As a burgeoning market, China's attractiveness is well known.

But the country's underdeveloped transportation infrastructure, fragmented distribution systems, limited use of technology, dearth of logistics talent, regulatory restrictions, and local protectionism still limit the efficient distribution of domestic and imported products. This article provides an overview of China's distribution and logistics sector, and includes practical advice for foreign companies planning to establish an effective presence.

Trends in Distribution and Logistics

Distribution and logistics present a significant challenge for companies doing business in China. Morgan Stanley estimates that, in 2001, logistics spending in China amounted to one-fifth of the nation's GDP - twice the level spent on logistics in the United States. According to a December 2001 Economist Intelligence Unit report, 90 percent of an average Chinese manufacturer's time is spent on logistics, while 10 percent is spent on manufacturing. Accounts receivable - a key measure of inefficient logistics practices - often exceeds 90 days. Despite these weaknesses, China's distribution and logistics sector is growing rapidly. The logistics industry reported annual revenue growth of 35 percent for 2000 and 55 percent for 2001. Additionally, the sector is expected to grow 50 percent per annum through 2004. Much of that growth will be consolidation-driven. Of the more than 18,000 registered companies claiming to offer logistics services in China, not one offers nationwide distribution services. In fact, no single logistics provider commands more than 2 percent of the market. Because of this industry fragmentation, the merging of logistics providers and the development of third-party logistics services are inevitable - especially given shippers' demands for greater efficiencies, scale, breadth of service offerings, and network coverage. Competition already is intensifying in the third-party logistics market, forcing a consolidation of this area as a whole. While foreign companies with strong international networks and better management are gaining market share, many domestic companies rely on underdeveloped homegrown operations. Local and regional distribution systems are replacing state-owned and centrally managed trading and distribution systems. According to a 2002 report, the outsourcing of logistics and transportation will continue to expand by roughly 25 percent annually through 2005 because of stronger global interest and demand for third-party services.1 Multinational companies (MNCs) relying on China as a global sourcing base are inclined to use - and are experienced in using - third-party services, especially those of third-party providers. More than 90 percent of MNCs in China currently contract at least a portion of their logistics business to third parties. These foreign companies have shown Chinese companies that they do not need to own all of the assets involved in service provision in order to offer a full line of services. Another major trend in distribution and logistics has been the rise of alliances and joint ventures (JVs), as the top companies in China combine forces to build competitive national distribution chains targeting specific industries. In June 2002, Legend Group, Ltd., and APL Logistics (the logistics branch of the NOL Group) announced the formation of a third-party logistics service joint venture to offer specialized logistics services for the information technology industry. Similar joint ventures have been formed by the TNT Group and the Shanghai Auto Industry Group, among others. Chinese and foreign companies across many industries in China have achieved success through the support of strong, modern distribution networks. Guangzhou Honda Automobile Co., initiated exclusive four-in-one franchises (sales, repair and maintenance, supply of parts and components, and information service) in China that have enabled it to strengthen its brand name and position by better controlling service quality, product price, and market information. The formation of the SAIC-Volkswagen Sales Co., Ltd., in 2000 is another example of a foreign company seeking to participate directly in the distribution business by building a dedicated distribution and after-sales support network.

Risks Remain
More than 80 percent of Fortune 500 companies already have invested in China. However, small- and medium-sized foreign companies are just now entering the country. But regardless of the depth of their experience in China, all companies face ongoing risks in the regulatory, political, and market arenas. One such risk involves World Trade Organization (WTO) commitment delays. China may delay WTO implementation and regulate competition to help local companies compete in the market (see Figure 2). As other WTO

