Description of the Site
About Dongguan
Dongguan has a population of 6,000,000, a coverage of 2465 square kilometers, most of which is mountainous area and plain, and a coastline of 61.9 kilometers.
Dongguan, the mainland China's major export-processing center and third largest exporting city (after Shenzhen and Shanghai), is located between Guangzhou and Shenzhen on the east side of the Pearl River. In the recent 20 years, it makes full use of its location advantage, which changed it from an agricultural county to an economically powerful city. Today the city hosts 13,800 foreign-invested manufacturers including industry giants like Founder Group, Samsung, V-tech, Sony, Philips and other 200 multinational brands. Since 1995 Dongguan has ranked third among mainland China's largest exporting cities, trailing closely behind Shenzhen and Shanghai
In 2001, its production volume reached 578 million RMB, with the increasing rate of 22% during 23 years. In the same year, its foreign trade volume reached 34.45 billion. With an export volume of $189.9 million, accounting for 19.9% of Guangdong and 7.1% of China.
Evaluation of the Site
It is an attractive place to be for manufacturers that require massive labor force like our company. The salary of low skilled workers is around HK$200-300 a month. And for those with higher education level, the salary may be about HK$600-700 a month. It is far lower than HK workers.
Labor is the most important part of our doll production. We need workers operate the plastic mold injection machines, sew the clothing and paint the details on the doll. A typical doll requires 15 separate paint stations. Because of the multitude of detailed tasks involved in the production of doll, labor costs must be kept to a minimum.
There is around 3 millions of labors force in total including 1.4 millions local labors and 2 millions foreign labors. It is believed that Dongguan is rich in human resources.
Dongguan is situated to the east bank of Zhujiang River, located about 55 miles south of Guangzhou, 50 miles north of Shenzhen, 90 miles from Hong Kong, and 77 miles from Macau by sea. Dongguan is the transportation hinge between Guangzhou and Hong Kong on one end, and Shenzhen and Zhuhai on the other end, which contributes to speed and convenient transportation between them. It is a key channel for the come-and-go of people from all over the world. Its geographical proximity to the southeastern coast is convenient for shipping.
- Availability of Transportation
Due to 100% of our products are exporting for sale and we have several overseas suppliers. So, we are very concerned with the transportation cost.
Dongguan has a good infrastructure, with highways, railways and waterways linking to all destinations. The Guangzhou-Shenzhen highway and National Highway 107 lead to Guangzhou, Shenzhen and Hong Kong. The Dongguan Railway Station is connected to all major railway networks in the country and is the meeting point of the Guangzhou-Kowloon and Beijing-Kowloon railways.
There is an ocean-going container wharf at Zhujiang port in the town of Humen in addition to a number of international container terminals within two hours' drive from the city. These include the Kwai Chung container terminals in Hong Kong, Huangpu in Guangzhou and only one hours' drive to Yantian and Shekou in Shenzhen. There are also a number of airfreight facilities in the neighborhood (within 1.5 hours’ drive), including the Hong Kong International Airport and the airports of Guangzhou in the north and Shenzhen in the south.
Actually, most of our product would export through Yantian Port. This is probably because of the low port handling fee and surcharges. Moreover, Yantian is targeting customers like us whose goods are of non-urgent and non-expensive nature. Up to now, Yantian port has set up relations with 16 international shipping companies in the world, forming main international regular shipping networks of American and Europe sea routes, established more than 20 liner routes direct to Europe, America, Australia and Asia.
Proximity to Market and Customers
Proximity to Market and Customers is a crucial issue for a company to gain competitive advantages. This relies heavily on both geographical and transportation factors.
It has perfect living convenient service establishment. With 47 first class hotels (six 5-star hotels and nine 4-star hotels), it is an ideal choice for business journey and holidays. America Wolma, French Carryfort, Hong Kong Parka, and Japanese Jusco have set up large-scale department in Dongguan, which facilitate the living condition. There are also adequate entertainment facilities including 5 golf centres and club houses. Its well-developed real estate provides investors with safe and comfortable residence.
- Taxes and Industrial Development Incentives
US Generalized System of Preferences (GSP). That was in the early 1990s, and China was eager to attract foreign investors. The government wanted to convert the southern city of Dongguan, 50 miles north of Hong Kong, to an industrial zone specializing in exports. Officials there offered Kuo tax breaks, inexpensive land and light regulation.
In the case of manufacturing facility, we are much concerned that the availability and cost of raw materials and component parts, as well as the cost of transporting these materials to our proposed plant site, are of significance.
