Logistics in ChinaTheory and Practice

Yi, JunminGuest Researcher, IØT/NTNU

Home Institution: School of Mechanical Engineering

                                East China Jiaotong University                                Nanchang, 330013 CHINA

2003-01-31

1. History Introduction

In the past (1949-1978)

• Central planned economic system

• Material supply & distribution all controlled by state--state run factories & companies

• Short of supply--inventory is very important

• No concept about inventory cost

• Warehousing facility

From 1980s

• Opening policy & transforming to market economic system began

• Physical distribution introduced into China from Japan

• Later, also related subjects: marketing, business logistics, industrial engineering

For enterprises:

• Began to consider marketing & distribution,

• Also procurement and materials supply

• MRP, MRP II was introduced into big manufacturers

• Basic logistics ideas formed gradually

Nowadays:• More market-oriented economy• WTO entry in 2002• Strong requirement for logistics system• Logistic fever in Government, research and

industries• All theory and practice entered into China:

SCM, ERP, 3PL, E-business, etc

2. Theory Research

General Information:• Began from introducing and translation of

western theories

• Priority is given to application: serve for economy

• By booming IT, MRP/ERP is more emphasized

2.1 Three levels

3 levels (hierarchy epistemological levels of logistics by Solem):

• Practice of logistics

• Science of logistics

• Epistemology of logistics

• Theory deployed in these two levels

Theory

2.2 Epistemology level

• Philosophy problem in China: Communist controlled

• Only one school: orthodox Dialectic Materialism

• No development in philosophical thinking of logistics

2.3 Science of logistics

Qualitative

The concept of logistics: A system view of logistics by a researcher

• Compare concepts of different countries

• His own concept of logistics

• Categories and principles of logistics

• As an industry, many efforts will be collected to develop it, hence more contribution to GDP.

• Maybe with the development of logistics, the related industries, such as transportation, manufacturing and information will increase.

• But in China the problem is, logistics cost already account for 20~25% of GDP, this is a 10% higher than those percentage in America, Europe and Japan.

• So this is a contradiction to the 3rd profit theory. • To develop logistics is to decrease this percentage, to have

a quicker and more rational movement of goods along the whole supply chain, rather than to have more output from these industries.

A debate: logistics as an industry or as a service system

• The supply of transportation and warehousing is more than demand, but this is a structural imbalance.

• Small and segmented low level warehousing and truck service all over China, but they can’t meet the demand of those total logistics solutions.

• However, their unreasonable low price limits the development of big logistics company.

• Up to now, there isn’t any nation-wide 3PL.

Quantitative: OR, Computer Simulation

• OR is first introduced into China by mathematicians and they have their own contribution to it,

• so many people think it is only the business of mathematicians.

• And because of transition economy, it is very difficult to get the necessary data for economic models, therefore usually people can’t expected a satisfactory result for OR application

Computer simulation

In design of some logistics centers, computer simulation was introduced.

• A research group in Tsinghua University had simulation for a big logistics center in Shenzhen,

• it took 2 doctors and 4 master students half a year hard working for it.

• OR and computer simulation only applied in some engineering related areas

• Engineering logistics also became popular because the strong influence of industrial engineering (IE) from US

SCM

• A professor Ma from central China wrote a book on SCM, this marks the first systematically introduction of SCM in China.

• SCM theories is accepted by English-acquainted young researchers, but for a board acceptance, it needs books in Chinese, especially with the writer’s own thought and explanation to the theory, not just the translation.

• Ma paid much attention to technological perspective in his book, but implementation tools for SCM in China is prevailed by foreign companies, such as SAP.

• There is a localisation problem for these software, and there is still problem for the application of MRP/ERP, let alone to SCM.

3PL

• A doctor graduated from Erasmus University Rotterdam gave a detailed system perspective about 3PL.

• There is also case study of 3PL in his book, but no example from China.

• And recent years some multinational logistics companies’ third party logistics practice in China also is an incentive to domestic players

Logistics center

• Theory on logistics center also imported from western countries,

• now researchers hardly mentioned the soviet warehousing theory.

