Excerpt from: China Supply Chain and Logistics Strategy
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| April 21, 2006 | | Regional vs. National Distribution Centers | Foreign manufacturers distributing in China’s domestic market typically are faced with the question of whether to set up one national DC in Shanghai versus 4 regional DCs in locations such as Beijing, Chengdu, Guangzhou, and Shanghai. The decision can be evaluated by analyzing cost and service level trade offs. A simplified RDC vs. DC matrix can be used to aid in the decision making process.
Consideration of the local logistics environment is also crucial when making such a decision.
A 4 hub distribution network in China (Shanghai, Guangzhou, Chengdu, Beijing) will allow you to reach about 80% of your customers within 1 day. Service levels will be high and costs are also higher. Cost per case can be expected to increase at least 30%. Additional costs include Storage + Handling (In/Out) + Local delivery.
For some companies, costs can be minimized by working with a warehousing and transportation provider which does not charge a minimum transportation fee. Typically such service providers are the local mom & pop operators providing very low rates and unreliable service.
Problem Faced by Many FMCG Manufacturers is Small Order Quantities by Retailers
Many foreign FMCG manufacturers selling in China are faced with the problem of low order quantities by the major retailers. This results in suboptimal logistics performance and significantly higher costs. In response, companies are forced to work with mom&pop logistics operators. For example, if your customers in Chengdu order small case quantities and your transport provider charges a minimum of 1 cbm per shipment from Shanghai, then your total logistics costs will increase significantly by using a national DC in Shanghai verus an RDC in Chengdu. This is because the cost to ship 1 carton to Chengdu will equal the cost to ship ~20 cartons (Assuming 20 cartons = 1 cbm). By shipping the 20 cartons to the Chengdu RDC you will only be paying an additional local delivery fee in Chengdu (in addition to warehousing fees). Your total cost per case may be reduced by approximately 30%. On the other hand, by outsourcing transportation to a mom & pop operation which does not charge a minimum fee your logistics costs will be minimized by shipping from the Shanghai DC. However, service will suffer due to longer shipping distances, unreliability of the service provider, etc.
Costs can also be minimized by shipping loose cartons since ~20% additional product can be loaded into a truck for delivery to the RDC. Shipping full pallets will increase transportation costs but service levels improvements will consist of higher security, limited pilferage & loss, reduced damages, quick loading/unloading, truck with a tailboard, and no hidden costs.
RDCs Are a Good Choice When Service Levels Must be High
From the decision matrix below you can see that the lowest cost operating model would be to use a centralized DC in Shanghai utilizing mom&pop warehouse and transport providers and shipping loose cartons with no minimum delivery charges. Service levels would obviously suffer for the following reasons:
- It is difficult to deliver high service level with long haul deliveries (unless you ship FTL).
- Damage rates are higher
- On-time delivery ratio is poor
- Collection of proof of deliveries is difficult
- The transport provider is not well-known or reliable
For some companies shipping higher volumes the operating model offering the highest service and lowest cost would consist of 4 RDCs, shipping full pallets with a reliable 3pl which charges minimum handling fees. For other companies with lower volume shipments a national DC in Shanghai would be optimal if their customers do not require delivery within 1 to 2 days.
| Low Cost
| High Cost
| High Service
| 4 RDCs
No min. charges
Mom&Pop
Loose cartons
| 4 RDCs
Min. charges
Known 3pls
Full pallets
| Low Service
| Shanghai DC
No min. charges
Mom&Pop
Loose cartons
| Shanghai DC
Min. charges
Known 3pls
Full pallets
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