Free Case Study About Jebel Ali Port And Free Zone
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Dubai is entitled as “the city of merchants” from centuries (DP World, 2013), possesses a short but flourishing history of countable decades of economic growth and modernization after the emergence of UAE in 1971 (Jacobs, & Hall, 2007). Considered as connecting hub for Persian Gulf and South-Asia to the world, Dubai is the renowned home of world trade in UAE with the extremely facilitating environment for businesses and trade needs (Wisconsin Project on Nuclear Arms Control, 1996). Around 7,000 business entities of the globe including a large base of fortune 500 companies enjoy the freedom of trade with lower costs in the said regions via residing in the Free Zone of Jebel Ali Port, Dubai in terms of distribution houses (Jacobs, & Hall, 2007).
Considering the prosperous prospect of Jebel Ali Free Zone, numerous companies of the world are interested to gain their distribution setup over there. Cost management and supply chain efficiency are the optimal goals of the companies by doing so in the highly challenging competitive economic and businesses scenario. In the same regard Japan Tech (JT), a company deals in consumer electronics is opt to initiate its distribution center in Dubai, Jebel Ali Free Zone for improving its supply chain operations. For the purpose, below presented is a document crafted to understand the feasibility of the opportunity in terms of cost-benefit analysis via assessing the balance of offered and perceived benefits and initiation costs’ feasibility of the proposed project.
Japan Tech., a renowned name in consumer electronics has manufacturing setups in multiple Asian countries including Thailand, Malaysia and Japan. The company mainly caters its middle-east market with a vast diversified portfolio including mobile phones, television and sound system. For the purpose of distribution company strategically operates with six GCC distributors for the region. Company is still utilizing the traditional logistic method of trading as company employed 20ft sea freight containers for making goods travel right from the factory. The inventories are only available in the respective factories and every order is directly sent to the GCC distributors from factories which are located in different countries far away from each other.
Jebel Ali Free Zone (JAFZA) established in 1985 with the aim of developing a strong logistic infrastructure to facilitate trade among the connected regions and to grow economically via exploiting profitable opportunity of being free port. Starting with only 19 companies as customers, JAFZA is now serving to around 7100 companies of almost 100 countries via 135000 employees. The entity is accounted for attracting overall 20% of total FDI of Dubai as well as more 50% export from Dubai with a trade value of 69 billion (JAFZA, 2013a). Free trade policies of the government and supporting environment for international trade made the port pint of attraction for business world.
Before initiating the entity and/or final proposal it is necessary to assess the viability of offered facilities by JAFZA for any multi-national company’s distribution centre. Further, it is also necessary to assess and match the capabilities of provided facilities with the need of said business not only in terms of cost efficiency but also in terms of efficient supply chain operations with reduced transaction time. Below presented is a snapshot of offered facilities from JAFZA to attract the companies, in terms of assessing decision’s viability for the company.
There is a huge base of offered facilities by JAFZA that attracts businesses. Mostly, businesses are attracted by well-connectivity of the post via all means of logistics and transportation, ease of handling of overall establishment procedures, operational support, and environmental benefits and most importantly monetary reliefs as elaborated below.
International trading companies first and foremost consider a well-connected infrastructure as the heart of their business. JAFZA being the 9th reputed most viable port is well-connected with all four means of connectivity via its multi-model logistic infrastructure and connectivity operations. Keeping existence in air, sea, rail and road the post offers companies with a variety of flexible alternatives for moving their goods (DWC, 2014). Claiming JAFZA a “man-made strategic location” to provide best connectivity infrastructure and logistics to the rest of the world, Jebel Ali port owns rights to utilized 170 shipping lines to make 15 million containers travel annually to any port of the world. Along with sea, JAFZA provide exclusive connectivity to the world’s 8th busiest cargo airport with a travel handling capacity of 2.7 million tons metric as well as 16,800 km road network with 75 km metro track and upcoming ETIHAD railway connectivity. Connectivity options offering is also bagged with the logistics assistance and support which in turn attracts more companies to utilize the offered services due to easy handling and care-free transactions.
