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By Bruce Tompkins, Executive Director, Tompkins Supply Chain Consortium
Introduction
Tobacco is a profitable industry for countries such as China and the United States, and although its popularity has begun to wane in many countries, the usage rates in other countries continue to rise. Thus, there is still a substantial need for efficient and effective supply chain practices in the industry.
In China, the tobacco industry is a government-run monopoly. Consequently, it is the single largest contributor to China’s tax revenue, making up 6-8% of the total tax revenue in China over the past seven years. And the industry continues to remain strong with no signs of tobacco usage fading.
As a government-run monopoly, China’s tobacco industry is unique compared to other tobacco markets in the world. And in order to learn more about the current tobacco industry in China, Tompkins International recently conducted a detailed analysis of China’s tobacco market and compiled information related to the state of the supply chain and projected trends. This article discusses some key findings from the survey.
Market Segment Overview
Since 2003, the Chinese government has been implementing a significant industry consolidation of the number of cigarette producers. This consolidation has driven a concentration of the top cigarette brands. The top 10 brands now represent nearly 40% of the marketplace, versus just 16% six years ago.
As part of the government-led consolidation, county-level administrative areas will no longer have the right to sell tobacco products, and all sales and distribution are from the prefectural level or above. The consolidation has also allowed tobacco sales to freely cross provinces and regions where they were not allowed previously.
Distribution Operations
Additionally, there has been major change in the distribution and logistics of the industry due to the consolidation. As the number of producers have declined so have the number of distribution centers (DCs). Generally this has meant that only the best DCs and logistics providers are still remaining, as competition has become more intense. And now the tobacco industry has some of the most advanced DCs of any market in China.
While there has been much consolidation, the Tompkins International survey indicates that 154 DCs are in operation throughout China, and there are an additional 118 DCs that were being constructed by the end of 2008. Trends for the new DCs include:
- Expanded use of high bay rack – three to four levels high;
- More attention to DC cube utilization;
- Significant reduction of floor stock;
- Greater use of automated equipment; and
- Growing use of RFID to track each pack of cigarettes from production to customers.
China’s tobacco industry is highly regulated, and it is the only industry in China with standards for logistics and DCs. These standards were created by the government – the China Tobacco Monopoly Bureau – in partnership with the leading service providers (LSPs). From 2008, the two most significant regulations issued were:
- YC/Z 260-2008 Standard System for Logistics of Tobacco Industry – Specifies the terms and definitions used in the industry and regulations/standards to be applied for various aspects of warehousing.
- YC/Z 261-2008 Operations Criteria for Cigarette Logistics Distribution – Specifies the standard operations procedures for DCs covering their various departments.
Additional standards are being defined and implemented to improve the efficiency of logistics for the tobacco industry. At the same time, it is imperative for anyone working in this industry to be informed of current and future standards in order to work effectively on distribution and logistics.
Warehousing
Also according to the study, China’s tobacco industry has approximately 340 tobacco leaf warehouses, 485 3PL warehouses and 166 factory warehouses. There are a total of five million monopoly retail stores selling to the public supported by approximately 350 DCs. The largest DC covers 50,000 retail stores.
Conclusion
In summary, the tobacco industry in China is huge and shows no signs of weakening. As a government monopoly, the industry has many advantages of scale and efficiency that otherwise would not be feasible. The monopoly exists throughout the supply chain – from leaf collection to sales at retail stores. This structure has allowed for considerable consolidation and has helped create one of the most efficient supply chains of any industry in China.
As time passes, additional automation (pick-to-light, voice picking, etc.) will be put in place in the DCs, and technology will be implemented throughout the supply chain to further improve the speed, capacity and productivity of the network. China’s tobacco industry will be a model of successful supply chain and distribution operations.
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