How Macro-environmental Factors Influence International Logistics

Updated: Sep 29

When it comes to International Logistics, a number of large scale influences are taken into account. Thus, it is crucial for logistics professionals to weigh the advantages and drawbacks of various strategies in order to reduce and minimize logistics costs while maintaining the desired customer service.


Among different types of factors, the four most notable are:


  • The trend of selling complementary products together

  • The Proliferation of alternative options for carriers

  • The common presence of substitute products

  • Customers reactions to Changes in transportation price


1. The trend of selling complementary products together


Complementary products are defined as items which usually sold together, for example, a razor with a blade, a diaper comes with the baby wipes. For these products, logistics practitioners should take into account how much inventory of both items it is going to maintain frequently.


Tooth paste and tooth brush are complementary products

Source


While it is sometimes overlooked, the availability of complementary products can enhance the economic outlook for a particular product. Complementary products are goods or services used in conjunction with the products that a company is contemplating introducing into foreign markets. For example, video cassettes are complementary to video cassette recorders. The widespread availability of complementary products makes the introduction of any new product in foreign markets a more attractive business opportunity. Indeed, the availability of complementary products may even be essential to the successful launch of a product [1].


2. The proliferation of alternative options for carriers


Choosing from a huge pool of delivery services continuing to increase in number is a challenge logistics professionals usually deals with. Take China with around 35,000 courier service providers as an example. There has been been a proliferation of ocean carriers that make up more than 60% of the total value of products being shipped universally. The much larger, more efficient container ships with capacities of 18,000 or more TEUs, like those owned by China Shipping Container Line and Maresk Line, offer better economies of scale and half the amount of previous emissions. However, while competing with each other, it is predicted that ship types will wipe out other smaller, less fuel-efficient ships out of the Asia-to-Europe routes. Other ocean routes may be dominated by particular carriers who have a monopoly, such as those going to the Middle East, and they may offer less price flexibility.


Choosing from a huge pool of delivery services

Source


3. Substitute products


A substitute product is one that serves the same purpose as another product in the market. Getting more of one commodity allows a consumer to demand less of the other product. The demand for substitute products shows a negative correlation. That is, the consumption of one product reduces or replaces the need for the other. Plus, substitute products also highlight the buyer’s power as they do not have to depend on one supplier.


Coca and Pepsi are substitute products

It is essential for logistics professionals to pay attention to the substitute products in its mix with the others selling to the customers, as it affects the amount of safety stocks that need to be maintained and also influences the stockout cost including lost sales, backorder cost, expediting, and additional manufacturing cost. Having the exact in-stock rate of a particular product while offering the substitute goods for customers so that they can turn to the others if their first option runs out is the perfect scenario for any logistics.



On the one hand, this substitute product strategy is ideally suited for logistics companies to enhance their customer experiences. However, it might raise slightly the average inventory and slow the inventory turnover.


It is such a challenge to achieve the above ideal scenario - having an accurate demand for each product and determining its right order quantity to assure maximum profit. The lesson logistics practitioners might bear in mind is to incorporate inventory decisions of all products when selling substitute products [2].


4. Customers' reactions to changes in transportation price


The way customers react to variations in the price of transportation is considered as another influencing factor. Typically, in a free market, price is a sensitive topic for customers and whenever there's a price reduction, the demand and total revenue for the item increase. That is referred to as demand elasticity.


Elasticity of Demand

Source


However, price reductions by transportation carriers do not align with this pattern. When freight rate decreases, it will not increase the demand for transportation noticeably. Just because logistics notices a price decrease, it will not likely decide to increase its number of shipments abroad. But if there’s a specific model or specific carrier offering reduced rates for transporting containers, then logistics might take advantage of those discounted rates and funnel more shipments to those providers if they have the right types of vehicles for carrying their products.


The competition between carriers who are competing by providing various service levels might create benefits for logistics companies. To gain the position and garner many businesses, transporters will offer the fastest transit time and higher service reliability to help shorten the delivery time to the end customers and this


Besides, not only does price play into the transportation decisions but so do a number of other service factors such as “The capabilities of the carriers”, “Time in transit”, “Consistency of transit times”, “Direct service”, and finally “Safety of the shipment”.


Conclusion


Being aware of the factors that might affect International is important to your company strategy. To understand the trends, it is important to update and keep track of your business performance frequently in order to make precise predictions as well as control your inventory to decides about substitute strategy.


Want to manage your Logistics operations effectively, contact us now for consultations!


References:

[1]https://www.exporthelp.co.za/modules/1_considering_exporting/env_econ/products.html

[2]http://www.diva-portal.org/smash/get/diva2:391407/FULLTEXT01.pdf

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