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Logistical Consideration for Building Lipton Tea Factory in Jebel Ali Free Zone

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Background

When you hear the phrase “Fast Moving Consumer Goods”, (FMCG), one particular brand comes into your mind, and that is the Lipton Tea. This tea brand is manufactured by Unilever, a leading FMCG company in the whole world. Unilever built the Lipton Tea factory at Jebel Ali Free Zone in Dubai which commenced its operations in the year 1998. Since the establishment of this factory in Dubai, the facility has grown to become a leading tea production plant in the East, as well as the second largest Unilever tea production plant globally.

Prior to the establishment of Lipton Tea factory in Jebel Ali, the Arabian Markets received their supply of Lipton Tea from the UK (Jones & Miskell 2007). There was a need for starting up a factory that would cater for the growing demand of Lipton Tea in this region, thus calling for a study to determine the most appropriate location for the facility, since there were three preferred countries. These countries included India, Sri Lanka, and Saudi Arabia.

Lipton Tea has more than 70% of the GCC countries in the Middle East. The GCC countries comprise of Bahrain, Kuwait, Omar, Qatar, UAE, and Saudi Arabia. Raw tea used to be transported from Sri Lanka and India to Leighton Buzzard in the United Kingdom for processing and bagging. It then would be shipped back to the Middle East for supply to its consumers. It, therefore, becomes apparent that considering the large market in the Middle East a lot of expenditure would be cut-off if Unilever was to establish a factory in the Middle East. Many logistical considerations were looked at before settling on the appropriate location of the new facility the Middle East. At last, Unilever Company decided to base the factory that would supply the GCC market in Jebel Ali Free Zone, Dubai (Ramos 2010).

Top of the list as part of the logistical considerations for Unilever before establishing the Lipton Tea in Jebel Ali Free Zone was in line with the strategic geographical positioning of tea growers and the leading tea consumers (GCC). This is what majorly informed their decision of settling for Dubai as the most appropriate site for the factory. The factory was Unilever’s first wholly automated tea manufacturing plant worldwide.

Comparing Port Jebel Ali, Colombo and Mumbai

1.      Port Jebel Ali

Prior to the establishment of Lipton Tea factory, Port Jebel Ali had already been constructed at Jebel Ali free Zone and was already in operation. This grand harbor had sixty seven berths, making it the greatest manmade port in the whole world. It, therefore, means that the Unilever team of experts that was analyzing the suitability of the three ports (Port Jebel Ali, Colombo and Mumbai) must have really been attracted to this port because of the numerous berths available (Hein, 2011).  

Logistical Operations

  1. Higher Levels of Decongestion

Port Jebel Ali comprises more than a million square meters of container area. As a result, congestion has not been such a dramatic issue due to the humble space available for the containers. This makes the port to be advanced with regard to efficiency. Movement of cargo from the port to the other terminal can sometimes be stressful, especially when congestion becomes apparent in port areas. Goods can spend many days of months as the port management tries to ease on the congestion, therefore, leading to the expiration of some of the commodities as well as delaying on the arrival of those commodities at the factories for processing. Nonetheless, Jebel Ali port had least of the worries being the greatest harbor with the biggest container yard in the world.

It is likely that Unilever was particularly attracted by this large container yard, which meant that the raw tea from tea growing areas such as Kenya, India, and Sri Lanka would be easily cleared and finds its way to Lipton Tea factory at Jebel Ali Free Zone. Put this in perspective: the largest tea factory in the Middle East and the second largest facility worldwide being located at the largest harbor in the whole world.

  1. Low Cost of transportation for Raw Tea to and Bagged Tea

Transportation logistics were not likely to pose any major challenges since the distance between the port and the factory is relatively short i.e. both port and the factory are located at Jebel Ali Free Zone. This meant that raw tea arriving at the port needed no further transportation since it had already reached its destination. Additionally, the distance of Jebel Ali Free Zone to the GCC countries was shorter as compared to India and Sri Lanka. This therefore meant that massive costs for transporting bagged tea to long distances could be cutoff.

  1. Availability of Ready and Improved Facilities

The port at Jebel Ali Free Zone had been built to serve as a warehouse and also facilitate distribution of products by multinational companies to the Gulf region. A lot of trading and services, manufacturing industries, as well as the market in this area, grew enormously to cover extended regions of Africa, East Europe, former Soviet Union as well as the rest of the world. The existence of about 15,000 companies in Jebel Ali Free Zone made it the best port of distribution of Lipton Tea to the GCC countries (Terterov 2006).  Marketing companies such as R & D would also be impressed thus establishing their branches in this region. This was crucial for Unilever, since R & D could assist it in developing newer packaging and products.

