By George Zafirov | 3PL News
A good network of local distribution centers is the key to efficient fulfillment in China. But how do you build one?
In the recent decades China has invested a tremendous amount of resources into the development of a modern logistics infrastructure. Improvements are made not only in the large coastal cities, but also in the interior, turning larger non-coastal cities into logistics hubs. This has been deemed necessary, as retail sales over the last decade have grown at a staggering rate, and consumer demand continues to grow beyond the major cities. Regardless of the amount of capital invested by the government to improve the infrastructure, however, an efficient supply chain in China is an extremely complex undertaking for a business of any size.
The Common Distribution Approach
Building a product distribution network can be done in a myriad of ways, and there is no one-fits-all solution, as each supply chain situation has its own unique circumstances. The right approach depends on the so many unique factors, that it’s almost impossible to make a general recommendation on distribution strategy.
However, looking at the actual implementations, a common approach to setting up a distribution network employs a well-known 3-tier structure: National Distribution Center (NDC) – Regional Distribution Center (RDC) – Local Distribution Center (LDC).
A National Distribution Center (NDC) is essentially a massive consolidating facility with inexpensive storage. It handles large volumes of inventory, mostly on a pallet-in/pallet-out basis (or raw materials), provides certain value-added services, and it serves a vast territory. In many cases it would hold 15 to 30 days’ worth of inventory, or long enough for another container to arrive. One NDC would be able to cover the entire nation, but in a large territory like China it is common to have several facilities. One in Shanghai, for example, can cover the entire Easter China. Another one in Guangzhou would be sufficient for Southern China, and so on. Global brands usually have full control over their NDCs, for understandable reasons. They allocate all necessary resources to ensure the NDCs fully meet their specific needs and they are usually directly involved in the management of their operations.
The Regional Distribution Center (RDC) is usually the medium point, which can be set up to cover a more manageable territory. It would work on a pallet-to-carton basis, and offer various value added services to meet local customer requirements. An area within a 250 km radius, for example, could offer Next Day Delivery service to Local Distribution Centers, as well as the local logistics hubs of major retailers. An RDC in many ways is a mini version of the NDC, as it is more often a consolidation and bulk storage point, rather than an actual fulfillment facility.
It is the Local Distribution Center (LDC) that actually interfaces with retailers or directly with customers, in the case of e-commerce. It handles inventory from pallets to cartons, to individual units, and handles last-mile deliveries, reverse logistics for returns, and a very broad spectrum of value added services. While NDCs and RDCs would be as large as possible, and strive for a lower cost per square foot, the LDCs would strive for maximum efficiency in how it handles the inventory and the multitude of parties it interacts with. They would have a smaller floor area, but their key advantages would be the proximity to customers, the specific warehousing functions they can perform, how many points they can serve, and so on. It would often serve an area with a radius of less than 50 km.
A very common situation is the feeder service to a local retailer. If a chain of retail stores may keep Fast Moving Consumer Goods (FMCG) in stock for no more than 2-3 days, the LDC would have to be able to not only keep a longer stock, perhaps even a monthly supply, but also have the capability to deliver at the required frequency to (and often from, in the case of reverse logistics operations) all the outlet points of that retailer.
The efficiency of the LDC network is what makes or breaks the Same-Day Delivery promise that so many retailers proudly promote online or in their stores. To ensure such expedient fulfillment, the seller must always maintain certain SKUs in stock at all the LDCs in the areas where that type of delivery service ii offered.
Unlike NDC, managing and controlling Regional and Local Distribution Centers (RDCs and LDCs) tends to be a far more challenging task, even for the biggest name in business. While big brands fully often fully own their NDC, it is common for manufacturers to rely on the regional distributors and retailers to manage the distribution on a regional and local level, due to their familiarity with that area.
The Complexity of Setting up Distribution in China
To achieve widespread distribution, and have it under reasonable control, a company must be able to handle an unimaginable set of both national and local challenges. The complexity of this task multiplies as the target fulfillment territory gets larger, which happens when the popularity of a certain product increases. While it’s all China, the rules and practices vary from place to place, based on the specifics of each region. Various city restrictions are in place, which affect key aspects of distribution - permitted transportation vehicle sizes, business hours, access to facilities, etc.
Outsourcing logistics to local operators who know the territory may very well be the only way to ensure uninterrupted inventory flows.
While this outsourcing may relieve the brand owner form some headaches, there are some disadvantages as well, which vary from place to place, and some are more obvious than others. These issues are related to KPI’s, credit terms, turnover frequency, and a number of other disadvantages resulting from the loss of logistics control. To ensure a smooth supply chain across the various regions in China, a company must selects its fulfillment and distribution partners very carefully. In many cases the LDCs represent the product brand and have the responsibility to protect its reputation. This is essentially a front line operation and it is crucial that brand owners select the right logistics partners. Customers must “feel right” about where the products come from and who delivers them.
But how do you find the right local logistics solutions in China? There are reports that the number of “registered” 3PLs (third party logistics providers) is near one million. You are looking for a needle in a haystack. And what’s more, if the inventory owners need some sort of advanced inventory analytics, they may have a serious problem. Don’t even mention contingency plans for delivery delays and scenario-based decision trees.
This is a knowledge issue. And it’s not whether local supply chain managers have the necessary knowledge to solve a particular logistics problem; they do have it. It’s about the knowledge where and who those managers are, how to work with them, what information do they need from the inventory owner, how to communicate effectively.
Managing nationwide fulfillment in China comes down to making a proper selection of local fulfillment partners. This is a challenge, because these type of providers are the hardest to find and often impossible to control.
Use Established Distribution Networks
On solution to this challenge is to use a network that is already built, such as the OYM Logistics Alliance. It focuses on finding and classifying thousands of local logistics providers in China, mostly warehousing operators, and analyzing their ability to comply with supply chain standards at various levels. All data on the capabilities of these local 3PLs is built into the Alliance Platform (PaaS). Users can then configure a distribution network to match their needs at the exact locations where they need local fulfillment.
This custom logistics footprint can be easily reconfigured, should the distribution needs change based on market conditions. This is made possible by the fact that long terms commitments are usually not required within the alliance network – a key benefit that is not always available in the industry.
The management of the Alliance can take various roles within each supply chain process, to ensure its members fully satisfy their clients. From providing basic information on what logistics capabilities are available and where, all the way to actually managing customer inventory at multiple locations.
The Alliance has members outside of China as well, as has begun to expand globally and logistics service providers from anywhere in the world are invited to join. (Read Alliance of Chinese Warehouses Expands Globally)