• With many cities ‘ fast expansion, they need guideline to logistics centers both on city planning, transportation and traffic system and logistics operation

3 Practice and Operation

Logistics practice in China goes ahead of the theory research in some way.

4 respects:

• Logistics infrastructure

• Logistics service

• Logistics operation by manufacturing firms

• International logistics

3.1 Logistics infrastructure

• 3.1.1 Transportation System in China: highway, railway, airway and waterway

• 3.1.2 Main logistics central cities: Hong Kong, Shanghai, Beijing

• 3.1.3 Warehousing and material handling

Transportation Transportation System in System in China:China:

• HighwayHighway• Railway Railway • Airway Airway • WaterwayWaterway

Map of China

Land: 9 600 000km2

Pop’n: 1 300 000 00034 Provinces(cities,regions)

N-S distance 5500kmW-E distance 5000km

Transportation system

These years, transportation system expanded dramatically in China.

• A planed national highway network with 3 north-south and 3 west-east lines connects with all the main cities.

• Some of them already finished, others are being built intensively.

Highway in China

Railway condition

• There also great progress in railway system. • The highest railway to Tibet is under construction to

connect the last provincial capital city to the nation-wide network.

• Railway system is monopolized by the Ministry of Railway, but separating operation from network will soon be taken into action.

• Although because of highway and airway competition, railway turnover rises but percentage drops a little every year.

• But the railway have raised their travelling speed both for passengers and freights many times these years.

Railway in mainland China

Rivers in China

Competition in transport

• Competition benefits both transporters and consigners.

• But it is not good for inland waterway, this cheapest but slowest way lost its customers annually.

• However, their brother company--ocean and sea shipping is much better.

• In all, highway and airway are the winners in market share.

Transportation China 1999

Turnover (bnt*km)

Percent Tonnes lifted (bnt)

Percent

Railway 1261.55 31.3% 16417.7 12.7%

Highway 572.43 14.2% 99044.4 76.8%

Waterway 2126.28 52.8% 11460.8 8.9%

Airway 4.23 0.1% 17.04 0.0%

Pipeline 62.8 1.6% 2023.2 1.6%

Total 4027.29 100.0% 128963.14 100.0%

Transportation China 1999

0

20000

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80000

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120000

140000

Annually tonnes lifted (bt)

Railway

Highway

Waterway

Airway

Pipeline

Total

Tonnes Percentage

Railway

Highway

Waterway

Airway

Pipeline

Transportation China 1999

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Turnover (bt*km)

Railway

Highway

Waterway

Airway

Pipeline

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Turnover Percentage

Railw ay

Highw ay

Waterw ay

Airw ay

Pipeline

Transportation: One problem:separated governing under different ministries

• Ministry of Communication (MOC) responsible for road and waterway;

• Ministry of Railway (MOR) for railway, • Administrative of Aviation (CAAC) for airway, • it lacks a strong co-ordination and co-operation

mechanism for these separated ministries. • On the contrary, they compete for the government

investment for their own sector. • In China, it is very difficult for a company to have

business spanning all over these sectors, therefore, nation-wide logistics operators are not ready.

Transportation Administration

State Council

MOC MOR CAAC

Road Waterway

Inland

Oversea

Infrastructure

Operation

14 Branches

56 Subbranches

Construction Industry Airlines Airports

State Commission

of Development and Planning

3.1.2 Main logistics central cities: Hong Kong, Shanghai, Beijing

Hong Kong: South centerHong Kong: South center

• Hong Kong is already a world-class logistics hub. Hong Kong is already a world-class logistics hub. • Hong Kong : the busiest container port and Hong Kong : the busiest container port and

international air cargo handling centre in the world. international air cargo handling centre in the world. • Logistics services span over sea, air and land transport, Logistics services span over sea, air and land transport, • Services areas, including distribution, supply chain Services areas, including distribution, supply chain

management and information technology.management and information technology.• Hong Kong’s hinterland is Guangdong province, Hong Kong’s hinterland is Guangdong province,

which is the richest province in mainland China. which is the richest province in mainland China. • Solid infrastructure to the preferred international and Solid infrastructure to the preferred international and

regional logistics hub and a supply-chain base.regional logistics hub and a supply-chain base.

