Logistics and Distribution Innovation in China: Part I

Logistics and Distribution Innovation in China: Part I

East meets West: These logistics solutions in China could have ripple effects up and down supply chains around the world.

Wednesday, February 20, 2019 - 11:35am

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Patricia Daugherty | Iowa State University

Editor’s Note: This is Part One in a two-part series. You can read Part Two here.

Two mega trends, e-commerce and urbanization, are on a collision course that will reshape logistics practices around the world. E-commerce turns what used to be multi-package shipments to retailers into individual shipments to consumers.

Consider that a shipment of 10 cases, each with 10 boxes of shoes, can now become 100 separate shipments to individual consumers. This is a 10-times increase in shipments, assuming no retail growth.

Couple this with more and more people moving to crowded urban centers and a world-class traffic jam on the horizon becomes clear. The way urban logistics is done in the U.S. today will simply not be sustainable in the future.

Thus, we offer a preview of what will impact the U.S. and Western countries during the next decade.

Chinese mega trends

For insights, we need look no further than China, where such mega trends have been accelerating for the last two decades.

China’s online retail sales had year-over-year growth of 34 percent, approaching $1 trillion in 2017. Urbanization, the growth in the proportion of the population living in urban areas, and the associated economic and social changes have added to the dynamism of the market.

China’s urban population grew from 172 million in 1978 to 771 million in 2015. At the same time, the corresponding rural population declined from 790 million to 603 million.

Some have referred to this change as the greatest human resettlement experiment ever.

To put this in perspective, the population of New York City in 2018 was 8.5 million. China’s fifth largest city, Chongqing, has a population more than triple that of New York City.

The combination of e-commerce and urban growth has required Chinese e-commerce providers and logistics companies to develop innovative solutions to meet consumer demands.

Put another way: “In an e-commerce environment, the quality of service is getting increasing importance and is often stimulating attention to performances and push to innovation.”

Ideally, we’d like to motivate logistics practitioners and academics to explore innovative logistics practices in China. Innovative logistics practices may represent solutions that could be applied in the Western world.

Logistics meets e-commerce

Improving logistics is important because it has been shown to be a key driver of competitive advantage and increased market share. This is particularly true with respect to e-commerce.

As noted in Contemporary Logistics in China, “With the increasingly intensified competition in the e-commerce market, logistics has become one of the core competitive factors … hence more and more e-commerce service providers began to offer logistics services [in China].”

A customer-centric (or consumer-centric) supply chain is one that “is structured to meet the ever-changing needs of customers.” Much of the logistics innovation in China is being driven by e-commerce leaders as part of a consumer-centric commerce ecosystem.

In e-commerce, logistics is a natural extension of the retail value proposition, the equivalent of a great in-store checkout experience. Because these companies are focused on the consumer, they are in a great position to expand the services provided to the consumer.

Western logistics companies are typically more focused on the seller (shipper) because that is who pays them. They usually have comparatively little information on the consumer, which makes it unlikely logistics companies could become retailers.

This asymmetric access to information gives retailers a decided advantage in a world of increasingly demanding consumers. Companies like Alibaba have leveraged the direct consumer feedback to make logistics part of a larger ecosystem geared toward faster deliveries, highly adaptable systems and new business models.

Speed of delivery

The consumer-centric logistics innovations in China embrace speed as a defining competitive characteristic. Yet, quick delivery and low cost are tough equations.

Same-day or next-day delivery reduces opportunities to consolidate volume, one of the traditional levers to control delivery cost. Chinese logistics providers are innovating to overcome this challenge and committing to consumer-centric logistics solutions that embrace quick delivery.

Many logistics providers are accomplishing this by operating their hubs in a continuous fashion versus the specific sort times typical in the West. Consequently, Chinese logistics centers can run four waves of couriers to and from the centers four times per day.

Tapping into the gig economy or temporary workers to make quick deliveries in urban areas is also a logistics staple in China. These crowdsourcing business models vary, but they follow a process similar to ride-share services like Uber.

A customer or retailer places an order on one of the delivery company’s apps, typically via smartphone, and the delivery is assigned to an available courier. Couriers near the pickup location are notified and can accept the delivery.

Most often these pickups and deliveries are on-demand for quick delivery. When delivery is confirmed, the courier receives payment.

While the speed of delivery has been a staple of the new logistics in China, the speed of economic change is a constant challenge that requires highly adaptable organizations.

