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China's Logistics Industry

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Abstract

The aim of this paper is to introduce development of China logistics industry in last decade. This paper examines problems during the development and the implementations to further develop China logistics industry in the future. The first part of this paper introduces the background of China logistics industry, problem statement and research objective. The measurements of development of China logistics industry are as dependent variables discussed in Chapter four. The second part talks about literature review for logistics, 3 elements in development of China logistics industry which are cost, productivity and expansion. Also, factors that affect development of China logistics industry are given which are transportation, government's regulation, warehousing and storage, IT supporting and infrastructure. Chapter three looks at research methodology which contains source of data, method of data analysis, questionnaire and interview. The theoretical framework shows the relationship between independent variables and dependent variables. Chapter four is mainly focuses on data analysis; the results are shown to indicate the main factors that limit the development of China logistics industry. Finally, the chapter five gives the conclusion and recommendation to solve the problems that effect development of China logistics industry that is integrated information technology to reduce transportation cost.

KEYWORDS: logistics, cost, information technology, transportation.

Chapter 1

Introduction

1.1 Background of Study

With the increase of the global competition and the rapid development of the Information Technology (IT), the logistics industry has become one of the most important industries in the 21st century. The scope and role of logistics have changed dramatically over recent years. In the past, logistics has played a supportive role to primary functions such as marketing and manufacturing. Now the scope of logistics has expanded beyond its traditional coverage of transportation and warehousing activities to include purchasing, distribution, inventory management, packaging, manufacturing and customer service. More importantly, logistics has dramatically evolved from a supportive role characterized and cost absorbing to a primary role and become an important of competitive advantage. Companies experiencing growing pressure to reduce costs and provide better service so that they engage in improving the logistics by outsourcing/expansion, an option that can improve both efficiency and effectiveness.

Modern theory of logistics in China was introduction in 1980s to pilot program of logistic and distribution centres built-up in early 1990s and then evolved into full-fledged industry by the end of 1990s. Since its economic reform and opening up in 1978, China's economy keeps booming, with an annual GDP growth rate of nearly 10 percent which has become a global manufacturing centre with its high economic growth rate (Wang et al. 2006). In 2001, a condition for China to become a full member of the World Trade Organization (WTO) was the removal of restrictions to foreign logistics investments. At the beginning, foreign capital was allowed only in form of joint ventures where Chinese partner held a majority (Goh and Ling, 2003). At the end of 2005, the restrictions were completely phased out. At present, state-owned, privately/locally owned, and foreign owned logistics companies are all equally allowed to enter and compete in logistics industry in China. China's logistic industry has been experiencing fast growth driven with the help of sustainable national economic expansion. Although there are tremendous opportunities, still the intense competition exists, especially after 2001. The logistics industry reported an annual growth rate of 31% in 1999, 35% in 2000, and 55% in 2001, and was expected to continue to expand rapidly in the future (Business knowledge on demand, 2007). According to Exhibit 1, the average annual growth rate of the logistics industry in China was 22.2%, and logistics expenditures accounted for about 21.8% of the GDP between 1992 and 2004 (business knowledge on demand, 2007). This sector has been developed in a physically sound way under improved infrastructure and external environment. According to Asia consulting, Added value has reached to RMB 1.4 trillion in 2006 up 13.9% over 2005. The transportation fee has been RMB 2.1 trillion increasing 12.1 %. The increase can be seen in inventory and delivery service along with 16.7% of warehousing fees. It is expected that China's logistics market value will reach RMB1.1972 trillion, and will continue to maintain an annual growth of 20% in 2010.

1.2 Total Logistics Market Size

The GDP of China is above RMB 10 trillion by the first time in 2002 that achieved a real growth of 8%. In the 10th Five-year Plan, the government is forecasting an average growth rate 7% per annum in 2002-2007. According to the forecasts by State Development Planning Commission (SDPC), the GDP will be quadruple, about US$4.3 Trillion by 2020. The price level will be stable because of higher price pressure within the economy. In a detailed survey by the China Federation of Logistics and Purchasing (CFLP), the total logistics market was estimated at RMB1, 788 billion, 20% of the GDP in 2000. In 2002, it was estimated that the total logistics market of China were about RMB 2 trillion. Though the economy was expanding in 7%, logistics expenses were going to increase in a slower rate. It was because there is sufficient supply of logistics capacity such as trucks, warehouses and other fixed assets. Government registration shows 700,000 logistics service providers are operating. On the other hand, improving logistics efficiency also reduces its proportion to the GDP. A moderate rate of 4.0%-4.9% growth is estimated in the coming five years. According to HK Trade Development Council, leading logistics companies in China such as UPS, FedEx and DHL-Sinotrans have all recorded annual growths in over 30% on operations in China and there are more outsourcing contributes to the growth of professional logistics firms. Moreover, as competition increases, it is expected that market share is shifting from local companies to foreign invested enterprises (FIEs) or local giants, who can offer more efficient services in lower fees.(LI & FUNG, 2003)

1.3 Players in the China Logistics Market

China's logistics market is fragmented, characterized by tens of thousands of logistics companies and many of them are small, poorly organized with fundamental infrastructure and technology. A vast majority of the players are lack of nationwide capabilities and serve a narrow customer base; and mainly focus on simple transportation and storage functions. Competition is fierce, particularly in the low-end market. Traditionally, China's logistics market is dominated by the state-owned enterprises (SOEs) which provide 90% of the logistics services, but none of these has a market share over 2%.

1.31 State-Owned Players

There are many state-owned players in China logistics market. Prior to 1980, under economic conditions in that time, China's logistics business could only be managed by state-owned enterprises and logistics was a monopoly industry, mostly for transpiration and warehousing. The characteristics of their management mode are small-scale native enterprises, slow product renovation, poor management, production plans following from various government agencies, etc. Due to government investment and monopolistic operation, these enterprises acquired large assets and became relatively large-scale business firms. Relying on their sufficiency capital and existing market share, in the past several years these enterprises rapidly became leaders in China logistics industry. However, due to the monopolistic nature of the industry and the separated management system, it will take time for these logistics firms to become truly comprehensive. The following is a list of today's relatively powerful state-owned backbone logistics enterprises that operate nationwide:

China Ocean Shipping (Group) Company (COSCO);

China Railway Express Company Limited (CREC);

China Post Logistics Company Limited (CPLC);

China Railway Container Transport Company Limited (CRCTC), etc.

