International Logistics Operations of MNCs: An Exploration of the Pharmaceutical Industry
by Rajshekhar G. Javalgi , Timothy H. Reisenwitz Marketers in multinational corporations (MNCs) realize that global markets mean intense competition and that logistics is the key to making and keeping customers. Exploratory research was conducted using telephone interviews with l6 pharmaceutical companies. Logistics techniques are compared across companies with negligible international sales to those with 100 percent international sales. Introduction Businesses are experiencing increasing pressure as the globalization of markets intensifies competition [7, 22]. Leading U.S. companies are responding by making changes in their organizations' operations. Logistics - managing the flow of materials from the raw material to ultimate consumer state - has emerged as an important element in this corporate renewal as it becomes a greater percentage of total costs. Logistics costs currently comprise between 10 and 25 percent of the total cost of an international sale [1], and these costs are rising. This increase occurs with the pursuit of more global market opportunities. Many companies have expanded their domestic operations and are now considered multinational corporations (MNCs), with operations in several countries outside the U.S. Neglecting distribution and logistics issues will not only yield higher costs but also eventual non-competitiveness, resulting in a loss of market share, more expensive supplies or lower profits. Logistics problems can prevent the marketer from fully exploring the potentially profitable global market. Logistics strategies must reflect that fewer and fewer companies are simply domestic operations. The efficiency/effectiveness balance - minimization of costs and increased customer satisfaction - has traditionally involved cost tradeoffs in the area of physical distribution. Improving customer service is a goal in dealing with increased competition, with logistics costs often increasing as well [11]. However, it has been noted that logistics can help a company attain a sustained competitive advantage through the combined benefits of improved customer service and lower costs [7]. Customer retention may result from building long-term relationships with customers. This study focuses on how the effectiveness/efficiency dichotomy is addressed for the logistics function in international distribution. The pharmaceutical industry was chosen as the group of firms to study for several reasons. First, this industry consists of various product categories, including products that are necessary to keep the recipient alive. This high degree of product importance makes the area a significant one to study. The pharmaceutical industry is also continually changing by developing, testing and marketing new products. Second, the players engaged in the international distribution of pharmaceuticals are changing, and the new players from small- and medium-sized firms are exploiting opportunities in the emerging economies of the world. Third, the global economy is changing with the elimination of tariffs and other trade barriers. In their continuing efforts to satisfy customers, logistics firms are transcending boundaries in adapting to a growing global market. Prior work on customer satisfaction and costs in the area of international logistics has not concentrated on any one industry. Although costs and customer satisfaction may be measurable across industries, the concerns, problems and challenges of international distribution are often unique to the industry or product category cited. For instance, the physical product may require certain logistical considerations. Pharmaceutical products may require more security, speedier delivery (especially for those pharmaceutical products with quick expiration dates) and special handling for those products with temperature restrictions. This article shares the insights derived from telephone interviews with the international logistics managers of several pharmaceutical firms. The first section of the study focuses on identifying customer expectations and meeting these expectations through strategic alternatives and operations. The next section presents insights gained from our exploratory research. And the final section discusses conclusions and implications of the study. Exhibit 1 summarizes the structure of the study. Evaluating Customer Expectations A prerequisite for delivering superior service is understanding customer expectations. Customers compare their perceptions with their expectations when evaluating a firm's service [17]. Customers expect service companies to do what they are supposed to do. Research has shown that reliability of service, which entails performing the promised service dependably and accurately, is the most important dimension in meeting customer expectations [17]. Further, the process dimensions, assurance, responsiveness and empathy are most important in exceeding customer expectations. Assurance is the knowledge and courtesy of employees, and their ability to communicate trust and confidence. Responsiveness is the willingness to help customers and provide prompt service. Empathy is the caring, individualized attention provided to the customer. The relationship between performance and expectations is well documented in research literature [17]. The difference between performance and expectations defines the level of satisfaction. In other words, when performance exceeds expectations, the result is satisfaction. Thus, exceeding customer expectations is key to achieving complete customer satisfaction, securing customer loyalty and generating superior long-term financial performance [13]. The only truly loyal customers are those who are totally satisfied. A completely satisfied customer usually believes that the organization excels in understanding and addressing his or her preferences, values, expectations or problems. Many organizations in the logistics business have realized that their environment is continuously evolving. Technological advancements have brought new dimensions of speed and ease in the area of international logistics operations. Leading carriers are facing the challenge of meeting the changing expectations of customers in the global