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Dealing with Supply Chain Technology Requirements in China’s Developing Market

Today, Third Party Providers (3PLs) are going beyond their traditional core competencies to provide scaleable technology solutions and in a global context garner customer input to galvanize innovative global processes. This case study focuses on working with customers to create new protocols for success.

By David Griffith

Using the successful operations model of a supply-side just-in-time support hub in relatively developed markets like Singapore or Malaysia, our company was asked by one of the world’s leading technology company’s to apply the same operational methods to support a new production operation in China. The goal was to replicate the operations at or near the new production site in China.

This is an example of how the third party logistics (3PL) industry is beginning to mature beyond simply leveraging balance sheet items beyond enterprise core competencies. In this case, the firm was looking for critical expertise and technology.

Research and customer requests are indicating that 3PL customers are interested in achieving additional benefits beyond the balance sheet. These 3PLs are extending themselves to bring essential components of their supply chain expertise to supplement the core competencies of their customers. In today’s market, companies are looking for their service providers to bring stable, viable and scalable technology solutions that enhance operational productivity. It helps reduce the need for customers to invest their own dollars to establish internal supply chain functions.

This research and these requests are positive for the 3PL service provider and even for the Lead Logistics Provider (LLP) who are contracted to manage or control several outsourced service providers for firm supply chain. However, this trend does not come without challenges, particularly in developing markets.

There are three challenges to overcome when taking a proven 3PL solution into a developing market:

  1. Infrastructure requirements;
  2. Intellectual expertise; and
  3. Cultural adaptation.

Each of these challenges and the stage of progress in the socio-economic development of a particular market influence how a supply chain solution should be designed, executed and operationally managed. Outlining the nature of each challenge will provide a backdrop for discussion regarding how to identify important success factors for implementation, management and measurement.

Elaborating on the example where the operation was replicated into China from a more stable market illustrates the infrastructure, expertise, and cultural challenges and some of the associated gaps.

  1. Infrastructure requirements – When outsourcing to a 3PL service provider and taking a proven solution to a developing market, it is important to understand the limitations of the physical infrastructure. Infrastructure has a far-reaching definition and can refer to the market’s real estate environment, customs processes and laws, airport and seaport capabilities, as well as roads and highways, utilities and ultimately the market’s level of technology acceptance. In our example, several critical success factors were identified for the project in the project-planning phase for the China market set up. The need to locate the operation in a customs bonded or free trade zone type facility that was in reasonable proximity to the customer’s production site was one requirement for success. Also, given that the operation is required to operate within a repeatable two-hour fulfillment cycle for the production plant, the Chinese customs formalities needed to be managed for inbound and outbound material flows.

  2. Intellectual Expertise – This refers to the level of professional education the labor market has available to support and operate the 3PL solution that is being brought into the market. This element is typically a double-edged sword. The cost of labor is one of the financial reasons considered when making a decision to enter a developing market and yet the education level of the available labor force can be one of the greatest inhibitors to a successful operation in that market. It is important to focus on the ability to recruit and retain supervisory and management level personnel that are critical to a sustained quality operation.

    A significant factor for our company was the line supervisory roles; the team leaders that operate the warehouse management system (WMS) and interface with the customer’s planning system. It was fundamentally important for these points to be tested, reviewed and managed through the implementation phase and even into sustained operations. A critical component for success was hiring, motivating and maintaining a viable workforce that had the necessary education and language skills to perform the functions of the operation in a mixed language system operation.

  3. Cultural Adaptation – While not mutually exclusive to intellectual expertise, it is important to understand cultural resistance points to a prescribed operation, such as language, religious protocol and the overall socio-economic demographics of the market. For 3PL solutions that will be expanded into or replicated in developing markets, the operating variations need to be identified and addressed when defining the standard operating procedures to avoid unnecessary start-up delays and performance issues. Our company’s in-depth understanding of customs requirements and statutory laws was critical in the initial planning of the China supply chain solution. This market knowledge is critical to maintain global shipments moving into and out of China. The formulation of versatile, creative, but legally conforming solution sets, acceptable by National Customs is an invisible but central value-add action by 3PLs to their customers.

One of the key ingredients of the ongoing operation outside of China is a sophisticated data interface between the customer’s planning system and the 3PL WMS. It allows both companies to be responsive to production schedule capacity requirements relative to available material in the warehouse. The warehouse operation is structured as a vendor-managed-inventory (VMI) environment that required our company to communicate in near real-time with both the customer’s supplier base (both inland and off-shore to its production plant) and its production facility in a 24-hour shift schedule.

As the implementation project moved from the planning to the solution-development phase, the project team (composed of business and technology leaders) needed to be extremely careful in identifying the unique market requirements for China. Even though the solution was to be replicated from an existing operation, it was important to customize it for the new local market. The initial operating procedures and systems development guidelines took into account the need for local language content for functional sections of the warehouse system.

The system’s configuration and facility layout were leveraged from the existing operation. Additional system-to-system and user-acceptance testing schedules and scripts were created to help mitigate any operational start-up gaps. The user-acceptance testing turned out to be the most critical part of this project’s success. The test scripts used were specifically written to account for the identified cultural and language differences anticipated in the operational processes. Within the testing cycles, systems modifications and process changes were identified and made to improve the operation’s effectiveness as prescribed and to be measured by the customer.

The launch of the operation was successful for the customer. It became readily apparent however, that the skill level in some key positions could not be sourced locally. This required ongoing support in the first year from external resources, putting a burden on the previously defined labor model from a cost and teamwork standpoint. The operations group recognized that they had to invest the necessary training resources and effort in several key positions in order to bring the skill set up to a sustainable level for a successful operation.

The setup of a global communications network with suppliers and customers who were mainly non-Chinese language speaking, was another major hurdle faced during this type of duplication of tried-and-tested models in a developing market such as China. The linguistic barrier, coupled with differences in time zone and work culture, proved to be daunting in the startup phase of this project.

Diligent evaluation, planning and implementation are required when attempting to leverage technology and business processes in developing markets. Even with the best efforts for assessment, the implementation process needs to have flexibility built into the project so that adjustments could be made to accommodate the market’s real conditions. Adjustments made through the findings of the user-acceptance testing process, and experienced back-up support for the initial launch and first periods of sustained operation, resulted in a successful operation for our company and the customer. The customer has a multi-country outsourced operation on a common operating platform and a common systems interface that allows for clear performance measurement and operational agility and our company manages the customer’s market demand changes and give near real-time visibility to its supplier community from a common technology base.

A 3PL that makes investments and has this expertise can provide localized management teams empowered to develop in-depth skill sets are which are critical to success in developing countries like China. A deep understanding and respect of cultural and national habits enables 3PLs to adapt to developing markets. Couple that with 3PL’s employees’ ability to tap into its global network pool of expertise and experience, and you have the ingredients for success for global supply chain solutions.