Considering China’s Warehousing Options WHITE PAPER
In brief Pursuing warehouse solutions in China is a strategic move for companies hoping to cut costs by shipping directly to end customers. In this paper, we’ll discuss the benefits of overseas warehousing, potential challenges, and implementation strategies to help companies determine if a China warehouse solution is the right enhancement to their global supply chains.
Contents Why China? How warehousing works in China Exploring the benefits Challenges to consider Keys to successful implementation The global 3PL advantage Is warehousing in China right for you?
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As companies continue to look for new ways to squeeze excess costs from their supply chains, moving some or all of their business operations overseas is an ever-growing practice. Generally speaking, foreign markets can offer cost-effective supply chain and logistics solutions for companies who want to save money by manufacturing, importing, exporting, and/or distributing in other locations. Why China? China continues to be a supply chain hotspot for many companies who want to expand their global business operations. A key reason for this growth is that China continues to be a vital supply point and economic hub of global commerce, with business volumes on a steady incline. As a result, the country is improving and expanding infrastructure, diversifying and amplifying supply chain service offerings, and implementing new customs policies to better accommodate the companies making this shift. KEY MOTIVES FOR ESTABLISHING A MANUFACTURING BASE IN CHINA1
Access to local Chinese Market Labor cost savings Access to Asian markets % of Respondents
Strategic move against key global competitors Material cost savings Access to talents/quality labor Utility cost savings
6.7
1
7.9
40.4
42.7
51.7
64.0
70.8
Booz Allen Hamilton. China Manufacturing Competitiveness 2007—2008.
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In particular, China’s warehouse solutions are appealing because they allow companies to consolidate orders from multiple vendors and ship directly to end customers, bypassing more costly distribution networks in other regions of the world, such as North America and Europe. And since a large majority of companies are already doing some kind of business in or with China, pursuing a warehouse solution in China can be a logical next step.
How warehousing works in China Companies that manufacture goods in China must be registered to either produce for export or for domestic consumption. In order to gain domestic distribution rights in China, they must operate legally within the Wholly Foreign Owned Enterprise (WFOE) framework, which is growing increasingly easier due to the relaxation of government regulations made possible as China entered the WTO (World Trade Organization). Once a company has met the legal requirements to manufacture in and distribute from China, the next step is choosing the right program and type of warehouse. Warehouse consolidation programs in China take on many shapes. There are single importer/multiple vendor consolidation programs, multiple importer/ multiple vendor consolidation programs, and direct import programs which are not specifically built around consolidation, but more about shipping product directly from origin to end customers (see Figures 1, 2, and 3). These models are ideal for vendors located in the same country as the warehouse. If your vendors are located in a different country than your warehouse, these options could have a reverse effect and cause transportation costs to increase.
FIGURE 1 SINGLE IMPORTER/MULTIPLE VENDOR CONSOLIDATION
Vendor A Vendor B
Warehouse
Importer
Vendor C Benefits
• I ncrease efficiencies, security, and • Improve cash flow information visibility control (depending on trade terms) • Improve quality assurance • Reduce lead times Importer •A Vendor llow smaller purchases of single • Gain flexibility with more A A items, which reduces inventory distribution options •A ccelerate and enhance order fulfillment • Improve cross-docking efficiencies for better on time performance, and reduce dock congestion Importer Vendor Warehouse compressed ordering cycles, and • Enable shipping immediatelyBupon B reduced cancellations arrival at the warehouse due to •M inimize domestic inventory, shipping pre-finishing options at origin Importer Vendor costs, and destination handling costs C C C.H. Robinson Worldwide, Inc. | Considering China’s Warehousing Options
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Vendor C
FIGURE 2 MULTIPLE IMPORTER/MULTIPLE VENDOR CONSOLIDATION
Importer A
Vendor A Vendor A Vendor B
Warehouse
Vendor B Vendor C
Warehouse
