Target and Toys R Us posted overall sales declines during the holidays.
The giant e-commerce company has projected spending $50 billion to create a modern logistics network in China, where online retailing is booming. One year into the ambitious project, supply chain expert Jim Tompkins assesses its progress.
One year ago, Alibaba founder Jack Ma announced his plans for an RMB300 billion (USD $50 billion) nationwide logistics network to be built in five to eight years.
Now that he’s a year into what is known as the Rookie Network, what is the consensus of opinion on Ma’s ability to actually get it done? We hear from both skeptics and cheerleaders on this issue. Skepticism arises from the massive scope, questions about return on investment, and the lack of experience for this kind of project. Optimism arises from the fact that it’s Jack Ma at the helm, with his esteemed network of partners on board and online platforms which carry half of China’s e-commerce business. (You can hear more about Jack Ma and The Alibaba Effect in this new video.)
The Scope: What is the ‘Rookie Network’?
Saying that Ma’s logistics network is a China version of UPS or FedEx would entirely miss the mark. China has literally millions of transportation providers, most of which are owner-operator companies with one truck. So Rookie does not need a large fleet of trucks. Furthermore, there are ample express delivery companies handling the last mile, at least in Tier 1 and 2 cities. Therefore, Rookie also does not need to perform courier services.
On the other hand, the problems they are tackling include the high cost of logistics and long lead times. Their aim is to deliver to the entire country in 24 hours. While that is probably not a good goal from a network planning perspective, it is nonetheless the grand vision for Rookie.
So the Rookie Network, also call the China Smart Logistics Network (CSN), fills the purpose of creating an intelligent backbone out of the current chaos. What is needed to create that backbone? Intelligent systems, facilities, and partnerships.
- Systems — The intelligent systems must be cloud-based and capable of optimizing LTL shipments, routing, tracking, and payments. Such a system would enable Rookie to align massive transportation resources to efficiently make their shipments. It should also incorporate financial technology for processing payments. Payment services represent a critical path for Alibaba via related company Alipay. Surely someone in China has already developed such a system? Yes, they have. Hence Rookie’s recent purchase of KXTX (www.kxtx.cn). The first character in the company’s name is 卡 which is used in the word truck (卡车) and membership card (会员卡) to indicate the membership required for transportation providers to join their network. Members must meet their standards to join the network, thus giving KXTX control over the delivery service level, while at the same time creating the open social platform they required for growth and flexibility. This system will need to be scaled up dramatically since it will be used for all TMall and many other platforms’ shipments. It will eventually ship RMB 30 billion in orders per day.
- Facilities — Facilities make up the bulk of the investment required for this network. While most of the infrastructure will be in logistics centers, Rookie will also need e-commerce offices, data processing centers and financial services buildings. An estimated 30,000 mu (5000 acres) is what it will take for all of this, and it would include 9 or 10 regional fulfillment centers for storage and order fulfillment (along with 20 transfer centers). Already, Rookie has begun operating its Tianjin facility, which was designed with Dematic material handling equipment. So it seems that facilities and land requirements are well on their way to being met.
- Partnerships — Rookie recently signed a strategic agreement with China post for delivery services. With more than 100,000 postal outlets around the country, China post is in the best positioned to reach those 3rd and 4th tier cities and remote areas. Last year’s RMB 500 million investment in Eternal Asia (怡亚通), a one-stop supply chain services provider, allows Rookie access to a broad range of capabilities, such as export, sourcing, supply chain finance, etc.
The Future of Rookie
With so much investment needed to get to the point where the network is creating enough efficiencies to turn a profit, one wonders when investors will run out of patience. Fortunately, Rookie is owned by those who also have a strategic stake in its success: 43% by TMall, 32% by InTime (银泰), and the rest by real estate developers and express carriers. So, it’s safe to say that at least the first phase will be successfully funded.
As for the goal of 24-hour delivery nationwide, it probably will not be reached. A more reasonable target would be 24-hour delivery to 80% of the population. To hit 24-hour delivery for the last 20% of population will prove to be far more expensive, and it’s not likely to be profitable. Holding inventory in Western distribution centers for relatively few customers is a poor investment, and air is not a viable transportation mode. The most likely reality is that the network will only hit 80%, but that does not make for a very compelling vision statement. “The entire country in 24 hours” is far more compelling, so who are we to rain on Jack Ma’s parade?
The Rookie Network is an epic project, and much will be learned as they navigate the treacherous terrain of China logistics to build out this vision. What they learn in China, while not likely to be relevant to Western markets, will give them the experience to grow into other developing countries. Most importantly, it has all of the critical ingredients for success in China and we look forward to watching it unfold.
Jim Tompkins is CEO of Tompkins International and a globally recognized supply chain authority. Contact him at firstname.lastname@example.org.This article first appeared in Tompkins International's Asia Supply Chain Excellence Report.