12-5b Physical Distribution

agent

a channel of distribution that represents a company in a foreign market and is paid by commission

distributor

a channel of distribution that purchases products from a company doing business in a foreign market and then resells them to other buyers

physical distribution

storage and transportation operations that are used in moving products to a foreign market 0.10X = $200,000 + .06X X = $5 million

At a sales volume exceeding $5 million, it would be less expensive to employ a direct strategy; under $5 million of sales, the direct strategy would be more costly. For example, at a sales volume of $6 million, the cost of the direct strategy would be $560,000 ($200,000 + 0.06 × $6 million), whereas the cost of the indirect strategy would be $600,000 ($6 million × 0.10).

Agents and distributors are the two major kinds of channels of distribution that international marketers can use. An agent acts on behalf of a company in a foreign market and will be compensated by a commission on the volume of sales achieved. The agent makes a profit if the commission is greater than the costs incurred in selling the client’s products.

A distributor purchases products from the company doing business in international markets and, in turn, resells them to other buyers. Distributors make a profit if they can sell the product at a price higher than what was paid for the products, plus the costs involved in reselling them.

Physical distribution refers to a company’s storage and transportation operations used in moving its products to their foreign markets. Storage involves the use of warehouses for a company’s products, either while they are retained in the home country or until they are transported to overseas markets. Sometimes products will also be stored in warehouses in the host country until purchased by international customers.

EBay and Amazon are finding that physical distribution is a major factor in breaking into the Indian market. Both companies instituted physical distribution operations that are designed to speed up deliveries and make them more reliable. Amazon will open up a second 150,000 square foot warehouse in Bangalore; the first was in Mumbai. EBay is guaranteeing nine-hour deliveries for customers located in Mumbai.23

When a company decides to begin selling its products overseas, it encounters a new set of variables that affect its physical distribution operations. In some countries, such as Italy and Japan, there will be more distribution layers than in the United States. Often, the wholesalers and retailers constituting these layers will be small, inefficient operations. These factors result in more complicated and costly physical distribution operations. Poor logistics infrastructures are another challenge in many foreign countries: bridges, tunnels, roads, ports, railroads, and airports may be of inferior quality. Foreign buyers are more likely to accept longer delivery times than domestic customers, but once the buyer and seller agree upon delivery dates, buyers expect deliveries to be on time. Because buyers may be separated from sellers by thousands of miles—making it difficult to address the various problems that may arise—international buyers demand that orders received be complete (no items missing), accurate (the correct products are received), and in good condition (not damaged).

The greater distance required for international shipments requires sellers to place more emphasis on the package designed to protect products in transit. The greater distances also increases the logistics costs for international shipments. Whereas truck and rail shipments dominate domestic shipments, air and water are the most important for international shipments. Shipments by air account for only 1 percent of all international shipments, but represent 20 percent of their value. High-value perishable items and those that need to reach customers quickly, such as cut flowers, personal computers, and machine parts, are examples of goods that are typically transported on airplanes. Giant-sized container ships and oil tankers move large quantities of products to international buyers at low per-unit costs but at a much slower pace than shipment by air. Cargo ships have

teCHnoloGy PersPeCtives Technology Breakthroughs Should Improve the Performance of International Shipping

The Danish shipping line A. P. Moller-Maersk, has commissioned the South Korean shipbuilder, Daewoo Shipbuilding and Marine Engineering to build 20 of the largest cargo ships ever, the Triple-E. Each Triple-E will cost $185 million, will be 1,312 feet long, 194 feet wide, weigh 55,000 tons empty, and have the capability to carry 9,000 40-foot long containers—about 40 percent more than current capacities. It is estimated that it will take one year to build each Triple-E. Their major route is projected to be from Northern Europe to China and return.

Triple-E ships offer a number of advantages to Maersk and its shippers. They are projected to be 30 percent more fuel efficient than Maersk’s largest capacity competitors. This fuel consumption advantage is dependent upon the Triple-E moving a steady 16 knots per hour. The increased fuel efficiency advantage translates to lower cost per unit shipped that can be passed on to shippers in the form of reduced shipping costs.

The European Union has commissioned a $4.8 million study to assess the feasibility of developing drone ships to ply the world’s waterways. A digital prototype was projected to be ready in 2015. Rolls Royce’s Vice President for innovation in marine engineering, Oskar Leander, came out in favor of the idea at a conference in May of 2014, and the company has developed a prototype.