Importer B Importer Importer C
Vendor C For general consolidation where For small importers pooling together and importers do not know each other dictating the load plan: and the consolidator dictates the • I ncrease efficiencies, security, and Vendor load plan: information visibility control A • Increase efficiencies, security, and • Improve quality assurance information visibility control •A llow smaller purchases of single items, Importer Vendor Importer • Improve quality assurance End which reduces inventory A A Manufacturing Warehouse Customers • Reduce costs for consignees • Reduce costs for consignees Site • Eliminate warehouse and labor costs • I mprove cash flow (depending on Importer Vendor trade terms) Warehouseat destination due to pre-finishing B Vendor B options at origin • Reduce lead times B •E nable shipping immediately upon arrival at the warehouse due to pre-finishing Importer Vendor options C C at origin Benefits
FIGURE 3 DIRECT IMPORT CONSOLIDATION
Vendor A Importer Manufacturing Site Vendor B
Warehouse
End Customers
Benefits
• Reduce lead time • Improve customer service • Increase speed to market
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Within these programs, there are many different types of warehouse options companies can use to consolidate orders (see Figure 4). The options are many and will vary for different industries, commodities, and market channels. In each type of warehouse, the balance of inventory, warehousing, customer service, and freight costs will be different and determined by the characteristics of the commodity and the demand. FIGURE 4 TYPES OF WAREHOUSE OPTIONS IN CHINA Export Processing Zone (EPZ)
Industrial park designated by the government to provide tax and other incentives to exporters.
Free Trade Zone (FTZ)
Special commercial and industrial area in or near ports of entry where foreign and domestic goods may be brought in without being subject to payment of customs duties.
Public Warehouse
A warehouse subject to government regulation where a number of different companies can store goods.
Bonded Warehouse
A warehouse where goods are stored under the direct or indirect supervision of a country’s import or export authorities.
Bonded Logistics Parks (BLP)
BLPs consolidate shipments and implement direct import programs acting as a specially designated zone.
Depending on the type of warehouse solution a company desires, they must perform due diligence and carefully consider each program and type of warehouse to ensure they select the solution that best aligns with their global supply chain strategies and goals.
Bonded Logistics Parks: A unique approach with additional benefits The Bonded Logistics Park (BLP) has an added benefit that differentiates it from the other warehouse options. Once goods enter the BLP, they are treated as fully exported items from China, enabling vendors to apply for their tax rebates immediately. Once within the BLP, goods can remain there indefinitely, and if needed, the goods can be directly imported back into China from the BLP. This feature makes the BLP a great solution for consolidating multiple vendor orders into a warehouse solution in China because it allows companies to fulfill customer orders globally.
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“Companies that do rise to the next management level by integrating their export-oriented activities for global markets with their domestic market opertations are achieving higher levels of profitability…Companies that successfully integrate their China operations enjoy profitability of 29.6 percent, on average, compared with 17.8 percent profitability for those that do not.”2 Exploring the benefits While pursuing warehouse opportunities in China helps companies streamline their global supply chains, improve efficiencies, and reduce costs, there are many additional benefits. A well-executed and managed warehouse solution in China can help companies: •D istribute their product directly from China to end customers and avoid more expensive distribution networks, such as North America or Europe •C hoose from multiple warehouse options due to more flexible customs policies in China •G ain transparency over end-to-end supply chain spending and reduce transportation costs • Improve cash flow •G ain extended visibility for earlier decision-making, risk prevention, and security control • Maintain control over shipments post-production • Relieve pressure on the destination’s distribution network • Improve vendor management and compliance • Pursue new sales and branding opportunities in other global markets
2 Bliss, Christoph, et al. “China’s Shifting Competitive Equation: How Multinational Manufacturers Must Respond.” Booz Allen Hamilton. 2008.