  1. Better Infrastructure

The Port at Jebel Ali Free Zone had a linkage to the superhighway system in Dubai. The International Airport Cargo Village in the city was also connected to Port Jebel Ali, enabling the transportation of cargo from the port to the aircraft faster (just within four hours). Port Jebel Ali is situated to the southwest of Dubai, about 35km. It settles on the Gulf coast. Resultantly, the port enjoys a strategic geographic positioning. It nears the east and west traders thus acting as a maritime linkage between the western trade with the Far East market thus the GCC countries. It, therefore, serves a market of around 1.5 billion people. Due to the location of Port Jebel Ali in Jebel Ali Free Zone, there had been many logistics, trade, and manufacturing companies that had been set up in this area. These logistical factors made Port Jebel Ali to be exemplary with regard to security, size, and efficiency thus appealing to Unilever.

  1. Fewer and more Friendlier Clearance Procedures

In the United Arab Emirates, all distribution and manufacturing companies are required to form a partnership with local companies and also pay for import duties. However, in the Jebel Ali Free Zone, foreign companies are neither obliged to form partnerships nor pay for import duties since they operate as “offshores”. They can manufacture, go into joint ventures or trade as they please without any restrictions.

For any foreign company that is trying to venture into any commercial activity within the Jebel Ali Free Zone, it just has to fill a short questionnaire with two pages, which it faxes to the local authority in Dubai for processing.  The authorities then send an initial response within a week followed by a more detailed validation such as the article of incorporation. The entire process has fewer bureaucracies, making it possible for new companies to commence operation within six weeks.

With regard to the workforce, Dubai allows for foreign workers to work there without any problems since its employment laws are flexible and very friendly. It, therefore, would seem feasible to have a nice technical team to run the activities of the factory and serve its supply chain.

  1. Low Custom Costs

There was a wide range of advantages for foreign companies operating in Jebel Ali Free, especially those that related to custom expenditure. They included: (i) total overseas proprietorship; (ii) complete profit and capital return to mother countries; (iii) absence of a minimum capital to invest;(iv) absence of currency constraints; (v) abolition of corporate taxes; (vi) and abolition of individual income taxes. All companies operating within the Jebel Ali Free Zone were exempted from import duties for all the goods that entered the area.

2.      Port Colombo

Colombo is the capital of Sri Lanka. It is the location of the Colombo Port, one of the biggest deep water ports. It is situated towards the southeast region of the small island of Sri Lanka. The port had two terminals i.e. Queen Elisabeth Quay and Jaya Container Terminal.

A survey conducted by the SLPA at the time showed that Colombo port was the least advantageous when compared to the regional ports. The survey which collected data on EDI facilities, port service, agents, prompt berthing and sailing, production, pricing, deviation cost benefit from four regional ports i.e. Colombo, Salala, Dubai and Singapore. Colombo port scored lowest in its own management organization (Kuroda, 2007).

The findings from this study suggested that the situation of Colombo Port was becoming poorer and that if the government was not going to put extra efforts, the port would experience worse conditions that could lead to its closure. 

Logistical Operations

  1. a.      Increasing Inefficiency

The start of 1990s had seen a decline in the throughput of the terminal’s container traffic. This was necessitated by obsolete systems and equipment. It led to increased delay and inefficiency in these terminals. At this time, more competitive ports were diverting 50% of the east-west traffic (Biedermann, 2009). Even though the regional traffic continued to grow as a result of the intensifying trade, the port still continued to lag behind. More advanced ports in terms of equipment and infrastructure would continue to enjoy a competitive edge to Colombo port.

Colombo port needed to modernize its facilities and required huge capital investment if it still wanted to sustain or increase its share of the market. The Situation would go on to worsen, prompting the Sri Lankan government to form a partnership with private companies. 

