e-Commerce and Supply Chain Management in China
Read this article. The authors provide a broad view of decisions on supply chain management concerning e-commerce in China, considering several factors, including consumer access to the internet and telecommunication infrastructure for a given location. Two case studies are included to evaluate the models included in the article. Pay particular attention to the intersection of IT and non-IT considerations for firm supply-chain management strategies.
Theoretical background
Relevance of international trade models and transport cost theories
E-commerce
is one of the prospering and competitive spheres of businesses in China. Jiang and Prater correctly estimated that e-commerce
adaptation would take time from Chinese logistics system and
infrastructure, however, once done, it would change significantly this
country. The long-term expectations for this digital market remain high
not only within one country, but across the global market, where a full
potential is far from being realized, especially in the sphere of
cross-border trade. Absolute e-commerce cross-border trade was estimated
to be 6.66 trillion yuan (around one trillion USD) in 2016, and this
mostly to export direction. Based on the statistics of
China's Custom, absolute e-commerce cross-border trade is 8.06 Trillion
yuan in 2017 (approximately 1.2 trillion USD). In the first half of
2018, absolute e-commerce cross-border trade reaches 4.5 trillion yuan
(almost 0.67 trillion USD; 100ec.cn 2019). One of the driving factors of
its growth is in the development of platform-based services, and particular, shopping platforms of Alibaba Group, such as
Aliexpress, Pandao, Joom, Wish that are used in Russia. For some other
foreign markets is used Lazada in Vietnam, Indonesia, Malaysia,
Singapore and the Philippines, as well as widespread growth of mobile
users contributing to m-commerce evolvement.
The current study
looks into the invisible part of the online trade, such as logistics,
purchasing and distribution practices, as well as initial manufacturing
phases that represent the offline side of omnichannel shoppers and
should be considered from an integral point of view.
Before any goods (tangible or intangible) appear on the company's
websites and purchased by consumers, they have to be produced, undergo
the value-added operations and then delivered to the required locations.
Forward-thinking companies may be aware of this need for simultaneous
developments, but do not know where to start and make the right
decisions on the online business development that drive margin and
profitability growth in both channels.
One of the sources for
gaining financial benefits is hidden in the economic concept, which
dates back to Smith. In particular, the economies of scale theory
can be applied to a variety of organizational and business situations,
because when the economy of scale is realized, the economic growth can
be achieved. According to the theory, when average costs starts falling
as output increases, then economies of scale are occurring. For doing
so, it is possible to purchase inputs at a lower per-unit cost when they
are purchased in large quantities, or use other sources of economies.
For example, in wholesale and retail distribution, the increase of the
speed of operations, such as order fulfilment, can lower the overall
costs of doing business. Continuing notions from the landmark book of A.
Smith 'The Wealth of Nations', where transport supports the
trade in goods on the national level, the article takes logistics and
trade perspective under the focus.
Logistics is considered as
indispensable part of studies on location of e-commerce enterprises. For example, the
research on dual-channel pricing under deterministic demand discusses
the various logistical determinants of price. Authors,
in turn, apply location-based pricing of a food retail company taking
into account spatial distribution of customers on logistics costs,
customers' channel preference and service providers' pricing. Li et al. studied the phenomenon of returns in e-commerce through the
location-inventory problem, which was solved by lagrangian relaxation
combined with ant colony algorithm (LRCAC). XiaoYan et al. also
developed reverse logistics network model, but under the assumption of
uncertain demand and return. Other recent studies likewise focus on logistics-oriented decisions for online
shopping, providing location orientation of E-shops and joint
distribution center by a new hybrid fuzzy multiple-criteria
decision-making methods.
Basic approaches for the analysis of international e-commerce
Apart from logistics and supply chain theories, the feasibility studies on the e-commerce enterprise location in China include other well-tested approaches and methods of scientific analysis. Due to the fact that omnichannel enterprises in cross-border trade are represented by large ecosystems processing of goods in international trade, the explanation of the arrangement of their multi-functional structure must be found additionally in the theories of trade and transport cost theories (Fig. 1). Specifically, the figure schematically shows the relationship of the basic approaches that were taken into consideration to justify the Chinese provinces advantageous for omnichannel shoppers, with the allowance for logistics and trade perspective of cross-border trade.