COSCO Logistics

COSCO Logistics is a branch of COSCO, China Ocean Shipping Company. It was formed in 2002. Because of the parent company's network and infrastructure, in 2004 to 2008 it ranked number 1 in China in terms of comprehensive logistics capacities. COSCO Logistics has 300 logistics facilities, covering 90% of the China market and the service is strongly marine transport related.

1.32 Private Players

Since the mid-1990s, China's private domestic logistics enterprises started to develop themselves. For example: EAS International Transportation Ltd (Shanghai). This company was founded in 1985 and it involves international business. In the past twenty years, EAS has gained notable achievement in building the unique operation platform to development modern logistics business according to the demand of customers.

There are many other private domestic logistics companies in China, such as St-Anda, PGL, China Overseas logistics and so on. They are all medium-size Chinese logistics provides emerged in the last 10-20 years. These firms have enjoyed the fastest growth in the market due to their light-asset nature and high efficiency. They are more focused on geographies, service and customers. But they have problems in lacking sufficient financial support for market expansion and internal management mechanisms and effective organization to support high growth and profitability. (Fu Qinqin, 2007)

1.33 International Logistics Players(ILCs)

Although the domestic companies dominate the general China logistics market, ILCs are playing a more important role, and their market shares are increasing rapidly. Among which the most important are the four giant ILCs that started with parcel and courier services. The international logistics players are: DHL, TNT, UPS, FedEx and so on.

Deutsche Post World Net/DHL

Deutsche Post World Net (DPWN) has a uniformed brand and image for its logistics, courier and parcel, and transport service; that is DHL. DHL first entered China in 1981. In 1986, it formed a joint venture with Sinotrans in courier and parcel delivery. Mainly because of this earliest partnership, DHL-Sinotrans has the biggest market share in courier service. Both parties enjoy a very fruitful partnership. For this reason, in 2002 when the first partnership ended, DHL and Sinotrans renewed the cooperation agreement for another 50 years, till the year of 2052. In May 2004, DHL initiated its domestic delivery of parcels in China, and again, DHL led the market. In the courier and parcel delivery market, the partnership between DHL and Sinotrans is the most stable. In the past twenty years, DHL has invested about $215 million in China. Out of its total investment of $1.1 billion in Asia, that was only about 20% of DHL's investment in Asia. However, DHL plan to invest about $273 millions in China from 2004-2008, or almost 2/3 of its $400 million investment in Asia over the same period. Clearly, the investment is heating up in the China logistics market. (Xuepin Cen, 2005)

Nowadays, many foreign logistics companies have established good cooperation relations with Chinese logistics firms by using joint ventures. The advantage foreign companies have competitive advantage in technology and management, but only when they are combined with experiences and existing service network of Chinese enterprises that they could be brought into full play. Therefore, some Chinese logistics companies usually face Merge and acquisition (M&A) risk. A number of foreign companies that have never touched on the Chinese market patiently search for Chinese companies for cooperation projects. Many inland Chinese cities promise many commercial opportunities in the logistics sector, and it needs time for foreign companies to fully penetrate into the Chinese market. However, for foreign logistics companies they are being challenged by infrastructure and customer base and of lack of on-the-ground capabilities in China.

1.34 Third Party Logistics companies (TPLs)

China's market for TPL is still in its early stage. Also, TPL is a relative new concept for most of the Chinese companies. A TPL company normally provides process-base services rather than a function-base logistics service, which generally toward to the integration and full control of a part or whole process of customers' logistics network. The rationale for outsourcing logistics is to achieve cost saving through economics of scale. Small or middle sized companies may not always have economics of scale to economically manage logistics operation, but this is precisely one of the advantages for third-party logistics companies. The year of 2006 is the first year of China's 11th Five-Year Plan (2006~2010), and is also the first year when logistics is opened up completely. From the year of 2006 to 2010, the basic frame and main functions of China's southern international logistics centre will come into being. The proportion of logistics cost in GDP will decrease more than 3%. The third party logistics will share up to 23% in the logistics market.(Fu Qinqin, 2007)

1.4 Major modes of Transport

The first few years of the 21st century have been characterized by the rapid construction of transport infrastructure in China. During the five-year plan from 2001 to2005, transport infrastructure has been built significantly including 250,000 kilometres of highways and 24,700 kilometres of expressways. By the end of 2006, the total length Chinese highway has reached 3,457,000 kilometres and 77,000 kilometres of railways (Waters, 2007). The current five-year plan (2006-2010) has an ambitious agenda and will spend hundreds of billions of dollars over the next five years to develop China's roads, river ports, and railroads. (Richard Brubaker,2005 )

1.41 Ports

According to Richard Brubaker, (2005) since the central government opened Chinese ports to overseas investment in March of 2002, Chinese Port facilities have received massive amounts of investment and have taken huge steps towards significantly increasing capacity. In 2003, the total investment in Chinese port development and construction was US$2.2 billion, and in 2004, the Ministry of Communication has reported this figure was to reach nearly US$4.3 billion in 2004. Currently, China's coastal cities like Dalian, Tianjin, Qingdao, Shanghai, Ningbo, Guangzhou and Shenzhen, are all competing to complete new berths and establish themselves as dominant regional logistics centres. (Exhibit 2) In Shanghai for example, container throughput of 11.28 million Twenty-Foot Equivalent Units (TEUs) for 2003 is expected to increase to 14.5million TEUs in 2004, with massive expansion already underway. In addition to expansion that will add more than 2m TEUs of capacity in 2005, Shanghai's massive Yangshan deepwater terminal is also under construction and will eventually handle 25m TEUs at a cost of €1.5bn. Although such massive investment and expansion, the improvements brought by increasing use of foreign terminal operators, Chinese ports still need to keep up with increasing demand.

