Over the past 60 years, China has undergone two fundamental changes-and is on the verge of a third. First was the 1949 revolution, which transformed a traditional, agrarian country into a centralized, command economy. The second was the abrupt transition to a market economy in the 1980s, when economic liberalization began to sweep the country into the modern era. For the past few years, China has been undergoing a transformation due to its astonishing growth rate into a global economic leader. But, a successful transition will require major changes in its business processes. One of those changes will be in the supply chain.

Today, approximately 30 percent or more of the cost of every manufactured product in China is attributable to the supply chain. This is compared to less than 10 percent in the United States and Europe. To be fully competitive in the long term, companies operating in China must drastically reduce supply chain spending.

From Market Share to Market Efficiency
China's accession to the World Trade Organization (WTO) in 2001 has helped generate an unprecedented amount of direct foreign investment. As China continues to open its economy, nearly all of its key industries are up for grabs. The country has been intently focused on its transition-in little more than a decade-from a third-world command economy to the fastest-growing market economy in the world. As a result, companies doing business in China have focused almost exclusively on building market share and gaining traction for their brand names.

While the supply chain has not been a key focus area, the Chinese government is aware that logistics is an area of major inefficiency within the country. To be fully competitive in the global economy, China must significantly develop its logistics systems. With only one coast, this makes China's task more difficult. Most of the country's development has occurred in its coastal areas. The government wants to spur development in the inland provinces, but this poses a major logistical challenge.
Now that companies have increased market share and driven higher revenues, they must look closer at their bottom line. That means optimizing inventory levels and reducing costs to become competitive and drive more profits to the bottom line. Logistics will be a key part of this equation.

New Information Infrastructure Focus
While some companies doing business in China have invested in information technology and advanced software solutions, most of these companies have not focused their information technology investments on the supply chain. The majority of IT solutions implemented over the past five years have been in enterprise resource planning (ERP) solutions for back-end accounting and human resource systems. Now, however, these companies are beginning to look at marketplace supply chains.

A good example of this is the highly inefficient Chinese pharmaceutical industry, which is moving from being exclusively state run to privately owned. With an aging population of 1.4 billion people, China's growth potential for pharmaceuticals is enormous. Two of the largest pharmaceutical distribution companies in China-SinoPharm and Shanghai Pharmaceuticals-recently purchased logistics software solutions to drive costs out of their logistics systems.

China's Supply Chain May 'Leapfrog' West's
There are three major tiers of companies in China-the multinational companies involved in joint ventures with Chinese companies; the top-tier Chinese companies that are publicly traded or have ambitions to be public companies and want to augment their domestic business by operating outside of China; and companies doing business only in China.
Companies in the first two tiers are looking at supply chain processes for the very first time. Compare that to the United States and Europe, where, for example, many companies are on their third or fourth update of supply chain processes. That stated, Chinese companies may be able to "leapfrog" their Western counterparts by leveraging best practices already developed in the U.S. and in Europe to rapidly adopt supply chain software and best practices.

Major value-and significant competitive advantage-can be derived from driving down supply chain costs in China. Companies that fail to invest the time and resources necessary to drive down supply chain costs will likely be left behind. Choosing the right supply chain partner can mean the difference between success and failure. Following are several key "do's and don'ts" to consider.

• Do work with companies that have direct experience in your industry. Many consultants in China say they can do everything, yet have no hands-on experience in bringing best practices into China. A supply chain solution is highly specialized and requires precise domain expertise and knowledge. So, for example, if you're a pharmaceutical company, working with vendors that have experience in pharmaceutical distribution is important.

• Do work with companies that can combine supply chain industry expertise outside of China with detailed knowledge of the local market. Companies that choose solutions providers that lack local and global domain expertise typically end up failing. Many organizations in U.S. and Europe that understand supply chains are unable to marry that knowledge with localization and understanding of Chinese business processes, culture and language. It is critical to select a provider that has both.

• Don't underestimate the challenge of change management in China, which is undergoing change more rapidly than any country in history. There is significant resistance to broad scale change in many Chinese enterprises. Without a history of capitalism, the motivations of many Chinese workers and managers will be different than their counterparts in Western countries. Many Chinese companies are migrating from a mentality that the state takes care of everyone, to one where companies live or die on their own. As a result, companies are more resistant to change.

• Don't have a "one size fits all" mentality. If you are introducing supply chain best practices to Chinese businesses, they must incorporate a high level of localization. Success requires a fine balance between industry best practices and in-market experience.

• Don't oversimplify the challenges. Any time an economy grows rapidly, managers tend to oversimplify things because they don't have experience in dealing with new situations. There is a shortage of people in China who can manage growth and the supply chain. To solve this problem, you need a combination of training and local expertise. Successful companies in China typically have programs for training locals, as well as allowing Chinese nationals to work in other business units outside of China.

Chinese Logistics, And the Future
While much work remains to be done, the future of Chinese logistics looks bright. For example, China is building its roadway infrastructure at an amazing pace. Shanghai is erecting 200 stations for a new underground transportation system. Chinese ports are already at full capacity and many new ones are in the planning stage, including the largest port in the world.

Additionally, radio frequency identification device systems, which have yet to be comprehensively deployed, will create new logistics opportunities. While the Chinese government has not yet authorized the frequency to transmit RFID data, pressure is growing to solve this problem. About 60 percent of Wal-Mart's goods come from China, and Wal-Mart is the largest single importer from China. For Wal-Mart's recently mandated RFID initiative to be fully realized, all RFID tagging eventually must take place in China.

As new tools to manage logistics proliferate in China, companies must be ready to use the powerful software tools that can drive dramatic efficiency improvements. With an economy evolving as rapidly as China's, there is little room for error.

Mark Weaser is vice president/Asia-Pacific for Atlanta-based Manhattan Associates.