GLOBAL LOGISTICS IN CHINA: AN INTERVIEW WITH VICTOR DEYGLIO, PRESIDENT, THE LOGISTICS INSITUTE Q.

International companies like DHL, UPS and FedEx are capturing logistics market share in China. What advantages and disadvantages do you think they have? A. We need to put this question in context by making a distinction between an international company and a global company. An international company might have a head office in one country, but operations in many countries, and each country operation has a specifically local market focus. We sometimes refer to these companies as multi-nationals. A global company, on the other hand, has a core corporate global vision, along with worldwide operating capabilities, that it brings to various operations, no matter where they are located. The greatest strength global companies have is their core vision and global capabilities. They are not DHL-China, or FedEx-China, or UPS-China; rather they are DHL or FedEx or UPSWorldwide. Their core values are integrally worldwide in perspective and in intent, and their presence in China is an extension of their global market strategies. One of the great difficulties, however, of this global approach is that it sometimes fails to recognize the nuances of cultural differences or to deal adequately with local realities. To hold to a big picture is one thing; it is quite another to implement that vision in everyday ways in different locations. Nonetheless, there are great opportunities in China both for these global companies and for Chinese companies as well. These companies can learn much from Chinese partners and even competitors about what works in China. In turn, Chinese companies can begin to go global, enter the international market as global players, rising above their current status as local suppliers to foreign and offshore customers. This global perspective is not simply a difference in attitude; it is a revolution in business reality -- truly global business cannot simply think differently; it must also act in completely new ways. The greatest threat to the success of these companies and even to their Chinese partners or competitors is the capacity to deliver on the global vision. The capacity to deliver involves three things: a global strategy that entails a worldwide vision; local processes and operations that support a global strategy; and people with the competencies to think globally and act locally to ensure competitive success. In China, as in any part of the world where these companies succeed, competitive success often entails major cultural changes in terms of values, visions, skills, knowledge and aptitudes. Ultimately, it is competent people who drive success, and without them no company will ever succeed. Without competent people at all levels of the organization, companies are doomed to fail.

Q. Modern logistics is a relatively new concept in China; there are many traditional logistics companies which were originally freight forwarders, warehousing operations, trucking companies, and so on. How do you think they can increase their competitiveness? A. Any company that wants to play in the logistics market has to rethink their competitive strategy along several dimensions. First, they have to ask a fundamental question: what is logistics today and how does it differ from yesterday? Traditionally, logistics was synonymous with transport and distribution, and the traditional orientation of companies has been around business tactics and operations, such as freight forwarding, warehousing, transportation, and so on. In a globally competitive market, however, we need to deal with more integrated and more strategic approaches to logistics. Integrated logistics is about the end-to-end flow of goods, information and money from source to customer that involves the alignment of three fundamental logistics operating clusters: purchasing, inventory management and distribution/warehousing/transportation. What is required in this integrating context is process thinking in terms of flow patterns and business operations. It is no longer enough to be a tactical business operation, like a warehouse; it is more competitively valuable to see the warehouse as an integral player is the flow of goods, information and money from source to consumer. At a more strategic level, logistics, often also called supply chain logistics, deals with customer value creation and the competitive market demand to deliver on customer expectations. Here we need to build strategic partnerships with our suppliers upstream and our customers downstream. What is required in this strategic context is managing the interorganizational relationships between the company and its upstream/downstream partners. Today, freight forwarders, warehouse operators, transport companies all must re-orient their business strategy around partnerships and managing inter-organizational relationships. It is not enough simply to own and operate a warehouse, for example. But there is even a greater degree of complexity to contend with: bringing the competitive strategy and the integrating process together is the pivotal position of inventory or company assets. A more traditional approach to logistics is to ensure there are optimum efficiencies in the aligned process so as to reduce or eliminate inventory. A just in time strategy builds on this mindset. In more recent times characterized by global strategic supply chains, however, the real focus is on asset productivity. Every piece of inventory, no matter where it is located or who is handling it in the supply chain, must realize a profit or return on investment for each player in that supply chain.