1.42 Road

Benefit from government heavy investment and the unreliability of other options for instance rail and inland water, road transport becomes most popular choice for the inland distribution of goods in China. Beijing has already emphasised on a plan to double China's expressway mileage. (Richard Brubaker,2005) By 2005, as China's new inter-provincial highway system nears completion, almost 200,000 km of new roads will bring the national total to roughly 1.5 million km. Among the most significant of these developments, Shanghai-Chengdu Highway and Beijing-Zhuhai Expressway are the most arresting plan. Because most of China's highways are financed using a fixed return toll based system, tolls account for roughly 20% of costs faced by long distance trucking operators and create huge incentives to overload trucks. Nearly 75% of China's more than 100,000 traffic fatalities per year have been attributed to overloaded trucks. These deaths have led to new road safety laws, which if observed, could have significant implications for the efficiency and the costs of trucking operations where trucks are overloaded on average by 30% and often by 50%. However, at present the trucking industry in China remains extremely fragmented and is not organized on a national basis. The largest of the nearly 3 million trucking service providers in China is Sinotrans, with a registered fleet of 3,000 trucks specializing in long-distance service. Short-distance trucking services in China are generally provided by local operators who offer relatively cost effective and competitive services. In spite of national policies, this separation between local and long distance trucking operators is in part due to efforts by local and city authorities to protect local businesses. By the end of 2004, Chinas WTO commitments require that China's trucking sector be fully opened to foreign firms. Experts said that current market fragmentation and the benefits of newly expanded infrastructure make the trucking sector particularly attractive for consolidation and foreign investment.

1.43 Rail

According to Richard Brubaker, (2005) China's Railway infrastructure has received relatively low levels of investment compared with China's road and port infrastructure. The Ministry of Railways has relatively modest plans to increase China's existing rail network from 72,000 km to 100,000 km in 2020. Use of the Chinese rail system increased 6% year on year between January of 2003 and January of 2004, though it would appear that this relatively modest increase can be less attributed to weak demand than the limitations posed by serious under capacity. Railway bottlenecks and the inability of the railway system to transport the requisite amounts of coal were in large part responsible for the power shortages of the summer of 2004. This has since led to the prioritization of coal shipments leaving other commodities and cargoes sitting on docks. Many importers, most notably China's steel mills have been struggling to find enough railcars to carry cargo and now often resort to barges and trucks at much greater cost. Poor handling practices, delays, unpredictable delivery times, bulk shipment requirements, theft, minimal shipment tracking, the lack of inter-modal facilities, and a general lack of infrastructure all plague the Chinese railways. However, despite these issues exist, the heavy subsidization still makes China's railway become the cheapest form of overland transport compare with shippers.

1.44 Inland Waterways

Infrastructure on inland waterways, most significantly the Yangtze River, increased 8% between January 2003 and January 2004. (Richard Brubaker,2005) Rivers such as the Yangtze can handle ships of up to 6000 tonnes and are generally uncongested; however, canals and low bridges can be problematic and projects such as the recently completed 3 Gorges Dam can serve to prolong dry seasons and keep water levels low.

1.45 Air freight

Although China's airfreight sector is constrained by inadequate infrastructure, its development has been rapid. China is the second-largest domestic airfreight market in the world after the United States. According to Boeing's World Air Cargo Forecast, the market has grown at more than 20 percent annually since 1991. (Richard Brubaker,2005)

Airports are seeing rapid expansion in three principal economic areas: the Yangtze River Delta (YRD), the Pearl River Delta (PRD), and the capital city of Beijing. Expansion in the PRD is very important that it threatens to cut into the volumes handled by Hong Kong, the world's largest air cargo airport. But a large proportion of the goods exported from South China are routed through Hong Kong. Its position has been strengthened, moreover, by an agreement that allows Chinese airlines to expand their international services via Hong Kong and gives Hong Kong airlines greater access to the mainland.

1.46 Warehousing

Most of China's warehousing facilities are older or old-style facilities with a range of associated issues. Many facilities do not have computerized stock supervision systems in place. Single and multi-story warehouse designs limit efficiency by preventing the use of multiple racking levels and by modern forklift trucks. Cross contamination is an issue as are unsealed loading platforms at refrigerated facilities, which expose food products to ambient air temperatures during loading and unloading. The shortage and shortcomings of existing facilities as well as the opening up of the Chinese warehousing under its WTO commitments by the end of 2005, have led to considerable investment and anticipation in this sector. (Richard Brubaker,2005 ) For example, in Shanghai, several foreign logistics services providers hoping to invest in the future and capitalize on preferential policies and proximity to port facilities (including APL Logistics, DHL and OOCL Logistics) have or are planning to establish massive logistics centres in Shanghai's Waigaoqiao Logistics Park / Free Trade Zone. The park has been established as an "international transit, delivery, sourcing and transhipment hub" to promote and coordinate the development of Shanghai's sea and air transport, warehousing and logistics industries.

1.5 Statements of the Problem

1.51 High Cost

Since the late of 1990s, China has been aiming at fostering logistics industry and improving logistics management skills, for the huge manufacturing industries in China has driven logistics industry growing rapidly in recent years. With its imminent entry into the World Trade Organization (WTO), China is embracing a big opportunity to develop its logistics industry, officials and experts noted. Zhang zhigang, deputy director of the State Economic and Trade Commission (SETC), said that:" it is urgent that China reforms its old circulation system and speeds up the development of its logistics industry as China faces new challenges in the globalization process." But the high logistics cost nibble the competence of firms. According to the data released by Development Research Center of the State Council of PR China, China's logistics expenditures amounted to 20% of the GDP in 2000 whereas logistics spending accounted for 10.3% of United States's GDP, 14% of Japan's GDP, and 10 to 13% of European Union's GGP (Waters, 2007). The annual growth rate of total logistics expenditures is 10.29, 12.99, 16.76 and 12.86 percent from 2002 to 2005 (National Development and Reform Commission, 2004). Statistics published by China Federation of Logistics and Purchasing show that China's total logistics expenses reached RMB3.8414 trillion in 2006, up 13.5% year on year at current price, a growth 0.6 percentage points higher than in 2005. The rate of total logistics expense of GDP was 18.3%, 0.2 percentage points lower than in 2005. This is the mainly problem that slow down the development of China logistics industry.