economy. Customers increasingly measure service providers by their ability to address particular logistics problems, not just the ability to provide cost-effective and reliable service [4]. In addition to invoice accuracy and a prompt response to inquiries, customers are seeking intelligence and imagination. Byrne and Markham [5, p. 42] state, "Suppliers that use a proactive approach with their customers have an advantage in a global economy because of the relationships they build with customers." Service failures occur because the company does not know its customers. Customers will continue to solicit suppliers who work cooperatively in meeting their expectations. But how are the expectations addressed? Meeting Customer Expectations through Strategic Alternatives and Operations. As shown in Exhibit 1, there are several alternatives when it comes to meeting customer expectations. These alternatives are neither mutually exclusive nor collectively exhaustive. Below we discuss the ways to meet customer expectations through strategic alternatives and operations... Strategic Alternatives. Organizational Strategic Structure for Internationalization: Largely due to their respective product lines or industry, some firms have been more successful than others in breaking into world markets. The successful industries have been named global industries [2]. According to Bartlett and Ghoshal [2], there are three major strategies and structures for engaging in international operations: global, multinational and transnational. Global corporations design products for the world market from the beginning. The products, such as cameras or stereos, seldom have to be localized to sell in different markets. Corporate subsidiaries do not have a great deal of autonomy, becoming integrated in the global organization and not playing any strategic role at all. In contrast, multinational corporations develop products for their own market, then offer them for adaptation by their overseas subsidiaries. Subsidiaries have the capacity to absorb parent company technology and adapt the resulting products to local conditions and tastes. Packaged foods are a good example in that they can be greatly influenced by local tastes and traditions. The global and multinational structures have serious potential problems, which will not be discussed here. The transnational structure is offered as a viable third alternative in that it seeks an optimal blend of the efficiency of the global structure and the local responsiveness of the multinational structure. The key elements of the transnational structure include a two-way flow of ideas and resources, frequent movement of people between units, extensive use of local boards of directors, and a global perspective by both the parent and subsidiary organizations. Transnational corporation subsidiaries have more autonomy than those in global corporations, but are still integrated as part of a global strategy. Pharmaceuticals, aerospace and telecommunications are examples of industries that have been successful using this strategy [2]. Third Party or Contract Logistics: Since international distribution complicates the logistics function, many firms have turned to third party or contract logistics [14]. Major manufacturers are looking to their transport operators to take over many of the functions previously done in-house. This outsourcing of logistics through exclusive long-term contracts has become a business function in its own right, allowing companies to focus on their core businesses. Benefits of these partnerships far exceed the initial costs [15]. Given that logistics costs of multinationals average 10 percent of sales, the potential savings are considerable. Medtronic Inc., a medical equipment manufacturer, saved $100,000 in 1994 and $300,000 in 1995 by consulting National Freight Management (NFM) on selecting carriers and negotiating prices for shipping their refrigerator-size machines for lung and heart support to Europe, Asia and Latin America [1]. Nexxus, Inc., a hair and skin care product manufacturer, experienced logistical problems when using a variety of brokers, forwarders and carriers to ship its products from California to various parts of Europe. Nexxus adopted Flowmasters from Nedlloyd Lines, a transportation system complete with full-range warehousing and distribution services. Nexxus can stock its products in one of 24 warehouses that Nedlloyd maintains in Europe. By using this system, Nexxus states it is saving about one-third of its previous transportation and warehousing costs [1]. Operations. Freight Forwarders, Exporting Organizations and Supply Chain Management: Freight forwarders have become logistics providers, offering not only consolidation but also inland transportation and tracking of intermodal containers. Freight is moved faster and more cheaply through closer relationships with fewer vendors. American President Companies (APC), the leading trans-Pacific shipping line and multi-modal transport service provider in North America, recognized it could no longer simply deliver containers for customers. A new approach offers full-service distribution from a point-to-point basis within and between North America and the Pacific Basin. A comprehensive information system offers current tracking and financial information regarding customer shipments. Exporting organizations are also seeking ways to lower costs while increasing customer service. A relatively new approach is supply chain management (SCM). Supply chain management differs from traditional materials and manufacturing control in several ways. First, SCM views the supply chain as a single process. Second, SCM requires strategic decision making due to its impact on overall costs and market share. Third, supply chain management regards inventories as a mechanism of last resort. Finally, it requires an integrated approach to systems [12]. Integration results in reduced inventory and significant cost benefits [10]. The success of SCM usually involves implementation of an information management system. The medical equipment firm, Becton Dickinson & Co., has achieved a significant competitive advantage through SCM and supply chain relationships. This company evaluates its supply chain program against strategic factors