Should drone ships become a reality, there are a number of projected benefits. The major one is that crews would not be required, resulting in a 44 percent reduction in operating costs that will translate into lower costs for shippers. If the bridge where the crew would normally live were replaced by cargo space and air conditioning, water and sewage systems for the crew would be eliminated; it is estimated that these ships, when empty, would be 5 percent lighter and 15 percent more efficient. Supporters of drone ships contend that they will be safer than crew-manned vessels once improvements in remote controls, preventative maintenance, and emergency backups occur.

As shipping lanes have become more clogged, China has been pushing the idea of constructing new canals. One possibility is to build one across the Isthmus of Kra. Its length would be about 30 miles and would cut across land belonging to Thailand and Malaysia. The objective would be to provide ships an east–west access that would allow them to bypass the Straits of Malacca—south of Singapore, north of Sumatra—one of the most congested waterways.

In the Western hemisphere, HK Nicaragua Canal Development Investment Co., headed up by Wang Jing, a Chinese telecommunications billionaire, has acquired the rights to construct a canal across Nicaragua. Also included would be an oil pipeline, two deep water ports, a railroad, and two airports. The total cost is estimated at $40 billion.

Jing maintains that this canal is needed to accommodate the larger-sized ships that are on the drawing board; even the Panama Canal cannot handle some of these bigger vessels, despite a $5 billion upgrade completed in 2014.

Questi O ns:

1) How long do you estimate it would take a Triple-E ship to go from Shanghai, China, to Rotterdam,

Netherlands?

2) What do you believe are the major disadvantages of drone ships? 3) Look at a map of the world. Are there other places where a new canal might be economically viable? What criteria would you use in making this assessment?

Sources: Drake Bennett and Lee Klaskow, “The World’s Biggest Boat,” BusinessWeek, September 9–15, 2013, pp. 44–50; Isaac Arnsdorf, “Will Drone Ships Sail the Seven Seas?” BusinessWeek, March 3–9, 2014, pp. 24–25; and Adam Williams, “Nicaragua Wants a Canal It Can Call Its Own,” BusinessWeek, July 1–7, 2013, pp. 18–19.

frequently been seized by pirates in the Gulf of Aden and the Indian Ocean, which has been a growing problem and cause of concern for businesses. The International Maritime Organization reported “a total of 135 attacks [in this region] during 2008, resulting in 44 ships having been seized by pirates and more than 600 seafarers having been kidnapped and held for ransom.”24

Containers facilitate the use of intermodal shipments to overseas customers.

s_oleg/Shutterstock.com

freight forwarder

agents for companies shipping products overseas who are chiefly involved with physical distribution activities and documentation

containerization

shipping products to overseas markets in trailer-sized containers

intermodal transport

international shipments using different modes of transportation

Companies selling products overseas often must engage the services of a freight forwarder. Freight forwarders act as agents for companies shipping products to international customers. They arrange for moving products to domestic ports or airports, negotiate with ships or airlines to transport products, expedite clearing customs in both the home country and the host country, negotiate storage arrangements, and most importantly, complete all the confusing and time-consuming documentation (paper work) needed for an overseas shipment.

An important development in international physical distribution is containerization, in which shipments are placed in trailer-sized containers (usually 40×8×8 feet) that can be moved from one type of transportation (truck, train, airplane, or oceangoing vessel) to another type without needing the contents to be unloaded and reloaded (intermodal transport). Huge container cranes allow heavy containers to be loaded on or off ships without capsizing them. Containerization reduces handling costs, spoilage, and pilferage.

Physical distribution is a key component in a company’s international operations. Didier Chenneveau was hired in 2008 by LG Electronics, the giant-sized, global South Korean electronics firm, “to deal with the company’s chaotic physical distribution system.” Mr. Chenneveau was attempting to merge LG’s ten warehouse-management systems, five transportation operations, and four computer program’s inventory tracking systems into one global system.25

Reality Che C k lO-5

Observe traffic on a major interstate highway or freight rail line near where you live or work. If you can, also visit the docks at a major ocean, lake, or river port, and observe the unloading and loading operations on cargo ships. Pay particular attention to the movement of containerized freight. Can you tell if any shipments are from overseas?

LO-6

Discuss the objectives and decisions involved in international pricing.

12-6 Developing the International Pricing Mix

Developing pricing objectives for international markets, setting prices in international markets, addressing the issue of dumping, and setting transfer prices are the major aspects of a company’s international pricing strategies. These are important decisions because they affect companies’ sales, costs, and profits obtained in overseas markets.