The total logistics cost encompasses transportation, inventory storage and management. In 2007, the total logistics cost increased by 18.2% to 4540.6 billion yuan. The total logistics cost in China generally includes three cost components, namely, transportation, inventory storage and management cost. According to Exhibit 3, it is clear that the total logistics cost increased rapidly during 1991-98, since then the growth started levelling off. In 2004, the total cost amounted to 2911.4 billion yuan (US$ 352 billion), grew by 16.6%. Of this total, transportation cost made up the largest portion and witnessed the highest growth rate. Transportation cost was 1655.8 billion yuan (US$ 200 billion), accounting for 56.9% of the total logistics cost. On the other hand, inventory storage and management cost were 846.7 and 408.9 billion yuan (US$ 102 billion and US$ 49 billion), accounting for 29.1% and 14% of the total logistics cost respectively (US$ 15.7 billion).

Adding the costs of packing, transport, storage and damage, the ratio of total logistics costs to total industry production ranges from 40% to 60%, whereas in the United States this percentage is close to 20% (Smyrlis, 2006). If logistics costs are broken down, transport accounts for 57% of costs, inventory and storage accounts for 29%, and management accounts for 14% (Exhibit 4). Percentage wise, transport costs in China are twice as expensive as in developed countries (Wakers, 2007).

1.52 Low in productivity

The ratio of total logistics cost to GDP represents the efficiency of logistics operation in the economy which means the productivity of logistics industry. It is also used as an indicator of the development level of the logistics industry. In general, the higher the percentage, the less efficient is the logistics industry. Exhibit 5 shows the total logistics cost as a percentage of GDP in the 10th Five-year Plan period (2000-2005). Despite the total logistics cost as a percentage of GDP has been on a downward trend that decreased from 19.4% in 2000 to 18.57% in 2005 and the total cost savings in the 10th Five-year Plan period totalled 109 billion yuan; according to exhibit 3, the logistics cost was still higher than that in US, Japan and developed countries which means lower inefficiency of China logistics industry. As predicted by the CFLP, the ratio of total logistics cost to GDP will continue higher that resulting inefficiency of modern logistics services. CFLP predicted that total logistics costs during the 11th Five-year Program period (2006-2010) will grow at 10% annually, 2% lower than that of the 10th Five-year Plan period. It also forecasted that the total logistics cost will reach 5,400 billion yuan in 2010, the ratio of total logistics cost to GDP at around 16.8% and cost savings yield during the period will be around 435 billion yuan.

1.53 Slowly expansion/outsourcing

One of the most significant drivers of growth in the global logistics industry is the trend of mergers and acquisitions. Such buyouts and mergers enable logistics players to build up their infrastructure and service scale, both of which are critical to remaining competitive. By merging their operations and collaborating on technology, complementary services partners can also scale up their logistics capability without having to invest heavily in infrastructure. The result is lower cycle-time, streamlined business processes and lower manpower costs, which in turn boosts companies' productivity and profitability. Although the giant logistics companies in China have overseas offices established from the 1980's and 1990's as their overseas branches to support their international transportation, their businesses are heavily dependent on agents. For example, Sinotrans has business in 200 countries, but there are only 40 overseas offices. The most international business is done via the agents. As Contrill claimed, "don't expect a wave of Chinese 3PLs to land on Western shores soon. The pace of change in China is slow by Western standards and there is much to do in the home market".

1.6 Research objective

The objective of this research is twofold. On one hand, the objective is: To understand the development of China logistics industry in last decades. On the other hand is to investigate the factors affect the development of China logistics industry and find the solutions to solve the current problems to further develop logistics industry in China. On meeting the two objectives this paper will develop a framework to address the factors that affect the development of China logistics industry.

1.7 Research questions

There questions will be discussed in this article:

1: To introduce the development of logistics industry in China in last decade.

2: What are the factors that affect the development of China logistics industry?

3: How to solve the current problems to further develop logistics industry in China?

1.8 Significance of study

This research would contribute by indicating and analyzing some of the problems that affect development of China logistics industry and this study was designed to answer some questions from perspectives of both the researcher and some practitioners. The theoretical framework was based on an extensive review of the literature on the various theoretical models of factors affect development China logistics industry.

1.9 Limitations of the research

  1. Because of time restriction (from September to November, 2009), this thesis will be finished within 3 months, I will cover the detail of logistics management (Transportation, Warehousing and IT supporting) as specific as possible.
  2. Because of the location of sampling in Shanghai, China, the searcher has to come to China but only around 1month, so time limited to the questionnaire distributing and receiving which cause low response rate.
  3. There are many problems that influence the development of logistics industry in China; in this paper, we only focus the above 5 main problems.
  4. Because of some companies are not public listed companies, it is difficult to find the financial data from the current annual reports released by these companies, so we may analyze these companies using the previous data (Eg: Annual Report in 2007)
  5. Some of questions are directly related to the internal strategy of company management, so managers are unwilling to answer.

1.10 Chapter Outline

Chapter one - Introduction: This provides the reader with background information of the study, which creates a pictorial flow of the main research. Research objectives, background of study, problems and significance as well as the limitations faced by the researcher are clearly stated in this chapter.

Chapter two -- Literature review: This chapter explores relevant literature; it basically dealt with pertinent literature on problems of current China logistics industry with discussions on related research variables such as government policy and regulations, transportation cost, warehousing and storage, training/education/IT supporting and infrastructure.

Chapter three -- Methodology and Data collection: This chapter describes the research design used to conduct this research. This chapter will further disclose the ways used in analyzing data collected, limitations of the methods used and how the data was collected. This section concludes with discussions of the data gathering techniques and the data analysis procedures that were used to answer the hypotheses and research questions.

Chapter four -- Results and discussions: This chapter outlines results of data analysis, provides discussion of research findings and builds bridges between objectives, findings and relevant literature. The result section summarizes the analysis of the data and present findings of the study with respect to the hypothesis and research questions. While the discussion section reviews the findings of the study in the context of the conceptual framework of the study.

