China’s size, economic growth and fast development of internet sales are unique in the world. This makes distribution network optimization complex. Companies need to establish a different approach to network optimization to make their supply chain China proof.

Key take-aways

  1. China’s strong urbanization and unique development of e-commerce makes it important to create flexible distribution networks that can serve multiple channels.
  2. To cope with the fast changes and growth in China, the network optimization process must become a more continuous process.
  3. Implementing strategic supply chain changes takes time, for example when new facilities are added to the network. Early anticipation based on a solid strategic logistics agenda is key.

What makes the China supply chain complex?

China is a huge country with the biggest population globally. It is one of the fastest growing economies in the world. The development of the logistics infrastructure however, is not growing at the same pace. The population is showing a strong move to cities and all these people want to buy products which they do more and more online. Another important development is that companies that had a manufacturing location in China only, are adding manufacturing capacity in Southeast Asia, the so-called ‘China + 1 strategy’. This strategy creates many new intra-Asia goods flows. These are just a few examples that makes China supply chains complex.

Typical demand spread in China

Effects in the China supply chain

There are several developments in China that influence the supply chain.

China+1 effect on inbound

The China+1 strategy means that a significant additional inbound flow from Southeast Asia arrives at the Southern East coast of China, in the ports of Shenzhen and Hong-Kong as example. These cities are in the so-called ‘Greater Bay Area’, a concentration of high value-added industries. This also means that Shanghai is not the default location for a Central Distribution Center anymore.

Infrastructure development follows urbanization

Improvements of logistics infrastructure such as warehouses and parcel networks follow the economic developments but at slower pace. A difference with Europe or the US is that China shows a wider variety in providers. In the parcel business there are more choices between low cost providers with longer lead times on one hand vs. more expensive parcel providers with shorter lead times and higher service experience (example SF Express) on the other hand. The logistics infrastructure of these providers typically develops in areas with fast growing cities such as along China’s East coast and towards the West in cities such as Chengdu.

E-commerce growth in China is unique

China has a fast-growing economy and more and more people buy online; today 35% is e-commerce sales but this is expected to increase to ~65% over the next 3 years. This means that the e-com channel strongly develops and this requires another product to market approach. To deal with higher demand volatility and shorter lead times (same day/next day), e-commerce channels require an expanded logistics network with higher levels of safety stock at more distribution centers. Where traditionally companies wanted to reach distributors in a few Tier-1 cities, the need has now become to penetrate more and smaller cities with a short lead time. E-commerce companies such as Alibaba, JD.com and Tencent have become market leading e-com companies by offering the networks that meet the new consumer requirements. Brand owners have two choices to adapt to the new reality; either they create an own dense network of DCs combined with quality parcel providers for the final mile, or they ‘tap into’ the networks of above-mentioned e-com companies. Cost wise an appealing approach, but it creates more distance between the brand owner and its customers.

Traditional channels not to be ignored

Next to the e-com developments and the additional channels this creates, the traditional channels can’t be ignored. Distributors, traditional retail, department stores and pop-up stores are still in the network but accept longer lead times and lower shipping frequencies.

Concluding: there is clearly not one size that fits all in the China market, but a mix of different structures is required to create a distribution network that fits all needs. This makes distribution network design complex and therefore requires a different approach.

Companies serving market in various channels will need combination of network structures

How to handle complex Network Optimization for China?

The customer service strategy of a company defines the different frequencies and service levels that apply in each channel. For example, weekly to distributors, daily to e-com platforms and next day to consumers buying online. As a result of the e-commerce boom and growth, it is important to go from a static network design (once per 3 years in Europe) to a more continuous approach for China. Obviously, in such approach the frequent collection of logistics data must be a lean exercise. This can be achieved by embedding the repetitive analysis in a logistics ‘Center of excellence’ (COE) of an organization and work with a digital replica (‘twin’) of the supply chain. The COE means a fixed team of logistics experts working on continuous logistics optimization and improvement. A digital twin is a set of models allowing quick ‘what-if analysis’, based on a data repository that is continuously held up-to-date with the relevant customer data.

Embedding of repetitive analytics in the organization in a ‘Center of Excellence’

The focus of the COE is the ‘ground layer’ of the data repository but also the questions of leadership that need to be answered. Questions can be operational (what is effect of a potential strike?) as well as strategic of nature when related to required network changes. Realizing strategic supply chain changes takes time. For example, the change of the location of a Central Distribution Center requires a solid business case and a significant preparation and implementation time. It is therefore key to have a logistics agenda for strategic logistics changes.

 

For more information about this article contact Henry van den  Born, Consultant BCI Global via henry.born@bciglobal.com or call +31 24 3790222.

 

Would you like to share experiences and discuss your specific case and logistics challenges in China? Contact BCI Global team to mutually create a strategic view on your complex supply chain in China and develop an agenda to cope with the unique growth and fast changes in domestic China.

 

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