Fig. 1 Theories advocating for omnichannel shopper's development
![](https://learn.saylor.org/pluginfile.php/5619169/mod_book/chapter/50156/01.jpeg)
Despite
the fact that some of the theories could be called by the authors as
approaches or simple models, they are still fundamental in the
international business. For the development of trade theory, first and foremost,
Smith made significant contribution. Adam Smith argued that
countries should specialize in production of goods for which they have
absolute advantage (e.g. French in production of wine). Depending on
countries absolute advantages in producing specific types of products,
it is possible to find out what products are profitable to export and
what is useful to import. On the other hand, countries should import
products, which can be made with lower cost in the partner country.
Specifically, David Ricardo's theory of comparative advantage took one
step further from A. Smith's theory, suggesting in his book 'Principles
of Political Economy' that countries should specialize in the
production of those goods they produce most efficiently and buy goods
they produce less efficiently from other countries. These theories
include many unrealistic assumptions and naturally have a lot of
limitations that make them suitable mainly for explaining trade flows
between the nations.
Unlike Ricardo's theory, the Heckscher-Ohlin
argues that the pattern of international trade is determined by
differences in factor endowments (like land, labour, and capital),
rather than differences in productivity. Thus, Swedish economists Eli
Heckscher (in 1919) and Bertin Ohlin (in 1933) put forward a different
explanation of comparative advantage. Another
famous Harvard strategy professor, Michael Porter, has also written
extensively on international trade. Porter theorizes that four broad
attributes (factor endownments; demand conditions; related and
supporting industries; firm strategy, structure, and rivalry),
constituting a diamond, bring the creation of competitive advantage. In the framework
of Porter' work "National Demand of Competitive advantage", Chen and
Ning evaluated China's progress towards building electronic
commerce.
It should be noted that these international trade
theories, at the same time, have important implications for business
practice (location, first-mover, and government policy implications).
Specifically, many economists believe and stress in their classical
trade theories (Smith, Ricardo, and Heckscher-Ohlin) that unrestricted
free trade between nations will raise the economic welfare of countries,
which participate in a free trade system. In light of current
governmental policy, e.g. tariffs, subsidiaries, import quotas, export
restraints, local content requirements, administrative policies, and
antidumping duties, which frequently intervene and influences the
international trade, the attention should be drawn to benefits of the
free trade explained by the theories (higher level of domestic
consumption, more efficient utilization of resources that stimulate
growth and creation of wealth of nations). Still, the critics, for
example from Paul Samuelson, show that free trade has historically
benefited rich countries, and, of course,
the political reality of international trade is beyond from the books'
models and approaches.
Moreover, in the works of authors on
international trade the attention to transport costs and related
barriers is scarce. Meanwhile, transport significantly determines the
trade in goods and services, therefore, the location of e-commerce
enterprise was considered with the accessibility to the transport
infrastructure and with the allowance for transport costs. Economic
analysis of the transport sector is elaborated in the works of Oliver E.
Williamson and Peter Nijkamp, theoretical and empirical studies of
transport costs were provided by Paul A. Samuelson, D. Hummels, P-P.
Combes and M. Lafourcade, while Russian school in the sphere of
transport and logistics is represented by K.V. Kholopov, L.B. Mirotin,
E. L. Limonov, E.G. Efimova, N.A. Zhuravleva, and A.S. Balalaev.
Further on, going down from the national
level to the regional, the omnichannel ecosystem was regarded as a
network of various companies, referring to logistics and supply
management theory. The question of the formation of the scientific base
of the integrated supply chain management is reflected in many works of
B. A. Anikin, V. V. Dybskaya, V. S. Lukinskiy, L. B. Mirotin, Yu. M.
Nerush, O. D. Protsenko, Yu. I. Ryzhikov, V. I. Sergeev, S. A. Uvarov
and others. The theories of logistics and supply
chain management are correlated with the 40 theories of marketing,
management and organization theory.
The scientific
basis for the management of material, information, financial, service
and personnel flows is, first of all, is grounded on models and methods
of the theory of logistics, management and marketing: transport models; network models; deterministic and probabilistic
models of dynamic programming; deterministic and probabilistic models
of inventory management; Markov decision-making processes; Queuing
systems; theory of games and decision-making, respectively, in terms of
certainty, risk, uncertainty; simulation modeling; method of dynamics of
averages; forecasting methods.