members have done, China also may work around WTO rules to maintain barriers against imports - for example, by erecting WTO-compatible non-tariff barriers, such as licensing, health, technical, and packaging standards. China recently released a draft regulation that would require "one license, one product" dealership licenses in the auto sector. These would prevent newcomers from using existing distribution channels and give local manufacturers more time to prepare for direct competition. Another important risk is regulatory fragmentation. China's distribution and logistics industry has been microregulated for years, with different logistics service components governed as distinct subsectors by various government departments. For example, the Ministry of Communications governs land and waterway transportation; the Ministry of Commerce administers trading rights and international freight forwarding licenses; and the General Administration of Customs of the People's Republic of China (PRC) controls brokerage services. Despite central government efforts to promote coordination, this shared jurisdiction system is unlikely to disappear quickly, so companies still must acquire separate licenses through various governing bodies to undertake different activities. Lack of enforcement capability and local protectionism also can cause problems. China's governing structure encompasses multiple layers of central and local governments. Despite central government efforts to liberalize the market, local-level interpretation and enforcement of laws and regulations can often be arbitrary and inequitably disposed toward local interests. Business risks associated with fluctuating capacity and demand are yet another concern. China has one of the most dynamic markets in the world, making errors in market demand forecasts more frequent and severe than those in other areas. In addition, almost all major cities and regions in China have invested in some form of distribution or warehousing center or logistics park. But according to research conducted by the China Storage Association in 2002, 60 percent of the country's logistics centers are empty. Lastly, social and political risks must be considered. Foreign companies planning to enter China through a partnership or joint venture must be extremely careful about their potential partners' visible and invisible liabilities. For example, protecting local employment is a high priority for PRC governments, so appropriate benefits for excess workers can be a huge issue in contract negotiations. Deft handling of corruption (particularly common at local levels) also is essential.

Proceed With Caution, but Do Proceed

As some successful companies are proving, effectiveness in distribution and logistics helps to achieve market share and profitability growth in China. However, to realize the true potential of the burgeoning China market, a great deal of homework and due diligence are still essential. First and foremost, companies must work to understand this radically different market. Contrary to what some experts think, cost and time concerns will limit the swiftness with which shippers develop their own sales and distribution approaches once China fulfills its WTO commitments in distribution services. Instead, smart players will work to enhance the capabilities of the PRC distributors with which they already have relationships. They also will pay attention to regional and local particulars, and acknowledge the intense emphasis that Chinese companies place on relationships. Every city or investment zone has different policies designed to attract certain types of foreign investment. For example, some zones provide local tax incentives, land leasing, and lower utility fees. Organizations such as the U.S.-China Business Council and the American Chamber of Commerce can help find appropriate locations. A well-connected and trustworthy local partner also is important.

The need to focus on value is a second key strategy. Companies should bypass inefficient parties and middlemen - thereby removing unnecessary layers of bureaucracy and streamlining distribution chains. This is already happening in many industries, such as personal computers and consumer electronics. Nokia, for example, has sidestepped the widely used industry distribution model that follows a "manufacturer, general agent, regional distributor, second-tier distributor, retailer, consumer" pattern. Instead, it supplies large regional distributors and retail outlets directly, thus cutting distribution costs and raising market responsiveness. A third imperative is to streamline distribution and logistics. Companies and their distributors must integrate, centralize, and streamline distribution and logistics functions, assets, infrastructure, staff, and operations. The long-term goal is for the supply chain to become a separate - yet shared - organization across different business units. Few companies can build or provide a full range of distribution services alone, which is why it is vital to build partnerships and alliances with local distribution service providers. By focusing on improving flows, companies' distribution and logistics functions in China can be based more on the transmission of reliable and timely

information, and less on direct control of the physical movement of consignments. To help make this happen, they also must emphasize the creative use of technology. The distribution and logistics sector in China is typically slow to adopt new technologies, partly because of the complexity and cost of setting up an integrated IT platform. Growth of the sector will require particularly great sophistication in supply chain planning, product visibility, and end-to-end supply chain integration. Finally, there will be an exceptional need to build and retain talent for long-term success. According to a 2002 survey by The Logistics Institute-Asia Pacific and The Logistics Institute of the Georgia Institute of Technology, a premier obstacle to operating in China is lack of talent. Value-added services in distribution and logistics require more expertise than most PRC providers currently possess. In fact, some observers believe that 85 to 90 percent of failed distribution initiatives were caused by workforce error. For the foreseeable future, training will be an integral part of any company's relationship with a PRC distribution service provider. Like few other countries, China is a nation of dramatic contrasts: old and new, national and local, modern and antiquated. The same holds true in its business environment: The challenges are daunting and the risks are great, but the opportunities are immense. In China, nothing is impossible, but everything is difficult.

Endnote
1 China Federation of Logistics and Purchasing, and Mercer Management Consulting.

