International Trade and Supply Chain: The Foster Group Example

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Abstract

One of the effects of globalization is that traditional business processes are now opening up to attain a global nature. Supply chains, production lines and markets are now interlinked through a worldwide network of interdependency.

In fact, it is almost unfathomable that a company seeking to expand its net worth can ignore the global business market entirely without recourse to any of the factors of production, supply and marketing. This research paper particularly looks at the various issues that arise when a company has an international supply chain.

It finds that doing business at a global level has various challenges which threaten the smooth flow of trade. The paper analyzes the Foster Group as an example of a company that has a global supply chain with the aim of understanding the dynamics of international operations.

Introduction

Nagurney (2006) describes a supply chain as “a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer (p.2).” Normally, a supply chain begins from the point of initial transformation of the raw natural resource into a component that is consumable or to a degree where it can be processed to a finished product.

However, the supply chain can begin from the end product where the product in question is recyclable. Supply chains are therefore value chains since the product is moved across various stages where value is added as every stage.

To build a comprehensive supply chain, there must be effective management of the process. Indeed supply chain management has evolved to become a basic need for any manufacturing company.

The entire management process is a concerted effort between suppliers, third parties, intermediaries or middlemen and finally, the customer. It is a complex process that interlinks the business tasks and procedures of a company to become included into a unified business network.

The key role of supply chain management is therefore the logistical activities providing smoother flow of manufacturing operations and the coordination of processes in other business functions such as product design, marketing and research.

In a supply chain, the aspects of biological or ecological regulation of natural raw materials form the initial stage. From the extraction to the production and finally the transportation of the end product to the customer, the supply chain will have involved several different companies across various geographical areas. All these companies will have a substantial interest in the product and will in one way or another add value to it. While all the players in the entire chain may not necessarily know each other, each plays a crucial role.

Company Profile

Foster’s Group is a business venture based in Melbourne, Australia that specializes in brewing, soft drink and wine making. The group is listed as a public limited company in the Australian Securities Exchange though it has businesses across Asia, the Americas, Middle East, Africa and Europe.

Currently, the group has a presence in 155 countries around the world employing over 6,000 workers (Foster’s Group Website 2011). Foster’s Limited is popular for making the internationally acclaimed Foster’s Lager and a good number of fine wines such as Rosemount, Penfolds and Lindemans.

The original brewing company was founded in 1886 in Melbourne by Ralph and William Foster. The two were Americans who owned a refrigeration plant and since the Australian weather is quite hot, the plant enabled them to establish a brewery which they later sold.

The brewery was acquired by Elders IXL, an Australian conglomerate in 1983 while trading as Carlton and United Breweries. Due to the Lager’s popularity, Elders rebranded to Foster’s Group in 1990.

Foster’s has recently acquired the successful Australian wine company Southcorp which has helped grow its overall revenues tremendously. The Group has continued to do well and it now plans a de-merger of its wine and beer businesses to form two different companies.

Speculation has also been rife that the group plans to sell off its beer business, to a bigger conglomerate such as Diageo, Heineken, SAB Miller and Molson Coors. This research paper shall focus on the activities of Foster’s Group in Australia.

Product profile: Foster’s Lager

Foster’s Lager has been a famous international beer brand for quite some time. The amber lager of 5.0% abv is a product of the Foster’s Group based in Melbourne though it is brewed and sold under license elsewhere in the world. In Europe, the product has been quite popular due to good marketing and because it is marketed by Heineken International which is a renowned name in the beer market.

The main consumers of Foster’s Lager in Europe have been the U.K, France, Germany, Portugal, Spain, Poland, Sweden, Ireland, Belgium, Greece and Ukraine. SAB Miller owns the rights to Foster’s in India and the U.S and Molson owns brewing rights in Canada.

Internationally, the lager has been marketed as an Australian product with Australian accents and stereotypes being used in advertisements. This has been well received with the brand being second to Carling in the UK.

However, the brand is no longer as popular in Australia as it previously was mainly due to stiff competition in the industry and changes in consumer preferences. Nevertheless, its international success especially in Europe has helped to keep the brand alive. This paper shall look into the supply chain processes involved in brewing this product in Australia.

Research methodology

This research utilized both primary and secondary data collection methods. Most of the data used for the research was secondary data obtained from relevant journals, articles, books, magazines, newspapers and online resources that had information that could assist in the better understanding of supply chains especially in the international context.

The data provided several authorities on the processes and functions of supply, procurement and logistics which brought in credibility and knowledge in the writing of this research report.

