Innovation in the supply chain

By Francis Bassolino and Pilar M Dieter 

The price of finished product and component parts in China attracts those in search of low costs. However, when logistics, storage, and handling costs are factored in, the country becomes much more expensive.

If China wants to maintain momentum, its logistics costs – currently up to three times the level of those in developed countries – must come down. Granted, massive public and private infrastructure projects are planned or already underway, and these foundational improvements will alleviate some pain over time. But companies looking to improve the logistics cost structure more immediately must develop innovative approaches and cultivate nimble channel partners.

Such companies, in fact, must devise a complete China logistics strategy. This strategy should include a clear and current understanding of the sometimes vast differences in regional offerings and impediments, service provider coverage or lack thereof, and channel partner support available within a region.

Rubber meets the road

Above all, the strategy should take into account three fundamental issues:

• Regionalization. China’s logistics environment is riddled with risks and inefficiencies. Moving goods across provincial boundaries can feel more like crossing international borders. For example, border crossings in China create unnecessary handoffs that result in damaged goods and on-time delivery performance dipping below 90%. While cross-provincial border crossings in the more developed east coast markets operate more efficiently, rising manufacturing costs in these regions are driving vendors west, where infrastructure and logistics-related services are less sophisticated.
• Deregulation. Over the past few years, deregulation has enabled world-renowned service providers to create wholly foreign-owned enterprises (WFOEs) in the transportation and logistics sector. Although a positive addition to the market, these companies are realizing the challenges of doing business in China. They must battle against entrenched local incumbents that often benefit from proprietary political and economic support. Their access to high quality equipment to build distribution operations is limited, and immature financial and management systems often create hurdles. As a result, there is a disconnect betweem China and more developed markets in terms of service levels for international customers.
• Fragmentation. The logistics sector is extremely fragmented. Most shippers track multi and separate truckers that have small fleets of a few vehicles as opposed to tracking one or two truckers with a national fleet. Moreover, many local logistics service providers (LSP) offer little more than basic transportation, leaving managers desperate for alternatives.

Making progress

In spite of these key logistics issues, efforts to improve the systems and offer more services are quickly evolving.

First quarter 2007 reports reveal that Shanghai Port, moving 5.8 million 20-foot equivalent units (TEU), is now the world’s second largest container port behind Singapore with 6.6 million TEU.  
Chinese ports occupied nine of the top 30 spots for container cargo volume worldwide in 2006. That same year, investments in China’s seaports totaled US$7.8 billion spread over more than 160 construction projects. Infrastructure developments around trading hubs such as the Yangtze River Delta region demonstrate China’s commitment to becoming the global gold standard for international trade and logistics.

In May 2007, Beijing permitted a US$1.6 billion foreign investment by CMA CGM (France), Deutsche Bahn AG (Germany), and Zim Logistics (Israel) in the newly established China United International Rail Containers Company. This is the first foreign investment of such size in the country’s historically protected rail network.

China continues to reduce the operating restrictions on foreign entities so domestic competitors can learn best practices. As a result, foreign third-party logistics providers (3PLs) are partnering with state-owned enterprises (SOEs) in an effort to merge modern logistics practices with local customs, processes and knowledge. Logistics related businesses in China are projected to grow at 25% per annum for the foreseeable future irrespective of the many supply chain challenges that exist.

The necessary network

In the absence of national service providers, free-flowing highways, and rail networks that support distribution hubs throughout the country, logistics managers are forced to think creatively to keep goods moving through China. Some areas where creativity is applied include the following:

• Downstream distribution. Greater control of downstream distribution means improved customer service and competitive pricing. Guangdong Honda Automobile’s franchise network demonstrates this modern distribution approach. By initiating exclusive four-in-one franchises (sales, repair and maintenance, supply of parts and information services), the company does not need to rely on shared logistics services. This arrangement ultimately translates into positive customer satisfaction levels and controllable inventory levels.
• Regional distribution centers. Ingersoll Rand recently announced a successful shift from a centralized warehousing facility to a regional distribution center (RDC) approach. With RDCs in Tianjin and Shanghai, the company has achieved higher levels of customer service and distribution efficiency, reduced inventory, and gained greater supply chain visibility. Ingersoll Rand’s RDC network has improved tracking capabilities, and the company no longer relies on shipment departure and arrival as the only data points on the supply chain.
• Build your own. Big box retailers and some industrial goods suppliers that came to China early established in-house logistics operations. They managed their own logistics with modern warehousing and nationwide distribution. For example, when Carrefour entered China, it stunned the traditional retail sector that functioned with antiquated logistics operations. Carrefour was able to transplant its replenishment methods of well-stocked superstores through a captive distribution system. The company succeeded in implementing this model in China through the use of 3PL’s who manage the distribution process.
• Partner up. Japanese shippers have used the classic keiretsu supply chain model to bring together compatriot multinationals doing business in China, integrating operations and coordinating responsibilities. Reducing individual costs and consolidating distribution networks, these companies use Nippon Express 3PL services to generate efficiency in the supply chain.

Inefficiencies in China’s logistics networks abound. As regulations allow a broader operating platform, foreign companies gain greater control over the fate of shipments throughout China, raising the level of sophistication across the system. Moreover, consolidation has begun and intra-regional efficiencies are evident particularly within more developed areas of the Yangtze and Pearl River Deltas.

In the first quarter of 2007, the revenues generated in China’s logistics sector were up 24% year-on-year. Thus, despite pot holes, poor visibility and corruption, trade remains healthy. 

Francis Bassolino is managing director and Pilar M Dieter is director at Alaris Consulting in Shanghai. For more information please contact pilar_dieter@alaris.com.cn