such as productivity, quality, service development and chain integration [3]. Information Management Systems: Various automated systems have helped both carriers and exporting organizations improve their logistics function. One such system, MicroAnalytics, helps traffic managers solve their routing problems. This service can maximize vehicle usage, optimize routing to reduce mileage and better meet service requirements. "Users reduce distribution costs by up to 30 percent" [21, p. 34]. Digital Electronic Corporation's (DEC's) electronic information network is in essence an electronic distribution superhighway [20]. The need for human intervention is reduced, and yet a detailed flow of product and parts can be monitored along the entire supply chain. Logistics costs decrease dramatically and customer satisfaction improves. Although the system costs millions of dollars, transportation companies are developing similar capabilities from which any size exporter can benefit. Bergen Brunswig Corporation, the second largest pharmaceutical wholesaler in the country, has automated the way its customers submit purchase orders. Electronic Data Interchange (EDD reduces inventory, cuts costs and speeds product delivery. Bergen Brunswig is trying to convince suppliers to use the system as well. The company now turns over inventory 9.8 times a year, compared to six times annually before automation. In one such relationship, the company has paired with healthcare product organizations West Company and Baxter International. Increased Use of Air Shipments: Shipping by air has traditionally been the most expensive mode of transportation and therefore comprised a small percentage of total freight shipped. Several organizations are finding that the use of air freight reduces costs and/or improves customer service [8]. These organizations manufacture high-end products where transportation costs are a small percentage of the product's price. Xerox's worldwide logistics organization is increasing its use of air freight as well as using fewer ocean carriers to reduce transportation and inventory costs. Both moves have improved the bottom line for the office equipment company. The Swedish Company, Sandvik Coromant, ships everything from Sweden by air. While it costs 10 times more than using ocean freight, this method keeps customer satisfaction high with faster transit, and keeps costs low through reduced inventories and risk of product obsolescence. The costs of maintaining higher stocks of product in the U.S. would be far greater than more frequent shipments by air. Ampex Corporation shifted from ocean to air carriage and eliminated excess international inventory and speed shipment cycle time [16]. Shippers at the 17th International Air Cargo Forum stated that their increase use of air freight revolved around dependability, despite higher costs [19]. Insights from Exploratory Research Our exploratory study consisted of telephone interviews with the international logistics managers of various pharmaceutical firms. An in-depth interview format used unstructured questions to encourage respondents to share as much information as possible in an unconstrained setting. There were few prompts or guiding questions. Telephone interviews are advantageous over mail interviews as they are quicker, with the likelihood of far better responses to open-ended questions. Rephrasing or explaining questions is possible to facilitate understanding. However, the interviews avoided using sensitive, long questions, or those with too many response categories [9]. A random sample was used from Redbook [18], an annual pharmaceutical trade publication that includes a manufacturer directory listing more than 1,000 pharmaceutical companies. Requesting to speak to individuals occupying identical positions (specifically, a logistics or distribution manager) enables the interviewer to pose questions to informants with similar access to information and perspectives [6]. The interviews consisted of several objective questions, including logistics costs as a percentage of sales [1]. Company representatives responded to questions asking how consistently their firm is meeting its goals in five service areas: damage-free receipt, invoice accuracy [4], order cycle time (number of days between a customer placing an order and their receipt of that order) [16], order completeness and speed of response to inquiries. They discussed how they learn about customers' expectations: through in-person interviews, phone or mall surveys, and focus groups, or if expectations are simply based upon interpretations from marketing or sales department inputs or customer complaints [5]. Also, respondents talked about the existence of long-range logistic plans and whether or not market entry/expansion, formalized partnerships or long-term contracts [15] are part of those plans. Further questions inquired about specific logistics challenges or problems, and remedies to address these challenges or probl ems. The information gathered in this study may be helpful to pharmaceutical logistics managers who are considering, or are currently operating in, international markets. Problems that one firm may have addressed may be similar to current problems of another organization. Results Derived from the Interviews. The telephone interviews yielded a variety of interesting results. A total of 46 initial phone calls yielded 16 interviews (35 percent response rate). Companies ranged from small, family-run organizations to huge, multinational conglomerates (see Exhibit 2 for a complete list of company names). Due to space limitations, not all of the interviews are presented here; only those firms with higher percentages of international sales. The companies are in order of increasing percentages of international sales volumes. At least one of the companies interviewed (CIBA Vision Ophthalmics) uses each of the strategic alternatives discussed earlier. The use of outsourcing occurs quite often -- in companies with minimal international sales volumes as well as those with a total focus in the international arena. G&W Laboratories: Joseph Rosner is manager of international sales at G&W Laboratories in South Plainfield, New Jersey. He is responsible for developing and implementing the export process for