Shanghai: Central center

• Biggest city in China, industrial & business metropolis in the Far East.

• Dragonhead of the Yangtze River economic zone. • Major trading port and gateway to inland China for

centuries. • World economic, financial and trade center. • 1% population & 0.06% land area contributes 1/12 of the

nation's total industrial output value, 1/6 of the country's port cargo handling volume, 1/4 of the country's total exports.

• The city has also played a leading role in logistics and related industries.

Beijing: Northern Center (with Tianjin seaport)

• The hubs of both national highway, railway and airway network systems.

• Ancient and modern capital, culture, research and political center.

• Also a major hub for shopping, retailing, and trade.• One of the most active economic center.• 146 of 500 biggest multinational groups have invested in

Beijing. • Tianjin, a coastal industrial city, 120km east from Beijing,

serve as the seaport to Beijing.

The 2nd: provincial capital and coastal cities

• Thanks to planned economic system, most provincial capitals are the biggest city of that province, acting as the center of both economy, politics and culture.

• Some coastal cities with good logistic position.• Among those 30 odd cities, more important cities

are Tianjin, Dalian, Qingdao, Xiamen, Guangzhou, Wuhan, Chongqing, Xian, Shenyang.

3.1.3 Warehousing and material handling

• Most big warehouses are the products of central planned economy;

• they lie in cluster in big cities, usually with high roof and railway feeder.

• But many of them are old and out of function and fashion.

• They are not design for forklift, high-roofed but without racks, so it wastes a lot of space.

Forklift & pallet problem

• In China, forklifts are not popular, and pallet is a big problem.

• Most pallets used are for exporting or imported goods. • Most managers think manpower is cheap, but they don’t

know that the efficiency ratio of forklift vs manpower is 10 to 1.

• For manpower as handling, there is no need for pallets. • However, without pallet as a whole packing, it increases

the frequency of manual handling many times, and these multi-handling also increase the risk of goods damage many times.

Forklift & pallet problem

• Researchers said this is one of the reasons for the 20% high logistics cost to GDP.

• The other two are unnecessary warehousing and irrational transportation.

• Owing to China’s nearly inexhaustible labour supply, it will take a long way for the automation of material handling

3.2 Logistics Service3.2.1 Distribution Center

• Nowadays, modern logistics center began to be built in China. • With high racks, pallet and forklift system, these distribution

centers are much higher in efficiency and in speed to meet the ever-increasing need for production and goods.

• And 3PLs began to operate in big cities. • A story is about P&G:

– This cosmetic company set up factories in south China’s Guangdong province.

– They chose a small private company to responsible for national distribution.

– With the big success of P&G, this small company also grew up. – Now, besides the whole national logistics business for P&G, it

also offer logistics service to many other manufacturers and companies.

• These years foreign invested manufacturing is booming in China,

• multinationals usually invite their own logistics partners to operate in China for international logistics,

• but for domestic logistics, there aren’t any satisfied 3PLs. • Sometimes, these companies teach and train their chosen

partners aiming to set up a supply chain system in China. • For example, GM Shanghai is training its logistics partners

and main suppliers to meet its requirement of JIT/lean car production.

3.2.2 3PL and future Nation-wide logistics

service providers

• 3PL concept and practice came into China only few years ago.

• There are city-wide or regional actors, but it is still difficult for them to extent their business nation-wide, especially to the vast west area.

• Regional imbalance in economy and society and separated governing of the national transportation system are the two main barriers to their development.

• So up to now no real national 3PL available, then who will become the first 3PL nation-wide?

• The answer probably goes to those mentioned above. • But for state owned company, it is difficult because of

their institutional embarrassment and faraway from the most active private or foreign firms.

