With cheaper port services and expanding freight destinations, China is overtaking Hong Kong in handling cargo export and distribution. At the same time, international forwarders like FedEx, DHL and UPS are expanding their regional businesses by leveraging their global networks, advanced technologies and customized services to handle end-to-end supply chain processes.
This is according to Professor CJ Tan, interim CEO of Logistics and Supply China Management Enabling Technology R&D (LSCM) Centre at Hong Kong University. "In this region, the tremendous development in industrial expansion and economic growth impose insurmountable demands for logistics services," said Tan. "It is a challenge as well as an opportunity to the local logistics business."
"Hong Kong is losing its edge in handling cargo," said Wilson Lee, head of information technology at Kerry Logistics. "Like many local logistics providers, we are seeing that as our major challenge."
As one of the first third-party logistics (3PL) service providers in Hong Kong, Lee noted the company traditionally focused on the handling of goods. While the cargo handling business is shrinking in Hong Kong, Kerry Logistics has been expanding rapidly in China to capture the growing volume of mainland business. Meanwhile, the company is riding on its experience in the industry to re-position itself from handling cargo delivery to managing supply chain operations.
This new position means Kerry Logistics aims to be the 3PL that provides outsourced logistics management services, which includes managing various logistics suppliers, monitoring their performance, providing consulting services or even transforming their supply chain processes.
"There's a huge opportunity in the supply chain management services. Since many multinational corporations have reached saturation point in optimizing the manufacturing process, the next step will be to optimize the delivery process," said Lee. "To optimize the process as an outsourced logistics provider, we rely heavily on IT."
IT brings visibility
"Since we like to manage our client's supply chain operation, having visibility in every single step of the supply chain process is important," said Lee. "Only when we are able to inform our clients [as thoroughly as] their own logistic department will we be able to gain their trust and business."
Kerry Logistics has developed a strategy named Kerry Vision, which aims to bring visibility in three major areas: pipeline, cost and event management. Pipeline visibility means the ability to track and locate the cargo throughout the supply chain-a 3PL should also able to identify the logistic cost down to the per-item level.
"It's easy to identify the logistic cost of a pallet of goods, like jeans, from one destination to the other," he explained. "But to compare the logistics cost of a pair of jeans delivered to shop A with one [going] to shop B, is very difficult."
Throughout the supply chain, delays or hiccups are common. A 3PL should also be able to indicate and alert the impact of the entire supply chain process when an unexpected event occurs. For example, when freight is delayed, a 3PL must be able to identify the impact on the warehouse storage cost or the truck delivery schedule.
"There's always a domino effect in the entire supply chain operation, when delay in a single step can cause a significant impact to the entire process," Lee said.
As part of the Kerry Vision initiative, Lee said his company is currently developing a new application architecture (slated for Q3 2006) to allow its systems to obtain information from other logistics providers on behalf of its clients. "Currently, we need to do a lot of coding in the application," he said. "But the new architecture will work like a web service and allow our system to better integrate with different logistic providers and obtain information more easily and quickly."
Building intelligence in SCM
Another major technology trend in the logistic industry is the use of business intelligence (BI).
"Logistics is a business based on heavy transactions, and it's impossible to keep track of every single detail," said Lee. "So scorecards have always been critical for measuring our business."
BI has been used to track the company's financial data and other key performance indicators, like the number of delays or responsiveness to clients' requests. Kerry's latest use of BI measures internal business performance and also offers that measurement as a service for tracking performance of other suppliers.
"Our ultimate goal is to take advantage of BI to enhance our value-added service," he said. "BI can help track and monitor the performance of each supplier in the entire process on behalf of our clients."
Lee said Kerry Logistics also expects BI to enhance their ability to forecast business trends. According to Lee, Kerry aims to allow clients to re-engineer their supply chain processes radically, like moving their global distribution center from an American or European locale to an Asian one. To do this, the application must be able to simulate the supply chain process and generate forecasts on the cost associated with both destinations.
"We believe that [supply chain re-engineering] is a very attractive service for many of our clients," he said. "Many multinational corporations are still seeking opportunities to optimize their costs and processes in logistics."
Support from government
Kerry Logistics is not the only one turning to IT to re-position its business strategy. Smaller scale logistics providers are also looking to upgrade their IT systems in order to play a part in the global supply chain network, said Tan.
"Compared to the rest of the world, Hong Kong's logistics industry is quite advanced, particularly in airport and freight management," said Tan. "But we are still very young in the growing 3PL service segment and will need technology to support local players to compete in the world-class level."
The smaller operators tend to provide last-mile logistics and are struggling to keep pace within the global network. Since most 3PL providers are subcontracting their businesses to these smaller operators, local operators need to upgrade their IT systems to remain connected with global supply chain providers, added Tan.
As part of the Hong Kong government's effort to nurture innovations and technologies, the LSCM R&D Centre aims to help both smaller and mid-size operators in Hong Kong to accelerate their business with the latest technologies, said Tan.
Although mid-size operators may have their own IT teams, they often cannot afford to have a dedicated technology R&D team. Most IT teams develop applications or structure application architecture to better facilitate the company's business strategy, but will not invest in nascent technologies that don't bring immediate benefit to business.
"We play a role in developing and exploring nascent technologies at the early stage, before they are applicable in the enterprises level," said Tan.
RFID capabilities
One of these areas is RFID. Currently the center is sponsoring six RFID research projects, which are also sponsored by the Guangdong-Hong Kong Technology Collaboration Scheme.
"RFID technology that supports multiple readings can be used in warehouse management to enhance the monitoring of incoming and outgoing of goods," said Tan. "[RFID's capability to] integrate product information and its physical whereabouts can help the inventory management of goods and can greatly improve efficiency in stock-taking."
"Logistics providers can definitely make use of RFID to streamline processes and track products," Lee added. "But more importantly, RFID brings us an enormous opportunity to expand our value-added service businesses and boost revenue."
He explained as a 3PL, the company can expand its value-added service to provide tagging services for smaller manufacturers, who may not afford the IT resources and knowledge to apply RFID. Through a few tests and pilot projects in RFID, Kerry Logistics has gained experience in the technology to help local manufacturers, said Lee.
But he also noted the lack of momentum of RFID adoption among retailers and their Asian suppliers has limited the use of the technology among logistics providers. Since logistics providers do not have ownership of the product, it is impossible for them to enforce or drive the use of RFID.
"RFID is only applicable in the supply chain process when the cargo arrives with the tags," said Lee. "We have no right to de-pallet the cargo and apply tags just to optimize our operation process."
Despite much R&D effort on the technology, Lee said RFID may not be as significant for logistics operators in Hong Kong. One of the reasons is the shrinking volume of goods being handled locally.
"With the development of ports in Southern China and their proximity to the manufacturing plants, less cargo is being handled in Hong Kong," he said. "Therefore warehouses are much smaller, so the use of RFID is less essential to search for products within the warehouse."
"The only useful area I see for RFID in Hong Kong is handling FMCG (fast moving consumer goods) or cargo that requires cross-stock: cargo that requires re-packing and re-distribution...quick turnover and limited handling time," he said. "But if manufacturers do not tag their goods before they arrive at the warehouse, we won't be able to make use of the technology to speed up the process."
Nurturing nascent technologies
Although RFID is important to the logistics industry, Tan said the center aims to also cover other useful nascent technologies.
"The center may not be developing off-the shelf applications, but it aims to develop technologies for tomorrow," he said. "Exploring new technologies is a business of the future, not today."
"With the establishment of the R&D center, we are having a dedicated effort on technical research," he said. "Moving forward, we need to bridge our research with the business environment for local operators."