Hello, this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International. I am pleased to welcome you to the seventh part of this series, where we welcome back a long-time Partner of Tompkins, Denny McKnight.
Denny, welcome. Denny has been heading up our distribution operations practice in China, and today I would like for him to get into what has been going on with distribution in China.
Denny, how would you characterize distribution in China, and how is it changing?
Denny
As a whole, distribution is in its infancy, with pockets of advanced technologies applied in specific industries. Most DCs are very basic in terms of material handling and storage.
These warehouses are characterized by low cube utilization and manual movement of product. This is changing, as the investment in fixed assets for warehousing equipment has grown annually over the last five years, driven by the rising cost of labor and land.
Use of third party logistics providers is prevalent, particularly with multi-national companies doing business in China. However, contract terms between the shippers and the 3PLs tend to be shorter in duration than in the West, which makes investing in material handling and storage systems infeasible for the service providers.
Jim
What industries are more advanced?
Denny
The most advanced distribution centers are generally found in the pharmaceutical and tobacco industries. These industries were early adopters of technologies and systems, including automated storage and retrieval systems, conveyor transport and sortation, and advanced order fulfillment processes.
These industries began incorporating advanced warehouse automation due to the Chinese government developing standards for DC design and performance. To achieve the top rating, specific automated technologies are required. The government is in the process of developing national standards in other industries, so we will see the trend of increasing capital investment in distribution centers.
With the rapid growth in the retail sector in China, many shippers are beginning to upgrade their distribution centers with more advanced handling and fulfillment systems. We see this to be particularly true in retail apparel and fashion, and includes both Chinese companies as well as multi-national corporations such as Nike and Adidas.
Jim
And this is being driven by the availability in labor?
Denny
Yes, to some degree, but not entirely. With the explosive growth in the retail sector, distribution centers need the aid of advanced handling and fulfillment systems just to get the orders turned. As we know, throwing more bodies at the workload in the DC has diminishing returns. China's retailers are tightening up their service windows, many now targeting a 24-hour turn from receipt of order. To achieve these goals in a rapidly growing market, retailers will need to turn to mechanized handling and advanced order fulfillment processes to achieve their service level targets.
Jim
What is happening with e-Commerce in China?
Denny
Web sales are exploding in China, and the e-Commerce retailers are scrambling to keep up with demand. Virtually all of the major e-Commerce retailers have major DC projects underway. These DCs will incorporate significant investments in conveyance and sortation technologies, as well as hybrid storage solutions to accommodate the high SKU counts required. Many e-Commerce retailers are committing to lead times not in days, but in hours. To meet these service commitments, dot-com retailers must have not only automated order fulfillment solutions, but fully integrated IT solutions.
Jim
What industry sectors have the most significant opportunity for advancement?
Denny
In addition to retail and e-Commerce, China's cold chain infrastructure lags far behind that of developed markets. Industry estimates suggest that over $100 billion of cold chain infrastructure investments will be needed over the next decade. This includes investment not only in physical facilities, but transportation as well. Currently, only 10% of the trucks used to transport perishable food in China are equipped with refrigeration or freezers, compared to approximately 90% in the US. With the health concerns associated with this deficit, the investments to improve the cold chain infrastructure cannot be made fast enough.
Jim
Why is cold chain distribution so far behind other developed markets?
Denny
The most glaring issue is there are no nationwide service providers across China. That includes 3rd party cold chain warehouse providers as well as transportation service providers. The market is very fragmented across the country. The problem is not as severe in the major population centers, but in distributing product in second-tier and third-tier cities.
Jim
How are retailers dealing with this lack of infrastructure?
Denny
In the case of Yum! Brands, they built their own network of 13 dedicated DCs to ensure timely delivery of quality products to their KFC and Pizza Hut stores. They simply made the investment themselves in both physical facilities and transport equipment across all the markets they serve. Another example is Starbucks, where they reduced the number of vendors, and certified 40 key suppliers to provide service to their rapidly growing chain.
The Chinese government is addressing the problem. In 2010, China, with the assistance of the U.S. Department of Agriculture, began establishing cold chain national standards to boost the industry's development. The country now has over 200 cold chain standards in place, mainly developed by government departments and industries for specific product categories.
Jim
What are some of the challenges in advancing distribution competencies in China?
Denny
Most shippers in China are looking for an easy answer and do not have an appreciation for the level of effort required to properly design and implement the right distribution solution. The need to take the time to properly define the requirements of the DC, both now and in the future, is not well understood. China is starving for Western distribution processes and techniques, but shippers want the answers now and do not want to invest the proper time and resources to get to the best optimal solution for their businesses.
But there is intense focus across multiple industries to improve the overall distribution across China, and the next ten years will be an exciting evolution for distribution in China.
Jim
Thank you Denny, really appreciate you taking the time to be with us today. In a couple weeks we will continue our series where we will talk with another Partner of Tompkins Associates, John Spain. He will speak specifically to the supply chain in China.
Speak to you all real soon!
