February 2013 allportcargoservices.com allportcargoservices.com p2 Retail Supply Chain Strategy for International Brands in China China presents unique supply chain challenges for international brands, but with the right logistics partner, you can succeed. Chinas logistics industry is still on an aggressive development curve, however there are plenty of quality operators able to support international brands with their physical logistics requirements. Less widespread is the wider supply chain management thought leadership that can help with all aspects of the supply chain from strategy to nal delivery. The good news is that there are already many brands now operating successfully in China, so no one entering today is pioneering in terms of operating model. The key is to partner with a strong player and leverage their existing operations and experience. You should demand that their service provision goes way beyond just physical logistics operations, combining thought leadership and appreciation of the wider supply chain and with a passion for service that extends through to the nal customer, the end consumer. The missing ingredient is often nding an operational partner who can translate what is happening on the ground, where much is based on interpretation rather than hard and fast rule. With over twenty years of experience in China, we know that you will need to take the following seven factors into consideration. 1 Licence to Import In China, to be able to trade, a foreign company, whether for import or export, wholesale or retail, must rst be registered as either a WOFE (Wholly Owned Foreign Enterprise) or a FICE (Foreign Invested Commercial Enterprise). These licences take a tremendous amount of efort to obtain, requiring, on average, up to a year, and an application pack of over 300 pages of supporting information. 2. Import Duty Import duty on international brands is relatively high, especially towards the luxury end, where duty ranges from 14% to 20%, on top of 17% VAT. This presents a couple of challenges aside from the obvious efect on cost of goods. Firstly cash ow. Most brands choose not to hold their imports in bonded warehouses, because of the impact on speed of replenishment to the customer if all outbound shipments have to be Customs cleared within the order / delivery cycle. Secondly it is difcult to redeploy inventory to adjacent markets if the initial allocation proves to be incorrect, as the duty, to all intents and purposes, ends up being a sunk cost. Unlike within the EU, for example, where there is vast market with free movement for redeployment. Customs clearance itself is not a major problem; the key is to partner with experienced brokers who know how to work the process at their respective entry ports. Generally clearance can be made within four days. The only irritation is the unplanned variability of clearance lead time which makes ow planning difcult to forecast. Recently, China Customs have become more aggressive around declaration errors and issues, with penalties being both administrative and / or criminal. That said, since joining the WTO in 2001, China has reduced average import tarifs from 15% to below 10% so this nancial barrier to trade has been steadily declining. The bad news is that it has been replaced by an up weighting of technical barriers to trade, driven by the Administration of Quality, Supervision, Inspection and Quarantine (AQSIQ) and CIQ. 3. China Inspection and Quarantine CIQ is a quality check carried out at the point of Customs clearance for specic categories of merchandise with the aim of protecting consumers from inferior quality or unsafe imported products. The prima face objective is admirable, the impact however is to slow down and complicate import supply chains into China creating cost and uncertainty of supply. allportcargoservices.com p3 Retail Supply Chain Strategy for International Brands in China For Fashion, target categories to date have been kids and intimate apparel, but recently and with only a couple of days notice, handbags and leather accessories were added to this list for an as yet undened period of time. CIQ, slows down the clearance of incoming shipments, generally adding two days. CIQ is a destructive test, so the merchandise tested is ultimately unt for sale afterwards, resulting in stock write of, an irritation for mid to low end fashion, but a not insubstantial cost of doing business for high end. On average, nine percent of inspected fashion shipments fail the test and have to be destroyed or exported, provided you have a licence of course! It can impact on range size, particularly for new entrants who lack critical mass. Sending a small shipment of a particular style item to China to test the market could result in 50% of the inventory being lost to CIQ, signicantly afecting gross protability of those specic items, and making them nancially unviable. 4. Labelling The three aspects of labelling that that need to be right are the care or washing label, the guarantee card, and the price ticket. For the care label, the composition of the fabric, lining and trimming, the washing methods, country of origin, style and size all need to be accurately recorded in Chinese. For the guarantee card, the style, SKU, size, composition, country of origin, washing instructions and brand logo must all be accurate and in Chinese. Finally the price ticket must be clearly printed with the barcode and price as well as the style and the SKU. Labelling needs to be either carried out in origin at the point of manufacture, or in country on arrival, both of which have associated risks and benets. It also builds in business risk as the authorities will do spot checks of merchandise in store and if labels do not meet the standards required, heavy penalties may be imposed on the brand along with damage to reputation and lost sales. 