Numerous case reviews suggests that establishing a specialized distribution entity in a foreign port call companies to go through a complex process of legal and regulatory matters along with associated complex terms and conditions. However, JAFZA’s offering in the regard has astonished not only the business community of the world but also other developed countries port managements. Initial search for accessing to the JAFZA clarifies the freedom of existence and operations as being the customers of JAFZA. Following reliefs are offered to the companies who are interested in registering themselves in JAFZA region (JAFZA, 2013b).
Registration Process and transactional time: JAZFA offers the assistance online portal on official site of the entity which made its easier to go through, understand and employ the procedure of registration. Only a two-page questionnaire type form is the initial requirement of starting the transaction and it only takes around two0month to fulfill all the requirements in case of application approval (JAFZA, 2013b).
Ownership: JAFZA provides 100% foreign ownership right facility which is not offered by any other country or port in the middle-east region. Due the fact that Arabic norm is to keep superiority over foreigners, countries practice to own 51% shares locally of any foreign or expatriate business entity (Wisconsin Project on Nuclear Arms Control, 1996).
Repatriation: the legislation allows 100% foreign currency conversions for profits and capitals. This facility allows companies to take their whole profit back to the home.
Taxes: a major concern of today’s businesses is the level of imposition of taxes by the countries from where companies operate in terms of import and export. JAFZA and Dubai administration has crossed miles far in relieving companies from taxes as it promises 0% corporate, personal, import and re-export taxes which is unmatched widely.
Lesser Restrictions: there are any restrictions about capital, foreign workforce or currency usage. It allows companies to call cheaper labor from outside the country and reduces hedging problems while dealing with their parent country currency.
Support: JAFZA provides support in terms of not only registering and establishing paper entity but also in physical infrastructure building via offering variety of purpose built properties. Mortgaging facilities also aid consumers in managing their financial needs.
JAFZA for ease of handling keeps offered entities simple and divide into three classes of businesses namely a free zone company, a free zone entity and a branch. Branch is basically explained as the new venture of an already existed entity which is match with the purpose of Japan Tech. Further, licensing according to the chosen business model allow company to easily operate in the required domain of their business nature. Considering the purpose of Japan Tech., a trading license allowing trading in terms of import, export, distribution and inventory building is best suited for the company that allows electronics category as well (JAFZA, 2013c).
Finally, among all the other facilitations JAFZA offers a huge base of purpose built infrastructures in terms of offices, showrooms, warehouses, plots, accommodations, connectivity to basic means of life and professionally required facilities with the flexibility of need based designs. This not only allows business to save huge initial costs but also mitigates the threat of incurred losses of depreciation and in case of not continuing business from the said location.
Reviewing the facilities and assistance offered by JAFZA to initiate a business in free zone via establishing a required entity, it is analyzed that JAFZA offers a variety of considerable meaningful facilities that add value to the place for businesses. Further, the recessive phase of world’s economy and highly competitive environment of trading all over the world call companies to be competitive in two major aspects including speed of transactions and efficiency of operational costs. By exploiting the offerings of JAFZA both of the two edges can be gained by the companies. Speed in terms of exploiting multiply available means of transportation while cost reduction in terms of distributing fleeting activities according to the need of timely reach and available cheaper means. There is flexibility of choosing road for sending goods inside UAE instead of using individual ports of other countries of UAE to send the goods. Further, huge initial cost for setting up an infrastructure is normally the requirement of setting a business and/or warehouse abroad. It usually needs higher outward cash flows from the existing business and/or gained investments which increase the interest expenses of the business. However, the provided facility of pre-built buildings by JAFZA has markedly reduced the need of huge investments for the businesses.
Benefits of Holding Inventory in Free Zone
Below presented is a brief prospective landscape of benefits that stakeholders would be possibly reaping via holding inventory of the company’s products in free zone via establishing distribution center.
Currently Japan Tech. is working with a traditional country-to-country trading model keeping inventories in the factory and employing sea as connectivity medium for each GCC distribution entity individually. The company is involved in a complex trading structure among multiple countries with only exploiting sea means. If company would make a distribution entity in JAFZA, it will be able to utilize all the means flexibly according to the need. For instance, company can utilize a cheaper mode in term of highways for making goods travel inside middle-east. Supply chain efficiency will also be increased by the reduced procedures and transactional time. To clarify the matter, below presented are comparable traditional and reformed supply chain models of the company before and after making distribution entity in JAFZA.
