13.2.6 Strengths of DCHS’ Logistic Services
Although DCHS has a relatively good base and has developed intoa powerful logistics company in the Pearl River Delta, it has alsofaced some problems. The development of the TPL industry hasincreased competition. DCHS is facing some challenges: how toexpand the business, how to develop new customers, how to maintainlong-term cooperative relationships with old customers, how to facethe pressure from competitors in price and services. These concernspushed DCHS into changing from a simple logistic provider to a TPLprovider. DCHS’s logistics team pays much more attention to thevalue-added services the company can provide, considering it to beone of the company’s competitive strengths.
Value-added services in the import bondedwarehouse
The products inside a bonded warehouse are equivalent to thoseoutside of China: they do not need to go through the importprocedure, and thus do not have to pay import duty, they do notneed to go through the export procedure when they are laterexported. During the period between import and export, the lawpermits the carrying out of many value-added services in the bondedwarehouses. Additionally, the cost for the rent of the warehouse inChina is much lower than that in other developed countries. Thefollowing example illustrates this situation.
Dongfang shoe factory in Dongguan exported a batch of sportshoes to Germany in June, 2006. Due to a slight defect inappearance (some tiny grey plastic particles stuck on the bottom ofthe shoe soles) they were regarded as unsuitable when the shoesarrived in Germany. The factory faced two choices: one was toentrust a local factory for second processing but the processingcost was too expensive and surpassed the commodity value. The otherwas to go back to China, but it would then have to go through theimport and export process again. At that time, the shoes had beenreturned to Hong Kong with a storage cost of 500,000 yuan permonth. The factory owner, Mr Xu, saw an advertisement about Sims ina harbor of Hong Kong and contacted the company for help. DCHSfirst transported the shoes to the bonded warehouse, which onlycosts 80,000 Yuan per month to rent, then organized workers toclean out the shoes and had them repackaged. Mr Xu soon foundanother customer and sold them to France. DCHS’s successfulsolution was based on its advantage of an imported bonded warehouseand value-added services, and solved the customer’s problem.
Logistic network design service based on import bondedwarehouse
Brown and Haley sells candies under the brand name Almond Roca,and it is very popular in China and Southeast Asia. Sims tradinghas been Almond Roca’s trade agent for over 10 years in the Asiamarket.
Before 2005, Almond Roca was only imported from the USA. Theprice was expensive and the product was only packaged in two sizes.The lack of variety in the packaging and the high price soon ledcustomers to turn to other brands. In recent years, the marketshare of Almond Roca has declined slightly. Faced with thisproblem, Sims and Brown and Haley thought to change the situationby redesigning the logistic network to offer a better service.Aware of the difficulties experienced by Brown and Haley, Simstrading introduced DCHS to them.
The original logistic network of Almond Roca was so organized:the Almond Roca factory in the USA collected the sweet materialfrom the USA producers and the packing material from papermanufactured in Zhongshan and Dongguan of China then shipped itthrough the ShenZhen Yantian Port. For the Asia market, the finalpacked candies were shipped to Sims Trading in Hong Kong, who werein charge of selling the Almond Roca for China and all theSoutheast Asia Market.
After considerable investigation and preparation, the DCHS teamdesigned a new logistics network. In the new design, instead ofpacking the Roca in the US factory, the candies are shipped in bulkto the bonded DCHS warehouse, as well as the packaging materials.The packing is conducted in the imported bonded warehouse, andwithout any complicated import and export procedures, the finishedproducts are sold to Southeast Asia. Customs clearance is onlynecessary for goods sold in China (Figure 13.4). DCHS providesservices of shipment, packing and quality controls for the entireoperation. Because DCHS installed an advanced computerizedinventory management system, Brown and Haley can log in to thesystem and monitor its Roca inventory. As the best temperature tostore candies is 20°C, DCHS, through GPS, cautiously and carefullymonitor all the storage, packing and transport processes to assureAlmond Roca’s quality.
This cooperation started in June, 2005 and by the end of 2006,both partners were satisfied with the relationship. The customerresponse time for Roca from buying materials to sales isone-quarter of the original. The price has decreased due to savedCustoms clearance and the reduced logistics costs. DCHS is alsohelping Brown and Haley to choose qualified and low-cost packingcompanies in China.
Logistic network design service based on export bondedwarehouse
This is a further example of how DCHS takes advantage of itsbonded warehouse to provide network design for its customers, whichdemands a higher level of cooperation with each party involved inthe network.
