By Lu Lixin, Vice President of the China Logistics Society, Vice President of Anhui Provincial Chamber of Commerce, and Chairman of Gongwu Logistics

In a recent speech, renowned economist Wei Jie categorized the service industry into four types: consumer services, business services, production services, and spiritual services. I believe business services and production services are B2B, and most logistics, being B2B, should fall under production services. The B2B platforms discussed here are limited to the narrow sense of business services, specifically in commodity circulation and trade. It is often said that B2B 1.0 is about information portals, B2B 2.0 about transaction closure, and B2B 3.0 about supply chain services. This is not wrong; the mistake is viewing supply chain services as logistics, or even as logistics operations. Many B2B platforms, under the guise of 3.0, engage in logistics operations, selling logistics services under the banner of B2B.

Look at your origins and your original intention; there is a broad road waiting for you

Long ago, our country's distribution model consisted of wholesale stations at various levels, all state-owned. These wholesale stations had unclear power dynamics with manufacturers, leaving the supply chain without a chain leader. In China, a leaderless group is a disaster. Under this distribution system, there were irreconcilable conflicts between manufacturers and distributors, severely constraining the development of manufacturers and affecting economic growth. Naturally, this system was phased out by the gradually established market economy.

Not long ago, Deng Xiaoping drew another circle on the southern coast, establishing the market economy. Foreign giants like P&G, Coca-Cola, and Unilever entered China, bringing new market distribution concepts. They established a complete market distribution system and new marketing models. Distributors at all levels gradually replaced wholesale stations. This distribution system, fully led by manufacturers, established a complete circulation system of manufacturers, distributors, sub-distributors, and retail terminals. With a chain leader, but exclusive and hierarchical, efficiency was not high. The most important question: where was the consumer's position? Meanwhile, various wholesale markets emerged to meet the distribution needs of small and medium-sized manufacturers and low-end goods.

With the advent of the internet era, consumer sovereignty gradually established, and such inefficient supply chains were increasingly rejected by consumers. Consumer purchasing behavior shifted rapidly from offline to online. This shift forced manufacturers, distributors, sub-distributors, and retail stores to recognize the need to use internet connectivity and data-driven methods to change and improve distribution efficiency. Since then, various B2B platforms have surged, threatening to replace distributors and wholesale markets. This is what I see as the original intention of various B2B platforms; it is natural for them to move toward B2B 3.0 supply chain services. As for their origins, they are无非三类: distributors transforming and upgrading, wholesale markets going online, and internet people crossing over.

Regardless of where they come from or where they are going, the supply chain playbook in the internet era should reference the following figure:

B2B must address two new propositions: how to organically unify the supply chains of online and offline distribution channels, and how to leverage the internet's rapid and broad connectivity to move beyond exclusive supply chains, from value chains to value networks, to create more value than traditional distributors. The measure of B2B's value and vitality is whether it can improve supply chain performance.

  • Will there be higher transparency and more data?
  • Can it effectively reduce distribution costs across the entire chain, making consumer purchases cheaper?
  • Has supply chain reliability improved, or will there still be frequent stockouts?
  • Are there flexible supply chain designs for different terminals and consumers?
  • Most importantly, has response speed improved, or is market information still fragmented and isolated, leaving design, production, and decision-makers disconnected from consumers?

Accurate and rapid transmission of demand to production and design is the foundation of new retail and new manufacturing. B2B must make progress in this area to be considered part of the industrial internet. In short, two questions: With you, have distribution costs been reduced? Is demand more accurately and timely identified, transmitted, and satisfied? Everything else is irrelevant.

Please note: The broad road for B2B is to improve distribution efficiency, not just logistics efficiency, and certainly not just logistics operations efficiency.

There are many paths to improve supply chain efficiency; why take the single-plank bridge?

At the beginning of this century, the concept of supply chain began to gain attention in China. I remember in 2002, when we established a supply chain technology company, it was the first in the country. Over a decade later, despite some supply chain finance companies in Shenzhen being hotly pursued and widely noticed, what people remember more is the harm caused by pseudo-supply chain companies, mainly steel trading companies. Just a few days ago, the state issued guidelines for supply chain innovation and application, which indeed excited the industry, making them complacent about their foresight and secretly happy about their imagined bright future.

But with direction, where is the road? There are many paths to improve supply chain efficiency; which one suits you, which one can take you to distant poetic places?

The figure below lists some paths to improve supply chain efficiency, based on my years of experience, for reference only.

From the figure above, it is clear that B2B platforms have great potential in improving supply chain efficiency. They can reduce transaction costs, optimize orders, promote new manufacturing, improve capital efficiency, better integrate supply chain finance, optimize warehouse layout, reduce warehouse levels, improve inventory turnover, and mutually reinforce improvements with distributors, new retail, and logistics internet platforms. The supply chain has four flows; improving the flow of goods is B2B's inherent duty and important. Finance is a lever and a necessity. Information flow can be renamed big data, and everyone knows its value. These three flows are far more important, urgent, and faster than logistics.