5. Final Mile Transport undoubtedly lags behind warehousing in terms of sophistication and cost to operate. You will nd high quality DCs on modern logistics parks, powered by best of breed WMS with mechanisation becoming more common. Yet on the transport side of things the industry is highly fragmented, which means operators lack the critical mass to drive super efcient networks, and there is a lack of investment in technology and service. There are few big national players, which mean that the transport buyer is squeezed into selecting from a relatively small group, or has to try and create their own network by adopting a regional procurement strategy with all of the associated issues with uniformity of service, lack of scale and management complexity. The biggest problem in the major cities is trafc congestion, making delivery times unreliable, which, coupled with the strict delivery requirements of inner city shopping malls, often leads to tension. The shopping malls vary greatly in terms of delivery arrangements, some will have a goods in dock so the replenishment can be behind the scenes, for others delivery is through the front door, some only during opening hours, others insisting on deliveries either immediately before, or after, the trading day meaning that store workers either have to start early or nish late to receive the delivery For inter city movements, the biggest challenge is cost. The infrastructure is world class but the tolls to pay for it are very high. The cost of domestic airfreight is often only 20% higher than express overland. Servicing far ung places becomes trickier as mobile Internet access for online shopping has spread further than the high quality infrastructure, so delivery reliability allportcargoservices.com p4 Retail Supply Chain Strategy for International Brands in China and cost deteriorates rapidly as does the choice of strong providers. The nal watch out is cash on delivery which is very common for online retailing, with the customer wanting to have the merchandise in their hands before making payment. As an example, even tickets to major sporting and concert events can be ordered online but with payment either cash or card to the delivery guy at your front door, its great for the customer but tricky for the retailer without the right partner. 6. Net to Gross The cost of retail space, particularly in the tier one cities, is exceptionally high, which means the net to gross ratio in terms of available selling space is a key prot driver. This means most retail outlets are designed with tiny stock rooms, making inventory control critical to avoid overwhelming the store. The majority of inventory for this reason is held on the shelf, supported by some often quite innovative storage solutions in the stock room to maximise the utilisation of the available space. As well as constraining the amount of inventory that can be pushed out to store for sales, it also means that end of season residual inventory needs to be rapidly cleared back from the store to ofsite storage such as a DC to avoid congesting the store operation. 7. Talent, Skills, and Experience There are plenty of great logistics professionals in China but overall skill levels are playing catch up with demand, whether that be for leadership and technical specialist roles in DCs or for contract / logistics managers to represent brands and retailers. Chinas greatest strength is in export logistics where, as a sourcing origin, it is probably second to none in terms of operational execution and innovation. Domestic logistics lags behind this sector, execution is still relatively strong but there are still opportunities particularly around leadership and empowerment of people, clarity of organisation and accountability, and innovation and lean thinking within the development of operational process. It often creates the unhappy combination of overly complex processes being delivered by workers whose training and level of empowerment is limited by a lack of a strong culture of leadership and coaching. The other opportunity lies in the relative weakness of the service culture, which is very much a China thing, disappointing news is often delivered quite matter of factly, and nding a true passion for service, a way to say how rather than why not is patchy to say the least. Key Considerations So with these in mind, what are the decisions that need to be on your supply chain checklist? Many will be universal, but some have added emphasis to deal with the uniqueness of operating in China. 1 Lead Time and Frequency The classic trade of between operating cost and inventory / on shelf availability risk, you need to be clear about what matters most, are you trying to win on price or service? 2 Push or Pull Push replenishment exercises strong control over inventory as you allocate in absolute terms, pull is more responsive to sales but harder to control as it is driven by complex algorithms which can produce unexpected results! 