Global Focus: Taking Supply Chain Management in China to the Next Level

Mastering the challenges of the opening Chinese logistics market will require more than valid licenses and modern transportation equipment

By Dr. Christopher Jahns, Roger Moser and Martin Lockström

With its entry into the World Trade Organization, China agreed to open up product and service markets that had been protected from global competition so far. China's 11th Five-year Plan (2006-2010) for the service industries states as two of its top priorities transportation and modern logistics development. It seems that politicians and managers have finally recognized the crucial role transportation and logistics play in modern markets due to its huge potential to spur economic growth.

For this reason, the government of China has made substantial investments in upgrading its transportation infrastructure over the past decade and will continue to do so in the future. Still, China's logistics infrastructure is characterized by fragmented supply and distribution systems, insufficient technology application and many bureaucratic obstacles. Moreover, rivalry among local governments creates trade barriers between provinces and adds to the complexity.

China's Logistics Industry — a Crucial Success Factor

Recently, the Chinese transportation and logistics market has been growing at an enormous rate. From 2002 to 2005, more than half of all logistics service providers have reported a yearly growth rate of more than 30 percent. This growth is promising, but the delivery performance is far from being efficient. In China, logistics often make up 20 to 40 percent of the cost of goods sold, compared to just about 10 percent in the United States.Viewed comparatively, China's logistics spending as a percent of gross domestic product (GDP) is twice that of the United States.

This inefficiency might be partly due to the fact that in China several hundred thousand logistics companies exist, compared to only about 7,000 in the United States. As a result, no logistics service provider offers nationwide distribution service or has more than about 2 percent market share.

The development of an integrated, nationwide logistics service provider industry is further hampered by two other problems. First, regulatory barriers prevent consolidation. Local governments frequently protect local transportation companies by erecting barriers to outside companies. In addition, the current licensing system for logistics companies is still complicated and costly. Second, logistics capabilities are limited and continue to lag behind other professional functions such as marketing of finance. China's long history of state ownership in this sector has left a legacy of poor management practices and an infrastructure geared toward the movement of bulk commodities. Therefore, the system is not ready to handle perishable or sensitive goods, track shipments or handle containerized shipments over land.

Good News — Bad News

This situation should be alarming to every company doing business in China. First, total cost advantages for exports could deteriorate if logistics costs cannot be decreased in the near future. Second, European and American logistics service providers should be prepared to master the coming supply chain challenges in China if they want to profit from the enormous growth rates.

The good news for supply chain managers in China is that they can expect to receive more recognition as the management of the overall supply chain becomes an even more critical factor to survive in China's tough competitive environment. The bad news is that the challenges to come cannot be mastered by highly professional Western supply chain managers with the usual support of some Chinese clerks. Instead, a new generation of Chinese supply chain managers needs to take over responsibility. Unless China studies become compulsory for Western SCM students, only well-educated local Chinese will have the required language skills, understanding of local conditions and necessary contact network to succeed.

Take Care of Your Chinese Supply Chain Managers — If You Can Find Them

Chinese government, logistics service providers and production companies will only improve their transportation situation if they have access to well-educated and experienced Chinese supply chain managers and logistics professionals.

In recent years, the focus of education at colleges, universities and professional schools has been on virtually any topic but logistics or transportation. Often, attention has predominantly been drawn to course subjects such as marketing and sales, with implicit promises of wealth and fortune. With the privatization and liberalization of the Chinese market, Chinese students (abroad and at home) have enrolled in these courses with great enthusiasm.

At the current state of China's rapid development, it has become increasingly clear that the best sales forecast or investment financing won't help much if a company's operations are encountering difficulties due to delayed or damaged shipments, or due to unnecessary warehousing costs. Today, many Chinese supply chain managers lack knowledge in substantial areas of logistics such as transportation planning or warehousing, but normally they are the only ones that can stay up-to-date with bureaucratic regulations and constantly shifting government policies to meet delivery schedules.

Therefore, China's growth policy and especially companies operating in China will only succeed if they are able to educate, attract, retain and further develop Chinese supply chain managers and logistics professionals. The Chinese government and many companies have recognized this need and are currently taking appropriate measures to address the situation. While politics is opening up the logistics service market, companies try to cover their needs through their own training activities. For example, DHL has recently opened up its own corporate university in Shanghai to develop its employees and profit from the dynamic growth rates in the Chinese logistics industry.

The private sector continues to seek solutions to this vexing issue. For example, an upcoming conference in Shanghai on March 6-7, 2007, "Supply Chain Excellence: China Sourcing Summit," will bring together supply chain managers and chief procurement officers from Western and Chinese companies to discuss the challenges and chances of China's rapid economic growth.

But be aware. Chinese employees are still hard to retain, and so far only a few companies have found viable solutions for not spending their money on HR development programs.

About the Authors: Prof. Dr. Christopher Jahns is rector of the European Business School (ebs), Oestrich-Winkel, Germany, and executive director of the Supply Management Institute SMI in Wiesbaden, Germany. Roger Moser is director of SMI International Network, Shanghai. Martin Lockström is director, SMI China, Shanghai.