Chapter five -- Conclusions and recommendations are provided in this chapter together with discussions on the contribution of the study to the body of knowledge. This chapter concludes the research and documents the implications of the study with recommendations for future research.

Chapter 2

Literature Review

2.1 Definition of logistics

"Logistic" is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services and related information from their point of origin to point of consumption for the purpose of conforming to customer requirements. (Raymond F. Boykin and Wm. Benjamin Martz Jr, pp: 45-55, 2004) The provision of logistics services requires inputs from a number of service providers, including the providers of transport and warehousing as well as other value-adding activities.

The concept of logistics has undergone many significant changes. (Luo Wenping and Christopher Findlay, 2002) divided the development of logistics into three stages:

- Stage 1: Physical Distribution or outbound logistics system (during 1960s and 1970s); businesses attempted to manage systematically a set of interrelated activities including transportation, distribution, warehousing, finished goods, inventory levels, packaging, and materials handling to ensure the efficient delivery of finished goods to customers.

- Stage 2: Integrated logistics Management (during the 1970s and 1980s); companies began to recognize the additional opportunities for savings by combining the inbound side (materials management) with the outbound side (physical distribution). Initially, this provided potential savings by having a single transportation manager who could coordinate inbound and outbound transportation. Companies also become aware of the opportunities to view the whole process, from raw materials to work-in-process inventory to finished goods, as a continuum that, managed from a systems perspective, could lead to more efficient operation.

- Stage 3: Supply Chain Management (from 1980s to 1990s); companies expanded their perspective on the logistics processes to include all the firms involved, making use of partnerships/alliances between manufacturing companies and their suppliers/vendors, customers (channels of distribution), and other logistics -related parties such as transportation and public warehousing companies.

2.2 Third Party Logistics (TPLs)

New phenomena often create problems in both definition and content. Third party logistics and related concepts are most often developed by researchers or consultants in collaboration with businesses demanding or offering third party services. Thus, the definitions reflect the phase of third party cooperation. The Scandinavian definition of third party logistics is more extensive than the American definition, as businesses in Scandinavia have an old tradition for close and long-term cooperation with external partners; cf. network studies of the Uppsala School (Tage Skjoett-Larsen, 2000).

Alessandra Marasco, (2008) used the following definition: "Third-party logistics involves the use of external companies to perform logistics functions that have traditionally been performed within an organization. The functions performed by the third party can encompass the entire logistics process or selected activities within that process". According to this definition, third party logistics includes any form of externalization of logistics activities previously performed "in-house". Through interviews with a number of North European third party service providers, Prabir K, Bagchi and Helge Virum, 1996 have pointed out the following definition: "A logistics alliance indicates a close and long-term relationship between a customer and a provider encompassing the delivery of a wide array of logistics needs. In a logistics alliance, the parties ideally consider each other as partners. They collaborate in understanding and defining the customer's logistics needs. Both partners participate in designing and developing logistics solutions and measuring performance. The goal of the relationship is to develop a win-win arrangement". This definition emphasizes the strategic dimension of the concept and presupposes that several characteristics are fulfilled before the relationship between buyer and seller of logistics functions can be characterized as TPL. These characteristics include certain duration, joint efforts to develop further cooperation, a customerization of the solution, together with a fair sharing of benefits and risks.

2.3 Measurement the development of logistics industry

Logistics has dramatically evolved from a supportive role characterized as passive and cost absorbing, to a primary role and critical factor in competitive advantage (Fu Chinchin and Gwi Ok Kim, 2004). Companies experiencing growing pressure to reduce costs and provide better service can improve their logistics by outsourcing to third-party logistics (3PL) firms, an option that can improve both efficiency and effectiveness, so logistics outsourcing has become a rapidly expanding source of competitive advantage and logistics cost savings.

2.31 Productivity

Alan Stainer. (1997) believe that, in measuring logistics performance, a comprehensive strategy of measurement is necessary for the successful planning, realization and control of the different activities which comprise the business logistics function. He also pointed out that, there should be a family of measures. This is a balanced collection of four to six performance measures, usually including productivity, quality and customer satisfaction, which together furnish an all-inclusive view of results but, individually, also provide a diagnostic value.

Within this performance scenario, productivity can be seen as a measurement of resource utilization, including the time element. Alberto G. Canen and Ana Canen, (2002, number: 2.pp: 73-85) points out, the productivity philosophy and its improvement has been a high priority, in the first instance, in manufacturing, then in marketing, and later in physical distribution and materials management. Thus, the time is now ripe to focus on the whole logistics process. The term productivity is often ill-defined but, basically, its measurement is that of a prescribed output to the resources consumed.

It can be divided into three main types:

(1) Partial measures being a ratio relating output to a single input, such as labour, materials or capital.

(2) Total factor or value-added productivity being based on sales less bought-in goods, materials and services.

(3) Total productivity measures being a ratio of total output to total input.

There is a clear link between productivity and performance improvement, as purported by Lynch and Cross (1995, pp. 63-91). They show performance as a pyramid which is filtered down from the corporate vision, with market and financial measures as the main resultants, supported by customer satisfaction, flexibility and productivity as core business processes. Despite this emphasis on performance, previous research by the author (Stainer and Stainer, 1995), based on a survey of both manufacturing and service industries in the UK, France and Germany, suggests that the implementation of formal productivity programmes is still marginally behind that of the US a decade ago. Further analysis of the survey divulges the use of these three productivity measures for all respondents, as well as for those respondents employing productivity measures in the field of logistics.

2.32 Cost

The total Logistics cost as a percentage of GDP has widely been used as an indicator of the development level of the Logistics industry in many developed countries. In general, the higher the percentage, the less efficient is the Logistics industry, which means the cost affect the development of logistics industry.