3. DC Location There are really three choices; direct replenishment from an origin DC, replenishment from a regional APAC DC, or replenishment from a DC inside China. The rst is lowest risk but worst service, the middle allportcargoservices.com p5 Retail Supply Chain Strategy for International Brands in China is the compromise but not by much as service is little improved, but the DC inside China needs critical mass to avoid both high operating cost and high inventory risk. 4.Retail Ready or Customise The debate is whether to push the labelling back to the various factories so the merchandise is only handled once and arrives retail ready, or whether to do it on arrival in China where it can be controlled and delivered to a consistent standard in one place but takes an extra day to be ready for pick and ship. 5. Format and Merchandising Strategy The nature of these key business decisions fundamentally changes the supply chain model required to support them, clarity of approach at the start will avoid expensive unwinding of the wrong decisions later on. . In terms of format the choices are about channel, single or multi, as well as store size and sales density, and in terms of merchandising, its about the size and depth of the range and whether its to be balanced towards replenish-able continuity or seasonal event. 6. Customer Returns For retail businesses, particularly towards the higher end, customer returns will still need to come back somewhere central to be processed and quality checked, maybe repackaged before being made available for sale again. Its relatively straight forward to execute, but it needs to be remembered and planned for, again its a cost of doing business. For online its more often forgotten as it doesnt come as naturally as it would in a stores business, so clarity on what the returns ofer is, how it is communicated to customers, and how the physical process will be executed are key up front decisions. 7. Markdown and Exit There will always be too much inventory at some point which will need to be dealt with in China as re export is impractical. Ultimately its a cost of doing business; the trick is to have a plan to exit that inventory cleanly and efciently without damaging the brand. This could be outlet sales, family sales, or an online channel to allow an extended sales window. Successful Strategies So in our experience, what does a winning supply chain strategy for an International brand entering China actually look like? Below would be our ve to drive: 1. Minimise Inventory Commitment Once its in China, its hard to redeploy inventory both from a cost and administrative perspective, and once its at the store, again the process of redeploying inventory to other stores is expensive and time consuming. Easy to say, but the prize of right rst time inventory allocation is exaggerated within China, which sharpens the trade of between inventory holding and on shelf availability. 2. Agile Inbound Replenishment The rst step to minimising inventory exposure is the inbound leg. The more responsive the inbound supply chain, the less safety stock your replenishment model will push into the China market in anticipation of sales, which reduces the impact of inaccurate forecasts on inventory levels and will help prevent over commitment. The most successful model is airfreight for the inbound mode, and daily shipment across all SKUs, that way the replenishment model knows it is only one day away from the next delivery and drops the safety stock accordingly. 3. Fast and Frequent Outbound The same principal applies for the store replenishment, the faster and more frequent the delivery, the less safety stock the model will push into stores with limited stock room space, as well as being more responsive to sales. The trade of is reduced drop size and increased transport expense but a balanced prole of deliveries based on stores relative sales densities will produce the best result. allportcargoservices.com p6 Retail Supply Chain Strategy for International Brands in China For online customers the delivery frequency has to be daily, the win strategy is just about how fast. Best in class is same day delivery but in China this means regional DCs and multiple stocking points which create inventory risk. For national distribution from one DC, a late afternoon cut of could see delivery to major cities in the afternoon and evening of the following day but for far ung paces it would be into day three. 4. Local DC with Integrated Transport Whilst an early entry strategy is to replenish directly from origin, or from regional hubs, especially for online, this very low risk strategy gives poor customer service in terms of responsiveness so tends not to be sustainable for long. Quickly a brand needs to establish an inventory holding in China to service providers. Demand so that the merchandise is customs cleared and retail ready enabling rapid response. Integrating the transport provision with the DC operation will help to ofset some of the challenges of nal mile delivery by at least avoiding the added complexity and coordination challenges which naturally come through having separate. 5. Simplicity, Knowledge in the Process not the People With demand continuing to outstrip supply in terms of talented supply chain professionals, and with execution rather than innovation or lateral thinking being the predominant operational mindset, it is critical to keep things simple. Clear processes supported by documented workows and SOPs, operating systems that enable simplicity rather than creating complexity, and a target to minimise exceptions and non compliance are all outcomes worth investing in to deliver supply chain success in China. At Allport Cargo Services we have the local knowledge, network, and know-how to help you put your brand on the China map, leaving you to focus on what we know is the really risky bit for new entrants, which is still the same as entering any other market, and that is getting the customer ofer right.
Paul Kelly Group Marketing Manager Head Ofce, Cowley DDI 01895 206 000 Mobile 07771 945652 paul.kelly@uk.allportcargoservices.com Contact Paul now to arrange your complimentary supply chain evaluation, leading to a concise set of recommendations without obligation. Its your China Supply Chain in a box!