La Cafetière is a famous producer of coffee pots and offers anexcellent price/value relationship, targeting the middle to highend of the coffee-maker market. It already sells its products allover the world with two distribution centers, one in the UK and onein the USA, to serve its major markets in Europe and the USA, thatin total account for some 60-70 per cent of sales. La Cafetièrealso sells in Asia where there is a considerable market growthrate.
La Cafetière’s distribution center is located in Greenfield,north Wales. It operates six days a week, 24 hours a day. Demandfluctuates and results in variation of working loads in the center.This challenge is well managed, but the biggest challenge comesfrom the outsourcing of products. Products are manufactured inAsia. This enables La Cafetière to satisfy the market with decentmargins; however, the drawback was that the company was forced tomaintain quite a large amount of inventory for each label in thedistribution center due to the long delivery time, usually over 45days. The old logistics flow is shown in Figure 13.5.
La Cafetière designs the coffee pots and sends the design draftsto its Asian manufacturers for production. Each manufacturer isresponsible for a specific type of coffee pot. The manufacturerssend the finished products to the La Cafetière’s distributioncenter in the UK for packing through Shenzhen Yantian port forcustom clearance. In the UK center, all of the goods were repackedby themselves, with or without promotion items, and then exportedto customers around the world, including Asia. Asian manufacturersof La Cafetière are distributed around Pearl River Delta inYangjiang, Zhongshan and Zhuhai.
La Cafetière has one distribution center in the UK, andeverything from the raw materials, packages and coffee-makers,passes through here to the UK to the manufacturers and sale agentslocated across Europe and Asia. Such a network has obviousshortcomings.
It requires a minimum production quantity of 3000 sets ofcoffee-makers, which filled one 40-inch container, otherwise theshipping costs per set are high. However, today’s consumer ordertends to be lower in quantity with more variation.
Demand for the company’s coffee-makers from Southeast Asia wereincreasing at a rapid rate, but cargo needed to be shipped to theUK from China for quality controls and then shipped back to China.Not only the custom clearance procedures were complicated, but alsothe shipping costs were high. If quality controls in the UK foundsome quality problems, the products needed to be shipped back andforth between China and the UK several times.
Last but not least is the long shipping time. The shipping timefrom factory in Guangdong to the center in the UK took one month.The cargo for the Asia market took three months from the order tothe arrival of final products: one month for the factory tomanufacture the goods, one month’s shipment from China to the UKand one month’s shipment from the UK to Asia.
Mr Johnson, the distribution manager, looked at the logisticflow chart after comments from the company CEO: ‘Johnson, consumercomplaints against us have grown – 1256 complaints in 2004, up to3034 this year, especially in the recent three months. Mostcomplaints focus on the late delivery. Can we take any steps tosolve this problem?’
At the HOFEX 2005 exhibition mid-May 2005 Sims Logistics werepromoting their one-stop logistics services. Customers and visitorswere particularly impressed by Sims’ new logistics center inXinhui. This was where Mr Johnson first met with Mr Smith, whichled to the strategic cooperation between DCHS and La Cafetière. MrSmith recommended a new network design, taking advantage of theirbonded warehouse in Xinhui, to Mr Johnson.
After several months of analysis and discussion between themanagers of DCHS and La Cafetière, they came up with a newlogistics network solution (shown in Figure 13.6). All the coffeepots and packing materials from the supplier are sent to DCHS’sexport bonded warehouse. Within the bonded warehouse, DCHS willpack them, conduct quality controls and provide cargo consolidationservices. As a result, DCHS not only replaced the main functionsoriginally provided by the distribution center in the UK, but savedLa Cafetière from expanding its present warehouse. The finishedproducts are sent to the Nansha port or Hong Kong port depending onthe cost, and from there sent to Asia, Europe or the center in theUK. DCHS owns very advanced inventory management (SLS) software,through which the British company is able to monitor theirinventory any time.
Such a design brings many benefits to La Cafetière. All of themanufacturers are near the DCHS warehouse. Time is saved in theshipment. If quality problems occur, the goods can be returnedquickly from DCHS before they are shipped overseas. Secondly, laborcost of China is much lower than that in the UK. Thirdly, all theproducts that were originally sent separately by each factory tothe distribution center in the UK can be aggregated into fullcontainers and sent to the market directly. The shipping costs arereduced dramatically.
In early 2006 La Cafetière and DCHS signed a contract andstarted the logistics cooperation. The results show that DCHSlogistics’ design successfully solved La Cafetière’s warehouseproblem, and reduced La Cafetière’s shipment costs.
1. What are the strengths and weaknesses ofDCHS?