Supply chains and distribution channels

Prior to the beginning of globalization and the emergence of multinational organizations, there were many independent market participants in the world. Manufacturers addressed the challenges relating to the issues of raw material supply, production, and distribution of final products separately. Manufacturing organizations and traders used to get a separate logistics service by signing a contract with the providers of a specific logistics functions. The business functions were quite fragmented (Bowersox et al., 1968). As each manufacturer tries to penetrate new markets, it took a lot of time to find reliable partners for product storage, transportation and distribution. On the other hand, the market was very competitive with many market participants (Vance, 1970). With the rapid spread of direct foreign investments and the cooperation of organizations in horizontal and vertical alliances, certain production clusters began to form in the world. Organizations built long-term partnerships in these industrial clusters. The logistics sector also responded to the worldwide expansion and physical shift of industries. Alliances and international organizations began demand for comprehensive logistic services in place of fragmented logistics services, but to handle large-scale logistics capacities to transport efficiently and storage of raw materials, parts, components, and manufactured products (David, 2021). Extractors of raw materials and manufacturers of components to achieve economies of scale in logistics began to organize the supply of their production through intermediate storage warehouses instead of individual shipments to a specific customer. One of the most important factors was the pursuit of economies of scale in transportation. Loading and transporting 20,000 containers on one ship is much cheaper than loading and transporting 20 ships with 1,000 containers each. Transport service providers have clearly and effectively communicated pricing structure, where the price per unit is inversely proportional to the size of the shipment. The task for suppliers of raw materials and components has become to form large shipments that could be used to create large-scale transport orders (MacKinnon & Cumbers 2019). Of course, increasing transport orders have pushed transport technology as well. Shipbuilders, seeing the need and growing demand for larger ships, built a much larger ship about every ten years. Thus, the biggest container ships had a challenge, because after some time even bigger ships appeared. The largest container ships introduced in 2013 transported almost 18 thousand containers in twenty-foot equivalent units – TEU, and at that time greatly surpassed its predecessors, but the biggest ultra-large container ships built in mid-2023 have a capacity of 24,346. By 2030, it is expected to have a ship with a capacity of up to 30 thousand TEU in the market. As the capacity of ships increased, there was a need for larger ports and terminals where ships could be loaded or unloaded.

Manufacturers, suppliers of raw materials and components began to efficiently use the growing capacities of ships, warehouses and terminals. In the middle of the 20^th century, the share of production of international organizations in the global economy was about 2-4 percent, but in year 2014, the OECD estimated that the share of multinational organizations including domestic and foreign affiliate business volume in the world output reached 33 percent. Indicators of oligopoly began to appear in the market. Even in contemporary times, at the time of examining any industry, we can find 3-5 competing international organizations that are competitively ahead of small and medium-sized local businesses. Large organizations desire to work with organizations with similar size and capacity. To standardize and simplify operations and processes, international organizations usually also choose international logistics providers as their logistics partners. For small market players, the way to survive in the competition of the giants is to find a place and take advantage of the opportunities provided by multinational organizations – to be suppliers or local partners of these organizations or buyers of services or specialize in specific niches. A very good example is international e-shops. Many small producers simply supply their products to global supply and distribution chains, instead of figuring out how to sell their goods, how to carry out the physical distribution of their goods. It is no longer necessary to search for and order a separate ship for goods, it is enough to hand over the distribution of the goods to a 3PL provider, where it takes care that the goods get too large regularly sailing ships, then to the distribution warehouses, and even later reach the final point of sale or the buyer.

For example, car manufacturers do not ship an individual car to a specific customer on another continent but ship a batch of manufactured cars to a distribution warehouse on another continent. Another example would be car light manufacturers. It’s not the case that every car manufacturer has a separate light manufacturer. The industry is dominated by a few large international organizations producing car lights. They are mostly produced in places where labor costs are cheaper – Asia, South and Central America, and some Eastern European countries. The same manufacturers of car lights produce lights for vehicles of different brands and models. The manufactured lights are supplied in large quantities to regional warehouses, and later from these warehouses the lights are delivered to different industry plants or as spare parts to various car maintenance providers. Similar to car lights, this concentration of production plants supplying multiple clients is also occurring for other vehicle parts, and this global distribution principle applies for many other industries.