Parties in the supply chain

The supply chain involves various parties due to the need for logistics and identifying the right suppliers. To understand who the parties in supply chain are, we must be familiar with the entire process. First, when the business decides that it needs a particular raw material or resource, its procurement department publishes a tender notice and allows suppliers to make tenders according to the established procurement process.

Once tenders are placed, the company will analyze them in terms of quoted price, quantity, experience record and quality of service. The firm then decides the bid it shall accept upon which a contract is signed for the supply of the tendered commodity.

In smaller businesses, tendering is not the major procurement method due to the complexities involved. Instead, the firm looks for the supplier they need by conducting their own market research. Once the supplier is identified, logistics have to be put in place to coordinate the movement of goods from the supplier to the company.

Looking at the above process, it is clear that various parties and professions are needed. First we have the supplier who is the key party in the chain and then there is the buyer who in this case is the company.

Other parties are those who offer advisory and support services to ensure that the contract between supplier and supplier is reached. These parties include procurement officers, middlemen, agents, 3^rd party logisticians (3PL) and 4^th party logisticians (4PL). 3PL are those logisticians who facilitate the movement of the goods from the suppliers’ warehouse to that of the customer (Murray 2005).

4PL are professional logisticians who are hired to oversee the entire logistical process including clearing and forwarding, cargo handling, customs clearing etcetera. However, it is to be noted that the term ‘logistics’ and ‘supply chain’ are not synonymous since the latter is more comprehensive as it includes manufacturing and procurement processes in addition to distribution.

Role of the supply chain

The chief role of the supply chain is to ensure that the customer’s needs are fully satisfied through; the efficient use of available resources, timely and cost-efficient distribution and proper inventory management.

To be specific, supply chains look to liaise with suppliers to; reduce bottlenecks that come with supply, avail lowest cost but quality material, provide affordable and efficient transportation, maintain well-located factories and warehouses, optimize logistics to reduce the length of the supply chain and finally to implement timely techniques that improve manufacturing flow. All in all, a good supply chain should provide the customer with the right good and at the right time, location and cost.

International supply chain

Offshore sourcing and globalization have led to the formation of these so-called international/global supply chains. The opening of borders for trade has improved business by allowing consumers to obtain the cheapest and best quality products from any corner of the globe.

The drive to reduce cost has actually been the major impetus for the acceptance of globalization and the aggressive manner in which business firms have opted for foreign solutions. However, the only difference between the international supply chain and the local chain is the stretching of interests and the increase of suppliers.

Global supply chains involve a wide array of suppliers all offering interesting packages to the customer. However, new opportunities usually come with new challenges that have to be effectively dealt with if the company is to reap the fruits of globalization (Gray 2007).

Issues of cost must be well-considered since so many factors come into play such as labour costs, freight costs, exchange rates etcetera. Another issue to be considered is the selection of suppliers through comparison of bids. Again, research is needed here since the lowest price might not necessarily mean the best bargain.

The company has to appreciate that selecting suppliers from a global list is complex and must be approached with caution. In addition, the number of international suppliers must be considered since fewer are easier to manage but their come with a bigger risk in case of default.

Benefits of logistics

While the use of the term “logistics” in the business sense began in the late 1950s, the increase in globalized supply chains has turned the word into an entirely new business profession (Chen & Paulraj 2004). Logisticians are now simplifying what was originally thought to be a complicated process-importation.

Currently, businesses do not have to worry about logistics; they just furnish logisticians of what they want, where and when and then they can sit and wait for the professionals to work. Logistics go a long way in completing the supply chain and ensuring that the bureaucracies that arise out of international trade are handled by experienced personnel (Oliver & Webber 1982).

Specific details on Foster Group supply chain

In the brewing of Foster’s Lager, the company usually requires several raw materials. The making of a lager such as Foster’s requires hops, malted barley and water among other additives. Since the company itself does not engage in farming activities, it has to source these products from suppliers in Australia and often from suppliers abroad.

According to former C.E.O Trevor O’Hoy, making a lager usually requires select skills and ingredients that have to be balanced. More often than not, Australia does not have all the ingredients needed though it produces the “pride of Ringwood hops” that provide that famous taste.

Foster’s suppliers are many and each produces some unique ingredient that goes into either the wines or the beers. Most overseas suppliers are from Germany mainly due to the established culture of brewing that has been perfected in that country (Daniels 2000). Naturally, Foster’s Group deals with the same suppliers in its supply chain.

This is because wines and beers have to be made from very specific ingredients so as to replicate the particular taste and aroma attributed to each product.

