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.
Two case studies
Company A is an online private sales website for
luxury lifestyle and fashion brands operating in Japan and China and
expanded to Korea in 2012 (see Table 7 concerning supply chain
information from two case studies completed). The company intends to
sell online flash products (for a limited time) at a discounted price
and a diverse range of luxury goods, which belong to five categories as
follows: past season shoes, fashion, cosmetics, accessories, and leather
goods. Company A rotates the brands it works with every week and will
work with each brand 3–4 times per year. Since they began in early 2009
in Japan, Company A has developed working relationships with 450 brands.
Table 7 Two companies operating in Chinese retail market and supply chain strategies
![](https://learn.saylor.org/pluginfile.php/5619169/mod_book/chapter/50158/41072_2019_45_Tab7_HTML.png?time=1645528325779)
Service
level is an important factor for the success of Company A and for this
reason, all customer service is managed by its own employees. Company A
has 35 dedicated customer service employees, who operate out of the
warehouse. One unique market characteristic in China is a large number
of orders that are paid for by cash on delivery (COD). For Company A,
this constitutes half of its sales. Remarkably, its rejection rate, the
rate at which customers either do not pay for the item upon delivery or
are not there to pay for the product is less than 1%. Customer service
agents who actively reach out to customers to make sure they are
informed about their purchase and delivery time. This customer-centric
approach gives people confidence in their purchase and provides the
comfort of knowing they are getting a quality product. Additionally,
Company A will cover the cost of any returned product again easing any
doubt for a customer to purchase a product.
For Company A, 40% of
its customers are based in China's tier 1 cities (Shanghai, Beijing,
Guangzhou, and Shenzhen), 35% are from tier 2 cities, and the remaining
25% are scattered in tier three and four cities. Customers living in
tier 1 cities are primarily business people with white-collar jobs and
the customers residing in the remaining tier 2, 3, and 4 cities are
entrepreneurs who are affluent, but do not have access to luxury goods.
The age of Company A's customer base ranges from 25 to 40-year-olds,
with 40% of them consisting of repeat customers. These customers
purchase on average 900 RMB per transaction. One difference has been
identified, and that relates to the average age of a customer. As
shopping retail stores age was 35 years, but the average age shopping
online was lower, 28 years old.
Company A currently operates a
centralized warehouse based in Shanghai, China. The location in Shanghai
allows it to closely monitor the quality control process and position
itself to service the majority of its customers with short lead times.
Company A has subcontracted its fulfillment operation to German-based
3PL that has been working in this market for a number of years. Third
party operator is responsible for all the receiving, picking and
packing, however, Company A has decided to keep all its customer service
in-house. Company A holds its entire inventory on consignment with 90%
of the goods coming from China and 10% being imported. Acquiring
inventory on consignment allows Company A to keep its working capital
free, manage obsolescence risk, and invest more in sales and marketing.
By sourcing the majority of its products within China, Company A is able
to keep ordering costs down and ensure the products meet customer
preferences for local style, colour and size. Because Company A does not
produce any of its own products, quality control is an important
operation for the company. It checks every inbound piece and before the
product is shipped to a customer, it ensures that the product meets the
quality standards expected by Company A's customer. This process has
proved beneficial as it achieved single-digit percentage in returns.
However, as Company A continues to grow, it looks to introduce regional
distribution centres and have suppliers ship directly to those
warehouses thereby bypassing the central DC in Shanghai. Company A's
warehouse expansion initiative will be guided by regional sales volume
and customer profiling.
Company A's goal is to deliver all its
products within 5 days and for large sales regions such as Shanghai and
Beijing, Company A offers next-day and two-day guaranteed delivery. As a
time to market is an essential component of handling a luxury service,
Company A is looking to expand its warehouse footprint to three or four
regional DC's that will be able to provide even faster time to market.
At the moment, Company A is the collecting and analyzing sales data to
decide, where and when it will open these regional distribution centres.
For distribution, it uses two courier service providers, one local and
one international, depending mostly on delivery costs (typically one
provider is able to give good prices for a particular group of cities,
but not for all).
The use of mobile technology varies in Asia and
is quite different from that of the US or Europe. For example, 25% of
Company A's business in Japan comes through mobile e-commerce. Company A
does not have available mobile e-commerce in China, but it is planning
to in upcoming years and can expect to see similar sales patterns.
As
Company A outsources its warehousing operations, the company does not
have a single integrated IT platform. Company A does manage its
e-commerce platform, allowing the company to manage its orders in real
time.
To date, Company B has operated its e-Commerce business in
Japan for 1 year and is working to launch in China as soon as possible.
Working with luxury products has afforded Company B healthy margins.
Therefore, any incremental supply chain costs the company incurs through
its e-commerce operations will unlikely overshadow the incremental
profits. The reason Company B has involved themselves in e-commerce
business is simply, because the company is growing so fast in China that
there are many other competing opportunities. Company B is opening one
store every 2 weeks in China and plans to continue this pace for 5
years. This type of growth puts a strain on building the organizational
capacity necessary for a different sales channel.
Asian markets
are all the time evolving. For example, mobile technology is taking off
in Japan and now constitutes 50% of Company B's e-commerce sales. One of
the striking differences between Japan and China is that in Japan,
promotions do not play a large role in generating sales. Conversely,
Chinese shoppers go online to find the best deal or a brand name product
at a discount. In Japan, Company B is the number one brand in the
number of bags sold and number two in value.
In general, Company B
prefers to keep its distribution and fulfillment operations in-house,
because it has a very high standard of service. From its experience
managing a 3PL in the past, Company B has learnt that it can take just
as much time to manage labour and operate the distribution and
fulfillment themselves. For these reasons, it operates under a
superstructure that will allow it to keep e-commerce distribution and
fulfillment in-house, but will look at outsourcing options for potential
fulfillment. The company has not yet completed an in-depth study of 3PL
potential partners. It plans to examine, which companies' with other
comparable brand are working with.
A unique characteristic of
e-commerce in China is that the majority of consumers prefer to pay by
COD rather than with credit cards. For products that that cost over
$400USD, this becomes a risk. Therefore, the company has to ensure that
the customer will be present and will be able to pay upon delivery.
Fortunately, Company B has not experienced these problems in Japan as
there are a number of steps a customer has to go through to complete an
online transaction. Returns rates are quite low and Company B remains
confident there will be a similar trend in China.
Another
challenge associated with COD is that a trusted courier company in
delivery and collection of cash in the various regions is critical. This
remains difficult, because there is not a single courier service that
can provide delivery to all postal codes; and the ones that reach more
remote locations do not always provide the level of service Company B
and its customers expect.
China is so vast that Company B does
not expect to reach all the tier 3 and 4 cities. Instead, the company
expects that the majority of their e-commerce business will come from
cities they already have a presence. Company B currently has two
warehouses in Shanghai, one of which is a bonded warehouse and the other
is a duty paid warehouse. Its only other warehouse is in Hong Kong
where currently, Company B runs half of its products through Hong Kong
and the other half through the Shanghai warehouse. However, volume
handled in Shanghai is growing at a much faster rate. In the medium and
long-term as e-commerce is projected to grow in China, company is
looking to couple its e-commerce inventory with that of retail and to
develop a hub-and-spoke model with regional DC's located in the North,
South, and West. This model will evolve over time.