O perating 31 retail stores across China—from Shenzhen in the south, to Kunming, Yunnan, in the west, and Harbin, Heilongjiang, in the north—Wal-Mart China Co. Ltd. is rapidly expanding in China's increasingly modern business environment. But certain aspects of China's distribution sector pose challenges for Wal-Mart and its suppliers, and overcoming these challenges through innovative and flexible supply chain management and logistics strategies are vital to Wal-Mart's success in China.

The effective management of a supply chain is high on many foreign companies' lists of goals. China's marketplace today is tremendously competitive, and the advantages foreign companies can gain over local companies are often narrowed by the inefficiency of their supply chains. Every day saved in lead time (the time between the placement of an order and receipt of goods), every percent gained in fill rate (the percentage of a purchase order filled), and every dollar saved on inventory can mean the difference between success and failure. To succeed in China, companies must address several key challenges: regionalism, technology, nontariff barriers, and financial issues.

Regionalism in China

Multinational corporations (MNCs), typically used to operating at national and multinational levels, face unfamiliar supply chain fragmentation and local protectionism within China. Like other foreign MNCs in China, Wal-Mart confronts the consequences of centuries of provincial autonomy and self-sufficiency. But modernization, which brings with it the potential for the application of advanced communication and infrastructure, diminishes the rationale for regional self-reliance. Indeed, such self-reliance hinders interprovincial cooperation, particularly interprovincial trade.

Local administrative bodies and physical infrastructure built to protect local interests pose difficulties for road transportation, private and commercial trucking, Customs clearance for imports, and interprovincial purchasing, whether distribution or wholesale. Such regionalism also affects domestic regulatory control of retail consumer and agricultural products. For example, health and sanitation certificates with local conditions apply to nationally approved food products, and local laws may require local wholesale purchases of alcohol and tobacco products. Local governments can use both of these means to regulate or hinder the interprovincial transportation and distribution of the products they cover.

Furthermore, regional or local governments may not operate in concert with central-government mandates or laws. Local governments can pass rules and regulations at any time without notice. This situation creates a confusing and costly business environment for companies trying to operate on a national level. Ideally, distribution and supply chains can be managed to achieve optimum efficiency and cost. Today in China, regional fragmentation of the supply chain due to local protectionism decreases efficiency and increases costs—resulting in fewer choices or higher prices for consumers.

Nevertheless, Wal-Mart strives to provide customers with the widest choice and selection possible, at an "everyday low price." The flexibility and efficiency that nationwide procurement and centralized distribution allow are key to achieving this goal. Wal-Mart's supply chain in China is centralized in south China through the Shenzhen distribution center and will soon be centralized in north China through the Tianjin distribution center, scheduled to open in October 2003. Wal-Mart does not require local suppliers that sell products exclusively to local stores to use its distribution center, but encourages suppliers that sell nationwide to use the distribution center because it is more efficient for a supplier to deliver to one location than to all the Wal-Mart stores across the country. For suppliers that have difficulty making a long journey to the distribution center, and that still wish to sell nationally, Wal-Mart offers back-haul services from their local marketplaces, giving these suppliers access to markets that they would otherwise be unable to reach. The company believes that the use of distribution centers and back-haul trucks is efficient and allows Wal-Mart to maintain control over most of its distribution chain. (Though the trucking is contracted out, Wal-Mart manages the rest of its supply chain directly.)

Appropriate technology levels

China's abundant labor supply means that companies can choose to use manual processes instead of automated processes and still save money. The tradeoffs are accuracy and quality, two standards that are rapidly changing in China. Whether a company chooses to use manual or automated processes will likely depend on the sector in which it operates.

In high-end technology and electronics manufacturing, which is moving from Japan, South Korea, and the United States to China, Chinese and foreign manufacturers alike are under pressure to produce goods that meet world-class quality standards. These standards require manufacturers to invest in robotics or automation. In stark contrast are the businesses of transportation, distribution, and retail, in which profit margins are low and competition is fierce. As a result, foreign companies and their local providers still opt either to process manually or to contract out to local, third-party logistics companies that use manual processes.

Companies thus often end up somewhere between the fully automated and fully manual options, particularly companies that employ educated and technically capable workers who are interested in careers that enable them to use their expertise. Finding an appropriate level of investment in technology or automation may mean considering "mid-tech" processes for supply chain management, such as radio-frequency-equipped forklifts instead of fully automated picking or order retrieval systems, or off-the-shelf warehouse-management systems instead of custom-designed ones. Rising labor costs may also lead companies to choose partially automated solutions.