The costs associated with logistics activities normally consist of the following components: transportation, warehousing, order processing/customer service, administration, and inventory holding (e.g. Lambert et al., 1998; Saccomano, 1999). Not surprisingly, total logistics costs often represent a large portion of total supply chain costs, especially when the supply chain is extended to the global market. As more organizations are outsourcing their products or services to global suppliers, it becomes increasingly critical to understand and evaluate the various logistics cost components in order to assure the profit margin.

2.33 Expansion /outsourcing

Elliot Rabinovich, Robert Windle and Martin Dresner, (1999) said that: the outsourcing of logistics functions to partners, known as "third-party logistics providers", has increasingly become a powerful alternative to the traditional, vertically-integrated firm in logistics industry. A growth in the number of outsourcing partnerships has contributed to the development of more flexible organizations, based on core competencies and mutually beneficial longer-term relationships. Overall, some 60 per cent of Fortune 500 companies report having at least one contract with a third-party logistics provider.

The development of logistics outsourcing - broadly defined in this paper as long and short-term contracts or alliances between manufacturing and service firms and third-party logistics providers - has been largely based on the needs that companies have to obtain cost savings and to concentrate on their core competencies. They also indicated that, the market and firm characteristics influence the decision to contract multiple combinations of third-party logistics services. These services range from single transportation activities to integrated warehousing, distribution, and information management activities.

Also several authors have indicated that across many industries logistics outsourcing has become a rapidly expanding source of competitive advantage and logistics cost savings in logistics industry. For example, Elliot Rabinovich, etl (1999) reported that some firms routinely have achieved up to 30 per cent to 40 per cent reductions in logistics costs and have been able to greatly streamline global logistics processes as a consequence of outsourcing. Other studies, however, have indicated that some logistics outsourcing arrangements are not successful. These unsuccessful relationships have been generally attributed to unclear goals and unrealistic expectations, internal sabotage by managers at the firms engaging in outsourcing, and flaws in the contractual agreements linking the parties involved.

2.4 Factors affect development of China logistics industry

2.41 Transportation

The key element in a logistics chain is transportation system, which joints the separated activities. Transport system makes goods and products movable and provides timely and regional efficacy to promote value-added under the least cost principle. Transport affects the results of logistics activities and, of course, it influences production and sale. In the logistics system, transportation cost could be regarded as a restriction of the objective market. Value of transportation varies with different industries. For those products with small volume, low weight and high value, transportation cost simply occupies a very small part of sale and is less regarded; for those big, heavy and low-valued products, transportation occupies a very big part of sale and affects profits more, and therefore it is more regarded. (M. Sreenivas and Dr. T. Srinivas, 2006)

Some articles (Logistics development in China) have investigated the Chinese logistics from various perspectives. Many multinational enterprises find it difficult to implement coherent strategies due to poor transportation. Despite overall low transport costs in China, it also costs more than the West. "In terms of unit cost, transport and Logistics is as competitive or more than anywhere in the world," Zhao said. "But a lack of scale of economy, as well inefficiency, particularly with backhauls, cause higher costs." In China, on average, nearly 50 per cent of vehicles return from deliveries with empty backhauls. In the US, it is 10 per cent.

Customers have increasing demands for transportation performance, higher on-time delivery performance, and reduced damage-in-transit. They expect transportation providers to be flexible and quickly adapt to order changes. Add to all of this an increased need for global freight visibility and control, and companies are scrambling to find the right solution to quickly address these challenges. So transportation and logistics management accomplishes this by supporting processes including carrier contract negotiations, transportation network modelling, shipment order handling, freight planning, order execution and monitoring, and freight financial settlement. The solution suite encompasses transportation procurement, planning, execution, and monitoring.

Bin Jiang and Edmund Prater, (2002) provide a breakdown of the total Logistics costs in China. They report that losses and damage account for 48% of the total, compared to 21% for the transport activities. They quote industry estimates that total Logistics costs could fall by 37% as a result of moving from the current arrangements for managing Logistics to a sub-contracting approach. The bulk of this reduction appears in their assessment to be attributable to the reduction in losses and damage, rather than a reduction of profit margins. Management fees may increase, to reflect the higher costs of the higher levels of management inputs, in terms of time and experience.

Hypothesis 1:

The higher the damage rate, the much more loss for logistics company.

Hypothesis 2:

Toll fees and road taxation are huge expenditure for logistics company.

Hypothesis 3:

Educated new driver and vehicle maintainence cost are necessary cost for logistics company.

2.42 Rising costs by fuel prices

Fuel prices in China have continued to climb over the past years. Take diesel fuel as an example, its price has jumped by 86% from 2002 to November 2007. On June 19, China's National Development and Reform Commission announced the biggest-ever adjustment to energy-related prices. Gasoline and diesel prices were both up by about 17-18% to reach 6,980 yuan per tonne and 6,520 yuan per tonne respectively while jet fuel prices will be raised to 7,450 yuan per tonne, up by 25%. It is estimated that fuel accounts for 35-40% of transportation enterprises' overall costs; rising fuel costs will undoubtedly put pressures on players. China's fuel prices are under government control. Despite the price increase, it is noteworthy that there is still a substantial discount between China and international fuel prices. This has resulted in tight fuel supply, as refineries were reluctant to supply to domestic market. A number of refineries were shut down last years, with queues at petrol stations and rationing remerging in some regions. These add to the difficulty for efficient deliveries. (LI & FUNG, 2008)

H4: The increasing of fuel frees effects profit of logistics company.

2.43 Regulation

Despite a reduction in national level regulations since China's entry to the WTO, local governments still set up bureaucratic and political barriers to protect local businesses or products and prevent the entry of outside competitors. Municipal governments also compete to attract logistics hubs and infrastructure. This local protectionism is driven by the desire to maximize local economic growth, employment, social stability and tax revenues, and less by concern about the efficient utilization of regional resources or the creation of an integrated national transport network (Zeyan Zhang and Miguel Andres Figliozzi,, 2006). Local interests and economic development have lobbied for, sometimes unnecessarily, the duplication of logistics parks and transport infrastructure in closely located municipalities.