So, supply chain disruptions become critical for any manufacturer. For example, during the COVID-19 pandemic, airports were closed due to quarantine, and semiconductor and microchip manufacturers in Asia were unable to manufacture and ship products to their customers around the world. As a result, car factories in Europe were forced to stop and have undergone periods of downtime. The pandemic has revealed that many industries are dependent on one or more suppliers and stable supply chains. To find and alternative supply chains and suppliers are not so easy. In some cases, it is impossible to find flexible, different supply sources at all, because some industries have reached such a degree of oligopoly that they are even close to a monopoly. This supply chain stability, inertia and market concentration happened both with global manufacturers and with global logistics service providers. For example, in a container shipping, in the global parcel distribution several large players compete with each other, each of which has its own network of warehouses and terminals, its own transport means, infrastructures and regular routes (Dennis, 2011).

As a result of the concentration of freight flows, areas with a large number of distribution warehouses appear. Regular routes of high-capacity transport means appear too. All that remains for each manufacturer is to take advantage of the resulting clustering in the supply and distribution chains. Ports have become one of the largest distribution areas and focal points because of their access to maritime transport. In Europe, these are North Sea ports such as Rotterdam, Hamburg, Antwerp, Felixstowe, Mediterranean ports Marseille, Genoa, Barcelona, Cartagena. In the US, these are the major port cities of the west and east coasts. The world’s largest ports are located in China. Additional information about the terminals and port can be found in other sections of this chapter.

Chapter 12 describes the integration of logistics functions and the emergence of 3PL and 4PL service providers, which are precisely what serve multinational organizations and form the backbone of their supply and distribution systems. Manufacturers outsource the management of physical and information flows to 3PL or 4PL service providers, as these, due to specialization, know-how and economies of scale, offer faster and cheaper solutions than manufacturers trying to find individual solutions themselves.

Therefore, when dealing with supply and distribution systems it is very important to repeat the principles described in Part A, Chapter 2, in the paragraph on Fordist and post-Fordist production. Specialization and economies of scale create a strong temptation for the manufacturer to produce as large quantities as possible and push them to market in the hope that buyers will buy all the output from warehouses. In logistics, this is called push logistics. In such cases, the shipments are large, and it is easy for the manufacturer to negotiate good terms and prices with the logistics service provider. Push logistics is relatively easy to organize due to the small number of interacting organizations and the homogeneous product. It worked successfully until the market was saturated. As the scale of production in the world increased and the markets were saturated with supply, the individual desire of the consumer became more and more significant. Thus, it became irrational to produce identical goods and send them to regional warehouses. The products began to have more modifications, models, variable design characteristics such as colors, and technical features. Thus, logistics shifted from mass “push” type logistics to individualized “pull” type logistics.

Pull means that the consumer first makes the impulse to buy the product, and it means that the production of the product does not commence until the customer has made a purchase for the product. There are two challenges for logistics here. How to apply economies of scale in transportation, when a shipment is no longer made up of many identical goods that are transported at the same time? The second challenge is how to deliver the product as quickly as possible, because the buyer does not want to wait for a long time? Shorter product waiting time has become one of the tools of competition. In the case of “pull” logistics, transportation and storage services had to become even more flexible, but at the same time faster, while maintaining a competitive price. This is where 3PL service providers’ searching for ability to coordinate the interests of different customers on the same routes, in the same vehicles, in the same warehouses and terminals has become very important. The most advanced integrated supply chain software includes inventory stock information and predictive analysis at all steps of the supply chain in real time.

In the case of pull logistics, 3PL and 4PL service providers can also offer reverse logistics, returning unsatisfactory or defective goods to the manufacturer or seller. In essence, 3PL and 4PL service providers can no longer be considered the servants of manufacturers but rather partners or even customers. Often, 3PL and 4PL service providers work very closely with retail chains and have a much better sense of market needs than the manufacturer itself. Manufacturing, which dominated the Fordist era, have taken over by logistics and distribution coordinators, as along with brand and product design developers in contemporary times. As more production moved to locations where is lower labor costs and less stringent legal, environmental, and other requirements, the transportation prices suggested by 3PL and 4PL providers went further down, so that in the end, the location of the physical production became even less dependent on distance (Bookbinder, 2012).

This was trend until the 2020, as the COVID-19 pandemic showed the fragility of global supply chains. On top of that, geopolitical tensions and the rise of China’s economic power forced many North American, Western European organizations to rethink their operational and supply strategies. This textbook is written precisely at this crossroads, and the author does not attempt to predict whether the concept of “low-cost production in Asia” served by global supply chains and global logistics organizations will remain sustainable, or whether supply chains will shorten, and the advantages of production at lower costs will be surpassed by the need to have geopolitical security and stability for supply chain.