Nontariff trade barriers

Nontariff trade barriers—often in the guise of geographical limitations, quality or safety standards, or, in retail, a cap on the number of stores a company can open—are among the most frequently discussed topics within China's retail supply chain sector these days. As China complies with World Trade Organization (WTO) terms and lowers its import tariffs, it will inevitably seek ways to protect its huge domestic market. For instance, many companies find vague testing and labeling laws to be particularly troublesome.

Like the United States, China needs domestic consumer demand to drive growth. But unlike the United States, China's domestic demand is underdeveloped. Since retail companies are at the heart of supporting consumer demand, foreign retail companies in China will be under the microscope when it comes to the watchful eye of government authorities and should anticipate government efforts to keep Chinese products on, and imported products off, shelves.

In reality, though, customer preferences in China, as elsewhere, will usually dictate what is on the shelves, and since local products often sell best, many retailers will willingly stock their shelves with local goods. In addition, many international brands are now manufactured in China and also count as "local" in the eyes of the government. At the same time, Chinese customers are still interested in trying new, imported goods, particularly when it comes to food.

Financial matters

China's current banking, finance, insurance, and taxation structures are bureaucratic and cumbersome. The goal of any supply chain or logistics manager is to create a seamless flow of product going one way and payment going the other way. Regional fragmentation of finance regulation, tax laws, and other institutions has the same effect on the payment side of the supply chain as regional protectionism has on the transport and distribution side. For instance, a company with joint ventures in several locations supplied by one supplier may have to make a separate payment from each venture to the supplier. Wal-Mart, however, has worked with the Chinese government to set up a holding company to consolidate joint venture distribution and finance. Also, since modern insurance is relatively new to the PRC, claims processing can be time consuming and confusing.

Businesses in China still depend heavily on a hard-copy paper flow of documentation, which adds cost, requires excess manpower, and creates opportunities for human error. The requirement for "chops" on official documents further complicates matters. Because there is no widely accepted way yet for such chops to be electronically authenticated or transmitted, paperwork must be in hard copy.

Pending reforms and modernization in finance, insurance, and taxation could pave the way for approval of technology that could improve the flow of documents and payments. Reforms will enable foreign companies with supply chain interests in China (including third-party logistics providers) to create seamless services and networks across the country.

LTL and private, nationwide parcel delivery

One thing most supply chain and logistics managers around the world take for granted is the readily available supply of less-than-truckload (LTL) service providers or express parcel delivery. In the United States, such services can handle anything from a single carton to a full shipment in a 53-cubic-foot trailer. By the carton, by the pallet, or by the trailer, door-to-door nationwide freight services are reliable and affordable. Always just a phone call away, shipments are tracked by tracking label and global positioning systems (GPS) to ensure minute-by-minute efficiency.

Such services are relatively undeveloped in China, but are making headway and will fill a niche in the transport industry. This development will have a huge impact on retail business, largely by allowing more flexibility through more delivery and transport options. Urgent or exception delivery, just-in-time inventory management, catalogue or mail order sales, and Internet sales are all business models that have been made possible around the world by these types of transport services. Although some service providers in China such as China Post or China Rail can arrange for such shipments today, the choice of service providers is limited, and tracking, pickup, and delivery are unreliable. In a promising sign for retailers, several joint ventures between Chinese state-owned transport firms and foreign freight or parcel companies have recently been established.

Perseverance pays off

Although these issues and concerns are noteworthy, they are by no means factors that would severely limit any enterprising manager or company from expanding in China. Despite the lack of national and advanced systems described above, for more than seven years Wal-Mart has operated and aggressively expanded its retail business in partnership with dedicated associates, joint venture partners, suppliers, and government officials. Wal-Mart's experience has shown that even the most daunting problems tend to transform themselves into opportunities. For instance, Wal-Mart has used case studies of fragmented transportation and distribution to educate its suppliers to help them streamline their operations and reduce costs—to the benefit of both parties. Sometimes these issues require company participation in the debate for liberalization and standardization. As a result, Wal-Mart has become heavily involved in government relations and has participated in these debates by talking directly with Chinese government officials at both local and national levels and through trade groups in both the United States and China. To overcome the difficulties of distribution and supply chain management in China, supply chain managers will have to be creative and persevere to achieve success in a market that will be central to them and their customers in the twenty-first century.