AREAS RIPE FOR IMPROVEMENT

Downstream supply chain management

Companies should not assume that Chinese distribution partners have advanced knowledge of downstream supply chain management, including the ability to forecast accurately or to assess service levels. Operationally, this means that foreign-invested manufacturers and foreign companies that sell to China must invest more capital and time to transfer knowledge of material movement requirements, especially improvement strategies to reach key performance-indicator goals. If rapid expansion in China is the goal, the company should focus on improving flexibility in distribution scheduling, placing inventory closer to the customer, and buffering lead times. Ready-to-use contingency plans, including scenario-based strategic decisionmaking, should also be in place to respond to delays. As a whole, Chinese distribution companies lack the capabilities of world-class logistics and supply chain companies in more developed economies. In particular, they tend to be weak in inventory management, lead-time planning, distribution network optimization, and demand forecasting.

Inventory management

Inventory management and lead-time planning are becoming critical focal points for improvement as a more sophisticated customer base demands better service. In China, suppliers hold a large amount of inventory and restock only about three times a year on average, compared with suppliers in Europe, Japan, South Korea, and the United States, who tend to restock about 10 times a year. This means the lead time to delivery in China can be significantly longer than in countries with more developed distribution networks. Chinese suppliers face less flexibility when compared to more developed and advanced counterparts, where capital invested in on-hand inventory is lower. Faster inventory turnover increases liquidity, which can be invested in expansion and resource development. Foreign companies should invest their resources in helping downstream partners increase annual inventory turnover so that downstream partners maintain a healthier cash flow that allows them to invest in expansion.

Distribution structure

The distribution structure is another area that can be streamlined. Many of China’s distribution networks are highly decentralized, creating fractured and often redundant distribution systems. For example, as many as five tiers may exist at a given level of distribution in Shanghai’s complex beverage distribution network, resulting in lower profit margins at every level—producer, wholesaler, distributor, and retailer. To streamline this process, downstream distribution analysis should include a supply chain assessment of factors such as capacity, throughput, and operational metrics, as determined by the company’s key performance indicators. If bottlenecks disrupt distribution, suppliers can leverage their influence to identify more direct routes for end-product distribution.

The challenge of fractured and redundant distribution systems is compounded by highly localized and regional distribution networks. A wholesaler may have exclusive access to a district or city, but wholesale distribution remains fragmented nationally, and companies trying to distribute nationwide must use multiple channels and vendors. Network optimization suffers because distributors are reluctant to work with distributors in other geographic areas. To maintain low logistics costs on long-distance distribution, companies try to avoid hauling products one-way over long distances, which in turn often leads companies to establish storage facilities in multiple cities, increasing holding costs and the amount of capital tied to inventory. An alternative solution would be to invest directly by setting up in-house distribution capabilities rather than using local distributors, and companies such as Metro AG and Carrefour SA are investigating direct investment in cold chain logistics. Companies can also collaborate with other vendors in similar situations, such as through joint-procurement agreements.

Localized demand forecasting

Localized demand forecasting is also underdeveloped in China. Many distributors are, in fact, investment companies that purchase and resell products. Few Chinese distributors have sophisticated knowledge of demand forecast planning. They often exclude important variables such as seasonality, product cannibalization, and forecasting cycles; use weak assumptions to forecast sales; and rarely compare forecasts to actual sales to ensure accuracy. Use of more advanced modeling such as regressions, product correlation, and smoothing is limited. (“Smoothing” is the use of variables in demand forecasting to reduce fluctuations that disrupt otherwise normal behavior.) When working with local distribution partners, foreign companies should determine how sophisticated the forecasting tools used by their downstream networks are. To reduce risk, foreign companies should also factor in additional time and costs when planning to supply the China market.