Figure 1: Traditional model of Japan tech. distribution for serving middle-east market
Above presented is model currently employed by Japan Tech. depicts that company is utilizing its six GCC distributors as hubs for serving middle-east market with three of its products that are made and plied up in three different countries. As reported above company utilizes containers via sea to deliver the products to each distributor which means that one hub/distribution point is served by three individual supply chains thus ending up the procedure with more costs and complexity of procedure not only at company’s end but also at distributors end. Further, the model suggests that company possess no direct access to the retailers and consumers of the huge market and losing the potential of reducing operational margins via excluding intermediaries.
In continuation to the subject, below presented is a prospect model that would be potentially emerged as supply chain of the company by keeping inventory at JAFZA via developing a distribution center.
Figure 2: Proposed Reformed Model
The major benefit can be easily witnessed comparing both of the models in terms of simplicity, speed and cost reduction. Benefits company would get keeping its inventory are listed below as inferred from the model as well as sought by other real world entities.
Reduced complexity: combination of three delivery and six receiving points made it 18 transactions for the company with current model while inventory pile up in JAFZA’s distribution centre will make it one receiving and inventory management point as well as a single delivery point to all distributors in middle-east which will turned up with huge cost saving and operational efficiency for the company (Choice Logistics, 2013).
Speed: readily available inventory and multiple means of travelling will allow company to deliver ever faster than before.
Cost Saving: not only with single point access but also exploiting opportunity of roads specially in middle-east, specifically in UAE will aid company reducing higher costs.
Reduction of tax and duties: as maintained before JAFZA relaxed many tax obligations for its consumer companies.
Intermediary extraction: with existence in the region company can directly made offers retailers and customers to get benefit out of it. Margin distribution concentration will really aid company offer products at lower costs as well as increase profit margins.
The measure of developing distribution center will not only benefit company but also distributors in the same manner. Maintaining and managing relationship with three different setups, taxes relaxations, quick delivery of needed inventory and fewer operational mode will be favoring distributors. However, company’s existence in the region will be emerged for the distributors as competitor.
Directly approaching to the company, retailer would be able to increase their margin share due to exclusion of intermediary as reported above. Further, retailers can also be benefitted out of strategic discount offers made by large companies.
As maintained, company deals in consumer electronics which finally end-up with huge cost for the consumers due to import duties and intermediary interference. If company adds the showroom facility as offered by JAFZA can serve directly to the consumer which will reduce consumer costs via strategic discounts in terms of “margin saved” and “duty-free”.
Distribution Centre Establishment Costs
Rodrigue and Hesse suggested that a distribution center refers to a physical facility utilized to aid handling freight via multiple services including warehouse facility which a need wider array of costs from transportation to warehouse and management to operations (Rodrigue, and Hesse, 2015). The purpose of the company suggests that company needs a central distribution location to simplify its logistic operations in the middle-east. Taking the inclination as grounds for cost estimation, theoretically central distribution location refers to a point from where goods are stored to be replenished to the customers and other distribution points and need comparatively lower costs (Patthapesin, n.d.).
As depicted by the definition, establishment of distribution initially required huge costs for infrastructure building, transportation means, skilled labor, management and legal registration costs. Further, considering the case of Japan Tech. and JAFZA, there would be no huge costs required by the company to establish the distribution center in JAFZA. As reported, JAFZA allow branch business to start their functions with no any specific minimum capital investment requirement (JAFZA, 2013e).
However, there would be some additional costs of the business associated with the establishment and functionality of the proposed distribution center including rent/purchase of property, refurbishment, operational costs in terms of transportation, energy, depreciation, maintenance, wages and inventory carriage costs. Below presented is a rough feasibility of the project in terms of establishment costs as well as explanation of forecasted operational costs.
Initial and operational Costs
Initially, company would need a fine investment in terms of establishing a new distribution center. It is inferred from the review of facilities JAFZA provides that company can reduce its initial cost via exploiting on provided alternatives. For instance, instead of purchasing/renting a plot and wasting time and resources in construction, company can rent a pre-built purposeful building and renovate according to the need. Below presented is a rough estimation as per information provided by JAFZA.
