Navigating China’s Challenges

BY JAMIE BOLTON PARTNER, SUPPLY CHAIN MANAGEMENT SERVICE LINE, ACCENTURE. WENBO (WATSON) LIU SENIOR MANAGER, SUPPLY CHAIN MANAGEMENTSERVICE LINE, ACCENTURE.

One-fifth of the world's consumers live in China—more than in all of Europe and North America combined. Most of the new Chinese citizen's spending is focused on the basics: Food, education, clothing, shelter and transportation.

China's business relationship with one of those basics—food— specifically the supply and distribution of products requiring temperature and atmospheric control, is an area of great concern to Chinese companies, as well as the many multinational corporations that invest or plan to invest in China. After all, China is experiencing all the growing pains that are typical of any expanding economy: Underdeveloped infrastructure, inadequate distribution systems,culture clashes and limited technology.

Companies aspiring to high performance understand that all of these hurdles must be surmounted to ensure an effective ‘cold supply chain’. To be a true high performer, a company must survive and thrive across economic and market disruptions, such as those presented by China's cold chain challenges. As corporations pursue profi table growth in new markets like China, Accenture's ongoing research into the characteristics of high-performance businesses has shown that companies' supply chains can spell the difference between success and failure in their endeavor. An essential underpinning of any growth initiative, the supply chain is critical to execution excellenceand market creation.

Hurdles

The ‘cold supply chain’ embodies a chilled or frozen food's complete life cycle: From the point of harvest or processing until it reaches the consumer—including pre-cooling, freezing, storing, delivering, distributing and retailing. Cold supply chain products must be kept in a consistently chilled environment, which requires the cooperation of farmer, processor, warehouser/distributor, transportation provider,retailer and consumer.

Every year, cold chain logistics problems in China result in massive product losses—largely because only 15 percent of all perishableproducts are transported by refrigerated vehicle, compared to nearly 90 percent in developed countries. The net effect is that $8.9 billion in fruits and vegetables are lost annually. This represents about 30 percent of China's annual output. Product losses in most developed countries are about 5 percent; in the US, the figure is less than 2 percent. In addition, millions of Chinese suffer various levels of food poisoning due to improper handling, inadequate refrigeration, and a lack of cold chain regulation or enforcement.

Contributing to both problems is the comparative rarity of modern processing practices: Only 25 percent of the food Chinese citizens consume is processed, compared to about 80 percent in more developed countries.

Government exacerbates the problem. China's cold supply chain is overseen by a complex mix of authorities, including the Ministry of Railways and the Ministry of Ministry of Light Industry. China's vast territory and broad differences in climate and temperature are a unique challenge to the long-haul transport of perishable foods. Massive distances also mean that the needs of less developed communities in China's interior generally go unaddressed. In fact, transportation infrastructure is China's most daunting cold-chain problem:

a) rail transport
About 20 percent of China's 22 million tons of perishable foods— mostly frozen meat and poultry—are moved annually by refrigerated railcars. Refrigerated container services are available, but the cost is often prohibitive.

b) road transport
Trucks carry about 25 percent of China's cold chain volume. However, a lack of refrigerated vehicles limits their range and usefulness. For the Guangdong province alone, more than 50 percent of fish, fruits and vegetables cannot be transported to the North due to lack of refrigerated vehicles. Traffic control and restricted access to urban areas compound the problem.

c) inland water transport
China has about 50 reefer carriers and a total capacity of 71,120 tons to cover its 124,000 kilometers of navigable waterway. This represents about 5 percent of total domestic freight volume.

d) ocean transport
China's seaports struggle constantly with problems related to bottlenecks, navigation/scheduling, berthing, cargo loading/ unloading, inspection, customs clearance, security, tracking/tracing and storage. The country's 10,000 refrigerated containers are used mostly for international trade.

e) air transport
Poor coverage, high costs and insufficient capacity mean limited use of airfreight in Chinese perishable food transport. Only about 50,000 tons per year of perishable product moves by air.

Infrastructure problems also are the result of inadequate facilities and equipment. For example, cold storage capacity in China covers about 25 percent of total output, compared to 70 percent to 80 percent in developed countries. Most of China's cold storage facilities are vastly out of date, forcing product to be moved manually and handstacked. Location compounds the problem: Cold storage warehouses generally are in major port cities, but few are close to their supply bases. In developed countries, most cold storage facilities are near their supply and production bases, which allows for timely treatment and processing.