this manufacturer of both prescription and nonprescription products, which include suppositories, creams, ointments and pills. This privately held company is just starting its exporting operations, so it has no international sales at this time. Product requests worldwide have been a driving force in the company's decision to explore international opportunities. South America is first on the list of areas for global marketing. G&W does not plan to outsource any of its logistic functions and will use cost, insurance and freight (CIF) in its pricing. The firm will use its own and competitors' actual performance, marketing/sales force input, phone/mail surveys and in-person customer interviews as bases to identify customers' requirements for service. Domestically, order completeness has been 95 percent, damage-free receipt a bout 98 percent and invoice accuracy has been virtually error-free. Mr. Rosner feels that an initial problem with international business has included slowness in product registration. Ethex Corporation: Marco Polizzi is product manager at Ethex Corporation of St. Louis, a division of KV Pharmaceuticals. His duties include identification of international distributors in foreign countries and setting up agreements to supply them with the product. The publicly held company is involved with the manufacturing and wholesaling of generic prescription drugs. About 1 percent of Ethex's sales is from international markets. Using Taiwan as an example, Mr. Polizzi states that of total business unit sales, 20 percent goes toward tariffs and taxes, 8 percent toward air transportation of the product and about 15 percent toward corporate overhead or administrative expenses. Product registration costs vary from country to country. Both air and sea transportation products are sent FOB St. Louis. Competitors' published goals, the firm's own and competitors' actual performance, and marketing/sales force input are used as bases to identify customers' requirements for service. Mr. Polizzi notes that knowing and dealing with individual markets and governments can be challenging in the international arena. Effcon Laboratories: Matt Burklow is quality assistant manager for Effcon Labs, a family-run business in Marietta, Georgia. This privately held company wholesales just three products: a nonprescription for pinworms, and prescription drugs for glaucoma and tuberculosis. Mr. Burklow is in charge of the maintenance of inventory levels and admits that only 1percent of the firm's $4-5 million sales volume is from international sales to Puerto Rico. The company outsources all of the international logistic function to Arkansas Best Freight (ABF). Effcon uses its own and competitors' actual performance and marketing/sales force input to identify international customers' requirements. Fujisawa USA: Two company representatives, Gina Battiste, international account executive for Europe, and Georgia Rombakis, administrative assistant for international business development, helped in completing this interview. Fujisawa USA is a division of Fujisawa World and is involved with distribution services. International sales are just 1-5 percent of its total. The parent company sales volume last year was approximately $3 billion. This publicly held company is traded in Japan and markets injectable pharmaceuticals. The logistics function depends upon the desires of the customer; FOB and CIF are the usual price quotations of this negotiated process. Competitors' published goals, the firm's and competitors' actual performance, marketing/sales force input, customer focus groups and in-person customer interviews identify customers' requirements. Order cycle time is less than two weeks, speed of response to inquiries is immediate but can take longer depending on the information requested, invoice accuracy i s over 90 percent and damage-free receipt is 99 percent or greater. Consistency in international documentation and clearing with customs have been problems over the past few years. The most successful international logistics initiative was the development of a tracking system to streamline the international order process. Long-range logistics planning includes getting on-line with the company's warehouse in nearby Bensonville, Illinois to improve internal logistics operations. ALK-ABELLO: Garth Bertini is the advertising and promotion manager for ALK-ABELLO, Wallingford, Connecticut, a company that produces allergenic extracts that are sold to allergists. The company is owned by Christian Hanson. While the parent company is publicly held, the division is privately held. The parent company has manufacturing plants in Pennsylvania and Texas, it imports products from Denmark and exports to Canada only. Its international sales are just 4 percent of the total revenue for the company. This division has no department involved with logistics. The product's movement is handled by another division of the parent company. Mr. Bertini stated that international customers' requirements for service are identified through its own and competitors' actual performance, marketing/sales force input, phone/mail customer surveys, customer focus groups, in-person customer interviews, and also through a web page on the internet. Although the firm's traditional speed of response to inquiries has been two to three days, the internet allows for a response to inquiries in just minutes. The most challenging international logistics problem over the past five years was dealing with FDA regulations, while the most successful international logistics improvement initiative was keeping in better touch with country subsidiaries for quicker referrals. The firm has no long-range plan for international logistics. Lemmon Corporation: Nicholas Varano is currently manager of government sales for Lemmon Corporation, a publicly held subsidiary of Teva Pharmaceuticals of Israel. Before Teva purchased the company, Mr. Varano was in charge of overseas contracts in South America and the Middle East for Lemmon. Although much higher before the acquisition, Lemmon's international sales are about 5 percent of its $290 million sales volume. Domestic business has become so great that Teva now has the international responsibility. Mr. Varano states it really wasn't worth the trouble. The