Electrolux Keeps Logistics In China Under Control

Sept. 19, 2006
China is important to Stockholm-headquartered Electrolux as both an end market and a manufacturing source. A network of buyers and logistics personnel

China is important to Stockholm-headquartered Electrolux as both an end market and a manufacturing source. A network of buyers and logistics personnel are spread throughout the region to support sourcing activities, explains Amit Kumar, whose group manages global freight and logistics in and out the country. One key to their success is how they have pushed out supply chain responsibility to local providers.

Kumar's group manages almost everything that moves in and out of Asia, including all ocean freight. From 60% to 70% of Electrolux cargo originates or terminates in Asia. Air freight and express are managed from Shanghai (Electrolux recently announced a multimillion-dollar exclusive contract with DHL to handle air express shipments.)

The Electrolux sales and manufacturing division that serves the Chinese market operates out of Shanghai. Electrolux recently divested its operations in India but it is left with two of its own factories in China, which mostly serve the domestic market. It also has two factories in Thailand, serving the other factories in the region and supporting exports. On the export side, a small Hong Kong office manages sourcing that originates in the Pearl River Delta region. All sourcing in China is managed from the office inf Shanghai.

With operations in Hong Kong and Beijing, geography came into play when executives had to decide where to locate the global freight and logistics office. Favorable tax incentives were one reason that Electrolux merged various operations in Shanghai, Kumar admits, but the city is also close to Electrolux's supplier base in the Yangtze River Delta. The company also gained some cost efficiencies in the consolidation.

From a transportation infrastructure standpoint, Kumar highlights two issues. First, the necessary roads, highways and airports are not a problem. "In fact, one of our factories is about 2,000 km inland, infrastructure wise, that's no problem," he says. But as a non-Chinese entity, trying to manage all of that domestic activity internally would have added a lot of complexity and cost.

"When we moved here about three years ago to set up our own logistics network, our intention was to do an endtoend solution," says Kumar. After looking at the costs, Electrolux managers decided to let the Chinese companies manage their own supply chains.

"We have two consolidation points in China. One is in Shanghai, one in Shenzhen." Less-than-containerload cargo comes into those hubs and is consolidated into full containers moving out. Otherwise, anything from the interior of China moves from the supplier's factory to the Electrolux consolidation hub under the local contracts and pricing established by the supplier.

In addition to pricing, Kumar says, compliance is better managed by the sourcing plants. "It's their region, it's their network, they know the right people to call, they know the right company to use," he says.

That doesn't mean Electrolux is entirely hands off with suppliers. Starting 15 days out from the vessel departure date the supplier should have called the shipping line Electrolux has contracted and made a booking. If that doesn't happen by 10 days before the sailing date, the third-party provider (3PL) appointed by Electrolux performs a vendor check. The 3PL will contact the vendor, confirm the part numbers and volumes, and ensure that the parts will be ready to ship. Vendors have access to a six-month rolling forecast on each part number.

"They see what's being consumed, they know what to ship, and they know when to ship, based on our standard operating procedures," says Kumar. It all sounds a bit information technology centric, but it's not that complex, according to Kumar. All suppliers need is access to the Internet, which is common now. "You are connected anywhere in China as long as you are somewhere in the vicinity of a town," he says. Still, while the technology hasn't been a problem, the information is in English, and language has sometimes presented a challenge.

Chinese Government Eliminates Barriers to Economic Growth
Economic expansion is not outrunning infrastructure development. "The Chinese government has been very proactive in setting up and growing the network wherever things would start to move in the future," says Kumar. If "the government wants to develop a certain area in the next five years, they start building infrastructure before anybody starts to move into those areas." Economic incentives are then available for companies to move into these areas.

When pressed on the impact of rapid economic growth, Kumar admits that power has been an occasional issue. Peak summer usage strains the grid, but Electrolux has seen little impact because of the seasonality of its production.

Port congestion has also cropped up, says Kumar. While most U.S. importers are aware of the problems at U.S. ports on the West Coast, Kumar says that sometimes there is port congestion on the China side as well. Vessels calling in the ports and the barge operations compete for access to the port infrastructure. But over the last five years the new Yangshan deepwater port has relieved some of the strain from Shanghai, and Yantien has expanded and added berths, so problems are more rare today.

Reaching end markets can still be challenging. While congestion at U.S. West Coast ports is a little less than last year, Kumar has problems with bigger vessels that cannot use the Panama Canal. That creates a bottleneck for taking goods to the East Coast.

The company faces a similar bottleneck moving goods into Europe through the Suez Canal, but it doesn't do a lot of sourcing for Europe out of Asia. The United States and Australia account for over 90% of the goods sourced from the region.

Security is important for U.S.-bound cargo. Small shipments coming into the Electrolux consolidation hubs aren't an issue because the hubs are in full compliance with Customs-Trade Partnership Against Terrorism (C-TPAT) rules. Full containerloads are also screened in the port area, Xrayed and randomly inspected.

Most vendors are aware of the C-TPAT rules and U.S. Customs and Border Protection regulations, as well as international maritime shipping security requirements. Electrolux works with service providers such as DHL to conduct local workshops for vendors to explain the importance of the various requirements and any new developments, such as the wood packaging rules.

"We're doing that in India, China, Korea and Malaysia, wherever we have our sourcing base," says Kumar.

As parting advice to others plannig to operate in the region, Kumar says that government rules and regulations keep changing. "You need to keep a very close eye on what's going on."

And, despite significant crackdowns on copyright infringement and counterfeiting, Kumar says companies have to be very careful with their intellectual capital. Often the same suppliers that build parts and components for one company are also used by competitors.

"We need to be very careful on how we secure design and research and development information to make sure they're not shared. That is something worth watching and—not that we've had any bad experiences—it certainly helps to know that things are under your control," he concludes.

Custom door panels on Electrolux refrigerators appeal to Chinese consumers.