Supply Chain and Logistics Management: Key to Success in Retailin

By

Vijay Prakash Anand

Sr. Lecturer IES Management College Opp. Lilavati Hospital, Bandra Reclamation, Mumbai-400050

"Interdependence is a higher value than independence" Stephen R. Covey in 'The 7 Habits of Highly Effective People' As rightly said in the above book by Stephen Covey, the value of interdependence is as much important in the business of Retail as it is important in the business of life. Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, the retail sector is poised for a big leap. Currently retail sector in India accounts for Rs. 55,000 crore ($12.4 billion) business at current prices in the calendar year 2006, increasing its share to 4.6% of the total Indian Retail Value that stood at Rs. 12,00,000 crore ($270 billion). With the potential of crossing Rs 2,00,000 crore ($45 billion) business by the Year 2010, generating employment for some 2.5 million people in various retail operations and over 10 million additional workforce in retail support activities including contract production & processing, supply chain & logistics, retail real estate development & management etc.; the retail sector is growing at a scorching pace of about 37 percent in 2007 and expected to grow by 42 per cent in 2008. With this enormous growth, the retail sector is also facing challenges on the fronts of escalating real estate cost, scarcity of skilled workforce and structured supply of merchandise. Importance of Supply Chain and Logistics Management One of the most important challenge in organized retail in India is faced by poor supply chain and logistics management. The importance can be understood by the fact that the logistics management cost component in India is as high as 7% -10% against the global average of 4% - 5% of the total retail price. Therefore, the margins in the retail sector can be improved by 3% - 5% by just improving the supply

chain and logistics management. In India, with demand for end-to-end logistics solutions far outstripping supply, the logistics market for organised retail is pegged at $50 million and is growing at 16%. It is expected to reach $120-$130 million by 2010. Organised retail on the other hand is growing at 400% and is expected to reach around $30 billion by 2010.Even supply chain and logistics firms like Hong Kong based Heng Tai Consumables and ABS Procurement Co and ACM China (the greenhouse specialist) is also eying the opportunity for managing the supplies. The supply chain management is logistics aspect of a value delivery chain. It comprises all of the parties that participate in the retail logistics process: Manufacturers, Wholesalers, Third Party Specialists like Shippers, Order Fulfillment House etc. and the Retailer. Here, logistics is the total process of planning, implementing and coordinating the physical movement of merchandise from manufacturer to retailer to customer in the most timely, effective and cost efficient manner possible. Logistics regards order processing and fulfillment, transportation, warehousing, customer service and inventory management as interdependent functions in the value delivery chain. It oversees inventory management decisions as items travel through a retail supply chain. If a logistics system works well, the retail firm reduces stock outs, hold down inventories and improve customer service all at the same time. Logistics and Supply Chain enables an organized retailer to move or store products more effectively. Efficient logistics management not only prevents needless movement of goods, vehicles transferring products back and forth; but also frees up storage space for more productive use. Retail analysts say on-time order replenishments will become even more critical once the Wal-Mart/ Bharti combine begins operations - the American retailer works almost entirely on cross-docking and is likely to demand higher service levels, including potential levies for delays in shipment. The efficiency and effectiveness of supply chain and logistics management can also be understood by the fact that m odern retail stores maintain lower inventories than traditional retail. In India, generally in the traditional kirana stores, three weeks inventories are kept; while in a modern retail store like Hypercity, it's nine days and it's under two weeks for Food Bazaar. Now, it is beneficial for both the manufacturer as well as the retailer. If we go through the following food supply chain in India, we find that a lot can be improved by maintaining the supply chain and logistics. Food Supply Chain in India: In India, about 60 percent of food quality is lost in the supply chain from the farm to the final consumer. Consumers actually end up paying approximately about 35 percent more than what they could be paying if the supply chain was improved, because of wastage as well as multiple margins in the current supply structure. The farmer in India gets around 30 percent of what the consumer pays at the retail store. Compare this with the situation obtaining in the USA, where farmers can receive up to 70 percent of the final retail price and wastage levels are as low as 4 to 6 percent. One can easily understand the benefits that could be generated from emulating those practices and tapping that expertise for the supply chain in India. As supply chain Management involves procuring the right inputs (raw materials, components and capital equipments); converting them efficiently into finished products and dispatching them to the final destinations; there is a need to study as to how the company's suppliers obtain their inputs. The supply chain perspective can help the retailers identify superior suppliers and distributors and help them improve productivity, which ultimately brings down the customers costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then implementing and controlling the physical flows of material and final goods from point of origin to points of use, to meet customer requirements at a profit. Till now most retailers in India have invested majorly into the front end, but relatively little on the back end and supply chain. Even in countries like the USA, Germany and England, where organized retail is highly developed; supply chain efficiency is a major concern. The nature of retail sector in India is different from other countries around the world. The organized retail sector in India is highly fragmented and there are huge inefficiencies in the supply chain. The most important part of retailing business is to find a balance between investing in front-end and backend operations. The channel dynamics is going to change over next couple of years as the retailers start growing in size and their bargaining power is likely to increase. Probably that would bring some kind of