If you are truly in love with logistics, then engage in high-end logistics activities. Logistics planning is a big topic: how to use data for dynamic logistics planning, deciding what facilities and equipment to place where, and what transportation modes and logistics models to use. And it must be dynamic and flexible; that's impressive. But this works better with larger commodity circulation scales. At the very least, improve logistics planning to better connect supply and demand, reduce inventory, improve supply reliability, and enhance capital efficiency. Only with good logistics planning can you fend off attacks from online retail giants. From my observation, one online retail giant frequently sends duplicate shipments, with inventory losses of at least billions without knowing it, showing how high inventory is. Another retail giant has returns on clothing: consumers return 20%, and manufacturers return 50%, but manufacturers dare not complain. Such supply chain efficiency is still alive. Traditional distributors' biggest headache is also inventory issues; distorted supply chain relationships and poor supply chain management capabilities cause distributors' earnings to be tied up in inventory, with high inventory costs eating away most profits. Now, B2B insists on doing logistics, connecting manufacturers and terminals, and if logistics planning is done well, it can repel these online retail giants. There is no need to engage in warehousing, distribution, and transportation, which are hard work.

Please note: For most consumer goods, logistics operations costs account for 5%-10% of the factory price, while total distribution costs account for 50%-100%. Focusing on logistics operations to improve supply chain efficiency is putting the cart before the horse.

The road of logistics operations is not easy; it requires professionalism and focus. Going it alone is not as good as joining forces.

The latest data shows there are nearly 7 million transportation operators and about 500,000 logistics companies nationwide. The logistics industry has developed for decades but has not escaped being scattered, chaotic, and small. Interestingly, the larger the logistics company, the less profitable it tends to be. Some might say there are large logistics companies with revenues in the tens of billions, but they are either in consumer logistics or large resource-based transportation like shipping, rail, ports, and aviation.

The figure below shows the current state and future landscape of logistics serving enterprises as I see it:

Enterprise logistics is not an easy road; otherwise, many large logistics companies would have emerged long ago, and the market would already be divided. Large logistics companies struggle with management: too strict and response speed suffers, affecting service quality; too loose and losses and leaks eat profits. But some B2B platforms, unconvinced, wave plausible reasons to enter logistics operations, which is pure self-consolation and not to be taken seriously.

Self-consolation 1: I have good relationships with upstream and downstream, so getting business is easy. Is that true? False. Once upstream and downstream have a trading or financial relationship with you, they don't want more ties. Independence and autonomy, avoiding control by others, are highly valued by most companies.

Self-consolation 2: Our employees are familiar with the goods, so doing logistics alongside trading is more professional and reliable. Is that true? False. Example: Many years ago, my logistics company discovered that tens of thousands of bottles of liquor were missing from the Shenyang warehouse. We called the police, and after investigation, it was determined that the cargo owner's (distributor's) salesperson colluded with our warehouse keeper to steal and sell them. I thought then that distributors shouldn't manage their own warehouses because their people know where to sell stolen goods, making theft more likely. A logistics company's warehouse keeper might not be able to steal and sell, at most drink a bit, and blushing would give them away. As for adulterating goods, salespeople have more opportunities to make money through such means. It's better to separate the management of goods and sales; logistics should operate independently. I've seen many distributors' warehouses, and I don't see any professionalism. I've also witnessed distributors' years of effort go up in flames, with millions of goods burned, and insurance not compensating due to management issues.

Self-consolation 3: I have some logistics needs myself, so doing consolidated warehousing and distribution will be easier to succeed. Is that true? False. Consolidated warehousing and distribution integrate warehousing and distribution across different companies. If you're doing commercial flow yourself, business partners won't want to give you their goods, fearing complicated relationships. Competitors won't use your services even if cheap, fearing you might harm them.

Self-consolation 4: I can combine supply chain finance to be more competitive. Is that true? False. Professional logistics companies manage goods neutrally, and financial institutions trust them more. If you manage it yourself, no matter how clear the data, it's hard to get loans against movable assets. In the steel trade finance incidents a few years ago, banks lost tens of billions, almost all due to self-operated logistics or fake third-party logistics outsourcing. Banks have an indelible impression of this.

Self-consolation 5: I can build a platform, integrate small and medium logistics companies, and work together. Is that true? True. The future logistics market is a model of logistics platforms plus small and medium enterprises. But if you become a logistics platform, you belong to that category, and only with professionalism and focus can you succeed. Also, consider what advantages you have in doing a logistics platform and whether putting all your resources and energy into it is the best choice.

...

I think handing logistics operations to professional companies and keeping your own involvement light is a consensus among many B2B platforms. Recently, Gongwu Logistics Platform and its affiliates have reached cooperation with several B2B platforms, and several more are in talks. Some 2C e-commerce companies that used to manage logistics themselves when small are now outsourcing as they grow, finding logistics lagging. More and more companies recognize that joining forces is faster and stronger than going it alone.

Please note: B2B improving its value or making money from logistics operations is not as rosy as it seems; often it's a pitfall.

B2B improving supply chain efficiency by starting with logistics operations is putting the cart before the horse. Believe it or not, I, an old logistics soldier, believe it.

The 2017 (3rd) FMCG + Internet Conference will be held in Chongqing in November 2017. The conference will focus on the theme "New Forces, New Ecology," inviting 1000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to explore new chapters of cross-border integration!

Click the links below to review the highlights of the first and second FMCG + Internet conferences:

2016 "FMCG + Internet" Summit Forum

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