Retail Supply Chain Strategy for

International Brands in China

February 2013
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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.
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Retail Supply Chain Strategy
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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
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Retail Supply Chain Strategy
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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
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Retail Supply Chain Strategy
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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.
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Retail Supply Chain Strategy
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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!