mutual understanding between manufactures and retailers to develop strong supply chain network. In such a scenario, both the existing operators and new operators must put collaborative efforts to phase out inefficiencies in the supply chain network. Now, let us try to find out what efforts are being taken up by the big retailers in India like Future Group with retail stores like Big Bazaar and Pantaloons, Reliance Retail and Wal-Mart & Bharti to improve the efficiency and effectiveness of supply chain and logistics. We will also try to find out the changed role of Agriculture Produce Marketing Cooperatives and third party sourcing firms. Future Group Future Group is the country's leading retail business group that caters to the entire Indian consumption space. It operates through six verticals: Future Retail (encompassing all lines of retail business), Future Capital (financial products and services), Future Brands (all brands owned or managed by group companies), Future Space (management of retail real estate), Future Logistics (management of supply chain and distribution) and Future Media (development and management of retail media spaces). The group's flagship company, Pantaloon Retail (India) Limited operates over 5 million square feet through 450 stores in 40 cities. Some of its leading retail formats include, Pantaloons, Big Bazaar, Central, Food Bazaar, Home Town, EZone, Depot, Health & Beauty Malls and online retail format, www.futurebazaar.com. The group's joint venture partners include Italian insurance major, Generali, French retailer ETAM group, US-based stationary products retailer, Staples and UK-based Lee Cooper and India-based Talwalkar's, Blue Foods and Liberty Shoes. Future Group is working on the vendor network as well as the logistics network. The company has identified up to 40 anchor vendors, each with turnovers of US$45 million, to achieve economies of scale. The group is also keen to ensure that its smaller vendors are able to reach turnovers of around US$1 million and a growth rate of 40% annually, to be able to pass on the benefits of scales. The company is also working towards bringing its 1,200 vendors online, like Wal-Mart. Going further in this direction, the Future Group has also launched Future Logistics initially aimed at handling the supply chain logistics of the group. However, sensing immense opportunity in this area, the company is now looking to offer its services to its 1000-odd vendors, spread across consumer related goods, to reach a targeted turnover of about Rs.700 crore by 2010.The thrust at present will be on modes of surface transport like roads and rail only. However, at a later stage, sea and air modes might also be considered as per the requirement, said sources. In India, Future group derives significant economies of scale in managing their supply chain. With more than 170000 products, the company maintains a strong supplier relationship in a partnership mode, avoiding the exploitative supplier buyer transactional philosophy. The IT enabled back-end operations and supply chain management increases the reliability and efficiency of the business. As part of the operation, Future Group is also undertaking to reduce its warehousing costs through a consolidation process. In a country like India, where most retail stores are located in the heart of the city where rents are high and storage space is scarcesupply chain management has even more serious business implications. Future Logistics now handles two-and-a-half million SKUs (or stock keeping units) a day across the Future Group's various retail formats around the country. By 2010, this number is expected to increase to more than 30 million SKUs a day. Even with 98% accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimated sales loss of more than Rs 4 crore a day. The biggest driver in consumer logistics is going to be zero defect in managing the supply chain. While infrastructure, technology, automation, processes and people will all play an important role, zero defect can only be achieved through vertical integration across the entire supply chainfrom raw material supply, production, wholesale and retail. The different parts of the supply chain will no longer be able to work in silos as they do today. Reliance Fresh Reliance Retail is also going to open one store for every 3,000 families within a radius of 2 km across all