Fragmented, unclear rules and regulations exacerbate cold chain problems. There are no country-level laws or regulations governing food safety in storage, transportation, distribution and retail. Trade rules and customs regulations are extremely complex and vary from region to region. Some have been upgraded in accordance with World Trade Organization (WTO) guidelines, but many remain complicated or vague. For example, there is no countrywide process for reviewing or resolving grievances. Enforcement tends to be arbitrary and opaque. Plus, Chinese lawmakers have been slow to curtail longstanding issues associated with favoritism and local protectionism, and to respond forcibly to ongoing corruption and smuggling problems.

In China, the need for capable third-party logistics services providers (3PLs) is acute. The country has more than 510,000 such companies. However, most offer basic transportation and storage services only. From a storage perspective, most public warehouses do not even have racking systems. Goods are hand-stacked.

Technology shortcomings affect every aspect of China's cold supply chain. Most acute is the need for precise commodity sorting and atmospheric control during transport. No company participating in an Accenture survey offers direct product purchasing online. Lastly,China's cold chain challenges often stem from people. On the one hand, many Chinese companies lack the management know-how and talent to establish effi cient operations. More than 90 percent of companies requiring cold chain services have to build them in-house. On the other hand, the preference of Chinese consumers for fresh foods has slowed the development of chilled/frozen product and facilities. Of course, fresh foods are highly nutritious and palatable, but practical issues associated with safety and portability limit their use. Increased acceptance of processed and preserved product is a public health priority, not just a commercial issue.

Developments

In China's most recent Five-Year Plan (2001-2005), chilled/frozen food was given priority status. This partially explains why the country's frozen food market is growing at an estimated annual rate of about 10 percent, and the annual output of processed frozen food is growing at 20 percent. A good example is ice cream, the per-capita consumption of which is under one liter in China, compared to about 6.5 liters in Europe and 12 liters in the US. Ice cream's growth potential has attracted many international companies to China.

To meet demand, Chinese retail is modernizing and growing, particularly in logistics. Again, global food-store chains are leading the charge. Food processing advancements are also accelerating: The food processing industry has grown at an annual rate of 14 percent since 1981, according to the China Food Industry Association. With additional WTO-mandated reforms and the expertise of foreign companies, annual growth could reach 18 percent within three years. WTO-mandated tariff reductions are allowing more foreign products to reach China.

Opportunities

High-performance businesses recognize that a tremendous opportunity exists in China to attract more buyers through effective cold chain management. These top performers understand that creating and exploiting distinctive, hard-to-replicate capabilities—in particular, an effective and efficient cold supply chain—can enable them to seize growth opportunities wherever they may arise. The good news for organizations aspiring to high performance is that there are myriad ways to make this happen.

Farm

Modern supply chain management begins here—with simple measures such as plucking and trimming fruits at the right time and in right way: Washing, spray treating, waxing, and employing proper packaging and handling technologies. All of these efforts can increase shelf-life and help maintain the quality of fresh product.

Processing

Know and understand the cold chain system. Consistently and diligently monitor temperature during the processing process. And then package for the entire transaction.

Transportation

Transportation management improvements are essential across the China supply chain. On the outbound side, manufacturers and processors can benefit by ensuring that products that are packed together are compatible; that cargo tracking/tracing capabilities are enacted; and that transaction delays at terminals, holding points, packing centers, carrier depots, and packing stations are minimized. If diverse products must be shipped together, then methods for monitoring temperature, chilling rates, production/sensitivity of ethylene, odors, off-flavors, and product life should be enacted. On the inbound side, extra effort must be made to monitor and enforce ontime deliveries. Strict inspection of received goods is just as important, with contractual recourse made available for spoiled or otherwise unacceptable product.

Distribution

Among the many ways companies can improve cold chain distribution in China, here are three specific areas:

a) Planning and forecasting
Balancing demand and supply is particularly tough in emerging markets where physical distances are great, buying patterns erratic, and delivery and product quality less predictable. Deployment of planning/forecasting technology is vital. However, unique, situation-specific capabilities also are needed to understand supplyconditions and make adjustments.

This is what a leading farm produce trade center in eastern China is seeking to address. It is working on an analytical warning servicecovering farm produce, animal products and seafood. Professional analysts would produce market studies and provide advance notification of supply problems and fluctuations.

b) Outbound management
The keys here are information and preparation. That means developing explicit transaction documentation, including requirements and instructions to involved parties; maximizing knowledge of supply chain partners' facilities and capabilities; and avoiding product damage and environmental exposure by packing for theentire transaction.

c) Freight forwarding
International food manufacturers and retailers are somewhat hamstrung because the Chinese government limits the provision of freight forwarding services by foreign companies. Companies can compensate to some extent by strictly following and monitoring temperature-controlled line-haul trucking. Diligent tracking/tracingcapabilities also are key.

