for its wireless handset, a supply chain which (as of 2011) included 35 different manufacturers, between 60 and 80 parts suppliers, "…and more than 1,000 commodity-part suppliers" (Pope). Along with all these suppliers, AT&T was dealing in 2011 with an "unknown number of brokers and distributors" (Pope).

The author points to five processes that are part of what goes into developing a reliable supply chain management system: a) the entire chain must be well planned out; b) with each new link in the chain a process of "sourcing" -- that is, identifying a source -- should be implemented (either purchasing products from outside sources or producing them in house); c) the making of the "fabrication or assembly process"; d) actually delivering the product to the customer; and e) the concept of "returning" products to customers or to the vendor is vital; it may be of poor quality, or it could be the wrong product was shipped or that the customer has changed his or her mind (Pope). Actually another reason the product could be returned is because it was identified as a candidate for recycling.

On the subject of recycling, in the European Union, a law exists that requires automobiles to be 85% recyclable by weight, and the manufacturer who built the auto is responsible for taking that vehicle back and performing the recycling, Pope continues.

What Companies can expect by entering the Global Marketplace

According to research in the journal Operations Management, for the company just dipping a toe into the waters of the global marketplace, it should understand that "most markets" are dominated by "well-prepared global competitors" (Alkanaani, 2013). In other words, going into a global business strategy should entail a total heads-up approach to what is out there and how stiff the competition already is.

The competitors having success in the global milieu have done their homework and have identified specific world markets that are the right places to sell their products. The most successful ones have also developed working strategies vis-a-vis manufacturing and logistics, which supports their well-thought-out marketing approach. The successful firms know how to standardize their parts, components and modules, and then, "…through flexible manufacturing and logistics," they understand how to "provide the specific products demanded by each market's consumers" (Alkanaani).

Beyond the specifics mentioned in the previous paragraph, Alkanaani asserts that companies getting into the global market should have a "global intellectual property strategy," because if they don't, they run the risk of being shut out of "certain overseas markets." In fact a "dynamic game plan" should be launched and well implemented in terms of sustaining a competitive edge and protecting the value of their intellectual property (Alkanaani). This calls for creating a well-thought-out and proactive patent strategy that will clearly prevent any competitors from stealing innovations, Alkanaani explains.

In terms of marketing products, once a company has a foothold in the global marketplace, it should realize that the needs that consumers have worldwide are "greater than ever." But since many cultures don't have the resources to pay for items they need, companies' pricing policies must fit the country in which they market their products (Alkanaani).

Understanding the political and legal realities is important -- whether at home or in a remote country where the culture is vastly different -- because relationships between nations change quickly sometimes, and being on top of those potential changes is vital.

Of course any globalized manufacturer would prefer to do business in a country where the government provides a stable and friendly response to foreign investments. And so wise companies getting into the global market absolutely should monitor the policies of any country before opening up the possibility of locating or selling products there. Most certainly a globalized company should avoid exporting goods to a market that is high risk. That is why it is important to diversify and explore and research, not just the supply chain and logistics issues, but the social and political dynamics of any country being considered as a target for potential sales.

Winners and Losers because of Globalization

The World Bank reports that globalization has greatly benefitted the "global middle class" and in people in India, China, Brazil and Indonesia have been helped economically by globalization. However, people at "…the very bottom of the income ladder, and the lower-middle class of rich countries, lost out" (World Bank, 2013). The Research Director at The World Bank, Asli Demirguc-Kunt, said that because globalization has made it much simpler for goods to be transported and for people to move around the world that should in time boost prosperity and help tackle inequality.

There are approximately 400 million people in the "global middle class," and they earned more in the twenty years before the global financial crisis than they had ever earned. The inflation-adjusted "real income" for that global middle class mentioned in the sentence above rose "…80% between 1988 and 2008," due to globalization (World Bank).

The Downside Issues that are part of Globalization & ICT

Meanwhile, globalization also has its downside, according to an article in the scholarly International Journal of Production Research. The downside is that because the globalization of production activities (in "geographically dispersed" facilities at various places around the world) actually increases the total production cycle time, getting the product to the customer is "a challenging task" (Hammami, et al., 2012). When goods are actually being transferred to various geographical locations, the shipment times play a vital role in making customers happy.

Hence, Hammami writes, the supply chain becomes a very important part of the logistics and transportation component of manufacturing. If the company could make the production sites closer to customers that would shorten the supply chain; and if the company was willing to pay a slightly higher price to a local supplier (rather than a lower price to a company at a distance) it would benefit customers and wouldn't really hurt the company (Hammami, 2761).

These are some of the issues that logistics and transportation professionals have to wrestle with as the globalization of manufacturing and marketing continues to be a growing trend. Derek Crews explains that managers are not always trained to supervise the logistics industry; and Crews also discovered that only 21% of logistical personnel are women, and those women in the logistics industry were paid an average of 23% less than male counterparts.