locations by 2011. The company is competing directly with the large number of traditional local provision stores. Reliance Retail is either going to set up new stores in the identified areas or take over existing stores. The company has already done that in Mumbai and other cities. Of the four million sq ft of retail space to be created under the "Reliance Fresh" brand (for groceries), one million will be through acquisitions. The retailer is also moving into laundry, personal care and apparel product lines, in which it plans to launch private labels. Reliance is planning to roll out its specialty format stores this year, beginning with consumer durables, for which it has struck sourcing deals with companies in Hong Kong, the Chinese mainland and with Videocon in India. To strengthen its links with farmers, the company is setting up integrated agri-retail business centres, which include three processing and distribution centres, 51 retail outlets for farmers and 75 rural business hubs, all with an investment of US$445 million. Many companies, looking at the retail boom in food and grocery, are setting up ventures to help retailers source these goods. Reliance Logistics Ltd part of Reliance Industries Ltd, currently handles Reliance Retail's logistics services. Wal-Mart and Bharti The success of Wal-Mart is well known all across the world. One of the major factors behind their success is the right implementation of supply and logistics management. Now the same Supply Chain and Logistics Management take a front seat here and that's why Wal-Mart is coming to India in a joint venture with Bharti Group. Here, Wal-Mart is going to manage the back end operation, while Bharti will manage the front end operations. Wal-Mart has also stated that it would replicate its global supply chain model in India, while taking into account the unique features of the Indian market. They are also going to emphasise on local sourcing of goods. Besides sourcing locally, Wal-Mart, through its international operations is also in a position to source globally. The company is set to roll out its first set of stores by the first quarter of 2008, in cities that have a population of one million. Wal-Mart claims it will take 35% of the Indian retail market by 2015. It is the sheer importance of the logistics management that Wal-Mart's fully-owned logistics arm Gazeley has already confirmed its India foray and is going to look after the Wal-Mart and Bharti retail venture. They are closely studying various logistics providers like Radhakrishnan Foods, before they finally closes on its India model. Again, Bharti Enterprises is directly negotiating with the rail authorities instead of negotiating with a logistics provider. Wal-Mart and Bharti FieldFresh Just like Reliance Fresh, Bharti Group in a joint venture with NM Rothschild is launching Field Fresh to provide premium quality fresh produce to markets worldwide. It has over 5,000 acres of land under cultivation all over the country producing many varieties of fruits and vegetables and is planning to double land under cultivation by the end of 2007. The company is to supply fresh produce to the Bharti-Wal-Mart venture. To ensure best qualities and varieties, Field Fresh has engaged ACM China, an industry leader in building greenhouses, to set up state-of-the-art glass-based greenhouses at the Field Fresh Agri Centre of Excellence in the Punjab. Field Fresh is also planning investments to the tune of US$220 million in the backend, including investments in cold chains and warehouses. Bharti's Field Fresh will enter this segment within the next three months. A number of companies are also venturing into this segment to service the backend needs of retailers. Agriculture Produce Marketing Cooperatives in India The Indian Retail Revolution is also changing the way farm produce was marketed in India. Now even the farmers are getting benefited due to less or no middlemen involved in the selling process. Till now, the Indian fresh produce marketing was controlled by state-owned Agriculture Produce Marketing Cooperatives (APMCs). Now it is also changing with reforms in the APMC Act in many states. This has opened up the space for private players, and all major retailers are setting up private 'mandis' (marketplaces), from where they can directly source their requirements of fresh foods. Almost everyone in the retail sector like Reliance, Future Group, Bharti Wal-Mart, Subhiksha are setting their bases at the

places of farm produce to source vegetable, fruits and other farm products. Sourcing Firms Besides the presence of retailers in the countryside for farm produce sourcing, now there are also few players; who are helping various retail chains for their sourcing requirements. For instance, DCM Shriram Consolidated Ltd (DSCL) is in the process of tying up with them to source fruits and vegetables from farmers and supply to the retail chains. DSCL is already doing this for Future Group's Food Bazaar, south based Subhiksha and RPG's Spencer. The new tie-ups would help the company to operate on economies of scale, and to operate all over the country. Conclusion Therefore, with the generous use of Global and Local Experiences, Indian retailers are going to improve their bottom lines with efficient management of Supply Chain and Logistics. At the same time, Indian Retailers like Future Group with retail stores like Big Bazaar, Pantaloons and Reliance Retail are also going to show the world as to how it can be managed in a more innovative and efficient manner.