• Once an expert suggested China Post to develop 3PL: – They already have the biggest and most broad national network. – If the Post improve their service, get rid of their monopoly

privilege, – and change their distribution system from only for small parcels to

for enough big goods packets, or co-operate with others, they may success.

3.2.3 Government policy in logistics

• China plans to further open up its commercial businesses to the outside world to modernize the commodity wholesaling, retailing and distributing sectors

• With WTO entry and China's overall opening-up policy, the country will gradually deregulate its commodity sectors such as wholesale, retail, franchise and other distribution services over the next two to five years.

• China will keep its WTO commitments by introducing statutes concerning foreign investment in this field, and opening the sector even wider to the free market.

• China will pay special attention to opening up chain-store businesses and the complementary logistics, encourage the introduction of advanced logistics experience and technologies and facilitate foreign capital to help upgrade China's traditional commercial businesses.

• China will pay even greater attention to the introduction of advanced technology and management expertise, and encourage domestic distribution businesses to expand to other countries.

3.3 Logistics Operation by manufacturing

3.3.1 Haier and Higher

• Haier is the biggest home appliance producer in China and now it enjoys a significant reputation in the world market.

• Statistics of the Forbes Global 8/2001 placed Haier 6th of the world top manufacturers for white goods production and sales.

• On the lists of world most respected companies issued by Euromonitor from a market survey for refrigerators and washing machines, Haier was placed 2nd and 3rd, respectively.

• On December 7, 1999, Haier's CEO Zhang Ruimin placed 26th on the list the world's 30 most respected entrepreneurs published by the Finance Times.

• Facing challenges from E-commerce and China's entry to Facing challenges from E-commerce and China's entry to WTO, Haier started in 1998 the management restructuring WTO, Haier started in 1998 the management restructuring program backed by the market-chain system, focusing on program backed by the market-chain system, focusing on improvement of information management efficiency for improvement of information management efficiency for purchase contract performance, supply and investment, as purchase contract performance, supply and investment, as well as after-sales services, inventory and operation cost well as after-sales services, inventory and operation cost reduction. reduction.

• In 1999 and 2001, Haier established two modern well-In 1999 and 2001, Haier established two modern well-equipped physical distribution centers in Qingdao, which equipped physical distribution centers in Qingdao, which have greatly improved the efficiency of product have greatly improved the efficiency of product distribution process and greatly decreased the inventory.distribution process and greatly decreased the inventory.

• Haier's management philosophy and enterprise culture are praised and researched by overseas researchers on enterprise management.

• Haier's achievements and experiences have been taken into archives and used as the teaching materials of MBA programs by Harvard University, European Business College and Lausanne Management College.

• Haier's development theme in 2002 is Creativity, Speed and SBU, and Haier's 30,000 employees are striving to reach the targets set forth in the SBU Program.

• Haier have integrated all its function and operation related to logistics into its Logistics SBU.

• Haier's goal is to obtain worldwide recognition for its products and become one of the Fortune Global 500.

3.3.2 Foreign enterprises: Coca-Cola, Walls

• Coca-Cola’s operation in China began by buying Coca-Cola’s operation in China began by buying local factories, local factories,

• they chose factories from coastal to inland they chose factories from coastal to inland gradually, gradually,

• and for each factory, chose local distributors for a and for each factory, chose local distributors for a designated area. designated area.

• In some way their logistics is simpler than In some way their logistics is simpler than technology-intensified manufacturers such as technology-intensified manufacturers such as IBM, GM etc.IBM, GM etc.

Walls Unilever’s ice cream

• 1st factory in Beijing, then second in a small city near Shanghai. • In the beginning they chose local retailers in big cities and lent them a special

refrigerator for free with a long-term contract to sell Walls solely. • They set up their own cold chain transportation and regional branches for sale

and distribution. • Walls/Unilever controlled all the imported supply (most raw materials are

imported) and inbound logistics to factories. • They use tricks to escape from firm income tax. In China, this tax is based on

the firm’s EBIT, so nothing for a losing firm. • Walls China ‘lose’ money in continuous eight years (1993-2001), but market

share now seems to be No.1 in China.• Here their material cost is not discussed, but their logistics cost:

– their special refrigerators imported, each costs 3 times as normal ones in China, are lent to retailers, but Walls still generate cost from them.