In the year 1998, the government through the Sri Lankan Port Authority (SLPA) went ahead to form the South Asia Gateway Terminal Limited (SAGT) that brought a number of private companies aboard to see if they can revive Colombo port. Colombo port was grabbling with the issue of excess staff that it needed to handle.  This lowered the efficiency and productivity of Colombo Port.  Conversely, Jebel Ali Port was highly automated thus seemed to be abreast with the advancement in technology. Taking into account that Colombo port was going through these difficulties at the time when Unilever was conducting its study to determine the most suitable port for its tea products in the Middle East region, it would be inappropriate to settle for Colombo port (Dharmasena, 1992). The other two ports seemed far much competitive.

b.      Higher Fees

 Colombo port charged its fees under the following categories as shown below;

i.       Berth Group

At Colombo Port, berth hire is always charged per 100 gross tonnages as the dockage. It however allows for a levy of the rental charges for berth occupation one hour after discharge and unloading are completed.

ii.      Cargo Operations Group

The port had and still continues to put in place charges for the movement of containers from the ship to the marshaling yard. Lifting off and on falls under demounting and mounting containers and is thus charged some fee.  There existed other services for hire such as the cranes and forklift thus increasing on the expenditure by companies using the port. There were other charges at Colombo Port that were very detailed. As a client, it was possible to get confused by such detailed charges thus slowing down the process of clearance.

  1. c.       Bureaucracy in Clearance

The issue of numerous terminal service agreements (TSA) and speed money added to the bottlenecks that would scare aware new investors. This contributed to delays at the port. It was in contrast to Jebel Ali Port which at this time had lesser clearance procedures. Delays in clearance at the port for both raw and bagged tea could have a grievous effect on Lipton Tea considering the high demand by its soaring market at that time. Even though Sri Lanka had the geographic advantage of being located right below India, it had not maximized on this favorable factor hence risking a fall into a feeder port. Unilever could not take a gamble with such a huge venture by choosing Colombo port as its import and export gateway.

3.      Mumbai Port

Mumbai Port was and is still the largest port in India. Though some countries such as Saudi Arabia were a step ahead in revising their port pricing methodologies, India still lagged behind failing to adopting the principle of cost based evaluation for that matter. Lack of adequate political goodwill had made the process to be difficult since it involved political engagement. This therefore meant that crucial revision of port prices had not been passed.  This resulted into Mumbai being one of the leading ports as far as high tariffs are concerned. Even though factors like inflation, increasing port worker wages, exchange losses as well as rising fuel costs had called for a revision of the port prices, India had not responded appropriately.

Logistical Operations

a.      Greater Fees

 Mumbai Port just like Colombo had higher (and more than Colombo’s) port charges in the Middle East region. Its fees were being charged as follows;

i.       Navigation Group

Its towage charges include tug assistance as well as pilot boat charges. The Port also has anchorage charges that are charged at the expiration of thirty days, immediately after anchorage is completed.

ii.      Cargo Operations Group

This is the second category of tariffs. Mumbai port has one of the highest port prices in the region. First of all, this is a result of the high charges on using the equipment at the port. Secondly, mobile cranes are charged, thus hiking the port, prices. Nonetheless, Mumbai port has levied some of the charges for dry dock for both docking and undocking.

b.      Prolonged Custom Procedures

Mumbai Port like many other ports was characterized by lengthy clearance procedures that were time consuming. Lipton Tea’s growing demand in the Middle East could not be sustained with such delays at the port. By choosing Mumbai Port, Unilever had to deal interruptions in the transportation of raw tea from the port to the factory and that of bagged tea from Mumbai port to the GCC countries. With all this logistical obscurities, it could not be ideal to base its factory in a country with such a less competent port even though the company was receiving much of its raw tea supply from India.

c.       Mumbai Port Congestion

Mumbai Port was experiences growing congestion at the port because the process of clearing containers at the port had been slowed down by long clearance procedures. Higher fees at the port such as those of using the port equipment such as mobile cranes as well as higher anchorage charges also contributed to congestion. For instance incoming cargo could not find a freeway to its inland destination because of congestion at Mumbai Port thus forcing it to stay at the port beyond the expiration of the thirty days grace period. This meant that it had to start paying for anchorage charges which sometimes accumulated to huge amounts that the clients could not easily raise hence furthering congestion at the port.

d.      Higher Transportation Costs for Bagged Tea from India

Basing the factory in India could mean that the bagged tea had to be transported to longer distances to the GCC countries (compared to Saudi Arabia). It also meant that the factory could save on money spent transporting raw tea to the factory since India was the chief supplier of raw tea to Unilever.  Money saved by basing the factory in India could be insignificant compared to the amount that was to be spent transporting bagged tea to GCC countries which were relatively far from India. On the other hand, building the factory in Saudi Arabia meant that bagged tea (which was expensive to transport) could travel shorter distance to its GCC markets thus saving huge amounts of money. The money that was to be spent on transporting raw tea from India to Saudi Arabia (however far it might look) could be considerably lower since transporting raw tea is cheaper.  Consequently it could be more beneficial to base the factory in Saudi Arabia as opposed to Either India or Sri Lanka.

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