This fundamental shift in thinking means that all players in the supply chain, whether freight forwarders or warehouse operators or transport companies, must begin to think of themselves as asset managers. The value they deliver to their customers in handling, storing or transporting goods is to realize ROI and profitability. After all, their own investments that is, trucks, warehouses, freight forwarding operations also need to have a profitable return. ROI is a key business driver of the new world of logistics. Second, today it is not enough simply to be successful; it is more critical to sustain success once it is achieved. Sustainability requires companies to shift their strategies from transactional business operations and services to a value creation model. In other words, they have to define their core business strategy in terms of their value proposition. What value can and do they deliver to their customers, as well as to their suppliers? There are many ways to consider value: For retail operations, it might be customer intimacy, whereby stores ensure product availability, and foster loyalty and repeat business, thereby ensuring sustainable growth. For manufacturing operations, it might be product identity that commands a presence in the marketplace in terms of quality and brand significance, like Armani, Nike or adidas. For service companies, like freight forwarders, warehouse operations, and transport companies, it might be operational efficiencies that prevent delays, manage assets and information, and eliminate the need for wasteful practices such as stock-piling inventory. Third, companies have to decide on their market niche: do they want to go global or do they prefer to remain local? The ability to make a profit does not necessitate that a company has to go big. Local logistics operations can be as profitable as any mega-company, within relative terms of reference. We must recognize, however, that no matter how local a companys operation might be, it is still a player in globally competitive supply chains. Conversely, no matter how a supply chain extends around the world, that last mile is a key component of competitive success or failure. There is a symbiotic relationship between global and local; one cannot succeed without the other. Thinking globally and acting locally is a true challenge in the 21st century. It is necessary for success, but difficult to sustain. Partnering along strategic supply chains is essential. Fourth, companies have to define their critical success factors, and be able to measure productivity and output. There are only three things a company needs to be successful: competitive strategy, identifying where it wants to be in the market [local or global, but aligning both]; business process, identifying how it will sustain its competitive position in the market [operational efficiency; product quality and identity; customer intimacy and loyalty]; competent people, who will drive success by having the right skills, knowledge and aptitudes to get the job done.

Companies have to align their capacity to deliver on their value proposition and their market strategy with their bench strength, and that means the right people with the right competencies and motivations, doing the right things in the right ways consistently, creatively, and innovatively. Success is as much a cultural affair as it is a business strategy and process. Success rests squarely on our ability to recruit, retain, motivate and employ people. And for this very reason, success is difficult to sustain, even if it is relatively easy to achieve the first time around. Q. Traditional logistics is one-way, i.e., from source to end-user. However, there is an emerging reality faced by many international companies like GM, IBM, HP, among others, that reverses the logistics direction, from end-user to source (also known as recycling or reprocessing or simply reverse logistics). Can you comment on reverse logistics? A. Returns is a complex issue for companies around the world. A recent study of the Canadian retail sector called returns a $10 billion-a-year headache for Canadian merchants. And researchers are only talking about returns of consumer goods in retail operations; they do not touch on the automotive, electronics manufacturing, pharmaceutical, grocery, or food sectors. The cost of managing this process, including reverse logistics, could be as high as $32.40 CDN per consumer item. That includes a phone call dealing with a return request; receiving the goods and reporting it in the warehouse; processing the return; and packing and handling the product. It does not include repairing the product. As much as 5 to 30% of retail sales in Canada are eaten up by returns. Retail returns are often motivated either by buyers remorse or by unwanted gifts. The situation affecting gifts is obvious: someone buys you a gift that you do not like or want or need, and you return it. Buyers remorse is more complicated: it entails the return of an item because it does not meet the customers expectations after purchase. In effect, a company is dealing with a disappointed customer, and this situation has a direct impact on corporate customer satisfaction and customer loyalty strategies. More recently, a companys customer loyalty strategy outweighs the cost of returns and reverse logistics. In some instances, retailers have extended the return period to as high a 180 days after purchase, simply in order to get customers to come back into the store, and potentially repeat purchase. The cost of reverse logistics is positioned as an acceptable cost of doing business. In the automotive sector, we can point to a comparable situation. Basically, there are two kinds of automotive returns: either call backs because of defects, or call backs because of obsolescence. The first instance has to do with quality production issues, and simply entails the need to mitigate legal liabilities that are raised by defective products. The recall of tainted drugs or spoiled food products falls into the same category. Whatever the reverse logistics costs, it is simply a legal necessity.

Call Backs for Obsolescence is a more intriguing situation: in effect, it is a recycling strategy. A number of years ago, European auto makers initiated a sector wide program to recycle usable parts from old cars, while compacting and handling unusable parts in environmentally safe ways. Such return programs are seen as good business, supporting an environmentally friendly approach. The cost of reverse logistics in these instances is considered a good business investment. Legal necessity [product recalls], or the cost of doing business [generating customer loyalty], or corporate social responsibility [recycling] whatever the motivation, returns and reverse logistics are the cost of doing business. CONCLUSION: Ultimately, we must recognize that competition has been redefined in the 21st century. It is no longer product vs product, or company vs company. It is supply chain vs supply chain. A product is only as valuable as it is accessible to the buying public in the marketplace; a company is only as successful in the market as it can generate customer loyalty, and not simply make sales. Global supply chain logistics makes products accessible and generates customer loyalty in terms of consistency, availability, reasonable purchase price and sustainable success. Logistics professionals, whether engaged in global supply chains or local logistics operations, must balance Value for customers by controlling total landed cost while delivering quality and post sales support Velocity by reducing product storage times, increasing inventory turns, reducing transit times and border delays Variability by eliminating unexpected changes in flow patterns and reducing the need for buffer inventories Visibility regarding where products are, when they will arrive, and levels of inventory in transit Vulnerability of channel and product exposure to terrorist infiltration, both visible and invisible Thank you.