Challenges Involved in International Trade Operations

International trade operations come with various challenges and risks. The reason there are more challenges is that first, there is a larger number of actors to deal with before the goods finally reach the customer.

Secondly, there is the lack of sound legal protection that is usually present in the local markets due to the laxity of international law and the huge costs of international litigation. However, most of the challenges are also experienced at the local level.

One of the biggest challenges in international operations is the lack of security. Since the law does not provide ample protection and the parties do not meet, the business risks and insecurity of trade are too great. Another big problem is that which UPS Chain Supply Solutions (2005) refer to as the “Tower of Babel problem”.

This is the challenge posed by dealing with persons from different cultures who speak different languages. The risk with this is that communication may become a barrier especially where the parties do not understand each other (Lee 1997).

Another challenge comes in the sense that to achieve an effective international chain, there must be a concerted effort between parties which may not be easy to achieve (Ayers 2001).

Lack of ownership of the supply chain sometimes leads to confusion especially where the supplier and customer have conflicting interests. Finally, we have managerial problems that arise due to non-exposure of the managerial staff to foreign audiences.

In its experience, Foster’s has faced several challenges in its supply chain due to its international operations. First, the financial crisis of 2007-2008 hit the company had and in fact it recorded a loss due to the poor performance of its wine-making business.

The exchange rate of the Australian dollar against other currencies was also quite unfavourable. While Fosters’ suppliers have been quite consistent, the rising costs of raw materials have led the company to discontinue the manufacture of certain brands (Ayers and Odegaard 2007).

Recommendations

Outsourcing is touted by most professionals as the solution to most of the problems that plague international operations. Instead of incurring huge tariff and shipping costs in a bid to manufacture a product, why should the company not outsource the whole manufacturing process and save overall costs? Outsourcing is the in-thing in modern-day business with entire business functions and processes being outsourced to Asian countries such as India or China where costs of manufacturing are generally low e.g.

Foster’s has now outsourced its IT department to Wipro company in India. Another way to beat the challenges that come with global supply chains is to outsource the logistics. Both 3PL and 4PL are great ways to avoid the hustles of international operations.

Other ingenious ways of dealing with these challenges may include; hiring of staff with international competency (Ferrer 2003), engaging in meticulous market research, looking for better local solutions first, dealing with the same ‘tested’ suppliers (Fisher 1997), avoiding excess risks where there is no background on a supplier (Steermann 2003) and finally, training staff on the needs of the international market.

Conclusion

From the above, we can see the issues that come with establishing international supply chains. Foster’s utilizes the global supply chain to obtain raw materials such as malted barley as well as support services such as IT.

Just like any other firm, Foster’s has experienced various challenges associated with using a global supply chain such as the financial crisis, which led to increased prices of raw materials globally. However, the benefits of reliance on the global supply chain seem to outweigh the demerits judging from Foster’s success.

References

Ayers, J.B. (2001) Root Cause – Weak Links. Information Strategy: The Executive’s Journal, 2(1), 42-56.

Ayers, J.B. and Odegaard, M.A. (2007) Know the ABCs of Retail Supply Chain Costs. Supply Chain Quarterly, 4(2), 229-243.

Chen, I. J. and Paulraj, A. (2004) Towards a theory of supply chain management: the constructs and measurements. Journal of Operations Management, 22(2), 119-150.

Daniels, R. (2000) Designing Great Beer. Perth: Brewers Publications.

Ferrer, J. (2003) European Supply Chain Management Characteristics and Challenges. ASCET, 5, 26.

Fisher, M. L. (1997). What is the right supply chain for your product? Harvard Business Review, 105-116.

Foster’s Group Website (2011) Overview of the Group. Web.

Gray, P. (2007) Sister Act: A Makeover. New York: Fortune Small Business.

Lee, H. (1997). Information distortion in a Supply Chain: The Bullwhip Effect. Management Science, 43, 4.

Murray, M (2005) Selecting a Third Party Logistics (3PL) Provider. Web.

Nagurney, A. (2006) Supply Chain Network Economics: Dynamics of Prices, Flows, and Profits. London: Edward Elgar Publishing.

Oliver, R.K. and Webber, M.D. (1982) Supply-chain management: logistics catches up with strategy. London: Prentice Hall.

Steermann, H (2003) A practical look at CPFR: the Sears – Michelin experience. Supply Chain Management Review, 46-53.

UPS Supply Chain Solutions (2005) Supply Chain Strategy: The Importance of Aligning Your Strategies. New York: United Parcel Service of America.

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