Penske executive describes 3PL challenge in China

Editor’s note: Angela Yang is managing director for the Asia-Pacific Region, overseeing all Asia-Pacific supply chain management activities for Penske Logistics. Yang joined the company in 2007 as operations director for Asia-Pacific. She has served as associate director – procurement for Pfizer, and held senior roles with Deloitte and Capgemini. She is a member of the Institute of Supply Management (ISM).  Yang earned a bachelor’s degree in automotive engineering from Tsinghua University and an MBA from Michigan State University.

LM: We understand that China’s infrastructure, regulations and work force are different than those of the U.S. and that government regulations are complex. Can you explain why many companies significantly underestimate this early on and often lack much-needed local guidance?
Angela Yang: Companies that have achieved success in other parts of the world tend to emulate what they have done in other markets. They fail to customize their approach to China, and as a result, they encounter difficulties with China’s regulation practices, competitive landscape and customer needs. A developing market like China requires an approach that differs from mature markets like Europe and the U.S. The successful Chinese companies have a good understanding of this market, understand the realities and challenges, and put the right people on the ground. Placing an expatriate team for startup purposes in China results in a learning curve that is too long. A localized business model works best, with a strong local team in place. In order for this to work most effectively, this requires a commitment from the company’s senior leadership, and senior leadership needs to provide related support during the startup phase.

LM: Working properly and in compliance with Chinese customs is critical and demands good planning and data management practices. What are the biggest mistakes made by U.S. shippers in this regard?
Yang: Many U.S. shippers’ operations are North American-centric and they don’t always realize the importance of good planning and accurate documentation. Failing to recognize this can have a potentially strong impact on overall business growth. Here is an example: it is common for many U.S. companies to have the wrong HS code for imports, or fail to produce the correct documentation for customs. In China, customs officials will keep detailed records on the history of a shipper. In the event the shipper makes several mistakes, the possibility is there for routine inspection and quarantine checks. If a shipper is regularly flagged, the lead time for product shipments could be delayed anywhere from two weeks, to one or two months. Planning ahead, effective communication and validations with customs ahead of the shipment are critical to overall lead time, and the efficiency of the supply chain.

LM: China is a rapidly developing marketplace and new cities, roads and infrastructure are constantly under construction. Can you explain why lean logistics or “just-in-time” is altered?
Yang: In China, the infrastructure is great in top-tier cities. In lower-tier cities and remote locations, it is still a challenge to ensure on-time delivery. That’s because there are many unexpected situations that occur during shipment: unannounced spur-of-the-moment road construction; traffic accidents that can bottle up traffic for several hours to several days; and new regulations for the city or region. As a result, lean logistics, or just-in-time, has to work out well for the overall supply chain, not just for a part of the process. This requires a lot of oversight, contingency planning, and effective planning with all parties, including carriers. The level of services depends on the weakest part of the supply chain. This is the best way to ensure the efficiency of the overall supply chain.

LM: Can you describe how 3PLs must interact with Chinese manufacturers on a personal level? How are the cultural differences addressed?
Yang: With China experiencing rapid growth in the last 20 years, I would call this a market dynamic but not yet mature. As a result, China is a very competitive marketplace and pricing is key in many industries. Manufacturers are constantly seeking low price providers. The logistics market is just so fragmented, and with lower prices constantly being offered, it’s vital that 3PLs like Penske develop strong personal relationships with the customer. Chinese culture places a strong value on personal relationships and it is imperative to gain trust from your customer. Once a good relationship has been established, together we can look at the big picture and focus on the total cost of ownership.

LM: Finally, please tell us about the logistics marketplace in China, and why its cost structure is unique. What challenges does this pose for a 3PL?
Yang: The cost of labor is a relatively small percentage of overall logistics costs in China. The lion’s share of costs are with warehouse leasing, which can run anywhere from 50 percent to 70 percent. Equipment expenses are also considerable. In many cases, companies would rather hiring additional people versus investing in equipment. Sourcing is key to a 3PL’s success in the Chinese market – leveraging resources in the marketplace, executing a lower total cost solution, and providing great customer service is important. Our customers understand the challenges of this market and they recognize our strong capabilities in vendor management, supply chain visibility, and customer service quality. When it comes to domestic transportation here in China, there are no major players like in the U.S. market. So, everyone has to outsource to a certain extent. 3PLs can be successful here if they truly understand customer needs, being able to work with customers as one team, and to execute a door-to-door solution. Continuous improvement is also a must.