They reviews a series of distribution reform activities and finds that some problems, such as regional differences, still exist and deter the development of Chinese logistics industry. Beyond the geographic size and unbalanced development, the political/legal barriers are the most powerful forces that separate China's distribution market. Government interference on economic activities increases the risk to private investment and affects the extent of participation of private sector in the supplying and distribution of goods. Legislation sets the allowed boundaries of distribution firms. While these limits can be placed at a national level, the biggest impact of political/legal barriers on distribution markets is regional protectionism.

Many of the nearly 500 breweries across the country - usually owned by local governments - are protected from outside competitors by dubious health requirements and arbitrary duties. Beijing seeks to promote a handful of strong national cigarette brands, but each province wrestles to preserve its inefficient but tax-generating cigarette factory (Bin Jiang and Edmund Prater, 2002).

Under a centrally planned economy, the Chinese government established a three-tier distribution system to control the flow of commodities. Logistics arrangements centered on wholesalers who undertook the task of fulfilling distribution goals set by the central government. State-owned logistics firms provided transportation and warehousing services but rarely performed value-added and other logistics activities (Transportation Journal, 2007). Private businesses were largely banned. Meanwhile, most manufacturing firms established in-house transportation and warehousing departments to serve themselves because of the shortage of third-party supply. This resulted in inefficiencies in management, organization, and operation of logistics services.

Although slowly opening up to outside competition, the Chinese transportation and logistics market is one of the most highly regulated in the world. Regulatory barriers in China exist at the national, regional and local levels and do much to hinder consolidation. Industry Report: Logistics (H1, 2005) has reported that even after 2006, when China's WTO commitments come into full effect, local governments may continue to protect local companies through WTO compliant non-tariff trade barriers such as licensing requirements, fees and inspection requirements, and by the costly and complicated licensing system for logistics companies.

Regionalism in China is quite pronounced, and nowhere is this more evident than in the logistics industry. There is no central governing body with jurisdiction over the transportation sector as a whole. For example, trucking companies are taxed and licensed based on the provincial areas where they pick up and deliver. If a carrier delivers to a certain province, it cannot pick up a load in that province unless it has the appropriate license. Regional authorities are keen to protect their own local interests and therefore impose their own local regulations, taxes and fees. (Francis Bassolino, 2005)

H5: China joined WTO brought lots of opportunities to logistics company.

H6: Although China's accession to the WTO has lowered trade barriers such as tariffs and quotas for international shipments, there are still problems related to moving goods around China itself.

2.44 Warehousing and storage

In today's competitive business climate, the effective coordination of the storage and distribution of company assets or product inventory is critical. The warehouse management system transforms warehouse operations into fully integrated logistics and fulfilment business. By enabling a company to take orders from multiple sources, process them in real time with mobile, voice- directed operations, and automating the shipping and billing processes, organizational efficiency will improve, with positive effect on the bottom line. (Total logistics management, 2009)

The Government maintains most of the warehousing capacity. There is no specific ministry or department in charge of warehousing. Warehouse space is widely available and relatively cheap, but comprehensive data on the number and locations of warehouses in China appear non-existent. Nonetheless, it is generally observed that warehouses are located near ports and railway stations. They can also be found in various zones meant for foreign investment. Most of these zones are located near the coast, to facilitate the export of finished goods.

Due to the lack of automated high-end warehousing facilities, most put away and order picking are still carried out manually. It is more economical, at least in the foreseeable short to medium term, to hire more labour than to automate warehouse activities. Until labour and equipment costs come closer to equalisation, the inclination towards warehouse automation remains slim. Besides the heavy initial capital outlay, automating warehouse activities will also incur the extra cost of training personnel to use the new technologies effectively.

Location problem is a classical planning problem, many literatures concerned this topic. Early studies concentrated at linear planning field, Efroymson and Ray (1966) developed a discrete choice model for plant location, while Francis and White (1974) solved Euclidean distance location problem with centre of gravity method. As the theoretical progress, various non-linear planning theories were used for location model. Holmbery (1999) considered non-linear transport cost and solved the problem with branch-bound algorithm. Barahohna and Jensen (1998) developed a warehouse location model with mixed integer planning.

The warehousing and storage system in the planned economy before reform was characterized by department or sector administration and operations, that is, different sectors built and owned their own warehousing and storage facilities and served their own demands only. (Luo Wenping and Christopher Findlay, 2002) Many sectors formed their own closed warehousing systems. Meanwhile, each local government at the provincial, city and county levels also established their own warehousing system to serve their local economy.

Most of China's warehousing facilities are older or old-style facilities with a range of associated issues. Many facilities do not have computerized stock supervision systems in place. Single and multi-story warehouse designs limit efficiency by preventing the use of multiple racking levels and by modern forklift trucks. Cross contamination is an issue as are unsealed loading platforms at refrigerated facilities, which expose food products to ambient air temperatures during loading and unloading.

H7: Location of the warehouse is very important because it decides whether company could provide effective and efficient service or not.

H8: Administration cost on warehouse takes heavy portion in total cost of logistics company.

H9: At present, old-style facilities cause poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector.

2.45 IT supporting

Logistics business worldwide is adopting technology to drive efficiencies and for saving operational costs. The information technology helped the business to realign the scenario and operational methodologies to increase integration, visibility and customer support. The challenges faced by the logistics operators and consumers all along the years. (Logistics management solution, 2009). Mark Goh and Charlene Ling, (2003) find several shortcomings of local logistics providers, especially their undependable services and unresponsiveness to customers' needs. Normally, young foreign companies cannot achieve high levels of local purchasing, and managers have to develop both technological and management expertise in their local suppliers.

Effective information technology (IT) has become absolutely necessary to support logistics processes. Fujun Lai, Xiande Zhao and Qiang Wang, (2006) said that by automating many routine logistics activities, IT has enabled managers to focus on strategic issues and core competencies and supported the use of intermediate supply chain activities, such as distribution. Some studies have even reported that IT could improve logistical efficiency, effectiveness, flexibility, cost, and service quality.

