Is China the future of warehousing?
Now that most U.S. manufacturers have outsourced manufacturing to China, will distribution follow? Modern conducted a virtual roundtable with four supply chain experts to see what they had to say about the future of warehousing.
By Bob Trebilcock, Editor at Large -- Modern Materials Handling, 8/1/2007
Everyone knows that China has become a major force in manufacturing. The advantages of the country's low wages and overhead far outweigh the additional logistics costs of shipping products all the way from Shanghai to Long Beach, Calif., and on to a store or regional distribution center.
That raises an interesting question: Could those same cost advantages be applied to warehousing and distribution?
Why not do value-added processes and store consolidations in China and then ship directly to a regional DC? Better yet, why not bypass the DC altogether and ship directly to a store?
That idea is not as far-fetched as it sounds, according to a recent survey of Chinese logistics providers by Jones Lang LaSalle (404-995-6300) and the China Supply Chain Council (86-21-5102-1617).
It's not surprising that processes associated with shipping bulk products to the United States—such as short-term storage prior to shipment—represent the most significant current use of warehousing space in China today. But "plans over the next three years indicate a shift away from warehousing for storage purposes toward higher-value activities," the report states, including a strong emphasis on value-added services.
In addition to value-added services, Chinese logistics providers expect:
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to operate with narrower delivery time windows
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to see a reduction in customer lead times, and
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to rely more heavily on information technology to meet customer demands.
That sounds a lot like the domestic third-party logistics (3PL) industry to us. In fact, according to some reports, products are already being palletized and shrink wrapped in Shanghai for delivery directly to Wal-Mart superstores in the United States and Tesco stores in Europe.
To find out how real the threat is to North American warehousing and distribution, Modern Materials Handling called on four supply chain consultants with experience in China, India and other low-cost countries, including:
George Stalk Jr. with The Boston Consulting Group
Jim Tompkins of Tompkins Associates
Randy Telfer with The Progress Group, and
Brooks Bentz at Accenture.
Modern: To start, I'd like to ask each of you the most basic question: Is it feasible that one day we may move warehousing functions other than storage to low-cost countries like China and India?
Brooks Bentz: At Accenture, we not only think it's feasible, we've been pitching this idea to our clients. Instead of bringing everything here in a container, crossdocking it to a DC, and sorting it for delivery to a store, why not pack and label it in Asia, send it to a UPS or FedEx sortation center here in the U.S. and then sort it directly to a store? The economics are compelling because everything from the labor to the utility costs to the cost of paving the yard is cheaper there than here.
Randy Telfer: It's feasible, but it's daunting. In the late '90s, I ran logistics for a global plastics company. We had warehousing in Hong Kong, Singapore and Thailand. I dealt with 3PLs then, and what I ran into is that you had to do a lot of due diligence just to figure out who owned what. That's a risk management issue. Put that aside, and you're still trading off the savings per order in labor rates against the cost per order in transportation to meet service levels and lead times. I'm not sure right now that there's a savings there.
Jim Tompkins: I'd like to approach the question from a different angle. It's interesting because we're running out of capacity in our ports. The average U.S. port can handle about 4,500 TEUs, or 20-foot containers, per acre and we're running out of land around the port to build new facilities. In Hong Kong, they can handle 15,000 TEUs per acre, which is the capacity of a super vessel. If one of those vessels comes into Hong Kong, it takes an acre to handle that vessel. If it comes into Long Beach, we need 3 or 4 acres. Somehow or another, we have to do something different from what we're doing now to get all that stuff off the boat.
George Stalk: I agree. There's no question but that China is making huge investments in its infrastructure, including ports and warehousing. I was there in 2002, and I saw all kinds of infrastructure issues, everything from roads to airports to power. I've made three trips since last summer, and it's amazing that the infrastructure issue is almost gone. We're planning to build three new ports in North America, including Canada. More than 80 are being planned for China. I know the idea of moving distribution there is in the wind. I can't tell you when it will happen, but I think it will happen. Someone like Wal-Mart or Target that has a sophisticated supply chain and lots of volume will do it. But, it won't be easy.
Modern: Why is that?
George Stalk: There's a huge issue around managing complexity. Any time you have volatility in demand, which you have in retail distribution, for instance, the complexity goes up. The cost to a retailer of an out of stock is huge. It's much larger than the savings from outsourcing distribution to China. And, you can't keep logistics costs low if you have to shorten lead times from China by using air freight to keep items on the shelf.
Jim Tompkins: I think that's right. We already have a client that is putting garments on hangers and doing store labeling in China. When a container arrives on the West Coast, the boxes are sorted directly to a store. In another scenario, we bypass Long Beach and ship a container directly to a regional distribution center. But if you don't have a good demand plan, you're toast.
Randy Telfer: Store allocation is the reason we think it's more likely it won't happen than that it will. Most retailers try to delay the final store allocation as long as possible. Right now, they may wait until a ship docks in Long Beach. To do store allocation in China, you have to plan two to four weeks before an ocean shipment arrives at the port. That might save physical handling labor, but those savings could be eaten up by the costs associated with forecasting further upstream. And forecasts are always off. That means higher inventories, stock-outs, obsolescence and discounted selling.
Brooks Bentz: We see two real stumbling blocks, despite the positive economics. One is that it's a huge cultural shift. You're really giving up immediate control. That can be overcome with good economics. The other issue is systemic. We're aware of a couple of companies that are doing this as a pilot, but the barrier is information technology. That can be overcome, too. But, when you put No. 1 and No. 2 together, it's a barrier.
Modern: Is there a scenario where it could work?
Randy Telfer: Absolutely. End-of-aisle displays are a labor-intensive warehousing task. There's no reason those couldn't be built and populated overseas and then shipped to stores. You may have a product-density issue, but that's just a math problem.
George Stalk: High value or very light products are another area because you can afford to air freight those products. I have one customer that makes women's lingerie. Seventy percent of their shipments go by air, anyway. If you're already shipping by air, you can do all the value-added services in China and still meet shorter lead times and high customer service levels.
Brooks Bentz: Another area where it would work is store allocations at the beginning of a season. You're pre-allocating 75% of your inventory, and you're saving the remaining 25% to allocate on the fly. In that situation, it might make sense to build a consolidation center in China where you bring in all the store merchandise from all of your Asian vendors and prepack that merchandise for the initial distribution to the stores. You can then do replenishment from a distribution network in the U.S.
Modern: So, you might need fewer or smaller DCs here in the U.S. That brings us to the last question: What should distributors and 3PLs here in the U.S. do to remain relevant.
Brooks Bentz: Right now, they don't have to do a whole lot because the economics make sense for them today. But, we don't know how shifting labor and fuel costs are going to change things long term.
George Stalk: I actually think it's an interesting opportunity for the big 3PL guys like UPS, FedEx and DHL that have the IT infrastructure in place to do this. If I were them, I'd be talking to a Home Depot or a Target to try doing something like this for them.
Randy Telfer: If you're a DC manager or a logistics manager and you care about your empire, the right thing to do now is to do your job as well as you can so that someone up the ladder doesn't make a decision for the wrong reasons.
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