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Research on the Role of SCM in China Dairy

Apr. 2005, Volume 4, No.4 (Serial No.22)

Chinese Business Review, ISSN 1537-1506, USA

Research on the Role of SCM in China Dairy Firms
Bin Lin* Xi’ Jiaotong University an Abstract: In this paper, we investigate supply chain management (SCM) in China dairy industry. The result shows that it can make enterprises cut the expenses and raise the efficiency by implementing of SCM. However, compared with other enterprises which do not implement SCM, those companies which have implemented SCM have not received the anticipated benefit. The reason is that those companies usually implement vertical integration before SCM. This practice normally saves the information cost while increasing the operation cost. It is very difficult to implement SCM system among domestic enterprises that have only business relationship. It is a new subject that the industry faces to implement the SCM by combining each related enterprises of the business together, based on the analysis of vertical integration suiting to enterprise’ own situation. s Key words: application supply chain management

1. Introduction
SCM is the control of product and informational flows from the source of raw materials to the end consumer based on coordinated relationships with both suppliers and retailers. This process is in the extreme complicated including stocking of raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and management, distribution, and delivery to customer. With the development of information technology in 1990s, the idea of supply chain management (SCM) has drawn extensive attention of multinational large-scale enterprises. For some domestic large-scale enterprises, they have gotten a significant return by introducing SCM in recent years. However, given the differences of each enterprise’ concrete results, the success of one case is not enough to convince some other enterprises. On the s other hand, there exists the case that the implemented enterprises don’ have much more outstanding performance t than the non-implemented enterprises, so it is very essential to compare the actual function of SCM among different enterprise management and analyze the existing questions in its implementation. In China, revenue from three dairy companies accounts for half of the whole industry. The three companies are representative in China dairy industry. Among the three leading dairy companies in China, Yili Group, Mengniu Dairy, Bright Dairy, one has already implemented the supply chain management, another one has carried on practice for some time, and the third is just introducing it. In this paper, we hope to provide some constructive advice for those enterprises who intend to implement SCM by analyzing the actual function and existing problems of supply chain management in these three dairy enterprises.

2. The Application of SCM in Enterprise Operation
Supply chain means the operation flow that is from materials’procurement to intermediate goods and semi-manufactured goods production and then to users. SCM means the management of logistics and relevant information caused by the goods movement from initial materials procurement to final consumption, while attempting to create and offer additional value for customers. The concept of SCM originated from logistics

Bin Lin, male, Ph.D. candidate of School of Economics and Finance, Xi’ Jiaotong University; Address: C407, Fuxing Garden, an Longwei Road, Xiameilin, Futian District, Shenzhen, China, Postcode: 518049; Tel: 13322929642; E-mail: linbinfyxt@yahoo.com.cn. 57