parent company now handles most of the international operations. Its volume last year was about $800 million. Lemmon is engaged in the manufacture, wholesale, retail and distribution of approximately 200 generic pharmaceutical products. There is no department for international logistics and the function is outsourced to a brokerage firm. Lemmon uses its own and competitors' actual performance to identify international customers' requirements for service. During the late 1980s when international sales were more important to Lemmon, order cycle time was about three months, speed of response to inquiries was about 30 days, order completeness was 90-95 percent, invoice accuracy was nearly error free, and damage-free receipt was about 98 percent The most challenging international problem for Lemmon was the vast amount of paperwork required by embassies. Immunex Corporation: The production planner! analyst for Immunex Corporation of Seattle plans production schedules for drug shipments, and follows this with in-bound and out-bound transportation responsibilities. The company's department for logistics also includes purchasing and product planning. This privately held manufacturing company has plants in Kansas, New York and Puerto Rico. Shipments are contracted out to Cardinal Health; otherwise, a very small percentage is sent by Federal Express. International distribution for Immunex is about 5-8 percent of the total for the company. The production planner/analyst at Immunex stated that the most successful recent logistics improvement initiative within the past year was outsourcing the logistics function to Cardinal Health. He concludes by noting the most challenging logistics problems are rising transportation costs and higher customer expectations for quicker product delivery as the global marketplace shrinks. The company has no comprehensive, long-range lo gistics plan. E. Fougera & Company: Charlotte Thacker is export coordinator for E. Fougera & Company, a manufacturing division of Altana. Her responsibilities include quotations, internal paperwork and country registration. The firm makes a variety of pharmaceuticals, particularly creams and ointments. International sales are less than 10 percent of a $17-22 million annual volume. None of the logistic function is outsourced and an export department manages the international logistics for the firm. Very few bases identify customers' requirements for service since most customers contact the company themselves. Order cycle time is from 48 hours to one to two months for air or sea destinations; speed of response to inquiries is seven days; order completeness, invoice accuracy and damage-free receipt are nearly 100 percent The most challenging problem has been product registration; each country has different requirements and classifications for prescription and nonprescription products. An appropriate long-range logistics plan is to increase the ease of getting the product through customs. The Torrance Company: Mark Torrance, vice president and third-generation namesake of The Torrance Company of Portage, Michigan, states that his distribution company has used UPS for both its domestic and international shipments since UPS began its operations. Mr. Torrance explains that there are several benefits to shipping via UPS. Domestically, UPS is capable of shipping interstate as well as intrastate. Roadway Packaging System (RPS) was considered for a brief period but was unable to ship intrastate. Internationally, UPS has its own brokerage department which is beneficial in that it deals with customs. Finally, UPS ships to many countries internationally, it guarantees against the loss or damage of the goods, and its representatives are pleasant to work with. Mr.Torrance notes that 8-10 percent of his annual sales are due to international transactions. CIBA Vision Ophthalmics: Reid Harris is manager of logistics of CIBA Vision Ophthalmics of Claremont, California. The parent company of this manufacturing and distribution division is CIBA Vision Corporation/CIBA-GEIGY Corporation. The firm has approximately 225 employees in the United States. Mr. Harris is responsible for assembly, distribution and return of both prescription and nonprescription ophthalmic pharmaceutical products, which include about 50 product lines and about 140 stock keeping units (SKUs). Approximately 15 percent of the division's annual sales volume is from international sales to Switzerland, France, Germany, Italy and Canada. This privately held company uses percent of sales as the productivity measure to manage international transportation. All of the bases mentioned to the respondent during the interview identify customers' requirements for service: competitors' published goals, the firm's own and competitors' actual performance and resulting "noise level," marketing/sales force input, phone/mail customer surveys, customer focus groups and in-person customer interviews. The division has an on-going goal for an order cycle time of less than 24 hours, which CIBA Vision Ophthalmics has reached 99 percent of the time. Invoice errors are minimal. The greatest logistics challenge for the company has been trying to work with international suppliers who expect orders and forecasts sooner than the lead time that's required. The most successful logistics improvement has been addressing this challenge with tremendous gains in order cycle time compression over the past five years. The firm has no long-range plan for logistics. Amgen, Inc.: Robin Campbell is vice president of Asia-Pacific and Latin American Operations for Amgen, Inc., a $30 billion, publicly held company with approximately 5,600 employees worldwide. The firm produces primarily hospital-based prescription pharmaceuticals in three product lines: hematopoiesis, inflammation and therapeutic neuro-endocrinology. International interests include all 16 European Union (EU) countries, Canada, Australia, Japan and China. Additionally, there are sales offices in Taiwan and New Zealand. Mr. Campbell's administrative position is in a division involved with selling, product development and finance. International sales account for about 25 percent of the firm's total sales volume. The division has a department that manages international logistics. The