Above presented is rough landscape of additional cost that business will have to bear in order to establish a distribution center in JAFZA, Dubai. Considering the business’s huge existence in the Asian region, it can be inferred that company can bear the estimated costs which will in turn return in continuous cost reduction due to the unfeasibility of old supply chain process as depicted above. However, final verdict on the feasibility of the project can be drafted only comparing the current costs with the prospect costs and viable of other alternative if available.
Conclusion and Recommendations
Explored above is the viability of the distribution center project of Japan Tech. The company wants to initiate a distribution center in Jebel Ali free zone, Dubai to improve its logistics via improving supply chain activities for serving middle-east region. JAFZA is the authority of Dubai government that manages Jebel Ali Port’s free zone activities. JAFZA offers a wide range of facilities and relaxed obligations to attract more FDI and businesses to the region.
Considering the previous model, company’s perceptual supply chain is showing a highly complex inefficient distribution system to serve middle-east market with huge costs. By initiating distribution center in Dubai, company will be able to control its cost and improve its operational efficiency in terms of reduced time and minimized monetary resources.
Critically reviewing company’s requirements and JAFZA’s policies it is concluded that JAFZA supports needed activities for such companies and it would be benefitted for the company to initiate business in JAFZA by opening distribution center. Considering the regard below presented as some recommendations to initiate the project.
Assessing and matching the needs of the business and JAFZA’s offerings it is concluded that the opportunity is feasible and if exploited correctly will pay company favorably. However, final decision should be crafted on the grounds of cost-benefit analysis and comparability with older system.
If chosen to build distribution center, company should avail as much as possible readily available offered facilities by the JAFZA instead of building own infrastructure as it will aid saving huge initial costs.
Finally, company should rent a “business plus package” with showroom and office facility instead of renting a warehouse only as it will add value to the business a pay favorably in the future.
Further, company should try to make most of the things locally. For instance, hiring workforce locally will be more beneficial than sending from parent countries.
Moreover, it will be beneficial for the company to develop forecasted plan in term of growing via said facility.
Choice Logistics. (2013). Choice Logistics Opens Service Parts Distribution Center in Dubai Free Trade Zone. Available from http://www.choicelogistics.com/pdfs/PR_Dubai_110513.pdf [Accessed 5th March, 2015]
DP World. (2013). Nurturing Trade, Geared for Growth. Available from http://www.dpworld.ae/uploads/Download/English/31217201384601PM894-DPWorld_InteractiveHandbook_En.pdf [Accessed 5th March, 2015]
DWC. (2014). Strategic Location For Innovative Logistics. Available from http://www.dwc.ae/project-details/logistics-district/ [Accessed 5th March, 2015]
Jacobs, W., & Hall, P. V. (2007). What conditions supply chain strategies of ports? The case of Dubai. GeoJournal, vol. 68, no. 4, pp. 327-342.
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JAFZA. (2013b). Connect, network and operate as part of Jafza’s centre of excellence. Available from http://www.jafza.ae/explore/why-jafza/ [Accessed 5th March, 2015]
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JAFZA. (2013e). FAQ. Available from http://oldwebsite.jafzatest.com/en/about-us/jafza-free-zone-faq-2.html [Accessed 5th March, 2015]
Patthapesin, P. (n.d.). Feasibility Study on Establishing Distribution Centres for Food Products in Europe. Available from http://www.maeus.grad.chula.ac.th/newweb/publications/6/Feasibility%20Study%20on%20Establishing%20Distribution%20Centres%20for%20Food%20Products%20in%20Europe.pdf [Accessed 5th March, 2015]
Rodrigue, J., and Hesse, M. (2015). Logistics and Freight Distribution. Hofstra University, Available from https://people.hofstra.edu/geotrans/eng/ch5en/conc5en/ch5c4en.html [Accessed 5th March, 2015]
Wisconsin Project on Nuclear Arms Control. (1996). What is the Jebel Ali Free Zone?. Available from http://www.wisconsinproject.org/countries/dubai/jebelali.html [Accessed 5th March, 2015]
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