July 2005 | Commentary | Viewpoint

Sourcing in China? Give BLPs a VIP Role

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As global sourcing continues to lengthen the inbound supply chain, companies are placing more focus at the beginning of the chain, where product originates. The growing number of manufactured products originating in Asian countries such as China presents challenges for manufacturers, wholesalers, distributors, and retailers that are sourcing inventory there.

Companies have not fully developed supplier management strategies due to the lack of free trade areas in China. As a result, use of Bonded Logistics Parks (BLPs) is on the rise. BLPs—which combine bonded land and international port capabilities—are particularly attractive to companies sourcing in Asia that want to optimize inventory velocity by using China as an international transfer, consolidation, and procurement hub.

BLP Boom

The Chinese government is building BLPs in eight existing bonded areas to promote zone/port interaction and eventually to serve as free trade ports.

The new BLPs connect the bonded zones—also loosely referred to as Free Trade Zones (FTZs)—with the ports. BLPs are designed to improve the environment for both foreign-invested and domestic enterprises, and promote the development of local regional economies by offering more efficient logistics and ocean freight services.

The first BLP was established in Shanghai's Waigaoqiao FTZ in 2004. Additional locations include Dalian, Zhangjiagang, Xiamen, Ningbo, Qingdao, Tianjin, and Shenzhen.

BLPs enjoy the same preferential policies as current FTZs. In addition, customs duties on imports and exports are levied and treated in accordance with the same policies for export processing zones.

Domestic goods shipped into bonded logistics parks, for example, are considered exports and are entitled to tax refunds. Companies operating in BLPs are also permitted to conduct de-consolidation, consolidation, and kitting with other cargo for transshipment, import, and export. This advantage is not available at bonded warehouses.

BLPs bring immediate benefits to companies involved in export processing by helping to reduce logistics and transaction costs. Because of its location next to an export terminal, the Shanghai BLP, for example, offers companies reduced freight costs and cycle times by enabling later container freight station cut-off times.

Cutting Costs, Saving Time

Before the introduction of BLPs, companies would need to ship product to Hong Kong to complete the export process, which, in turn, allowed their suppliers to receive value-added tax (VAT) rebates. This method entails high logistics costs and lost time.

With the newly formed BLPs, foreign-invested enterprises bypass the trip to Hong Kong, and receive an immediate VAT refund. Companies operating in the Shanghai BLP save approximately $1,000/FEU and 10 to 14 days compared with shipping to Hong Kong.

Another significant advantage is that goods in the park can be shipped overseas and back to China—outside the park—through duty/VAT claims, or through bonded manufacturing handbook transfers.

Multinational companies in China can develop a superior holistic logistics and supply management strategy by using BLPs as global purchasing centers. They can also reduce purchase order lead times by utilizing an inventory pull system that enables a third party to pull inventory from their China distribution hub.

Companies in BLPs can also perform operations such as pick-and-pack and bar coding, allowing for pre-distribution and DC bypass in the United States or Europe.

In addition, "milk-run" pickups help companies save on domestic transportation costs. Finally, the consignee has full control of the cargo because the product has left the factory.

Are BLPs Right for You?

When evaluating whether to operate in a BLP, companies should consider how to allocate the relevant costs—including VAT export and logistics expenses—in the new supply chain model. Companies need to address important operational issues, such as finding ways to reduce operating costs within the BLP, and improving transactions between BLP and FTZ warehouses.

Overall, the newly formed BLPs in China offer multinational companies sourcing in Asia significant potential advantages when compared to export processing zones and free trade zones.

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