Comparing the architecture of push and pull logistics chains, they differ (Exhibit 13-1). In the case of push logistics, there were more participants, more warehouses, and the information flow was from the manufacture plants to the retail shops. Suppliers of raw materials used to have their own warehouses, manufacturers used to send and store the manufactured products in regional warehouses, from which they used to distribute goods to local warehouses, and from there to stores. In the case of pull logistics, raw material warehouses and regional and local warehouses owned by manufacturers have almost disappeared as a function. They have been replaced by 3PL service providers with large integrated distribution centres that consolidate different raw materials and parts from different manufacturers. Also, the information flow is reversed from customer back to manufacturer, with the most advanced integrated supply chain software including inventory stock information and predictive analysis at all steps of the supply chain in real time.

Ex. 13‑1 Architecture of push and pull logistics

Keywords: supply driven, push logistics, pull logistics

While the information flow is reversed, the control and contract payment remain top down, with the main decisions about architecture and its configuration of supply chain in the hands of manufacturing and retail service industry.

The term supply chain in its broadest sense includes the entire sample of actors and processes from the extraction of raw materials to the end user, starting from the extraction, following with production of part or components, assembly of products and finishing with distribution to end users, including all intermediate actors, if their participation is necessary (Christopher, 2011). In the case of an all-inclusive supply chain, the final result is the arrival of the product to its end user, and the starting point was the moment of extraction of raw materials.

A manufacturer’s supply chain includes that part of the supply chain that starts with raw materials and ends with the manufacturer’s production process. For example, there are many participants in the supply chain of car manufacturers, starting with various raw materials such as plastic, metal, glass, including intermediate components – tires, engines, lights, frame, bolts and many other details (Exhibit 13-2).

For the manufacturer, the reliability of all component supply chains is important, because if the supply of one component fails, the entire assembly line has to be stopped. Manufacturers avoid accumulating inventory levels for the reasons described in Chapter 12.

For example, in a car final assembly plant, hundreds of different parts need to be delivered to the assembly line, and when considering all kinds of materials such as screws, nuts, and the total amount of individual parts reaches 10 thousand or more. Different details have different value.

Ex. 13‑2 Supply chain in automotive industry

Keywords: car industry, automotive supply

For example, storing a large amount of nuts in the factory warehouse is not a big problem for the manufacturer, because they do not take up much space and they cost relatively little. However, the accumulation of more expensive parts, such as electronics, or large parts, such as tires, creates the problem of frozen funds and storage costs for the manufacturer. Each item has different supply chain length and supply reliability. Some parts can be purchased in the local market, their delivery distances are short, and there are many suppliers. However, some parts are critical because they have long supply distances and are supplied by few suppliers worldwide, or they were produced exclusively in-house. It is especially important for manufacturers not only to coordinate the supply chains of many parts, so that the right amount of each component is delivered to the production line every production time slot, the so-called just-in-time (JIT) logistics, but also to accumulate an inventory for those components whose supply takes longer, is more complex, and less reliable. It should also be understood that the manufacturer is a customer for its suppliers. In many cases, even a strategic customer. Component manufacturers often begin producing components only after receiving an order from the manufacturer. Particularly in these situations where the component is usually unique and cannot be sold to a different manufacturer. For example, a manufacturer of lights for a specific car model can only sell those lights to the manufacturer of that specific model. However, a tire manufacturer is less dependent on a car manufacturer because the same tires are installed in cars of different manufacturers.

When it comes to decide about the right supply chain architecture, the perception of supply chain and distribution channel are often confused. The essential difference in perception depends on the entity against which we want to define the physical movement of raw materials, components or goods.

Ex. 13‑3 Perception of supply chain, value chain and distribution channel

Keywords: supply chain, distribution channel

A manufacturer considers what arrives at his factory as supply. Sometimes the concepts and wording of “procurement”, “upstream supply chain” or “sourcing” is used for the supply of an industry plant (Exhibit 13-3). Meanwhile, distribution to be considered as what the manufacturer sells product to a customer. The terms often used to describe distribution are distribution channels, distribution network, downstream supply chains, or distribution chain. Thus, in the case of a global supply chain, the same segment of the chain from a component supplier to a manufacturer is perceived either as the supply chain from the point of views of the manufacturer or as the distribution chain or channel for the component supplier.

Economies of scale and just-in-time supply strategies have reduced the number of intermediate warehouses in both supply chains and distribution channels. A manufacturer uses several strategies to distribute the output it produces.