Location problem and multi-criteria decision-making methods
To
define the advantageous location of the enterprise in the sphere of
e-commerce cross-border trade, depending on the type or complexity of
location problem (single facility location problem, multi-facility
allocation or location-allocation problem)
different methods can be applied (e.g. linear, non-linear programming,
simplex algorithm, lagrangian relaxation, branch & cut methods,
branch and bound, local beam search, tabu search, artificial neural
network, expert systems, fuzzy control, generic algorithms, multi-agent
systems, and so on). In the current study, the general
choice algorithm is applied, which was for the first time proposed by
Lukinskiy et al. and further used by Lukinskiy and Lukinskiy for the selection of intermediaries in the supply chain. In the
earlier publication, Lukinskiy and Katkova provided the
comparative evaluation of the analytic hierarchy process (AHP),
point-rating assessment method (PRA) and proposed general
intermediaries' choice algorithm (ICA).
According to the authors, the ICA
method is more difficult than the PRA one, but its objectivity is
higher. At the same time, the ICA method produces almost the same
evaluations as the AHP method does. In spite of AHP method popularity, it is often criticized because of a
series of drawbacks. It allows some
small inconsistency in augments because human is not always consistent,
therefore, there is an inability to adequately handle the inherent
uncertainty with the AHP method. Moreover, the AHP method possesses an
advantage only when there is no any quantitative (tangible) information
except for the experts' evaluations. In the below analyses, the tangible
information was collected about all relative factors for the choice of
alternatives.
The choice was made among 31 Chinese provinces
based on the 15 factors that were partly mentioned in the similar
studies: (1) Number of cross-border
e-commerce zones, (2) Access to the sea, (3) Number of postal offices,
(4) Number of outlets for express services, (5) Length of postal routes,
(6) Retail purchase value, (7) Retail sales value, (8) Retail stock
value, (9) Number of corporate enterprises of retail trade, (10) Number
of websites, (11) Number of Internet users, (12) Broadband subscribers
port of Internet, (13) Labour productivity, (14) Wages level, and (15)
Unemployment rate.
For multi-criteria decision-making, the
general choice algorithm (GCA) was used to rank the most advantageous
regions for the development of e-commerce enterprise. GCA, as AHP, is
grounded on the pairwise comparison. In a pairwise comparison, two
alternatives are compared according to criterion and one is preferred.
The objective of AHP is to choose the best alternative. The decision
maker selects the alternative that best meets the decision criteria. As a
rule, the general mathematical process includes several steps. In the
first step, it is required to mathematically determine preferences (e.g.
for the site) with respect to each criterion. In the second step,
mathematically identify preferences for criteria (rank order of
importance). Then, combine these two sets of preferences to
mathematically derive the composite score for each site. Finally, select
the site with the highest score.
According to GCA, at the
beginning, the criteria should be divided into three groups:
quantitative, qualitative and relay (or 'killer-evaluation'). Then, the
pairwise comparison is used to rank the criteria. Quantitative data
processing is carried out by the qualimetry methods, and to obtain
quality criterion values authors suggested to use Harrington
desirability function. The calculation of
the integral estimates is a sum of qualitative and quantitative
criteria evaluation. In the current research, all data were of the
quantitative nature, which again justifies the use of GCA, because AHP
method 'possesses substantial advantages without having any quantitative
(tangible) information except for the experts' evaluations'.
GCA and AHP both utilize pairwise
comparison. In this regard, GCA is similar to AHP. Pairwise comparison
was carried out based on the mathematical steps. Firstly, a pairwise
comparison matrix for each decision alternative for each criterion was
developed. Afterwards, the synthesization was done in several sub-steps.
That is the row value of the pairwise comparison matrix was summed up
in the last column. Next, the sum of the last column was found.
Afterwards, each value in last column was divided by its column sum.
Finally, the value in each row of normalized matrices was averaged, and
the sum of the row averages in the normalized matrix equaled to 1. The
row average values represented the preference vector. Preference vectors
for other criteria are computed similarly, resulting in the preference
matrix (that is step 1 in AHP).
As a result, the final criteria
preference matrix was used for the overall ranking for the decision
alternatives, assuming the equal importance of the criteria. So, with
GCA, preferences for the site with respect to each criterion were
determined mathematically. GCA did not utilize preference scale, which
assigns numerical values (as a rule, from 1 to 9) to different levels of
importance. GCA did not resort to preference scale for pairwise
comparison because quantitative (tangible) information was available for
each criterion. In conclusion, it is worth to mention that the research
was partly done in the Henan Key Laboratory for Big Data Processing
& Analytics of Electronic Commerce, which has an affiliation to
Luoyang Normal University.