Adaptive logistics

Logistics firms often must sacrifice adaptability to create more efficient, cost-effective networks. Innovative logistics firms in China have often succeeded in doing both by using new technology in new ways.

Consider the innovation of “pop-up stores.” In the U.S., companies like UPS have invested substantial capital into establishing a fixed network of packaging and shipping stores to improve the convenience of their services.

In China, some couriers have set up pop-up stores to collect packages. Integrated GPS and messaging apps allow shippers to know the exact location of delivery drivers. SF Express couriers, for example, may set up multiple pop-up stores throughout the day.

Shippers can be alerted to the nearby pop-up store through the SF app. SF Express not only enables full track and trace from China’s most popular messaging app WeChat, but they also allow users to reserve a pickup time on WeChat.

Upon pickup, the couriers print waybills from portable printers attached at their hips. Customers can also request a push notification of the courier’s photo to enhance safety for both pickup and delivery.

The use of technology to create pick-up locations based on demand versus static physical locations is a digital economy innovation. Another innovative take on a current logistics solution is delivery lockers.

Consider the use of mobile lockers in Hong Kong, where the fixed-location model does not work because real estate is so expensive. In cities like Shanghai, couriers may even take the delivery locker up elevators in high-rise buildings to each floor and call or text the consignee to open the locker.

Hive Box is another great example of innovation. This delivery locker company is jointly owned by multiple courier companies in China and is an open network available to any courier. Because it is an open system, it creates a virtuous circle.

With more couriers using the lockers, the increased volume translates to a need for more locations.

This contrasts to the current locker models in the U.S. that are owned locations by individual firms. In the U.S, the boxes can only be used by the owner. This makes more sense in the U.S. since there are fewer courier firms delivering a large portion of the packages, but this dynamic is changing, especially in the cities.

Perhaps the greatest breakthrough is how open locker systems unlock old-fashioned entrepreneurial innovation with the couriers. Hive Box payment is linked directly to the couriers’ personal account. Couriers make decisions on a daily basis as to whether to drop a package in a Hive Box and pay for it or take the time to deliver the package to the consignee.

While they pay to drop a package in a Hive Box, they can deliver more, which means more revenue. Some couriers will even pre-book locker space on peak days. Some of these lockers have more than 100-percent utilization, meaning that more than one delivery and pickup is made in a single day.

This represents a new spin on a current Western logistics solution and helps create a new business model.

Enablers of logistics innovation in China

Logistics innovations in China are made possible because of unique environmental characteristics.

(1) Ubiquitous connectivity and applications

The wide adoption of mobile devices and ubiquitous commerce-enabling applications make many of the logistics innovations possible. WeChat and AliPay (Alibaba) are omnipresent in the major cities where most people control their life on their smartphone.

While similar communication and payment platforms are available in the U.S. and Europe, it is not the same seamless experience. For example, in Europe, the payment process will typically route the user to a separate website for authentication.

These commerce-enabling applications in China are supported by heavy investment in cloud-based big data solutions.

(2) Dynamic, low-cost labor environment

As noted earlier, the rural population moving to cities is creating in-country immigrants seeking employment. Migrants provide a massive labor force – all connected with smart phones embedded with messaging and payment applications.

The technology-empowered gig workers create a social network for logistics that can be accessed on an as-needed basis. Further, many of these logistics innovations are enabled by an entrepreneurial mindset in the immigrant population.

Interestingly, the core driver of much of this logistics innovation in China could be the capitalist ideology of Adam Smith’s “invisible hand,” which holds that individuals laboring to maximize their personal wealth collectively also benefit society at large, even though this was not their intention.

An added benefit of this increase in urbanization from a logistics viewpoint is density.

In the logistics business, density creates opportunity. For logistics companies like UPS, small changes in delivery density (packages/stop and distance between stops) driven by population density have large impacts on delivery costs. In China, this benefit has extended beyond package delivery to people delivery (public transportation), enabling heavy investments in projects like high-speed rail.

(3) Government support

Government support for the logistics industry and specific enabling technologies may also promote logistics innovation in China. The General Office of the State Council released guidelines in 2017 to encourage smart supply chain innovation across China.

The guidelines include administrative reforms, tax relief for logistics vehicles and consideration of the need for logistics support in rural and urban development planning.

This is Part One in a two-part series. You can read Part Two here.

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