When designing the right supply chain configuration, the choice of distribution channel is influenced by many factors related to products, consumers, competitors and the organization. Product-related factors include frequency of purchase, price, convenience and cost of transportation, storage conditions, and the need for consulting and technical support. Factors related to consumers are the number of consumers, territorial distribution of the population, purchasing power, purchasing habits. Namely, the size and capacity of the consumer market has long been a critical factor in manufacturers’ decisions on supply channel architecture.

A manufacturer often sought to establish their own warehouses near large city with several million inhabitants, from which goods could be continuously distributed to a retail trade. To serve less populated cities, manufacturers chose warehouses that serve several cities and positioned these warehouses in accordance with the catchment area principle approximately in or close to a central location of the market they serve. In large or medium size states with tens or hundreds of millions of inhabitants, a manufacturer often chose to distribute goods via local country of city-oriented distribution warehouses. In smaller countries with a few or tens of millions of inhabitants, manufacturers often consider one region of several countries and serve it from one regional warehouse. Operating through a city, coverage area, or at least a warehouse serving the region used to be a common manufacturer’s distribution channel solutions. It was not uncommon for manufacturers to organize distribution through several distribution warehouses, from larger ones to regional or city ones. These principles existed from the Fordist production culture to the emergence of modern demand-driven international trade.

In contemporary distribution channels, the number of participants has decreased. Significant part of warehouses is now owned by 3PL and controlled by 4PL service providers. E-commerce has contributed a lot to this. With the expansion of online commerce, the emergence of global e-commerce platforms, from the beginning of the 21^st century to 2019, e-commerce grew step by step. During the COVID-19 pandemic, when many countries locked-down and limited the possibility of physical contact, for period of almost two years. So, people in the world were limited to leave their homes or did so with great restrictions. It has become a core e-commerce accelerator. If before the COVID-19 pandemic, manufacturers and retailers considered physical stores as the core and only felt the need and consumer pressure to have an electronic store as well, then after the COVID-19 pandemic, e-commerce has turned into the core for many manufacturers and retailers, and physical stores are just an additional service now. Over the years, there has been a transformation that has shifted the priorities of physical and electronic purchasing. However, not all countries have e-commerce physical distribution channels that operate equally quickly and smoothly. Although any inhabitant of the world can buy the desired product from a global electronic store with the click of a computer key, but electronic stores, despite being electronic, have their own network of physical warehouses and their own physical supply chains and distribution channels. In large highly populated countries, for example, the USA, Spain, Germany, India, a buyer buying a product from a global e-store can often receive the product in a country-specific account in just a day or a few days. However, in smaller countries, such as Lithuania or Estonia, where there are no local global e-store warehouses, it may take weeks or months. In smaller countries, there is often room for local e-shops that operate at the national level, which compete quite successfully with global e-shops in small markets.

The circular economy principles are becoming increasingly important in the world. Actually, now it is more a marketing and green wash than in changing real supply architecture. It is formally based on the desire to create more jobs in local markets, to use extracted raw materials or manufactured products in local markets, to recycle and reuse key components, and avoid waste. Circular economy principles are fundamentally opposed to one-way global supply chains, whereby short supply chains are favored over long-distance supplies. However, sourcing raw materials or components from local suppliers in small quantities is often more costly than sourcing from global suppliers, due to not having such economies of scale. Short supply chains from local suppliers are considered more reliable, due to the shorter distance and closer relationship with the supplier. It is sometimes very difficult for small local manufacturers to secure supply from global organizations, because small customers are not as attractive and interesting as large customers. Small local producers get more attention from local suppliers, due to more flexibility and adaptability, so short supply chains have both their advantages and their place in various domestic industries.

Sometimes supply chains become a tool of competition, when a large manufacturer seeks exclusive supply terms from its supplier, while blocking the opportunity for other manufacturers to acquire the same raw materials or components. It is secured by exclusive supply contracts. So, sourcing raw materials from global suppliers, especially for new manufacturers, can be more complicated than it seems. This is covered in more detail in Chapter 4 of the book, which deals with alliances-based business models.

In addition to the physical aspect of warehouses and logistics channels, the international trade restriction aspect is also important in e-commerce. Although the consumer buys the product at the click of a computer key, it may mean that the product will be transported from one country to another country or to an economic union that wants to protect its manufacturers from imported goods. Thus, an import tariff may be applied to imported goods, or even a non-tariff restriction may apply in some cases. More on these trade barriers are presented in Chapter 3 of the book. There are also curious situations when a product that is legal in one country is prohibited in another country, so a person who buys a product in an electronic store basically becomes a violator of law, sometimes it even incurs criminal liability.