Hello, this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International. I am pleased to be with you today for the eighth part of our series where we welcome John Spain, a long time partner with Tompkins Associates.
John, you and I often discuss the mega-supply chain processes of PLAN-BUY-MAKE-MOVE-STORE –SELL. What do you see as the major differences between these in China verses the USA and Europe?
John
That is an excellent question, Jim, and one that is difficult to answer for several reasons. First, most of the information about China’s supply chains is anecdotal. We are beginning to see some data being published but there just isn’t a lot available yet.
Secondly, China is a little like the gold rush of the Wild West in the US. Everything is changing extremely quickly as everyone is rushing as fast as they can to capture the growing market. By the time we get today’s information and begin to understand it, it’s out of date. As we often hear – China is on “dog years.” One year in China is about, like, 7 years in the USA or Europe.
And, third, China’s supply chain maturity is often related to the parent company’s origin. Western companies are bringing more supply chain management experience and maturity to their operations in China. Chinese companies, in general, are not as advanced.
A lot of this relates to the lack of available experienced management that really understands how to manage the supply chain and its various components in order to generate value. We often hear about the hourly labor shortage but maybe even a bigger problem is the lack of skilled management. They just don’t know what they don’t know.
Jim
Ok, I certainly see some of the challenges but tell me, what is the state of supply chain planning in China?
John
Well, planning is one of the key areas where you see a big difference between Chinese companies and Western companies. Western companies are bringing their systems, such as forecasting, and their processes, such as S&OP, to their operations in China. It may not be as advanced yet as what they have in the USA or Europe – partly because of the language and cultural differences – but the planning processes and systems are in place or being put in place.
This is one of the areas where I think Chinese companies really lag. They often develop their own IT systems which in most cases don’t have the full functionality needed to manage the planning process. For example, it is common to see spreadsheets and other unsophisticated methods for forecasting.
In addition to the lack of systems, the Chinese are not as experienced with working cooperatively with their suppliers to improve the supply chain for everyone. Continuous improvement initiatives, such as the S&OP process have not really matured yet.
Jim
Well, how does this affect sourcing in China? The BUY-MAKE processes?
John
Western companies are moving from buying on just price to developing long term suppliers. They are bringing the processes, systems and talent to help suppliers become better and more effective. For example, visibility to the status of their orders with their suppliers. The tools may be less advanced than in the West but they are getting there.
Chinese companies tend to do business with their suppliers (and their customers) based on Guanxi – or the relationships that they have. But, at the same time, they don’t have the systems and processes to monitor and manage their suppliers on an ongoing basis. It also seems as if they will change suppliers quickly based on price.
Jim
Tell me about the MOVE process - transportation in China.
John
Transportation is one of the toughest supply chain issues in China. There are just no nation-wide providers that can handle all of your needs. In fact, the largest transportation provider in China only has 1-2% of the total volume. And, if you are in the e-commerce space, it is even more difficult. There are no parcel carries that can deliver to all homes in China. The infrastructure is just not there.
The last mile is often someone on a bicycle, pushing a 2-wheel cart, taking the subway, walking, or even a taxi. This means that you have to set up many small depots around a city (or even a street corner) that can serve each community. You ship the orders to these depots where they are handed over to the people doing the last mile delivery in their community.
This makes it very difficult to manage deliveries – especially service times. And, it is impossible to track the order. Transportation management is probably the biggest challenge in China.
Jim
Let’s talk about warehousing and distribution in China. What are the trends in the STORE-SELL processes?
John
The fast pace of China’s retail and consumer goods markets means that the future fulfillment and distribution requirements will be much more complex than those of today. And those requirements are changing very quickly as the consumer pool grows and customers become more demanding. Today, it is estimated that China has 180 million on-line shoppers. By 2013 it is estimated that number will be 240 million. That’s just 2 years.
That level of growth is hard to imagine, but it’s happening. But e-commerce (or B2C) is not the only segment that’s growing rapidly. Retailers are also opening stores at an unbelievable rate. Many are opening several hundred per year. All of this is putting pressure to have better, more efficient and more effective fulfillment operations.
But, in general, China is not well prepared to handle the more sophisticated distribution requirements. Labor costs and talent availability are becoming greater challenges. Labor rates are rising at 15-20% per year. A bigger issue than just rising costs is the lack of available talent – both hourly and management. Turn-over is very high, and there is just not enough talent.
Growth is so fast, I don’t see this gap closing anytime soon. Most fulfillment DCs are manual with paper-based picking solutions that are error prone and inefficient. Since companies are having such a hard time finding and retaining talented labor (and land costs have gotten very expensive), more and more companies are looking to implement more sophisticated DC technologies – automated material handling systems and WMS. This is especially true for Western companies; however, the Chinese companies are also beginning to understand the need for more advanced DCs.
Unfortunately, there are few resources to plan and implement these more sophisticated technologies. Chinese companies are in a steep learning curve, especially for the IT systems – Warehouse Management Systems (WMS), Warehouse Control Systems (WCS), and Labor Management Systems (LMS).
Jim
That brings up a good point. How do the supply chain IT systems in China compare to those of Western companies?
John
For the most part, Chinese companies have developed their own IT systems. It reminds me of the USA 25-30 years ago. There are large IT departments with the task of developing the software needed to manage the business. As a result, homegrown order management and WMS are still very prevalent. Manual data entry is common.
While many of these homegrown WMS packages have the basic functionally, there are not any local Chinese WMS packages that have the full functionality needed for sophisticated DCs. Western companies usually bring their WMS package from back home but, in general, the Chinese have not migrated to buying IT packages yet.
Jim
Given the challenges in China, it would seem that the Logistics Service Providers (3PLs) would be able to provide significant benefits. What are we seeing here as a trend?
John
Certainly the use of third parties is very prevalent in China – especially for transportation. However, as I pointed out before, there is no one transportation provider that can handle all, or even most of China. Another issue is that contract terms typically have short durations.
For DCs this means that the application of advanced technologies is just not financially viable. So you have third parties that are running warehouses that tend to be manual. Another issues is that contract terms typically have short durations, so the application of advanced technologies is not financially viable. You just can’t recuperate your investment in such short timeframes.
At this point, LSPs are usually not very advanced and often compete on price. As a result, the LSP often cannot fully meet the customer’s needs. Getting improvements is difficult, as they usually don’t have a rigorous continuous improvement initiative.
Jim
John, thanks for your time today. You have certainly given us a lot to think about. Any final thoughts?
John
The supply chains in China - technologies, processes, labor, systems and management - are immature. Think back 20 -25 years ago in the USA or Europe. But they are evolving very, very quickly. As in the Western countries, those that can master the supply chain in China and make it a competitive asset will be the big winners. But, you have to develop this capability very quickly. China is on the move and will not wait.
Jim
John thanks for being with us today and sharing your insights from your many visits to China. That wraps up the eighth part of this series and only leaves part nine, which we will pickup in a couple of weeks, when I summarize the China myths that we have covered in this series. So I hope you all have a great Thanksgiving, bye for now, we will talk to you all real soon.