– And cost of their refrigerator trucks is also several times than those in China.

3.4 International Logistics

• With increasing economy and WTO-entry, China will have significant growth in international logistics,

• and besides national players, more international players will join it or increase business operation.

• And with the interfacing of domestic and international operations, it is expected that domestic logistics operation will develop well and reach to international standard gradually.

3.4.1 Domestic Enterprises: COSCO, China Shipping, SINOTRANS

• COSCO or China Ocean Shipping Company is a large conglomerate taking international shipping as its core business.

• COSCO Group has branches all over China’s main coastal ports and representative offices in 38 different countries in all other continents,

• Its business spans to ocean shipping, air freight, inland haulage and storage, trading.

• The Mission Statement of COSCO Group is:– To be a world leader in shipping and logistics services by

maintaining trustworthy relationships with our customers, employees and partners, yielding best returns for shareholders, society and environment.

• They have established partner relationship with regard to logistics services with other companies such as NYK lines.

• China Shipping is an alternative to COSCO, it has 5 specialized shipping fleets: oil tankers, tramps, passenger ships, container vessels and special cargo ships.

• Businesses: integrated logistics, terminal management, finance and investment, engineering and labor service, supply and trading, and information technology.

• It has established more than 30 overseas subsidiaries. • China Shipping’s container fleet: 100+ vessels, capacity:

120,000TEUs. • More than 40 shipping routes, including main-haul and feeder

services, both domestic and international trade. • China Shipping Container Lines Co.,Ltd. Has ranked among the

world's 20 largest container carriers.

China National Foreign Trade Transportation (Group) Corporation

• A multinational giant enterprise group majoring in comprehensive logistics services.

• With 100+ domestic branches, joint ventures throughout the country and 10+ overseas representative offices and joint ventures.

• Services: freight forwarding, ocean shipping, ship agency, air transportation, air courier, truck and railway transportation, inter-model transportation as well as storage and warehousing.

• Provides services of comprehensive transportation for major domestic foreign trade giants, offering international inter-model transportation for state key projects and international exhibitions, fairs as well as sports games.

• Nowadays, SINOTRANS also arranges inventory control, transition and physical distribution for famous multinationals.

• With 50 years operation, SINOTRANS now provide customers:– comprehensive logistics solutions– all-round logistics services – its global network and complete service scope.

3.4.2 Foreign enterprises:

UPS, FedEx, APL, Maersk etc

• UPS in China 3 branches: Hong Hong, Taiwan and mainland China. • To China in 1988 and 6 regional offices now. Plan 20 offices by the end

of 2003. • Localization is to better understand the local market, learn the

requirements of its Chinese customers and serve Chinese customer by providing best quality services.

• UPS has close partnership with SINOTRANS with business in 170+ cities:

– win-win alliance with joint efforts– expand UPS presence in Chinese local market, – upgrade their service quality – and raise customer satisfaction. – built sound foundation by integrating its international network with the

domestic network owned by SINOTRANS. – has enabled local customers to enjoy world-class international express

delivery services.

• FedEx Asia headquarters in Hong Kong, which responsible for business in 21 Asian countries and regions.

• FedEx has maintained its highly focused approach to expansion and strategic development throughout the region.

• In 1995, it purchased the route authority to operate its own aircraft, manned by FedEx crews, between China and the U.S.

• In March 1996, FedEx became the sole U.S.-based express transportation company with aviation rights to China, and now operates ten flights per week.

• FedEx has 3 Regional office in China for their express transportation business: – Beijing: Northern China, – Shanghai: Eastern & Central China, – Guangzhou: Southern China.

