To see how the most adaptive companies coped with the challenges of global trade, we conducted our first research project “Follow the shipper” in Shenzhen, southern China between 2004 and 2006. We focused on how the US Beneficial Cargo Owners (BCO’s) from the consumer goods and retail sectors were coping with this region’s particular logistical challenges.
The research program was designed to understand how companies were managing the dynamics of global trade in this new scenario and to determine how the most adaptive were coping with its challenges. Furthermore The aim of the study was to establish accepted best practice by the stakeholders in Sino–US trade, creating ‘bench-marks’ and to promote standard operating procedures and their adoption by other shippers. The research identified the early adopters at brand level and led to the accreditation of Home Depot with "Best in Class" status for their contribution to the development of best practice in maritime logistics.
BACKGROUND: A Doubling in the Value of Globally Traded Goods
Chinas entry in to the World Trade Organization in November 2001 can rightly be adjudged as the beginning of the present era of globalization. The figures for internationally traded goods between 2004 and 2014 show just how enormous an impact on world trade it had with a doubling of the value of such trade from $10 Trillion to $20 Trillion over the period. This translates directly to a significant increase in container flow, China witnessed a 500% increase in container throughput from 2002-2012.
In 2004-6 the period in which the Institute was on the ground in southern China, more than 40% of America's imports were from the overseas subsidiaries of its corporations with China accounted for about 25% of the global growth of GDP. Globally, comparative advantages were shifting rapidly, leading to the de-industrialization in North America and Europe, and a re-industrialization of Asia. Industry forecasts on low cost sourcing trends, pointed to an 18% increase in spend by Fortune 500 brands on sourcing in low —cost platforms over the 3 years between 2006 and 2009, with expenditure expected to rise from 21% to 39% over the same period.
Extended Supply Chain
These factors were imposing a major shift in global freight flows and creating an ever- lengthening supply chain. Economic development in China had been the prevailing factor behind the growth of international transportation. The trading distances involved were often considerable and this had resulted in increased demands on both the maritime shipping industry and on port activities.
As its industrial and manufacturing activities developed, China was importing growing quantities of raw materials and energy and exporting increasing quantities of manufactured goods. Consequently there had been a surge in demand for the movement of goods. The ports in the Pearl River Delta in Guangdong Province, now handled almost as many containers as the ports in the United States combined.
All indications were that this development was set to continue.
Shippers were realizing significant cost advantages through their China sourcing programs, with consumer goods and retail companies gaining annual savings that ranged from 9 to 46% on selected items sourced from China. However, such savings had been accompanied by negative effects to supply chains, such as longer lead times, unreliable delivery, and slower turn on inventory.
Academics commenting on the logistics implications associated with China’s accession to the WTO, identified that the science of logistics in China was in its infancy and that tight regulation, large levels of bureaucracy together with cultural and skills challenges were hampering its effectiveness. However they were confident that global 3PL’s would plug the gap on behalf of companies sourcing or manufacturing there.
Acting as a bridge between the worlds of academia and business, we set up research parameters using both hypotheses from the academic community and the real experience of innovators and early adopters.
Research was focused on the Consumer Products Vertical and on the Chinese Market specifically focused on the Trans Pacific Trade Lane and the Containerized Shipping Mode of Transport .
In the following environments, the internal Chinese logistics market, Portside at both sides of the Pacific Ocean. Within the following contexts, the demands of today's consumer for more choice, the ever—increasing security detail surrounding global trade, the highly fragmented, expensive and developing Chinese logistics market and the worsening congestion problems on the West Coast USA. Home Depot were our primary case study and were at that time importing 100,000 TEU per annum from the region.
GIL conducted several knowledge missions to the region during the period and using a combination of formal/ informal interviews, direct observation, participation in buying missions & logistics negotiations, attendance and participation in conferences and the convening of focus groups with various stakeholders built up a detailed picture of the environment.
Establishing China as the Factory of the World
Shenzhen was a very busy place in 2004-06, the factories in the region were growing a testament to their rapid response to the needs of the global buyer. From a logistics perspective activities had grown in both scale and complexity. In this period China's central governments focus was on exports and in building up a positive balance of payments and establishing China as the factory of the world focused on global markets. Global markets were closest to the coast and as 90% of all exports would travel by ship, it was on the coast, beginning with Shenzhen at the mouth of the Pearl River Delta that economic development was concentrated.
While 3PL's were very effective in coordinating the hinterland logistics for shippers, once the container was deposited at the port they ceased to be effective. 3PL's had no say as to what happened at port, they had no contractual ties with port operators and the area was strictly off limits.
Logistics is a Team Sport
In Shenzhen, the common good was greater than individual interests. Beneficial Cargo Owners were driving the agenda and frustrated by challenges they were experiencing at the port, which they often referred to as a "black hole" sought to talk directly with port management if they were to be convinced to prefer Shenzhen over the Port of Hong Kong These meetings brought the BCO, sometimes in the company of their dedicated ocean carrier or indeed their 3PL face to face with the port authority, terminal operator and other port stakeholders.