Research on the Role of SCM in China Dairy Firms

management. With the rapid development of information technology, the effect of SCM has become more and more obvious during enterprise management, so it has received enterprises’ extensive concern. 2.1 The Function of SCM in Enterprise Management The reason why SCM draws more and more attention of enterprises is that it can bring enormous economic benefits to enterprise itself, such as improving logistics efficiency, catering customer, reducing the logistics and trade expenses, and finally promoting enterprise’ competitive advantages. s (1) Reduce the logistics expenses. Research shows that the relevant enterprises or each relevant department of enterprise may reduce the logistics cost through cooperation and coordination measure in storage, transportation, purchase and supply stage (Christian Bechtel and Jayanch Jayaram, 1997). SCM can make stocks drop to a relatively low level so as to save expenses on fund occupation, storage expenses, etc. In an enterprise which has implemented SCM, through electronic data interchange, each side in the supply chain can share the information and data about the enterprise’ production, sale, stock, and distribution to control the flow situation of s raw and processed materials, materials in process and manufactured goods in channel and to monitor transportation or delivery situation, stock or sales situation and customer’ demand situation. Through this, s enterprises can adjust production and distribution rapidly according to market demand information, without holding large quantity of stocks. SCM can save enterprise investment on logistics facilities. The logistics resource-sharing mechanism among members of supply chain replaces every enterprise’ overlapping investment s on logistics facilities and saves lots of fund for the enterprises and the society. (2) Reduce the trade expenses. Every transaction involves transaction costs in market economy. Both parties, in order to detect the quality and price of the products, search the transacting object, carry through a series of activities including negotiating, consulting, contracting etc., have to pay relevant costs. Vertical integration is an effective way to save the trade expenses. Implementing SCM can effectively minimize information cost among and inside enterprises. Setting up an exchange platform above enterprise and interdepartmental scale can reduce the corresponding expenses under a long-term cooperation. (3) Improve logistics efficiency. SCM integrates every individual enterprise in supply chain to one entity by setting up an information interchange platform through the cooperation of enterprises in different stages, making sure of fast reaction through supplying and delivering in time and fast reaction to market and customer demand, shortening order cycle, taking rapid action to customer and market demand, and improving working efficiency of logistics in supply chain. (4) Improve customer satisfaction. By using of SCM, on one hand, enterprise can reduce the logistics cost and lighten customer’burden; on the other hand, it can improve the logistics’service level, accelerate the speed of delivering goods, reduce the number of times in short supply, increase the dependability of distribution, improve customers’ satisfaction. Moreover, SCM makes it possible for enterprise to arrange production according to customer demand and meet customer’ demand better. s So an effective SCM can not only lower costs, but also create new value, thus strengthen the competition advantages of enterprises generally. 2.2 The Application of SCM The early stage SCM was logistics management in fact. During World War II, the American military, in order to reduce the supply expenses of the strategic materials and raise the efficiency of the supply, took planning and unison disposing to such activities as the wartime materials’ production, purchase, transportation, distribution, etc. After the war, the American business group began to apply this method to enterprise’ production, purchase, transportation s storage, etc., and SCM improved enterprise’ business efficiency, saved the logistics expenses. Later, manufacturers s accepted SCM. In Japanese and German large-scale manufacturing enterprises, affiliated enterprises offered tailor-made and sale service, took large-scale manufacturing company as the core, set up a set of SCM system to link

Research on the Role of SCM in China Dairy Firms

up all affiliated enterprises so as to improve efficiency. As a result, the Japanese and German automobile manufacturing industries have gotten good return by the implementation of SCM, so as to other European and American large-scale enterprises. It is much more convenient in the process of enterprise’ implementation of SCM s inside than outside, for instance after such companies as P&G, Hewlett-Packard, etc. implementing SCM, each interdepartmental connection inside the company is closer and efficiency is improved by a large margin. SCM also draws attention of numerous domestic enterprises. According to an investigation, at present, Bright Dairy and Younger Group have built the whole SCM system, which is mostly used for integrating materials procurement, processing and manufacturing, trading and sale. Lack of information-based foundation, some enterprises have lots of doubts about SCM and have not considered it at present. However, through practice of some domestic enterprises, implementing the SCM can really improve enterprise’ performance and promote the s competitiveness although some enterprises’ normal operation may be influenced due to temporary incompatibility.

3. The Result of China Dairy Industry’ SCM s
In China, there are about 600 enterprises manufacturing milk product. Total revenue from the industry is about RMB 60-70 billion. At the same time, the income from three leading companies reaches 50% market share of the whole industry. So through investigating SCM in the three leading companies, we can know the whole industry approximately. The supply chain of dairy products industry from raw milk to consumers includes different parts, from peasant household (pasture), processing factory, transportation, storing, to distributing, etc. Although the mode of the three dairy products companies’ SCM aims at above-mentioned parts basically, each has its own emphasis. Bright has introduced the SCM system on vertical integration basis in 2001; Yili has also built its own marketing network in a high integration degree and extended to the counties and cities conveniently for management, and optimized the logistics network system; meanwhile, Mengniu focuses on distribution mode which has a low integration degree, and began to introduce SCM system in 2004. The three enterprises have different SCM mode, which results in different performance. In general, there are many parameters to be used to value the effect of SCM, for example, current inventory, average inventory, demand/output ratio, production cycle time, administration cost, core operating cost, product quality, delivery JIT, profit/cost ratio etc. Because it is difficult to gather indexes mentioned above, in a nutshell, we use those criteria including gross margin, net margin, operating expense and inventory turnover to value SCM in the three companies.
Company Yili Bright Mengniu Table 1 The Performance of the Three Dairy Enterprises Gross margin (%) Net margin (%) 02 03 04 01 02 03 33.3 32.2 29.7 4.4 3.5 3.2 34.2 32.8 32.3 4.6 4.5 4.7 27.1 25.1 22.3 4.6 4.7 5.7

01 29.1 33.8 25.4

04 2.7 4.7 6.5

Among the three companies, Mengniu has the lowest gross margin, but has the highest net margin; and Bright has the similar gross margin with that of Yili, but has higher net margin than Yili from 2001 to 2004. During the past four years, the gross margin of three companies has gone through the trend from low to high and then to low, but the net margin is different. The trend of the Mengniu is up and up year by year while that of Bright is from high to low then to high and that of Yili is down and down.


