UNC Kenan-Flagler Insights

Taming the logistical dragon

October 14, 2010 By Heather Harreld

china3Dr. Noel P. Greis, an expert in global logistics and supply chain management, has seen first-hand the opportunities and challenges faced by Western companies in China. She has helped a variety of companies and organizations to understand aspects of doing business in China, including its culture, infrastructure, regulatory environment and approach to business processes.

Greis is director of the Center for Logistics and Digital Strategy at the Frank Hawkins Kenan Institute of Private Enterprise at UNC Kenan-Flagler. She also is co-director of the UNC-Tsinghua Center for Logistics and Enterprise Development in Beijing.

In this post, she shares her views on the obstacles and prospects for companies looking to tap into the economic engine of “The Middle Kingdom.”

China can be a challenging business environment for Western companies. What types of logistics problems might they encounter there?

One of the biggest logistics problems is the lack of infrastructure, especially in western China. China is trying to change that through a massive stimulus program. For example, the government is rolling out a high-speed rail system linking different parts of the country, and building new airports and other transportation hubs, especially in the west. As China develops a strong middle class in its central and western regions, the region will need that infrastructure in place to move goods and materials in and out of the region very quickly. In the east, a new high-speed rail system linking Beijing and Shanghai will reduce the transit time from 10 to 4 hours for both people and goods.

Logistics are further complicated by the fact that 33 different administrative regions control regulations governing transportation. This is one reason that national logistics companies have not evolved in China in the same way they have in the U.S. And it makes it more costly and difficult for companies that want to source products in China to do so efficiently. Logistics costs in China are about 18-20% of GDP, while they are only 8-10% in the U.S.

What types of different logistics challenges can companies looking to do business in China expect to encounter?

In addition to the lack of infrastructure there are other administrative difficulties since the process by which you obtain permits in China is complicated and not always transparent. You might have to go to several different ministries or government departments following a process that’s not always clearly defined. The administrative challenges can drive costs higher.

Another issue is the lack of visibility into the supply chain in China. In the U.S. and Europe we’re increasingly able to track and trace products as they move from point to point. A lot of this tracking technology is not yet available across regions of China. As a result, a disruption in the supply chain is often difficult to track down. A supply chain can be disrupted by lost shipments and trucks not adhering to schedules, to strikes and natural disasters. We experienced many different disruptions during a recent benchmarking study of a shipment of frozen turkeys through the cold chain.

As part of our recent food safety symposium, we tracked a shipment of frozen turkeys through the cold chain from North Carolina to Beijing to identify problems. A North Carolina producer donated 600 pounds of turkeys that we tracked. They went by truck to Atlanta and put on a flight to Beijing that stopped in Vancouver before it went on to Hong Kong and Beijing. From the Beijing airport the turkeys should have gone through customs and been delivered to a hotel to be served at the welcome dinner for our food safety symposium.

The turkeys never made it to the dinner. The range of different disruptions included lost paperwork and the fact that our freight forwarder in North Carolina contracted with a freight forwarder in China that was not permitted to receive the turkeys at the Beijing customs facility. The forwarder was only licensed to work in another administrative region. In addition, dry ice was not replaced in the containers in Hong Kong per shipment instructions. The turkeys spoiled and had to be destroyed.

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What are the best approaches for western companies to handle what is a fragmented logistics market  in China?

Logistics is a very young industry in China. There are not enough logisticians or people with logistics training to meet the country’s needs, which is another reason why the costs of doing business there are so high.

The logistics industry is also very fragmented. Most trucking companies are small operators with fewer than five trucks. The biggest problem is the “last mile” of transportation, which refers to the segment of the logistics chain from the airport to the customer. Often the cargo isn’t handled properly or safely and it’s put in open-backed vehicles draped with blue tarps to hold everything in place.

Time is the solution. The industry has to mature. Over time, more concentration in the industry will offer more efficiency and control. Right now we are starting to see a number of joint ventures and consolidations that suggest a move in this direction.

For those companies that have been most successful in overcoming the logistics issues in China, what do they have in common?

A trend we’ve noticed is that many companies, in the food industry, for example, tend to integrate vertically. Some companies own their own warehouses and trucks, which enable them to control their entire supply chains. This trend will for many companies until the logistics sector matures.

Your research has focused on virtual teaming and the application of Internet-based tools to manage the complexity of logistics environments. What are you finding in terms of new, innovative ways that these approaches could be applied in China?

Our work in virtual teaming hasn’t been in China but we’re very interested in the use of digital tools for reducing logistics complexity. Using the Web to track and trace products in the supply chain, including the use of RFID and other tags, is just starting to take off in China.

There is a growing interest in using these Internet-based tools to control the supply chain and to provide visibility—whether tracking and tracing parts and components, monitoring temperature-controlled environments for perishable products, or just getting products to customers more quickly and efficiently.

What should every manager know in order to succeed in China?

One lesson is to try not to duplicate what might have worked elsewhere. Many strategies and approaches used in the U.S. need to be translated into the Chinese environment. The markets are different. For instance, Oreo cookies are a popular treat for kids and adults alike, but when Kraft introduced them into China they didn’t sell. The Chinese didn’t like the thickness of the biscuit. So Kraft customized the cookie for the Chinese market using layers of thin wafers. The lesson is that you need to customize products and processes to meet the requirements of the Chinese market and business environment.

What are the key opportunities for western companies looking to do business in China?

Everyone sees China as a huge market that’s opening up to Western products. There have been some hiccups lately. Because of the economic crisis, China has focused its efforts lately on developing the domestic market for Chinese companies and products. There’s still a tremendous opportunity for U.S. companies to do well in China, but it’s going to be a bumpy road in the near term.