Material sources
Our company, imports the doll’s body and doll’s wig by sea from Malaysia and Japan respectively because importing such materials would not be imposed any tariffs. As far as the cotton cloth for doll dresses is concerned, essentially, the dresses for the dolls are manufactured in sequence so that they can go right off the delivery vehicle onto the doll assembly line in the order in which they will be assembled. The plant site making the dolls clothes is only twenty minutes away from the assembly plant, as a result, for twenty hours per day, trucks loaded with dolls dresses leave the factory every fifteen minutes. Hence, the location still delivers true, JIT (just-in-time) deliveries.
- Land Costs
As a manufacturing plant needing a large scale of land use, the cost of land is critical. This represents a potentially significant expense. However, the land cost at Dongguan is still reasonably competitive. Also, the cost of construction is considerably low as there are sufficient cheap labours readily employed.
- Seafreight Accessorial Charges
The container handling charges involved in Shenzhen are much cheaper than in Hong Kong. The table below shows the difference of charges involved between Yantian and Hong Kong terminals.
Power Supply
Dongguan has sufficient power supply with 73 power stations (each generates more than 110000 volts) supplying for the country and city at the same price and through the same net. It employs a double-loop power supply for some key enterprises. In 2001, its power supply reached 207.72 billion volts hour, which tops most of the cities in Guangdong.
Water supply
Dongguan has three large-scale water factories in its central water-supplying system, which boasts of a capacity of 2 million stere per day. The water factory now under construction has the capacity of 600000 stere per day. With 300 different sized water factories, its water supply per day exceeds 30 million stere per day. Tap water permeation reaches 98%, which can meet the needs of industrial and everyday use of water.
Apart from considering the above-mentioned major locational determinants, we also take China’s entry to WTO into account when choosing Dongguan as the site to be used to establish the logistics network. After China’s entry to WTO, under the constraints of the principles of the WTO, the policy will be more transparent and the market will be open to a higher degree. In addition, a survey indicated that general tariffs for China would decrease from the current average 24.6 percent to 9.44 percent after its accession to the WTO. Thus, makes our company be more competitive.
Evaluation of Thirty Party Logistics Service
We believe that third party logistics services should be used because it is obvious that our company will receive significant benefits from one or more areas, and that these benefits would not be possible if not employing the third party logistics provider. There are several aspects which drive us to choose the third party logistics services. They are asset/cost efficiency, customer services, marketing advantage, profit stability/growth, goodwill of the company, expertise.
Saving cost is a significant element that forces our company to use third party logistics services. The major activities provided by third party logistics provider are transportation, distribution, freight payment and auditing, cost accounting and control, inventory and warehouse management, monitor receipt and so on. We estimate that the fixed logistics assets will be reduced by 15.3% if we use the third party logistics services.
The objective in outsourcing freight payment and/or freight bill auditing is to reduce the cost and complexity associated with logistics-related labour. The advantage in outsourcing freight payment and/or audit activities is that costs and issues associated with managing a typically low skill level and/or part-time pool of workers. In addition, HR-related tasks, such as interviewing, benefits management and other functions, can be eliminated for these workers owing to the outsourcing process. Also, employing the third party logistics provider can lower our transportation costs because they gained a vast amount of experience with all types of freight and with all modes of shipping. They have complete information in hand and bargaining power of the better freight rate. We could eventually save cost on searching the cheapest freight rate. It approximately saves 9% transportation cost.
Usually, we have little idea about how much we are paying for the inbound freight expenses because these costs are often included in our vendors' product prices. In this case, the third party logistics company can help us to find out exactly where our inbound freight dollars go and get the best service for each transportation dollar we spend.
Lead time reduction is also a crucial element of manufacturing improvement programmes. As we are not familiar with the route in the Mainland, the lead time it takes to deliver the finished dolls from our Dongguan factory to the destinations in Europe is currently 25 days. However, if we use the third party logistics services, the lead time can be reduced from 25 days to 20 days. The main reason is that the third party has thorough understanding of the route in the Mainland, they will choose the shortest and fastest route for us.
Additionally, the third party logistics provider also provides value-added services such as packing. For our company is a small-medium enterprise, we do not have enough capital to set up a team for packing. It would save our time to search for another company to pack our goods if we use the third-party logistics services.