Third-party logistics

Most food companies doing business in China have little choice but to rely on in-house logistics groups to support cold chain operations. However, many would prefer to outsource these operations and focus instead on their core capabilities.

In fact, Accenture research confirms that high performance businesses revisit and adapt their operating models to sustain competitive advantages over time, including embracing opportunities to outsource non-core competencies to service providers for which the work is a core competency.

Outsourcing can help companies entering or expanding their presence in China to gain access to important new capabilities without upfront capital investments. This is particularly important when conducting business in new or uncertain markets like China. With outsourcing, a company can quickly ramp up for business to capitalize on opportunities in an emerging market, and reap the benefi ts of fi rst-mover status. Before this can happen, however, more third-party services providers must become available, with capabilities that include cost-effective, integrated, end-to-end supply chain management. In the meantime, manufacturers, processors and retailers must do it themselves or rely on the few full-service players that do exist, such as DHL Logistics.

Additional improvement opportunities are not tied to one specific cold chain function or business process. Some of these are:

a) Develop China-specific key performance indicators (KPIs)
Metrics such as distribution cost as a percent of sales, productdamage ratios and on-time delivery should be calibrated to ensure high performance relative to China's unique circumstances.

b) Benchmark leading practices
Cold chain practices in China should be benchmarked against leading practices in developed countries. This will help cold chain players in China identify performance gaps and find new solutions.

c) Leverage special technologies
Non-electric cold containers are available that use pressurized carbon dioxide to reduce spoilage. Easy-to-assemble insulated pallet containers are designed to provide excellent thermal protection for large payloads, while polyurethane-insulated containers are ideal for maintaining temperature in shipments over long periods or extreme temperature conditions. Special packaging, materials and equipment also are available to extend product and shelf life. Foam bricks, for example, stay uniform in shape while frozen or thawed, and make tightly fi tting packaging confi gurations a cinch. The bricks also surpass other refrigerants for cooling longevity due to a slow, even rate of heat absorption.

d) Invest in training
Extensive distance-learning programs for line and staff are available for nearly all aspects of supply chain management and can greatly improve an organization's productivity and overall performance. Customization can also be obtained to make these programs even more applicable to China-based training in areas such as receiving,inspection, cold storage and delivery.

Implementation considerations

Although it seems as if supporting the growth of fresh- and frozenfood processing and storage is one of the Chinese government's toppriorities, this hardly means that positive results are assured.

High cost of entry is another barrier. Currently, the capital required to set up logistics companies in China far exceeds the amounts neededto operate nonasset-based services. The government supposedlyenforces these requirements to control fraud. However, the approachhas not been particularly effective, but no credit-rating or audit/inspection system has been developed to replace it.

China's economic, political and cultural environments make it difficult for companies to emulate leading practices. Company-wide economic and operating models often must be recalibrated, which requires long-range planning for an area whose economic and operating future is not particularly predictable.

Most companies also will have to accept a slower return on investment than what they are used to receiving. As we have discussed, a developed cold chain infrastructure is largely absent in China. This not only means a signifi cant outlay for those determined to enter the market early, but it also means that tomorrow's competitors could benefit by leveraging an infrastructure that was largely paid for by earlier entrants.

Lastly, China's marketplace already is one of the most competitive in the world—despite the immaturity of its cold chain infrastructure. And irrespective of the country's global friendliness, the advantages favor the country's domestic industries.

Nevertheless, signifi cant opportunities and increasingly open markets seem inevitable, since waste, losses and high prices are simply not acceptable. The government also knows that excessive protectionism will hinder progress, given that constrained competition means constrained self-improvement. The Chinese government simply wants to hold out until a reasonably level playing field is created. This is why the value proposition of an efficient cold supply chain is particularly strong: Effective cold chain management will contribute to national savings and efficiency, reduce waste, push down prices, and engender vast improvements in public health. It also will help ensure the success of international manufacturers, processors and retailers because effi cient supply chain management helps other businesses operate more efficiently.

Simply put, there is no point to growing, processing, shipping and selling if a quality, right-priced product doesn't reach the end user. Domestic and international companies are all too familiar with this. Most importantly, the Chinese government understands this basic supply chain tenet. Optimism is warranted, therefore, because every party ultimately has the same goal: an integrated, efficient cold supply chain that increases the health of the marketplace, as well as the health and economic wellbeing of the consumer.

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