Research on the Role of SCM in China Dairy Firms Table 2 Inventory and Expense of the Three Dairy Companies Operation expense (%) Inventory turnover (day) 01 02 03 04 01 02 03 19.2 22.5 22.1 24.9 46 46 43 21.4 20.9 21.9 22.4 36 32 27 15.9 16.6 15.5 16.4 38 40 35

Company Yili Bright Mengniu

04 41 29 35

For the three companies, the expense level of Mengniu is the lowest, whereas that of Yili is slightly higher than Bright’ inventory turnover of Bright is the quickest, Mengniu takes the second place, and Yili is the slowest. s; In other words, for Bright, the implementation of SCM has not made the operation cost obviously lower than that of the other two companies though inventory turnover is faster. Although implementing SCM later than Yili, Mengniu’ inventory turnover and expense rate are lower than Yili’ s s. Through analysis, we find out that the vertical integration mode of Bright is higher than Yili’ and Mengniu’ s s. The implementation of SCM is based on the vertical integration. Though the information communication is convenient, the operation cost has risen. The reason why Yili’ expenses rate is higher than Mengniu’ is that s s Yili’ vertical integration degree is higher than Mengniu’ Although bearing the integrated cost, Yili has not yet s s. enjoyed the saving effect brought by the implementation of SCM. Due to the historical and cultural reason, domestic enterprises have to take vertical integration action before implementation SCM in China. Most domestic enterprises hope to share outside enterprises’ information, but do not like to share its own information with outside enterprises. There exist many obstacles to implementation of SCM among different enterprises. Focusing on individual company, the effect of the implementation of SCM is still obvious. After implementation of SCM in 2001, the expense rate of Bright dropped in the second year, the inventory turnover has been accelerated continuously; meanwhile Yili has optimized its logistics network system in 2003, and its operation cost has been dropped and inventory turnover has been raised.

4. Conclusion
After reviewing the situations of these three leading enterprises in China dairy industry, we may conclude that SCM has a positive effect on enterprises in the way of cutting the operation cost and upgrading the efficiency. However, comparing with other enterprises that have not yet introduced SCM, we find out the anticipated benefit has not been reached. The reason is that the company implements vertical integration before SCM. This practice normally saves the information cost while increasing the operation cost. At present, it is very difficult to implement SCM system among domestic enterprises that have only business relationship. It is a new subject that the industry faces to implement the SCM by combining each related enterprise of the business together, based on the analysis of vertical integration suiting to enterprise’ own situation. s
References: 1. Charu Chandra, Armen Tumanyan. Information Modeling to Manage Supply Chain: Problems Taxonomy, http://www.isye. gatech.edu/faculty/Leon_McGinnis/8851/Sources/Ontology/Chandra/Information%20Modeling%20to%20Manage%20Supply%20C hain%20Problems%20Taxonomy.doc, 2004 2. Mingkun Chen. The Study of Bullwhip Effect of Supply Chain Production and Inventory Strategy under Declined Trend Demand, http://www.if.itri.org.tw/content04/01if44.htm, 2004 3. Yuanzhi Chen. How to Found and Use the Model of SCM, http://www.wm23.com/paper/P09/09006.htm, 2004 4. Dongle Guo, Ze Song. Frontier of the Theoretical Development of China: Commercial Economics, Beijing: Social Science Cultural Heritage Publishing House, 2000: 231-262 5. John Groenewegen. Transaction Cost Economics and Beyond, Shanghai: Shanghai Finance and Economics University Publishing Company, 2000: 89-113 6. S. McVey. The Essential Supply Chain, http://www.technologyevaluation.com, August, 2000

(Edited by Ann and Joy)

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