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Challenges to consider While the benefits of a warehouse solution in China make it a viable opportunity for many companies, it is important to weigh them against the potential challenges. • Lack of technology solutions. Many warehouse providers in China hesitate to invest in costly IT platforms because they operate on a build-to-order basis. While most welcome customer-owned platforms and take steps to install and utilize them, some only offer simplistic platforms. This can severely limit the company’s visibility to their supply chain, which is essential to successfully managing overseas operations. • Limited commodity expertise. Some local warehouse providers are only experienced in handling specific commodity types, such as electronics, garments, and housewares. As a result, they may lack the experience in working with a wide variety of industry verticals. • Longer lead times. Warehousing overseas requires extra lead time. For example, pulling from North American inventory may only require a few days of lead time, but pulling from inventory in China could require a week or more of lead time. This can be a difficult adjustment for many companies and create delivery delays for their end customers.
“While deal-makers understand that execution takes longer in China, many still underestimate the time it takes to close a transaction. Access to information in China may be restricted or difficult to obtain, and financial and tax records may lack transparency. There may be a need to focus more on operational due diligence as opposed to traditional financial due diligence.”3 • Local customs relationships. If a company has strong local relationships with specific Chinese customs officials, they may opt to maintain those relationships instead of moving locations or pursuing a new warehouse solution for their export customs clearance. • Increased inventory costs. Depending on terms of sale, there is the potential that end customers will end up carrying inventory for longer periods of time, which could lead to excess costs. • Ownership of inventory stored overseas. Companies that own inventory and store it overseas can be exposed to income taxes in the country where their inventory is stored. In addition, companies may be exposed to other taxes, such as customs duties or value added tax (VAT). Before storing inventory overseas, companies should speak with their tax advisors to discuss potential risks and consequences.
3
“ Time to Rethink China.” Highlights from the Grant Thornton LLP study, “Is China in Your Future?” Worldtradewt100.com. 2009.
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Keys to a successful China warehouse implementation
1 E xplore and understand your options
1. Explore and understand your options. As China continues to expand its supply chain services and implement new customs rules and regulations, the number of viable warehousing solutions and their specific capabilities continue to increase. In order to determine the best fit, companies need to understand their options (see Figures 1—4) and how each solution would impact their global supply chains. Some considerations that should factor into a company’s warehouse selection include: • Tax rebate implications • Ownership of inventory • Insurance coverage • Customs formalities • Complexity of operations within the warehouse • Technology capabilities • Unit level cost
2 B uild a strong relationship with the warehouse provider
Managing logistics operations from a third-party location is complex, which is why selecting the right warehouse solution from the beginning is imperative. When companies bounce between different warehouse solutions, they typically accrue many additional costs. These costs can be avoided by developing a long-term, steady relationship with one warehouse provider.
3 H ave a local presence
2. Build a strong relationship with the warehouse provider. To successfully manage a warehouse solution, it is important to build a strong relationship with a reliable warehouse provider. Establishing trust, keeping communication lines open, and making sure there is a clear, mutual understanding of processes, goals, and desired outcomes will ensure companies maintain visibility and control over their global warehouse operations.
4 U tilize an electronic communication process
3. Have a local presence. Having local employees dedicated to a company’s warehouse activities in China is a distinct advantage. Local resources are invaluable because they can identify and develop solutions within the local market, solve potential supply chain problems, and help companies manage their global operations with ease. Since the regulatory environment in China is dynamic, having local resources who can help companies adapt their processes accordingly is a critical factor to the success of any warehouse solution. 4. Utilize an electronic communication process. Visibility is essential when companies are conducting business in multiple markets around the world. Having electronic connectivity capabilities such as Electronic Data Interchange (EDI) allows companies to connect with their warehouse, integrate their technology systems, and gain all-access visibility to their day-to-day operations, data, and processes. In addition, EDI can make a company more efficient by reducing costs and environmental impacts. If the warehouse does not have these capabilities, it is important to discuss whether or not they are willing to invest in the technology necessary to support the company’s goals.