APL mainland has 3 APL mainland has 3 branches: branches:

• North in Tinajin, North in Tinajin, • Central in Shanghai Central in Shanghai • South in Hong KongSouth in Hong Kong

Maersk Logistics (China) Co. Ltd

• Head office in Shanghai, branches in 14 cities, and in addition, they are working with agencies to cover other areas across China.

• With a strong presence in China, Maersk was the first European logistics company granted incorporation in the country, registered as a Wholly Owned Foreign Enterprise (WOFE) and awarded operating license in 1998.

• Maersk’s long term commitment:– driven by client requirements – will continue to drive the expansion of our services throughout the coastal and

interior regions of People's Republic of China.• Established in Hong Kong in 1995, Maersk Logistics (China) Co. Ltd has

developed steadily from initially 24 employees into 500 employees today. • Maersk’s logistics setup aims both the coastal region and the inland

provinces, new challenges in sourcing and distributing, and skilful management of the supply chain.

• Specific warehousing & distribution facilities for all handling, sortation, or transportation service.

Warehousing & distribution services provided in China:

1) Bar code scanning. The electronic reading of bar code identification labels.

2) Transloading. The movement of goods after sortation to a truck, trailer or container for subsequent delivery to a distribution center or final customer.

3) Cross docking. Transhipment of goods at various points along the supply chain. It relates to the physical receipt of goods and their immediate transfer to the next onward phase without being brought into inventory.

4) Bonded warehousing service. A free trade zone granting exemption from national or local customs tax and duty.

5) Cold storage service. Storage of goods in temperature controlled facilities. Normally covering a range from –30 to +5 degrees Celsius.

6) Haulage. Moving of goods and/or containers by road.7) Trucking. Movements of goods by road.

8) Local drayage. Locally performed trucking within a short distance.

9) On-carriage. Inland transportation (typically by road or rail) beyond the ocean discharge port.

10) Rail transport. The movement of goods via rail.11) Stripping. The act of removing goods from a container or

truck.12) De-consolidation. Stripping and segregating cargo which has

been received as one shipment.13) Disassembly. The service of splitting a consignment into

several smaller consignments.14) Special Handling At Destination (SHAD). The catering to

specific client needs prior to final distribution to sales outlets – e.g. Garment On Hanger refurbishment, assembly of parts, etc.

Warehousing & distribution services provided in China:

15) Collection of Returns. Collecting returned goods from the final consumer or retailer.

16) Reverse logistics. The process of planning, implementing and controlling the efficient, cost-effective flow of products back upstream in the supply chain for the purpose of source reduction and/or conservation, recycling, substitution and disposal.

17) Transit cargo. The forwarding of goods with final destination in inland countries.

18) Quality control. The physical inspection of cargo to ensure that the quality of goods meet the predefined standards.

19) Pre-packing. The packing of cargo at origin to fit specific requirements at the final destination – generally used if goods are shipped directly to the end consumer or retailer (i.e. bypassing the distribution centre).

20) Pick & Pack. The picking of individual goods from stock and re-packing these as per specific packing lists.

21) Vacuum packing. A service provided primarily for garments, alleviating the need for reconditioning at destination.

Warehousing & distribution services provided in China:

Norwegian companies in China

http://www.ntcbeijing.com/ncc.htm Lists Nearly 100 companies and branches:

• Barwil (Wilh. Wilhelmsen ASA) : Beijing, Shanghai, Tianjin, Shenzhen, Qingdao, Ningbo, Xiamen

• Norsk Hydro: Al (Wuxi), Mg (Xi’an), Plastics (Suzhou)

• Statoil• Elkem: Chartering, Carbon, International

warehousing and trade• DSD Shipping

A explanation to the terms about China

• China including Hong Kong, Taiwan and Macao with total area 9.6 million sq km, and population of 1.3 billion.

• Mainland China usually refers to those areas except Taiwan, HK and Macao.

• Mainland can be divided into 3 regions:– by west-east direction: coastal, inland and west (and

economy is better eastward, coastal ward);

– by north-south direction: north, central and south.