Western Retailers Rethink SCM Postponement Strategy

Just recently the Financial Times had an article, titled "Western retailers shift their supply chain tasks to China," regarding changes the author, Robin Wright, reports are occuring in retail and consumer goods industry supply chains. The focus is where postponement on the creation of market-ready finished goods is increasingly being dropped for including such work closer to the actual production in low cost countries.

Although the article could use more specifics or examples of retail products in question, it states the primary driver of making such a shift in strategy is lower costs. But is this really the case? The author says little about the costs associated with reworking products close to market that have been imported with bad packaging or mistakes in finalization.

Later, the author mentions another factor that I feel has more of an impact than low costs: the fact that low cost countries, such as China, are increasingly more sophisticated in finished goods for foreign markets and the fact that their own markets' growth will eventually require retailers to have this capability rooted in China. Below is that section:

Vera Tang, general manager for corporate development of Hong Kong-based Kerry Logistics, expects growth in the next few years to be "huge" as so many companies still run expensive distribution centres at home.

"You can imagine - in those high-living-standard countries like Scandinavia - if we can replace what they are doing at the destination with a similar operation at origin, the percentage [saving] can be huge."

Among Kerry clients using distribution centre bypass are a New Zealand-based lingerie maker and department store chains in the US, Spain and Chile. In Chile's case, she said the company shifted logistics operations abroad not primarily for cost reasons but because Chinese workers were more reliable.

Later, the article adds:

Many expect Chinese processing to become more sophisticated. Erxin Yao, managing director for China at OOCL, a Hong Kong shipping line, said his company's logistics arm hoped to attract imports of goods not made in China for sorting at its warehouse to distribute to Japan and Korea.

If Western retailers are thus focused less on thru-processing in their more expensive markets, and in other expensive countries like Japan, and are able to shift savings to investments in marketing or elsewhere, it is a valid shift assuming imports are of high quality and accuracy. However, if this shift decreases the quality level of market responsiveness, then this also must be carefully factored.

For Japan in particular, I have personally seen several instances where pre-packaged products have arrived in unsatisfactory condition--and often if there is even just one problem per case, the entire case is rejected. To ensure these problems are not identified at store locations, inspection and thru-processing in Japan has always been time- and people-intensive, leading to high material handling and processing fees that confound importers.

So this strategy, what is called "distribution center bypass," should not be applied liberally, but rather carefully considered for different product groups and their related market requirements.

Comments

[Eric]

"Many expect Chinese processing to become more sophisticated. Erxin Yao, managing director for China at OOCL, a Hong Kong shipping line, said his company's logistics arm hoped to attract imports of goods not made in China for sorting at its warehouse to distribute to Japan and Korea."

Good luck Erxin. To my knowledge you cant import products into china then re-export them. When I was at APL Logistics we had an electronics customer who wanted to take products made in SE Asia and import to China for consolidation with Chinese origin goods, then re-export. In the US, you can do this under a TIB. At least 4 years ago you couldnt do this in China unless things have changed.

OOCL is a HK Chinese company, so that may also be a factor.

Eric