e-Commerce and Supply Chain Management in China

Company A is an online private sales website for luxury lifestyle and fashion brands operating in Japan and China and expanded to Korea in 2012 (see Table 7 concerning supply chain information from two case studies completed). The company intends to sell online flash products (for a limited time) at a discounted price and a diverse range of luxury goods, which belong to five categories as follows: past season shoes, fashion, cosmetics, accessories, and leather goods. Company A rotates the brands it works with every week and will work with each brand 3–4 times per year. Since they began in early 2009 in Japan, Company A has developed working relationships with 450 brands.

Table 7 Two companies operating in Chinese retail market and supply chain strategies

Service level is an important factor for the success of Company A and for this reason, all customer service is managed by its own employees. Company A has 35 dedicated customer service employees, who operate out of the warehouse. One unique market characteristic in China is a large number of orders that are paid for by cash on delivery (COD). For Company A, this constitutes half of its sales. Remarkably, its rejection rate, the rate at which customers either do not pay for the item upon delivery or are not there to pay for the product is less than 1%. Customer service agents who actively reach out to customers to make sure they are informed about their purchase and delivery time. This customer-centric approach gives people confidence in their purchase and provides the comfort of knowing they are getting a quality product. Additionally, Company A will cover the cost of any returned product again easing any doubt for a customer to purchase a product.

For Company A, 40% of its customers are based in China's tier 1 cities (Shanghai, Beijing, Guangzhou, and Shenzhen), 35% are from tier 2 cities, and the remaining 25% are scattered in tier three and four cities. Customers living in tier 1 cities are primarily business people with white-collar jobs and the customers residing in the remaining tier 2, 3, and 4 cities are entrepreneurs who are affluent, but do not have access to luxury goods. The age of Company A's customer base ranges from 25 to 40-year-olds, with 40% of them consisting of repeat customers. These customers purchase on average 900 RMB per transaction. One difference has been identified, and that relates to the average age of a customer. As shopping retail stores age was 35 years, but the average age shopping online was lower, 28 years old.

Company A currently operates a centralized warehouse based in Shanghai, China. The location in Shanghai allows it to closely monitor the quality control process and position itself to service the majority of its customers with short lead times. Company A has subcontracted its fulfillment operation to German-based 3PL that has been working in this market for a number of years. Third party operator is responsible for all the receiving, picking and packing, however, Company A has decided to keep all its customer service in-house. Company A holds its entire inventory on consignment with 90% of the goods coming from China and 10% being imported. Acquiring inventory on consignment allows Company A to keep its working capital free, manage obsolescence risk, and invest more in sales and marketing. By sourcing the majority of its products within China, Company A is able to keep ordering costs down and ensure the products meet customer preferences for local style, colour and size. Because Company A does not produce any of its own products, quality control is an important operation for the company. It checks every inbound piece and before the product is shipped to a customer, it ensures that the product meets the quality standards expected by Company A's customer. This process has proved beneficial as it achieved single-digit percentage in returns. However, as Company A continues to grow, it looks to introduce regional distribution centres and have suppliers ship directly to those warehouses thereby bypassing the central DC in Shanghai. Company A's warehouse expansion initiative will be guided by regional sales volume and customer profiling.

Company A's goal is to deliver all its products within 5 days and for large sales regions such as Shanghai and Beijing, Company A offers next-day and two-day guaranteed delivery. As a time to market is an essential component of handling a luxury service, Company A is looking to expand its warehouse footprint to three or four regional DC's that will be able to provide even faster time to market. At the moment, Company A is the collecting and analyzing sales data to decide, where and when it will open these regional distribution centres. For distribution, it uses two courier service providers, one local and one international, depending mostly on delivery costs (typically one provider is able to give good prices for a particular group of cities, but not for all).

The use of mobile technology varies in Asia and is quite different from that of the US or Europe. For example, 25% of Company A's business in Japan comes through mobile e-commerce. Company A does not have available mobile e-commerce in China, but it is planning to in upcoming years and can expect to see similar sales patterns.

As Company A outsources its warehousing operations, the company does not have a single integrated IT platform. Company A does manage its e-commerce platform, allowing the company to manage its orders in real time.

To date, Company B has operated its e-Commerce business in Japan for 1 year and is working to launch in China as soon as possible. Working with luxury products has afforded Company B healthy margins. Therefore, any incremental supply chain costs the company incurs through its e-commerce operations will unlikely overshadow the incremental profits. The reason Company B has involved themselves in e-commerce business is simply, because the company is growing so fast in China that there are many other competing opportunities. Company B is opening one store every 2 weeks in China and plans to continue this pace for 5 years. This type of growth puts a strain on building the organizational capacity necessary for a different sales channel.

Asian markets are all the time evolving. For example, mobile technology is taking off in Japan and now constitutes 50% of Company B's e-commerce sales. One of the striking differences between Japan and China is that in Japan, promotions do not play a large role in generating sales. Conversely, Chinese shoppers go online to find the best deal or a brand name product at a discount. In Japan, Company B is the number one brand in the number of bags sold and number two in value.

In general, Company B prefers to keep its distribution and fulfillment operations in-house, because it has a very high standard of service. From its experience managing a 3PL in the past, Company B has learnt that it can take just as much time to manage labour and operate the distribution and fulfillment themselves. For these reasons, it operates under a superstructure that will allow it to keep e-commerce distribution and fulfillment in-house, but will look at outsourcing options for potential fulfillment. The company has not yet completed an in-depth study of 3PL potential partners. It plans to examine, which companies' with other comparable brand are working with.

A unique characteristic of e-commerce in China is that the majority of consumers prefer to pay by COD rather than with credit cards. For products that that cost over $400USD, this becomes a risk. Therefore, the company has to ensure that the customer will be present and will be able to pay upon delivery. Fortunately, Company B has not experienced these problems in Japan as there are a number of steps a customer has to go through to complete an online transaction. Returns rates are quite low and Company B remains confident there will be a similar trend in China.

Another challenge associated with COD is that a trusted courier company in delivery and collection of cash in the various regions is critical. This remains difficult, because there is not a single courier service that can provide delivery to all postal codes; and the ones that reach more remote locations do not always provide the level of service Company B and its customers expect.

China is so vast that Company B does not expect to reach all the tier 3 and 4 cities. Instead, the company expects that the majority of their e-commerce business will come from cities they already have a presence. Company B currently has two warehouses in Shanghai, one of which is a bonded warehouse and the other is a duty paid warehouse. Its only other warehouse is in Hong Kong where currently, Company B runs half of its products through Hong Kong and the other half through the Shanghai warehouse. However, volume handled in Shanghai is growing at a much faster rate. In the medium and long-term as e-commerce is projected to grow in China, company is looking to couple its e-commerce inventory with that of retail and to develop a hub-and-spoke model with regional DC's located in the North, South, and West. This model will evolve over time.