Yantian International Container Terminals (YICT) who in 2004/5 were and still are Shenzhen's and indeed the world's largest single container terminal were actively engaged in these meetings and were championing "Joined Up Thinking" and for very good reason. YICT had built cargo volumes through marketing directly to cargo-owners a strategy they called ‘End User Marketing’ which in itself was a key innovation for the port industry and has been widely copied since. The principle behind the strategy was very simple, if the port could convince the cargo owner to use Shenzhen, they in turn would specify the port as their preferred choice leaving the carrier no choice but to call. The key to winning the cargo was to work with the shipper to overcome their challenges and in finding ways to add value and reduce costs.
This strategy was in stark contrast to how traditional ports operated who rarely engaged with the cargo owners, this was largely due to the absence of a direct contractual arrangement between the parties and also a cultural understanding that the carrier was the party that dealt with the cargo owner and nobody else.
Port Centric Logistics which as we know has grown to become a vital part of global supply chain strategy today was born in Shenzhen out of this dynamic and continues to proliferate globally, DP World's $2.5 Billion Dollar development London Gateway in the U.K. is built on a portcentric model.
If It Can't Be Measured, It Can't Be Managed
Our research was conducted against a backdrop of record breaking growth, a time when the Port of Shenzhen and its container terminals were meeting the challenges of South China becoming the Factory of the World and new infrastructure was being built at a blistering pace. As it could not be developed in line with the growth of demand, terminal operators were forced to look for process improvements.
YICT’s investment in the latest equipment and technology was testament to this, as well as its maintenance of active links with business schools, consultants, and ﬁrms leading in management practice. An example of the latter was YICT’s direct approach to General Electric and Motorola to access details of the Six Sigma system which they leveraged to develop their own Terminal Quality System built around Benchmarks, KPI's and measure to manage methodologies.
Home Depot, only too aware that US west coast container throughput capacity was in danger of falling up to 10 million TEU short of anticipated demand by 2008, were keen to use YICT's formula to conduct their own research on US west coast container terminals and help them to decide on carrier contracts based, not just on the port of call, but also on the terminal of call.
A Ports Evolution Is A Coevolution Between The Business And Institutional Environment
Ports by their very nature are as much institutional environments as business ones and cargo flow can be as easily disrupted by laws, regulations, policies and regulatory procedures as they can by any physical obstacles. In the case of Shenzhen multinationals sourcing in the region often complained of delays to their cargo for regulatory reasons usually customs, as we know the politics of customs regulation is a national and not a regional issue and yet port managers in Shenzhen made it their business to engage with custom authorities locally and nationally to understand their concerns and work with them to achieve a mutual understanding. In most cases a solution was arrived at, almost always after investment was provided for new technology and systems aiding the modernizing of government regulatory procedures at the port.
The fact is that the business and institutional environment of a port need to coevolve if cargo is to flow smoothly.
The Seaport is the Key Difference Between Regional And Global Logistics
The Institute’s first research project “Follow the Shipper" proved:
- The seaport was the key difference between logistics and global logistics and would become increasingly relied upon to drive global trade;
- Joined up thinking between all stakeholders in the container supply chain can lead to significant operational improvement
- Ports and Terminals could gain significant competitive advantage by engaging directly with the cargo owner.
These three findings led to the formation of the Institute's Global Maritime Logistics Council in 2005. The network and experience gained in convening the focus groups as part of our research was used as the building block for the council.
Home Depot was identified as the thought leader in pioneering global logistics solutions in the course of our research and were accredited by the Institute as Best in Class.
“United States BCO's Sourcing in China: The Logistics Challenges” is an ongoing Institute research program focussed on southern China . The first module examined on how the US Beneficial Cargo Owners (BCO’s) from the consumer goods and retail sectors were coping with this region’s particular logistical challenges.
The research program is designed to understand how companies manage the dynamics of global trade in this new scenario and to determine how the most adaptive were coping with its challenges. Furthermore The aim of the research is to establish accepted best practice by the stakeholders in Sino–US trade, creating ‘bench-marks’ and to promote standard operating procedures and their adoption by other shippers.
The research identified the early adopters at brand level and led to the accreditation of Home Depot with "Best in Class" in the execution of container logistics strategy.
Home Depot's international logistics departments has direct relationships with each stakeholder in its global logistics process and while like majority of Fortune 500 companies, it outsources directly to third party logistics provider's (3PL's) however it regards as "best practice" to have direct contact with the the key logistics service providers, particularly the liner shipping company and the container terminal operator. Home Depot are the pioneers in managing direct relationships with container terminal operators.
Beneficial Cargo Owners including Home Depot do not have contractual relationship with any of stakeholders inside the port, leading it to a dependence on third parties for status reports etc. This leads to misreporting and guessing about the status of a particular container. Home Depot mitigated this by liaising directly with the container terminal operator. This led led directly to greater Visibility, increased Velocity and added Value add in their container logistics processes.
For terminal operators direct relationships with their end user had a direct influence on decisions by shipping lines to include their terminal on their network maps. Shipping lines are heavily influenced by their upstream customers − the port’s end users.
The collaboration also leads to logistics innovation particularly in the area of “Port Centric Logistics”
Port Centric Logistics models have led to a myriad of new logistics programs: For instance DC Bypass whereby Beneficial Cargo Owners instead of shipping containers of a product to the USA where they would then be cross-docked for store delivery, execute the cross docking process in China,thereby eliminating a relocation move at the receiving port and, in doing so, cut out considerable costs.