However, due to its high costs and widespread lack of expertise among users, the IT adoption rate among logistics firms remains low. Fujun Lai, Xiande Zhao and Qiang Wang, (2006) also said that one implication of this low IT adoption rate among logistics user firms has been a greater opportunity for third-party logistics (3PL) providers to exploit their advanced IT skills. Therefore, IT in 3PL firms plays an essential role in synchronizing and coordinating complex supply chain activities across logistics users and their customers.

Research on logistics, especially among business firms, is rare and the professional education system has so far included little logistics training. Foreign investment and establishments in the logistics service sector will bring technology and management know-how. The relevant know-how includes not only the operation of particular segments of the logistics operation but also the manner in which the elements fit together, as well as the management of the relationships between all the suppliers and the customers. Opening other service sectors, such as education, will also raise the quality of options available for education and training in this sector.

H10: Training in both the third party logistics sector and the manufacturing and retailing sectors is very weak both at a practical level in China.

H1: There is lack of IT standards and poor systems integration and equipment in logistics company in China.

2.46 Infrastructure

The transport sector is still a weak link in China's economy:.

-The number of either rail or road trunk lines linking different regions is insufficient. The major railway lines are over-loaded. The trunk lines of the highway system linking different provinces are not well networked and cannot meet the demand. These impediments also contribute to differences in growth rates between regions.

-The coordination between different modes requires planning and development.

Within each mode of transport, there are imbalances. In the rail sector, on the busy lines, the mixing together of passenger trains with cargo trains leads to slower speeds and low efficiency. (Luo and Christopher, 2002) In the air sector, there is an imbalance between the trunk and feeder lines, and in the number of big and small aircraft. In the road sector, the construction of the national level trunk road system has been accelerated, but in the rural areas the road network is far less developed.

-Service quality is generally low and the technical level of the equipment is also low. For example, in the rail sector, the share of double lines and electrified lines in the total length of lines is relatively low. Less than 20% of the freight trucks can carry containers. (Luo and Christopher, 2002)

Zeyan Zhang and Miguel Andres Figliozzi, (2006) said that, despite recent efforts to upgrade transport infrastruture, China's transport infrastructure is still insufficient to satisfy the huge demand generated by its booming economy. Congestion and shipments delay are frequent at Chinese seaports due to capacity shortage fall. Highway construction and transport bottlenecks augment congestion problems in prot area. Archaic infrastructure and lack of adequate highway networks connecting the developed coastrl regions to underdeveloped inland provinces increase rail and river congestion as more companies are moving inland to take advantage of reduces labour costs.

Considerable research has been done concerning strategic decisions of logistics providers in China. For instance, Junjie Hong & Binglian Liu (2007) examine strategic postures of 3PL providers in China. They find that differentiation strategy users perform better, and companies pursuing cost leadership are shifting towards differentiation strategy under the pressure of intense competition. And also they studied those location decisions of foreign logistics providers in China based on a census database. They find that the location decisions are determined by market size, labor cost and quality, transport conditions, and government policies. In addition, foreign logistics firms tend to cluster in cities with a large number of existing logistics providers, confirming the existence of logistics agglomeration.

H12: Transport infrastructure plays the key role for any logistics company because that directly effects profit of logistics company.

Chapter 3

Research Methodology

3.1 Introduction

This chapter illustrates an in-depth description of the research methods used to conduct this study. In this section, geographical location of study, method of data collection, sampling techniques and the methods of analysis were explained. Besides, it includes the reflective statement which describes some of the incidents that the researcher faced. This chapter is of great importance to this study because it highlights adopted models and methods used to answer research questions. Cooper and Schindler (2003) defined a model "as a representation of a system that is constructed to study some aspect of that system or the system as a whole". This theatrical framework is developed based on literature review (chapter two).

The goal of any research dictates the appropriate data analytic method selected. According to Darlington (1990); Rawlings (1988); Wapold & Freund (1987) one of the two basic goals of a researcher is finding out relationships. This first goal is to describe relationships among variables which this study starts with i.e descriptive statistics. Hypotheses are developed and presented. This chapter then details the research methodology that was applied to determine if the hypotheses were supported. The methodology section describes the operational measures of the observed variables used to test the hypotheses presented in the previous section. Then, the research methodology is discussed relative to the country's data source. Finally, analysis methods are presented to validate the hypotheses among the set of dependent and independent factors (constructs).

3.2Location of study: Shanghai

Questionnaires were developed to collect information from logistics companies in Shanghai, China. The reason why this paper chooses Shanghai as place done the survey is that Shanghai is the most promising logistics city in China, even in Asia-Pacific. Statistics show that the logistics industry has become a mainstay industry for Shanghai. According to official allege: In 2005, its freight volume reached 78 million tons, of which port throughput was 443 million tonnes, making Shanghai port the largest in the world in cargo transport. Its container throughput amounted to 18.084 million TEUs and ranked No.3 in the world. Shanghai's logistics added value was US$31.88 billion in 2005, accounting for 13% of its GDP and becoming one of the top four in the service sector. Also, Shanghai has been giving priority to the development of 3 large-scale logistics parks, namely Waigaoqiao, Pudong Konggang and Xibei, during its 10th five-year plan period. The Waigaoqiao Logistics Park in the Pudong New Area will invest 10 US$1.2 billion in distribution and delivery centres for multinational companies in the next 5-10 years. The Pudong Logistics Park plans to spend US$843 million in its second-phase of construction during the next four years. By the year 2010, Shanghai will have basically established a modern logistics service system with an internationally competitive edge, and built itself into an important logistics nexus of the world and one of the logistics centres in Asia-Pacific.

3.3 Source of Data

There are two main methods available for data collection, the primary and secondary data collection methods.

3.31 Primary Data

By study of Parasuraman (1991), data collected specifically for a research project are called and the research undertaken is called primary research. By studying of Kent (1999), primary research involves the use of observations, experiments or questionnaires in order to collect new information about specific market problems. Primary research can further be classified as qualitative and quantitative research depending on the data to be collected.

This research used quantitative data in the form of questionnaires. The quantitative data in form of questionnaires consist of close and open ended questions and also continuous questions based on 5 Likert-scales. Questionnaire was selected as a quantitative method for collecting data because according to Oppenheim (1972) "Questionnaires are not merely


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