logistics function is outsourced in that existing wholesalers in the countries of import are contracted to import, distribute and collect accounts receivable, with the exception of European countries. A company-owned distribution facility in Europe coordinates logistics there. International customers' requirements for service are identified using its own and competitors' actual performance, marketing/sales force input, in-person customer interviews and cooperation with trade associations. Order cycle time is within 24 hours, speed of response to inquiries can be immediate with the firm's 24-hour customer service number, order completeness is 100 percent, and damage-free receipt is well over 90 percent. The most challenging international logistics problem in the past five years was proper handling of the product, since in some cases it must be kept refrigerated. The most successful logistics initiative has been reducing accounts receivable. The company has a comprehensive, long-range plan for international logistics with a three to five year planning horizon. The plan considers market entry/expansion plans, customer or supplier relationships, long-term contracts and outsourcing of logistic responsibilities. Abbott Laboratories International: Frank Sturiale is the general manager of US export operations for Abbott Laboratories International of New Orleans, a division of Abbott Laboratories. His division exports mainly hospital supplies and infant and medical materials. This division, primarily involved in the distribution process, gathers overseas demand data for products produced in the United States, has the product manufactured domestically and coordinates movement to points overseas. Freight forwarders handle freight payment and other documentation for the division. Abbott Laboratories is one of the top 50 pharmaceutical companies. The annual stockholder report states that the parent company had an annual sales volume in excess of $10 billion; 40 percent of this total from international sales. Abbott Laboratories International and Abbott Laboratories Diagnostic Division both contribute to this international percentage through their exports. In addition to the efforts of these two divisions, there are 30 manufacturing sites outside the United States. Productivity measures to manage international transportation are based on the price per kilo [gram], i.e., by weight. Mr. Sturiale states that productivity measures to manage international warehousing are not under the control of his division. Noting that Abbott affiliates are the division's customers, Mr. Sturiale acknowledges that all of the bases mentioned by the interviewer identify international customers' (i.e., Abbott affiliates') requirements for service: competitors' published goals, the firm's own and competitors' actual performance and resulting noise level, marketing/sales force input, phone/mail customer surveys, customer focus groups and in-person customer interviews. Published manufacturer lead time makes customers aware of the approximate order cycle time. There is a 4-hour policy of response to inquiries. Abbott International has a 99 percent invoice accuracy rate and it noted that damage-free receipt is not a problem that merits tracking. Mr. Sturiale states that the most challenging logistics problem in the past five years has been documentation or supplying the necessary data for exporting. The North American Free Trade Agreement (NAFTA) has actually complicated this problem. The most recent international logistics effort was the negotiation and support by lobbyists for the deregulation of the ocean industry. Current legislation proposals call for the elimination of the Federal Maritime Commission (FMC), a U.S. government agency that protects ocean carriers. As a result, prices are fixed at unnecessarily high levels. Long-term logistics planning for Abbott International includes market expansion into China, Vietnam and Eastern Europe over the next 10 years. In conclusion, Mr. Sturiale feels that American businesspersons are naive regarding the international marketplace and must be more adaptive when marketing beyond U.S. borders. Lack of flexibility in labeling the product has been a roadblock in pursuing the opportunity potential of international markets. Wyeth-Ayerst International: Bill Devroe is director of supply operations for Wyeth-Ayerst International of Cherry Hill, New Jersey, a distribution services division of American Home Products, a $67.9 billion company with 60,523 employees worldwide. Mr. Devroe is responsible for inventory planning, forecasting, materials management, export shipments from the U.S. (invoicing, documentation) and invoicing drop shipments (supply sources other than the U.S.). The company carries pharmaceuticals (7,600 SKUs); in addition, American Home Products markets consumer health care products (4,400 SKUs), food products, medical devices and agricultural products. Approximately 4lpercent of its annual sales total is international sales in 145 countries. The parent company's annual volume is more than $13 billion. This publicly held company has its own department to manage international logistics and currently does not contract out any of the logistic function; but it is looking to outsource part of the freight forwarding operation next year. Wyeth-Ayerst International uses its own and competitors' actual performance, marketing/sales force input, phone/mail customer surveys and in-person customer interviews to identify customers' requirements for service. Order cycle time varies from 20 days for international distribution center stock inventory to 30 days for a U.S. domestic label to 120 days for made-to-order, country-specific purchases. Speed of response to inquiries is usually 24 hours. Order completeness is 58 percent. Invoice accuracy is not formalized at this point. Damage-free receipt is not tracked because it is so minimal. The most challenging logistics problem was the recent integration of American Cyanamid (Lederle Products) with WyethAyerst job responsibilities and communication were not clear in international operations. The most successful improvement was a new order entry system that ties into the company's financial statements to replace the two systems each of the aforementioned