On the importance of boring logistics - Paul French

Chinabiz Speaker Paul French writes in his latest newsletter about the boring business of logistics:

Little Tommy Friedman likes to pontificate on globalisation from the golf courses of India, and (we have to admit) it’s been a profitable pastime for him. But of course, what drives globalisation is not pundits on golf courses, or even nerds with websites, but bloody big ships full of bloody big containers crossing the world’s seas – logistics. However, most people talk far too much about things like Blackberrys, blogs and Wiki this and Wiki that and far too little about TEUs and deep-water ports. The plain fact is that while essential, logistics is as boring as a Sunday afternoon in Carlisle (believe us, we’ve spent a Sunday afternoon in Carlisle).
This year, logistics has become even more important than before. Over the last few years, as retailers and brands have moved out of the gilded cages of Beijing and Shanghai, and into the terra incognita of China’s tier 2 and 3, logistics has been vital. But, in 2007, with commodity prices remaining high, manufacturing wages rising, oil peaking and inflation rampant, margins have been squeezed harder than ever. In sum, we’ll all have sold more in China of course, but the margin squeeze is hurting. So if you can’t make the product cheaper, and the inflation-aware Chinese consumer is remaining cost conscious, how do you keep any semblance of a margin and not go to the wall? The answer, for an increasing number of people, is slim the logistics, shave the costs through improving logistical efficiencies and try and recoup your margin there. Not easy, but essential, and for many local firms in China a nettle that really needed to be grasped.
Given that logistics in China can compose 18-20% of your costs compared to 8-10% in the US and EU, there’s some serous savings to be made. Everyone from Adidas to Gome is investing in centralising distribution and combining export out of China warehousing with internal distribution, in order to get an economy of scale. There’s still a long way to go – improved back loads systems would make trucking more efficient, better track and trace software and palletisation would help immensely. Palletisation is a major bell weather of development in logistics in China, and is coming slowly as the old slip sheets give way to RFID (radio frequency identification) pallets, pioneered in China by companies such as Coca-Cola and METRO, but rolling out slowly. Consider that sales of fork lift trucks in China grew by 30% this year, indicating that warehousing and palleting is starting to catch on.
And that is where things will remain for a good while yet. Brands are not going to be able to raise prices to get margins significantly up in this inflationary atmosphere, and the cost of production is not about to fall either. The margins will have to come from improvements in the nuts and bolts of the system – as ever the devil is in the details. Boring for all the lovers of service offerings, and interactive websites and all that fringe stuff, but that’s just the way it is. If you’ve always ignored the really boring logistics guy in the corner at the Christmas party before, this might be the year to make nice to him.