According to the above-mentioned point, lead time could be shorten by using third party logistics services. This may help to improve the customer services because lead time is the most significant factor regarding the customer satisfaction. Most customers want to receive their ordering as soon as possible, so they would choose the seller who could offer the shortest lead time. As our company’s lead time is reduced, this could certainly attract more potential customers. Also, if our company could keep such a short lead time, this may help to build a long-term relationship between the customers and our company. Therefore, using third party logistics services could make our company meet customers’ needs by keeping a shorter lead time.
To add, using third party logistics services could save cost. The cost that is saved could be used to improve the customer services. As the total cost is reduced, the company could spend more on improving the products’ quality, the information flow and establishing a hotline or web site for the customers’ feedback. All these could help to improve customer satisfaction. This is because if the customers know more about the company and its products, they may be more familiar with our company and interested in our product. Customers would probably have more confidence in our company. Thus, using third party logistics is helpful to improve the customer services.
Goodwill of the company is vitally important because it would affect the profit of the company and market shares. As we mentioned before, the reduction in lead time would meet the customers’ requirements. The customers need not waste time on waiting for long of our goods, they can receive the finished dolls and sell it as soon as possible. The third-party logistics help us to save 5 days of lead time. It not only meets customers’ requirement, but also exceeds their expectation. After that, more and more customers are willing to do business with our company, and improve the goodwill of our company. In the long run, the profit will increase as increase in order cycle, also the market shares will be extended and our company is able to explore trade opportunities globally.
By using third party logistics services, the labour that are previously working in transport team could then be reallocated to participate company’s core business. This is because when the company is using the third party logistics services, the logistics company would handle the whole transportation process including the transportation operation and administrative works. In this situation, no work will be assigned to the Transportation Department. These workers would then be reallocated to different departments to increase the overall productivity and competitiveness. Third party logistics company could provide the expertise logistics services and hence the core business of the company could be more developed by reallocation of human resources.
Recommendations
In accordance with the description and evaluation of the site, we believe that Dongguan is a suitable place for us to establish the logistics network to serve the customers. Dongguan is located between Guangzhou and Shenzhen (the major cities in China) on the east side of the Pearl River, it is a chance for us to enter a great potential market, China. Furthermore, the road, rail, air and water transportation are well developed in Dongguan, we could deliver our products to the overseas customer through the Yantian Port.
Also, we could save the operating cost in Duogguan. As we all know, labour cost in China is considerably cheaper than Hong Kong. For those Chinese workers with higher education levels, their salaries are still relatively lower than those employed in Hong Kong doing general work. This could benefit us to produce higher quality dolls. Apart from this, lower cost of utilities and lower taxation are essential elements driving us to move the factory from Hong Kong to China.
About using Third-Party Logistics Services
As we mentioned in the previous parts, we should use the third-party logistics services. Firstly, our company is a small-medium enterprise, it is difficult for us to invest a huge amount of capital on Logistics Department. Also, the transportation cost, fixed cost, distribution cost, lead time would be reduced because third-party logistics have experience and professors to deal with logistics work. Due to lead time and cost reduced, we could meet the requirements of customers and improve the customer services. This would help us to increase the sales volume and improve the goodwill of our company. Also, third party logistics service could provide the expertise logistics services and the core business of the company could be enhanced by reallocation of labor.
Impact to the Company
In conclusions, using third party logistics services could reduce the company’s operation and administrative cost because the logistics company provides the services including the transport operation and also the administrative work. The company does not have to spend a large amount of capital to maintain the transport or logistics team, she only needs to pay for the services charges to the logistics company. So capital would not be tied up. The company could make use the saving on other aspects to improve the company’s overall performance.
Another benefit is that using third party logistics network could reduce the lead time. Lead time is the major factor concerning the customer’s satisfaction. The shorter the lead time, the more attractive to the customers and hence possibly increasing sales volume.
Although using third party logistics services brings significant advantages to the company, there are still some risks. It would be difficult for us to control the transportation process because when the logistics services is contract-out to a logistics company, the whole transportation process is handled by that company. Our company could not monitor the process, so there is a risk of rip-off during the transportation.
Also, there is a risk of disclosure of company’s information. This is because when the company uses third party logistics services, much information needed to be given to the logistics company. Our company could not ensure that the information used is kept confidential. So we need to bear the risk of information disclosure.
Although using third party logistics services would induce certain risks, the benefits brought to the company still outweigh the shortcomings. Third party logistics services are not only useful for reducing the cost and increasing the sales volume, but it also helps to raise the company’s reputation and improve overall performance. All in all, it is worthwhile to employ third party logistics.