companies had. A one- to three-year long-range logistics plan is to rationalize the product range and manufacturing centers, which includes a reorganization/consolidation of global manufacturing and distribution. Medicus USA: Dan Allen is export manager for Medicus USA, a wholesaling and distribution services company consisting of just three people in Cleveland, Ohio. Mr. Allen is in charge of distribution management and handles all shipping and regulatory requirements (all documentation), packaging, location of freight forwarders and letters of credit for five surgical product lines the company markets. The company's $1 million sales volume is entirely from international markets, which include all of the countries in the European Union (EU) and 15 other countries. One person manages the international logistics of this privately held company. The logistic function is outsourced to an in-country logistics service company. Customers call and use its off-site distribution and warehousing facilities in Europe if needed, i.e., a satellite warehouse. Ex-works shipping is the price of quotation. Cost as a percent of sales is the productivity measure of international warehousing. Competitors' published goals identify customers' requirements, even though there are few to utilize. The firm also uses its own and competitors' performance, marketing/sales force input and interviews at trade shows as bases. Order cycle time is seven to 21 days, speed of response to inquiries is five to 14 days, order completeness is over 90 percent, invoice accuracy is 100 percent and damage-free receipt is 95 percent. Mr. Allen states that the most challenging logistics problem is the paperwork and cost involved in initiating the CE mark to meet the EU's manufacturing quality assurance standards (CE or "Conformite Europeene" mark, indicating that the manufacturer has conformed with legislation required for access to the European market). Once acquired, the CE mark is placed on the product itself As of June 1998, all products sold in Europe must have it. The greatest improvement in logistics has been the increased consistency of carrier rules, making it easier to ship products. Shipping costs have decreased with Medicus USA's use of air and the U.S. Postal Service express mall. Conclusions and Reconunendations Pharmaceutical managers realize that international markets mean competition and that logistics is the key to making and keeping customers. Although this study was exploratory and the results cannot be generalized, there were some interesting insights from the interviews regarding efficiency and effectiveness. As expected, smaller companies did not have departments or specialists in logistics. Their interviews were not as robust due to the respondents' lack of time, their minimal amount of international sales, the outsourcing of the logistics function and/or their unfamiliarity with the area. Representatives of larger pharmaceutical companies generally provided more complete interviews. Except for one measure from one company, reported service measures for international customers (order completeness, invoice accuracy and damage-free receipt) were all 90 percent or greater. Still, in a study of more than 1,700 companies over three continents, Byrne and Markham [5] found that only about 10 percent of companies are capable of totally satisfying their customers. Some advanced companies now refer to failure rates instead of success rates. Companies are no longer comfortable with 970 successes out of 1,000 (97 percent success rate). They are concerned that they did not satisfy their customers 30 times. Larger organizations reported using many or all bases mentioned for identifying customer requirements. In total, 24 percent used competitors' published goals, 65 percent used the firm's own and competitors' actual performance, 53 percent used marketing/sales force input, 29 percent used phone/mall customer surveys, 29 percent used customer focus groups and 47 percent used in-person customer interviews. Although companies still rely most heavily on input from marketing and sales to understand customer requirements, the use of in-person customer interviews by almost half of the companies interviewed demonstrates a proactive approach to determine what customers want in the way of service. This compares to the Byrne and Markham [5] study that noted that at least 80 percent of all companies greatly depend on marketing or sales department input or customer complaints to interpret customer expectations. The study also concluded that a proactive approach was found in respondents from North America to a greater extent than those in Japan and Europe: 66 percent use in-person interviews, 52 percent use phone or mail surveys and 39 percent use focus groups to obtain information on which to base their service goals. Several companies noted that speed of delivery was a logistics concern in satisfying international customers. Additional challenges for pharmaceutical firms included international product registration, time lags associated with the international distribution process and the great amount of documentation required internationally (e.g., import licensing). Long-range plans for some of these firms included electronic data interchange (EDD, efforts to deregulate the ocean industry and increasing the ease of getting the product through customs. Only 29 percent of those companies interviewed had a long-range logistics plan. This is considerably lower than the Byrne and Markham [5] study that reported that only 49 percent of the North American companies surveyed have long-range plans. In the U.S., companies have relied on a relatively stable domestic market and did not see the necessity of engaging in long-term logistics planning. Based on the interviews, it appears that the pharmaceutical industry is certainly no ex ception to this generalization. The telephone interviews provided some interesting insights regarding international logistics of pharmaceutical companies. However, company representatives did not supply much of the quantitative data requested, stating that the information was either unavailable or confidential. This article is not based on quantitative research that emphasizes a systematic research design with data collection