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The global 3PL advantage One way that many companies are implementing successful warehouse solutions in China is by outsourcing to a global forwarding provider or third party logistics (3PL) company to help them establish, execute, and facilitate their outsourced warehouse solution. In 2008, AMR Research found that over 90 percent of companies surveyed relied on outsourced providers (3PLs, freight forwarders, customs brokers) to execute their global logistics.4 However, before selecting a provider, it is important to ensure they meet the following requirements: •S trong local market presence in China, including strategic office locations in key manufacturing regions, local onsite employees, and pre-established relationships with warehouse providers in China •L arge, global network of logistics options, including freight services and outsource solutions •T he ability to provide flexible warehouse solutions in China as well as North America, Europe, and other key economic hotspots •N on-asset based business model with the flexibility to provide the best resources to meet a company’s specific needs in China and other regions of the world •C utting-edge technology to provide full visibility, electronic connectivity, supply chain analysis and reporting tools, ROI measurement, and process improvements •T horough understanding of China’s customs regulations, laws, language, and business culture
According to Wally Gruenes—co-author of the Grant Thornton LLP study “Is China in Your Future?”—a key consideration for foreign shippers doing business in China is ensuring they have local resources effectively managing their operations. “Do your suppliers or joint venture partners have the management skills and talent that you need? While China certainly has many bright individuals from a business perspective and a manufacturing perspective, the concept of managerial talent and business management, at least in a Western sense, is still a relatively new concept.”5
4 5
Aimi, Greg. “3PLs Need to Fill an Expandable Role in Today’s Supply Chains.” Amrresearch.com. 2009. Sowinski, Laura L. “Some Observations on the Study.” Worldtradewt100.com. 2009.
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IDEAS IN ACTION® Case Study: How a global provider makes a difference Challenge
Solution
Results
When a leading manufacturer of safety containment systems decided to manufacture some of their products in China, they needed a consolidation option that would allow them to ship their goods directly to their end customers in a costeffective and efficient manner, rather than importing items into the U.S. and reshipping them to their customers globally. They chose to use a Bonded Logistics Park (BLP) warehouse in South China to manage the consolidation and shipping of products from multiple vendors within Asia. But managing their consolidation orders and inventory in a third-party location proved to be difficult, due to the lack of a consistent, controlled process, unstable pricing, and minimal visibility to day-to-day operations.
The manufacturer chose to work with an experienced global forwarding provider, who helped them choose the best BLP option and build a strong relationship with the chosen warehouse. They also took advantage of the provider’s IT capabilities to establish electronic connectivity to the BLP, which alleviated the customer’s concerns about visibility to receipts, inventory, and orders shipped. With dedicated resources both in the U.S. and in China, the integration was successful. The customer also relied on the provider to handle all the local deliveries into the BLP and ensure that each carrier followed the customer’s standard operating
• Complete visibility to warehouse activities including receipts, inventory, and orders shipped • Development of a manual inventory reconciliation process to support the electronic process • Consistent, quality service and stable pricing • Continuous electronic connectivity and error monitoring through EDI • Vendors and end customers benefit from established SOPs, including on time deliveries and improved customer service
procedures for delivery.
Is warehousing in China right for you? Pursuing a warehouse solution in China may be a smart move for many companies who are looking to boost the efficiency of their global supply chains. The benefits add up: lower costs, direct shipping to end customers, better visibility, and opportunities to infiltrate new global markets—just to name a few. Before making the leap, however, companies should carefully consider all the options and resources available to ensure they find, implement, and execute the right warehouse solution.
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About us Founded in 1905, C.H. Robinson Worldwide, Inc. is one of the largest third party logistics companies in the world, providing freight services, logistics outsource solutions, fresh produce sourcing, and information services to more than 36,000 customers globally, ranging from Fortune 500 companies to small businesses in a variety of industries. For more information, please visit www.chrobinson.com.
14701 Charlson Road, Eden Prairie, MN 55347 | 800.323.7587 | www.chrobinson.com Originally published in January 2010. Reprinted in June 2010. Š 2011 C.H. Robinson Worldwide, Inc. All Rights Reserved.
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