and analysis. However, qualitative research employed in this study provides insightful information to practitioners and researchers alike. The authors believe the findings of this study can be used as a basis to examine international logistics operations of MNCs using extensive quantitative research. This additional research may better evaluate international logistics operations of pharmaceutical firms. References (1.) Barks, J. "Logistics for Hire," International Business, 7(5), 1994, 36-38. (2.) Bartlett, C.A. and S. Ghoshal. Managing Across Borders: The Transnational Solution, Boston: Harvard Business School Press, 1998. (3.) Battaglia, A. J. "Beyond Logistics: Supply Chain Management," Chief Executive, 99, 1994,48-49. (4.) Bradley, P. "Anatomy of a World Class Transportation Program," Purchasing, 117(2), 1994, 64-65. (5.) Byrne, P.M. and W.J. Markham. "Global Logistics: Only 10% of Companies Satisfy Customers," Transportation and Distribution, 34(12), 1993, 41-45. (6.) Cabaniss, R.F. "Comparing Domestic and International Distributors' Performance," International Journal of Physical Distribution and Logistics Management, 25(6), 1995, 41-53. (7.) Christopher, M. "Logistics and Competitive Strategy," European Management Journal, 11(2), 1993, 258-261. (8.) Cooke, J.A. "How Xerox Cut Millions from Its International Freight Bill," Traffic Management, 30(6), 1991, 67, 69. (9.) Dillman, D.A. Mail and Telephone Surveys: The Total Design Method, New York: John Wiley and Sons, 1978. (10.) Evans, G.N. "Dynamic Supply Chain Performance: Assessing the Impact of Information Systems," Logistics Information Management, 6(4), 1993, 15-25. (11.) Fox, M.L. "Logistics Planning: The Supply Chain as an Integrated Enterprise," Production and Inventory Management, 11(7), 1991, 12, 15. (12.) Houlihan, J.B. "International Supply Chains: A New Approach," Management Decisions, 26(3), 1988, 13-19. (13.) Jones, T.O., and W.E. Sasser, Jr. "Why Satisfied Customers Defect," Harvard Business Review, 73(2), 1995,88-99. (14.) Lamb, J.J. "An Evolutionary Idea," World Trade, 8(7), 1995, 40-46. (15.) Large, G. "Exclusive World of Distribution." Asian Business, 31(2), 1995, 43-45. (16.) Muller, E.J. "Airfreight Makes Service Levels Soar," Distribution, 88(1), 1989, 58-63. (17.) Parasuraman, A, L.L. Berry, and V.A. Zeithaml. "Understanding Customer Expectations of Service," Sloan Management Review, 32(3), 1991, 39-48. (18.) Redbook, NJ: Medical Economics Data Production Co., 1994. (19.) "Shippers Want results, Not Just Speed," Distribution, 93(13), 1994, 24. (20.) Van Oldenborgh, M. "Distribution Superhighway," International Business, 7(6), 1994, 80-84. (21.) Wolpert, B. "MicroAnalytics Grows in Europe," Global Trade, 109(2), 1989, 34-35. (22.) Wood ,A.L. "Develop an Agile Approach to Change," Transportation and Distribution, 34(11), 1993, 56. | |
EXHIBIT 2. INTERVIEWED COMPANIES, THEIR INTERNATIONAL LOGISTICS METHODS
AND THEIR INTERNATIONAL SALES
Company International Logistics Method
G&W Laboratories beginning to explore international
markets
Ethex Corporation FOB St. Louis; air and ship
Effcon Laboratories outsourced; Arkansas Best Freight
(ABF)
Fujisawa USA outsourced depending on customer
request
ALK-ABELLO another division handles logistics
responsibilities
Lemmon Corporation outsourced; brokerage firm
Immunex Corporation outsourced to Cardinal Health and
Federal
Express
E. Fougera & Company FOB US port of export air and ship
The Torrance Company outsourced using United Parcel
Service (UPS)
Terumo Corporation internally planned and
implemented; third
party warehousing, supply chain
management,
electronic data interchange (EDI)
on the
horizon (order placement,
shipment
notification, invoicing).
Andersen Laboratories, Inc. outsourced; shipping companies
such as UPS or
Federal Express
CIBA Vision Ophthalmics internally planned and
implemented;
outsourcing for storage and
handling, UPS or
other small package carriers for
some
shipments, air
Amgen, Inc. outsourced and internal; existing
wholesalers
in the country of import are
contracted to
import, distribute, and collect
accounts
receivable with the exception of
Europe which
has a company-owned central
distribution
facility
Abbott Laboratories International internally planned and
implemented; freight
forwarder outsourced
(documentation)
Wyeth-Ayerst International currently internally planned and
implemented,
seeking to outsource part of the
freight
forwarding operation next year
Medicus USA outsourced using an in-country
logistics
service company
International
Company Sales
(percentage of total)
G&W Laboratories 0%
Ethex Corporation 1%
Effcon Laboratories 1%
Fujisawa USA 1-5%
ALK-ABELLO 4%
Lemmon Corporation 5%
Immunex Corporation 5-8%
E. Fougera & Company [less than]10%
The Torrance Company 8-10%
Terumo Corporation
10%
Andersen Laboratories, Inc. 15%
CIBA Vision Ophthalmics
15%
Amgen, Inc.
25%
Abbott Laboratories International 40%
Wyeth-Ayerst International
41%
Medicus USA
100%
| | EXHIBIT 1. OUTLINE OF THE STUDY Customer Expectations * Identification and satisfaction of consumer expectations, which are the key components of the marketing concept and are also important in logistics organizations. Meeting Customer Expectations Through Strategic Alternatives * Organizational Strategic Structure for Internationalization * Third party or contract logistics (versus in-house logistics) Meeting Customer Expectations Through Operations * Freight forwarders, exporting organizations and supply chain management * Information management systems * Shipping by air Exploratory Research and Method * Exploratory study * Telephone interviews with the international logistics manager of pharmaceutical firms * Unstructured questions and an in-depth interview format * Random sample from Redbook, an annual pharmaceutical trade publication Results * 46 initial telephone calls yielded 16 interviews (35 percent response rate) * Organization size ranged from small, family-ran businesses to multinational conglomerates * Organization's international involvement ranged from minimal international operations to 100 percent international involvement Policy Implications and Conclusions * Logistics as a competitive tool * The need to become closer to the customer |
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